UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended April 1, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ________
Commission File Number 001-13615
---------
Rayovac Corporation
--------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 22-2423556
----------------------- -------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
601 Rayovac Drive, Madison, Wisconsin 53711
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
(608) 275-3340
----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
---------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes ( X ) No ( )
The number of shares outstanding of the Registrant's common stock, $.01
par value, as of April 30, 2001, was 27,856,722.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RAYOVAC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
April 1, 2001 and September 30, 2000
(Unaudited)
(In thousands, except per share amounts)
APRIL 1, 2001 SEPTEMBER 30, 2000
------------- ------------------
-ASSETS-
Current assets:
Cash and cash equivalents................................. $ 10,563 $ 9,757
Receivables............................................... 127,534 153,667
Inventories............................................... 90,926 100,676
Prepaid expenses and other................................ 37,917 27,070
--------- --------
Total current assets...................................... 266,940 291,170
Property, plant and equipment, net.......................... 99,819 111,897
Deferred charges and other, net............................. 46,261 43,835
Intangible assets, net...................................... 120,316 122,114
--------- --------
Total assets............................................. $ 533,336 $ 569,016
========= ========
-LIABILITIES AND SHAREHOLDERS' EQUITY -
Current liabilities:
Current maturities of long-term debt...................... $ 24,038 $ 44,815
Accounts payable.......................................... 68,448 97,857
Accrued liabilities:
Wages and benefits and other........................... 37,561 42,830
Recapitalization and other special charges............. 5,835 978
--------- --------
Total current liabilities........................... 135,882 186,480
Long-term debt, net of current maturities................... 286,629 272,815
Employee benefit obligations, net of current portion........ 16,057 15,365
Other....................................................... 13,608 13,660
--------- --------
Total liabilities......................................... 452,176 488,320
Shareholders' equity:
Common stock, $.01 par value, authorized 150,000 shares;
issued 57,393 and 57,101 shares respectively;
outstanding 27,857 and 27,570 shares, respectively........ 574 571
Additional paid-in capital.................................. 109,116 104,197
Retained earnings........................................... 110,809 108,450
Accumulated other comprehensive income (loss)............... (1,548) 650
Notes receivable from officers/shareholders................. (3,765) (3,190)
--------- --------
215,186 210,678
Less: Treasury stock, at cost, 29,536 and 29,531
shares, respectively..................................... (130,070) (129,982)
Less: Unearned restricted stock compensation................ (3,956) 0
--------- --------
Total shareholders' equity................................ 81,160 80,696
--------- --------
Total liabilities and shareholders' equity................ $ 533,336 $ 569,016
========= ========
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS.
2
RAYOVAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six month periods ended April 1, 2001 and April 2, 2000
(Unaudited)
(In thousands, except per share amounts)
THREE MONTHS ENDING SIX MONTHS
----------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Net sales............................................. $ 145,192 $ 140,118 $ 328,751 $ 351,488
Cost of goods sold.................................... 75,803 72,732 167,309 183,561
Special charges....................................... 230 - 16,260 -
---------- ---------- ---------- ----------
Gross profit..................................... 69,159 67,386 145,182 167,927
Selling .............................................. 40,749 39,498 94,706 94,646
General and administrative............................ 11,596 11,921 24,019 25,286
Research and development.............................. 3,005 2,737 6,020 5,292
---------- ---------- ---------- ----------
Total operating expenses......................... 55,350 54,156 124,745 125,224
Income from operations........................ 13,809 13,230 20,437 42,703
Interest expense.................................... 7,182 7,131 15,374 15,252
Other expense, net.................................. 181 483 1,133 420
---------- ---------- ---------- ----------
Income before income taxes............................ 6,446 5,616 3,930 27,031
Income tax expense.................................... 2,321 1,965 1,571 9,461
---------- ---------- ---------- ----------
Net income.................................... $ 4,125 $ 3,651 $ 2,359 $ 17,570
========== ========== ========== ==========
BASIC EARNINGS PER SHARE
Weighted average shares of common stock outstanding... 27,578 27,491 27,575 27,490
Net Income............................................ $ 0.15 $ 0.13 $ 0.09 $ 0.64
DILUTED EARNINGS PER SHARE
Weighted average shares
and equivalents outstanding......................... 28,719 29,057 28,602 29,082
Net Income............................................ $ 0.14 $ 0.13 $ 0.08 $ 0.60
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS.
3
RAYOVAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six month periods ended April 1, 2001 and April 2, 2000
(Unaudited)
(In thousands)
SIX MONTHS ENDING
--------------------
2001 2000
-------- ---------
Cash flows from operating activities:
Net income............................................. $ 2,359 $ 17,570
Non-cash adjustments to net income:
Amortization......................................... 2,895 3,222
Depreciation......................................... 8,706 8,090
Other non-cash adjustments........................... 5,233 3,089
Net changes in assets and liabilities.................. (8,097) 1,031
-------- ---------
Net cash provided by operating activities.......... 11,096 33,002
Cash flows from investing activities:
Purchases of property, plant and equipment............. (4,217) (7,451)
Proceeds from sale of property, plant and equipment.... 24 386
-------- ---------
Net cash used by investing activities.............. (4,193) (7,065)
Cash flows from financing activities:
Reduction of debt...................................... (197,175) (105,330)
Proceeds from debt financing........................... 190,686 80,055
Other ................................................. (1,040) (423)
-------- ---------
Net cash used by financing activities.............. (7,529) (25,698)
-------- ---------
Effect of exchange rate changes on cash and cash
equivalents............................................ 1,432 (97)
-------- ---------
Net increase in cash and cash equivalents.......... 806 142
Cash and cash equivalents, beginning of period........... 9,757 11,065
-------- ---------
Cash and cash equivalents, end of period................. $ 10,563 $ 11,207
======== =========
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS.
4
RAYOVAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1 SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: These financial statements have been prepared by
Rayovac Corporation (the "Company"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission (the
"SEC") and, in the opinion of the Company, include all adjustments (all
of which are normal and recurring in nature) necessary to present
fairly the financial position of the Company at April 1, 2001, results
of operations for the three and six month periods ended April 1, 2001,
and April 2, 2000, and cash flows for the six month periods ended April
1, 2001 and April 2, 2000. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such SEC rules and regulations. These condensed
consolidated financial statements should be read in conjunction with
the audited financial statements and notes thereto as of September 30,
2000. Certain prior year amounts have been reclassified to conform with
the current year presentation.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS: In January 2001, the
Financial Accounting Standards Board's Emerging Issues Task Force
(EITF) reached a consensus on Issue 3 of EITF 00-22, "Accounting for
"Points" and Certain Other Time-Based or Volume-Based Sales Incentive
Offers, and Offers for Free Products or Services to Be Delivered in the
Future". Issue 3 addresses the recognition, measurement, and income
statement classification for offers to a customer to rebate or refund a
specified amount of cash that may be redeemed if the customer completes
a specified volume of transactions. The consensus was effective for
quarters ending after February 15, 2001. The Company adopted the
consensus reached on Issue 3, in the second fiscal quarter of 2001. The
adoption and subsequent restatement of the Fiscal 2001 and Fiscal 2000
Quarter and Six Months resulted in the reclassification of certain
selling expenses as a reduction in revenue of $2,432 and $2,478,
respectively, in the Fiscal 2001 and Fiscal 2000 Quarter and $4,791 and
$5,898, respectively, in the Fiscal 2001 and Fiscal 2000 Six Months.
The reclassifications had no impact on pre-tax income, net income, or
earnings per share.
DERIVATIVE FINANCIAL INSTRUMENTS:
Derivative financial instruments are used by the Company principally in
the management of its interest rate, foreign currency and raw material
price exposures. The Company does not hold or issue derivative
financial instruments for trading purposes.
The Company uses interest rate swaps to manage its interest rate risk.
The swaps are designated as cash flow hedges with the fair value
recorded in Other Comprehensive Income ("OCI") and as a hedge asset or
liability as applicable. The swaps settle periodically in arrears with
the related amounts for the current settlement period payable to, or
receivable from, the counter-parties included in accrued liabilities or
accounts receivable and recognized in earnings as an adjustment to
interest expense from the underlying debt to which the swap is
designated. During the three and six month periods ended April 1, 2001,
$117 and $42, respectively, of pretax derivative losses from such
hedges were recorded as an adjustment to interest expense. At April 1,
2001, the Company had a series of interest rate swap agreements
outstanding which effectively fix the interest rate on floating rate
debt at a rate of 6.404% for a notional principal amount of $75,000
through October 2002 and a series of interest rate swap agreements
outstanding which effectively fix the interest rate on floating rate
debt at a rate of 4.99% for a notional principal amount of $25,000 for
the period May through December 2001. The derivative net losses on
these contracts recorded in OCI at April 1, 2001 was an after-tax loss
of $1,322.
The Company enters into forward and swap foreign exchange contracts, to
hedge the risk from forecasted settlement in local currencies of
intercompany purchases and sales, trade sales, and trade purchases.
These contracts generally require the Company to exchange foreign
currencies for U.S. dollars or Pounds Sterling. These contracts are
designated as cash flow hedges with the fair value recorded in OCI and
as a hedge asset or liability as applicable. Once the forecasted
transaction has been recognized as a purchase or sale and a related
liability or asset recorded in the balance sheet, the gain or loss on
the related derivate hedge contract is reclassified from OCI into
earnings as an offset to the change in value of the liability or asset.
During the three and six month periods ended April 1, 2001, $56
5
of pretax derivative gains and $53 of pretax derivative losses,
respectively, were recorded as an adjustment to earnings for cash flow
hedges related to an asset or liability. During the three and six month
periods ended April 1, 2001, $232 and $581, respectively, of pretax
derivative losses were recorded as an adjustment to earnings for
forward and swap contracts settled at maturity. At April 1, 2001, the
Company had a series of forward and swap contracts outstanding with a
contract value of $8,768. The derivative net gain on these contracts
recorded in OCI at April 1, 2001 was an after-tax gain of $33.
The Company periodically enters into forward foreign exchange
contracts, to hedge the risk from changes in fair value from
unrecognized firm purchase commitments. These firm purchase commitments
generally require the Company to exchange U.S. dollars for foreign
currencies. These hedge contracts are designated as fair value hedges
with the fair value recorded in earnings on a pretax basis and as a
hedge asset or liability as applicable. To the extent effective,
changes in the value of the forward contracts recorded in earnings will
be offset by changes in the value of the hedged item, also recorded in
earnings on a pretax basis and as an asset or liability as applicable.
Once the firm purchase commitment has been consummated, the firm
commitment asset or liability balance will be reclassified as an
addition to or subtraction from, the carrying value of the purchased
asset. The Company has entered into a series of forward contracts for
the period April 2001 through October 2001 to hedge the exposure from a
firm commitment to purchase certain battery manufacturing equipment
denominated in Japanese Yen. During the three and six month periods
ended April 1, 2001, $722 of pretax derivative losses were recorded as
an adjustment to earnings for fair value hedges of this firm purchase
commitment. During the three and six month periods ended April 1, 2001,
$722 of pretax gains were recorded as an adjustment to earnings for
changes in fair value of this firm purchase commitment. At April 1,
2001, the series of outstanding forward contracts for this firm
purchase commitment had a contract value of $8,368.
The Company is exposed to risk from fluctuating prices for zinc used in
the manufacturing process. The Company hedges a portion of this risk
through the use of commodity swaps. The swaps are designated as cash
flow hedges with the fair value recorded in OCI and as a hedge asset or
liability as applicable. The fair value of the swaps is reclassified
from OCI into earnings when the hedged purchase of zinc metal-based
items also affects earnings. The swaps effectively fix the floating
price on a specified quantity of a commodity through a specified date.
During the three and six month periods ended April 1, 2001, $147 and
$280, respectively, of pretax derivative losses were recorded as an
adjustment to cost of sales for swap contracts settled at maturity. At
April 1, 2001, the Company had a series of swap contracts outstanding
through March 2002 with a contract value of $12,679. The derivative net
losses on these contracts recorded in OCI at April 1, 2001 was an
after-tax loss of $553.
2 INVENTORIES
Inventories consist of the following:
APRIL 1, 2001 SEPTEMBER 30, 2000
------------- ------------------
Raw material........... $27,710 $31,355
Work-in-process........ 13,162 11,650
Finished goods......... 50,054 57,671
------ --------
$90,926 $100,676
======= ========
6
3 OTHER COMPREHENSIVE INCOME
Comprehensive income and the components of other comprehensive income
(loss) for the three and six months ended April 1, 2001 and April 2,
2000 are as follows:
THREE MONTHS SIX MONTHS
------------ ----------
2001 2000 2001 2000
---- ---- ---- ----
Net income................................... $4,125 $3,651 $2,359 $17,570
Other comprehensive (loss):
Foreign currency translation............... (663) (97) (356) (887)
Cumulative effect of change in
accounting principle...................... -- -- (150) --
Net (loss) on derivative
instruments............................... (981) -- (1,692) --
------ ------ ------- -------
Comprehensive income......................... $2,481 $3,554 $161 $16,683
====== ====== ======= =======
4 NET INCOME PER COMMON SHARE
Net income per common share for the three and six months
ended April 1, 2001 and April 2, 2000 is calculated based upon the
following shares:
THREE MONTHS SIX MONTHS
------------ ----------
2001 2000 2001 2000
---- ---- ---- ----
Basic........................................ 27,578 27,491 27,575 27,490
Effect of assumed conversion of options...... 1,141 1,566 1,027 1,592
------ ------ ------ ------
Diluted...................................... 28,719 29,057 28,602 29,082
====== ====== ====== ======
5 COMMITMENTS AND CONTINGENCIES
In March 1998, the Company entered into an agreement to purchase
certain equipment and to pay annual royalties. In connection with this
1998 agreement, which supersedes previous agreements dated December
1991, and March 1994, the Company committed to pay royalties of $2,000
in 1998 and 1999, $3,000 in 2000 through 2002, and $500 in each year
thereafter, as long as the related equipment patents are enforceable
(2022). The Company incurred royalty expenses of $2,000 for 1998, 1999
and $2,250 for 2000.
The Company has provided for the estimated costs associated with
environmental remediation activities at some of its current and former
manufacturing sites. In addition, the Company, together with other
parties, has been designated a potentially responsible party of various
third-party sites on the United States EPA National Priorities List
(Superfund). The Company provides for the estimated costs of
investigation and remediation of these sites when such losses are
probable and the amounts can be reasonably estimated. The actual cost
incurred may vary from these estimates due to the inherent
uncertainties involved. The Company believes that any additional
liability in excess of the amounts provided of $2,639, which may result
from resolution of these matters, will not have a material adverse
effect on the financial condition, liquidity, or cash flow of the
Company.
The Company has certain other contingent liabilities with respect to
litigation, claims and contractual agreements arising in the ordinary
course of business. In the opinion of management, such contingent
liabilities are not likely to have a material adverse effect on the
financial condition, liquidity or cash flow of the Company.
7
6 OTHER
During Fiscal 2001, the Company recorded special charges related to:
(i) an organizational restructuring in the U.S, (ii) manufacturing and
distribution cost rationalization initiatives in the Company's
Tegucigalpa, Honduras and Mexico City, Mexico manufacturing facilities
and in our European operations, (iii) the closure of the Company's
Wonewoc, Wisconsin, manufacturing facility, (iv) and the
rationalization of uneconomic manufacturing processes at the Company's
Fennimore, Wisconsin, manufacturing facility, and rationalization of
packaging operations and product lines. The amount recorded includes
$5,100 of employee termination benefits for approximately 360
employees, $10,400 of equipment, inventory, and other asset write-offs,
and $800 of other expenses. A summary of the 2001 restructuring
activities follows:
2001 RESTRUCTURING SUMMARY
TERMINATION OTHER
BENEFITS COSTS TOTAL
----------- ------- -------
Expense accrued................... $5,000 $11,000 $16,000
------ ------- -------
Balance December 31, 2000......... $5,000 $11,000 $16,000
Expense as incurred............... 100 200 300
Cash expenditures................. (800) (200) (1,000)
Non cash charges.................. -- (3,000) (3,000)
------ ------- -------
Balance April 1, 2001............. $4,300 $8,000 $12,300
====== ====== =======
During 1999, the Company recorded special charges as follows: (i)
$2,528 of employee termination benefits for 43 employees related to
organizational restructuring in the U.S. and Europe, (ii) $1,300 of
charges related to the discontinuation of the manufacturing of
silver-oxide cells at the Company's Portage, Wisconsin, facility, and
(iii) $2,100 of charges related to the termination of non-performing
foreign distributors. The Company also recognized special charges of
$803 related to the investigation of financing options and developing
organizational strategies for the Latin American acquisition. A summary
of the 1999 restructuring activities follows:
1999 RESTRUCTURING SUMMARY
TERMINATION OTHER
BENEFITS COSTS TOTAL
----------- ------- -------
Expense accrued................... $2,500 $3,400 $5,900
Cash expenditures................. (200) -- (200)
----------- ------- -------
Balance September 30, 1999........ $2,300 $3,400 $5,700
Change in estimate................ -- 100 100
Cash expenditures................. (2,200) -- (2,200)
Non cash charges.................. -- (3,300) (3,300)
----------- ------- -------
Balance September 30, 2000........ $100 $200 $300
Cash expenditures................. (100) -- (100)
Non cash charges.................. -- (200) (200)
----------- ------- -------
Balance April 1, 2001............. $-- $-- $--
=========== ======= =======
8
7 SEGMENT INFORMATION
The Company manages operations in three reportable segments based upon
geographic area. North America includes the United States and Canada;
Latin America includes Mexico, Central America, and South America;
Europe/Rest of World ("Europe/ROW") includes the United Kingdom, Europe
and all other countries in which the Company does business.
The Company manufactures and markets dry cell batteries including
alkaline, zinc carbon, alkaline rechargeable, hearing aid, and other
specialty batteries and lighting products throughout the world.
Net sales and cost of sales to other segments have been eliminated. The
gross contribution of inter segment sales is included in the segment
selling the product to the external customer. Segment revenues are
based upon the geographic area in which the product is sold.
The reportable segment profits do not include interest expense,
interest income, and income tax expense. Also, not included in the
reportable segments, are corporate expenses including corporate
purchasing expense, general and administrative expense and research and
development expense. All depreciation and amortization included in
income from operations is related to corporate or reportable segments.
Costs are identified to reportable segments or corporate, according to
the function of each cost center.
The reportable segment assets do not include cash, deferred tax
benefits, investments, long-term intercompany receivables, most
deferred charges, and miscellaneous assets. Capital expenditures are
related to reportable segments or corporate. Variable allocations of
assets are not made for segment reporting.
REVENUES FROM EXTERNAL CUSTOMERS
THREE MONTH PERIODS ENDED SIX MONTH PERIODS ENDED
-------------------------------- -----------------------------
APRIL 1, 2001 APRIL 2, 2000 APRIL 1, 2001 APRIL 2, 2000
------------- ------------- ------------- -------------
North America................. $105,997 $101,875 $242,862 $265,966
Latin America................. 26,639 25,211 60,363 56,228
Europe/ROW.................... 12,556 13,032 25,526 29,294
------------- ------------- ------------- -------------
Total segments................ $145,192 $140,118 $328,751 $351,488
============= ============= ============= =============
INTER SEGMENT REVENUES
THREE MONTH PERIODS ENDED SIX MONTH PERIODS ENDED
-------------------------------- -----------------------------
APRIL 1, 2001 APRIL 2, 2000 APRIL 1, 2001 APRIL 2, 2000
------------- ------------- ------------- -------------
North America................. $8,728 $5,704 $16,940 $12,644
Latin America................. 3,038 -- 4,456 --
Europe/ROW.................... 582 154 1,181 315
------------- ------------- ------------- -------------
Total segments................ $12,348 $5,858 $22,577 $12,959
============= ============= ============= =============
9
SEGMENT PROFIT THREE MONTH PERIODS ENDED SIX MONTH PERIODS ENDED
APRIL 1, 2001 APRIL 2, 2000 APRIL 1, 2001 APRIL 2, 2000
------------- ------------- ------------- -------------
North America................................ $15,752 $13,670 $38,748 $42,563
Latin America................................ 4,514 4,579 11,420 10,288
Europe/ROW................................... 1,116 2,015 1,293 4,036
----- ----- ----- -----
Total segments............................... 21,382 20,264 51,461 56,887
Corporate.................................... 7,343 7,034 14,764 14,184
Special charges.............................. 230 -- 16,260 --
Interest expense............................. 7,182 7,131 15,374 15,252
Other expense, net........................... 181 483 1,133 420
--- --- ----- ---
Income before income taxes................... $6,446 $5,616 $3,930 $27,031
====== ====== ====== =======
SEGMENT ASSETS APRIL 1, 2001 APRIL 2, 2000
------------- -------------
North America................................ $248,537 $248,793
Latin America................................ 206,327 186,150
Europe/ROW................................... 27,768 30,200
------ ------
Total segments............................... 482,632 465,143
Corporate.................................... 50,704 41,900
------ ------
Total assets at period end................... $533,336 $507,043
======== ========
8 GUARANTOR SUBSIDIARIES (ROV HOLDING, INC. AND ROVCAL, INC.)
The following condensed consolidating financial data illustrate the
composition of the consolidated financial statements. Investments in
subsidiaries are accounted for by the Company and the Guarantor
Subsidiaries using the equity method for purposes of the consolidating
presentation. Earnings of subsidiaries are therefore reflected in the
Company's and Guarantor Subsidiary's' investment accounts and earnings.
The principal elimination entries eliminate investments in subsidiaries
and inter-company balances and transactions. Separate financial
statements of the Guarantor Subsidiaries are not presented because
management has determined that such financial statements would not be
material to investors.
10
RAYOVAC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
As of April 1, 2001
(Unaudited)
(In thousands)
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------- ------------ ------------ ------------ ------------
-ASSETS-
Current assets:
Cash and cash equivalents........................... $ 2,351 $ 45 $ 8,167 $ - $ 10,563
Receivables......................................... 56,529 42,104 50,971 (22,070) 127,534
Inventories......................................... 58,227 - 30,608 2,091 90,926
Prepaid expenses and other.......................... 24,582 342 12,993 - 37,917
--------- ------------ ------------ ------------ ------------
Total current assets............................. 141,689 42,491 102,739 (19,979) 266,940
Property, plant and equipment, net..................... 68,588 40 31,191 - 99,819
Deferred charges and other, net........................ 59,719 887 4,134 (18,479) 46,261
Intangible assets, net................................. 90,724 - 29,780 (188) 120,316
Investments in subsidiaries............................ 138,980 98,037 - (237,017) -
--------- ------------ ------------ ------------ ------------
Total assets........................................ $ 499,700 $ 141,455 $ 167,844 $ (275,663) $ 533,336
========= ============ ============ ============ ============
-LIABILITIES AND SHAREHOLDERS' EQUITY-
Current liabilities:
Current maturities of long-term debt................ $ 15,500 $ - $ 8,709 $ (171) $ 24,038
Accounts payable.................................... 65,601 11 22,248 (19,412) 68,448
Accrued liabilities:
Wages benefits and other......................... 23,166 2,464 11,931 - 37,561
Recapitalization and other special charges....... 5,835 - - - 5,835
--------- ------------ ------------ ------------ ------------
Total current liabilities................... 110,102 2,475 42,888 (19,583) 135,882
Long term debt, net of current maturities.............. 287,275 - 17,151 (17,797) 286,629
Employee benefit obligations, net of current portion... 15,254 - 803 - 16,057
Other.................................................. 4,642 - 8,966 - 13,608
--------- ------------ ------------ ------------ ------------
Total liabilities............................. 417,273 2,475 69,808 (37,380) 452,176
Shareholders' equity:
Common stock........................................ 573 1 12,072 (12,072) 574
Additional paid-in capital.......................... 108,998 62,788 54,904 (117,574) 109,116
Retained earnings................................... 111,837 75,492 31,715 (108,235) 110,809
Accumulated other comprehensive income (loss)....... (1,190) 699 (655) (402) (1,548)
Notes receivable from officers/shareholders......... (3,765) - - - (3,765)
--------- ------------ ------------ ------------ ------------
216,453 138,980 98,036 (238,283) 215,186
Less treasury stock, at cost........................... (130,070) - - - (130,070)
Less unearned restricted stock compensation............ (3,956) - - - (3,956)
--------- ------------ ------------ ------------ ------------
Total shareholders' equity.......................... 82,427 138,980 98,036 (238,283) 81,160
--------- ------------ ------------ ------------ ------------
Total liabilities & shareholders' equity............ $ 499,700 $ 141,455 $ 167,844 $ (275,663) $ 533,336
========= ============ ============ ============ ============
11
RAYOVAC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the three month period ended April 1, 2001
(Unaudited)
(In thousands)
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------- ------------ ------------ ------------ ------------
Net sales ....................................... $ 102,485 $ 10,804 $46,875 $(14,972) $145,192
Cost of goods sold .............................. 51,865 10,480 28,266 (14,808) 75,803
Special charges ................................. 29 -- 201 -- 230
--------- -------- ------- -------- --------
Gross profit ................................. 50,591 324 18,408 (164) 69,159
Selling expense ................................. 31,082 174 9,553 (60) 40,749
General and administrative ...................... 10,286 (2,539) 3,849 -- 11,596
Research and development ........................ 3,005 -- -- -- 3,005
--------- -------- ------- -------- --------
Total operating expenses ..................... 44,373 (2,365) 13,402 (60) 55,350
Income from operations ....................... 6,218 2,689 5,006 (104) 13,809
Interest expense ............................. 6,903 -- 898 (619) 7,182
Equity (income) .............................. (5,024) (2,465) -- 7,489 --
Other (income) expense, net .................. (714) 14 259 622 181
--------- -------- ------- -------- --------
Income before income taxes ...................... 5,053 5,140 3,849 (7,596) 6,446
Income tax expense .............................. 822 116 1,384 (1) 2,321
--------- -------- ------- -------- --------
Net income ................................... $ 4,231 $ 5,024 $ 2,465 $ (7,595) $ 4,125
========= ======== ======= ======== ========
12
RAYOVAC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the six month period ended April 1, 2001
(Unaudited)
(In thousands)
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------- ------------ ------------ ------------ ------------
Net sales ....................................... $ 236,468 $ 21,814 $99,620 $(29,151) $328,751
Cost of goods sold .............................. 116,595 21,159 58,449 (28,894) 167,309
Special charges ................................. 16,059 -- 201 -- 16,260
--------- -------- ------- -------- --------
Gross profit ................................. 103,814 655 40,970 (257) 145,182
Selling expense ................................. 73,151 354 21,358 (157) 94,706
General and administrative ...................... 21,965 (5,663) 7,717 -- 24,019
Research and development ........................ 6,020 -- -- -- 6,020
--------- -------- ------- -------- --------
Total operating expenses ..................... 101,136 (5,309) 29,075 (157) 124,745
Income from operations ....................... 2,678 5,964 11,895 (100) 20,437
Interest expense ............................. 14,625 -- 1,369 (620) 15,374
Equity (income) .............................. (12,017) (6,278) -- 18,295 --
Other (income) expense, net .................. (729) 2 1,240 620 1,133
--------- -------- ------- -------- --------
Income before income taxes ...................... 799 12,240 9,286 (18,395) 3,930
Income tax (benefit) expense ................... (1,660) 223 3,008 -- 1,571
--------- -------- ------- -------- --------
Net income ................................... $ 2,459 $ 12,017 $ 6,278 $(18,395) $ 2,359
========= ======== ======= ======== ========
13
RAYOVAC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the six month period ended April 1, 2001
(Unaudited)
(In thousands)
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------- ------------ ------------ ------------ ------------
Net cash provided by operating activities ................... $ 5,932 $ 1 $ 5,163 $-- $ 11,096
Cash flows from investing activities:
Purchases of property, plant and equipment .......... (3,485) -- (732) -- (4,217)
Proceeds from sale of property, plant, and equip .... 9 -- 15 -- 24
--------- ---- ------- --- ---------
Net cash used by investing activities ....................... (3,476) -- (717) -- (4,193)
Cash flows from financing activities:
Reduction of debt ................................... (192,557) -- (4,618) -- (197,175)
Proceeds from debt financing ........................ 190,686 -- -- -- 190,686
Other ............................................... (925) -- (115) -- (1,040)
--------- ---- ------- --- ---------
Net cash used by financing activities ....................... (2,796) -- (4,733) -- (7,529)
Effect of exchange rate changes on cash and cash
equivalents ......................................... -- -- 1,432 -- 1,432
--------- ---- ------- --- ---------
Net (decrease) increase in cash and cash equivalents ........ (340) 1 1,145 -- 806
Cash and cash equivalents, beginning of period .............. 2,691 44 7,022 -- 9,757
--------- ---- ------- --- ---------
Cash and cash equivalents, end of period .................... $ 2,351 $45 $ 8,167 $-- $ 10,563
========= ==== ======= === =========
14
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FISCAL QUARTER AND SIX MONTHS ENDED APRIL 1, 2001 COMPARED TO
FISCAL QUARTER AND SIX MONTHS ENDED APRIL 2, 2000
NET SALES. Net sales for the three months ended April 1, 2001 (the
"Fiscal 2001 Quarter") increased $5.1 million, or 3.6%, to $145.2 million from
$140.1 million in the three months ended April 2, 2000 (the "Fiscal 2000
Quarter"). The increase was driven by growth in general battery and hearing aid
battery sales, partially offset by decreases in lighting products primarily
reflecting the impacts of Y2K loading last year and retailer inventory
reductions compounded by lower sales of specialty batteries to OEM customers in
the PC, telecommunications and electronics industries.
Net sales for the six months ended April 1, 2001 (the "Fiscal 2001 Six
Months") decreased $22.7 million, or 6.5%, to $328.8 million from $351.5 million
in the six months ended April 2, 2000 (the "Fiscal 2000 Six Months"). The
decrease was driven by decreased sales of alkaline and lighting products
primarily reflecting the impacts of Y2K loading last year, a weak storm season,
and retailer inventory reductions compounded by softness in sales of specialty
batteries to OEM customers in the PC, telecommunications and electronics
industries. Offsetting the weakness in sales was hearing aid batteries, which
increased $3.5 million, or 10.9%.
NET INCOME. Net income for the Fiscal 2001 Quarter increased $0.4
million, or 10.8%, to $4.1 million from $3.7 million in the Fiscal 2000 Quarter.
The increase reflects the favorable margin impact of sales growth in North
America and Latin America partially offset by weakness in Europe/Rest of World
("Europe/ROW") and operating expense increases.
Net income for the Fiscal 2001 Six Months decreased $15.2 million to
$2.4 million from $17.6 million in the Fiscal 2000 Six Months. The decrease
reflects the impact of a $16.3 million restructuring charge, sales softness in
North America and Europe/ROW and unfavorable currency devaluation partially
offset by lower operating expenses.
SEGMENT RESULTS. The Company manages operations in three reportable
segments based upon geographic area. North America includes the United States
and Canada; Latin America includes Mexico, Central America, and South America;
Europe/ROW includes the United Kingdom, Europe and all other countries in which
the company does business. We evaluate segment profitability based on income
from operations before corporate expense which includes corporate purchasing
expense, general and administrative expense and research and development
expense.
FISCAL QUARTER SIX MONTHS
NORTH AMERICA 2001 2000 2001 2000
---- ---- ---- ----
Revenue from external customers..................... $106.0 $101.9 $242.9 $266.0
Profitability....................................... 15.8 13.7 38.7 42.6
Profitability as a % of net sales................... 14.9% 13.4% 15.9% 16.0%
Assets.............................................. $248.5 $248.8 $248.5 $248.8
Our sales to external customers increased $4.1 million, or 4.0%, to
$106.0 million in the Fiscal 2001 Quarter from $101.9 million the previous year
due primarily to increased sales of alkaline, rechargeable, and heavy duty
batteries compounded by strong sales of hearing aid batteries partially offset
by weakness in lighting products and speciality batteries. Alkaline sales
increases of $6.1 million, or 11.4%, were primarily attributable to distribution
gains and strong sales in the mass merchandiser and OEM trade channels.
Rechargeable batteries sales increases of $1.3 million, or 19.4%, were driven by
strong growth of nickel metal hydride (NiMh) batteries and new distribution at a
major mass retailer. Heavy duty batteries sales increases of $2.6 million, or
38.7%, were primarily driven by product line expansion at a key mass retailer.
Hearing aid battery sales increases of $2.4 million, or 23.8%, primarily
reflects strong growth in the professional hearing aid trade channel and
expanded retail distribution. Lighting product sales decreases of $2.7 million,
or 17.4%, were driven by weakness in the lights product line and in lantern
battery sales reflecting the lingering effects of not being able to repeat last
year's Y2K buying binge. Speciality batteries sales
15
decreases versus last year primarily reflect softness in camcorder battery and
lithium battery sales of $2.2 million and $3.6 million, respectively. These
decreases primarily reflect the transition to the camcorder licensing agreement
with our Hong Kong licensee and general softness in demand from OEM customers in
the PC, telecommunications and electronics industries.
In the Fiscal 2001 Six Months, our sales to external customers
decreased $23.1 million, or 8.7%, to $242.9 million from $266.0 million the
previous year due primarily to decreased sales of alkaline batteries, lighting
products, and specialty batteries, partially offset by increased sales of
hearing aid batteries. Alkaline sales decreases of $11.5 million, or 7.5%, were
driven by the impacts of Y2K on last year's sales volumes, a strong hurricane
season in the Fiscal 2000 First Quarter, lower promotional activity at certain
food retailers, partially offset by distribution gains and strong sales in the
mass merchandiser and OEM trade channels. Lighting product sales decreases of
$10.3 million, or 26.5%, were driven by weakness in the lights product line and
in lantern battery sales reflecting the impact of the Y2K phenomenom and the
lack of a strong storm season, which resulted in strong sales of lighting and
related products last year. Specialty batteries sales versus last year primarily
reflect softness in camcorder battery and lithium battery sales of $4.4 and $5.4
million, respectively, reflecting the transition to the licensing agreement with
our Hong Kong licensee, timing of promotions at a key electronics retailer, and
general softness in lithium battery demand from OEM customers in the PC,
telecommunications and electronics industries. Hearing aid battery sales
increases of $4.3 million, or 22.5%, primarily reflect strength in the
professional channel and expanded distribution in Fiscal 2001.
Our profitability increased $2.1 million, or 15.3%, to $15.8 million in
the Fiscal 2001 Quarter from $13.7 million in the Fiscal 2000 Quarter. The
increase in profitability in the Fiscal 2001 Quarter was primarily attributable
to the sales expansion and favorable gross profit margins reflecting a favorable
product mix partially offset by increased distribution expenses. Our
profitability margins increased 150 basis points to 14.9% from 13.4% in the
previous year. The increase primarily reflects favorable gross profit margins
attributed to a favorable product mix and price increases implemented last year
compounded by lower operating expenses as a percentage of sales.
In the Fiscal 2001 Six Months, our profitability decreased $3.9
million, or 9.2%, to $38.7 million from $42.6 million. The decrease in
profitability in the Fiscal 2001 Six Months was primarily attributable to the
sales shortfall partially offset by improved gross profit margins, reflecting a
favorable product mix, price increases and operating expense decreases. Our
profitability margins were relatively unchanged from the previous year.
There were no significant changes in our assets from the previous year.
FISCAL QUARTER SIX MONTHS
LATIN AMERICA 2001 2000 2001 2000
---- ---- ---- ----
Revenue from external customers................ $26.6 $25.2 $60.4 $56.2
Profitability.................................. 4.5 4.6 11.4 10.3
Profitability as a % of net sales.............. 16.9% 18.3% 18.9% 18.3 %
Assets......................................... $206.3 $186.2 $206.3 $186.2
Our sales to external customers increased $1.4 million, or 5.6% to
$26.6 million in the Fiscal 2001 Quarter from $25.2 million and increased $4.2
million, or 7.5% to $60.4 million in the Fiscal 2001 Six Months from $56.2
million the previous year due primarily to increased sales of alkaline batteries
partially offset by a slowing economic environment and the unfavorable impacts
of currency devaluation of $0.7 million and $1.4 million, respectively. Alkaline
sales increases of $1.6 million and $4.8 million in the Fiscal 2001 Quarter and
Six Months, respectively, were driven by new distribution of alkaline batteries
in mass merchandiser chains compounded by expansion of distribution into the
Southern region of South America in Fiscal 2000. Heavy duty battery sales were
slightly unfavorable versus last year.
Our profitability declined slightly in the Fiscal 2001 Quarter and
increased $1.1 million, or 10.7%, in the Fiscal 2001 Six Months versus the
Fiscal 2000 Six Months. The increase in profitability in the Fiscal 2001 Six
Months is primarily attributable to the expansion of sales and gross profit
partially offset by higher operating expenses reflecting the expansion into the
Southern region of South America in Fiscal 2000.
16
Our profitability margins as a percent of net sales decreased 140 basis
points in the Fiscal 2001 Quarter primarily reflecting an increase in selling
and promotional expenses associated with the expanded distribution into the
Southern region of South America which offset improved gross profit margins,
reflecting a favorable product mix and the benefits of price increases
implemented during Fiscal 2000. Our profitability margins as a percent of net
sales increased 60 basis points in the Fiscal 2001 Six Months primarily
reflecting a favorable product mix and the benefits of price increases partially
offset by an increase in selling and promotional expenses.
Our assets increased $20.1 million, or 10.8%, to $206.3 million in the
Fiscal 2001 Quarter from $186.2 million the previous year. The increase was
primarily attributable to an increase in accounts receivable of $15.3 million
and an increase in inventory of $2.1 million reflecting expanded distribution
with mass merchandisers and expansion into the Southern region of South America.
FISCAL QUARTER SIX MONTHS
EUROPE/ROW 2001 2000 2001 2000
---- ---- ---- ----
Revenue from external customers............. $12.6 $13.0 $25.5 $29.3
Profitability............................... 1.1 2.0 1.3 4.0
Profitability as a % of net sales........... 8.7% 15.4% 5.1% 13.7%
Assets...................................... $27.8 $30.2 $27.8 $30.2
Our sales to external customers decreased $0.4 million, or 3.1%, to
$12.6 million in the Fiscal 2001 Quarter from $13.0 million and decreased $3.8
million, or 13.0%, to $25.5 million in the Fiscal 2001 Six Months from $29.3
million the previous year primarily reflecting the impacts of currency
devaluation of $1.0 million and $3.0 million, respectively. Excluding the
effects of foreign exchange, Europe/ROW for the Fiscal 2001 Quarter and Six
Months experienced volume gains in alkaline and hearing aid battery sales.
Our profitability decreased $0.9 million to $1.1 million in the Fiscal
2001 Quarter and $2.7 million to $1.3 million in the Fiscal 2001 Six Months
reflecting the impact of currency devaluation on gross profit compounded by
higher selling and distribution costs partially offset by gross profit margin
improvement reflecting a favorable product mix. Our profitability margins
decrease, as a percentage of sales, are attributable to the fixed nature of our
operating expenses over lower sales volumes.
Our assets decreased $2.4 million, or 7.9%, to $27.8 million from $30.2
million the previous year due primarily to a decrease in inventory of $2.3
million primarily reflecting improvements in inventory management and weaker
sales.
CORPORATE EXPENSE. Our corporate expense increased $0.3 million, or
4.3%, to $7.3 million in the Fiscal 2001 Quarter from $7.0 million in the Fiscal
2000 Quarter and $0.6 million, or 4.2%, to $14.8 million in the Fiscal 2001 Six
Months from $14.2 million in the Fiscal 2000 Six months. These increases were
primarily attributable to higher research and development expenses of $0.3
million and $0.7 million, respectively, reflecting an increase in technology
royalties and other expenses partially offset by lower legal and other
administrative expenses. As a percentage of total sales, our corporate expense
was 5.0% in the Fiscal 2001 Quarter and Fiscal 2000 Quarter and 4.5% in the
Fiscal 2001 Six Months and 4.0% in the Fiscal 2000 Six Months.
SPECIAL CHARGES. The Company recorded special charges of $0.2
million in the Fiscal 2001 Quarter primarily reflecting expenses associated
with the shutdown of the Company's Wonewoc, Wisconsin, manufacturing
facility. In the Fiscal 2001 Six Months, the Company recorded special charges
related to: (i) an organizational restructuring in the U.S, (ii)
manufacturing and distribution cost rationalization initiatives in the
Company's Tegucigalpa, Honduras and Mexico City, Mexico manufacturing
facilities and in our European operations, (iii) the closure of the Company's
Wonewoc, Wisconsin, manufacturing facility, (iv) and the rationalization of
uneconomic manufacturing processes at the Company's Fennimore, Wisconsin,
manufacturing facility, and rationalization of packaging operations and
product lines. The amount recorded includes $5.1 million of employee
termination benefits for approximately 360 employees, $10.4 million of
equipment, inventory, and other asset write-offs, and $0.8 million of other
expenses.
INCOME FROM OPERATIONS. Our income from operations increased $0.6
million, or 4.5%, to $13.8 million in the Fiscal 2001 Quarter from $13.2 million
the previous year. These increases were primarily due to increased
17
profitability in North America partially offset by the impacts of currency
devaluation in Europe/ROW and the impact of special charges of $0.2 million
recognized in the Fiscal 2001 Quarter. Excluding the impact of the special
charges, income from operations increased $0.8 million, or 6.0%.
In the Fiscal 2001 Six Months, our income from operations decreased
$22.3 million, or 52.2%, to $20.4 million from $42.7 million the previous year.
These decreases were primarily due to decreased profitability in North America
and Europe/ROW, currency devaluation in Europe/ROW and special charges of $16.3
million. Excluding the impact of the special charges, income from operations
decreased $6.0 million, or 14.1%.
INTEREST EXPENSE. Interest expense increased $0.1 million to $7.2
million in the Fiscal 2001 Quarter and increased $0.1 million to $15.4 million
Fiscal 2001 Six Months versus the comparable periods in the prior year.
OTHER EXPENSE (INCOME). Other expense decreased $0.3 million to a $0.2
million net expense in the Fiscal 2001 Quarter and increased $0.7 million to a
$1.1 million net expense in the Fiscal 2001 Six Months. The decrease in the net
expense in the Fiscal 2001 Quarter primarily reflects increased interest income
and lower foreign exchange losses. The increase in net expense in the Fiscal
2001 Six Months primarily reflects increased foreign exchange losses, primarily
in Latin America, partially offset by higher interest income.
INCOME TAX EXPENSE. Our effective tax rate was 36.0% for the Fiscal
2001 Quarter compared to 35.0% in the Fiscal 2000 Quarter and 40.0% in the
Fiscal 2001 Six Months compared to 35.0% in the Fiscal 2000 Six Months. The
increase in effective tax rate for the quarter and six months primarily reflects
a larger percentage of our income being derived from foreign jurisdictions.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
Effective October 1, 2000, the Company adopted SFAS 133, which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. All derivatives, whether designated in hedging relationships
or not, are required to be recorded on the balance sheet at fair value. If the
derivative is designated as a fair value hedge, the change in the fair value of
the derivative and of the hedged item attributable to the hedged risk are
recognized in earnings. If the derivative is designated as a cash flow hedge,
the effective portions of changes in the fair value of the derivative are
recorded in other comprehensive income (OCI) and are recognized in the income
statement when the hedged item affects earnings. Ineffective portions of changes
in the fair value of cash flow hedges are recognized in earnings.
The adoption of SFAS 133 resulted in a pre-tax reduction to OCI of $0.3
million ($0.2 million after tax). The reduction to OCI is primarily attributable
to losses of approximately $0.5 million for foreign exchange forward cash flow
hedges partially offset by gains of approximately $0.2 million on interest rate
swap cash flow hedges. The net derivative losses included in OCI as of October
1, 2000 will be reclassified into earnings during the twelve months ending
September 30, 2001.
In January 2001, the Financial Accounting Standards Board's Emerging
Issues Task Force (EITF) reached a consensus on Issue 3 of EITF Issue 00-22,
"Accounting for "Points" and Certain Other Time-Based or Volume-Based Sales
Incentive Offers, and Offers for Free Products or Services to Be Delivered in
the Future". Issue 3 addresses the recognition, measurement, and income
statement classification for offers to a customer to rebate or refund a
specified amount of cash that may be redeemed if the customer completes a
specified volume of transactions. The consensus was effective for quarters
ending after February 15, 2001. The Company adopted the consensus reached on
Issue 3, in the second fiscal quarter of 2001. The adoption and subsequent
restatement of the Fiscal 2001 and Fiscal 2000 Quarter and Six Months resulted
in the reclassification of certain selling expenses as a reduction in revenue
and had no impact on pre-tax income, net income, or earnings per share.
18
LIQUIDITY AND CAPITAL RESOURCES
For the Fiscal 2001 Six Months, operating activities provided $11.1
million in net cash compared with $33.0 million the previous year. Operating
cash flow decreases versus the previous year primarily reflect lower operating
earnings attributable to our decrease in sales compounded by working capital
increases which were $9.1 million more than the previous year. Working capital
increases reflect increased investments in accounts receivable and prepaid
expenses partially offset by lower inventory investments and higher accrued
liabilities.
Net cash used by investing activities decreased $2.9 million versus the
same period a year ago primarily reflecting lower capital expenditures.
Expenditures in the current year were primarily for improvements to alkaline
battery manufacturing and information systems hardware and software. The Company
currently expects capital spending for Fiscal 2001 to be approximately $20.0
million due to alkaline capacity expansion, alkaline vertical integration
programs, and enhancements to our warehouse and distribution systems.
During the Fiscal 2001 Six Months we granted approximately 0.8 million
options to purchase shares of common stock to various employees of the company.
All grants have been at an exercise price equal to the market price of the
common stock on the date of the grant. We also granted approximately 277,000
shares of restricted stock on October 1, 2000, from the 1997 incentive plan, to
certain members of management. Approximately 210,000 of these shares will vest
on September 30, 2003 provided the recipient is still employed by the Company.
The remainder vests one third each year for the next three years. The total
market value of the restricted shares on date of grant totaled approximately
$4.7 million and has been recorded as restricted stock as a separate component
of shareholders' equity. Unearned compensation is being amortized to expense
over the three-year vesting period.
The Company believes that cash flow from operating activities and
periodic borrowings under its amended credit facilities will be adequate to meet
the Company's short-term and long-term liquidity requirements prior to the
maturity of those credit facilities, although no guarantee can be given in this
regard. The Company's current credit facilities include a revolving credit
facility of $250.0 million and term loan of $75.0 million. As of April 1, 2001,
$40.4 million of the term loan remained outstanding and $196.2 million was
outstanding under the revolving facility with approximately $17.9 million of the
remaining availability utilized for outstanding letters of credit.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition" (SAB 101). The SAB summarizes
certain of the SEC's views in applying U.S. generally accepted accounting
principles to revenue recognition in financial statements. In June 2000, the SEC
issued SAB 101B, which delays the implementation date of SAB 101 until no later
than the fourth fiscal quarter of fiscal years beginning after December 15,
1999. In October 2000, the SEC issued frequently asked questions and answers
about how guidance in accounting standards and SAB 101 would apply to particular
transactions. The amendment in June 2000 delayed the effective date for the
Company until the fourth fiscal quarter of 2001, which is when the Company will
adopt the bulletin. The impact of adopting SAB 101 is still being evaluated. The
Company does not currently believe its adoption will have a material impact on
the consolidated financial statements.
In May 2000, the EITF reached a consensus on Issue No. 00-14,
"Accounting for Certain Sales Incentives". This Issue addresses the
recognition, measurement, and income statement classification for various
types of sales incentives including discounts, coupons, rebates and free
products. In April 2001, the EITF delayed the implementation of EITF 00-14
until no later than quarters beginning after December 15, 2001. The Company
is required to adopt this consensus in the second fiscal quarter of 2002. The
impact of this consensus on the Company's consolidated financial statements
is still being evaluated. The Company does not currently believe its adoption
will have a material impact on the consolidated financial statements.
In July and September 2000, the EITF reached a consensus on Issue
No. 00-10, "Accounting for Shipping and Handling Fees and Costs." This Issue
addresses the income statement classification for shipping and handling fees
and costs. The Company will adopt this consensus in the fourth fiscal quarter
of 2001. The impact of this consensus on the Company's consolidated financial
statements is still being evaluated. The Company does not currently believe
its adoption will have a material impact on the consolidated financial
statements.
In April 2001, the EITF reached a consensus on Issue No. 00-25, "Vendor
Income Statement Characterization of Consideration to a Purchaser of the
Vendor's Products or Services". This Issue addresses when consideration from a
19
vendor to a retailer or distributor in connection with the purchase of the
vendor's products to promote sales of the vendor's products should be
classified in the vendor's income statement as a reduction of revenue or
expense. The Company is required to adopt this consensus in the second fiscal
quarter of 2002. The Company does not currently believe its adoption will
have a material impact on the consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK FACTORS
We have market risk exposure from changes in interest rates, foreign
currency exchange rates and commodity prices. We use derivative financial
instruments for purposes other than trading to mitigate the risk from such
exposures.
A discussion of our accounting policies for derivative financial
instruments is included in Note 1 "Significant Accounting Policies in Notes to
our Condensed Consolidated Financial Statements. "
INTEREST RATE RISK
We have bank lines of credit at variable interest rates. The general
level of U.S. interest rates, LIBOR, IBOR, and to a lesser extent European Base
rates, primarily affects interest expense. We use interest rate swaps to manage
such risk. The swaps are designated as cash flow hedges with the fair value
recorded in OCI and as a hedge asset or liability as applicable. The swaps
settle periodically in arrears with the related amounts for the current
settlement period payable to, or receivable from, the counter-parties included
in accrued liabilities or accounts receivable and recognized in earnings as an
adjustment to interest expense from the underlying debt to which the swap is
designated.
FOREIGN EXCHANGE RISK
We are subject to risk from sales to, purchases from and loans to our
subsidiaries as well as sales to, purchases from and bank lines of credit with,
third-party customers, suppliers and creditors, respectively, denominated in
foreign currencies. Foreign currency sales are made primarily in Pounds
Sterling, Canadian Dollars, Euro, German Marks, French Francs, Italian Lira,
Spanish Pesetas, Dutch Guilders, Mexican Pesos, Guatemalan Quetzals, Dominican
Pesos, Venezuelan Bolivars, Argentine Pesos, Chilean Pesos and Honduran Lempira.
Foreign currency purchases are made primarily in Pounds Sterling, German Marks,
French Francs, Mexican Pesos, Dominican Pesos, Guatemalan Quetzals and Honduran
Lempira. We manage our foreign exchange exposure from forecasted sales, accounts
receivable, forecasted purchases, accounts payable, intercompany loans, firm
purchase commitments and credit obligations through the use of naturally
occurring offsetting positions (borrowing in local currency) and forward foreign
exchange contracts. Forward foreign exchange contracts to hedge forecasted
transactions are designated as cash flow hedges with the fair value recorded in
OCI and as a hedge asset or liability as applicable. Once the forecasted
transaction has been recognized as a sale or purchase and a related asset or
liability recorded in the balance sheet, the gain or loss on the related
derivative hedge contract is re-classified from OCI into earnings as an offset
to the change in value of the asset or liability. Forward foreign exchange
contracts to hedge firm purchase commitments are designated as fair value hedges
with the fair value recorded in earnings and as a hedge asset or liability as
applicable.
20
COMMODITY PRICE RISK
We are exposed to fluctuation in market prices for purchases of zinc
metal-based items used in the manufacturing process. We hedge a portion of this
risk through the use of commodity swaps. The swaps are designated as cash flow
hedges with the fair value recorded in OCI and as a hedge asset or liability as
applicable. The fair value of the swaps is reclassified from OCI into earnings
when the hedged forecasted purchase of zinc metal-based items also affects
earnings.
SENSITIVITY ANALYSIS
The analysis below is hypothetical and should not be considered a
projection of future risks. Earnings projections are before tax.
As of April 1, 2001, the potential change in fair value of
outstanding interest rate derivative instruments, assuming a 1% unfavorable
shift in the underlying interest rates would be a loss of $1.5 million. The
net impact on reported earnings, after also including the reduction in one
year's interest expense on the related debt due to the same shift in interest
rates, would be a net gain of $1.0 million.
As of April 1, 2001, the potential change in fair value of
outstanding foreign exchange rate derivative instruments, assuming a 10%
unfavorable change in the underlying foreign exchange rates would be a loss
of $0.9 million. The net impact on future cash flows, after also including
the gain in value on the related accounts receivable payment obligations
outstanding at April 1, 2001 due to the same change in exchange rates, would
be a net gain of $1.6 million.
As of April 1, 2001, the potential change in fair value of outstanding
commodity price derivative instruments, assuming a 10% unfavorable change in the
underlying commodity prices would be a loss of $1.1 million. The net impact on
reported earnings, after also including the reduction in cost of one year's
purchases of the related commodities due to the same change in commodity prices,
would be a net gain of $0.4 million.
FORWARD LOOKING STATEMENTS
Certain of the information contained in this Form 10-Q, including
without limitation statements made under Part I, Item 1, "Financial Statements"
and Part I, Item 2, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Part I, Item 3, "Quantitative and Qualitative
Disclosures about Market Risk" which are not historical facts, may include
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act, as amended. In reviewing such information, you should
note that our actual results may differ materially from those set forth in such
forward-looking statements.
Important factors that could cause our actual results to differ
materially from those included in the forward-looking statements made herein
include, without limitation, (1) significant changes in consumer demand and
buying practices for household batteries, hearing aid batteries or other
products we manufacture or sell in North America, Latin America or Europe/ROW;
(2) the loss of, or a significant reduction in, sales through a significant
retail customer; (3) the successful introduction or expansion of competitive
brands into the marketplace, including private label offerings; (4) the
introduction of new product features or new battery technologies by a
competitor; (5) promotional campaigns and spending by a competitor; (6)
difficulties or delays in the integration of operations of acquired companies;
(7) our ability to successfully implement manufacturing and distribution cost
efficiencies and improvements; (8) delays in manufacturing or distribution due
to work stoppages, problems with suppliers, natural causes or other factors; (9)
the enactment or imposition of unexpected environmental regulations negatively
impacting consumer demand for certain of our battery products or increasing our
cost of manufacture or distribution; (10) the costs and effects of unanticipated
legal, tax or regulatory proceedings; (11) the effects of competitors' patents
or other intellectual property rights; (12) interest rate, exchange rate and raw
material price fluctuations; (13) impact of unusual items resulting from
evaluation of business strategies, acquisitions and divestitures and
organizational structure; (14) changes in accounting standards applicable to our
business; and (15) the effects of changes in trade, monetary or fiscal policies
and regulations by governments in countries where we do business.
21
Additional factors and assumptions that could generally cause our
actual results to differ materially from those included in the forward-looking
statements made herein include, without limitation, (1) our ability to develop
and introduce new products; (2) the effects of general economic conditions in
North America, Europe, Latin America or other countries where we do business,
including inflation, labor costs and stock market volatility; (3) the effects of
political or economic conditions, unrest or volatility in Latin America and
other international markets; (4) the sufficiency of our production and
distribution capacity to meet future demand for our products; (5) our ability to
keep pace with the product and manufacturing technological standards in our
industry; and (6) our ability to continue to penetrate and develop new
distribution channels for our products. Other factors and assumptions not
identified above were also involved in the derivation of the forward-looking
statements contained in this Form 10-Q and the failure of such other assumptions
to be realized, as well as other factors, may also cause actual results to
differ materially from those projected. We assume no obligations to update these
forward-looking statements to reflect actual results or changes in factors or
assumptions affecting such forward-looking statements.
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
There have been no significant changes in the status of Rayovac's legal
proceedings since the filing of Rayovac's Annual Report on Form 10-K for its
fiscal year ended September 30, 2000 ("2000 Form 10-K").
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NUMBER DESCRIPTION
3.1+ Amended and Restated Articles of Incorporation of the Company.
3.2****** Amended and Restated By-laws of the Company, as amended through May 17, 1999.
4.1** Indenture, dated as of October 22, 1996, by and among the Company, ROV Holding, Inc. and
Marine Midland Bank, as trustee, relating to the
Company's 101/4% Senior Subordinated Notes due 2006.
4.2****** First Supplemental Indenture, dated as of February 26, 1999, by and among the Company, ROV
Holding, Inc. and HSBC Bank USA (formerly known as Marine Midland Bank) as trustee,
relating to the Company's 101/4% Senior Subordinated Notes due 2006.
4.3++++ Second Supplemental Indenture, dated as of August 6, 1999, by and among the Company, ROV
Holding, Inc. and HSBC Bank USA (formerly known as Marine Midland Bank) as trustee,
relating to the Company's 101/4% Senior Subordinated Notes due 2006.
4.4** Specimen of the Notes (included as an exhibit to Exhibit 4.1)
4.5**** Amended and Restated Credit Agreement, dated as of December 30, 1997, by and among the
Company, the lenders party thereto and Bank of America National Trust and Savings
Association ("BofA"), as Administrative Agent.
4.6++++ Second Amended and Restated Credit Agreement, dated as of
August 9, 1999, by and among the Company, the lenders
party thereto and Bank of America, NA as Administrative
Agent.
4.7+++++ The First Amendment dated as of July 28, 2000 to the
Second Amended and Restated Credit Agreement, dated as of
August 9, 1999, by and among the Company, the lenders
party thereto and Bank of America, NA as Administrative
Agent.
4.8 The Second Amendment dated as of December 31, 2000 to the Second Amended and Restated
Credit Agreement, dated as of August 9, 1999 by and among the Company, various financial
institutions, and Bank of America, N.A. as administrative agent.
4.9** The Security Agreement, dated as of September 12, 1996, by and among the Company, ROV
Holding, Inc. and BofA.
4.10** The Company Pledge Agreement, dated as of September 12, 1996, by and between the Company
and BofA.
4.11*** Shareholders Agreement, dated as of September 12, 1996, by and among the Company and the
shareholders of the Company referred to therein.
4.12*** Amendment No. 1 to Rayovac Shareholders Agreement, dated August 1, 1997, by and among the
Company and the shareholders of the Company referred to therein.
4.13***** Amendment No. 2 to Rayovac Shareholders Agreement, dated as of January 8, 1999, by and
among the Company and the Shareholders of the Company referred to therein.
4.14++++++ Amendment No. 3 to Rayovac Shareholders Agreement dated January 1, 2001, by and among the
Company and the shareholders of the Company referred to therein.
4.15* Specimen certificate representing the Common Stock.
10.1+++++ Amended and Restated Employment Agreement, dated as of October 1, 2000, by and between the
Company and David A. Jones.
10.2+++++ Amended and Restated Employment Agreement, dated as of October 1, 2000, by and between the
Company and Kent J. Hussey.
10.3+++++ Employment Agreement, dated as of October 1, 2000, by and between the Company and Randall
J. Steward.
10.4+++++ Employment Agreement, dated as of October 1, 2000, by and between the Company and Kenneth
V. Biller.
10.5+++++ Employment Agreement, dated as of October 1, 2000, by and between the Company and Stephen
P. Shanesy.
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10.6+++++ Employment Agreement, dated as of October 1, 2000, by and between the Company and Merrell
M. Tomlin.
10.7+++++ Employment Agreement, dated as of October 1, 2000, by and between the Company and Luis A.
Cancio.
- ----------------
* Incorporated by reference to the Company's Registration Statement on
Form S-1 (Registration No. 333-35181) filed with the Commission.
** Incorporated by reference to the Company's Registration Statement on
Form S-1 (Registration No. 333-17895) filed with the Commission.
*** Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 29, 1997, filed with the
Commission on August 13, 1997.
**** Incorporated by reference to the Company's Registration Statement on
Form S-3 (Registration No. 333-49281) filed with the Commission.
***** Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended January 3, 1999, filed with the
Commission on February 17, 1999.
****** Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended April 4, 1999, filed with the
Commission on May 17, 1999.
+ Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1997, filed with the
Commission on December 23, 1997.
++++ Incorporated by reference to the Company's Current Report on Form
8-K filed with the Commission on August 24, 1999, as subsequently
amended on October 26, 1999.
+++++ Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 2000, filed with the
Commission on December 19, 2000.
++++++ Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended December 31, 2000, filed with
the Commission on February 14, 2001.
(b) Reports on Form 8-K: The Company has not filed any reports on Form
8-K during the three-month period ending April 1, 2001.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: May 14, 2001
RAYOVAC CORPORATION
By: /s/ Randall J. Steward
------------------------------------------------
Randall J. Steward
Executive Vice President of Administration
and Chief Financial Officer
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