1
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 JUNE 30, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________________ TO _________________
COMMISSION FILE NUMBER 1-15297
WATER PIK TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 25-1843384
------------------------------- -------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
23 CORPORATE PLAZA, SUITE 246
NEWPORT BEACH, CA 92660
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 719-3700
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 of Common Stock outstanding on August 10, 2001 was
12,245,677 shares.
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WATER PIK TECHNOLOGIES, INC.
INDEX
Page Number
-----------
Part I - Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - June 30, 2001 (unaudited) and
December 31, 2000 3
Consolidated Statements of Income - Three months and six months
ended June 30, 2001 and 2000 (unaudited) 4
Consolidated Statements of Cash Flows - Six months
ended June 30, 2001 and 2000 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
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PART I--FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
WATER PIK TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share amounts)
June 30, December 31,
2001 2000
--------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,428 $ 1,383
Accounts receivable, less allowances for doubtful accounts of
$2,054 at June 30, 2001 and $1,910 at December 31, 2000 45,385 62,519
Inventories 37,016 33,866
Deferred income taxes 4,697 6,877
Prepaid expenses and other current assets 1,460 2,284
--------- ---------
TOTAL CURRENT ASSETS 90,986 106,929
Property, plant and equipment, net 49,927 42,364
Cost in excess of net assets acquired, net 19,280 20,109
Deferred income taxes 4,533 1,760
Other assets 2,190 2,034
--------- ---------
TOTAL ASSETS $ 166,916 $ 173,196
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 18,325 $ 26,255
Accrued income taxes 696 3,284
Accrued liabilities 15,505 25,162
Current portion of long-term debt 4,829 5,740
--------- ---------
TOTAL CURRENT LIABILITIES 39,355 60,441
Long-term debt, less current portion 36,866 36,995
Other accrued liabilities 7,813 9,013
--------- ---------
TOTAL LIABILITIES 84,034 106,449
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value: 5,000,000 shares authorized; none issued -- --
Common stock, $0.01 par value: 50,000,000 shares authorized;
12,245,011 and 9,923,685 shares issued and outstanding at
June 30, 2001 and December 31, 2000, respectively 122 99
Additional paid-in capital 76,282 60,064
Retained earnings 13,930 11,399
Equity adjustments due to stock plans (6,863) (4,314)
Accumulated comprehensive loss (589) (501)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 82,882 66,747
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 166,916 $ 173,196
========= =========
See accompanying notes
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WATER PIK TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except for share and per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
2001 2000 2001 2000
------------ ----------- ------------ -----------
SALES $ 73,475 $ 77,722 $ 129,649 $ 144,826
Cost and expenses:
Cost of sales 48,219 50,618 86,453 95,400
Selling expenses 12,127 12,184 23,577 24,280
General and administrative expenses 7,156 8,633 14,098 16,996
------------ ----------- ------------ -----------
67,502 71,435 124,128 136,676
------------ ----------- ------------ -----------
Income before other income and expenses 5,973 6,287 5,521 8,150
Interest expense 967 1,143 1,850 2,144
Other income, net (392) (103) (492) (163)
------------ ----------- ------------ -----------
INCOME BEFORE INCOME TAXES 5,398 5,247 4,163 6,169
Provision for income taxes 2,115 2,167 1,632 2,548
------------ ----------- ------------ -----------
NET INCOME $ 3,283 $ 3,080 $ 2,531 $ 3,621
============ =========== ============ ===========
BASIC NET INCOME PER COMMON SHARE $ 0.28 $ 0.31 $ 0.22 $ 0.37
============ =========== ============ ===========
DILUTED NET INCOME PER COMMON SHARE $ 0.28 $ 0.31 $ 0.21 $ 0.37
============ =========== ============ ===========
SHARES USED IN PER SHARE CALCULATION - BASIC 11,825,000 9,882,000 11,734,000 9,812,000
============ =========== ============ ===========
SHARES USED IN PER SHARE CALCULATION - DILUTED 11,911,000 9,885,000 11,801,000 9,828,000
============ =========== ============ ===========
See accompanying notes
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WATER PIK TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
-----------------------
2001 2000
-------- --------
OPERATING ACTIVITIES:
Net income $ 2,531 $ 3,621
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation and amortization 4,504 4,935
Deferred income taxes (593) 923
Compensation expense arising from stock awards 196 145
Gain on sale of property, plant and equipment (315) --
Change in operating assets and liabilities:
Accounts receivable 17,114 12,350
Inventories (3,204) (5,684)
Accounts payable (7,913) (1,365)
Accrued liabilities (9,814) (2,993)
Accrued income taxes (2,561) 1,075
Other assets and liabilities (785) 170
-------- --------
CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (840) 13,177
-------- --------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (10,955) (3,779)
Disposals of property, plant and equipment 348 72
-------- --------
CASH USED IN INVESTING ACTIVITIES (10,607) (3,707)
-------- --------
FINANCING ACTIVITIES:
Net borrowings under credit facilities (977) (9,531)
Net proceeds from common stock offering 13,646 --
Principal payments on capital leases (85) (113)
-------- --------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 12,584 (9,644)
-------- --------
Effect of exchange rate changes on cash and cash equivalents (92) (24)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,045 (198)
Cash and cash equivalents at beginning of period 1,383 1,514
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,428 $ 1,316
======== ========
SUPPLEMENTAL INFORMATION
Cash paid during the period:
Interest $ 1,794 $ 2,025
Taxes $ 4,616 $ 555
See accompanying notes
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WATER PIK TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS
Water Pik Technologies, Inc. ("Water Pik Technologies" or the "Company") is a
leader in the design, manufacturing and marketing of a broad range of
well-recognized personal health care products and pool products and heating
systems. The Company's products include: showerheads; oral health products;
water filtration products; pool and spa heaters, controls, valves and water
features; and residential and commercial water-heating systems. Water Pik
Technologies operates in two business segments -- Personal Health Care and Pool
Products and Heating Systems.
SPIN-OFF FROM ALLEGHENY TELEDYNE INCORPORATED
Water Pik Technologies became an independent public company on November 29, 1999
when Allegheny Teledyne Incorporated, now known as Allegheny Technologies
Incorporated ("ATI"), distributed all of the common stock of Water Pik
Technologies to the stockholders of ATI in a tax-free transaction (the
"spin-off"). Stockholders of ATI received one share of Company common stock for
every 20 shares of ATI stock. Following the spin-off, ATI held no equity
interest in the Company.
Water Pik Technologies consists of the former consumer products segment of ATI,
which includes the operations of the Teledyne Water Pik division with operations
in the U.S. and Canada and the Teledyne Laars division with operations in the
U.S. and Canada.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Certain amounts reported
in previous years have been reclassified to conform to the 2001 presentation.
These reclassifications had no effect on reported results of operations or
stockholders' equity. These financial statements should be read in conjunction
with the Company's Annual Report on Form 10-K for the year ended December 31,
2000. Operating results for the interim periods presented are not necessarily
indicative of the results to be expected for the full year ended December 31,
2001.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets," effective for fiscal years
beginning after December 15, 2001. Under SFAS No. 142, goodwill will no longer
be amortized but will be subject to annual impairment tests. Other intangible
assets will continue to be amortized over their useful lives. The Company will
apply the new rules on accounting for goodwill and other intangible assets
beginning in the first quarter of 2002. The absence of goodwill amortization is
expected to result in an increase in net income of $1,042,000 ($0.09 per share)
per year. The Company will perform the first of the required impairment tests of
goodwill, which is classified as cost in excess of net assets acquired in the
accompanying consolidated balance sheets, as of January 1, 2002 and is currently
evaluating the impact of adopting SFAS No. 142.
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In September 2000, the Emerging Issues Task Force (EITF) reached a final
consensus on EITF Issue 00-10, "Accounting for Shipping and Handling Fees and
Costs," which addresses the classification of shipping and handling costs and
the related revenue. The Company adopted EITF Issue 00-10 in the fourth quarter
of 2000 resulting in a reclassification of outgoing freight costs from a
deduction in arriving at net sales to an expense in cost of sales. In accordance
with the guidance, outgoing freight costs for all prior periods presented have
been reclassified. As a result of the reclassification, sales and cost of sales
for the three months ended June 30, 2000 increased $2,062,000 to $77,722,000 and
$50,618,000, respectively, and sales and cost of sales for the six months ended
June 30, 2000 increased $3,997,000 to $144,826,000 and $95,400,000,
respectively. These reclassifications had no effect on reported gross profit or
results of operations.
In May 2000, the EITF reached a consensus on EITF Issue 00-14, "Accounting for
Certain Sales Incentives." EITF 00-14, as amended, addresses the recognition,
measurement and income statement classification for sales incentives offered
voluntarily by a vendor without charge to customers that can be used in, or that
are exercisable by a customer as a result of, a single exchange transaction. The
Company is required to adopt EITF Issue 00-14 by the first quarter of 2002.
Management does not anticipate that the adoption of EITF Issue 00-14 will have a
significant impact on the Company's consolidated results of operations,
financial position or income statement classification.
In April 2001, the EITF reached a consensus on EITF Issue 00-25 "Vendor Income
Statement Characterization of Consideration from a Vendor to a Retailer." This
guidance requires that consideration paid by a vendor to a retailer be
classified in the vendor's income statement as a reduction of revenue instead of
expense unless certain criteria are met. The Company is required to adopt EITF
Issue 00-25 by the first quarter of 2002. Management is currently evaluating the
impact of adopting EITF Issue 00-25.
2. INVENTORIES
Inventories are stated at the lower of cost (last-in, first-out (LIFO) and
first-in, first-out (FIFO) cost methods) or market. Inventories consist of the
following:
June 30, December 31,
2001 2000
-------- ------------
(In thousands)
Raw materials and supplies $ 13,045 $ 12,207
Work-in-process 6,538 5,273
Finished goods 22,169 21,026
-------- --------
Total inventories at current cost 41,752 38,506
Less: Allowances to reduce current cost values to LIFO basis (4,736) (4,640)
-------- --------
Total inventories $ 37,016 $ 33,866
======== ========
Inventories determined using the LIFO cost method were $30,635,000 at June 30,
2001 and $28,515,000 at December 31, 2000, net of the respective LIFO reserves.
The remainder of inventory was determined using the FIFO cost method.
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3. LONG-TERM DEBT
Long-term debt is comprised of the following:
June 30, December 31,
2001 2000
-------- -----------
(In thousands)
Revolving credit facility $ 36,791 $ 36,845
Canadian revolving credit facility 1,499 2,399
8 percent promissory note 3,158 3,133
Capitalized leases 247 358
-------- --------
41,695 42,735
Less: Current portion (4,829) (5,740)
-------- --------
Long-term debt $ 36,866 $ 36,995
======== ========
On June 29, 2001, the Company voluntarily amended its revolving credit facility
to modify certain terms of the agreement dated November 29, 1999. The agreement
was modified to increase the concentration limits of eligible accounts
receivable from major customers, to provide an option for the release of
mortgages on real property which secure the revolving credit facility to enable
financing with alternate lenders upon approval, to waive a reduction in real
property and machinery and equipment availability pursuant to the completion of
the required equity offering, to increase intercompany indebtedness limitations
and to modify certain financial covenants.
4. STOCKHOLDERS' EQUITY
On May 7, 2001, certain officers of the Company exercised their rights under the
Company's Stock Acquisition and Retention Program (SARP) to acquire an aggregate
of 220,892 shares of the Company's common stock for $1,746,000 based on the
average quoted market price of the shares for the ten days preceding the date of
purchase. Payment for the purchased shares was in the form of full-recourse
notes receivable by the Company from the officers which bear interest at 5.4
percent per annum and are payable in level monthly payments of principal and
interest beginning on the fifth anniversary of the notes. The aggregate amount
of notes receivable from officers related to the purchase of shares under the
SARP was $4,581,000 and $2,835,000 as of June 30, 2001 and December 31, 2000,
respectively, and is classified, along with the related interest receivable, as
a reduction in stockholders' equity. Further, pursuant to the SARP, the Company
awarded one share of restricted common stock of the Company at no cost to the
officers for every two shares purchased under the SARP, for a total of 110,446
shares with an aggregate market value on the date of issuance of $873,000. The
restrictions on the restricted shares lapse five years from the date of grant.
The amounts are being amortized as compensation expense on a straight-line basis
over the period of restrictions and the unamortized balance is classified as a
reduction of stockholders' equity.
On January 3, 2001, the Company sold 1,973,685 shares of common stock at $7.60
per share to two investment funds managed by Special Value Investment
Management, LLC in a private placement. Proceeds from the offering in the amount
of $15,000,006, less $1,354,000 in offering costs, were used for capital
expenditures related to new product development activities and to repay
borrowings under the Company's revolving credit facility pending their use for
new product development activities and for further development of lower cost
manufacturing capabilities in accordance with the amended IRS tax ruling
received by ATI in connection with the spin-off. Subsequent to January 3, 2002,
at the request of the purchaser, the Company has the obligation to register
these shares, plus an additional 386,800 shares of common stock that the
purchasers owned prior to the offering, under the Securities Act of 1933, as
amended, and to pay certain registration expenses.
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5. COMPREHENSIVE INCOME
The components of comprehensive income were as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2001 2000 2001 2000
------- ------- ------- -------
Net Income $ 3,283 $ 3,080 $ 2,531 $ 3,621
Foreign currency translation losses (91) (233) (88) (186)
------- ------- ------- -------
Comprehensive income $ 3,192 $ 2,847 $ 2,443 $ 3,435
======= ======= ======= =======
6. INCOME TAXES
The provision for income taxes for the 2001 and 2000 interim periods was
computed in accordance with FASB Interpretation No. 18, "Accounting for Income
Taxes in Interim Periods," and was based on projections of total year pretax
income in accordance with SFAS No. 109, "Accounting for Income Taxes." The
effective income tax rate was 39.1 percent for the three months and six months
ended June 30, 2001 and 41.3 percent for the three months and six months ended
June 30, 2000. The decrease in the effective tax rate in 2001 is due to a more
favorable apportionment method for state income taxes and to the identification
and utilization of state tax credits and research and development credits not
utilized in prior years.
7. LEGAL CONTINGENCIES
A number of lawsuits, claims and proceedings have been or may be asserted
against the Company relating to the conduct of its business, including those
pertaining to product liability, personal injury, patent infringement,
commercial, employment and employee benefits. While the outcome of litigation
cannot be predicted with certainty and some of these lawsuits, claims or
proceedings may be determined adversely to the Company, management does not
believe that the disposition of any such pending matters is likely to have a
material adverse effect on the Company's financial condition or liquidity,
although the resolution in any reporting period of one or more of these matters
could have a material adverse effect on the Company's results of operations for
that period.
As a consumer goods manufacturer and distributor, the Company is subject to
continuing risk of product liability and related lawsuits involving claims for
substantial monetary damages. The Company is party to various personal injury
and property damage lawsuits and claims relating to its products and other
routine litigation incidental to its business. The Company has general
liability, product liability and workers' compensation insurance coverage. The
Company's insurance coverage provides that the Company is responsible for policy
deductibles and an allocation of legal costs and expenses. Loss accruals have
been recorded in accordance with SFAS No. 5, "Accounting for Contingencies" to
cover the portion of liability claims not covered by insurance policies. Such
accruals are based on estimates which include information provided by the
Company's insurance company, claims adjusters and insurance broker, taking into
account prior experience, numbers of claims, discussions with legal counsel and
other relevant factors. The methods of making such estimates and establishing
the resulting accrual are reviewed on a regular basis and any adjustments
resulting therefrom are reflected in current operating results.
The Company has recorded loss accruals covering the portion of lawsuits and
claims not covered by insurance policies of $8,083,000 and $9,503,000 as of June
30, 2001 and December 31, 2000, respectively. The amount related to product and
general liability lawsuits and asserted claims and incurred but not reported
claims was $7,355,000 and $9,230,000 as of June 30, 2001 and December 31, 2000,
respectively. The remaining amount relates to workers' compensation claims, both
asserted and incurred but not reported.
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The Tax Sharing and Indemnification Agreement between the Company and ATI
provides that the Company will indemnify ATI and its directors, officers, agents
and representatives for any taxes imposed on, and other amounts paid by, them or
ATI's stockholders if the Company takes actions or fails to take actions that
result in the spin-off not qualifying as a tax-free distribution. Pursuant to
the Tax Sharing and Indemnification Agreement, the Company has agreed for a
two-year period following the date of the spin-off: (i) to continue to engage in
the Company's businesses; (ii) to continue to own and manage at least 50 percent
of the assets owned directly or indirectly immediately after the spin-off; and
(iii) not to engage in a number of specified transactions without the consent of
ATI. If any of the taxes or other amounts were to become payable by the Company,
the payment could have a material adverse effect on the Company's business,
results of operations, financial condition and cash flow.
8. EARNINGS PER SHARE
Basic net income per common share is calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
net income per common share is calculated by dividing net income by the sum of
the weighted average number of common shares outstanding plus the dilutive
effect of unvested restricted shares and outstanding stock options using the
"treasury stock" method.
A reconciliation of weighted average shares outstanding, used to calculate basic
net income per common share, to weighted average shares outstanding assuming
dilution, used to calculate diluted net income per common share, follows (in
thousands):
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2001 2000 2001 2000
------ ----- ------ -----
Weighted average common shares outstanding - basic 11,825 9,882 11,734 9,812
Dilutive effect of employee stock options and restricted shares 86 3 67 16
------ ----- ------ -----
Weighted average common shares outstanding - diluted 11,911 9,885 11,801 9,828
====== ===== ====== =====
9. BUSINESS SEGMENTS
The Company operates in two business segments organized around its products:
Personal Health Care and Pool Products and Heating Systems. The Personal Health
Care segment designs, manufactures and markets showerheads, oral health
products, water filtration products and professional dental products. The Pool
Products and Heating Systems segment designs, manufactures and markets swimming
pool and spa heaters, electronic controls, valves, water features and
residential and commercial water-heating systems.
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Information on the Company's business segments is as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ----------------------------
2001 2000 2001 2000
-------- -------- --------- ---------
Sales:
Personal Health Care $ 28,770 $ 29,196 $ 56,377 $ 57,461
Pool Products and Heating Systems 44,705 48,526 73,272 87,365
-------- -------- --------- ---------
Total Sales $ 73,475 $ 77,722 $ 129,649 $ 144,826
======== ======== ========= =========
Operating profit:
Personal Health Care $ 380 $ 577 $ 1,654 $ 1,577
Pool Products and Heating Systems 5,593 5,710 3,867 6,573
-------- -------- --------- ---------
Total operating profit 5,973 6,287 5,521 8,150
Interest expense 967 1,143 1,850 2,144
Other income (392) (103) (492) (163)
-------- -------- --------- ---------
Income before taxes $ 5,398 $ 5,247 $ 4,163 $ 6,169
======== ======== ========= =========
June 30, December 31,
2001 2000
-------- ------------
Identifiable assets:
Personal Health Care $ 62,043 $ 53,842
Pool Products and Heating Systems 93,431 108,867
Corporate 11,442 10,487
-------- --------
Total identifiable assets $166,916 $173,196
======== ========
Total international sales were $12,334,000 and $22,148,000 for the three months
and six months ended June 30, 2001, respectively, and $14,344,000 and
$26,465,000 for the three months and six months ended June 30, 2000,
respectively. Of these amounts, sales by operations in the United States to
customers in other countries amounted to $3,354,000 and $7,852,000 for the three
months and six months ended June 30, 2001, respectively, and $5,261,000 and
$10,159,000 for the three months and six months ended June 30, 2000,
respectively.
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ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis contains forward-looking statements
regarding future events or the future financial performance of the Company that
involve certain risks and uncertainties which are discussed in the Company's
Annual Report on Form 10-K for the year ended December 31, 2000. Actual events
or the actual future results of the Company may differ materially from any
forward-looking statement due to such risks and uncertainties.
OVERVIEW OF BUSINESS
Water Pik Technologies is a leader in the design, manufacturing and marketing of
a broad range of well-recognized personal health care products and pool and
water-heating products. The Company operates in two business segments: Personal
Health Care and Pool Products and Heating Systems. The Personal Health Care
segment designs, manufactures and markets personal health care products,
including showerheads, oral health products, water filtration products and
professional dental products. The Pool Products and Heating Systems segment
designs, manufactures and markets swimming pool and spa heaters, electronic
controls, valves, water features and residential and commercial water-heating
systems.
Total sales of the Company's two segments for the three months and six months
ended June 30, 2001 and 2000 are summarized below:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- -------------------------------------
2001 2000 2001 2000
--------------- --------------- ----------------- ----------------
(Dollars in thousands)
Segment
Personal Health Care $28,770 39.2% $29,196 37.6% $ 56,377 43.5% $ 57,461 39.7%
Pool Products and Heating Systems 44,705 60.8% 48,526 62.4% 73,272 56.5% 87,365 60.3%
------- ----- ------- ----- -------- ----- -------- -----
Total Sales $73,475 100.0% $77,722 100.0% $129,649 100.0% $144,826 100.0%
======= ===== ======= ===== ======== ===== ======== =====
RESULTS OF OPERATIONS
Consolidated Results of Operations
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- ------------------------------
2001 2000 % Change 2001 2000 % Change
--------- --------- -------- -------- -------- --------
(Dollars in thousands)
Sales $ 73,475 $ 77,722 (5.5%) $129,649 $144,826 (10.5%)
Gross profit $ 25,256 $ 27,104 (6.8%) $ 43,196 $ 49,426 (12.6%)
Operating profit $ 5,973 $ 6,287 (5.0%) $ 5,521 $ 8,150 (32.3%)
Gross profit as a percentage of sales 34.4% 34.9% 33.3% 34.1%
Operating profit as a percentage of sales 8.1% 8.1% 4.3% 5.6%
International sales as a percentage of sales 16.8% 18.5% 17.1% 18.3%
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THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2000
Sales for the three months ended June 30, 2001 were $73,475,000, representing a
decrease of $4,247,000 or 5.5 percent over the comparable period in 2000,
primarily due to lower sales in the Pool Products and Heating Systems segment.
Gross profit (sales less cost of sales) as a percentage of sales for the three
months ended June 30, 2001 decreased to 34.4 percent compared with 34.9 percent
for the three months ended June 30, 2000. The decline in gross profit percentage
was due primarily to lower sales resulting in fixed manufacturing costs
increasing as a percentage of sales, to a less profitable sales mix and to
higher freight costs.
Operating profit (gross profit less selling expenses and general and
administrative expenses) decreased $314,000 to $5,973,000 for the three months
ended June 30, 2001 from $6,287,000 for the three months ended June 30, 2000.
The decrease in gross profit of $1,848,000 resulting primarily from lower sales
of pool products and heating systems products was partially offset by a
$1,534,000 decrease in selling, general and administrative expenses.
Selling expenses decreased $57,000 to $12,127,000 for the three months ended
June 30, 2001 from $12,184,000 for the three months ended June 30, 2000. The
decrease is due to the lower sales levels and to cost reduction initiatives
partially offset by increases in spending related to new products to be
introduced in the second half of 2001.
General and administrative expenses decreased $1,477,000 to $7,156,000 for the
three months ended June 30, 2001 from $8,633,000 for the three months ended June
30, 2000. This improvement is primarily due to cost reduction measures
implemented in 2001 partially offset by an increase in research and development
expense related to new product development.
Interest expense, which relates to borrowings under the Company's credit
facilities and to the promissory note issued in connection with an acquisition,
decreased $176,000 to $967,000 for the three months ended June 30, 2001 from
$1,143,000 for the three months ended June 30, 2000. This decrease is due to
lower average balances outstanding under the credit facilities during second
quarter 2001 compared to second quarter 2000 as net offering proceeds of
$13,646,000 were used to repay borrowings pending their use for new product
development activities and for further development of lower cost manufacturing
capabilities in accordance with the amended IRS tax ruling received by ATI in
connection with the spin-off. Additionally, the weighted average interest rate
on borrowings during second quarter 2001 was lower than the weighted average
rate during second quarter 2000.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2000
Sales for the six months ended June 30, 2001 were $129,649,000, representing a
decrease of $15,177,000 or 10.5 percent over the comparable period in 2000,
primarily due to lower sales in the Pool Products and Heating Systems segment.
Gross profit (sales less cost of sales) as a percentage of sales for the six
months ended June 30, 2001 decreased to 33.3 percent compared with 34.1 percent
for the six months ended June 30, 2000 primarily due to the lower sales volume
as discussed above, to a less profitable sales mix and to higher freight costs.
Operating profit (gross profit less selling expenses and general and
administrative expenses) decreased $2,629,000 to $5,521,000 for the six months
ended June 30, 2001 from $8,150,000 for the six months ended June 30, 2000. The
decrease in gross profit of $6,230,000 resulting primarily from lower sales of
pool products and heating systems products was partially offset by a $3,601,000
decrease in selling, general and administrative expenses.
Selling expenses decreased $703,000 to $23,577,000 for the six months ended June
30, 2001 from $24,280,000 for the six months ended June 30, 2000. The decrease
relates primarily to the lower sales levels as well as to cost reduction
initiatives implemented in 2001 to mitigate the impact of lower sales.
General and administrative expenses decreased $2,898,000 to $14,098,000 for the
six months ended June 30, 2001 from $16,996,000 for the six months ended June
30, 2000. This improvement is primarily due to cost cutting measures implemented
in first and second quarter 2001 and to higher initial costs experienced in the
first quarter of 2000 subsequent to the spin-off from ATI partially offset by an
increase in research and development expense related to new product development.
Interest expense decreased $294,000 to $1,850,000 for the six months ended June
30, 2001 from $2,144,000 for the six months ended June 30, 2000. This decrease
is due to lower average balances outstanding under the credit facilities during
the six months ended June 30, 2001 compared to the same period in 2000 as net
offering proceeds
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of $13,646,000 were used to repay borrowings pending their use for new product
development activities and for further development of lower cost manufacturing
capabilities in accordance with the amended IRS tax ruling received by ATI in
connection with the spin-off. Additionally, the weighted average interest rate
on borrowings during 2001 was lower than the weighted average rate during 2000.
PERSONAL HEALTH CARE
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- ----------------------------
2001 2000 % Change 2001 2000 % Change
------- ------- -------- ------- ------- --------
(Dollars in thousands)
Sales $28,770 $29,196 (1.5%) $56,377 $57,461 (1.9%)
Operating profit $ 380 $ 577 (34.1%) $ 1,654 $ 1,577 4.9%
Operating profit as a percentage of sales 1.3% 2.0% 2.9% 2.7%
International sales as a percentage of sales 20.2% 19.9% 18.6% 19.8%
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2000
Sales in the Personal Health Care segment for the three months ended June 30,
2001 were $28,770,000, a decrease of $426,000 or 1.5 percent over the comparable
period in 2000, reflecting the continued difficult U.S. retail environment.
Lower sales of showerheads and water treatment products offset increased
consumer oral health sales, including increased sales of the Water Pik(TM)
flosser and oral irrigators.
Operating profit decreased $197,000 to $380,000 for the three months ended June
30, 2001 from $577,000 for the three months ended June 30, 2000. The decrease in
operating profit is due to lower sales and a less profitable sales mix as well
as to an increase in research and development expenses related to new product
development partially offset by cost reduction initiatives implemented in 2001.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2000
Sales in the Personal Health Care segment for the six months ended June 30, 2001
were $56,377,000, a decrease of $1,084,000 or 1.9 percent over the comparable
period in 2000, reflecting the difficult U.S. retail environment. Lower sales of
showerheads, water treatment products and professional oral health products
offset increased consumer oral health sales, including increased sales of the
Water Pik(TM) flosser and oral irrigators.
Operating profit increased $77,000 to $1,654,000 for the six months ended June
30, 2001 from $1,577,000 for the six months ended June 30, 2000. The increase in
operating profit is due to cost reduction initiatives partially offset by the
impact of lower sales, a less profitable sales mix, and an increase in research
and development expenses related to new product development.
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POOL PRODUCTS AND HEATING SYSTEMS
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ----------------------------
2001 2000 % Change 2001 2000 % Change
------- ------- -------- ------- ------- --------
(Dollars in thousands)
Sales $44,705 $48,526 (7.9%) $73,272 $87,365 (16.1%)
Operating profit $ 5,593 $ 5,710 (2.0%) $ 3,867 $ 6,573 (41.2%)
Operating profit as a percentage of sales 12.5% 11.8% 5.3% 7.5%
International sales as a percentage of sales 14.6% 17.6% 15.9% 17.2%
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2000
Sales in the Pool Products and Heating Systems segment were $44,705,000 for the
three months ended June 30, 2001, a decrease of $3,821,000 or 7.9 percent from
the comparable period of 2000. This decrease is primarily due to the challenging
U.S. economic environment as well as to continued high customer inventory levels
resulting from aggressive customer purchasing during the fourth quarter 2000 and
unusually wet weather patterns in the Sunbelt states in 2001 compared to 2000.
Operating profit decreased $117,000 to $5,593,000 for the three months ended
June 30, 2001 from $5,710,000 in the comparable period of 2000. Operating profit
as a percentage of sales increased to 12.5 percent for the three months ended
June 30, 2001 from 11.8 percent in the three months ended June 30, 2000. Cost
reduction initiatives implemented in the first and second quarter 2001
contributed to the improvement in the operating profit percentage.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2000
Sales in the Pool Products and Heating Systems segment were $73,272,000 for the
six months ended June 30, 2001, a decrease of $14,093,000 or 16.1 percent from
the comparable period of 2000. The decrease is primarily due to the challenging
U.S. economic environment compounded by high customer inventory levels resulting
from aggressive customer purchasing during the fourth quarter 2000, unusually
wet weather patterns in the Sunbelt states and a prolonged winter in the
Northern states in 2001 compared to 2000.
Operating profit decreased $2,706,000 to $3,867,000 for the six months ended
June 30, 2001 from $6,573,000 in the comparable period of 2000. This decrease is
due to lower sales across all product lines within the segment partially offset
by the impact of cost reduction initiatives implemented in the first and second
quarter 2001.
SEASONALITY
Our business is highly seasonal, with operating results varying from quarter to
quarter. The Personal Health Care segment has historically experienced higher
sales in the fourth quarter of each year due to stronger retail demand during
the holiday season. The Pool Products and Heating Systems segment has
historically experienced higher sales in the second and fourth quarters of each
year as customers purchase such products in preparation for the cooler weather
and in anticipation of the warm spring and summer months. In addition, as a
result of the seasonality of sales, the Pool Products and Heating Systems
segment offers incentive programs and extended payment terms to encourage pool
product customers to purchase products during the winter months, as is
consistent with industry practice. These normal seasonal variations in operating
results can also be impacted by short-term trends including changes in the
economic environment and weather patterns.
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FINANCIAL CONDITION AND LIQUIDITY
Our principal capital requirements are to fund working capital needs and capital
expenditures and to meet required debt payments. We anticipate that our
operating cash flow, together with available borrowings under our credit
facilities described below, will be sufficient to meet our working capital
requirements, capital expenditure requirements and interest service requirements
on our debt obligations for at least the next 12 months.
On January 3, 2001, the Company sold 1,973,685 shares of its common stock at
$7.60 per share to two investment funds managed by Special Value Investment
Management in a private placement. Proceeds from the offering in the amount of
$15,000,006, less $1,354,000 in offering costs, were used for capital
expenditures related to new product development activities and to repay
borrowings under the revolving credit facility pending their use for new product
development activities and for further development of lower cost manufacturing
capabilities in accordance with the amended IRS tax ruling received by ATI in
connection with the spin-off. Subsequent to January 3, 2002, at the request of
the purchaser, the Company has the obligation to register these shares, plus an
additional 386,800 shares of common stock that the purchasers owned prior to the
offering, under the Securities Act of 1933, as amended, and to pay certain
registration expenses. The transaction satisfies the requirements of the tax
ruling from the Internal Revenue Service (the IRS) regarding the tax-free status
of the spin-off from ATI, as amended on July 12, 2000, which required the
Company to complete a $15,000,000 equity offering by April 30, 2001.
Cash and cash equivalents increased $1,045,000 from $1,383,000 at December 31,
2000 to $2,428,000 at June 30, 2001. Cash provided by financing activities,
including net proceeds of $13,646,000 from the issuance of common stock
partially offset by $977,000 in decreased borrowings under the credit
facilities, were used to fund capital expenditures of $10,607,000 and operating
activities in the amount of $840,000.
Net cash used in operating activities is primarily due to decreases in accounts
payable, accrued liabilities and income taxes and to an increase in inventory,
partially offset by a decrease in accounts receivable. Accounts payable
decreased due to reduced purchasing in response to higher inventory levels and
to cost reduction initiatives implemented during first and second quarter 2001.
The decrease in accrued liabilities is due to the payment of customer rebates
and commissions in first quarter 2001 as well as to lower accruals of rebates,
commissions, cooperative advertising and warranties due to lower sales in first
and second quarter 2001 as compared with fourth quarter 2000. Accrued income tax
decreased due to the payment of federal and state income taxes in first quarter
2001. Inventory increased due to normal seasonal fluctuations as well as to
lower than anticipated sales. The decrease in accounts receivable is primarily
due to collections on seasonally higher sales in the fourth quarter of 2000.
For the six months ended June 30, 2000, cash provided by operating activities of
$13,177,000 was used to fund capital expenditures of $3,707,000 and to repay
borrowings under the credit facilities.
Cash used in operating activities was $840,000 for the six months ended June 30,
2001 as compared to cash provided by operating activities of $13,177,000 during
the same period in 2000. This fluctuation is due to lower net income in 2001, to
an increase in cash used for working capital requirements and to an increase in
deferred tax assets from December 31, 2000 to June 30, 2001 compared to a
decrease over the same period of 2000 resulting from changes in the underlying
temporary differences in expense recognition for financial reporting and income
tax purposes. Cash used for working capital requirements increased in the six
months ended June 30, 2001 compared to the same period in 2000 due to decreased
accounts payable resulting from reduced purchasing in 2001 in response to higher
inventory levels and from cost reduction initiatives implemented during first
and second quarter 2001, to increased income tax payments related to the first
full year as an independent public company and to increased rebate and
cooperative advertising payments as well as lower accruals in 2001 based on
lower sales levels. These increases in cash usage were partially offset by a
larger decrease in accounts receivable due primarily to lower sales in first and
second quarter 2001 as compared to the comparable period of 2000 and to a
smaller increase in inventory due to lower production in response to lower
sales.
The Company's working capital increased to $51,631,000 at June 30, 2001 from
$46,488,000 at December 31, 2000. The current ratio increased to 2.3 at June 30,
2001 from 1.8 at December 31, 2000. The increase in working capital at June 30,
2001 was primarily due to higher inventory balances as well as to lower accounts
payable, accrued income tax, accrued liability and current-portion of long-term
debt balances. These effects were partially offset by lower accounts receivable
and current deferred income tax asset balances.
The Company has a $60,000,000 revolving bank credit facility that expires in
November 2004. Borrowings under the facility are limited to borrowing base
calculations based upon eligible accounts receivable, inventory, real
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property and machinery and equipment balances. The credit facility also provides
for the issuance of letters of credit up to the borrowing base less the
outstanding line of credit, not to exceed $5,000,000. In June 2001, the credit
facility was amended to modify certain terms of the agreement including to
increase the concentration limits of eligible accounts receivable from major
customers, to provide an option for the release of mortgages on real property
which secure the revolving credit facility to enable financing with alternate
lenders upon approval to waive a reduction in real property and machinery and
equipment availability pursuant to the completion of the required equity
offering, to increase intercompany indebtedness limitations and to modify
certain financial covenants. At June 30, 2001, there was $11,787,000 of
borrowing availability remaining under borrowing base limitations of the credit
facility.
The Company's Canadian subsidiary has a CDN. $11,000,000 revolving bank line of
credit facility, increasing by CDN. $1,000,000 for certain months of the year, a
forward exchange contract facility of up to CDN. $2,000,000 and a letter of
credit facility of up to CDN. $500,000. Borrowings under the facility are due on
demand. At June 30, 2001, the Company had CDN. $4,945,000 of borrowing
availability remaining under the credit facility.
These credit facilities require the Company to comply with various financial
covenants and restrictions, including covenants and restrictions relating to
indebtedness, liens, investments, dividend payments, consolidated net worth,
interest coverage and the relationship of total consolidated indebtedness to
earnings before interest, taxes, depreciation and amortization. A security
interest in substantially all of the Company's assets was granted to the lenders
under the credit agreements as collateral.
Due to the seasonality of the Company's pool products business, the extended
payment term receivables offered during the winter months are collected during
the spring and summer. This creates a seasonal peak in borrowing levels during
the spring months.
The Company currently anticipates that no cash dividends will be paid on Water
Pik Technologies common stock in order to conserve cash to fund the Company's
growth. In addition, the terms of the Company's credit facilities prohibit the
Company from paying dividends.
Prior to November 29, 1999 the Company participated in the general liability,
product liability, and workers' compensation insurance programs sponsored by
ATI. The Company has since entered into general liability, product liability and
workers' compensation insurance programs of its own. Insurance coverage under
these programs are subject to policy deductibles for which the Company is at
risk for losses. In connection with the spin-off, the Company has agreed to
indemnify ATI for losses attributable to its operations prior to the spin-off.
Reserves have been established based upon existing and estimated claims and
historical experience in settling such matters. As a result of the spin-off, ATI
transferred to the Company reserves for estimated losses under these insurance
programs totaling $10,423,000 and related deferred taxes of $4,882,000. During
2000 and 2001, a number of these cases were settled. The Company has recorded
loss accruals covering the portion of lawsuits and claims not covered by
insurance policies of $8,083,000 and $9,503,000 as of June 30, 2001 and December
31, 2000, respectively. The amount related to product and general liability
lawsuits and asserted claims and incurred but not reported claims was $7,355,000
and $9,230,000 as of June 30, 2001 and December 31, 2000, respectively. The
remaining amount relates to workers' compensation claims, both asserted and
incurred but not reported. The actual settlements of claims under these
insurance programs may differ from estimated reserves, but the possible range of
loss in excess of those accrued is not reasonably estimable. Based upon
currently available information, management does not believe that settlement of
insurance claims will have a material adverse effect on the Company's financial
condition or liquidity, although the resolution in any reporting period of one
or more of these matters could have a material adverse effect on the Company's
results of operations for that period.
In connection with the spin-off, ATI received a tax ruling from the IRS stating
that the spin-off would be tax-free to ATI and to ATI's stockholders. The
continuing validity of the Internal Revenue Service tax ruling, as amended on
July 12, 2000, is subject to certain factual representations and assumptions,
including use of the proceeds of the required offering of the Company's common
stock completed January 3, 2001, for further development of high quality, lower
cost manufacturing capabilities, for product line extensions, to expand channels
of distribution, to develop a self-sustaining product development process, and
for acquisitions and/or joint ventures. Pursuant to the Separation and
Distribution Agreement that Water Pik Technologies signed prior to the spin-off
and pursuant to the supplemental ruling issued by the IRS to ATI modifying
certain requirements imposed under the prior tax ruling, the Company agreed with
ATI to undertake such an offering. The January 2001 private placement fulfilled
a material requirement of the ruling.
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The Tax Sharing and Indemnification Agreement between ATI and Water Pik
Technologies provides that the Company will indemnify ATI and its agents and
representatives for taxes imposed on, and other amounts paid by, them or ATI's
stockholders if the Company takes actions or fails to take actions that result
in the spin-off not qualifying as a tax-free distribution. If any of the taxes
or other amounts were to become payable by the Company, the payment could have a
material adverse effect on the Company's business, results of operations,
financial condition and cash flow and the amount the Company could be required
to pay could exceed its net worth by a substantial amount.
ITEM 3--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to Part II, Item 7A, Quantitative and Qualitative Disclosures
About Market Risk, in the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2000. There has been no significant change in the nature or
amount of market risk since year-end.
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PART II--OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of Water Pik Technologies, Inc. was held on
April 26, 2001. Proxies for the meeting were solicited pursuant to Section 14(a)
of the Securities Exchange Act of 1934 and Regulation 14A thereunder for the
purpose of:
(i) Election of a class of two directors for a three-year term expiring in
2004;
(ii) Amendment of the Company's 1999 Non-Employee Director Stock Compensation
Plan;
(iii) Amendment of the Company's Employee Stock Purchase Plan; and
(iv) Ratification of the appointment of Ernst & Young LLP as the Company's
independent auditors for 2001.
There was no solicitation in opposition to management's nominees for directors
and all of management's nominees were elected.
At the meeting, Michael P. Hoopis and William G. Ouchi were elected as directors
for three-year terms expiring in 2004, the amendments to the 1999 Non-Employee
Director Stock Compensation Plan and the Employee Stock Purchase Plan were
approved and the appointment of Ernst & Young LLP as independent public auditors
was ratified.
The tables below summarize the results of the stockholder vote:
Number Percentage
---------- ----------
Shares outstanding and entitled to vote 11,910,673 100.0%
Shares represented in person or by proxy at meeting 10,529,309 88.4%
Shares not voted at meeting 1,381,364 11.6%
Proposal one (Election of Directors)
Breakdown of votes cast for each nominee
Votes For Votes Withheld
--------- --------------
Michael P. Hoopis 10,274,270 255,039
William G. Ouchi 10,319,032 210,277
Proposal two (Amendment of 1999 Non-Employee
Director Stock Compensation Plan)
Breakdown of votes cast
Broker
Votes For Votes Against Abstain Non-Votes
--------- ------------- ------- ---------
6,705,650 986,974 23,675 2,813,010
Proposal three (Amendment of Employee
Stock Purchase Plan)
Breakdown of votes cast
Broker
Votes For Votes Against Abstain Non-Votes
--------- ------------- ------- ---------
6,717,443 977,690 21,069 2,813,107
Proposal four (Ratification of
Auditor Appointment)
Breakdown of votes cast
Broker
Votes For Votes Against Abstain Non-Votes
--------- ------------- ------- ---------
10,280,401 238,528 10,380 0
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
4.1 Amendment and Waiver Agreement dated June 29, 2001 to the
Restated Credit Agreement dated as of November 29, 1999 between
Water Pik, Inc. and Laars, Inc., the Guarantors and Lenders
named therein, and The Chase Manhattan Bank, as Agent for the
Lenders
10.1 Form of Indemnity Agreement entered into with directors and
executive officers of Water Pik Technologies, Inc.
(b) Reports on Form 8-K Filed in the first quarter of 2001 -
The Company filed no reports on Form 8-K during the quarter ended June
30, 2001 and through the date of this report.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WATER PIK TECHNOLOGIES, INC.
Date: August 14, 2001 By: /s/ Michael P. Hoopis
------------------------
Michael P. Hoopis
President and Chief
Executive Officer
Date: August 14, 2001 By: /s/ Victor C. Streufert
------------------------
Victor C. Streufert
Vice President and
Chief Financial
Officer (Principal
Financial and
Accounting Officer)
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EXHIBIT INDEX
Exhibit
Number Description
------ -----------
4.1 Amendment and Waiver Agreement dated June 29, 2001 to the
Restated Credit Agreement dated as of November 29, 1999 between Water
Pik, Inc. and Laars, Inc., the Guarantors and Lenders named therein,
and The Chase Manhattan Bank, as Agent for the Lenders
10.1 Form of Indemnity Agreement entered into with directors and executive
officers of Water Pik Technologies, Inc.