UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 26, 2003
Commission file number 1-5452
ONEIDA LTD.
(Exact name of Registrant as specified in its charter)
NEW YORK 15-0405700
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification Number
ONEIDA, NEW YORK 13421
(Address of principal executive offices) (Zip code)
(315) 361-3636
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for 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 Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of September 5, 2003: 16,627,760
ONEIDA LTD.
FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED July 26, 2003
INDEX
Page
----
PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED STATEMENTS OF OPERATIONS 4
CONSOLIDATED BALANCE SHEETS 5
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY 7
CONSOLIDATED STATEMENTS OF CASH FLOWS 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 15
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK 20
ITEM 4. CONTROLS AND PROCEDURES 20
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
2
Page
----
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 Certification of Chief Executive Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. 22
31.2 Certification of Chief Financial Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. 24
32.1 Certification of Chief Executive Officer Pursuant
to 18 U.S.C. Section 1350, as adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. 26
32.2 Certification of Chief Financial Officer Pursuant
to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. 27
(b) Current Reports on Form 8-K:
A Form 8-K, dated as of May 13, 2003, was filed May 14, 2003,
under Item 5, relating to a Press Release in which the Company
disclosed selected, unaudited financial information related to
the first quarter of its fiscal year ended January 2004.
SIGNATURES 21
3
PART I
ITEM 1.
ONEIDA LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
(Dollars in Thousands except JUL 26, JUL 27, JUL 26, JUL 27,
per share amounts) 2003 2002 2003 2002
-------- -------- -------- --------
REVENUES:
Net sales .................... $105,975 $113,811 $212,147 $230,672
Licensing fees ............... 350 311 690 679
-------- -------- -------- --------
TOTAL REVENUES ................. 106,325 114,122 212,837 231,351
COSTS AND EXPENSES:
Cost of sales ................ 76,975 77,083 154,303 156,855
Selling, distribution and
administrative expenses ..... 31,145 31,242 62,084 62,352
-------- -------- -------- --------
TOTAL COSTS AND EXPENSES ....... 108,120 108,325 216,387 219,207
LOSS ON SALE OF FIXED ASSETS ... 43 23 69 27
-------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS .. (1,838) 5,774 (3,619) 12,117
Other income ................... 525 4,281 1,058 5,232
Other expense .................. 503 1,204 764 1,614
Interest and amortization of
deferred financing costs ...... 4,068 4,206 7,932 8,464
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES . (5,884) 4,645 (11,257) 7,271
PROVISION (BENEFIT)
FOR INCOME TAXES ........... (2,177) 1,730 (4,165) 2,708
--------- ------- -------- --------
NET INCOME (LOSS) .............. $ (3,707) $ 2,915 $ (7,092) $ 4,563
======== ======== ======== ========
EARNINGS PER SHARE OF COMMON STOCK:
Net income (loss):
Basic ...................... $(.23) $ .17 $(.43) $ .27
Diluted (NOTE 3)............ (.23) .17 (.43) .27
SHARES USED IN PER SHARE DATA:
Basic ...................... 16,577 16,540 16,566 16,535
Diluted (NOTE 3) ........... 16,577 16,608 16,566 16,575
CASH DIVIDENDS DECLARED (Common) $.00 $.02 $.02 $.04
See notes to consolidated financial statements.
4
ONEIDA LTD.
CONSOLIDATED BALANCE SHEETS
JULY 26, 2003 AND JANUARY 25, 2003
(Dollars in Thousands)
JULY 26, JAN 25,
2003 2003
(Unaudited)
-------- --------
ASSETS
CURRENT ASSETS:
Cash............................................... $ 4,291 $ 2,653
Accounts receivable, net of allowance for doubtful.
accounts of $2,907 and $2,963 .................... 63,330 75,810
Other accounts and notes receivable ............... 2,724 2,196
Inventories:
Finished goods ................................... 150,666 145,836
Goods in process ................................. 11,922 12,531
Raw materials and supplies ....................... 9,581 9,206
Other current assets .............................. 10,591 9,290
-------- --------
Total current assets ........................... 253,105 257,522
-------- --------
PROPERTY, PLANT AND EQUIPMENT-At cost:
Land and buildings ................................ 70,570 70,265
Machinery and equipment ........................... 158,167 156,513
Tooling ........................................... 32,308 30,727
Less accumulated depreciation ..................... (162,264) (155,139)
-------- --------
Property, plant and equipment-net............... 98,781 102,366
-------- --------
OTHER NON-CURRENT ASSETS:
Goodwill .......................................... 134,969 133,944
Deferred income taxes ............................. 18,396 18,575
Other assets ...................................... 13,473 12,713
-------- --------
TOTAL ......................................... $518,724 $525,120
======== ========
See notes to consolidated financial statements.
5
ONEIDA LTD.
CONSOLIDATED BALANCE SHEETS
JULY 26, 2003 AND JANUARY 25, 2003
(Dollars in Thousands)
JULY 26, JAN 25,
2003 2003
(Unaudited)
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt .............................. $ 8,909 $ 8,510
Accounts payable ............................. 22,698 25,711
Accrued liabilities .......................... 27,840 32,008
Dividends payable ............................ 363
Current installments of long-term debt ....... 230,295 6,406
-------- --------
Total current liabilities ................. 289,742 72,998
-------- --------
LONG-TERM DEBT ................................ 3,056 219,037
-------- --------
OTHER NON-CURRENT LIABILITIES:
Accrued postretirement liability ............. 61,007 59,708
Accrued pension liability .................... 23,691 23,496
Other liabilities ............................ 16,603 20,492
-------- --------
Total ..................................... 101,301 103,696
-------- --------
STOCKHOLDERS' EQUITY:
Cumulative 6% preferred stock; $25 par
value; authorized 95,660 shares, issued
86,036 shares, callable at $30 per share .... 2,151 2,151
Common stock $1 par value; authorized
48,000,000 shares, issued 17,862,164
and 17,836,571 shares ....................... 17,862 17,837
Additional paid-in capital ................... 84,502 84,318
Retained earnings ............................ 60,374 68,407
Accumulated other comprehensive loss ......... (17,037) (19,190)
Less cost of common stock held in treasury;
1,237,677 shares and 1,285,679 shares ....... (23,227) (24,134)
-------- --------
Stockholders' Equity ....................... 124,625 129,389
-------- --------
TOTAL .................................... $518,724 $525,120
======== ========
See notes to consolidated financial statements.
6
ONEIDA LTD.
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JULY 26, 2003
(In Thousands)
Accumulated
Comp. Add'l
Income Common Common Pref'd Paid-in Retained
Unaudited) (Loss) Shares Stock Stock Capital Earnings
-------------------------------------------------------
Balance at Jan 25, 2003.. 17,837 $17,837 $2,151 $84,318 $68,407
Exercise of stock
options ................ 25 25 184
Contribution of treasury
shares to ESOP ......... (578)
Cash dividends declared
($.02 per share) ..... (363)
Net income (loss) ....... $(7,092) (7,092)
Other comprehensive
income ............... 2,153
-------
Comprehensive loss ...... $(4,939)
=======
--------------------------------------------
Balance at July 26, 2003. 17,862 $17,862 $2,151 $84,502 $60,374
============================================
Accumulated
Other Comp Treasury
Income(Loss) Stock
------------------------------------------------------
Balance at Jan 25, 2003 . $(19,190) $(24,134)
Contribution of treasury
shares to ESOP ......... 907
Other comprehensive
income ............... 2,153
------------------------------------------------------
Balance at July 26, 2003. $(17,037) $(23,227)
======================================================
See notes to consolidated financial statements.
7
ONEIDA LTD.
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JULY 27, 2002
(In Thousands)
Accumulated Add'l
Comp. Common Common Pref'd Paid-in Retained
(Unaudited) Income Shares Stock Stock Capital Earnings
-------------------------------------------------------
Balance at Jan 26, 2002 17,809 $17,809 $2,151 $83,965 $60,638
Exercise of stock
options ................ 19 19 173
Cash dividends declared
($.04 per share) ..... (727)
Net income .............. $ 4,563 4,563
Other comprehensive
income ............... 921
-------
Comprehensive income .... $ 5,484
=======
--------------------------------------------
Balance at July 27, 2002. 17,828 $17,828 $2,151 $84,138 $64,474
============================================
Accumulated
Other Comp Treasury
Income(Loss) Stock
------------------------------------------------------
Balance at Jan 26, 2002 . $(16,328) $(24,134)
Other comprehensive
income ............... 921
------------------------------------------------------
Balance at July 27, 2002. $(15,407) $(24,134)
======================================================
See notes to consolidated financial statements.
8
ONEIDA LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JULY 26, 2003 AND JULY 27, 2002
(Unaudited)
(In Thousands)
FOR THE SIX MONTHS ENDED
JULY 26, JULY 27,
2003 2002
-------- --------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) .................................. $(7,092) $ 4,563
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ..................... 8,205 7,950
Deferred income taxes ............................ 179 34
Changes in operating assets and liabilities:
Accounts receivable .............................. 11,951 11,392
Inventories ...................................... (4,597) (6,606)
Other current assets.............................. (1,301) (4,467)
Other assets ..................................... (3,236) (6,407)
Accounts payable ................................. (3,013) 5,282
Accrued liabilities .............................. (4,203) (10,779)
Other liabilities ................................ (2,392) 13,308
------- -------
Net cash provided by (used in) operating
activities ................................. (5,499) 14,270
------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures ............................... (3,670) (4,390)
Proceeds from sale of fixed assets ................. 500 409
Proceeds from sale of marketable securities ........ 8,399
------- -------
Net cash provided by (used in) investing
activities ................................. (3,170) 4,418
------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ............. 210 192
Increase (decrease) in short-term debt ............. 399 (2,083)
Increase (decrease) in long-term debt .............. 7,908 (25,450)
Dividends paid ..................................... (363) (726)
------- -------
Net cash provided by (used in) financing
activities ................................ 8,154 (28,067)
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH .............. 2,153 921
------- -------
NET (DECREASE)INCREASE IN CASH ....................... 1,638 (8,458)
CASH AT BEGINNING OF YEAR ............................ 2,653 11,112
------- -------
CASH AT END OF PERIOD ................................ $4,291 $2,654
======= =======
NON-CASH CONTRIBUTION OF TREASURY SHARES TO ESOP ..... $907
See notes to consolidated financial statements.
9
ONEIDA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Thousands)
1. The consolidated financial statements for the three and six months ended July
26, 2003 and July 27, 2002 are unaudited; in the opinion of management such
unaudited statements include all adjustments (which comprise only normal
recurring accruals) necessary for a fair presentation of the results of such
periods. The results of operations for the three and six months ended July 26,
2003 are not necessarily indicative of the results of operations to be expected
for the year ending January 31, 2004. The consolidated financial statements and
notes thereto should be read in conjunction with the consolidated financial
statements and notes for the years ended in January 2003 and 2002 included in
the Company's January 25, 2003 Annual Report to the Securities and Exchange
Commission on Form 10-K.
Certain reclassifications have been made to the prior year's information to
conform to the current year presentation. In 2002, shipping and handling costs
have been reclassified from net sales to cost of sales. This reclassification
resulted in an increase in net sales and cost of sales of $2,572 and $4,426 for
the three and six months ending July 26, 2002, respectively. Additionally,
amortization of deferred financing costs has been reclassified from other
expense to interest and amortization of deferred financing costs. This
reclassification resulted in a decrease in other expenses and an increase in
interest and amortization of deferred financing costs of $416 and $587 for the
three and six months ending July 27, 2002, respectively.
2. The provision for income taxes is based on pre-tax income for financial
statement purposes. Deferred tax is provided to give effect to changes in
temporary and permanent differences between the financial statements and tax
bases of assets and liabilities. The temporary differences arise principally
from postretirement benefits, depreciation and other employee benefits. The
Company anticipates an effective tax rate of 37% for the year ended January
2004.
3. Basic and diluted earnings per share are presented for each period in which a
statement of operations is presented. Basic earnings per share is computed by
dividing income less preferred stock dividends by the weighted average shares
actually outstanding for the period. Diluted earnings per share includes the
potentially dilutive effect of shares issuable under the employee stock purchase
and incentive stock option plans.
10
The following is a reconciliation of basic earnings per share to diluted
earnings per share for the three months ended July 26, 2003 and July 27, 2002:
Net Preferred Adjusted Earnings
Income Stock Net Income Average (Loss)
(Loss) Dividends (Loss) Shares Per Share
--------------------------------------------------------------------------------
2003:
Basic earnings (loss)
per share ............. $(3,707) $(32) $(3,739) 16,577 $(.23)
Effect of stock options.
Diluted earnings (loss)
per share ............. (3,707) (32) (3,739) 16,577 (.23)
--------------------------------------------------------------------------------
2002:
Basic earnings
per share ............. $2,915 $(32) $2,883 16,540 $.17
Effect of stock options. 68
Diluted earnings
per share ............. 2,915 (32) 2,883 16,608 .17
--------------------------------------------------------------------------------
The following is a reconciliation of basic earnings per share to diluted
earnings per share for the six months ended July 26, 2003 and July 27, 2002:
Net Preferred Adjusted Earnings
Income Stock Net Income Average (Loss)
(Loss) Dividends (Loss) Shares Per Share
--------------------------------------------------------------------------------
2003:
Basic earnings (loss)
per share ............. $(7,092) $(64) $(7,156) 16,566 $(.43)
Effect of stock options.
Diluted earnings (loss)
per share ............. (7,092) (64) (7,156) 16,566 (.43)
--------------------------------------------------------------------------------
2002:
Basic earnings
per share ............. $4,563 $(64) $4,499 16,535 $.27
Effect of stock options. 40
Diluted earnings
per share ............. 4,563 (64) 4,499 16,575 .27
--------------------------------------------------------------------------------
4. In April 2003, the Company and its required lenders entered into amendments
to the revolving credit and note agreements. These amendments extend the
maturity to May 31, 2005 from February 1, 2004, adjust certain financial
covenants and prohibit payment of dividends on common stock. In addition, the
commitment under the revolving credit facility reduced to $225,000 upon signing
of the amendment with further reductions to $220,000 on July 25, 2003, $215,000
on November 3, 2003, $205,000 on January 30, 2004, $185,000 on February 7, 2004,
$175,000 on May 3, 2004 and $165,000 on November 1, 2004.
11
These facilities contain certain financial covenants, including a restriction
limiting the Company's total debt outstanding to a pre-determined multiple of
the prior rolling twelve months earnings before interest, taxes, deprecation and
amortization. A default in compliance with these covenants, if unremedied, could
cause the lenders to declare the principal outstanding to be payable
immediately. As of July 26, 2003 the Company was in violation of the interest
coverage ratio, leverage ratio and net worth covenants and received waivers from
its required lenders. The Company will pay $28 in compensation for these
waivers. More restrictive covenants must be met as of October 25, 2003 and it is
probable that the Company will fail to meet those covenants, and as a result,
the Company's outstanding borrowings are classified as current. In the third
quarter, the Company intends to request amendments to the existing revolving
credit and note agreements to incorporate a number of changes. These changes
include the amendment of the financial covenants to permit certain transactions.
In the event that the existing revolving credit and note agreements cannot be
amended or appropriate waivers are not obtained, the Company may not have
sufficient liquidity to support future operations.
The aggregate amounts of long term debt maturities due each year are as follows:
Year Ended January 2004 ..... $230,295
2005 ......... $575
2006 ....... $1,493
2007 ......... $913
2008 .......... $21
2009 .......... $22
After ......... $32
As of July 26, 2003 the Company had unused bank lines of credit of $11,600.
Under the provisions of the amended revolving credit and note agreements, at
July 26, 2003 the Company was able to declare dividends on its 6% Cumulative
Preferred Stock up to $32 per quarter. However, no dividend was declared on the
preferred stock for the first or second quarter of 2003.
In order to improve profitability and liquidity, the Company is implementing
lean manufacturing and improving production efficiencies as well as reducing
headcount in the Sherrill, NY manufacturing facility. Additionally, the Company
is in the process of identifying additional opportunities, which may include
further headcount reductions and the potential closure of inefficient
facilities. If any manufacturing facilities are closed, the Company could
continue to market the affected product, using independent suppliers. The
results of the Company's actions are intended to reduce costs, increase the
Company's liquidity and better position the Company to compete under the current
economic conditions. If any facilities are closed, the related assets could be
liquidated, contingent on the approval by the Company's lenders.
Provided the above amendments or waivers are obtained, management believes there
is sufficient liquidity to support the Company's funding requirements over the
next year from future operations as well as from available bank lines of credit.
The Company may need to raise additional capital to reduce its outstanding debt
obligations as required by the amended agreements. Our revenue and costs may be
dependent upon factors that are not within our control. Due to the uncertainty
of these factors, actual revenue and costs may vary from expected amounts,
possibly to a material degree, and such variations could affect our future
liquidity. Should factors differ materially, management may delay capital
expenditures, reduce overhead, selling, distribution and administrative
expenses, or seek alternative financing.
12
5. The Company's operations and assets are in one principal segment; tableware
products. The Company's tableware segment is grouped around the manufacture and
distribution of three major product categories: metal tableware, china
dinnerware and glass tableware products. The Company also distributes a variety
of other tableware accessories. These products are sold directly to a broad base
of retail outlets including department stores, mass merchandisers, Oneida Home
stores and chain stores. Additionally, these products are sold to special sales
markets, which include customers who use them as premiums, incentives and
business gifts. The Company also sells directly or through distributors to
foodservice operations worldwide, including hotels, restaurants, airlines,
cruise lines, schools and healthcare facilities. The Company's operations are
located in the United States, Canada, Mexico, Italy, Australia, The United
Kingdom and China.
Sales by product category for the quarter and first half of 2003 and 2002 were
as follows:
(Dollars in Thousands)
Second Quarter
--------------- Metal Dinnerware Glass Other Total
------- ---------- ------ ------ --------
2003 Net Sales $66,158 $30,361 $ 7,654 $1,802 $105,975
2002 Net Sales 71,319 33,265 7,459 1,768 113,811
Year to date Metal Dinnerware Glass Other Total
------------ ------- ---------- ------ ------ --------
2003 Net Sales $129,573 $64,629 $14,182 $3,763 $212,147
2002 Net Sales 141,866 70,160 14,688 3,958 230,672
6. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
establishes 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 an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) because that financial instrument embodies an obligation of the
issuer. This statement is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The Company currently does
not hold any financial instruments that should be considered for transition from
equity to liabilities. The Company will continue to evaluate for application
under the standard.
On January 17, 2003 the FASB issued Financial Interpretation ("FIN") No. 46,
"Consolidation of Variable Interest Entities." The objective of FIN No. 46 is to
improve financial reporting by companies involved with variable interest
entities. FIN No. 46 changes certain consolidation requirements by requiring a
variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns or
both. The consolidation requirements apply to entities created before February
1, 2003, no later than the beginning of the first fiscal year or interim period
beginning after June 15, 2003. The Company does not expect the adoption of this
standard to have a material impact on its financial condition or results of
operations.
13
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS 123, "Accounting for Stock-Based Compensation"
to require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results.
The Company has elected to continue following APB No. 25 in accounting for its
stock-based compensation plans. Under APB No. 25, compensation expense is not
required to be recognized for the Company's stock-based compensation plans
because the fair value equals the option price. Under SFAS 123 as amended by
SFAS 148, compensation expense is recognized for the fair value of the options
on the date of grant over the vesting period of the options.
Application of the fair-value based accounting provision of SFAS 123 results in
the following pro forma amounts of net income (loss) and earnings (loss) per
share for the three and six months ended July 26, 2003 and July 27, 2002:
(Thousands Except Per Share Amounts)
Three Months Ended Six Months Ended
July 26, July 27, July 26, July 27,
2003 2002 2003 2002
-------- -------- ------- -------
Net income (loss), as reported $(3,707) $2,915 $(7,092) $4,563
Deduct: Total stock-based
employee compensation expense
determined under Black-Scholes
option pricing model, net of
related income tax effect (459) (573) (917) (1,146)
-------- -------- ------- -------
Pro forma net income (loss) $(4,166) $2,342 $(8,009) $3,417
Earnings (loss) per share:
As reported: Basic $ (.23) $ .17 $(.43) $ .27
Diluted (.23) .17 (.43) .27
Pro forma: Basic (.25) .14 (.49) .20
Diluted (.25) .14 (.49) .20
There was no stock based employee compensation expense included in the
Consolidated Statement of Operations for any of the periods presented.
14
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Quarter ended July 26, 2003 compared with
the quarter ended July 27, 2002
(In Thousands)
Operations
Net Sales by Product Line:
Three Months Ended July
2003 2002 %Change
------- ------- -----
Metal products....... $ 66,158 $ 71,319 (7.2)
Dinnerware products.. 30,361 33,265 (8.7)
Glass products....... 7,654 7,459 2.6
Other Products....... 1,802 1,768 1.9
-------- -------- -----
Total............... $105,975 $113,811 (6.9)
======== ======== =====
Quarterly Review
Consolidated net sales for the quarter ended July 26, 2003 decreased by $7,836
or 6.9% over the same period a year ago. Metal products net sales decreased by
$5,161 or 7.2% over the second quarter of 2002 as consumer confidence remains
weak and spending for metal products continues to be depressed. Also
contributing to the lower metal product sales are decreased personal and
business travel and restaurant activity. Dinnerware products net sales decreased
by $2,904 or 8.7% over the same period a year ago also as a result of decreased
personal and business travel and restaurant activity and weak consumer
confidence. An increase in the Encore supermarket division dinnerware continuity
program sales offset a portion of the decrease. Glass products net sales
increased by $195 or 2.6% and other products net sales increased by $34 or 1.9%
over the second quarter of 2002.
Gross margin as a percentage of net sales was 27.4% in the second quarter of
2003 as compared to 32.3% for the same period of 2002. Lower net sales resulted
in the manufacturing plants operating at lower volumes generating unfavorable
factory variances. The unfavorable factory variances were the principle cause of
the decline in gross margin. Also contributing to the decrease in gross margin
and factory utilization was a trend towards less expensive, lower margin sourced
product. The Company experienced a slight cost increase in procured product,
which represents over 50% of total sales.
Total operating expenses decreased by $97, or 0.3%, from the same quarter last
year. As a percentage of sales, operating expenses were 29.4% compared to 27.5%
in 2002. Total operating expenses as a percentage of sales will decline as sales
return to expected levels.
Other income was $525 for the quarter as compared to $4,281 for the second
quarter of 2002. Other income for the three months ended July 27, 2002 was
principally generated from insurance proceeds of $3,000 and gain on sale of
Prudential stock of $944.
Interest expense and amortization of deferred financing costs decreased by $138
or 3.3% in the second quarter of 2003 compared with the same period a year ago.
Capitalized interest was $70 in the quarter ended 2003 and $29 over the same
period a year ago.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Six Months ended July 26, 2003 compared with
the six months ended July 27, 2002
(In Thousands)
Operations
Net Sales by Product Line:
Six Months Ended July
2003 2002 %Change
------- ------- -----
Metal products....... $129,573 $141,866 (8.7)
Dinnerware products.. 64,629 70,160 (7.9)
Glass products....... 14,182 14,688 (3.4)
Other Products....... 3,763 3,958 (4.9)
-------- -------- ----
Total............... $212,147 $230,672 (8.0)
======== ======== ====
Six month review
Consolidated net sales for the six months ended July 26, 2003 decreased by
$18,525 or 8.0% over the same period a year ago. An aggressive pricing strategy
was utilized in the foodservice and consumer markets to maintain market share
across all product lines. Metal products net sales decreased by $12,293 or 8.7%
and dinnerware products net sales decreased by $5,531 or 7.9% over the same
period a year ago. Reduced personal and business travel and restaurant activity
resulted in lower net sales. Weak consumer confidence also contributed to the
lower net sales. An increase in the Encore supermarket continuity metal products
and dinnerware products programs net sales offset the decreases caused by
reduced travel and consumer confidence. Glass products net sales decreased by
$506 or 3.4% and other products net sales decreased by $195 or 4.9% over 2002.
Gross margin as a percentage of net sales was 27.3% for the first six months of
2003 as compared to 32.0% for the same period of 2002. The aggressive pricing
strategy utilized to maintain market share coupled with the manufacturing plants
operating at lower volumes resulted in lower gross margins. Also contributing to
the decrease in gross margin was a trend towards less expensive, lower margin
sourced product and a slight cost increase in procured product.
Total operating expenses decreased by $268, or 0.4%, compared to the first six
months of the prior year. As a percentage of sales, year to date operating
expenses were 29.3% compared to 27.0% in 2002. Total operating expenses as a
percentage of sales will decline as sales return to expected levels.
Other income for the period was $1,058 compared to $5,232 for the six months
ended July 27, 2002. Other income for the six months ended July 27, 2002 was
principally generated from insurance proceeds of $3,000 and gain on sale of
Prudential stock of $1,300.
Interest expense and amortization of deferred financing costs decreased by $532
or 6.3% in the first six months of 2003 compared with the same period a year
ago. The decrease is due to slightly lower average borrowings and lower
prevailing interest rates. Capitalized interest was $80 for the six months ended
July 26, 2003 and $55 over the same period a year ago.
16
Lean Manufacturing and Potential Restructuring Costs
The Company is implementing a lean manufacturing approach at its Sherrill, NY
manufacturing facility in an effort to reduce manufacturing and overhead costs.
In August, approximately 70 overhead positions were eliminated at the Sherrill,
N.Y. flatware manufacturing operation. The affected employment primarily
involved supporting positions that are no longer needed under the Company's
continued conversion to a lean manufacturing system. In addition, 30 direct
labor positions were reduced as a result of lower demand. The Company will
record a pretax expense of $372 in the third quarter associated with these
terminations. The lean manufacturing conversion is projected to be complete by
April 24, 2004 and expected annual savings are $18 million. Lean manufacturing
is a process that eliminates all costs that do not add value to the finished
product. The savings will be achieved through the continual elimination of
overhead positions and increased manufacturing efficiencies associated with lean
manufacturing.
The Company is in the process of identifying opportunities to reduce costs
within its manufacturing operations and is considering closing some or all of
its other manufacturing facilities: Buffalo China factories in Buffalo, NY and
Juarez, Mexico; flatware factory in Toluca, Mexico, hollowware factories in
Vercelli, Italy and Shanghai, China. If any manufacturing facilities are closed,
the Company could continue to market the affected product, using independent
suppliers. The Company is accumulating and analyzing information related to the
potential facility closures and has not committed to closing these manufacturing
facilities. The Company is considering several factors including its ability to
reduce these facilities' operating costs, ability to source production, and
customer reaction. The Company's lenders will have to approve any significant
asset disposals. No asset impairments have occurred as of July 26, 2003 and
accordingly no costs have been recorded as of that date.
Liquidity & Financial Resources
Cash flow used by operating activities was $5,499 as compared to cash provided
by operating activities of $14,270 in the first half of 2002. The net cash used
for operating activities during the six months ended July 26, 2003 was primarily
due to net losses and negative net working capital changes of $6,791. The net
cash provided by operating activities for the six months ended July 27, 2002 was
the result of net income and positive changes in working capital of $1,723.
Net cash used in investing activities was $3,170 for the six months ended July
26, 2003 compared with net cash provided of $4,418 for the same period of 2002.
Net cash used in investing activities for the six months ended July 26, 2003
primarily related to capital expenditures supporting the lean manufacturing
effort in Sherrill, NY and manufacturing equipment purchases. Capital spending
for the remainder of 2003 is anticipated to be approximately $4,100. Net cash
provided in investing activities for the six months ended July 27, 2002 are the
result of the sale of marketable equity securities offset by capital
expenditures.
Net cash provided by financing activities was $8,154 for the six months ended
July 26, 2003 compared to net cash used by financing activities of $28,067 in
the first half of 2002. Net cash provided by financing activities for the six
months ended July 26, 2003 was primarily related to borrowings under the
revolving credit agreement. The net cash used in financing activities for the
six months ended June 27, 2002 was primarily related to debt reduction.
17
In April 2003, the Company and its required lenders entered into amendments to
the revolving credit and note agreements. The amendments extend the maturity to
May 31, 2005 from February 1, 2004, adjust certain financial covenants and
prohibit payment of dividends on common stock. In addition, the commitment under
the revolving credit facility reduced to $225,000 upon signing of the amendment
with further reductions to $220,000 on July 25, 2003, $215,000 on November 3,
2003, $205,000 on January 30, 2004, $185,000 on February 7, 2004, $175,000 on
May 3, 2004 and $165,000 on November 1, 2004.
These facilities contain certain financial covenants, including a restriction
limiting the Company's total debt outstanding to a pre-determined multiple of
the prior rolling twelve months earnings before interest, taxes, deprecation and
amortization. A default in compliance with these covenants, if unremedied, could
cause the lenders to declare the principal outstanding to be payable
immediately. As of July 26, 2003 the Company was in violation of the interest
coverage ratio, leverage ratio and net worth covenants and received waivers from
its required lenders. The Company will pay $28 in compensation for these
waivers. More restrictive covenants must be met as of October 25, 2003 and it is
probable that the Company will fail to meet those covenants and, as such, the
outstanding borrowings are classified as current. The Company intends to request
amendments to the existing revolving credit and note agreements to incorporate a
number of changes. These changes include the amendment of the financial
covenants to permit the transactions associated with the potential restructuring
plan previously discussed. In the event that the existing revolving credit and
note agreements cannot be amended or appropriate waivers are not obtained, the
Company may not have sufficient liquidity to support future operations.
The aggregate amounts of long term debt maturities due each year are as follows:
Year Ended January 2004 ..... $230,295
2005 ......... $575
2006 ....... $1,493
2007 ......... $913
2008 .......... $21
2009 .......... $22
After ......... $32
Working capital was $(36,637) as of July 26, 2003 as compared to $184,524 at
January 25, 2003. The decrease in working capital as of July 26, 2003 was caused
by the current classification of the revolving credit and note agreements. As of
July 26, 2003 the Company had unused bank lines of credit of $11,600. Under the
provisions of the amended revolving credit and note agreements, at July 26, 2003
the Company was able to declare dividends on its 6% Cumulative Preferred Stock
up to $32 per quarter. However, no dividend was declared on the preferred stock
for the first or second quarter of 2003.
In order to improve profitability and liquidity, the Company is implementing
lean manufacturing and improving production efficiencies as well as reducing
headcount in the Sherrill, NY manufacturing facility. Additionally, the Company
is in the process of identifying additional opportunities, which may include
further headcount reductions and the potential closure of inefficient
facilities. If any manufacturing facilities are closed, the Company could
continue to market the affected product, using independent suppliers. The
results of the Company's actions are intended to reduce costs, increase the
Company's liquidity and better position the Company to compete under the current
economic conditions. If any facilities are closed, the related assets could be
liquidated, contingent on the approval by the Company's lenders.
18
Provided the above amendments or waivers are obtained, management believes there
is sufficient liquidity to support the Company's funding requirements over the
next year from future operations as well as from available bank lines of credit.
The Company may need to raise additional capital to reduce its outstanding debt
obligations as required by the amended agreements. Our revenue and costs may be
dependent upon factors that are not within our control. Due to the uncertainty
of these factors, actual revenue and costs may vary from expected amounts,
possibly to a material degree, and such variations could affect our future
liquidity. Should factors differ materially, management may delay capital
expenditures, reduce overhead, selling, distribution and administrative
expenses, or seek alternative financing.
Accounting Pronouncements
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
establishes 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 an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) because that financial instrument embodies an obligation of the
issuer. This statement is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The Company currently does
not hold any financial instruments that should be considered for transition from
equity to liabilities. The Company will continue to evaluate for application
under the standard.
On January 17, 2003 the FASB issued Financial Interpretation ("FIN") No. 46,
"Consolidation of Variable Interest Entities." The objective of FIN No. 46 is to
improve financial reporting by companies involved with variable interest
entities. FIN No. 46 changes certain consolidation requirements by requiring a
variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns or
both. The consolidation requirements apply to entities created before February
1, 2003, no later than the beginning of the first fiscal year or interim period
beginning after June 15, 2003. The Company does not expect the adoption of this
standard to have a material impact on its financial condition or results of
operations.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS 123, "Accounting for Stock-Based Compensation"
to require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results.
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ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk.
The Company's market risk is impacted by changes in interest rates and foreign
currency exchange rates. Pursuant to the Company's policies, the Company does
not hold or issue any significant derivative financial instruments.
The Company's primary market risk is interest rate exposure in the United
States. Historically, the Company manages interest rate exposure through a mix
of fixed and floating rate debt. The majority of the Company's debt is currently
at floating rates. Based on floating rate borrowings outstanding at July 2003, a
1% change in the rate would result in a corresponding change in annualized
interest expense of $2.0 million.
ITEM 4.
Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and our Chief Financial Officer have carried out an
evaluation, with the participation of the Company's management, of the design
and operation of the Company's "disclosure controls and procedures" (as defined
in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) as of the end of the period. Based upon that evaluation,
each has concluded that the Company's "disclosure controls and procedures" are
effective to insure that information required to be disclosed in the reports
that we file under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified by the Securities and Exchange
Commission's rules and regulations.
Changes in Internal Controls.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls, nor any significant
deficiencies or material weaknesses in such controls requiring corrective
action, subsequent to the date of their evaluation.
20
Forward Looking Information
With the exception of historical data, the information contained in this Form
10-Q, as well as those other documents incorporated by reference herein, may
constitute forward-looking statements, within the meaning of the Federal
securities laws, including but not limited to the Private Securities Litigation
Reform Act of 1995. As such, the Company cautions readers that changes in
certain factors could affect the Company's future results and could cause the
Company's future consolidated results to differ materially from those expressed
or implied herein. Such factors include, but are not limited to: changes in
national or international political conditions; civil unrest, war or terrorist
attacks; general economic conditions in the Company's own markets and related
markets; difficulties or delays in the development, production and marketing of
new products; the impact of competitive products and pricing; certain
assumptions related to consumer purchasing patterns; significant increases in
interest rates or the level of the Company's indebtedness; ; inability of the
Company to maintain sufficient levels of liquidity; failure of the Company to
obtain needed waivers and/or amendments relative to its financing agreements;;
foreign currency fluctuations; major slowdowns in the retail, travel or
entertainment industries; the loss of several of the Company's key executives,
major customers or suppliers; underutilization of, or negative variances at,
some or all of the Company's plants and factories; the Company's failure to
achieve the savings and profit goals of any planned restructuring or
reorganization programs; international health epidemics such as the SARS
outbreak; the impact of changes in accounting standards; potential legal
proceedings; changes in pension and medical benefit costs; and the amount and
rate of growth of the Company's selling, general and administrative expenses.
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.
ONEIDA LTD.
(Registrant)
Date: September 9, 2003
/s/ GREGG R. DENNY
-----------------------
Gregg R. Denny
Chief Financial Officer
21