UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 1, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 001-13615
---------
Rayovac Corporation
--------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 22-2423556
----------------------- -------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
601 Rayovac Drive, Madison, Wisconsin 53711
-----------------------------------------
(Address of principal executive offices) (Zip Code)
(608) 275-3340
--------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
--------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes ( X ) No ( )
The number of shares outstanding of the Registrant's common stock, $.01
par value, as of August 1, 2001, was 32,038,821.
RAYOVAC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
July 1, 2001 and September 30, 2000
(Unaudited)
(In thousands)
JULY 1, 2001 SEPTEMBER 30, 2000
--------------------- ------------------------
-ASSETS-
Current assets:
Cash and cash equivalents $ 10,260 $ 9,757
Receivables 153,720 153,667
Inventories 92,313 100,676
Prepaid expenses and other 37,868 27,070
--------------------- ------------------------
Total current assets 294,161 291,170
Property, plant and equipment, net 108,013 111,897
Deferred charges and other, net 39,994 43,835
Intangible assets, net 119,418 122,114
--------------------- ------------------------
Total assets $ 561,586 $ 569,016
===================== ========================
-LIABILITIES AND SHAREHOLDERS' EQUITY -
Current liabilities:
Current maturities of long-term debt $ 25,075 $ 44,815
Accounts payable 98,441 97,857
Accrued liabilities:
Wages and benefits and other 30,515 42,830
Recapitalization and other special charges 4,931 978
---------------------- ------------------------
Total current liabilities 158,962 186,480
Long-term debt, net of current maturities 217,816 272,815
Employee benefit obligations, net of current portion 16,345 15,365
Other 12,480 13,660
---------------------- ------------------------
Total liabilities 405,603 488,320
Shareholders' equity:
Commonstock, $.01 par value, authorized 150,000 shares;
issued 61,574 and 57,101 shares, respectively;
outstanding 32,038 and and 27,570 shares, respectively 616 571
Additional paid-in capital 181,019 104,197
Retained earnings 113,531 108,450
Accumulated other comprehensive (loss) income (1,889) 650
Notes receivable from officers/shareholders (3,665) (3,190)
-------------------- -----------------------
289,612 210,678
Less Treasury stock, at cost, 29,536 and 29,531
shares, respectively (130,070) (129,982)
Less: Unearned restricted stock compensation (3,559) -
-------------------- -----------------------
Total shareholders' equity 155,983 80,696
-------------------- -----------------------
Total liabilities and shareholders' equity $ 561,586 $ 569,016
==================== =======================
2
RAYOVAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine month periods ended July 1, 2001 and July 2, 2000
(Unaudited)
(In thousands)
THREE MONTHS NINE MONTHS
---------------------------------- ----------------------------
2001 2000 2001 2000
----------------- -------------- ------------- --------------
Net sales $ 159,132 $ 150,351 487,883 $ 501,839
Cost of goods sold 81,951 77,302 249,260 260,863
Special charges 2,279 - 18,539 -
----------------- -------------- ------------- --------------
Gross profit 74,902 73,049 220,084 240,976
Selling 42,757 37,592 137,463 132,238
General and administrative 9,893 13,109 33,912 38,395
Research and development 2,990 2,580 9,010 7,872
Other special charges 300 - 300 -
----------------- -------------- ------------- --------------
Total operating expenses 55,940 53,281 180,685 178,505
Income from operations 18,962 19,768 39,399 62,471
Interest expense 7,017 7,727 22,391 22,979
Other (income) expense, net (180) (387) 953 33
----------------- -------------- ------------- --------------
Income before income taxes and extraordinary item 12,125 12,428 16,055 39,459
Income tax expense 4,053 4,350 5,624 13,811
----------------- -------------- ------------- --------------
Income before extraordinary item 8,072 8,078 10,431 25,648
Extraordinary item, loss on early extinguishment
of debt, net of income tax benefit of $3,279 (5,350) - (5,350) -
----------------- -------------- ------------- --------------
Net Income $ 2,722 $ 8,078 $ 5,081 $ 25,648
================= ============== ============= ==============
BASIC EARNINGS PER SHARE
Weighted average shares
and equivalents outstanding 28,080 27,511 27,743 27,497
Income before extraordinary item $ 0.29 $ 0.29 $ 0.38 $ 0.93
Extraordinary item (0.19) - (0.20) -
----------------- -------------- ------------- --------------
Net income $ 0.10 $ 0.29 $ 0.18 $ 0.93
================= ============== ============= ==============
DILUTED EARNINGS PER SHARE
Weighted average shares
and equivalents outstanding 29,128 29,044 28,776 29,069
Income before extraordinary item $ 0.28 $ 0.28 $ 0.36 $ 0.88
Extraordinary item (0.19) - (0.18) -
----------------- -------------- ------------- --------------
Net income $ 0.09 $ 0.28 $ 0.18 $ 0.88
================= ============== ============= ==============
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS.
3
RAYOVAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine month periods ended July 1, 2001 and July 2, 2000
(Unaudited)
(In thousands)
NINE MONTHS
--------------------------------------------------
2001 2000
---------------- ----------------
Cash flows from operating activities:
Net income $ 5,081 $ 25,648
Non-cash adjustments to net income:
Extraordinary item, loss on early retirement of debt 8,628 -
Amortization 4,329 4,795
Depreciation 12,849 11,954
Other non-cash adjustments 4,685 4,690
Net changes in assets and liabilities (7,956) (16,021)
---------------- ----------------
Net cash provided by operating activities 27,616 31,066
Cash flows from investing activities:
Purchases of property, plant and equipment (15,215) (12,452)
Purchases of investments (799) -
Proceeds from sale of investments 1,361 -
Proceeds from sale of property, plant and equipment 509 407
---------------- ----------------
Net cash used by investing activities (14,144) (12,045)
Cash flows from financing activities:
Reduction of debt (320,619) (150,663)
Early retirement of debt (69,693) -
Proceeds from debt financing 310,601 130,395
Issuance of common stock 67,781 181
Other (1,246) (912)
---------------- ----------------
Net cash used by financing activities (13,176) (20,999)
Effect of exchange rate changes on cash and cash
equivalents 207 (158)
---------------- ----------------
Net increase in cash and cash equivalents 503 (2,136)
Cash and cash equivalents, beginning of period 9,757 11,065
---------------- ----------------
Cash and cash equivalents, end of period $ 10,260 $ 8,929
================ =================
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS.
4
RAYOVAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1 SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: These financial statements have been prepared by Rayovac
Corporation (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC") and, in the
opinion of the Company, include all adjustments (which are normal and recurring
in nature) necessary to present fairly the financial position of the Company at
July 1, 2001, results of operations for the three and nine month periods ended
July 1, 2001, and July 2, 2000, and cash flows for the nine month periods ended
July 1, 2001 and July 2, 2000. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such SEC rules and regulations. These condensed
consolidated financial statements should be read in conjunction with the audited
financial statements and notes thereto as of September 30, 2000. Certain prior
year amounts have been reclassified to conform with the current year
presentation.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS: In January 2001, the Financial
Accounting Standards Board's Emerging Issues Task Force (EITF) reached a
consensus on Issue 3 of EITF 00-22, "Accounting for "Points" and Certain Other
Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products
or Services to Be Delivered in the Future". Issue 3 addresses the recognition,
measurement, and income statement classification for offers to a customer to
rebate or refund a specified amount of cash that may be redeemed if the customer
completes a specified volume of transactions. The consensus was effective for
quarters ending after February 15, 2001. The Company adopted the consensus
reached on Issue 3, in the second fiscal quarter of 2001. The adoption and
subsequent restatement of the Fiscal 2000 three and nine month periods resulted
in the reclassification of certain selling expenses as a reduction in revenue of
$1,649 and $7,547, respectively. The reclassifications had no impact on pre-tax
income, net income, or earnings per share.
DERIVATIVE FINANCIAL INSTRUMENTS:
Derivative financial instruments are used by the Company principally in the
management of its interest rate, foreign currency and raw material price
exposures. The Company does not hold or issue derivative financial instruments
for trading purposes.
The Company uses interest rate swaps to manage its interest rate risk. The swaps
are designated as cash flow hedges with the fair value recorded in Other
Comprehensive Income ("OCI") and as a hedge asset or liability, as applicable.
The swaps settle periodically in arrears with the related amounts for the
current settlement period payable to, or receivable from, the counter-parties
included in accrued liabilities or accounts receivable and recognized in
earnings as an adjustment to interest expense from the underlying debt to which
the swap is designated. During the three and nine month periods ended July 1,
2001, $326 and $368, respectively, of pretax derivative losses from such hedges
were recorded as an adjustment to interest expense. At July 1, 2001, the Company
had a series of interest rate swap agreements outstanding which effectively fix
the interest rate on floating rate debt at a rate of 6.404% for a notional
principal amount of $75,000 through October 2002 and a series of interest rate
swap agreements outstanding which effectively fix the interest rate on floating
rate debt at a rate of 4.99% for a notional principal amount of $25,000 through
December 2001. The derivative net losses on these contracts recorded in OCI at
July 1, 2001 was an after-tax loss of $1,310.
The Company enters into forward and swap foreign exchange contracts, to hedge
the risk from forecasted settlement in local currencies of intercompany
purchases and sales, trade sales, and trade purchases. These contracts generally
require the Company to exchange foreign currencies for U.S. dollars or Pounds
Sterling. These contracts are designated as cash flow hedges with the fair value
recorded in OCI and as a hedge asset or liability, as applicable. Once the
forecasted transaction has been recognized as a purchase or sale and a related
liability or asset recorded in the balance sheet, the gain or loss on the
related derivate hedge contract is
5
reclassified from OCI into earnings as an offset to the change in value of the
liability or asset. During the three and nine month periods ended July 1, 2001,
$56 and $3, respectively, of pretax derivative gains were recorded as an
adjustment to earnings for cash flow hedges related to an asset or liability.
During the three and nine month periods ended July 1, 2001, $327 and $908,
respectively, of pretax derivative losses were recorded as an adjustment to
earnings for forward and swap contracts settled at maturity. At July 1, 2001,
the Company had a series of forward and swap contracts outstanding with a
contract value of $4,485. The derivative net gain on these contracts recorded in
OCI at July 1, 2001 was an after-tax gain of $56.
The Company periodically enters into forward foreign exchange contracts, to
hedge the risk from changes in fair value from unrecognized firm purchase
commitments. These firm purchase commitments generally require the Company to
exchange U.S. dollars for foreign currencies. These hedge contracts are
designated as fair value hedges with the fair value recorded in earnings on a
pretax basis and as a hedge asset or liability, as applicable. To the extent
effective, changes in the value of the forward contracts recorded in earnings
will be offset by changes in the value of the hedged item, also recorded in
earnings on a pretax basis and as an asset or liability, as applicable. Once the
firm purchase commitment has been consummated, the firm commitment asset or
liability balance will be reclassified as an addition to or subtraction from,
the carrying value of the purchased asset. The Company has entered into a series
of forward contracts for the period July 2001 through October 2001 to hedge the
exposure from a firm commitment to purchase certain battery manufacturing
equipment denominated in Japanese Yen. During the three and nine month periods
ended July 1, 2001, $433 of pretax derivative gains and $289 of pretax
derivative losses, respectively, were recorded as an adjustment to earnings for
fair value hedges of this firm purchase commitment and $433 of pretax losses and
$289 of pretax gains, respectively, were recorded as an adjustment to earnings
for changes in fair value of this firm purchase commitment. During the three and
nine month periods ended July 1, 2001, $314 of pretax derivative losses were
recorded as an adjustment to earnings for fair value hedges of this firm
purchase commitment that were settled at maturity and $314 of pretax gains were
recorded as an adjustment to earnings for payments made against this firm
purchase commitment. At July 1, 2001, the series of outstanding forward
contracts for this firm purchase commitment had a contract value of $3,170.
The Company is exposed to risk from fluctuating prices for zinc used in the
manufacturing process. The Company hedges a portion of this risk through the use
of commodity swaps. The swaps are designated as cash flow hedges with the fair
value recorded in OCI and as a hedge asset or liability, as applicable. The fair
value of the swaps is reclassified from OCI into earnings when the hedged
purchase of zinc metal-based items also affects earnings. The swaps effectively
fix the floating price on a specified quantity of a commodity through a
specified date. During the three and nine month periods ended July 1, 2001, $373
and $653, respectively, of pretax derivative losses were recorded as an
adjustment to cost of sales for swap contracts settled at maturity. At July 1,
2001, the Company had a series of swap contracts outstanding through September
2002 with a contract value of $12,057. The derivative net losses on these
contracts recorded in OCI at July 1, 2001 was an after-tax loss of $1,077.
2 INVENTORIES
Inventories consist of the following:
JULY 1, 2001 SEPTEMBER 30, 2000
------------ ------------------
Raw material..................................... $28,864 $31,355
Work-in-process.................................. 18,129 11,650
Finished goods................................... 45,320 57,671
------ --------
$92,313 $100,676
======= ========
6
3 OTHER COMPREHENSIVE INCOME
Comprehensive income and the components of other comprehensive income for the
three and nine months ended July 1, 2001 and July 2, 2000 are as follows:
THREE MONTHS NINE MONTHS
------------ -----------
2001 2000 2001 2000
---- ---- ---- ----
Net income........................................... $2,722 $8,078 $5,081 $25,648
Other comprehensive income (loss):
Foreign currency translation....................... 44 (657) (312) (1,544)
Net unrealized gain on available for sale
securities......................................... 105 -- 105 --
Cumulative effect of change in accounting principle -- -- (150) --
Net loss on derivative instruments................. (490) -- (2,182) --
----- -- ------- --
Comprehensive income................................. $2,381 $7,421 $2,542 $24,104
====== ====== ====== =======
4 NET INCOME PER COMMON SHARE
Net income per common share for the three and nine months ended July 1, 2001 and
July 2, 2000 is calculated based upon the following shares:
THREE MONTHS NINE MONTHS
------------ -----------
2001 2000 2001 2000
---- ---- ---- ----
Basic............................................... 28,080 27,511 27,743 27,497
Effect of assumed conversion of options............. 1,048 1,533 1,033 1,572
----- ----- ----- -----
Diluted............................................. 29,128 29,044 28,776 29,069
====== ====== ====== ======
5 SHAREHOLDERS' EQUITY
On June 22, 2001, the Company completed a primary offering of 3,500 shares of
Common Stock. The net proceeds of approximately $64,500, after deducting the
underwriting discounts and offering expenses, were used to repurchase
approximately $64,800 principal amount of 10-1/4% Series B Senior Subordinated
Notes.
Concurrently, the Thomas H. Lee Group and its affiliates sold approximately
4,200 shares and certain Rayovac officers and employees sold approximately 900
shares in a secondary offering of common stock. The Company did not receive any
proceeds from the sale of the secondary offering shares but incurred expenses
for the offering of approximately $300 which are included in Other Special
Charges.
6 COMMITMENTS AND CONTINGENCIES
In March 1998, the Company entered into an agreement to purchase certain
equipment and to pay annual royalties. In connection with this 1998 agreement,
which supersedes previous agreements dated December 1991, and March 1994, the
Company committed to pay royalties of $2,000 in 1998 and 1999, $3,000 in 2000
through 2002, and $500 in each year thereafter, as long as the related equipment
patents are enforceable (2022). The Company incurred royalty expenses of $2,000
for 1998, 1999 and $2,250 for 2000. At July 1, 2001, the Company had commitments
of approximately $3,170 for the acquisition of manufacturing equipment, all of
which is expected to be incurred in calendar 2001.
The Company has provided for the estimated costs associated with environmental
remediation activities at some of its current and former manufacturing sites. In
addition, the Company, together with other parties, has been designated a
potentially responsible party of various third-party sites on the United States
EPA National Priorities
7
List (Superfund). The Company provides for the estimated costs of investigation
and remediation of these sites when such losses are probable and the amounts can
be reasonably estimated. The actual cost incurred may vary from these estimates
due to the inherent uncertainties involved. The Company believes that any
additional liability in excess of the amounts provided of $2,776, which may
result from resolution of these matters, will not have a material adverse effect
on the financial condition, liquidity, or cash flow of the Company.
The Company has certain other contingent liabilities with respect to litigation,
claims and contractual agreements arising in the ordinary course of business. In
the opinion of management, such contingent liabilities are not likely to have a
material adverse effect on the financial condition, liquidity or cash flow of
the Company.
7 OTHER
During Fiscal 2001, the Company recorded special charges related to: (i) an
organizational restructuring in the U.S, (ii) manufacturing and distribution
cost rationalization initiatives in the Company's Tegucigalpa, Honduras and
Mexico City, Mexico manufacturing facilities and in our European operations,
(iii) the closure of the Company's Wonewoc, Wisconsin, manufacturing facility,
(iv) the rationalization of uneconomic manufacturing processes at the Company's
Fennimore, Wisconsin, manufacturing facility, and rationalization of packaging
operations and product lines, and (v) costs associated with our June 2001
secondary offering. The amount recorded includes $7,100 of employee termination
benefits for approximately 500 employees, $10,600 of equipment, inventory, and
other asset write-offs, and $1,100 of other expenses. A summary of the 2001
restructuring activities follows:
2001 RESTRUCTURING SUMMARY
TERMINATION OTHER
BENEFITS COSTS TOTAL
-------- ----- -----
Expense accrued............................................... $5,000 $11,000 $16,000
------ ------- -------
Balance December 31, 2000..................................... $5,000 $11,000 $16,000
Expense as incurred........................................... 100 200 300
Cash expenditures............................................. (800) (200) (1,000)
Non cash charges.............................................. -- (3,000) (3,000)
------ ------- -------
Balance April 1, 2001......................................... $4,300 $8,000 $12,300
Change in estimate............................................ 2,000 (100) 1,900
Expense as incurred........................................... -- 200 200
Cash expenditures............................................. (3,100) -- (3,100)
Non cash charges.............................................. -- (3,000) (3,000)
------ ------- -------
Balance July 1, 2001.......................................... $3,200 $5,100 $8,300
====== ====== ======
During 1999, the Company recorded special charges as follows: (i) $2,528 of
employee termination benefits for 43 employees related to organizational
restructuring in the U.S. and Europe, (ii) $1,300 of charges related to the
discontinuation of the manufacturing of silver-oxide cells at the Company's
Portage, Wisconsin, facility, and (iii) $2,100 of charges related to the
termination of non-performing foreign distributors. The Company also recognized
special charges of $803 related to the investigation of financing options and
developing organizational strategies for the Latin American acquisition. A
summary of the 1999 restructuring activities follows:
8
1999 RESTRUCTURING SUMMARY
TERMINATION OTHER
BENEFITS COSTS TOTAL
-------- ----- -----
Expense accrued............................................... $2,500 $3,400 $5,900
Cash expenditures............................................. (200) -- (200)
----- ------ -----
Balance September 30, 1999.................................... $2,300 $3,400 $5,700
Change in estimate............................................ -- 100 100
Cash expenditures............................................. (2,200) -- (2,200)
Non cash charges.............................................. -- (3,300) (3,300)
------ ------- -------
Balance September 30, 2000.................................... $100 $200 $300
Cash expenditures............................................. (100) -- (100)
Non cash charges.............................................. -- (200) (200)
------ ----- -----
Balance July 1, 2001.......................................... $-- $-- $--
====== ====== =====
8 SEGMENT INFORMATION
The Company manages operations in three reportable segments based upon
geographic area. North America includes the United States and Canada; Latin
America includes Mexico, Central America, and South America; Europe/Rest of
World ("Europe/ROW") includes the United Kingdom, Europe and all other countries
in which the Company does business.
The Company manufactures and markets dry cell batteries including alkaline, zinc
carbon, alkaline rechargeable, hearing aid, and other specialty batteries and
lighting products throughout the world.
Net sales and cost of sales to other segments have been eliminated. The gross
contribution of inter segment sales is included in the segment selling the
product to the external customer. Segment revenues are based upon the geographic
area in which the product is sold.
The reportable segment profits do not include interest expense, interest income,
and income tax expense. Also, not included in the reportable segments, are
corporate expenses including corporate purchasing expense, general and
administrative expense and research and development expense. All depreciation
and amortization included in income from operations is related to corporate or
reportable segments. Costs are identified to reportable segments or corporate,
according to the function of each cost center.
The reportable segment assets do not include cash, deferred tax benefits,
investments, long-term intercompany receivables, most deferred charges, and
miscellaneous assets. Capital expenditures are related to reportable segments or
corporate. Variable allocations of assets are not made for segment reporting.
REVENUES FROM EXTERNAL CUSTOMERS
THREE MONTH PERIODS ENDED NINE MONTH PERIODS ENDED
------------------------- ------------------------
JULY 1, 2001 JULY 2, 2000 JULY 1, 2001 JULY 2, 2000
------------ ------------ ------------ ------------
North America............................. $119,005 $111,530 $361,867 $377,496
Latin America............................. 29,062 27,369 89,425 83,597
Europe/ROW................................ 11,065 11,452 36,591 40,746
------ ------ ------ ------
Total segments............................ $159,132 $150,351 $487,883 $501,839
======== ======== ======== ========
9
THREE MONTH PERIODS ENDED NINE MONTH PERIODS ENDED
------------------------- ------------------------
JULY 1, 2001 JULY 2, 2000 JULY 1, 2001 JULY 2, 2000
------------ ------------ ------------ ------------
INTER SEGMENT REVENUES
North America............................. $6,724 $4,665 $23,664 $17,309
Latin America............................. 2,711 208 7,167 208
Europe/ROW................................ 574 327 1,755 642
--- --- ----- ---
Total segments............................ $10,009 $5,200 $32,586 $18,159
======= ====== ======= =======
SEGMENT PROFIT THREE MONTH PERIODS ENDED NINE MONTH PERIODS ENDED
------------------------- ------------------------
JULY 1, 2001 JULY 2, 2000 JULY 1, 2001 JULY 2, 2000
------------ ------------ ------------ ------------
North America................................ $22,347 $21,338 $61,095 $63,901
Latin America................................ 3,529 5,036 14,949 15,324
Europe/ROW................................... 1,583 628 2,876 4,664
----- --- ----- -----
Total segments............................... 27,459 27,002 78,920 83,889
Corporate.................................... 5,918 7,234 20,682 21,418
Special charges.............................. 2,579 -- 18,839 --
Interest expense............................. 7,017 7,727 22,391 22,979
Other (income) expense, net.................. (180) (387) 953 33
----- ----- --- --
Income before income taxes and extraordinary
item...................................... $12,125 $12,428 $16,055 $39,459
======= ======= ======= =======
SEGMENT ASSETS JULY 1, 2001 JULY 2, 2000
------------ ------------
North America................................ $283,809 $266,140
Latin America................................ 207,786 192,606
Europe/ROW................................... 27,360 27,824
------ ------
Total segments............................... 518,955 486,570
Corporate.................................... 42,631 37,925
------ ------
Total assets at period end................... $561,586 $524,495
======== ========
9 GUARANTOR SUBSIDIARIES (ROV HOLDING, INC. AND ROVCAL, INC.)
The following condensed consolidating financial data illustrate the composition
of the consolidated financial statements. Investments in subsidiaries are
accounted for by the Company and the Guarantor Subsidiaries using the equity
method for purposes of the consolidating presentation. Earnings of subsidiaries
are therefore reflected in the Company's and Guarantor Subsidiary's' investment
accounts and earnings. The principal elimination entries eliminate investments
in subsidiaries and inter-company balances and transactions. Separate financial
statements of the Guarantor Subsidiaries are not presented because management
has determined that such financial statements would not be material to
investors.
10
RAYOVAC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
As of July 1, 2001
(Unaudited)
(In thousands)
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- -------------- -------------- -------------- ------------
-ASSETS-
Current assets:
Cash and cash equivalents $ 1,814 $ 48 $ 8,398 $ - $ 10,260
Receivables 69,230 45,414 59,072 (19,996) 153,720
Inventories 65,359 - 27,053 (99) 92,313
Prepaid expenses and other 25,255 342 12,271 - 37,868
---------- -------------- -------------- -------------- ------------
Total current assets 161,658 45,804 106,794 (20,095) 294,161
Property, plant and equipment, net 77,113 37 30,863 - 108,013
Deferred charges and other, net 57,490 274 2,412 (20,182) 39,994
Intangible assets, net 90,096 - 29,510 (188) 119,418
Investments in subsidiaries 143,063 99,049 - (242,112) -
---------- -------------- -------------- -------------- ------------
Total assets $ 529,420 $ 145,164 $ 169,579 $ (282,577) $ 561,586
========== ============== ============== ============== ============
-LIABILITIES AND SHAREHOLDERS' EQUITY-
Current liabilities:
Current maturities of long-term debt $ 23,282 $ - $ 8,979 $ (7,186) $ 25,075
Accounts payable 87,461 16 23,392 (12,428) 98,441
Accrued liabilities:
Wages benefits and other 17,256 2,085 11,174 - 30,515
Recapitalization and other special charges 4,931 - - - 4,931
---------- -------------- -------------- -------------- ------------
Total current liabilities 132,930 2,101 43,545 (19,614) 158,962
Long term debt, net of current maturities 218,511 - 18,490 (19,185) 217,816
Employee benefit obligations, net of current portion 15,744 - 601 - 16,345
Other 4,586 - 7,894 - 12,480
---------- -------------- -------------- -------------- ------------
Total liabilities 371,771 2,101 70,530 (38,799) 405,603
Shareholders' equity:
Common stock 615 1 12,072 (12,072) 616
Additional paid-in capital 180,901 62,788 54,904 (117,574) 181,019
Retained earnings 114,959 80,440 33,593 (115,461) 113,531
Accumulated other comprehensive loss (1,532) (166) (1,520) 1,329 (1,889)
Notes receivable from officers/shareholders (3,665) - - - (3,665)
---------- -------------- -------------- -------------- ------------
291,278 143,063 99,049 (243,778) 289,612
Less treasury stock, at cost (130,070) - - - (130,070)
Less unearned restricted stock compensation (3,559) - - - (3,559)
---------- -------------- -------------- -------------- ------------
Total shareholders' equity 157,649 143,063 99,049 (243,778) 155,983
---------- -------------- -------------- -------------- ------------
Total liabilities & shareholders' equity $ 529,420 $ 145,164 $ 169,579 $ (282,577) $ 561,586
========== ============== ============== ============== ============
11
RAYOVAC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the three month period ended July 1, 2001
(Unaudited)
(In thousands)
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- -------------- -------------- -------------- ------------
Net sales $ 113,453 $ 10,917 $ 47,216 $ (12,454) $ 159,132
Cost of goods sold 54,536 10,589 28,837 (12,011) 81,951
Special charges 287 - 1,992 - 2,279
---------- -------------- -------------- -------------- ------------
Gross profit 58,630 328 16,387 (443) 74,902
Selling expense 32,781 167 9,852 (43) 42,757
General and administrative 10,356 (2,714) 2,251 - 9,893
Research and development 2,990 - - - 2,990
Other special charges 300 - - - 300
---------- -------------- -------------- -------------- ------------
Total operating expenses 46,427 (2,547) 12,103 (43) 55,940
Income from operations 12,203 2,875 4,284 (400) 18,962
Interest expense 6,656 - 1,152 (791) 7,017
Equity income (4,948) (1,878) - 6,826 -
Other (income) expense, net (639) (429) 97 791 (180)
---------- -------------- -------------- -------------- ------------
Income before income taxes and extraordinary item 11,134 5,182 3,035 (7,226) 12,125
Income tax expense 2,662 234 1,157 - 4,053
---------- -------------- -------------- -------------- ------------
Income before extraordinary item 8,472 4,948 1,878 (7,226) 8,072
Extraordinary item, loss on early extinguishment
of debt, net of income tax benefit of $3,279 (5,350) - - - (5,350)
---------- -------------- -------------- -------------- ------------
Net Income $ 3,122 $ 4,948 $ 1,878 $ (7,226) $ 2,722
========== ============== ============== ============== ============
12
RAYOVAC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the nine month period ended July 1, 2001
(Unaudited)
(In thousands)
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- -------------- -------------- -------------- ------------
Net sales $ 349,922 $ 32,730 $ 146,836 $ (41,605) $ 487,883
Cost of goods sold 171,131 31,748 87,286 (40,905) 249,260
Special charges 16,346 - 2,193 - 18,539
---------- -------------- -------------- -------------- ------------
Gross profit 162,445 982 57,357 (700) 220,084
Selling expense 105,932 521 31,210 (200) 137,463
General and administrative 32,321 (8,377) 9,968 - 33,912
Research and development 9,010 - - - 9,010
Other special charges 300 - - - 300
---------- -------------- -------------- -------------- ------------
Total operating expenses 147,563 (7,856) 41,178 (200) 180,685
Income from operations 14,882 8,838 16,179 (500) 39,399
Interest expense 21,280 - 2,522 (1,411) 22,391
Equity income (16,963) (8,155) - 25,118 -
Other (income) expense, net (1,368) (427) 1,337 1,411 953
---------- -------------- -------------- -------------- ------------
Income before income taxes and extraordinary item 11,933 17,420 12,320 (25,618) 16,055
Income tax expense 1,002 457 4,165 - 5,624
---------- -------------- -------------- -------------- ------------
Income before extraordinary item 10,931 16,963 8,155 (25,618) 10,431
Extraordinary item, loss on early extinguishment
of debt, net of income tax benefit of $3,279 (5,350) - - - (5,350)
---------- -------------- -------------- -------------- ------------
Net Income $ 5,581 $ 16,963 $ 8,155 $ (25,618) $ 5,081
========== ============== ============== ============== ============
13
RAYOVAC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the nine month period ended July 1, 2001
(Unaudited)
(In thousands)
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- -------------- -------------- -------------- ------------
Net cash provided by operating activities $ 21,623 $ 10 $ 5,983 $ - $ 27,616
Cash flows from investing activities:
Purchases of property, plant and equipment (14,007) - (1,208) - (15,215)
Purchases of investments (500) - (299) - (799)
Proceeds from sale of investments - - 1,361 - 1,361
Proceeds from sale of property, plant,
and equipment 487 - 22 - 509
----------- ---------- ------------- --------- --------------
Net cash used by investing activities (14,020) (14,144)
Cash flows from financing activities:
Reduction of debt (316,094) - (4,525) - (320,619)
Extinguishment of debt (69,693) - - - (69,693)
Proceeds from debt financing 310,601 - - - 310,601
Issuance of stock 67,781 - - - 67,781
Other (1,075) (6) (165) - (1,246)
----------- ---------- ------------- --------- --------------
Net cash used by financing activities (8,480) (6) (4,690) - (13,176)
Effect of exchange rate changes on cash and cash
equivalents - - 207 - 207
----------- ---------- ------------- --------- --------------
Net (decrease) increase in cash and cash equivalents (877) 4 1,376 - 503
Cash and cash equivalents, beginning of period 2,691 44 7,022 - 9,757
----------- ---------- ------------- --------- --------------
Cash and cash equivalents, end of period $ 1,814 $ 48 $ 8,398 $ - $ 10,260
=========== ========== ============= ========= ==============
14
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FISCAL QUARTER AND NINE MONTHS ENDED JULY 1, 2001 COMPARED TO
FISCAL QUARTER AND NINE MONTHS ENDED JULY 2, 2000
NET SALES. Net sales for the three months ended July 1, 2001 (the
"Fiscal 2001 Quarter") increased $8.7 million, or 5.8%, to $159.1 million from
$150.4 million in the three months ended July 2, 2000 (the "Fiscal 2000
Quarter"). The increase was driven by growth in alkaline battery sales
attributable to new distribution, product line expansion, promotional timing,
and growth in the OEM trade channel. Partially offsetting the alklaine battery
increases were decreases in lighting products primarily reflecting reduced sales
in North America attributable to hurricane shipments in the Fiscal 2000 Quarter
and general market softness compounded by lower sales of specialty batteries to
OEM customers in the PC, telecommunications and electronics industries and
softness in rechargeable sales.
Net sales for the nine months ended July 1, 2001 (the "Fiscal 2001 Nine
Months") decreased $13.9 million, or 2.8%, to $487.9 million from $501.8 million
in the nine months ended July 2, 2000 (the "Fiscal 2000 Nine Months"). Increases
in hearing aid batteries and alkaline sales were offset by decreased lighting
products sales, softness in sales of specialty batteries to OEM customers in the
PC, telecommunications and electronics industries, and the transition to the
camcorder license arrangement.
NET INCOME. Net income for the Fiscal 2001 Quarter decreased $5.4
million to $2.7 million from $8.1 million in the Fiscal 2000 Quarter. The
decrease reflects an extraordinary loss of $5.4 million, net of tax,
resulting from the premium on the repurchase of $64.8 million of Senior
Subordinated Notes following the Company's secondary offering in June 2001
and related write-off of unamortized debt issuance costs. Restructuring
charges and expenses associated with our June 2001 secondary offering were
offset by income from sales growth in North America.
Net income for the Fiscal 2001 Nine Months decreased $20.5 million to
$5.1 million from $25.6 million in the Fiscal 2000 Nine Months. The decrease
reflects the impact of a $18.5 million pretax restructuring charge, a $5.4
million extraordinary loss, net of tax, and sales softness in North America and
Europe/ROW partially offset by sales growth in Latin America.
SEGMENT RESULTS. The Company manages operations in three reportable
segments based upon geographic area. North America includes the United States
and Canada; Latin America includes Mexico, Central America, and South America;
Europe/ROW includes the United Kingdom, Europe and all other countries in which
the company does business. We evaluate segment profitability based on income
from operations before corporate expense which includes corporate purchasing
expense, general and administrative expense and research and development
expense.
FISCAL QUARTER NINE MONTHS
-------------- --------------
NORTH AMERICA 2001 2000 2001 2000
---- ---- ---- ----
Revenue from external customers........ $119.0 $111.5 $361.9 $377.5
Profitability.......................... 22.4 21.4 61.1 63.9
Profitability as a % of net sales...... 18.8% 19.2% 16.9% 16.9%
Assets................................. $283.8 $266.1 $283.8 $266.1
Our sales to external customers increased $7.5 million, or 6.7%, to
$119.0 million in the Fiscal 2001 Quarter from $111.5 million the previous year
due primarily to strong sales of alkaline, heavy duty, and hearing aid batteries
partially offset by weakness in specialty batteries, lighting products, and
rechargeable batteries. Alkaline sales increases of $15.0 million, or 24.9%,
were primarily attributable to strong sales at retail, distribution gains, and
product line expansion compounded by strong sales in the OEM trade channel
partially offset by weakness in the food and drug trade channels. Heavy duty
sales increases of $1.5 million, or 17.9%, were primarily driven by product line
expansion at retail. Hearing aid battery sales increases of $0.6 million, or
6.1%, primarily reflect strong growth in the
15
professional hearing aid trade channel and expanded retail distribution.
Specialty batteries sales decreases versus last year primarily reflect softness
in camcorder battery and lithium battery sales of $2.6 million and $1.9 million,
respectively. These decreases reflect the transition to the camcorder licensing
agreement with our Hong Kong licensee and general softness in demand from OEM
customers in the PC, telecommunications and electronics industries. Lighting
product sales decreases of $3.1 million, or 17.7%, were driven by general
weakness in the lights category. Rechargeable battery sales decreases of $2.1
million, or 25.0%, were driven by promotional timing and our inability to
anniversary an initial sell-in last year to a major mass retailer.
In the Fiscal 2001 Nine Months, our sales to external customers
decreased $15.6 million, or 4.1%, to $361.9 million from $377.5 million the
previous year. Increased sales of hearing aid, alkaline, and heavy duty
batteries were offset by decreased sales of lighting products and specialty
batteries. Lighting product sales decreases of $13.4 million, or 23.8%, were
driven by weakness in the lights and lantern battery category reflecting the
impact of the Y2K phenomenon. Specialty batteries sales versus last year
primarily reflect softness in camcorder battery and lithium battery sales of
$5.8 and $8.0 million, respectively, reflecting the transition to a licensing
agreement and general softness in lithium battery demand from OEM customers in
the PC, telecommunications and electronics industries. Hearing aid battery sales
increases of $4.8 million, or 16.5%, primarily reflect strength in the
professional channel and expanded retail distribution in Fiscal 2001. Alkaline
sales increases of $3.6 million, or 1.7%, were driven by distribution gains,
product line expansion, and strong sales in the mass merchandiser and OEM trade
channels partially offset by the impacts of Y2K on sales volumes and lower
promotional activity at certain food retailers this year. Heavy duty sales
increases of $3.0 million, or 10.3%, primarily reflect product line expansion at
retail.
Our profitability increased $1.0 million, or 4.7%, to $22.4 million in
the Fiscal 2001 Quarter from $21.4 million in the Fiscal 2000 Quarter. The
increase in profitability in the Fiscal 2001 Quarter was primarily attributable
to the sales expansion partially offset by higher selling and distribution
expenses. Our profitability margins decreased 40 basis points to 18.8% from
19.2% in the previous year. The decrease primarily reflects higher operating
expenses as a percentage of sales partially offset by improved gross profit
margins.
In the Fiscal 2001 Nine Months, our profitability decreased $2.8
million, or 4.4%, to $61.1 million from $63.9 million. The decrease in
profitability in the Fiscal 2001 Nine Months was primarily attributable to the
sales shortfall partially offset by improved gross profit margins, reflecting a
favorable product mix, price increases and operating expense decreases. Our
profitability margins were unchanged from the previous year.
Our assets increased $17.7 million, or 6.7%, to $283.8 million in the
Fiscal 2001 Quarter from $266.1 million the previous year. The increase was
primarily attributable to an increase in accounts receivable partially offset by
lower inventories.
FISCAL QUARTER NINE MONTHS
--------------- ---------------
LATIN AMERICA 2001 2000 2001 2000
---- ---- ---- ----
Revenue from external customers........ $29.0 $27.4 $89.4 $83.6
Profitability.......................... 3.5 5.0 14.9 15.3
Profitability as a % of net sales...... 12.1% 18.2% 16.7% 18.3%
Assets................................. $207.8 $192.6 $207.8 $192.6
Our sales to external customers increased $1.6 million, or 5.8% to
$29.0 million in the Fiscal 2001 Quarter from $27.4 million and increased
$5.8 million, or 6.9% to $89.4 million in the Fiscal 2001 Nine Months from
$83.6 million the previous year due primarily to increased sales of alkaline
batteries partially offset by lower sales of zinc carbon batteries affected
by a slowing economic environment and the unfavorable impacts of currency
devaluation of $0.2 million and $1.6 million, respectively. Alkaline sales
increases of $1.3 million and $6.1 million in the Fiscal 2001 Quarter and
Nine Months, respectively, were driven by new distribution in mass
merchandiser chains compounded by expansion into the Southern region of South
America in Fiscal 2000. Heavy duty battery sales were relatively unchanged
for the Fiscal 2001 Quarter and Nine Months versus last year.
Our profitability declined $1.5 million, or 30.0%, in the Fiscal
2001 Quarter and decreased $0.4 million, or 2.6% in the Fiscal 2001 Nine
Months versus the Fiscal 2000 Nine Months. The decrease in profitability
versus the Fiscal 2000 Quarter primarily reflects higher operating expenses
reflecting expansion into the
16
Southern region of South America and higher costs associated with our Mexican
operations. The operating expense increases reflect our ongoing expansion in the
Southern region and an increase in Mexico reflecting increased marketing and
promotional expenses associated with new distribution at larger retail accounts.
The decrease in profitability in the Fiscal 2001 Nine Months is primarily
attributable to the higher operating expenses reflecting the expansion into the
Southern region of South America in Fiscal 2000 partially offset by of increased
sales and gross profit.
Our profitability margins in the Fiscal 2001 Quarter decreased 610
basis points primarily reflecting an increase in operating expenses compounded
by weakness in gross profit margins. The operating expense increase primarily
reflects increases in the Southern region of South America and in Mexico. Our
profitability margins in the Fiscal 2001 Nine Months decreased 160 basis points
primarily reflecting an increase in operating expense attributable to a full
year impact of expansion into the Southern region of South America compounded by
an increase in expenses associated with new distribution at larger retail
accounts, partially offset by improved gross profit margins.
Our assets increased $15.2 million, or 7.9%, to $207.8 million in the
Fiscal 2001 Quarter from $192.6 million the previous year. The increase was
primarily attributable to an increase in accounts receivable of $19.5 million
reflecting longer terms associated with distribution at larger retail accounts
and general economic weakness partially offset by a decrease in inventory of
$3.9 million reflecting improved inventory management in Mexico.
FISCAL QUARTER NINE MONTHS
-------------- -------------
EUROPE/ROW 2001 2000 2001 2000
---- ---- ---- ----
Revenue from external customers.......... $11.1 $11.5 $36.6 $40.7
Profitability............................ 1.6 0.6 2.9 4.7
Profitability as a % of net sales........ 14.4% 5.2% 7.9% 11.6%
Assets................................... $27.4 $27.8 $27.4 $27.8
Our sales to external customers decreased $0.4 million, or 3.5%, to
$11.1 million in the Fiscal 2001 Quarter from $11.5 million and decreased $4.1
million, or 10.1%, to $36.6 million in the Fiscal 2001 Nine Months from $40.7
million the previous year primarily reflecting the impacts of currency
devaluation of $0.8 million and $3.8 million, respectively. Excluding the
effects of foreign exchange, Europe/ROW for the Fiscal 2001 Quarter experienced
volume gains in alkaline and hearing aid battery sales.
Our profitability increased $1.0 million to $1.6 million in the Fiscal
2001 Quarter and decreased $1.8 million to $2.9 million in the Fiscal 2001 Nine
Months. The increase in profitability in the Fiscal 2001 Quarter primarily
reflects lower selling expenses reflecting changes in estimated costs of
promotional programs. The profitability decrease in the Fiscal 2001 Nine Months
reflects the impact of currency devaluation on gross profit compounded by higher
selling and distribution expenses.
Our profitability margin increase, as a percentage of sales, in the
Fiscal 2001 Quarter is primarily driven by our favorable selling expenses and
the profitability margin decrease, as a percentage of sales, in the Fiscal 2001
Nine Months, is attributable to the fixed nature of our expenses over lower
sales volumes.
Our assets decreased $0.4 million, or 1.4%, to $27.4 million from $27.8
million the previous year due primarily to a decrease in inventory reflecting
improvements in inventory management and a decrease in accounts receivable.
CORPORATE EXPENSE. Our corporate expense decreased $1.3 million, or
18.1%, to $5.9 million in the Fiscal 2001 Quarter from $7.2 million in the
Fiscal 2000 Quarter and $0.7 million, or 3.3%, to $20.7 million in the Fiscal
2001 Nine Months from $21.4 million in the Fiscal 2000 Nine months. These
decreases were primarily attributable to lower management incentives, legal
expenses, a gain on the sale of an investment partially offset by higher
research and development expenses reflecting an increase in technology
spending. As a percentage of total sales, our corporate expense was 3.7% and
4.8% in the Fiscal 2001 and Fiscal 2000 Quarters and was 4.2% and 4.3% in the
Fiscal 2001 and Fiscal 2000 Nine Months, respectively.
17
SPECIAL CHARGES. The Company recorded special charges of $2.6 million
in the Fiscal 2001 Quarter primarily reflecting expenses associated with the
shutdown of the Company's Wonewoc, Wisconsin, manufacturing facility and
restructuring initiatives in Latin America and the U.S.
In the Fiscal 2001 Nine Months, the Company recorded special charges
related to: (i) an organizational restructuring in the U.S, (ii) manufacturing
and distribution cost rationalization initiatives in the Company's Tegucigalpa,
Honduras and Mexico City, Mexico manufacturing facilities and in our European
operations, (iii) the closure of the Company's Wonewoc, Wisconsin, manufacturing
facility, (iv) the rationalization of uneconomic manufacturing processes at the
Company's Fennimore, Wisconsin, manufacturing facility, and rationalization of
packaging operations and product lines, (v) and costs associated with our
secondary offering in June 2001. The amount recorded includes $7.1 million of
employee termination benefits for approximately 500 employees, $10.6 million of
equipment, inventory, and other asset write-offs, and $1.1 million of other
expenses.
INCOME FROM OPERATIONS. Our income from operations decreased $0.8
million, or 4.0%, to $19.0 million in the Fiscal 2001 Quarter from $19.8 million
the previous year. The decrease was attributable to special charges of $2.6
million partially offset by improved profitability in North America and
Europe/ROW. Excluding the impact of the special charges, income from operations
increased $1.8 million, or 9.1%.
In the Fiscal 2001 Nine Months, our income from operations decreased
$23.1 million, or 37.0%, to $39.4 million from $62.5 million the previous year.
These decreases were primarily due to special charges of $18.8 million,
decreased profitability in North America, Latin America, and Europe/ROW.
Excluding the impact of the special charges, income from operations decreased
$4.3 million, or 6.9%.
INTEREST EXPENSE. Interest expense decreased $0.7 million to $7.0
million in the Fiscal 2001 Quarter and decreased $0.6 million to $22.4 million
Fiscal 2001 Nine Months versus the comparable periods in the prior year due
primarily to lower effective interest rates.
OTHER (INCOME) EXPENSE. Other (income) expense decreased $0.2 million
to a $0.2 million net income in the Fiscal 2001 Quarter. The decrease in the net
income in the Fiscal 2001 Quarter primarily reflects foreign exchange losses
partially offset by higher interest income. In the Fiscal 2001 Nine Months other
(income) expense increased to a $0.9 million net expense primarily reflecting
foreign exchange losses, primarily in Latin America, partially offset by higher
interest income.
INCOME TAX EXPENSE. Our effective tax rate was 33.4% for the Fiscal
2001 Quarter which brought the Fiscal 2001 Nine Months rate to 35.0%, equal to
last year's rate for the Fiscal 2000 Nine Months.
EXTRAORDINARY ITEM. In the Fiscal 2001 Quarter, the Company recorded an
extraordinary loss of $5.4 million, net of tax, resulting from the premium on
the repurchase of $64.8 million Senior B Subordinated Notes and the related
write-off of unamortized debt issuance costs.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
Effective October 1, 2000, the Company adopted SFAS 133, which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. All derivatives, whether designated in hedging relationships
or not, are required to be recorded on the balance sheet at fair value. If the
derivative is designated as a fair value hedge, the change in the fair value of
the derivative and of the hedged item attributable to the hedged risk are
recognized in earnings. If the derivative is designated as a cash flow hedge,
the effective portions of changes in the fair value of the derivative are
recorded in other comprehensive income (OCI) and are recognized in the income
statement when the hedged item affects earnings. Ineffective portions of changes
in the fair value of cash flow hedges are recognized in earnings.
The adoption of SFAS 133 resulted in a pre-tax reduction to OCI of $0.3
million ($0.2 million after tax). The reduction to OCI is primarily attributable
to losses of approximately $0.5 million for foreign exchange forward cash flow
hedges partially offset by gains of approximately $0.2 million on interest rate
swap cash flow hedges. The net derivative losses included in OCI as of October
1, 2000 will be reclassified into earnings during the twelve months ending
September 30, 2001.
18
In January 2001, the Financial Accounting Standards Board's Emerging
Issues Task Force (EITF) reached a consensus on Issue 3 of EITF Issue 00-22,
"Accounting for "Points" and Certain Other Time-Based or Volume-Based Sales
Incentive Offers, and Offers for Free Products or Services to Be Delivered in
the Future". Issue 3 addresses the recognition, measurement, and income
statement classification for offers to a customer to rebate or refund a
specified amount of cash that may be redeemed if the customer completes a
specified volume of transactions. The consensus was effective for quarters
ending after February 15, 2001. The Company adopted the consensus reached on
Issue 3, in the second fiscal quarter of 2001. The adoption and subsequent
restatement of the Fiscal 2001 and Fiscal 2000 Quarter and Nine Months resulted
in the reclassification of certain selling expenses as a reduction in revenue
and had no impact on pre-tax income, net income, or earnings per share.
LIQUIDITY AND CAPITAL RESOURCES
For the Fiscal 2001 Nine Months, operating activities provided $27.6
million in net cash compared with $31.1 million the previous year. Operating
cash flow decreases versus the previous year primarily reflect lower operating
earnings attributable to our decrease in sales partially offset by working
capital which was $3.7 million lower than the previous year. The lower
investment in working capital versus the comparable period a year ago primarily
reflects lower inventory investments and higher special charge restructuring
liabilities partially offset by increased accounts receivable and prepaid
expenses and a decrease in accounts payable.
Net cash used by investing activities increased $2.1 million versus the
same period a year ago primarily reflecting an increase in capital expenditures
partially offset by proceeds from the sale of investments and property, plant,
and equipment. Expenditures in the current year were primarily for improvements
to alkaline battery manufacturing and information systems hardware and software.
The Company currently expects capital spending for Fiscal 2001 to be
approximately $20.0 million primarily due to alkaline battery manufacturing.
During the Fiscal 2001 Nine Months we granted approximately 0.8 million
options to purchase shares of common stock to various employees of the company.
All grants have been at an exercise price equal to the market price of the
common stock on the date of the grant. We also granted approximately 277,000
shares of restricted stock on October 1, 2000, from the 1997 incentive plan, to
certain members of management. Approximately 210,000 of these shares will vest
on September 30, 2003 provided the recipient is still employed by the Company.
The remainder vests one third each year for the next three years. The total
market value of the restricted shares on date of grant totaled approximately
$4.7 million and has been recorded as restricted stock as a separate component
of shareholders' equity. Unearned compensation is being amortized to expense
over the three-year vesting period.
The Company believes that cash flow from operating activities and
periodic borrowings under its amended credit facilities will be adequate to meet
the Company's short-term and long-term liquidity requirements prior to the
maturity of those credit facilities, although no guarantee can be given in this
regard. The Company's current credit facilities include a revolving credit
facility of $250.0 million and term loan of $75.0 million. As of July 1, 2001,
$37.8 million of the term loan remained outstanding and $195.2 million was
outstanding under the revolving facility with approximately $13.3 million of the
remaining availability utilized for outstanding letters of credit.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition" (SAB 101). The SAB summarizes
certain of the SEC's views in applying U.S. generally accepted accounting
principles to revenue recognition in financial statements. In June 2000, the SEC
issued SAB 101B, which delays the implementation date of SAB 101 until no later
than the fourth fiscal quarter of fiscal years beginning after December 15,
1999. In October 2000, the SEC issued frequently asked questions and answers
about how guidance in accounting standards and SAB 101 would apply to particular
transactions. The amendment in June 2000 delayed the effective date for the
Company until the fourth fiscal quarter of 2001, which is when the Company will
adopt the bulletin. The adoption will not have a material impact on the
consolidated financial statements.
In May 2000, the EITF reached a consensus on Issue No. 00-14,
"Accounting for Certain Sales Incentives". This Issue addresses the recognition,
measurement, and income statement classification for various types of sales
incentives
19
including discounts, coupons, rebates and free products. In July 2001, the EITF
delayed the implementation of EITF 00-14 until no later than quarters beginning
after December 15, 2001. The Company is required to adopt this consensus in the
second fiscal quarter of 2002. The impact of this consensus on the Company's
consolidated financial statements is still being evaluated. The Company does not
currently believe its adoption will have a material impact on the consolidated
financial statements other than the reclassification of certain selling expenses
to cost of sales or a reduction of revenue.
In July and September 2000, the EITF reached a consensus on Issue No.
00-10, "Accounting for Shipping and Handling Fees and Costs." This Issue
addresses the income statement classification for shipping and handling fees and
costs. The Company will adopt this consensus in the fourth fiscal quarter of
2001. The impact of this consensus on the Company's consolidated financial
statements is still being evaluated. The adoption will not have a material
impact on the consolidated financial statements.
In April 2001, the EITF reached a consensus on Issue No. 00-25, "Vendor
Income Statement Characterization of Consideration to a Purchaser of the
Vendor's Products or Services". This Issue addresses when consideration from a
vendor to a retailer or distributor in connection with the purchase of the
vendor's products to promote sales of the vendor's products should be classified
in the vendor's income statement as a reduction of revenue or expense. The
Company is required to adopt this consensus in the second fiscal quarter of
2002. The Company does not currently believe its adoption will have a material
impact on the consolidated financial statements, other than the reclassification
of certain selling expenses to cost of sales or a reduction in revenue.
On July 20, 2001, the FASB issued Statement No. 141, BUSINESS
COMBINATIONS, and Statement No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS.
Statement 141 requires that all business combinations be accounted for under a
single method -- the purchase method. Use of the pooling-of-interests method no
longer is permitted. Statement 141 requires that the purchase method be used for
business combinations initiated after June 30, 2001. Statement 142 requires that
goodwill and intangible assets with an indefinite life no longer be amortized to
earnings, but instead be reviewed for impairment. The amortization of goodwill
and intangible assets with an indefinite life acquired in a transaction
completed prior to June 30, 2001, ceases upon adoption of the Statement, which
the Company is required to adopt no later than our fiscal year beginning October
1, 2002. Management is currently evaluating the impact of adoption on the
consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK FACTORS
We have market risk exposure from changes in interest rates, foreign
currency exchange rates and commodity prices. We use derivative financial
instruments for purposes other than trading to mitigate the risk from such
exposures.
A discussion of our accounting policies for derivative financial
instruments is included in Note 1 "Significant Accounting Policies in Notes to
our Condensed Consolidated Financial Statements."
INTEREST RATE RISK
We have bank lines of credit at variable interest rates. The general
level of U.S. interest rates, LIBOR, IBOR, and to a lesser extent European Base
rates, primarily affects interest expense. We use interest rate swaps to manage
such risk. The swaps are designated as cash flow hedges with the fair value
recorded in OCI and as a hedge asset or liability as applicable. The swaps
settle periodically in arrears with the related amounts for the current
settlement period payable to, or receivable from, the counter-parties included
in accrued liabilities or accounts receivable and recognized in earnings as an
adjustment to interest expense from the underlying debt to which the swap is
designated.
FOREIGN EXCHANGE RISK
We are subject to risk from sales to, purchases from and loans to our
subsidiaries as well as sales to, purchases from and bank lines of credit with,
third-party customers, suppliers and creditors, respectively, denominated in
foreign currencies. Foreign currency sales are made primarily in Pounds
Sterling, Canadian Dollars, Euro, German Marks,
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French Francs, Italian Lira, Spanish Pesetas, Dutch Guilders, Mexican Pesos,
Guatemalan Quetzals, Dominican Pesos, Venezuelan Bolivars, Argentine Pesos,
Chilean Pesos and Honduran Lempira. Foreign currency purchases are made
primarily in Pounds Sterling, German Marks, French Francs, Mexican Pesos,
Dominican Pesos, Guatemalan Quetzals and Honduran Lempira. We manage our foreign
exchange exposure from forecasted sales, accounts receivable, forecasted
purchases, accounts payable, intercompany loans, firm purchase commitments and
credit obligations through the use of naturally occurring offsetting positions
(borrowing in local currency) and forward foreign exchange contracts. Forward
foreign exchange contracts to hedge forecasted transactions are designated as
cash flow hedges with the fair value recorded in OCI and as a hedge asset or
liability as applicable. Once the forecasted transaction has been recognized as
a sale or purchase and a related asset or liability recorded in the balance
sheet, the gain or loss on the related derivative hedge contract is
re-classified from OCI into earnings as an offset to the change in value of the
asset or liability. Forward foreign exchange contracts to hedge firm purchase
commitments are designated as fair value hedges with the fair value recorded in
earnings and as a hedge asset or liability as applicable.
COMMODITY PRICE RISK
We are exposed to fluctuation in market prices for purchases of zinc
metal-based items used in the manufacturing process. We hedge a portion of this
risk through the use of commodity swaps. The swaps are designated as cash flow
hedges with the fair value recorded in OCI and as a hedge asset or liability as
applicable. The fair value of the swaps is reclassified from OCI into earnings
when the hedged forecasted purchase of zinc metal-based items also affects
earnings.
SENSITIVITY ANALYSIS
The analysis below is hypothetical and should not be considered a
projection of future risks. Earnings projections are before tax.
As of July 1, 2001, the potential change in fair value of outstanding
interest rate derivative instruments, assuming a 1% unfavorable shift in the
underlying interest rates would be a loss of $0.9 million. The net impact on
reported earnings, after also including the reduction in one year's interest
expense on the related debt due to the same shift in interest rates, would be a
net gain of $1.5 million.
As of July 1, 2001, the potential change in fair value of outstanding
foreign exchange rate derivative instruments, assuming a 10% unfavorable change
in the underlying foreign exchange rates would be a loss of $0.5 million. The
net impact on future cash flows, after also including the gain in value on the
related accounts receivable payment obligations outstanding at July 1, 2001 due
to the same change in exchange rates, would be a net gain of $2.2 million.
As of July 1, 2001, the potential change in fair value of outstanding
commodity price derivative instruments, assuming a 10% unfavorable change in the
underlying commodity prices would be a loss of $1.2 million. The net impact on
reported earnings, after also including the reduction in cost of one year's
purchases of the related commodities due to the same change in commodity prices,
would be immaterial.
FORWARD LOOKING STATEMENTS
Certain of the information contained in this Form 10-Q, including
without limitation statements made under Part I, Item 1, "Financial Statements"
and Part I, Item 2, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Part I, Item 3, "Quantitative and Qualitative
Disclosures about Market Risk" which are not historical facts, may include
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act, as amended. In reviewing such information, you should
note that our actual results may differ materially from those set forth in such
forward-looking statements.
Important factors that could cause our actual results to differ
materially from those included in the forward-looking statements made herein
include, without limitation, (1) significant changes in consumer demand and
buying practices for household batteries, hearing aid batteries or other
products we manufacture or sell in North America, Latin America or Europe/ROW;
(2) the loss of, or a significant reduction in, sales through a significant
retail customer; (3) the successful introduction or expansion of competitive
brands into the marketplace, including private label offerings; (4) the
introduction of new product features or new battery technologies by a
competitor; (5) promotional campaigns and
21
spending by a competitor; (6) difficulties or delays in the integration of
operations of acquired companies; (7) our ability to successfully implement
manufacturing and distribution cost efficiencies and improvements; (8) delays in
manufacturing or distribution due to work stoppages, problems with suppliers,
natural causes or other factors; (9) the enactment or imposition of unexpected
environmental regulations negatively impacting consumer demand for certain of
our battery products or increasing our cost of manufacture or distribution; (10)
the costs and effects of unanticipated legal, tax or regulatory proceedings;
(11) the effects of competitors' patents or other intellectual property rights;
(12) interest rate, exchange rate and raw material price fluctuations; (13)
impact of unusual items resulting from evaluation of business strategies,
acquisitions and divestitures and organizational structure; (14) changes in
accounting standards applicable to our business; and (15) the effects of changes
in trade, monetary or fiscal policies and regulations by governments in
countries where we do business.
Additional factors and assumptions that could generally cause our
actual results to differ materially from those included in the forward-looking
statements made herein include, without limitation, (1) our ability to develop
and introduce new products; (2) the effects of general economic conditions in
North America, Europe, Latin America or other countries where we do business,
including inflation, labor costs and stock market volatility; (3) the effects of
political or economic conditions, unrest or volatility in Latin America and
other international markets; (4) the sufficiency of our production and
distribution capacity to meet future demand for our products; (5) our ability to
keep pace with the product and manufacturing technological standards in our
industry; (6) our ability to continue to penetrate and develop new distribution
channels for our products; and (7) various other factors, including those
discussed herein and those set forth in our most recent Annual Report on Form
10-K and the prospectus supplement for our most recent public offering of common
stock. Other factors and assumptions not identified above were also involved in
the derivation of the forward-looking statements contained in this Form 10-Q and
the failure of such other assumptions to be realized, as well as other factors,
may also cause actual results to differ materially from those projected. We
assume no obligations to update these forward-looking statements to reflect
actual results or changes in factors or assumptions affecting such
forward-looking statements.
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
There have been no significant changes in the status of Rayovac's legal
proceedings since the filing of Rayovac's Annual Report on Form 10-K for its
fiscal year ended September 30, 2000 ("2000 Form 10-K") except as follows:
On February 9, 2001, the Wisconsin Department of Natural Resources
approved our request to proceed under Wisconsin's Voluntary Party Liability
Exemption program to investigate and, if necessary, remediate environmental
matters at our Wonewoc, Wisconsin, manufacturing facility. Investigative work to
date suggests there may be battery materials containing various heavy metals in
fill on the property. However, we do not expect this matter to result in
material expenditures.
On April 11, 2001, Eveready Battery Company, Inc. filed a complaint
against us in U.S. District Court for the Northern District of Ohio, Eastern
Division, alleging that we have infringed on a patent held by Eveready relating
to mercury-free alkaline batteries. Eveready is seeking injunctive relief as
well as treble damages and other costs and expenses. We have not been served
with the complaint in this matter. We believe we have meritorious defenses to
the claims presented in the complaint and, should we ultimately be served, we
intend to dispute the allegations and otherwise defend our position. We cannot
estimate at this time the effect, if any, that this claim may have on our
business or financial condition.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NUMBER DESCRIPTION
3.1+ Amended and Restated Articles of Incorporation of the
Company.
3.2****** Amended and Restated By-laws of the Company, as amended
through May 17, 1999.
4.1** Indenture, dated as of October 22, 1996, by and among the
Company, ROV Holding, Inc. and Marine Midland Bank, as
trustee, relating to the Company's 10 1/4% Senior
Subordinated Notes due 2006.
4.2****** First Supplemental Indenture, dated as of February 26,
1999, by and among the Company, ROV Holding, Inc. and
HSBC Bank USA (formerly known as Marine Midland Bank) as
trustee, relating to the Company's 10 1/4% Senior
Subordinated Notes due 2006.
4.3++++ Second Supplemental Indenture, dated as of August 6,
1999, by and among the Company, ROV Holding, Inc. and
HSBC Bank USA (formerly known as Marine Midland Bank) as
trustee, relating to the Company's 10 1/4% Senior
Subordinated Notes due 2006.
4.4******* Third Supplemental Indenture, dated as of June 13, 2001,
by and among the Company, ROV Holding, Inc., ROVCAL, Inc.
and HSBC Bank USA (formerly known as Marine Midland
Bank) as trustee, relating to the Company's 10 1/4%
Senior Subordinated Notes due 2006.
4.5** Specimen of the Notes (included as an exhibit to Exhibit
4.1)
4.6**** Amended and Restated Credit Agreement, dated as of
December 30, 1997, by and among the Company, the lenders
party thereto and Bank of America National Trust and
Savings Association ("BofA"), as Administrative Agent.
4.7++++ Second Amended and Restated Credit Agreement, dated as of
August 9, 1999, by and among the Company, the lenders
party thereto and Bank of America, NA as Administrative
Agent.
4.8+++++ The First Amendment dated as of July 28, 2000 to the
Second Amended and Restated Credit Agreement, dated as of
August 9, 1999, by and among the Company, the lenders
party thereto and Bank of America, NA as Administrative
Agent.
4.9+++++++ The Second Amendment dated as of December 31, 2000 to the
Second Amended and Restated Credit Agreement, dated as of
August 9, 1999, by and among the Company, various
financial institutions, and Bank of America, N.A. as
Administrative Agent.
4.10 The Third Amendment dated as of June 11, 2001, to the
Second Amended and Restated Credit Agreement, dated as of
August 9, 1999, by and among the Company, various
financial institutions, and Bank of America, NA as
Administrative Agent.
4.11** The Security Agreement, dated as of September 12, 1996,
by and among the Company, ROV Holding, Inc. and BofA.
4.12** The Company Pledge Agreement, dated as of September 12,
1996, by and between the Company and BofA.
4.13*** Shareholders Agreement, dated as of September 12, 1996,
by and among the Company and the shareholders of the
Company referred to therein.
4.14*** Amendment No. 1 to Rayovac Shareholders Agreement, dated
August 1, 1997, by and among the Company and the
shareholders of the Company referred to therein.
4.15***** Amendment No. 2 to Rayovac Shareholders Agreement, dated
as of January 8, 1999, by and among the Company and the
Shareholders of the Company referred to therein.
4.16++++++ Amendment No. 3 to Rayovac Shareholders Agreement dated
January 1, 2001, by and among the Company and the
shareholders of the Company referred to therein.
23
4.17* Specimen certificate representing the Common Stock.
10.1+++++ Amended and Restated Employment Agreement, dated as of
October 1, 2000, by and between the Company and David A.
Jones.
10.2+++++ Amended and Restated Employment Agreement, dated as of
October 1, 2000, by and between the Company and Kent J.
Hussey.
10.3+++++ Employment Agreement, dated as of October 1, 2000, by and
between the Company and Randall J. Steward.
10.4+++++ Employment Agreement, dated as of October 1, 2000, by and
between the Company and Kenneth V. Biller.
10.5+++++ Employment Agreement, dated as of October 1, 2000, by and
between the Company and Stephen P. Shanesy.
10.6+++++ Employment Agreement, dated as of October 1, 2000, by and
between the Company and Merrell M. Tomlin.
10.7+++++ Employment Agreement, dated as of October 1, 2000, by and
between the Company and Luis A. Cancio.
----------------
* Incorporated by reference to the Company's Registration
Statement on Form S-1 (Registration No. 333-35181) filed with
the Commission.
** Incorporated by reference to the Company's Registration
Statement on Form S-1 (Registration No. 333-17895) filed with
the Commission.
*** Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended June 29, 1997,
filed with the Commission on August 13, 1997.
**** Incorporated by reference to the Company's Registration
Statement on Form S-3 (Registration No. 333-49281) filed with
the Commission.
***** Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended January 3, 1999,
filed with the Commission on February 17, 1999.
****** Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended April 4, 1999,
filed with the Commission on May 17, 1999.
******* Incorporated by reference to the Company's Report on Form 8-K
filed with the Commission on June 19, 2001.
+ Incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1997, filed
with the Commission on December 23, 1997.
++++ Incorporated by reference to the Company's Current Report on
Form 8-K filed with the Commission on August 24, 1999, as
subsequently amended on October 26, 1999.
+++++ Incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 2000, filed
with the Commission on December 19, 2000.
++++++ Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended December 31,
2000, filed with the Commission on February 14, 2001.
+++++++ Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended March 31, 2001,
filed with the Commission on May 14, 2001.
(b) Reports on Form 8-K: The Company has filed the following reports on Form
8-K during the three-month period ending July 1, 2001:
1. On June 14, 2001, the Company filed with the Commission a Report on
Form 8-K to report issuance of a press release regarding the expiration
of its consent solicitation and receipt of consents sufficient to amend
the indenture relating to the Company's 10 1/4% Series B Senior
Subordinated Notes due 2006.
2. On June 19, 2001, the Company filed with the Commission a Report on
Form 8-K to report that a supplemental indenture incorporating the
amendments to the indenture referenced in the Company's June 14, 2001,
Form 8-K was executed on June 17, 2001, and will become operative when
the tendered notes are accepted for payment.
3. On June 20, 2001, the Company filed with the Commission a Report on
Form 8-K for the purpose of filing the Purchase Agreement dated June
20, 2001, by and among the Company, certain shareholders
24
identified in the Purchase Agreement ("Selling Shareholders") and
Salomon Smith Barney Inc., and certain other underwriters identified in
the Purchase Agreement ("Underwriters") as an exhibit to the Company's
shelf registration statement on Form S-3 (Registration No. 333-59086).
4. On June 25, 2001, the Company filed with the Commission a Report on
Form 8-K to report issuance of a press release announcing the pricing
terms for the tender offer for all of its outstanding $65 million
principal amount of 10 1/4% Series B Senior Subordinated Notes
due 2006.
5. On June 28, 2001, the Company filed with the Commission a Report on
Form 8-K to report issuance of a press release announcing the closing
of the offer to purchase for cash and consent solicitation with respect
to its outstanding $65 million principal amount of 10 1/4% Series B
Senior Subordinated Notes due 2006.
25
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: August 9, 2001
RAYOVAC CORPORATION
By: /s/ Randall J. Steward
-------------------------------
Randall J. Steward
Executive Vice President of Administration
and Chief Financial Officer
26