UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934. For the quarterly period ended MARCH 31, 2002.
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934. For the transition period from to .
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Commission file number 0-19431
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ROYAL APPLIANCE MFG. CO.
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(Exact name of registrant as specified in its charter)
OHIO 34-1350353
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
7005 COCHRAN ROAD, GLENWILLOW, OHIO 44139
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(Address of Principal Executive Offices) Zip Code
(440) 996-2000
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(Registrant's telephone number, including area code)
Indicate, by check mark, whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate the number of shares outstanding of each of the issuer's
classes of common shares, as of the latest practicable date.
Common Shares, without par value 13,047,752
-------------------------------- ----------------------------
(Class) (Outstanding at May 8, 2002)
The Exhibit index appears on sequential page 21.
1
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
INDEX
Page
Number
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Part I FINANCIAL INFORMATION
Item 1 Financial Statements
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Consolidated Balance Sheets - 3
March 31, 2002 and December 31, 2001
Consolidated Statements of Operations - 4
three months ended March 31, 2002 and 2001
Consolidated Statements of Cash Flows - 5
three months ended March 31, 2002 and 2001
Notes to Consolidated Financial Statements 6 - 12
Item 2 Management's Discussion and Analysis of Financial 13 - 18
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Condition and Results of Operations
-----------------------------------
Part II OTHER INFORMATION 19
Item 6 Exhibits and Reports on Form 8-K 19
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Signatures 20
Exhibit Index 21
*Numbered in accordance with Item 601 of Regulation S-K
2
Part I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
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ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, December 31,
2002 2001
--------- ------------
ASSETS (Unaudited)
Current assets:
Cash $ 803 $ 3,421
Trade accounts receivable, net 42,544 35,986
Inventories 46,753 50,807
Deferred income taxes 4,458 4,549
Prepaid expenses and other 1,677 1,636
--------- ---------
Total current assets 96,235 96,399
--------- ---------
Property, plant and equipment, at cost:
Land 1,541 1,541
Building 7,777 7,777
Molds, tooling, and equipment 51,927 52,031
Furniture, office and computer equipment and software 15,692 12,154
Assets under capital leases 3,171 3,171
Leasehold improvements and other 7,456 7,456
--------- ---------
87,564 84,130
Less accumulated depreciation and amortization (50,440) (46,556)
--------- ---------
37,124 37,574
--------- ---------
Computer software and tooling deposits 2,995 4,405
Other 1,881 2,066
--------- ---------
Total assets $ 138,235 $ 140,444
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 33,907 $ 27,433
Accrued liabilities:
Advertising and promotion 12,132 11,196
Salaries, benefits, and payroll taxes 3,090 7,258
Warranty and customer returns 9,800 9,950
Income taxes 714 1,370
Other 6,784 6,479
Current portions of capital lease obligations
and notes payable 151 147
--------- ---------
Total current liabilities 66,578 63,833
--------- ---------
Revolving credit facility 29,000 32,000
Capitalized lease obligations, less current portion 1,950 1,978
--------- ---------
Total long-term debt 30,950 33,978
Deferred income taxes 4,011 4,011
--------- ---------
Total liabilities 101,539 101,822
--------- ---------
Commitments and contingencies (Note 3) -- --
Shareholders' equity:
Common shares, at stated value 214 214
Additional paid-in capital 44,518 44,167
Retained earnings 70,574 70,489
--------- ---------
115,306 114,870
Less treasury shares, at cost (12,832,600 and
12,365,700 shares at March 31, 2002 and
December 31, 2001, respectively) (78,610) (76,248)
--------- ---------
Total shareholders' equity 36,696 38,622
--------- ---------
Total liabilities and shareholders' equity $ 138,235 $ 140,444
========= =========
The accompanying notes are an integral part of these financial statements.
3
Part I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
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ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended
March 31,
-------------------
2002 2001
------- --------
Net sales $91,164 $103,060
Cost of sales 72,816 81,888
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Gross margin 18,348 21,172
Selling, general and administrative expenses 17,749 16,547
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Income from operations 599 4,625
Interest expense, net 328 739
Receivable securitization and other expense, net 141 515
------- --------
Income before income taxes 130 3,371
Income tax expense 45 1,197
------- --------
Net income $ 85 $ 2,174
======= ========
BASIC
Weighted average number of common
shares outstanding (in thousands) 13,243 13,729
Earnings per share $ .01 $ .16
DILUTED
Weighted average number of common
shares and equivalents outstanding (in thousands) 14,007 14,231
Earnings per share $ .01 $ .15
The accompanying notes are an integral part of these financial statements
4
Part I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
------ --------------------
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Three Months
Ended March 31,
-------------------
2002 2001
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Cash flows from operating activities:
Net income $ 85 $ 2,174
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Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 4,267 3,613
Compensatory effect of stock awards 273 137
Deferred income taxes 91 (177)
(Increase) decrease in assets:
Trade accounts receivable, net (6,558) (484)
Inventories 4,054 9,067
Refundable and accrued income taxes (656) 1,884
Prepaid expenses and other (41) (145)
Other (65) (313)
Increase (decrease) in liabilities:
Trade accounts payable 6,474 3,945
Accrued advertising and promotion 936 (4,418)
Accrued salaries, benefits, and payroll taxes (4,168) 966
Accrued warranty and customer returns (150) 100
Accrued other 305 636
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Total adjustments 4,762 14,811
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Net cash from operating activities 4,847 16,985
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Cash flows from investing activities:
Purchases of tooling, property, plant, and equipment, net (3,567) (1,013)
Decrease (increase) in tooling deposits and other 1,410 (2,690)
------- --------
Net cash from investing activities (2,157) (3,703)
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Cash flows from financing activities:
Payments on bank debt, net (3,000) (12,850)
Proceeds from exercise of stock options 78 --
Payments on capital lease obligations (24) (32)
Repurchase of common stock (2,362) --
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Net cash from financing activities (5,308) (12,882)
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Net (decrease) increase in cash (2,618) 400
------- --------
Cash at beginning of period 3,421 704
------- --------
Cash at end of period $ 803 $ 1,104
======= ========
Supplemental disclosure of cash flow information:
Cash payments for:
Interest $ 334 $ 875
======= ========
Income taxes, net of refunds $ 610 $ (509)
======= ========
The accompanying notes are an integral part of these financial statements.
5
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1: BASIS OF PRESENTATION
The financial information for Royal Appliance Mfg. Co. and Subsidiaries
(the Company) included herein is unaudited; however, such information reflects
all adjustments (consisting solely of normal recurring adjustments) which are,
in the opinion of management, necessary for a fair presentation of the
consolidated statements of financial position as of March 31, 2002 and December
31, 2001, and the related statements of operations and cash flows as of, and for
the interim periods ended, March 31, 2002 and 2001. These condensed financial
statements should be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's latest annual report
(Form 10-K).
The results of operations for the three month period ended March 31,
2002, are not necessarily indicative of the results to be expected for the full
year.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect reported amounts and
related disclosures. Actual results could differ from those estimates.
Significant estimates include the allowance for doubtful accounts, the reserve
for returns and allowances, and depreciation and amortization, among others.
Certain prior year amounts have been reclassified to conform to the
2002 presentation.
Net income per common share is computed based on the weighted average
number of common shares outstanding for basic earnings per share and on the
weighted average number of common shares and common share equivalents
outstanding for diluted earnings per share.
The Company's revenue recognition policy is to recognize revenues when
products are shipped. The Company's return policy is to replace, repair or issue
credit for product under warranty. Returns received during the current period
are expensed as received and a provision is provided for future returns based on
current shipments. All sales are final upon shipment of goods to the customers.
The Company's revenue recognition policy is in accordance with Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements."
In fiscal 2001, the Emerging Issues Task Force ("EITF") issued EITF No.
00-14, "Accounting for Certain Sales Incentives," and EITF No. 00-25, "Vendor
Income Statement Characterization of Consideration to a Purchaser of the
Vendor's Products or Services." These pronouncements address the recognition,
measurement and statement of operations classification for certain sales
incentives and are effective January 1, 2002. The Company adopted these
pronouncements in the first quarter of fiscal 2002 and as a result certain items
previously included in selling, general and administrative expenses were
reclassified as a reduction of net sales. Additionally, prior period amounts
were reclassified to conform to the new requirements. The impact of these two
issues resulted in a reduction of net sales of $698 and $1,462 for the quarters
ended March 31, 2002 and 2001, respectively. These amounts, consisting
principally of promotional allowances to the Company's retail customers, were
previously recorded as selling, general and administrative expenses; therefore,
there was no impact to net income for either period.
International operations, primarily Canadian, are conducted in their
local currency. Assets and liabilities denominated in foreign currencies are
translated at current exchange rates, and income and expenses are translated
using weighted average exchange rates. The net effect of currency gains and
losses realized on these business transactions is included in the determination
of net income.
6
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1: BASIS OF PRESENTATION (CONTINUED)
The Company has used forward exchange contracts to reduce fluctuations
in foreign currency cash flows related to receivables denominated in foreign
currencies. The terms of the currency instruments are consistent with the timing
of the transactions being hedged. The purpose of the Company's foreign currency
management activity is to protect the Company from the risk that the eventual
cash flows from the foreign currency denominated transactions may be adversely
affected by changes in exchange rates. Gains and losses on forward exchange
contracts are deferred and recognized in income when the related transactions
being hedged are recognized. Such gains and losses are generally reported on the
same financial line as the hedged transaction. The Company does not use
derivative financial instruments for trading or speculative purposes.
Outstanding as of March 31, 2002 and December 31, 2001 were $785 and $0,
respectively, in contracts to purchase foreign currency forward. There is no
significant unrealized gain or loss on these contracts. All contracts have terms
of three months or less.
Cost incurred for producing and communicating advertising are expensed
during the period aired, including costs incurred under the Company's
cooperative advertising program.
NOTE 2: INVENTORIES
Inventories are stated at the lower of cost or market using the
first-in, first-out (FIFO) method. Inventories at March 31, 2002, and December
31, 2001, consisted of the following:
March 31, December 31,
2002 2001
---- ----
Finished goods $41,143 $43,277
Work in process and purchased parts 5,610 7,530
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$46,753 $50,807
======= =======
NOTE 3: COMMITMENTS AND CONTINGENCIES
At March 31, 2002, the Company estimates having contractual commitments
for future advertising and promotional expense of approximately $3,900 including
commitments for television advertising through December 31, 2002. Other
contractual commitments for items in the normal course of business total
approximately $3,000.
The Company is self-insured with respect to workers' compensation
benefits in Ohio and carries excess workers' compensation insurance covering
aggregate claims exceeding $350 per occurrence.
7
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3: COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Hoover Company (Hoover) filed a lawsuit in federal court, in the
Northern District of Ohio (case #1:00cv 0347), against the Company on February
4, 2000, under the patent, trademark, and unfair competition laws of the United
States. The Complaint asserts that the Company's Dirt Devil Easy Steamer
infringes three utility patents and two design patents held by Hoover, and also
that the Easy Steamer design infringes the trade dress of Hoover's carpet
extractor products. Recently, the Court has dismissed charges of infringement
against Royal regarding one of the three utility patents, and has found that the
Dirt Devil Easy Steamer infringes one claim of a second utility patent. The
Court refused to grant summary judgment of infringement regarding the third
utility patent, and also reserved judgment as to the validity of both of the
remaining utility patents. Royal has motions currently pending to dismiss the
charges of infringement of the design patents and the trademark claims. Hoover
seeks damages, injunction on future production, and legal fees. The Company is
vigorously defending the suit and believes it is without merit. In accordance
with Financial Accounting Standards No. 5, "Accounting for Contingencies", a
loss is reasonably possible, however, no range of potential loss can be
estimated at this time. If Hoover were to prevail on all its remaining claims,
it could have a material adverse effect on the consolidated financial position,
results of operations, or cash flows of the Company.
The Company filed a lawsuit in federal court, in the Northern District
of Ohio (case #1:01cv 2775), against The Hoover Company (Hoover) on December 10,
2001, under the patent, trademark, and unfair competition laws of the United
States. The Complaint asserts that Hoover infringes certain patents relating to
bagless technology held by the Company. The Company seeks damages, injunction on
future production, and legal fees.
The Company filed a lawsuit in federal court, in the Northern District
of Ohio (case #1:02cv 0338), against Bissell Homecare, Inc. (Bissell) on
February 22, 2002, under the patent, trademark, and unfair competition laws of
the United States. The Complaint asserts that Bissell infringes certain patents
relating to bagless technology held by the Company. The Company seeks damages,
injunction on future production, and legal fees.
Bissell Homecare, Inc. (Bissell) filed a lawsuit in federal court, in
the Western District of Michigan (case #1:02cv 0142), against the Company on
March 1, 2002, under the patent, trademark, and unfair competition laws of the
United States. The lawsuit was voluntarily dismissed by Bissell on March 19,
2002 and immediately re-filed in the Eastern District of Michigan (case
#02cv71079) on March 20, 2002. The Complaint asserts that the Company's Dirt
Devil Easy Steamer and Platinum Force Extractor products infringe certain design
and utility patents held by Bissell. Bissell seeks damages, injunction on future
production, and legal fees. The Company is vigorously defending the suit and
believes it is without merit. If Bissell were to prevail on all its claims, it
could have a material adverse effect on the consolidated financial position,
results of operations, or cash flows of the Company.
Black & Decker Inc. and Black & Decker (U.S.) Inc. (B&D) filed a
lawsuit in federal court, Northern District of Illinois (case #02C 1765) against
the Company on March 8, 2002, under the patent, trademark, and unfair
competition laws of the United States. The Complaint asserts that the Company's
Roommate and Touch-Up vacuum cleaners infringe upon certain patents held by B&D.
The Company is vigorously defending the suit and believes it is without merit.
If B&D were to prevail on all its claims, it could have a material adverse
effect on the consolidated financial position, results of operations, or cash
flows of the Company.
The Company is involved in various other claims and litigation arising
in the normal course of business. In the opinion of management, the ultimate
resolution of these actions will not materially affect the consolidated
financial position, results of operations, or cash flows of the Company.
8
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4: DEBT
At March 31, 2002, the Company had a reducing collateralized revolving
credit facility with availability of up to $64,000 and a maturity date of March
7, 2003. The Company was in compliance with all applicable covenants as of March
31, 2002.
On April 1, 2002, the Company entered into a new $70,000 three year
collateralized revolving credit facility. Under the agreement, pricing options
of the bank's base lending rate and LIBOR rate are based on a defined formula.
In addition, the Company pays a commitment fee based on a defined formula on the
unused portion of the facility. The revolving credit facility contains
covenants, which require, among other things, the achievement of minimum net
worth levels and the maintenance of certain financial ratios. As long as the
Company remains in compliance with all covenants, the revolving credit facility
permits share repurchases and dividends up to $20,000, as defined. The new
facility replaced the Company's $64,000 revolving credit facility.
The Company also utilizes a revolving trade accounts receivable
securitization program to sell without recourse, through a wholly-owned
subsidiary, certain trade accounts receivable. Under the program, the maximum
amount allowed to be sold at any given time is $30,000, seasonally adjusted to
$35,000 from September through December. At March 31, 2002, the Company had
received approximately $21,100 from the sale of trade accounts receivable that
has not yet been collected. The proceeds from the sales were used to reduce
borrowings under the Company's revolving credit facility. Costs of the program,
which primarily consist of the purchaser's financing cost of issuing commercial
paper backed by the receivables, totaled $122 and $322 for the three months
ended March 31, 2002 and 2001, respectively, and have been classified as
"Receivable securitization and other expense, net" in the accompanying
Consolidated Statements of Operations. The Company, as agent for the purchaser
of the receivables, retains collection and administrative responsibilities for
the purchased receivables.
NOTE 5: SHARE REPURCHASE PROGRAM
In April 2001, the Company's Board of Directors authorized a common
share repurchase program that provides for the Company to purchase, in the open
market and through negotiated transactions, up to 3,400 of its outstanding
common shares. As of May 8, 2002, the Company has repurchased approximately
1,057 shares for an aggregate purchase price of $5,280 under the new program
that is scheduled to expire in December 2002.
9
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 6: EARNINGS PER SHARE
The Company follows Statement of Financial Accounting Standards
("SFAS") No. 128, Earnings per Share, for the calculation of earnings per share.
Basic earnings per share excludes dilution and is computed by dividing income by
the weighted average number of common shares outstanding for the period. Diluted
earnings per share includes the dilution of common stock equivalents.
Three months ended
March 31,
------------------
2002 2001
-------- -------
Net income $ 85 $ 2,174
======== =======
BASIC:
Common shares outstanding, net of treasury
shares, beginning of period 13,464 13,729
Weighted average common shares issued
during period 12 --
Weighted average treasury shares repurchased
during period (233) --
-------- -------
Weighted average common shares outstanding,
net of treasury shares, end of period 13,243 13,729
======== =======
Net income per common share $ 0.01 $ 0.16
======== =======
DILUTED:
Common shares outstanding, net of treasury
shares, beginning of period 13,464 13,729
Weighted average common shares issued
during period 12 --
Weighted average common share equivalents 764 502
Weighted average treasury shares repurchased
during period (233) --
-------- -------
Weighted average common shares outstanding,
net of treasury shares, end of period 14,007 14,231
======== =======
Net income per common share $ 0.01 $ 0.15
======== =======
10
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 7: BUSINESS SEGMENT INFORMATION
The Company has two reportable segments: Consumer Products - Floorcare
and Consumer Products - Other. The operations of the Consumer Products -
Floorcare segment includes the design, assembly or sourcing, marketing and
distribution of a full line of plastic and metal vacuum cleaners. The primary
brand names associated with this segment include Dirt Devil and Royal. These
products are sold primarily to major mass merchant retailers and independent
dealers in North America. The operations of the Consumer Products - Other
segment represents business conducted by Privacy Technologies, Inc. and Product
Launch Partners, Inc., both of which are wholly owned subsidiaries of the
Company. Currently, the primary product line within this segment is the
TeleZapper, a telephone attachment that helps reduce unwanted computer-dialed
telemarketing calls. These products are sold primarily to major mass merchant
retailers and national electronic chains in North America.
The Company's reportable segments are distinguished by the nature of
products sold. The Company evaluates performance and allocates resources to
reportable segments primarily based on net sales and operating income. The
accounting policies of the reportable segments are the same as those described
in Note 1, the accounting policies footnote. The Company records its federal and
state tax assets and liabilities at corporate. There are no intersegment sales.
11
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 7: BUSINESS SEGMENT INFORMATION (CONTINUED)
Financial information for the Company's Reportable Segments consisted
of the following:
Three month ended March 31,
2002 2001
--------- --------
Net Sales
Consumer Products - Floorcare $ 83,228 $103,060
Consumer Products - Other 7,936 --
--------- --------
Consolidated Total $ 91,164 $103,060
========= ========
Income (loss) from Operations
Consumer Products - Floorcare $ (1,056) $ 4,625
Consumer Products - Other 1,655 --
--------- --------
Consolidated Total $ 599 $ 4,625
========= ========
Capital Expenditures
Consumer Products - Floorcare $ 1,871 $ 2,060
Consumer Products - Other -- 12
--------- --------
Total for Reportable Segments 1,871 2,072
Corporate 286 1,631
--------- --------
Consolidated Total $ 2,157 $ 3,703
========= ========
Depreciation and Amortization
Consumer Products - Floorcare $ 3,099 $ 3,017
Consumer Products - Other 105 --
--------- --------
Total for Reportable Segments 3,204 3,017
Corporate 1,063 596
--------- --------
Consolidated Total $ 4,267 $ 3,613
========= ========
Total Assets
Consumer Products - Floorcare $ 111,013 $113,908
Consumer Products - Other 7,462 45
--------- --------
Total for Reportable Segments 118,475 113,953
Corporate 19,760 16,354
--------- --------
Consolidated Total $ 138,235 $130,307
========= ========
12
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-------------------------------------------------------------------------
OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
-------------
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
------------------------------------------
Management's discussion and analysis of its financial position and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires management to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosure of contingent assets and liabilities. Actual results could
differ from those estimates. Financial Reporting Release No. 60, which was
recently issued by the Securities and Exchange Commission ("SEC"), requires all
registrants, including the Company, to include a discussion of "Critical"
accounting policies or methods used in the preparation of financial statements.
Management believes that the critical accounting policies and areas that require
the most significant judgments and estimates to be used in the preparation of
the consolidated financial statements are revenue recognition including customer
based programs and incentives, allowance for doubtful accounts, useful lives of
tooling and other long lived assets and accrued warranty and customer returns.
Revenue Recognition - The Company's revenue recognition policy is to
recognize revenues when products are shipped. All sales are final upon shipment
of product to the customer. The Company records estimated reductions to net
sales for customer programs and incentive offerings including pricing
arrangements, promotions and other volume based incentives. If market conditions
were to soften, the Company may take actions to increase customer incentives,
possibly resulting in a reduction of net sales and gross margins at the time the
incentive is offered.
Allowance for Doubtful Accounts - The Company maintains an allowance
for trade accounts receivable for which collection on specific customer accounts
is doubtful. In determining collectibility, management reviews available
customer financial statement information, credit rating reports as well as other
external documents and public filings. When it is deemed probable that a
specific customer account is uncollectible, that balance is included in the
reserve calculation. Actual results could differ from these estimates under
different assumptions.
Useful Lives of Tooling - The Company capitalizes the cost of tooling
used in the production of its products by third party suppliers and global
contract manufacturers. The tooling is depreciated on a straight-line basis over
2-4 years, based on the nature of the product and the estimated product life
cycle. The useful lives are reviewed on a quarterly basis by management and
useful lives may be shortened if needed. In determining whether or not
shortening of useful lives is required, management reviews sell-through data at
retail, forecast demand and the timeframe of new product introductions.
Accrued Warranty and Customer Returns - The Company's return policy is
to replace, repair or issue credit for product under warranty. Returns received
during the current period are expensed as received and a reserve is maintained
for future returns from current shipments. Management calculates the reserve
utilizing historical return rates by product family. These rates are reviewed
and adjusted periodically. Management utilizes judgment for estimating return
rates of new products and adjusts those estimates as actual results become
available.
13
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (CONTINUED)
-------------
RESULTS OF OPERATIONS
---------------------
Net sales decreased 11.5% for the first quarter ended March 31, 2002,
compared with the same period in the prior year. The decrease in the first
quarter net sales was due to lower shipments of floorcare products primarily in
the extractor category and lower average wholesale selling prices on uprights
and extractors. These sales declines were partially offset by shipments of the
TeleZapper, which was introduced in the third quarter of 2001. Overall sales to
the top 5 customers (all of which are major retailers) decreased in the first
three months of 2002, both in terms of dollars and as a percentage of total net
sales, accounting for approximately 67.5% as compared with approximately 70.5%
in the first three months of 2001. The Company believes that its dependence on
sales to its largest customers will continue. Recently, several major retailers
have experienced significant financial difficulties and some, including Kmart,
have filed for protection from creditors under applicable bankruptcy laws. As of
March 31, 2002, the net exposure related to Kmart as well as other customer
balances for which management believes that collection is doubtful was included
in the calculation of allowance for doubtful accounts. The Company sells its
products to certain customers that are in bankruptcy proceedings.
Gross margin, as a percent of net sales, decreased from 20.5% for the
first quarter 2001 to 20.1% in the first quarter 2002. The gross margin
percentage was negatively affected in 2002 by overall lower shipments of
floorcare products and by lower average wholesale selling prices on the
Company's line of uprights due to continued heightened competition. This
negative impact on gross margins was partially offset by favorable TeleZapper
margins and lower floorcare product returns.
Selling, general and administrative expenses increased 7.3% for the
first quarter of 2002 compared with the first quarter of 2001, and increased as
a percentage of sales from 16.1% for the quarter ended March 31, 2001 to 19.5%
for the quarter ended March 31, 2002. The increase in selling, general and
administrative expenses was primarily due to increases in employee related
benefit expenses, professional services associated with litigation and
depreciation expense associated with recent upgrades to the Company's
information technology, partially offset by lower advertising and
promotional expenditures.
Interest expense decreased 55.6% for the first quarter 2002, compared
with the first quarter in 2001. The decrease in interest expense is the result
of lower effective borrowing rates and lower levels of variable rate borrowings
to finance working capital, capital expenditures and share repurchases.
Receivable securitization and other expense, net, principally reflects
the effect of the cost of the Company's trade accounts receivable securitization
program and foreign currency transaction gains or losses related to the
Company's North American assets.
Due to the factors discussed above, the Company had income before
income taxes for the first quarter 2002 of $130 compared to income before income
taxes for the first quarter 2001 of $3,371.
14
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (CONTINUED)
-------------
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company used cash generated from operations during the quarter
ended March 31, 2002 to fund its capital expenditures, share repurchases and
make payments on its revolving line of credit facility. Working capital was
$29,657 at March 31, 2002, a decrease of 8.9% over December 31, 2001. Current
assets decreased by $164 reflecting in part a decrease in inventory of $4,054,
and a $2,618 decrease in cash, substantially offset by an increase in trade
accounts receivable of $6,558. Current liabilities increased by $2,745,
reflecting in part a $6,474 increase in accounts payable, $936 increase in
accrued advertising and promotion, partially offset by a $4,168 decrease in
accrued salaries, benefits, and payroll taxes and a $656 decrease in accrued
income taxes.
In the first three months of 2002, the Company utilized $2,157 of cash
for capital expenditures, including approximately $1,100 of tooling related to
the new bagged Platinum Force Upright.
At March 31, 2002, the Company had a reducing collateralized revolving
credit facility with availability of up to $64,000 and a maturity date of March
7, 2003. The Company was in compliance with all applicable covenants as of March
31, 2002.
On April 1, 2002, the Company entered into a new $70,000 three year
collateralized revolving credit facility. Under the agreement, pricing options
of the bank's base lending rate and LIBOR rate are based on a defined formula.
In addition, the Company pays a commitment fee based on a defined formula on the
unused portion of the facility. The revolving credit facility contains
covenants, which require, among other things, the achievement of minimum net
worth levels and the maintenance of certain financial ratios. As long as the
Company remains in compliance with all covenants, the revolving credit facility
permits share repurchases and dividends up to $20,000, as defined. The new
facility replaced the Company's $64,000 revolving credit facility.
The Company also utilizes a revolving trade accounts receivable
securitization program to sell without recourse, through a wholly-owned
subsidiary, certain trade accounts receivable. Under the program, the maximum
amount allowed to be sold at any given time is $30,000, seasonally adjusted to
$35,000 from September to December. At March 31, 2002, the Company had received
approximately $21,100 from the sale of trade accounts receivable that has not
yet been collected. The proceeds from the sales were used to reduce borrowings
under the Company's revolving credit facility. Costs of the program, which
primarily consist of the purchaser's financing cost of issuing commercial paper
backed by the receivables, totaled $122 and $322 for the three months ended
March 31, 2002 and 2001, respectively, and have been classified as "Receivable
securitization and other expense, net" in the accompanying Consolidated
Statements of Operations. The Company, as agent for the purchaser of the
receivables, retains collection and administrative responsibilities for the
purchased receivables.
In April 2001, the Company's Board of Directors authorized a common
share repurchase program that provides for the Company to purchase, in the open
market and through negotiated transactions, up to 3,400 of its outstanding
common shares. As of May 8, 2002, the Company has repurchased approximately
1,057 shares for an aggregate purchase price of $5,280 under the new program
that is scheduled to expire in December 2002.
The Company believes that its revolving credit facilities along with
cash generated by operations will be sufficient to provide for the Company's
anticipated working capital and capital expenditure requirements for the next
twelve months, as well as any additional stock repurchases under the current
repurchase program.
15
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (CONTINUED)
-------------
QUARTERLY OPERATING RESULTS
---------------------------
The following table presents certain unaudited consolidated quarterly
operating information for the Company and includes all adjustments (consisting
only of normal recurring adjustments) that the Company considers necessary for a
fair presentation of such information for the interim periods. Certain prior
period amounts have been reclassified to conform to current period presentation
(See Note 1 to Notes to Consolidated Financial Statements).
Three Months Ended
-----------------------------------------------------
March 31, Dec. 31, Sept. 30, June 30, March 31,
2002 2001 2001 2001 2001
---- ---- ---- ---- ----
Net sales $91,164 $127,236 $111,503 $79,512 $103,060
Gross margin 18,348 32,663 26,461 15,269 21,172
Net income (loss) 85 3,773 4,085 (708) 2,174
Net income (loss)
per share - diluted (a) $ 0.01 $ 0.27 $ 0.29 $ (0.05) $ 0.15
(a) The sum of 2001 quarterly net income (loss) per common share does not
equal annual net income per common share due to the change in the
weighted average number of common shares outstanding due to share
repurchases.
The Company believes that a significant percentage of certain of its
products are given as gifts and therefore, sell in larger volumes during the
Christmas and other holiday shopping seasons. The Company's continued dependency
on its major customers, the timing of purchases by these major customers and the
timing of new product introductions cause quarterly fluctuations in the
Company's net sales. As a consequence, results in prior quarters are not
necessarily indicative of future results of operations.
OTHER
-----
The Company's Consumer Products - Floorcare business segment's most
significant competitors are Hoover, Eureka and Bissell in the upright vacuum and
carpet shampooer markets and, Black & Decker and Euro Pro in the hand-held
market. Many of these competitors and several others are subsidiaries or
divisions of companies that are more diversified and have greater financial
resources than the Company. The Company believes that the domestic vacuum
cleaner industry is a mature industry with modest annual growth in many of its
products but with a decline in certain other products. Competition is dependent
upon price, quality, extension of product lines, and advertising and promotion
expenditures. Additionally, competition is influenced by innovation in the
design of replacement models and by marketing and approaches to distribution.
The Company experiences extensive competition, including price pressure and
increased advertising by its competitors, in all product lines within the
Consumer Products - Floorcare segment. These trends are expected to continue
throughout 2002.
The Company's Consumer Products - Other business segment competes with
a variety of other consumer products and services. In addition to various state
"do not call" lists, the Federal Trade Commission is proposing a national "do
not call" list that may have an impact on the sales of the TeleZapper.
During the first quarter of 2002, the Company announced a licensing
arrangement with The Proctor and Gamble Company for the rights to a new carpet
cleaning system. This system will be marketed under the name Carpet CPR(TM). The
Company initially planned to launch this product utilizing direct response
television to educate the consumers about this new product during the third
quarter of 2002, followed by a mass retail launch in the fourth quarter of 2002.
The Company has recently decided to extend the direct response television
portion of the product launch into the fourth quarter of 2002 to increase
consumer education and learning and will seek very limited mass retail
distribution in 2002.
16
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (CONTINUED)
-------------
INFLATION
---------
The Company does not believe that inflation by itself has had a
material effect on the Company's results of operations. However, as the Company
experiences price increases from its suppliers, which may include increases due
to inflation, retail pressures may prevent the Company from increasing its
prices.
LITIGATION
----------
The Hoover Company (Hoover) filed a lawsuit in federal court, in the
Northern District of Ohio (case #1:00cv 0347), against the Company on February
4, 2000, under the patent, trademark, and unfair competition laws of the United
States. The Complaint asserts that the Company's Dirt Devil Easy Steamer
infringes three utility patents and two design patents held by Hoover, and also
that the Easy Steamer design infringes the trade dress of Hoover's carpet
extractor products. Recently, the Court has dismissed charges of infringement
against Royal regarding one of the three utility patents, and has found that the
Dirt Devil Easy Steamer infringes one claim of a second utility patent. The
Court refused to grant summary judgment of infringement regarding the third
utility patent, and also reserved judgment as to the validity of both of the
remaining utility patents. Royal has motions currently pending to dismiss the
charges of infringement of the design patents and the trademark claims. Hoover
seeks damages, injunction on future production, and legal fees. The Company is
vigorously defending the suit and believes it is without merit. In accordance
with Financial Accounting Standards No. 5, "Accounting for Contingencies", a
loss is reasonably possible, however, no range of potential loss can be
estimated at this time. If Hoover were to prevail on all its remaining claims,
it could have a material adverse effect on the consolidated financial position,
results of operations, or cash flows of the Company.
The Company filed a lawsuit in federal court, in the Northern District
of Ohio (case #1:01cv 2775), against The Hoover Company (Hoover) on December 10,
2001, under the patent, trademark, and unfair competition laws of the United
States. The Complaint asserts that Hoover infringes certain patents relating to
bagless technology held by the Company. The Company seeks damages, injunction on
future production, and legal fees.
The Company filed a lawsuit in federal court, in the Northern District
of Ohio (case #1:02cv 0338), against Bissell Homecare, Inc. (Bissell) on
February 22, 2002, under the patent, trademark, and unfair competition laws of
the United States. The Complaint asserts that Bissell infringes certain patents
relating to bagless technology held by the Company. The Company seeks damages,
injunction on future production, and legal fees.
Bissell Homecare, Inc. (Bissell) filed a lawsuit in federal court, in
the Western District of Michigan (case #1:02cv 0142), against the Company on
March 1, 2002, under the patent, trademark, and unfair competition laws of the
United States. The lawsuit was voluntarily dismissed by Bissell on March 19,
2002 and immediately re-filed in the Eastern District of Michigan (case
#02cv71079) on March 20, 2002. The Complaint asserts that the Company's Dirt
Devil Easy Steamer and Platinum Force Extractor products infringe certain design
and utility patents held by Bissell. Bissell seeks damages, injunction on future
production, and legal fees. The Company is vigorously defending the suit and
believes it is without merit. If Bissell were to prevail on all its claims, it
could have a material adverse effect on the consolidated financial position,
results of operations, or cash flows of the Company.
Black & Decker Inc. and Black & Decker (U.S.) Inc. (B&D) filed a
lawsuit in federal court, Northern District of Illinois (case #02C 1765) against
the Company on March 8, 2002, under the patent, trademark, and unfair
competition laws of the United States. The Complaint asserts that the Company's
Roommate and Touch-Up vacuum cleaners infringe upon certain patents held by B&D.
The Company is vigorously defending the suit and believes it is without merit.
If B&D were to prevail on all its claims, it could have a material adverse
effect on the consolidated financial position, results of operations, or cash
flows of the Company.
17
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (CONTINUED)
-------------
ACCOUNTING STANDARDS
--------------------
The Company has implemented or considered the following new accounting
pronouncements during the first quarter of 2002:
SFAS No. 141, "Business Combinations" - This statement requires that
all business combinations be accounted for under a single method, the purchase
method. Use of the pooling-of-interests method is no longer permitted.
SFAS No. 142, "Goodwill and Other Intangible Assets" - This statement
addresses financial accounting and reporting for acquired goodwill and other
intangible assets, and in summary discontinues the amortization of goodwill and
other intangibles with indefinite lives.
SFAS No. 143, "Accounting for Asset Retirement Obligations" - This
statement addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" - This statement addresses financial accounting and reporting for the
impairment or disposal of long-lived assets.
In fiscal 2001, the Emerging Issues Task Force ("EITF") issued EITF No.
00-14, "Accounting for Certain Sales Incentives," and EITF No. 00-25, "Vendor
Income Statement Characterization of Consideration to a Purchaser of the
Vendor's Products or Services." These pronouncements address the recognition,
measurement and statement of operations classification for certain sales
incentives and are effective January 1, 2002. The Company adopted these
pronouncements in the first quarter of fiscal 2002 and as a result certain items
previously included in selling, general and administrative expenses were
reclassified as a reduction of net sales. Additionally, prior period amounts
were reclassified to conform to the new requirements. The impact of these two
issues resulted in a reduction of net sales of $698 and $1,462 for the quarters
ended March 31, 2002 and 2001, respectively. These amounts, consisting
principally of promotional allowances to the Company's retail customers, were
previously recorded as selling, general and administrative expenses; therefore,
there was no impact to net income for either period.
The Company expects that the implementation of the above standards will
not have a material impact on its consolidated financial position, results of
operations or cash flows.
FORWARD-LOOKING STATEMENTS
--------------------------
Forward-looking statements in this Form 10Q are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from those projected.
Readers are cautioned not to place undue reliance on these forward-looking
statements which speak only as of the date hereof. Potential risks and
uncertainties include, but are not limited to: the financial strength of the
retail industry particularly in the major mass retail channel; the impact of
Kmart's recent bankruptcy filing on Royal's future sales and earnings; the
impact of an adverse outcome in any of the patent infringement cases; the
competitive pricing and aggressive product development environment within the
floorcare industry; the impact of private-label programs by mass retailers; the
cost and effectiveness of planned advertising, marketing and promotional
campaigns; the success at retail and the continued acceptance by consumers of
the Company's new products, including the Company's bagless uprights, carpet
shampooers, Carpet CPR(TM) and its first consumer electronics product, the
TeleZapper(TM), the dependence upon the Company's ability to continue to
successfully develop and introduce innovative products; the uncertainty of the
Company's global suppliers to continuously supply sourced finished goods and
component parts; and general business and economic conditions.
18
PART II - OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K
------ --------------------------------
The Exhibits filed herewith are set forth on the Index to
Exhibits filed as part of this report.
Forms 8-K - None
The following documents are furnished as an exhibit and numbered
pursuant to Item 601 of Regulation S-K:
None
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Royal Appliance Mfg. Co.
-----------------------------------------------
(Registrant)
/s/ Michael J. Merriman
-----------------------------------------------
Michael J. Merriman
Chief Executive Officer, President and Director
(Principal Executive Officer)
Date: May 13, 2002 /s/ Richard G. Vasek
------------ -----------------------------------------------
Richard G. Vasek
Chief Financial Officer, Vice President -
Finance and Secretary
(Principal Financial Officer)
20
INDEX TO EXHIBITS
PAGE NUMBER
-----------
4(a) Credit Agreement dated as of April 1, 2002, by and among
the Registrant and various banks including National City
Bank as Administrative Agent.
21