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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 quarter ended June 30, 2003.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
Commission file number 333-07429
333-07429-01
Remington Products Company, L.L.C.
Remington Capital Corp.
(Exact name of registrant as specified in its charter)
06-1451076
Delaware 06-1451079
- -------------------------------------- ----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Nos.)
60 Main Street, Bridgeport, Connecticut 06604
- --------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 367-4400
----------------
Securities registered pursuant to Section 12(b) of the Act:
Title of Each class Name of each exchange on which registered
None None
------------------- -----------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
None
-----------------------------------------------------------
(Title of Class)
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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
REMINGTON PRODUCTS COMPANY, L.L.C.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2003
INDEX
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PAGE
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PART I. FINANCIAL INFORMATION
Item I. Financial Statements (unaudited):
Consolidated Balance Sheets -
June 30, 2003, December 31, 2002 and June 30, 2002 3
Consolidated Statements of Operations -
For the three and six months ended June 30, 2003 and 2002 4
Consolidated Statements of Cash Flows -
For the six months ended June 30, 2003 and 2002 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
Item 4. Controls and Procedures 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
2
Remington Products Company, L.L.C.
Consolidated Balance Sheets
(unaudited, in thousands)
June30, December 31, June 30,
2003 2002 2002
-------- ------------ ----------
ASSETS
Current assets:
Cash and cash equivalents $ 24,748 $ 32,846 $ 3,724
Accounts receivable, less allowance for doubtful accounts
of $4,556 at June 2003, $4,552 at December 2002
and $4,550 at June 2002 41,170 73,205 46,382
Inventories 52,150 49,122 67,188
Prepaid and other current assets 6,044 3,484 4,584
--------- --------- ---------
Total current assets 124,112 158,657 121,878
Property, plant and equipment, net 12,148 12,314 12,809
Goodwill 27,720 27,720 27,720
Intangibles, net 24,165 24,399 24,630
Other assets 10,439 12,026 13,894
--------- --------- ---------
Total assets $198,584 $235,116 $200,931
========= ========= =========
LIABILITIES AND MEMBERS' DEFICIT
Current liabilities:
Accounts payable $ 19,363 $ 24,218 $ 16,188
Short-term borrowings - 1,613 2,512
Current portion of long-term debt 241 314 295
Accrued liabilities 23,884 49,960 27,723
--------- --------- ---------
Total current liabilities 43,488 76,105 46,718
Long-term debt 180,228 185,163 200,303
Other liabilities 844 839 852
Members'deficit:
Members' deficit (20,338) (19,413) (40,490)
Accumulated other comprehensive loss (5,638) (7,578) (6,452)
--------- --------- ---------
Total members'deficit (25,976) (26,991) (46,942)
--------- --------- ---------
Total liabilities and members' deficit $198,584 $235,116 $200,931
========= ========= =========
See notes to unaudited consolidated financial statements.
3
Remington Products Company, L.L.C.
Consolidated Statements of Operations
(unaudited, in thousands)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
------------ ----------- -------- ---------
Net sales $ 71,267 $ 70,000 $119,003 $123,805
Cost of sales 39,804 41,742 66,198 74,089
--------- --------- --------- ---------
Gross profit 31,463 28,258 52,805 49,716
Selling, general and administrative expenses 22,680 23,254 42,614 42,904
Amortization of intangibles 117 119 234 236
--------- --------- --------- ---------
Operating income 8,666 4,885 9,957 6,576
Interest expense, net 5,649 5,840 11,154 11,896
Other income (428) (578) (966) (671)
--------- --------- --------- ---------
Income (loss) before income taxes 3,445 (377) (231) (4,649)
Provision (benefit) for income taxes 526 (139) 694 (345)
--------- ---------- --------- ---------
Net income (loss) $ 2,919 $ (238) $ (925) $ (4,304)
========= ========== ========= =========
Net loss applicable to common units $ (1,263) $ (3,954) $ (9,167) $(11,627)
========= ========== ========== =========
See notes to unaudited consolidated financial statements.
4
Remington Products Company, L.L.C.
Consolidated Statements of Cash Flows
(unaudited, in thousands)
Six Months Ended June 30,
----------------------------
2003 2002
----------- -----------
Cash flows from operating activities:
Net loss $ (925) $(4,304)
Adjustment to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation 1,490 1,365
Amortization of intangibles 234 236
Amortization of deferred financing fees 1,253 1,028
Other 746 (1,235)
-------- ---------
2,798 (2,910)
Changes in assets and liabilities:
Accounts receivable 34,786 34,141
Inventories (2,270) 9,700
Accounts payable (5,084) (14,050)
Accrued liabilities (27,086) (12,355)
Other, net (3,834) (2,762)
-------- ---------
Net cash provided by (used in) operating activities (690) 11,764
-------- ---------
Cash flows from investing activities:
Capital expenditures (1,131) (1,062)
-------- ---------
Cash flows from financing activities:
Repayments under credit facilities (7,301) (23,099)
Borrowings under credit facilities 351 12,037
Other - (223)
-------- --------
Net cash used in financing activities (6,950) (11,285)
-------- --------
Effect of exchange rate changes on cash 673 220
-------- --------
Decrease in cash (8,098) (363)
Cash, beginning of period 32,846 4,087
-------- --------
Cash, end of period $ 24,748 $ 3,724
======== ========
Supplemental cash flow information:
Interest paid $ 10,367 $11,076
Income taxes paid, net $ 97 $ 251
See notes to unaudited consolidated financial statements.
5
Remington Products Company, L.L.C.
Notes to Unaudited Consolidated Financial Statements
1. Basis of Presentation
The accompanying financial statements have been prepared by the Company
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission and according to accounting principles generally accepted in
the United States of America, and reflect all adjustments, consisting only of
normal recurring accruals, which in the opinion of management are necessary for
a fair statement of the results of the interim periods presented. Results of
interim periods may not be indicative of results to be expected for the entire
year. These financial statements do not include all disclosures associated with
annual financial statements and, accordingly, should be read in conjunction with
the notes contained in the Company's audited consolidated financial statements
included in its Form 10-K for the year ended December 31, 2002. Certain prior
period amounts have been reclassified to conform with the current presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results will differ from those
estimates. Estimates are used for, but not limited to the establishment of the
allowance for doubtful accounts, reserves for sales returns and allowances,
reserves for obsolete inventories, product warranty costs, taxes and
contingencies.
Remington Capital Corp. is a wholly-owned subsidiary of Remington Products
Company, L.L.C. and has no significant operations of its own.
2. Recent Accounting Pronouncements
In August 2001, SFAS No. 143, Accounting for Asset Retirement Obligations,
was issued. This statement establishes accounting standards for recognition and
measurement of a liability for an asset retirement obligation and the associated
asset retirement cost. SFAS No. 143 was adopted by the Company on January 1,
2003.
In June 2002, SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities was issued. This statement provides guidance on the
recognition and measurement of liabilities associated with disposal activities.
SFAS No. 146 is effective for exit or disposal activities that are initiated
after December 31, 2002.
In November 2002, FASB Interpretation No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN No. 45) was issued. FIN No. 45 elaborates on
required disclosures by a guarantor in its financial statements about
obligations under certain guarantees that it has issued and clarifies the need
for a guarantor to recognize, at the inception of certain guarantees, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The disclosure provisions of FIN No. 45 were effective for the
Company at December 31, 2002, and its initial measurement and recognition
provisions effective for guarantees entered into or modified after that date.
6
In January 2003, FASB Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN No. 46) was issued. FIN No. 46 clarifies the application
of Accounting Research Bulletin No. 51, Consolidated Financial Statements, and
applies immediately to any variable interest entities created after January 31,
2003 and to variable interest entities in which an interest is obtained after
that date, and to all other interests in variable interest entities effective
July 1, 2003.
In April 2003, SFAS No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities was issued. SFAS No. 149 clarifies the
definition of derivatives, expands the nature of exemptions from Statement 133,
clarifies the application of hedge accounting when using certain instruments and
modifies the cash flow presentation of derivative instruments that contain
financing elements. This Statement is effective for all derivative transactions
and hedging relationships entered into or modified after June 30, 2003.
In May 2003, SFAS No. 150 Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity was issued. This statement
established standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. It requires that issuers classify as liabilities a
financial instrument that is within its scope as a liability because that
financial instrument embodies an obligation of the issuer. The provisions of
SFAS 150 are effective for financial instruments entered into or modified after
May 31, 2003 and to all other instruments that exist as of the beginning of the
first interim financial reporting period beginning after June 15, 2003.
The adoption of the statements and interpretations listed above has not
had, individually or collectively, a material impact on the Company's
consolidated financial position, results of operations or cash flows.
3. Inventories
Inventories were comprised of the following (in thousands):
June 30, December 31, June 30,
2003 2002 2002
-------- ------------ --------
Finished goods $47,994 $46,552 $63,485
Work in process and raw materials 4,156 2,570 3,703
------- ------- -------
$52,150 $49,122 $67,188
======= ======= =======
4. Goodwill and Other Intangibles
The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets,
effective January 1, 2002. In accordance with SFAS No. 142, beginning on January
1, 2002, the Company's goodwill and its tradenames, which have been deemed to
have indefinite lives, are no longer being amortized and are subject to annual
impairment tests. As of January 1, 2002 the Company performed the required
transitional impairment tests of goodwill and tradenames and no transitional
impairment was present. As of June 30, 2002 and 2003 the Company performed the
required annual impairment tests of goodwill and tradenames and no impairment
was present.
Goodwill and other intangible assets were comprised of the following (in
thousands):
7
June 30, December 31, June 30,
2003 2002 2002
---------- ------------- ----------
Amortized Intangible Assets:
Patents carrying amount $ 4,670 $4,670 $ 4,670
Patents accumulated amortization 3,324 3,090 2,859
------- ------ -------
Patents, net $ 1,346 $1,580 $ 1,811
======= ====== =======
Unamortized Intangible Assets:
Goodwill $27,720 $27,720 $27,720
Tradenames 22,819 22,819 22,819
------- ------- -------
$50,539 $50,539 $50,539
======= ======= =======
Estimated amortization expense is $467 thousand for each of the three years
in the period ending December 31, 2005, $179 thousand for the year ending
December 31, 2006 and zero for each year thereafter.
5. Income Taxes
Federal income taxes on net earnings of the Company are payable directly by
the members pursuant to the Internal Revenue Code. Accordingly, no provision has
been made for Federal income taxes for the Company. The Company provides tax for
certain state and local jurisdictions where it is required to do so.
Furthermore, earnings of certain foreign operations are taxable under local
statutes. In these foreign jurisdictions, deferred taxes on income are provided,
if necessary, for temporary differences reflecting differences between the
financial and tax basis of assets and liabilities. The Company also records
valuation allowances against deferred tax assets where, based on the weight of
available evidence, it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
6. Commitments and Contingencies
Pursuant to agreements with certain former executives of the Company, such
former executives' phantom stock awards were cancelled. However, the value of
the vested portion of these awards as of the beginning of 2003, as determined by
the Management Committee of the Company, will be paid to the former executives
at the time an "event" occurs which would otherwise require generally payments
under the Company's phantom equity program. The aggregate amount of such
contingent payments is approximately $2.0 million.
The Company is involved in legal and administrative proceedings and claims
of various types. While any litigation contains an element of uncertainty,
management believes that the outcome of each such proceeding or claim which is
pending or known to be threatened, or all of them combined, would not have a
material adverse effect on the Company's consolidated financial position or
results of operations.
7. Comprehensive Income
Comprehensive income consists of the following (in thousands):
8
Three Months Ended June 30, Six Months ended June 30,
--------------------------- --------------------------
2003 2002 2003 2002
--------- -------- -------- --------
Net income (loss) $ 2,919 $ (238) $ (925) $(4,304)
Other comprehensive income:
Foreign currency translation adjustments 1,613 916 2,095 907
Net unrealized hedging loss (1,342) (1,448) (155) (1,177)
-------- ------- -------- --------
Comprehensive income (loss) $ 3,190 $ (770) $ 1,015 $(4,574)
======== ======= ======== ========
8. Business Segment and Geographical Information
The Company distributes its products through its three operating segments,
which are comprised of 1) the North America segment, which sells product
primarily through mass-merchant retailers, department stores and drug store
chains throughout the United States and Canada, 2) the International segment,
which sells product to similar customers through an international network of
subsidiaries and distributors and 3) the U.S. Service Stores segment, consisting
of Company-owned and operated service stores located throughout the United
States.
Information by segment and geographical location is as follows (in thousands):
Three Months Ended March 31, Six Months Ended June 30,
---------------------------- -------------------------
2003 2002 2003 2002
------------ ------------- ------------ ---------
Net Sales:
North America $44,715 $46,042 $ 69,301 $ 76,642
International 20,753 16,705 38,842 33,484
U.S. Service Stores 5,799 7,253 10,860 13,679
-------- -------- --------- ---------
Total $71,267 $70,000 $119,003 $123,805
======== ======== ========= =========
Operating income
North America $ 7,810 $ 6,358 $ 9,509 $ 9,461
International 1,942 (518) 3,017 (797)
U.S. Service Stores (193) (145) (845) (487)
Depreciation and amortization (893) (810) (1,724) (1,601)
-------- -------- --------- ---------
Total $ 8,666 $ 4,885 $ 9,957 $ 6,576
======== ======== ========= =========
June 30, December 31, June 30,
2003 2002 2002
---------- ------------ ----------
Segment Assets:
North America $122,408 $137,112 $140,731
International 44,986 58,050 48,948
U.S. Service Stores 6,442 7,108 7,528
Cash and cash equivalents 24,748 32,846 3,724
-------- -------- --------
Total $198,584 $235,116 $200,931
======== ======== ========
9
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company is a leading consumer products company focusing on the
development and marketing of personal care products. The Company designs and
distributes electric shavers and accessories, grooming products, hair care
appliances and other small electrical consumer products. The Company distributes
its products through three operating segments which are comprised of 1) the
North America segment, which sells products through mass-merchant retailers,
department stores and drugstore chains throughout the United States and Canada,
2) the International segment, which sells products to similar customers through
an international network of subsidiaries and distributors, and 3) the U.S.
Service Stores segment consisting of Company-owned and operated service stores
located throughout the United States.
Sales of the Company's products are highly seasonal, with a large
percentage of net sales occurring during the Christmas selling season. The
Company typically derives approximately 45% of its annual net sales in the
fourth quarter of each year while the first quarter of each year is generally
the Company's weakest quarter. As a result of this seasonality, the Company's
inventory and working capital needs fluctuate substantially during the year.
Results of Operations
The following table sets forth the Company's unaudited consolidated
statements of operations, including net sales and operating income, by its North
America, International and U.S. Service Stores operating segments for the three
and six months ended June 30, 2003 and 2002.
10
Three Months Ended June 30, Six Months Ended June 30,
----------------------------------- -----------------------------------
2003 2002 2003 2002
-------------- ---------------- --------------- ---------------
$ % $ % $ % $ %
----- ----- ----- ----- ----- ----- ----- -----
Net Sales:
North America $44.7 62.7 $46.0 65.7 $69.3 58.2 $76.6 61.9
International 20.8 29.2 16.7 23.9 38.8 32.6 33.5 27.0
U.S. Service Stores 5.8 8.1 7.3 10.4 10.9 9.2 13.7 11.1
------ ------ ------ ------ ------ ------ ------ ------
71.3 100.0 70.0 100.0 119.0 100.0 123.8 100.0
Cost of sales 39.8 55.8 41.7 59.6 66.2 55.6 74.1 59.9
------ ------ ------ ------ ------ ------ ------ ------
Gross profit 31.5 44.2 28.3 40.4 52.8 44.4 49.7 40.1
Selling, general and
administrative expenses 22.7 31.9 23.3 33.3 42.6 35.8 42.9 34.7
Amortization of intangibles 0.1 0.1 0.1 0.1 0.2 0.2 0.2 0.1
------ ------ ------ ------ ------ ------ ------ ------
Operating income:
North America 7.9 11.1 6.3 9.0 9.5 8.0 9.5 7.7
International 1.9 2.7 (0.5) (0.7) 3.0 2.5 (0.8) (0.6)
U.S. Service Stores (0.2) (0.3) (0.1) (0.1) (0.8) (0.7) (0.5) (0.4)
Depreciation and amortization (0.9) (1.3) (0.8) (1.2) (1.7) (1.4) (1.6) ( 1.4)
------ ------ ------ ------ ------ ------ ------ ------
Total operating income 8.7 12.2 4.9 7.0 10.0 8.4 6.6 5.3
Interest expense, net 5.6 7.9 5.8 8.4 11.2 9.4 11.9 9.6
Other income (0.3) (0.4) (0.5) (0.9) (1.0) (0.8) (0.7) (0.6)
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before income taxes 3.4 4.8 (0.4) (0.5) (0.2) (0.2) (4.6) (3.7)
Provision (benefit) for income taxes 0.5 0.7 (0.2) (0.3) 0.7 0.6 (0.3) (0.2)
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) $ 2.9 4.1 $(0.2) (0.2) $(0.9) (0.8) $(4.3) (3.5)
====== ====== ====== ====== ====== ====== ====== ======
Second Quarter Ended June 30, 2003 Versus June 30, 2002
Net Sales. Net sales for the quarter ended June 30, 2003 increased 2% to
$71.3 million compared to $70.0 million for the quarter ended June 30, 2002. The
increase was driven by higher net sales in the International segment principally
as a result of the positive impact of foreign currency exchange rates and by
strong sales of shaver and grooming products in North America. This increase was
partially offset by a decline in sales of haircare and wellness products in
North America and lower sales in the Company's U.S. Service Stores segment.
Net sales in North America declined 3% to $44.7 million in the second
quarter of 2003, compared to $46.0 million in the second quarter of 2002. Sales
of shaver and grooming products increased in North America, principally a result
of new products and increased distribution at existing customers. This increase
was offset by a decline in wellness sales as a result of the decision to
de-emphasize the product line and lower haircare sales which benefited in the
prior year from new product introductions.
International net sales were $20.8 million an increase of 25% over the
$16.7 million in the second quarter of 2002. Of the $4.1 million increase $2.9
million resulted from the positive impact of foreign currency exchange rates.
Also impacting the increase was higher sales of shaver, grooming and haircare
products which was partially offset by lower sales of wellness and other
non-core products.
11
Net sales through the Company's U.S. Service Stores decreased 21% to $5.8
million in the second quarter of 2003 from $7.3 million in the second quarter of
2002. The decrease was due to a 13% decline in same store sales and 10 fewer
stores on average operating during the comparable periods.
Gross Profit. Gross profit was $31.5 million, or 44.2% of net sales in the
second quarter of 2003 compared to $28.3 million, or 40.4% of net sales in the
second quarter of 2002. The increase in percentage over the prior year was the
result of the combination of a better sales mix toward shaver and grooming
products and product cost savings, including the positive impact of foreign
currency on U.S. dollar denominated inventory purchases in the International
segment.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $22.7 million, or 31.9% of net sales, in the second
quarter of 2003, compared to $23.3 million or 33.3% of net sales in 2002.
Although the negative impact of a weaker dollar had the effect of increasing
International expenses by $1.1 million, total expenses decreased by $0.6 million
primarily as a result of lower expenses in the U.S. Service Stores segment and
lower distribution expenses in North America.
Operating Income. Operating income for the second quarter of 2003 was $8.7
million compared to $4.9 million in the second quarter of 2002. The increase was
the result of the higher sales, improved gross margin and lower operating
expenses.
Net Interest Expense. Net interest expense decreased to $5.6 million for
the second quarter of 2003 compared to $5.8 million in the second quarter of
2002. The decline was due primarily to lower average borrowings in 2003 compared
to 2002.
Other Income. Other income was $0.3 million in the second quarter of 2003
compared to $0.5 million in the second quarter of 2002. The decline was
primarily the result of lower currency gains on U.S. dollar denominated
obligations in the Company's International segment.
Provision (Benefit) for Income Taxes. The net provision for income taxes
was $0.5 million for the second quarter of 2003 compared to a benefit of $0.2
million in the second quarter of 2002. The current period's provision was the
result of pretax earnings generated within the Company's International segment
while the prior year's benefit was the result of pretax losses generated within
the Company's International segment.
Six Months Ended June 30, 2003 Versus June 30, 2002
Net Sales. Net sales for the six months ended June 30, 2003 were $119.0
million, a decrease of 4% compared to $123.8 million for the six months ended
June 30, 2002. The decrease in net sales was the result of lower sales in the
North America and U.S. Service Stores segments. These declines were partially
offset by an increase in the International segment resulting from the positive
impact of foreign currency exchange rates.
Net sales in North America were $69.3 million for the first six months of
2003, a decrease of 10% compared to $76.6 million for the first six months of
2002. The decline was the result of lower wellness sales resulting from the
Company's decision to de-emphasize this product line, coupled with lower
haircare sales which benefited in the prior year from new product introductions.
Also impacting the decline were lower shaver and grooming sales in the first
quarter which resulted from higher year-end shaver inventories at certain retail
accounts due to a slow Christmas retail environment and lower returns.
International net sales were $38.8 million for the first six months of
2003, an increase of $5.3 million or 16% compared to $33.5 million for the first
six months of 2002. The increase in net sales was due to the $5.5 million
positive impact of foreign currency exchange rates and an increase in sales of
shaver, grooming and haircare products. These increases were partially offset by
lower sales of wellness and other non-core products.
12
Net sales in the U.S. Service Stores were $10.9 million for the first six
months of 2003, a 20% decrease compared to $13.7 million for the first six
months of 2002. The decrease was in part the result of 10 fewer stores on
average operating during the first six months of 2003 compared to the first six
months of 2002. Also contributing to the decline was a 13% decrease in same
store sales versus the same period a year ago.
Gross Profit. Gross profit was $52.8 million, or 44.4% of net sales for the
first six months of 2003 compared to $49.7 million, or 40.1% of net sales for
the first six months of 2002. The increase in percentage over the prior year was
primarily the result of a better sales mix toward shaver and grooming products.
Also impacting the improved margin were product cost savings, which included the
positive impact of foreign currency on U.S. dollar denominated inventory
purchases in the International segment.
Selling General and Administrative Expenses. Selling, general and
administrative expenses were $42.6 million or 35.8% of net sales for the first
six months of 2003, compared to $42.9 million or 34.7% of net sales in 2002. An
increase in expenses of $2.1 million resulting from the effect of the weaker
dollar on the translation of International expenses was offset by lower
distribution costs and lower expenses within the U.S. Service Stores segment
resulting from fewer stores in operation during the comparable periods.
Operating Income. Operating income for the first six months of 2003 was
$10.0 million compared to $6.6 million for the first six months of 2002. The
increase from period to period was the result of the improved gross margin and
lower operating expenses partially offset by the lower net sales.
Net Interest Expense. Net interest expense decreased to $11.2 million for
the first six months of 2003 compared to $11.9 million for the first six months
of 2002. The decline was the result of lower average borrowings during the first
six month of 2003 compared to the same period in 2002.
Other Income. Other income increased to $1.0 million in the first six
months of 2003 compared to $0.7 million in the same period of the prior year.
This increase was primarily the result of higher currency gains on U.S. dollar
denominated obligations in the Company's International segment.
Provision (Benefit) for Income Taxes. The net provision for income taxes
was $0.7 million for the first six months of 2003 compared to a benefit of $0.3
million in the same period of 2002. The current period's provision was the
result of pretax earnings generated within the Company's International segment
while the prior year's benefit was the result of pretax losses generated within
the Company's International segment.
Liquidity and Capital Resources
Net cash used in operating activities for the first six months of 2003 was
$0.7 million compared to $11.8 million in cash provided by operating activities
in the same period of 2002. The variance from 2002 to 2003 was due primarily to
the reduction of excess working capital during the first six months of 2002.
The Company's operations are not capital intensive. The Company's capital
expenditures totaled $1.1 million during the first six months of 2003 and 2002.
As a result of an increase in tooling and machinery for new products, total
capital expenditures for 2003 are expected to increase to approximately $4
million, up from $2.1 million in 2002.
The Company's primary sources of liquidity are cash and cash equivalents,
funds generated from operations and available borrowings under its $110.0
million asset based revolving credit facility (the "Facility"). Borrowings under
the Facility are subject to a borrowing base of 85% of eligible receivables and
60% of eligible inventories. The Facility matures on March 31, 2006. The
Company, its principal members or their affiliates, may, from time to time,
enter the market to purchase or sell the Company's Senior Subordinated Notes, in
compliance with any applicable securities laws.
As of June 30, 2003, the Company was in compliance with all covenants under
the Facility and availability under the Facility was approximately $50 million
in addition to the Company's cash and cash equivalents of $24.8 million. The
Company believes that its cash and cash equivalents, together with cash
generated from operations and borrowing resources, will be adequate to permit
the Company to meet both its debt service requirements and capital requirements
for the next twelve months, although no assurance can be given in this regard.
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Critical Accounting Policies
As disclosed in Note 1 to the "Notes to the Unaudited Consolidated
Financial Statements", the preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
certain estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Future events and
their effects cannot be determined with absolute certainty. Therefore, the
determination of estimates requires the exercise of judgment. Actual results
inevitably will differ from those estimates, and such differences may be
material to the consolidated financial statements. The following accounting
policies, which were disclosed in the Company's report on Form 10-K for the year
ended December 31, 2002 and for which there has been no change in their
application as of June 30, 2003, affect the Company's more significant estimates
used in the preparation of its consolidated financial statements:
Revenue Recognition:
Revenue from product sales is recognized, net of estimated sales returns,
and other allowances when goods are shipped and title passes to the customer.
The Company recognizes an estimated allowance for sales returns when the
sale is recorded. The Company continuously monitors historical return rates from
customers. Using this information, the Company estimates the allowance for sales
returns and adjusts this estimate for any specific knowledge that would not be
reflected in the historical return rates.
The Company recognizes allowances for certain promotional incentives to
customers, primarily cooperative advertising, when the sale is recorded. The
majority of these promotional incentives are covered by contract with the
customer. Upon recognition of a sale, the Company estimates and records an
allowance for promotional incentives based upon the terms of the contract and
any other specific incentives offered to customers.
Allowance for Doubtful Accounts:
The Company maintains an allowance for doubtful accounts receivable for
estimated losses resulting from the inability of customers to make required
payments. The allowance is based upon specific knowledge of customers from whom
collection is determined to be doubtful and the Company's historical collection
experience with such customers.
Warranty Reserves:
The Company maintains a reserve for its liability under the warranty
provided on its products. The reserve is estimated based upon current sales
volumes and past experience of warranty claims by the end consumer. In addition
the Company considers other known factors including the current level of product
quality in relation to historical levels.
Inventory Reserves:
The Company's inventory is valued at the lower of cost or estimated net
realizable value. The Company regularly reviews inventory quantities on hand for
slow moving or obsolete items based upon expected future demand. For such items,
if it is estimated that the market value is below the original cost, the Company
reduces the book value to the net amount expected to be realized upon sale. This
reduction in value is charged to cost of sales. If demand does not meet
management's expectations, additional inventory write-downs may be required.
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Forward Looking Statements
This Management's Discussion and Analysis may contain forward-looking
statements which include assumptions about future market conditions, operations
and results. These statements are based on current expectations and are subject
to risks and uncertainties. They are made pursuant to safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Among the many factors
that could cause actual results to differ materially from any forward-looking
statements are the success of new product introductions and promotions, changes
in the competitive environment for the Company's products, changes in economic
conditions, foreign exchange risk, outcome of litigation and other factors
discussed in prior Securities and Exchange Commission filings by the Company.
The Company assumes no obligation to update these forward-looking statements or
advise of changes in the assumptions on which they were based.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
There are no material changes to the disclosure on this matter made in the
Company's report on Form 10-K for the year ended December 31, 2002.
ITEM 4. Controls and Procedures
The Company's Chief Executive Officer (CEO) and Chief Financial Officer
(CFO) evaluated the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of June 30, 2003. Based on that evaluation
the CEO and CFO concluded that the Company's disclosure controls and procedures
were effective.
During the quarter ended June 30, 2003 there was no change in the Company's
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.12 Executive Severance Agreement dated as of November 25, 1996 between
Remington and Alexander R. Castaldi.
31.1 Chief Executive Officer Certification of Periodic Financial Report
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer Certification of Periodic Financial Report
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On May 1, 2003 the Company filed a Current Report on Form 8-K, reporting
under Item 9 and Item 12 the announcement that the Company issued a press
release on its first quarter 2003 results.
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SIGNATURE
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.
REMINGTON PRODUCTS COMPANY, L.L.C.
By: /s/ Kris J. Kelley
-----------------------------------------------------
Kris J. Kelley, Vice President and Controller
Date: August 12, 2003
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