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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the quarterly period ended MARCH 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the transition period from to
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Commission file number 0-19431
ROYAL APPLIANCE MFG. CO.
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(Exact name of registrant as specified in its charter)
OHIO 34-1350353
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
650 ALPHA DRIVE, CLEVELAND, OHIO 44143
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(Address of Principal Executive Offices) (Zip Code)
(216) 449-6150
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(Registrant's telephone number, including area code)
Indicate, by check mark, whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for 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 .
Indicate the number of shares outstanding of each of the issuer's
classes of common shares, as of the latest practicable date.
Common Shares, without par value 23,741,000
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(Class) (Outstanding at May 13, 1997)
The Exhibit index appears on sequential page 14.
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ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
INDEX
Page No.
Part I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets -
March 31, 1997 and December 31, 1996 3
Consolidated Statements of Operations -
three months ended March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows -
three months ended March 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6-7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-11
Part II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 12
Signatures 13
Exhibit Index 14
Exhibit 11* - Computation of earnings per common share. 15
Exhibit 27* - Financial data schedule
*Numbered in accordance with Item 601 of Regulation S-K.
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
March 31, December 31,
1997 1996
--------- -----------
ASSETS (Unaudited)
Current assets:
Cash $ -- $ 1,001
Trade accounts receivable, net 28,924 39,761
Inventories 25,672 34,052
Refundable and deferred income taxes 6,474 6,552
Prepaid expenses and other 3,036 2,436
--------- ---------
Total current assets 64,106 83,802
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Property, plant and equipment, at cost:
Land 2,356 2,356
Building 13,117 13,117
Molds, tooling, and equipment 44,880 44,716
Furniture and office equipment 5,494 5,221
Assets under capital leases 4,810 4,810
Leasehold improvements and other 2,729 2,717
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73,386 72,937
Less accumulated depreciation and amortization 37,196 35,654
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36,190 37,283
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Tooling deposits 6,597 3,962
Other 1,646 1,094
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Total assets $ 108,539 $ 126,141
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 15,682 $ 20,679
Accrued liabilities:
Advertising and promotion 5,657 11,682
Salaries, benefits, payroll taxes 2,563 5,980
Warranty and customer returns 7,900 7,975
Income taxes 827 3,503
Interest and other 4,101 3,680
Current portions of capital lease obligations and notes payable 669 665
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Total current liabilities 37,399 54,164
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Revolving credit agreement 2,217 2,886
Capitalized lease obligations, less current portion 3,272 3,307
Notes payable, less current portion 9,419 9,550
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Total long-term debt 14,908 15,743
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Total liabilities 52,307 69,907
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Commitments and contingencies (Note 3) -- --
Shareholders' equity:
Common shares, at stated value 210 210
Additional paid-in capital 41,637 41,500
Retained earnings 28,217 27,611
Cumulative translation adjustment (107) (107)
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69,957 69,214
Less treasury shares, at cost (1,316,000 and 1,201,000 shares at
March 31, 1997, and December 31, 1996, respectively) (13,725) (12,980)
--------- ---------
Total shareholders' equity 56,232 56,234
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Total liabilities and shareholders' equity $ 108,539 $ 126,141
========= =========
The accompanying notes are an integral part of these financial statements.
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three months ended
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March 31,
1997 1996
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Net sales $ 58,618 $ 52,262
Cost of sales 42,384 38,499
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Gross margin 16,234 13,763
Advertising and promotion 9,023 6,403
Other selling 1,837 2,074
General and administrative 3,005 3,044
Engineering and product development 1,022 771
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Income from operations 1,347 1,471
Interest expense, net 253 855
Other expense, net 84 71
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Income before income taxes 1,010 545
Income tax expense 404 213
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Net income $ 606 $ 332
========= =========
Net income per common share $ .02 $ .01
Weighted average number of common shares
and equivalents outstanding (in thousands) 24,390 23,999
The accompanying notes are an integral part of these financial statements.
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Three months
Ended March 31,
----------------------
1997 1996
--------- ---------
Cash flows from operating activities:
Net income $ 606 $ 332
--------- ---------
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 1,660 1,788
Compensatory effect of stock options 20 15
(Increase) decrease in assets:
Trade accounts receivable, net 10,837 12,163
Inventories 8,380 (708)
Refundable, deferred, and accrued income taxes (2,598) 5,340
Prepaid expenses and other (600) (716)
Other (670) (468)
Increase (decrease) in liabilities:
Trade accounts payable (4,997) (3,199)
Accrued advertising and promotion (6,025) (2,986)
Accrued salaries, benefits, and payroll taxes (3,417) (281)
Accrued warranty and customer returns (75) (200)
Accrued interest and other 421 76
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Total adjustments 2,936 10,824
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Net cash from operating activities 3,542 11,156
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Cash flows from investing activities:
Purchases of tooling, property, plant, and equipment, net (449) (328)
Increase in tooling deposits (2,635) (821)
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Net cash from investing activities (3,084) (1,149)
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Cash flows from financing activities:
Payments on bank debt (669) (9,824)
Payments on note payable (102) (97)
Payments on capital lease obligations (60) (89)
Proceeds from exercise of stock options 117 --
Repurchase of common stock (745) --
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Net cash from financing activities (1,459) (10,010)
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Effect of exchange rate changes on cash -- 3
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Net decrease in cash (1,001) --
--------- ---------
Cash at beginning of period 1,001 --
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Cash at end of period $ -- $ --
========= =========
Supplemental disclosure of cash flow information:
Cash payments (refunds) for:
Interest $ 340 $ 1,161
========= =========
Income taxes, net of refunds $ 3,002 $ (5,128)
========= =========
The accompanying notes are an integral part of these financial statements.
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ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1: BASIS OF PRESENTATION
The financial information for Royal Appliance Mfg. Co. and Subsidiaries
(the Company) included herein is unaudited; however, such information reflects
all adjustments (consisting solely of normal recurring adjustments) which are,
in the opinion of management, necessary for a fair presentation of the
consolidated statements of financial position as of March 31, 1997, and December
31, 1996, and the related statements of operations and cash flows as of, and for
the interim periods ended, March 31, 1997 and 1996. It is suggested that these
condensed financial statements be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's latest
shareholders' annual report (Form 10-K).
The results of operations for the three month period ended March 31,
1997, are not necessarily indicative of the results to be expected for the full
year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts and related disclosures. Actual results
could differ from those estimates.
The Company's revenue recognition policy is to recognize revenues when
products are shipped.
Net income per share is computed based on the weighted average number of
common and common equivalent shares outstanding and when applicable is adjusted
for the assumed conversion of shares issuable upon exercise of options, after
the assumed repurchase of common shares with the related proceeds.
NOTE 2: INVENTORIES
Inventories are stated at the lower of cost or market. Inventories at
March 31, 1997, and December 31, 1996, consisted of the following:
March 31, December 31,
1997 1996
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Finished goods $ 19,946 $ 23,177
Work in process and purchased parts 5,726 10,875
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Inventories at FIFO cost $ 25,672 $ 34,052
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NOTE 3: COMMITMENTS AND CONTINGENCIES
At March 31, 1997, the Company estimates having contractual commitments
for future advertising and promotional expense of approximately $7,100,
including commitments for television advertising through September 30, 1997.
Other contractual commitments for items in the normal course of business total
approximately $1,800.
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ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 4: DEBT
The Company's revolving credit facility has a maturity date of April 1,
1999, and is classified as long-term at March 31, 1997. The facility provides
for revolving credit up to $50,000, subject to a borrowing base formula as
defined in the agreement. The maximum amount allowable to the Company under the
borrowing base formula was $27,000 as of March 31, 1997, resulting in
availability of approximately $25,000. The agreement requires monthly payments
of interest only through maturity. The facility provides for pricing options at
the bank's base lending rate and LIBOR, plus a rate spread as defined in the
agreement. At March 31, 1997, the base lending rate was 8.50%. In addition, the
Company pays a commitment fee at the annual rate of 0.375% on the unused portion
of the facility. The carrying amount of the facility approximates fair value.
The revolving credit facility contains covenants which require, among
other things, the achievement of minimum net worth levels and the maintenance of
certain financial ratios. The Company was in compliance with all applicable
covenants as of March 31, 1997. The revolving credit facility is collateralized
by the Company's inventories, trade accounts receivable, equipment and general
intangibles.
In October 1996, the Company entered into a revolving trade accounts
receivable securitization program to sell, through a wholly-owned subsidiary,
certain trade accounts receivables. The maximum amount of receivables that can
be sold is seasonally adjusted. The maximum amount allowed at March 31, 1997, is
$9,000. At March 31, 1997, the Company received approximately $8,000 from the
sale of trade accounts receivables. The proceeds from the sales were used to
reduce borrowings under the Company's revolving credit facility. Costs of the
program, which primarily consist of the purchaser's financing cost of issuing
commercial paper backed by the receivables, totaled $132 for the first quarter
ended March 31, 1997, and have been classified as Other expense in the
accompanying Consolidated Statements of Operations. The Company, as agent for
the purchaser of the receivables, retains collection and administrative
responsibilities for the purchased receivables.
The Company has a variable rate mortgage note payable in the amount of
$4,161. The note is collateralized by one of the Company's assembly facilities.
Monthly payments of principal and interest are payable through July 1, 2000, at
which time the balance of approximately $3,485 is due. Interest is at a 2.35%
spread above the 30 day commercial paper rate. At March 31, 1997, the 30 day
commercial paper rate was 5.66%. The carrying amount of the mortgage note
payable approximates fair value.
The Company has a 7.9% fixed rate mortgage note payable in the amount of
$5,706. The note is collateralized by the Company's distribution facility.
Monthly payments of principal and interest are payable through November 1, 2000,
at which time the balance of approximately $4,775 is due. The carrying amount of
the mortgage note payable approximates fair value.
NOTE 5: SHARE REPURCHASE PROGRAM
In February 1997, the Company's Board of Directors authorized a common
share repurchase program that provides for the Company to purchase, in the open
market and through negotiated transactions, up to 1,200 of its outstanding
common shares. As of March 31, 1997, the Company has repurchased 115 shares for
an aggregate purchase price of $745. The program is scheduled to expire on March
1, 1998.
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS)
RESULTS OF OPERATIONS
Net sales increased 12.2% for the first quarter ended March 31, 1997,
compared with the same period in the prior year. The increase in the first
quarter was primarily a result of sales of the new Dirt Devil(R) Ultra MVP(TM)
upright vacuum and the Dirt Devil(R) Ultra Hand Vac, which was introduced during
the second quarter of 1996. The increase in net sales was partially offset by
decreases in the sales of certain other products in the Dirt Devil(R) vacuum
line. Overall sales to the top 5 customers in the first three months of 1997
(all of which are major retailers) accounted for approximately 68.3% of net
sales as compared with approximately 51.1% in the first three months of 1996.
The Company believes that its dependence on sales to its largest customers will
continue. Recently, many major retailers have experienced significant financial
difficulties and some have filed for protection from creditors under applicable
bankruptcy laws. The Company sells its products to certain customers that are in
bankruptcy proceedings.
Gross margin, as a percent of net sales, increased from 26.3% for the
first quarter 1996 to 27.7% in the first quarter 1997. The gross margin
percentage was positively affected in 1997 primarily by the introduction of new
products and production costs being allocated over higher net sales. The
increase in gross margin as a percent of net sales, was partially offset by
higher product returns.
Advertising and promotion expenses for the first quarter 1997 were
$9,023, an increase of 40.9% from the first quarter 1996. The increase in
advertising and promotion expenses was due primarily to the launch of the Fred
Astaire advertising campaign. The Company intends to continue emphasizing
cooperative advertising and television as its primary methods of advertising and
promotion. In general, the Company's advertising expenditures are not
specifically proportional to anticipated sales. For example, the amount of
advertising and promotional expenditures may be concentrated during critical
retail shopping periods during the year, particularly the fourth quarter and
during product and promotional campaign introductions. Beginning in 1996, the
Company has utilized direct response infomercials for the introduction of its
new products.
Other selling expenses for the first quarter 1997 were $1,837, a decrease
of 11.4% from the first quarter 1996. The largest components of other selling
expenses are internal sales and marketing personnel compensation and commissions
to manufacturers' representatives. The Company has reduced its dependency on
outside manufacturers' representatives resulting in lower commissions for the
first quarter 1997, compared with the same period in 1996.
General and administrative expenses for the first quarter 1997 were
$3,005, comparable with the first quarter 1996. General and administrative
expenses decreased as a percentage of net sales from 5.8% to 5.1% because of the
higher net sales in the first quarter 1997. The principal components are
compensation (including benefits), insurance, travel and professional services.
Engineering and product development expenses for the first quarter 1997
were $1,022, an increase of 32.6% from the first quarter 1996, as the Company
intensified its new product innovation efforts. The principal components are
engineering salaries, outside professional engineering and design services and
other related product development expenditures. The amount of outside
professional engineering and design services and other related product
development expenditures are dependent upon the number and complexity of new
product introductions in any given year. The increase in the first quarter 1997
was primarily due to costs associated with the three new product introductions
in 1997.
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RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS) (CONTINUED)
Interest expense for the first quarter 1997 was $253, a decrease of 70.4%
from the first quarter 1996. The decrease in interest expense resulted primarily
from lower levels of variable rate borrowings to finance working capital and
capital expenditures, and a lower effective borrowing rate.
Other expense principally reflects the effect of foreign currency
transaction gains or losses related to the Company's international assets and
the cost of the Company's trade accounts receivable securitization program.
Due to the factors discussed above, the Company had income of $1,010
before income taxes for the first quarter 1997 compared to income of $545 before
income taxes for the comparable period in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has used working capital generated from operations to fund
its operations, capital expenditures and its reduction in long-term debt.
Working capital was $26,707 at March 31, 1997, a decrease of 9.9% over the
December 31, 1996 level. Current liabilities decreased by $16,765 principally
reflecting a decrease in trade payables of $4,997, accrued advertising of
$6,025, accrued salaries, benefits and payroll taxes of $3,417, and accrued
income taxes of $2,676. Current assets also decreased by $19,696 reflecting a
reduction in trade accounts receivable by $10,837 (net of a $8,000 sale of trade
receivables, as described below) and inventory of $8,380 which was partially
offset by an increase in prepaid expenses.
In the first three months of 1997, the Company utilized $3,084 of cash
for capital purchases, including approximately $2,600 of tooling related to the
new Dirt Devil(R) Swivel Glide(TM) and Dirt Devil(R) Mop Vac(TM).
The Company's revolving credit facility has a maturity date of April 1,
1999, and is classified as long-term at March 31, 1997. The facility provides
for revolving credit up to $50,000, subject to a borrowing base formula as
defined in the agreement. The maximum amount allowable to the Company under the
borrowing base formula was $27,000 as of March 31, 1997, resulting in
availability of approximately $25,000. The agreement requires monthly payments
of interest only through maturity. The facility provides for pricing options at
the bank's base lending rate and LIBOR, plus a rate spread as defined in the
Agreement. At March 31, 1997, the base lending rate was 8.50% In addition, the
Company pays a commitment fee at the annual rate of .375% on the unused portion
of the facility.
The revolving credit facility contains covenants which require, among
other things, the achievement of minimum net worth levels and the maintenance of
certain financial ratios. The Company was in compliance with all applicable
covenants as of March 31, 1997. The revolving credit facility is collateralized
by the Company's inventories, trade accounts receivable, certain real estate,
equipment and general intangibles.
In October 1996, the Company entered into a revolving trade accounts
receivable securitization program to sell, through a wholly-owned subsidiary,
certain trade accounts receivables. The maximum amount of receivables that can
be sold is seasonally adjusted. The maximum amount allowed at March 31, 1997, is
$9,000. At March 31, 1997, the Company received approximately $8,000 from the
sale of trade accounts receivables. The proceeds from the sales were used to
reduce borrowings under the Company's revolving credit facility. Costs of the
program, which primarily consist of the purchaser's financing cost of issuing
commercial paper backed by the receivables, totaled $132 for the first quarter
ended March 31, 1997, and have been classified as Other expense in the
accompanying Consolidated Statements of Operations. The Company, as agent for
the purchaser of the receivables, retains collection and administrative
responsibilities for the purchased receivables.
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LIQUIDITY AND CAPITAL RESOURCES (CONT.)
In February 1997, the Company's Board of Directors authorized a common
share repurchase program that provides for the Company to purchase, in the open
market and through negotiated transactions, up to 1,200 of its outstanding
common shares. As of March 31, 1997, the Company has repurchased 115 shares for
an aggregate purchase price of $745. The program is scheduled to expire on March
1, 1998.
The Company believes that its revolving credit facilities along with cash
generated by operations will be sufficient to provide for the Company's
anticipated working capital and capital expenditure requirements for the next
twelve months, as well as any additional stock repurchases.
QUARTERLY OPERATING RESULTS
The following table presents certain unaudited consolidated quarterly
operating information for the Company and includes all adjustments (consisting
only of normal recurring adjustments) that the Company considers necessary for a
fair presentation of such information for the interim periods.
Three Months Ended
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March 31, Dec. 31, Sept. 30, June 30, March 31,
1997 1996 1996 1996 1996
---- ---- ---- ---- ----
(Dollars in thousands, except per share amounts)
Net Sales $58,618 $97,204 $73,688 $62,969 $52,262
Gross margin 16,234 30,633 21,223 16,504 13,763
Net income 606 4,625 3,151 1,328 332
Net income per
common share (a) .02 .19 .13 .05 .01
(a) The sum of 1996 quarterly net income per common share does not equal
annual net income per common share due to the effect of rounding
The Company's business is highly seasonal. The Company believes that a
significant percentage of certain of its products, particularly the Dirt
Devil(R) Hand Vac and Dirt Devil(R) Broom Vac(TM), are given as gifts and
therefore sell in larger volumes during the Christmas shopping season. Because
of the Company's continued dependency on its major customers, the timing of
purchases by these major customers could cause quarterly fluctuations in the
Company's net sales. As a consequence, results in prior quarters are not
necessarily indicative of future results of operations.
OTHER
The Company believes that the domestic vacuum cleaner industry is a
mature industry with modest annual growth in many of its products but with a
decline in certain other products. Competition is dependent upon price, quality,
extension of product lines, and advertising and promotion expenditures.
Additionally, competition is influenced by innovation in the design of
replacement models and by marketing and approaches to distribution. The Company
has experienced heightened competition in the upright market segment since 1992,
and believes that its net sales and market share in the domestic upright market
segment remain under pressure as a result of increased advertising expenditures
and new product introductions by its competitors. The Company's most significant
competitors are Hoover and Eureka, and Black & Decker, in the hand-held market.
These competitors and several others are subsidiaries of companies that are more
diversified and have greater financial resources than the Company.
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INFLATION
The Company does not believe that inflation by itself has had a material
effect on the Company's results of operations. However, as the Company
experiences price increases from its suppliers, which may include increases due
to inflation, retail pressures may prevent the Company from increasing its
prices.
LITIGATION
The Company is involved in various claims and litigation arising in the
normal course of business. In the opinion of management, the ultimate resolution
of these actions will not materially affect the consolidated financial position,
results of operations, or cash flows of the Company.
ACCOUNTING STANDARDS
The Company implemented Statement of Financial Accounting Standards
"SFAS" No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, in the first quarter of 1997. The impact of
implementing SFAS No. 125 did not have a material impact on its consolidated
financial position and results of operations.
The Company will be required to implement SFAS No. 128, Earnings Per
Share, in the fourth quarter of 1997. The Company expects the implementation of
SFAS No. 128 will not have a material impact on its calculation of earnings
per share.
FORWARD LOOKING STATEMENTS
Forward-looking statements in this Form 10-Q are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from those projected.
Readers are cautioned not to place undue reliance on these forward-looking
statements which speak only as of the date hereof. Potential risks and
uncertainties include, but are not limited to, general business and economic
conditions; the financial strength of the retail industry particularly the major
mass retail channel; the competitive pricing environment within the vacuum
cleaner segment of the floor care industry; the cost and effectiveness of
planned advertising, marketing and promotional campaigns, the success at retail
of the Company's new products, and the dependence upon the Company's ability to
continue to successfully develop and introduce innovative products.
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PART II - OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K
Forms 8-K - None
The following documents are furnished as an exhibit and
numbered pursuant to Item 601 of Regulation S-K:
Exhibit 11 - Computation of earnings per common share.
Exhibit 27 - Financial data schedule
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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.
Royal Appliance Mfg. Co.
-------------------------------------------------
(Registrant)
/s/ Michael J. Merriman
-------------------------------------------------
Michael J. Merriman
Chief Executive Officer, President and Director
(Principal Executive and Financial Officer)
Date: May 13, 1997 /s/ Richard G. Vasek
------------- --------------------------------------------------
Richard G. Vasek
Controller, Secretary and Chief Accounting Officer
(Principal Accounting Officer)
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INDEX TO EXHIBITS
Page No.
Exhibit 11 - Computation of earnings per common share 15
Exhibit 27 - Financial data schedule
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