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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2001
------------------
[ ] 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 333-57099
---------
WKI HOLDING COMPANY, INC.
-------------------------
(Registrant)
DELAWARE 16-1403318
-------- ----------
(State of incorporation) (I.R.S. Employer Identification No.)
ONE PYREX PLACE, ELMIRA NEW YORK 14902
-------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 607-377-8000
------------
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 and (2) has been subject to the filing requirements for
at least the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
68,160,599 shares of WKI Holding Company, Inc.'s, $0.01 Par Value, were
outstanding as of November 13, 2001.
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1
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
WKI HOLDING COMPANY, INC.
(In thousands, except share and per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
SEPTEMBER 30, OCTOBER 1, SEPTEMBER 30, OCTOBER 1,
2001 2000 2001 2000
-------------- -------------- -------------- --------------
Net sales $ 188,479 $ 204,264 $ 522,118 $ 566,414
Cost of sales 142,043 139,321 384,849 389,019
Selling, general and administrative expenses 29,769 53,186 120,801 159,301
Provision for restructuring and rationalization
costs 10,048 -- 47,173 --
Integration related expenses -- 7,365 -- 21,453
Other expense 3,886 2,095 9,894 8,494
-------------- -------------- -------------- --------------
Operating income (loss) 2,733 2,297 (40,599) (11,853)
Interest expense 18,214 18,509 55,681 54,678
-------------- -------------- -------------- --------------
Loss before taxes on income (15,481) (16,212) (96,280) (66,531)
Income tax expense (benefit) (175) 57,503 939 51,454
-------------- -------------- -------------- --------------
Loss before minority interest (15,306) (73,715) (97,219) (117,985)
Minority interest in earnings of subsidiary 100 121 177 230
-------------- -------------- -------------- --------------
Net loss (15,406) (73,836) (97,396) (118,215)
-------------- -------------- -------------- --------------
Preferred stock dividends (3,930) (3,404) (11,379) (9,856)
-------------- -------------- -------------- --------------
NET LOSS APPLICABLE TO COMMON STOCK $ (19,336) $ (77,240) $ (108,775) $ (128,071)
============== ============== ============== ==============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.29) $ (1.15) $ (1.61) $ (1.91)
============== ============== ============== ==============
Weighted average number of common shares
outstanding during the period 67,715,544 67,010,938 67,508,618 66,908,408
============== ============== ============== ==============
The accompanying notes are an integral part of these statements.
2
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
WKI HOLDING COMPANY, INC.
(In thousands)
SEPTEMBER 30, DECEMBER 31,
2001 2000
--------------- --------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,336 $ 7,913
Accounts receivable (net of allowances of $19,290 in 2001
and $25,567 in 2000) 130,450 146,040
Inventories:
Finished and in-process goods 178,752 188,011
Raw materials and supplies 20,172 18,571
Other current assets 16,427 17,017
--------------- --------------
Total current assets 350,137 377,552
--------------- --------------
OTHER ASSETS
Other assets (net of accumulated amortization of $32,668 in
2001 and $23,399 in 2000) 51,797 55,706
--------------- --------------
51,797 55,706
--------------- --------------
PROPERTY AND EQUIPMENT
Land 3,668 4,076
Buildings 86,906 89,789
Machinery and equipment 297,665 305,576
--------------- --------------
388,239 399,441
Less accumulated depreciation (277,951) (257,985)
--------------- --------------
110,288 141,456
--------------- --------------
INTANGIBLES
Trademarks and patents (net of accumulated amortization
of $14,384 in 2001 and $9,852 in 2000) 144,176 148,708
Goodwill (net of accumulated amortization of $18,501 in
2001 and $14,373 in 2000) 201,670 205,798
--------------- --------------
345,846 354,506
--------------- --------------
TOTAL ASSETS $ 858,068 $ 929,220
=============== ==============
The accompanying notes are an integral part of these statements.
3
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
WKI HOLDING COMPANY, INC.
(In thousands, except share and per share amounts)
SEPTEMBER 30, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' DEFICIT 2001 2000
--------------- --------------
CURRENT LIABILITIES
Accounts payable $ 54,841 $ 62,418
Note payable to Borden -- 6,100
Current maturities of long-term debt 3,155 3,635
Reserve for restructuring 13,669 --
Other current liabilities 83,580 104,085
--------------- --------------
155,245 176,238
--------------- --------------
OTHER LIABILITIES
Note payable to Borden 23,950 --
Preferred dividends payable to Borden 17,815 10,287
Long-term debt 784,943 766,528
Non-pension post-employment benefit obligations 42,899 42,545
Other long-term liabilities 11,351 6,754
--------------- --------------
880,958 826,114
--------------- --------------
MINORITY INTEREST IN SUBSIDIARY 1,396 1,219
STOCKHOLDERS' DEFICIT
Preferred stock - 5,000,000 shares authorized;
3,200,000 shares issued 95,378 91,527
Common stock - $0.01 par value, 80,000,000 shares authorized;
68,897,028 and 67,397,028 shares issued in 2001 and 2000,
respectively 689 674
Common stock held in treasury at cost (736,429 and 280,000
shares in 2001 and 2000, respectively) (2,151) (940)
Contributed capital 607,345 604,911
Accumulated deficit (876,359) (767,584)
Accumulated other comprehensive income (4,433) (2,939)
--------------- --------------
Total stockholders' deficit (179,531) (74,351)
--------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 858,068 $ 929,220
=============== ==============
The accompanying notes are an integral part of these statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
WKI HOLDING COMPANY, INC.
(In thousands)
NINE MONTHS ENDED
-----------------------------
SEPTEMBER 30, OCTOBER 1,
CASH FLOWS FROM OPERATING ACTIVITIES: 2001 2000
--------------- ------------
Net loss $ (97,396) $ (118,215)
Adjustments to reconcile net loss to net cash used in
Operating activities:
Depreciation and amortization 38,160 34,778
Amortization of deferred financing fees 2,652 1,623
Minority interest in income of subsidiary 177 231
Deferred tax provision -- 48,611
Provision for restructuring and rationalization costs 47,173 --
Provision for integration-related costs -- 21,453
Sale of accounts receivable -- 90,000
Provision for close-out of inventories -- 2,900
Provision for post-retirement benefits, net of cash paid 10,861 4,540
Changes in operating assets and liabilities:
Accounts receivable 15,590 (43,227)
Inventories 7,229 (35,507)
Prepaid expenses and other current assets 590 (3,680)
Accounts payable and accrued expenses (33,757) 15,759
Cash paid for restructuring and rationalization (9,531) --
Cash paid for integration-related costs -- (32,651)
Other assets/liabilities (2,651) (22,415)
--------------- ------------
NET CASH USED IN OPERATING ACTIVITIES (20,903) (35,800)
--------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment and other assets (15,323) (38,797)
Net proceeds from sale of assets 1,500 --
--------------- ------------
NET CASH USED IN INVESTING ACTIVITIES (13,823) (38,797)
--------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on Borden revolving credit facility, net 17,850 --
Borrowing on revolving credit facility, net 22,100 105,300
Repayment of long-term debt, other than revolving
credit facility (4,165) (3,331)
Issuance of common stock 2,449 1,615
Treasury stock purchases (1,211) (914)
Payments of deferred financing fees (5,874) --
--------------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 31,149 102,670
--------------- ------------
Net change in cash and cash equivalents (3,577) 28,073
Cash and cash equivalents at beginning of period 7,913 8,368
--------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,336 $ 36,441
=============== ============
The accompanying notes are an integral part of these statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
WKI HOLDING COMPANY, INC.
(In thousands)
NINE MONTHS ENDED
---------------------------
SEPTEMBER 30, OCTOBER 1,
2001 2000
------------- ------------
SUPPLEMENTAL DATA:
Cash (received) paid during the year for:
Income taxes, net $ (55) $ 1,863
============= ============
Interest $ 49,855 $ 46,322
============= ============
Non-cash activity:
Preferred stock dividends $ 11,379 $ 9,856
============= ============
The accompanying notes are an integral part of these statements.
6
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT (UNAUDITED)
WKI HOLDING COMPANY, INC.
(In thousands)
ACCUMULATED
OTHER TOTAL
PREFERRED COMMON TREASURY CONTRIBUTED ACCUMULATED COMPREHENSIVE STOCKHOLDERS
STOCK STOCK STOCK CAPTIAL DEFICIT INCOME DEFICIT
---------- ------- ---------- ------------- ------------- --------------- --------------
BALANCE, DECEMBER 31, 2000 $ 91,527 $ 674 $ (940) $ 604,911 $ (767,584) $ (2,939) $ (74,351)
NET LOSS (97,396) (97,396)
FOREIGN CURRENCY TRANSLATION
ADJUSTMENT (672) (672)
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING FOR DERIVATIVE
FINANCIAL INSTRUMENTS (189) (189)
DERIVATIVE FAIR VALUE (633) (633)
ADJUSTMENT
--------------
TOTAL COMPREHENSIVE INCOME (98,890)
--------------
ISSUANCE OF COMMON STOCK 15 2,234 2,249
COLLECTION OF RECEIVABLE FOR 200 200
STOCK SOLD
REPURCHASE OF COMMON STOCK (1,211) (1,165)
PREFERRED STOCK DIVIDENDS 3,851 (11,379) (7,528)
---------- ------- ---------- ------------- ------------- --------------- --------------
BALANCE, SEPTEMBER 30, 2001 $ 93,378 $ 689 $ (2,151) $ (607,345) $ (876,345) $ (4,433) $ (179,531)
========== ======= ========== ============= ============= =============== ==============
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WKI HOLDING COMPANY, INC.
(1) NATURE OF OPERATIONS AND BASIS OF PRESENTATION
WKI Holding Company, Inc. (the Company or WKI) is a leading manufacturer and
marketer of housewares, including bakeware, dinnerware, rangetop cookware,
kitchen and household products, cutlery and precision cutting tools. The
Company believes that its brands, including Corningware(R), Pyrex(R),
Corelle(R), Revere Ware(R), Visions(R), EKCO(R), Via(R), Baker's Secret(R),
Chicago Cutlery(R), OLO(R), OXO(R) and Grilla Gear(R), constitute one of the
broadest and best recognized collection of brands in the housewares industry.
Pursuant to Regulation 15(d) of the Securities Act of 1934, WKI is filing herein
its quarterly report on Form 10-Q, which includes the third fiscal quarter of
the year ending December 31, 2001. The consolidated financial statements
reflect all adjustments, which, in the opinion of management, are necessary for
a fair statement of the results of operations and financial position for the
interim periods presented. All such adjustments are of a normal recurring
nature. The consolidated financial statements have been compiled without audit
and are subject to such year-end adjustments as may be considered appropriate by
the registrant and should be read in conjunction with the Company's Form 10-K
for the year ended December 31, 2000, which has been filed with the Securities
and Exchange Commission.
Certain 2000 amounts have been reclassified to conform with 2001 presentation.
The health of the general economy, which continued to deteriorate in the third
quarter of 2001, is not expected to improve in the near term, particularly in
light of uncertainties created by recent world events. This economic downturn
has affected and is expected to continue to negatively impact the Company. The
Company's credit facilities contain financial covenants, which are tied to the
Company's earnings and cash flow performance. The Company was in compliance
with these financial covenants as of September 30, 2001. However, in light of
the poor economic environment there can be no assurance that these covenants
will be met at December 31, 2001.
To address the Company's prior performance issues, management embarked upon a
comprehensive restructuring and rationalization program beginning in the first
quarter of 2001. These programs are expected to generate significant cost
savings, some of which will be realized during 2002 and beyond and which will
improve the Company's ability to withstand external market pressures.
Additionally, as a result of the current downturn in the economy, management
amended the credit facility between the Company and Borden, Inc. (Borden), an
affiliate of Kohlberg, Kravis Roberts & Co., L.P. (KKR), the Company's parent,
to provide for an additional $13 million in financing to cover short-term cash
needs.
8
(2) RECENT ACCOUNTING PRONOUNCEMENTS
In April 2001, the Emerging Issues Task Force (EITF) reached a consensus on
Issue No. 00-25, "Accounting for Consideration from a Vendor to a Retailer in
Connection with the Purchase or Promotion of the Vendor's Products." This issue
requires that consideration paid from a vendor to a purchaser be classified as a
reduction of revenue in the vendor's income statement unless it can be
determined that an identifiable benefit will be received by the vendor and the
fair value of the benefit exceeds the consideration provided to the purchaser.
In that case, the consideration should be characterized as a cost. This EITF is
effective for quarters beginning after December 15, 2001. The Company is in the
process of determining the impact of this consensus but does not expect reported
financial results will be significantly impacted.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 142, "Goodwill and Other Intangible
Assets". This standard requires that amortization of goodwill and other
intangible assets with indefinite lives be discontinued. Instead, goodwill and
other intangible assets with indefinite lives will be assessed, at least
annually, for impairment by applying a fair-value-based test. However, an
intangible asset acquired through contractual or other legal rights or that can
be sold, transferred, licensed, rented or exchanged will still be amortized over
its useful life, which is no longer capped at 40 years. SFAS No. 142, which may
have an impact on the carrying value of goodwill and other intangible assets,
will be implemented as of January 1, 2002. The Company is in the process of
evaluating the impact of implementing SFAS No.142.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations". SFAS No. 143 addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. SFAS No.
143 is effective for fiscal years beginning after June 15, 2002. The Company is
in the process of evaluating the impact of implementing SFAS No. 143.
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment of Long-Lived Assets" which supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" and the accounting and reporting provisions of APB No.
30, "Reporting the Results of Operations - Reporting and Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" for the disposal of a segment of a business. This
statement is effective for fiscal years beginning after December 15, 2001. SFAS
No. 144 retains many of the provisions of SFAS No. 121, but addresses certain
implementation issues associated with that Statement. The Company is currently
evaluating the impact of implementing SFAS No. 144.
(3) RESTRUCTURING AND RATIONALIZATION
In 2001, the Company implemented an initiative to restructure and rationalize
several aspects of the Company's manufacturing, distribution and administrative
operations. The initiatives include the following:
(1) Exit from the Martinsburg, West Virginia facility by the end of the
first quarter of 2002, where the Corningware(R) and Visions(R) product
lines are manufactured. This product will be entirely sourced from
third party vendors in 2002.
(2) Consolidation of certain distribution operations at Waynesboro,
Virginia into the Company's existing distribution centers at Monee,
Illinois and Greencastle, Pennsylvania. The consolidation is expected
to occur in 2002.
(3) Significant restructuring of metal bakeware manufacturing at
Massillon, Ohio to reduce costs.
(4) Exited the Wauconda, Illinois facility effective September 30, 2001,
where Chicago Cutlery(R) product lines were manufactured. These
products are now being sourced from third party vendors.
(5) Business redesign activities associated with rationalizing processes
and headcount throughout the organization to improve overall
efficiency, effectiveness and responsiveness of the organization.
9
The initiatives have resulted in $47.2 million of expenses for restructuring and
rationalization programs through the third quarter of 2001. To date cash
payments of $3.8 million and $5.7 have been made for these programs,
respectively.
Restructuring and rationalization expense details are as follows (in 000)'s:
THIRD QUARTER 2001 YEAR TO DATE SEPTEMBER 2001
-------------------------------------------------- --------------------------------------------------
TOTAL TOTAL
RESTRUCTURING RESTRUCTURING
RESTRUCTURING RATIONALIZATION AND RESTRUCTURING RATIONALIZATION AND
CHARGE CHARGE RATIONALIZATION CHARGE CHARGE RATIONALIZATION
-------------- ---------------- ---------------- -------------- ---------------- ----------------
DISPOSAL OF ASSETS $ 439 $ -- $ 439 $ 15,450 $ 4,318 $ 19,768
EMPLOYEE TERMINATION COSTS 4,061 -- 4,061 16,339 -- 16,339
OTHER EXIT COSTS 1,900 -- 1,900 3,485 -- 3,485
BUSINESS REDESIGN COSTS -- 3,648 3,648 -- 7,581 7,581
-------------- ---------------- ---------------- -------------- ---------------- ----------------
$ 6,400 $ 3,648 $ 10,048 $ 35,274 $ 11,899 $ 47,173
============== ================ ================ ============== ================ ================
Restructuring balance sheet details are as follows (in 000)'s:
RESTRUCTURING LIABILITY AT
LIABILITY AT EXPENSE BALANCE SHEET CASH SEPTEMBER 30,
12/31/2000 2001 RECLASSIFICATIONS PAID 2001
------------- -------------- ------------------- -------- --------------
DISPOSAL OF ASSETS $ -- $ 15,450 $ (15,406) $ (44) $ --
EMPLOYEE TERMINATION COSTS -- 16,339 (2,366) (2,517) 11,456
OTHER EXIT COSTS -- 3,485 -- (1,272) 2,213
------------- -------------- ------------------- -------- --------------
$ -- $ 35,274 $ (17,772) $(3,833) $ 13,669
============= ============== =================== ======== ==============
Disposal of Assets
- ------------------
As part of the restructuring initiative to close or streamline manufacturing,
distribution and administrative locations, the tangible assets of the
Martinsburg, Waynesboro, Massillon, Wauconda and certain administrative
facilities have been written down to fair value. Through the third quarter of
2001, $15.4 million of the expense is related to write down of property and
equipment. Management judgment is involved in estimating the tangible assets'
fair value; accordingly, actual results could vary significantly from such
estimates. Rationalization charges primarily consist of environmental
expenditures associated with the closure and anticipated sale of Martinsburg.
Management is continuing to evaluate the necessity of additional asset disposals
through additional restructuring measures.
Employee termination costs
- --------------------------
As part of the restructuring initiative approximately 600 employees have been
notified of their release from employment, generating a $16.3 million
restructuring charge through the third quarter of 2001. As of September 30,
2001, approximately 250 employees have been released. Included in the charge is
a net pension and post retirement benefit charge of $2.4 million, which resulted
from the terminations. This charge was reserved in non-pension post employment
benefits and other long-term liabilities.
Other exit costs
- ----------------
Other exit costs primarily consist of legal costs, lease cancellation expenses
and shut down costs associated with the closure and anticipated sale of
facilities.
10
Business redesign costs
- -----------------------
The Company is in the process of realigning its administrative, manufacturing
and sourcing strategies to be more competitive. The business redesign costs
primarily include consulting expenses associated with process redesign work
required to support the restructuring initiatives, and such costs are expensed
as incurred.
Restructuring and rationalization charges generated from these initiatives are
expected to increase to approximately $56.0 million, including cash payments of
approximately $20.0 million, by the end of 2001. In addition, management is
continuing to evaluate the necessity of additional restructuring programs.
(4) SUPPLEMENTAL BALANCE SHEET DATA
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2001 2000
--------------- -------------
Other current liabilities
Wages and employee benefits $ 15,920 $ 30,254
Accrued advertising and promotion 16,227 28,277
Accrued interest 14,740 11,601
Other accrued expenses 36,693 33,953
--------------- -------------
$ 83,580 $ 104,085
=============== =============
(5) BORROWINGS
On April 12, 2001, the Company entered into an Amended and Restated Credit
Agreement, which amended and restated the senior credit agreement dated April 9,
1998 (1998 Credit Agreement), under which $292.0 million of term loans remain
outstanding and the $275.0 million revolving credit facility remains in effect.
The Amended and Restated Credit Agreement also provides for the following
significant changes from the 1998 Credit Agreement: a first priority lien on
substantially all of the assets of the Company and its subsidiaries; an
additional secured revolving credit facility of $25.0 million maturing on March
31, 2004; amended financial covenants; an additional financial covenant;
increased pricing on the credit facilities; and changes in the restrictions
affecting, among other things, indebtedness, investments, acquisitions,
dispositions and prepayment of subordinated indebtedness.
The Company's Amended and Restated Credit Agreement contains numerous financial
and operating covenants that limit the discretion of the Company's management
with respect to certain business matters. These covenants place significant
restrictions on, among other things, the ability of the Company to incur
additional indebtedness, pay dividends and other distributions, prepay
subordinated indebtedness, enter into sale and leaseback transactions, create
liens or other encumbrances, make capital expenditures, make certain investments
or acquisitions, engage in certain transactions with affiliates, sell or
otherwise dispose of assets and merge or consolidate with other entities and
otherwise restrict corporate activities. In addition, the credit facilities
also require that the Company meet certain financial ratios and tests, including
a minimum EBITDA, a ratio of debt to EBITDA and a ratio of EBITDA to cash
interest expense (where EBITDA represents adjusted cash flow as described more
fully in the credit facilities).
The Amended and Restated Credit Agreement contains customary events of default.
The Company was in compliance with the financial covenants contained in the
senior credit facility as of September 30, 2001.
The current economic downturn has negatively affected, and is expected to
continue to negatively affect the Company. As such, there can be no assurance
that these covenants will be met at December 31, 2001. The Company believes
that it will be able to meet all scheduled debt and interest payments in 2001.
During the third quarter of 2000, Borden agreed to provide the Company a $40.0
million temporary revolving credit facility to assist in meeting working capital
requirements, capital expenditures, interest payments and scheduled principal
11
payments. The original maturity date of the Borden facility of December 31,
2000 was extended to March 31, 2004. Effective July 2, 2001, Borden increased
its line of credit to the Company from $40.0 million to $50.0 million. On
August 16, 2001, Borden's commitment decreased from $50 million to $25.0
million. The facility is secured with an interest on the Company's assets that
is second in priority behind the interests securing the Amended and Restated
Credit Agreement.
To meet current liquidity requirements the Company, effective October 26, 2001,
entered into a $13 million credit facility with Borden, maturing on December 28,
2001, which replaced a prior borrowing which matured on October 25, 2001. The
new $13 million credit facility has terms and conditions which are similar to
the $25 million revolving credit facility but is unsecured. At November 13,
2001, $23 million was available under the existing revolving credit facilities.
(6) RELATED PARTY TRANSACTIONS
The following transactions with related parties are included in the consolidated
statements of operations for the quarters ended September 30, 2001 and October
1, 2000.
(IN THOUSANDS)
THREE MONTHS ENDED: NINE MONTHS ENDED:
------------------------------ -----------------------------
SEPTEMBER 30, OCTOBER 1, SEPTEMBER 30, OCTOBER 1,
2001 2000 2001 2000
--------------- ------------- -------------- -------------
Borden management fees $ (500) $ 625 $ 750 $ 1,875
Services provided by Borden 285 244 799 319
Interest expense to Borden 667 154 1,729 154
(note 5)
The Company incurs management fees and expenses for services provided by Borden.
In the third quarter of 2001 the Company and Borden amended the management
agreement originally dated February 23, 2000. The agreement now provides for a
variable payout, not to exceed $2.5 million annually, based on Adjusted EBITDA
(Earnings Before Interest, Taxes, Depreciation and Amortization, Restructuring
and Rationalization expenses). In 2000, the management fee was fixed at $2.5
million annually.
Through the third quarter of 2001, the Company had accrued $11.4 million in
preferred stock dividends which are payable to Borden and the Company's parent
in the amounts of $7.5 million and $3.9 million, respectively. Dividends
payable to Borden are recorded in other long-term liabilities. The dividends
payable to the Company's parent will be paid in additional shares and are
accrued in preferred stock.
The Company and/or affiliates of the Company, including entities related to KKR,
from time to time have purchased, and may in the future purchase, depending on
market conditions, senior subordinated notes and other debt obligations
previously issued by the Company in the open market or by other means. As of
September 30, 2001, affiliates have purchased an aggregate of $80.5 million of
senior subordinated notes in open market transactions. Additionally an
affiliate of KKR acquired $20.7 million of loans under the Company's senior
credit facility during the third quarter of 2001.
(7) COMMITMENTS
The Company is a defendant or plaintiff in various claims and lawsuits arising
in the normal course of business. The Company believes, based upon information
it currently possesses, and taking into account established reserves for
estimated liabilities and its insurance coverage, that the ultimate outcome of
the proceedings and actions is unlikely to have a material adverse effect on the
Company's financial statements.
12
(8) DERIVATIVES
Effective January 1, 2001, the Company adopted SFAS No. 133, 137 and 138 related
to "Accounting for Derivative Instruments and Hedging Activities". At that time
the Company had a $15.0 million notional amount interest rate swap with a fair
value of $(0.2) million. In accordance with these statements, the Company
recorded a transition adjustment to other comprehensive income and other
liabilities of $0.2 million. At September 30, 2001, the swap had a fair value
of $(0.8) million. Other comprehensive income and other liabilities have been
adjusted accordingly. A 1% increase or decrease in market interest rates would
result in a $0.3 million increase/(decrease) in the fair value of the interest
rate swap. The swap expires on July 29, 2003.
(9) SEGMENT INFORMATION
The Company believes its business units have similar economic characteristics
and that it meets the aggregation criteria of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information."
13
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
The following discussion should be read in conjunction with the consolidated
financial statements and related notes included elsewhere herein.
Background
- ----------
WKI Holding Company Inc. (the Company or WKI), is a leading manufacturer and
marketer of bakeware, rangetop cookware, kitchen and household tools, tabletop
dinnerware, cutlery, and precision cutting tools. The Company has strong
positions in major channels of distribution for its products in North America
and has also achieved a significant presence in certain international markets,
primarily Asia, Australia, and Latin America. In North America the Company
sells both on a wholesale basis to retailers, distributors and other accounts
that resell the Company's products, and on a retail basis, through
Company-operated factory stores. In the international market the Company has
established its presence on a wholesale basis through an international sales
force along with localized distribution and marketing capabilities.
Product categories as defined by the Company are Oven/Bakeware, which includes
the Corningware(R), Pyrex(R), EKCO(R) metal bakeware, Farberware(R) and
Cuisinart(R) brands; Rangetop Cookware which includes the Revere(R), Visions(R)
and EKCO(R) Cookware brands; Kitchenware which includes kitchen tools and
gadgets sold under the EKCO(R) and Grilla Gear(R) brands; Tabletop which
includes Corelle(R) dinnerware; Cutlery which includes the Chicago Cutlery(R)
and Regent Sheffield brands; OXO(R) which includes kitchen and household tools
under the OXO Good Grips(R), OXO Softworks(TM) , OXO Touchables (TM) and OXO
Basics(TM) brand names; and "Other" which includes cleaning products, precision
cutting tools sold under the OLFA and OLO(R) brands, and other kitchen
accessories that are manufactured by third parties and are sold primarily
through the Company-operated factory stores.
In 2001, the Company implemented an initiative to restructure and rationalize
several aspects of the Company's manufacturing, distribution and administrative
operations. The program will result in charges of approximately $56.0 million
and cash payments of approximately $20.0 million in 2001. The program includes
five major components:
(1) Exit from the Martinsburg, West Virginia facility by the end of the
first quarter of 2002, where the Corningware(R) and Visions(R) product
lines are manufactured.
(2) Consolidation of certain distribution operations at Waynesboro,
Virginia into the Company's existing distribution centers at Monee,
Illinois and Greencastle, Pennsylvania. The consolidation is expected
to occur in 2002.
(3) Significant restructuring of metal bakeware manufacturing at
Massillon, Ohio to reduce costs.
(4) Exited the Wauconda, Illinois facility effective September 30, 2001,
where Chicago Cutlery(R) product lines were manufactured.
(5) Business redesign activities associated with rationalizing processes
and headcount throughout the organization to improve overall
efficiency, effectiveness and responsiveness of the organization.
Management is continuing to evaluate the necessity of additional restructuring
measures.
Economic Environment
- --------------------
In the third quarter of 2001, the economic environment continued to decline.
This was evidenced by reduced sales volume versus the prior year throughout most
of the Company's major product categories. This slowdown occurred as customers
continued to manage inventories in expectation of a weaker holiday buying season
or respond to real declines in retail traffic. In addition, recent world events
have continued to affect consumer confidence. As such, it is not possible for
the Company to determine the ultimate impact this situation will have on its
financial condition and results of operations.
14
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
- ---------------------
THIRD QUARTER 2001 VERSUS THIRD QUARTER 2000
- --------------------------------------------
(IN THOUSANDS)
THREE MONTHS ENDED THREE MONTHS ENDED
------------------------------ -------------------------------
SEPTEMBER 30, % OF NET OCTOBER 1, % OF NET
2001 SALES 2000 SALES
--------------- ------------- -------------- ---------------
Net Sales $ 188,479 100.0% $ 204,264 100.0%
Cost of sales 142,043 75.4 139,321 68.2
--------------- ------------- -------------- ---------------
Gross profit 46,436 24.6 64,943 31.8
Selling, general and administrative 29,769 15.8 53,186 26.0
Provision for restructuring and
rationalization costs 10,048 5.3 -- --
Integration related expenses -- -- 7,365 3.6
Other expenses 3,886 2.1 2,095 1.0
--------------- ------------- -------------- ---------------
Operating income 2,733 1.4 2,297 1.1
Interest expense 18,214 9.7 18,509 9.1
--------------- ------------- -------------- ---------------
Loss before taxes on income (15,481) (8.2) (16,212) (7.9)
Income tax (benefit) expense (175) (0.1) 57,503 28.2
--------------- ------------- -------------- ---------------
Loss before minority interest (15,306) (8.1) (73,715) (36.1)
Minority interest in earnings of
subsidiary 100 0.1 121 0.1
--------------- ------------- -------------- ---------------
Net loss $ (15,406) (8.2)% $ (73,836) (36.1)%
=============== ============= ============== ===============
EBITDA 15,545 8.2% 13,977 6.8%
Integration related expenses -- -- 7,365 3.6
Loss and transaction fees associated
with sale of assets -- -- 823 0.4
Provision for restructuring and
rationalization costs 10,048 5.3 -- --
--------------- ------------- -------------- ---------------
Adjusted EBITDA $ 25,593 13.6% $ 22,165 10.9%
=============== ============= ============== ===============
15
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS (CONTINUED)
YEAR TO DATE SEPTEMBER 30, 2001 VERSUS YEAR TO DATE OCTOBER 1, 2000
- -------------------------------------------------------------------
(IN THOUSANDS)
NINE MONTHS ENDED NINE MONTHS ENDED
----------------------------- ------------------------------
SEPTEMBER 20, % OF NET OCTOBER 1, % OF NET
2001 SALES 2000 SALES
--------------- ------------ -------------- --------------
Net Sales $ 522,118 100.0% $ 566,414 100.0%
Cost of sales 384,849 73.7 389,019 68.7
--------------- ------------ -------------- --------------
Gross profit 137,269 26.3 177,395 31.3
Selling, general and administrative 120,801 23.1 159,301 28.1
Provision for restructuring and
rationalization costs 47,173 9.0 -- --
Integration related expenses -- -- 21,453 3.8
Other expenses 9,894 1.9 8,494 1.5
--------------- ------------ -------------- --------------
Operating loss (40,599) (7.8) (11,853) (2.1)
Interest expense 55,681 10.7 54,678 9.7
--------------- ------------ -------------- --------------
Loss before taxes on income (96,280) (18.4) (66,531) (11.7)
Income tax expense 939 0.2 51,454 9.1
--------------- ------------ -------------- --------------
Loss before minority interest (97,219) (18.6) (117,985) (20.8)
Minority interest in earnings of
subsidiary 177 -- 230 --
--------------- ------------ -------------- --------------
Net loss $ (97,396) (18.7)% $ (118,215) (20.9)%
=============== ============ ============== ==============
EBITDA (2,439) (0.5)% 22,925 4.0%
Integration related expenses -- -- 21,453 3.8
Provisions for close-out inventories -- -- 2,900 0.5
Loss and transaction fees associated
with sale of assets -- -- 823 0.1
Provision for restructuring and
rationalization costs 47,173 9.0 -- --
--------------- ------------ -------------- --------------
Adjusted EBITDA $ 44,734 8.6% $ 48,101 8.5%
=============== ============ ============== ==============
16
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS (CONTINUED)
NET SALES BY PRODUCT CATEGORIES:
(IN MILLIONS)
THREE MONTHS ENDED
--------------------------
SEPTEMBER 1, OCTOBER 1,
2001 2000 $ CHANGE % CHANGE
------------- ----------- --------- -----------
Oven Bakeware $ 64.6 $ 69.3 $ (4.7) (6.8) %
Tabletop 37.0 41.7 (4.7) (11.2)
Rangetop Cookware 26.4 25.4 1.0 3.8
OXO 19.3 19.7 (0.4) (2.3)
Kitchenware 19.1 18.8 0.3 1.9
Cutlery 8.6 7.6 1.0 12.4
Other 12.5 17.9 (5.4) (29.8)
------------- ----------- ---------
Sub-Total $ 187.5 $ 200.4 $ (12.9) (6.4)
Cleaning (1) 1.0 3.9 (2.9) (74.3)
Total $ 188.5 $ 204.3 $ (15.8) (7.7) %
============= =========== =========
NINE MONTHS ENDED
--------------------------
SEPTEMBER 1, OCTOBER 1,
2001 2000 $ CHANGE % CHANGE
------------- ----------- --------- -----------
Oven Bakeware $ 164.6 $ 184.4 $ (19.8) (10.7) %
Tabletop 119.5 125.0 (5.5) (4.4)
Rangetop Cookware 71.4 63.7 7.7 12.1
OXO 53.5 49.2 4.3 8.8
Kitchenware 52.1 48.4 3.7 7.8
Cutlery 23.3 19.9 3.4 17.0
Other 36.7 62.3 (25.6) (41.1)
------------- ----------- ---------
Sub-Total $ 521.1 $ 552.9 $ (31.8) (5.8)
Cleaning (1) 1.0 13.5 (12.5) (92.6)
------------- ----------- ---------
Total $ 522.1 $ 566.4 $ (44.3) (7.8) %
============= =========== =========
<FN>
(1) The Company exited the cleaning products line in the third quarter of 2000.
Sales in 2001 reflect the closeout of the remaining cleaning inventories.
NET SALES
Net sales for the third quarter of 2001 were $188.5 million, a decrease of $15.8
million or 7.7% versus the third quarter of 2000 net sales of $204.3 million.
Excluding the impact of exiting the cleaning products line, net sales for the
third quarter of 2001 declined $12.9 million or 6.4% versus the third quarter of
2000.
Year to date net sales through the third quarter 2001 were $522.1 million, a
decrease of $44.3 million or 7.8% versus net sales of $566.4 million in the
comparable period in 2000. Excluding the impact of exiting the cleaning
products line, net sales through the third quarter of 2001 declined $31.8
million or 5.8% versus the comparable period in 2000.
17
The decrease for the quarter, excluding the exit of the cleaning products line,
is primarily attributable to lower volumes as a result of the continued downturn
in the economy. This was evidenced in lower sales at the factory stores,
curtailment of shipments to financially troubled accounts and shortfalls in
grocery distribution channels. The year to date shortfall versus prior year,
excluding the exit of the cleaning products line, is also largely volume driven
as seen in lower factory store sales, softness in the grocery channel and lower
international sales.
Oven Bakeware
Net sales for the Oven Bakeware category in the third quarter of 2001 were $64.6
million, a decrease of $4.7 million or 6.8% versus the third quarter of 2000 net
sales of $69.3 million. Year to date net sales through the third quarter of
2001 for Oven Bakeware were $164.6 million, a decrease of $19.8 million or 10.7%
versus net sales of $184.4 million for the comparable period in 2000. The
decrease for the quarter is primarily attributable to lower sales in grocery
channels as a result of competitive pricing pressures and the curtailment of
shipments to financially troubled retailers. The year to date decrease is
primarily attributable to the loss of Corningware original equipment
manufacturing program, competitive pricing pressures in the grocery channel and
softness in certain international markets.
Tabletop
Net sales for the Tabletop category in the third quarter of 2001 were $37.0
million, a decrease of $4.7 million or 11.2% from the third quarter of 2000 net
sales of $41.7 million. Year to date net sales through the third quarter of
2001 were $119.5 million, a decrease of $5.5 million or 4.4% versus net sales of
$125.0 million for the comparable period in 2000. The decline is attributable
to retail softness in the domestic market following a flat first half of 2001.
Successful new product introductions including the Corningware Tabletop line,
Corelle Coordinates and new Corelle patterns substantially offset the reduction
in sales in the factory stores as well as to financially troubled retailers.
Rangetop Cookware
Net sales for the Rangetop Cookware category in the third quarter of 2001 were
$26.4 million, an increase of $1.0 million or 3.8% versus the third quarter of
2000 net sales of $25.4 million. Year to date net sales through the third
quarter of 2001were $71.4 million, an increase of $7.7 million or 12.1% over net
sales of $63.7 million for the comparable period in 2000. The increase for the
third quarter and year-to-date is primarily due to mass merchant sales, most
notably the successful introduction of the Martha Stewart products at K-Mart and
the introduction of the Magnalite(R) products at Wal-Mart.
OXO
Net sales for OXO in the third quarter of 2001 were $19.3 million, a decrease of
$0.4 million or 2.3% over the third quarter of 2000 net sales of $19.7 million.
Year to date net sales through the third quarter of 2001 were $53.5 million, an
increase of $4.3 million or 8.8% over net sales of $49.2 million for the
comparable period in 2000. The decrease in the third quarter of 2001 versus the
third quarter of 2000 is primarily due to the timing of promotional programs.
The year-to-date increase through the third quarter of 2001 versus the
comparable period in 2000, is attributable to successful new product launches
including the OXO SteeL line of stainless steel kitchen tools and utensils, OXO
Good Grips enamel tea kettles and extensions to OXO Good Grips cleaning and food
preparation products.
18
Kitchenware
Net sales for the Kitchenware category in the third quarter of 2001 were $19.1
million, an increase of $0.3 million or 1.9% over the third quarter of 2000 net
sales of $18.8 million. Year to date net sales through the third quarter of
2001 were $52.1 million, an increase of $3.7 million or 7.8% over net sales of
$48.4 million for the comparable period in 2000. Sales for the quarter were
consistent with those in the prior year. Year-to-date, increased net sales
reflect the addition of the Kitchenware product line to the Company-operated
factory stores.
Cutlery
Net sales for the Cutlery category in the third quarter of 2001 were $8.6
million, an increase of $1.0 million or 12.4% over the third quarter of 2000 net
sales of $7.6 million. Year to date net sales through the third quarter of 2001
were $23.3 million, an increase of $3.4 million or 17.0% over net sales of $19.9
million for the comparable period in 2000. The increase for the third quarter
and year-to-date is primarily attributable to successful new product
introductions in the mass merchant channel and additions to the Company's
customer base.
Other
Net sales for the "Other" category in the third quarter of 2001 were $12.5
million, a decrease of $5.4 million or 29.8% versus the third quarter of 2000
net sales of $17.9 million. Year to date net sales through the third quarter of
2001 for the "Other" category were $36.7 million, a decrease of $25.6 million or
41.1% versus net sales of $62.3 million for the comparable period in 2000. The
decreases are primarily attributable to the Company discontinuing a portion of
kitchen accessories sold through Company-operated factory stores in the fourth
quarter of 2000 and the first half of 2001. The Company-operated factory stores
are in the process of replacing a portion of these products with EKCO and OXO
branded products, which are included in the Kitchenware and OXO product
categories.
GROSS PROFIT
Gross profit for the third quarter of 2001 was $46.4 million, a decrease of
$18.5 million when compared to gross profit of $64.9 million for the third
quarter of 2000. As a percentage of net sales, gross profit decreased to 24.6%
in the third quarter of 2001 from 31.8% in the third quarter of 2000.
Year-to-date gross profit through the third quarter of 2001 was $137.3 million,
a decrease of $40.1 million when compared to $177.4 million for the comparable
period in 2000. As a percentage of net sales, gross profit decreased to 26.3%
through the third quarter of 2001 from 31.3% through the third quarter of 2000.
The third quarter and year to date decreases are primarily attributable to a
volume driven decrease in net sales and the impact of the Company's efforts to
improve cash flow with a comprehensive inventory management program. The first
element of this program, implemented in the first quarter of 2001, led to the
elimination of a significant number of stock-keeping units (SKU's) across all
product lines. These discontinued items were sold at lower than normal prices,
which impacted gross margin realization. The second element of the program
included a comprehensive analysis of the total supply chain, which resulted in
production curtailments at various manufacturing facilities. In the short term,
these curtailments increase the cost of inventories and as a result, gross
margins in the third quarter were unfavorably impacted. In the future, however,
these actions should reduce overall carrying costs and improve customer service
levels.
19
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the third quarter 2001 were
$29.8 million, a decrease of $23.4 million or 44.0% from $53.2 million in the
third quarter of 2000. As a percentage of net sales, selling, general and
administrative expenses decreased in the third quarter of 2001 to 15.8% from
26.6% in the third quarter of 2000.
Year-to-date selling, general and administrative expenses through the third
quarter of 2001 were $120.8 million, a decrease of $38.5 million or 24.2% from
$159.3 million for the comparable period in 2000. As a percentage of net sales,
selling, general and administrative expenses decreased through the third quarter
of 2001 to 23.1% compared to 28.1% for the comparable period in 2000.
Administrative expenses have been significantly reduced as a result of the
Company's emphasis on managing costs and streamlining support functions. This
included the consolidation of EKCO Group, Inc. (EKCO) and General Housewares
Corporation (GHC), into the Company at the end of 2000. In addition, the
Company has implemented new cost control measures leading to reductions in
discretionary advertising and product development spending, lower overall
employee expenses and further headcount reductions from the prior year.
RESTRUCTURING AND RATIONALIZATION
In 2001, the Company implemented an initiative to restructure and rationalize
several aspects of the Company's manufacturing, distribution and administrative
operations including the following:
1) Exit from the Martinsburg, West Virginia facility by the end of the
first quarter of 2002, where the Corningware(R) and Visions(R) product
lines are manufactured.
2) Consolidation of certain distribution operations at Waynesboro,
Virginia into the Company's existing distribution centers at Monee,
Illinois and Greencastle, Pennsylvania. The consolidation is expected
to occur in 2002.
3) Significant restructuring of metal bakeware manufacturing at
Massillon, Ohio to reduce costs.
4) Exited the Wauconda, Illinois facility effective September 30, 2001,
where Chicago Cutlery(R) product lines were manufactured.
5) Business redesign activities associated with rationalizing processes
and headcount throughout the organization to improve overall
efficiency, effectiveness and responsiveness of the organization.
Restructuring and rationalization expenses were $10.0 and $47.2 million for the
third quarter and year to date, respectively. The charges consist of asset
disposals, employee termination expenses, other exit costs and business redesign
expenses.
INTEGRATION RELATED EXPENSES
The Company incurred costs relating to the integration of EKCO and GHC's
operations into WKI of $7.4 million for the third quarter of 2000 and $21.5
million through the third quarter of 2000. The integration costs primarily
related to systems implementations, employee compensation arrangements,
consulting services and other integration costs. The integration of EKCO and
GHC was completed in 2000.
OTHER EXPENSE, NET
Other operating expense for the third quarter of 2001 was $3.9 million versus
$2.1 million for the third quarter of 2000. Year-to-date other operating
expense through the third quarter of 2001 was $9.9 million versus $8.5 million
for the comparable period in 2000. The increase for the quarter and
year-to-date is attributable to a $0.7 million investment gain in 2000 that did
not occur in 2001 and a reduction in brand licensing programs.
20
INTEREST EXPENSE
Interest expense was $18.2 million in the third quarter of 2001 compared to
$18.5 million in the third quarter of 2000. A decrease in average interest
rates was partially offset by higher average debt balances in the third quarter
of 2001 versus 2000, and higher amortization of fees incurred as a result of the
renegotiated credit agreement.
Year-to-date interest expense through the third quarter of 2001 was $55.7
million versus $54.7 million for the comparable period in 2000. The $1.0
million increase from 2000 to 2001 is primarily due to higher amortization of
fees incurred as a result of the renegotiated credit agreement. Lower average
interest rates were effectively offset by higher average outstanding debt.
INCOME TAX
In the third quarter of 2001, there was an income tax benefit of $0.2 million
compared to income tax expense of $57.5 million in the third quarter of 2000. In
the third quarter of 2000, the Company concluded that it was more likely than
not that it would not generate sufficient income to realize the net deferred tax
assets. The Company provided a full valuation allowance on the domestic income
tax benefit relating to the current period pre-tax losses. The 2001 income
taxes are primarily attributable to foreign and state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements arise principally in connection with
financing working capital needs, servicing debt obligations, funding
manufacturing restructuring costs, financing its acquisitions and completing the
integration of such acquisitions, and funding capital expenditures. During 2000,
the Company fully utilized its $275.0 million revolving credit facility and
received a temporary $40.0 million credit facility from Borden to meet its
working capital and liquidity requirements.
On April 12, 2001, the Company amended and restated its temporary $40 million
credit facility from Borden to provide a permanent $40 million revolving
facility maturing March 31, 2004. On July 2, 2001, Borden increased its
commitment to $50 million. Also on April 12, 2001, the Company amended and
restated its 1998 Credit Agreement to provide, among other things, an additional
secured revolving credit facility of $25 million. The additional $25 million
facility became available on August 16, 2001 and matures March 31, 2004. Upon
the availability of this $25 million facility, Borden's commitment decreased
from $50 million to $25 million. These actions have resulted in an additional
$50.0 million in long-term financing commitments, which expire on March 31,
2004. In addition, the Company may elect, within the limitations of its current
debt instruments, to obtain additional financing commitments.
To meet current liquidity requirements the Company, effective October 26, 2001,
entered into a $13 million credit facility with Borden, maturing on December 28,
2001, which replaced a prior borrowing which matured on October 25, 2001. The
new $13 million credit facility has terms and conditions which are similar to
the $25 million revolving credit facility but is unsecured. At November 13,
2001, $23 million was available under the existing revolving credit facilities.
The Amended and Restated Credit Agreement also waived the defaults under the
coverage ratio and leverage ratios covenants for the quarter ended December 31,
2000 and amended the future financial covenants beginning March 31, 2001. In
addition, the Amended and Restated Credit Agreement provides for a first
priority lien on substantially all of the Company's assets and its subsidiaries'
assets; increased pricing on the credit facilities; and changes in the
restrictions affecting indebtedness, investments, acquisitions, dispositions and
prepayment of subordinated indebtedness. The Company's ability to fund its
21
operations, capital expenditures and debt service will depend upon its future
financial, business and other factors, some of which are beyond the Company's
control.
The Company's credit facilities contain numerous financial and operating
covenants that limit the discretion of the Company's management with respect to
certain business matters. These covenants place significant restrictions on,
among other things, the ability of the Company to incur additional indebtedness,
pay dividends and other distributions, prepay subordinated indebtedness, enter
into sale and leaseback transactions create liens or other encumbrances, make
capital expenditures, make certain investments or acquisitions, engage in
certain transactions with affiliates, sell or otherwise dispose of assets and
merge or consolidate with other entities and otherwise restrict corporate
activities. In addition, the credit facilities also require the Company to meet
certain financial ratios and tests, including a minimum EBITDA, a ratio of debt
to EBITDA and EBITDA to cash interest expense (where EBITDA represents adjusted
cash flow as described more fully in the credit facilities).
The credit facilities and the indenture contain customary events of default. The
Company was in compliance with the financial covenants contained in its credit
facilities as of September 30, 2001. The current economic downturn has effected
and is expected to continue to negatively affect the Company. As such there can
be no assurance that these covenants will be met at December 31, 2001. The
Company believes that it will be able to meet all scheduled debt and interest
payments in 2001.
In 2001, the Company implemented an initiative to restructure and rationalize
several aspects of the Company's manufacturing, distribution and administrative
operations. The program will result in cash payments of approximately $20.0
million in 2001.
CASH FLOWS
Through the third quarter of 2001, the Company's operating activities used cash
of $20.9 million compared to $35.8 million used in operating activities through
the third quarter of 2000. This improvement in relation to the prior year was
largely driven by significant inventory reduction efforts and lower
restructuring spending in 2001 compared to integration spending in 2000.
Accounts receivable generated cash of $15.6 million as a result of lower volumes
in relation to the comparable period in 2000. The prior period was positively
impacted by the sale of $90 million of receivables to an affiliate, which
yielded net cash benefits of approximately $40.0 million. No such transaction
occurred in 2001. Inventory levels decreased by $7.2 million as compared to an
increase of $35.5 million for the comparable period in 2000. This was the
result of the Company's emphasis on managing inventory purchases and reducing
prior inventories with an aggressive inventory SKU rationalization program.
Cash used for restructuring and rationalization programs in 2001 was $9.5
million. Integration related cash expenditures related to the acquisitions of
EKCO and GHC operations were approximately $32.7 million through the third
quarter of 2000.
Investing activities used cash of $13.8 million through the third quarter of
2001 compared to $38.8 million through the third quarter of 2000. Cash used in
investing activities in 2001 includes proceeds on the sale of idle property and
equipment in the third quarter of 2001. The cash used for investing activities
in 2000 included costs associated with the systems implementation in the
acquired EKCO and GHC businesses.
Net cash provided by financing activities totaled $31.1 million through the
third quarter of 2001 versus $102.7 million through the third quarter of 2000.
Cash provided by financing activities was the result of financing the items
noted above.
22
RISK MANAGEMENT
The Company primarily has market risk in the areas of foreign currency and fixed
rate debt. The Company invoices a significant portion of its international
sales in U.S. dollars, minimizing the effect of foreign exchange gains or losses
on its earnings. As a result, the Company's foreign sales are affected by
currency fluctuations versus U.S. dollar invoicing. The Company's costs are
predominantly denominated in U.S. dollars. With respect to sales conducted in
foreign currencies, increased strength of the U.S. dollar decreases the
Company's reported revenues and margins in respect of such sales to the extent
the Company is unable or determines not to increase local selling prices.
From time to time the Company reduces foreign currency cash flow exposure due to
exchange rate fluctuations by entering into forward foreign currency exchange
contracts. The use of these contracts protects cash flows against unfavorable
movements in exchange rates, to the extent of the amount under contract. At
September 30, 2001, the Company had no forward foreign currency exchange
contracts outstanding.
The Company enters into interest rate swaps to lower funding costs or to alter
interest rate exposures between fixed and floating rates on long-term debt.
Under interest rate swaps, the Company agrees with other parties to exchange, at
specified intervals, the difference between fixed rate and floating rate
interest amounts calculated by reference to an agreed upon notional principal
amount.
Effective January 1, 2001, the Company adopted SFAS No. 133, 137 and 138 related
to "Accounting for Derivative Instruments and Hedging Activities". At that time
the Company had a $15 million notional amount interest rate swap with a fair
value of $(0.2) million. In accordance with these statements, the Company
recorded a transition adjustment to other comprehensive income and other
liabilities of $0.2 million. At September 30, 2001, the swap had a fair value
of $(0.8) million. Other comprehensive income and other liabilities have been
adjusted accordingly. A 1% increase or decrease in market interest rates would
result in a $0.3 million increase/(decrease) in the fair value of the interest
rate swap. The swap expires on July 29, 2003.
At September 30, 2001, the Company had $210.0 million in fixed rate debt
outstanding. The fair value of the Company's fixed rate debt at September 30,
2001, was $42.0 million.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2001, the Emerging Issues Task Force (EITF) reached a consensus on
Issue No. 00-25, "Accounting for Consideration from a Vendor to a Retailer in
connection with the Purchase or Promotion of the Vendor's Products." This issue
requires that consideration paid from a vendor to a purchaser be classified as a
reduction of revenue in the vendor's income statement unless it can be
determined that an identifiable benefit will be received by the vendor and the
fair value of the benefit exceeds the consideration provided to the purchaser.
In that case, the consideration should be characterized as a cost. This EITF is
effective for quarters beginning after December 15, 2001. The Company is in the
process of determining the impact of this consensus but does not expect reported
financial results will be significantly impacted.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 142, "Goodwill and Other Intangible
Assets". This standard requires that amortization of goodwill and other
intangible assets with indefinite lives be discontinued. Instead, goodwill and
other intangible assets with indefinite lives will be assessed, at least
annually, for impairment by applying a fair-value-based test. However, an
intangible asset acquired through contractual or other legal rights or that can
be sold, transferred, licensed, rented or exchanged will still be amortized over
its useful life, which is no longer capped at 40 years. SFAS No. 142, may have
an impact on the carrying value of goodwill and other intangibles and will be
implemented as of January 1, 2002. The Company is in the process of evaluating
the impact of implementing SFAS No.142.
23
In August 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations". SFAS No. 143 addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. SFAS No.
143 is effective for fiscal years beginning after June 15, 2002. The Company is
in the process of evaluating the impact of implementing SFAS No. 143.
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment of Long-Lived Assets" which supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" and the accounting and reporting provisions of APB No.
30, "Reporting the Results of Operations - Reporting and Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" for the disposal of a segment of a business. This
statement is effective for fiscal years beginning after December 15, 2001. SFAS
No. 144 retains many of the provisions of SFAS No. 121, but addresses certain
implementation issues associated with that Statement. The Company is currently
evaluating the impact of implementing SFAS No. 144.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
and other intangibles for certain forward-looking statements. The factors
discussed below, among others, could cause actual results to differ materially
from those contained in forward-looking statements made in this report,
including without limitation, in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," in the Company's related press
releases and in oral statements made by authorized officers of the Company.
When used in this report, any press release or oral statement, the words
"looking forward," "estimate," "project," "anticipate," "expect," "intend,"
"believe" and similar expressions are intended to identify a forward-looking
statement. Forward-looking statements are not guarantees of future performance
and are subject to risks, uncertainties and other factors (many of which are
beyond the Company's control) that could cause actual results to differ
materially from future results expressed or implied by such forward-looking
statements. The forward-looking statements regarding such matters are based on
certain assumptions and analyses made by the Company in light of its experience
and its perception of historical trends, current conditions and expected future
developments, as well as other factors it believes are appropriate in the
circumstances. Whether actual results and developments will conform with the
Company's expectations and predictions, however, is subject to a number of risks
and uncertainties, in addition to the risk factors discussed above, including:
the Company's ability to comply with the terms of its existing credit
facilities, a global economic slowdown in any one, or all, of the Company's
sales categories; loss of sales as the Company streamlines and focuses on
strategic accounts; unpredictable difficulties or delays in the development of
new product programs; increasing reliance on third party manufacturers,
increased difficulties in obtaining a consistent supply of basic raw materials
such as sand, soda ash, steel or copper and energy inputs such as electrical
power or natural gas at stable pricing levels; development by the Company of an
adequate administrative infrastructure; technological shifts away from the
Company's technologies and core competencies; unforeseen interruptions to the
Company's business with its largest customers resulting from, but not limited
to, the continuation of the current economic downturn; financial instabilities
or inventory excesses; the effects of extreme changes in monetary and fiscal
policies in the United States and abroad, including extreme currency
fluctuations and unforeseen inflationary pressures; drastic and unforeseen price
pressures on the Company's products or significant cost increases that cannot be
recovered through price increases or productivity improvements; significant
changes in interest rates or in the availability of financing for the Company or
certain of its customers; loss of any material intellectual property rights; any
difficulties in obtaining or retaining the management or other human resource
competencies that the Company needs to achieve its business objectives; and
other factors, many of which are beyond the control of the Company.
Consequently, all of the forward-looking statements made in this Form 10-Q are
qualified by these cautionary statements, and there can be no assurance that the
actual results or developments anticipated by the Company will be realized or,
even if substantially realized, that they will have the expected consequences to
or effects on the Company and its subsidiaries or their business or operations.
24
PART II - OTHER INFORMATION
ITEM 3 - LEGAL PROCEEDINGS
- --------------------------
There are no pending legal proceedings, which are material in relation to the
consolidated financial statements of WKI.
WKI has been engaged in, and will continue to be engaged in, the defense of
product liability claims related to its products, particularly its bakeware and
cookware product lines. The Company maintains product liability coverage,
subject to certain deductibles and maximum coverage levels that the Company
believes is adequate and in accordance with industry standards.
In addition to product liability claims, from time to time the Company is
involved in various legal actions in the ordinary course of business. The
Company is not currently involved in any legal actions, which, in the belief of
management could have a material adverse impact on the Company's financial
statements.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
a) Exhibit
10.1 - Amendment dated September 25, 2001 to the credit facility
between the Company and Borden, Inc.
10.2 - Amendment dated October 26, 2001 to the credit facility between
the Company and Borden, Inc.
b) Reports on Form 8-K
On August 13, 2001, the registrant filed a report on Form 8-K under
"Item 5-Other Events" to announce a press release announcing its
quarterly conference call with bondholders to review financial
results.
On August 14, 2001, the registrant filed a report on Form 8-K under
"Item 5-Other Events" to announce a press release announcing its
second quarter 2001 financial results.
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SIGNATURES
- ----------
Pursuant to the requirements of Section 13 or 15(d) 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.
WKI HOLDING COMPANY, INC.
By /s/ Steven G. Lamb President and November 14, 2001
-------------------------- Chief Executive Officer
(Steven G. Lamb)
By /s/ Joseph W. McGarr Senior Vice President and November 14, 2001
-------------------------- Chief Financial Officer
(Joseph W. McGarr)
26