<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________________ TO _____________________
COMMISSION FILE NUMBER 333-16453
SHOP VAC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW JERSEY 13-5609081
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2323 REACH ROAD, WILLIAMSPORT, PA 17701
(717) 326-0502
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
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, and (2) has been subject to such filing requirements
for the past 90 days. Yes [x] No [ ]
Common Shares, No Par Value, Outstanding at March 31, 1998 -- 6,500 Class A
voting and 650,000 Class B non-voting.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHOP VAC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
(dollars in thousands)
<TABLE>
<CAPTION>
================================================================================================
Assets December 31, 1997 March 31, 1998
(Unaudited)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................. $ 34,450 $ 26,696
Receivables, less allowance for doubtful
accounts of $1,946 in 1997 and $1,984
in 1998 ............................................ 25,265 24,226
Inventories (note 2) ................................. 22,508 25,327
Prepaid expenses and other current assets ............ 2,636 2,753
Deferred income taxes ................................ 3,502 4,637
- ------------------------------------------------------------------------------------------------
Total current assets ..................................... 88,361 83,639
Property, plant, and equipment, net .................. 29,428 29,796
Property, plant, and equipment under
capital leases, net ............................... 6,175 6,013
Deferred income taxes ................................ 15,846 14,035
Other assets ......................................... 5,588 5,369
- ------------------------------------------------------------------------------------------------
Total assets ............................................. $145,398 $138,852
================================================================================================
</TABLE>
(Continued)
1
<PAGE> 3
SHOP VAC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
(dollars in thousands)
<TABLE>
<CAPTION>
=================================================================================================
Liabilities and Stockholders' Equity (Deficit) December 31, 1997 March 31, 1998
(Unaudited)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Current liabilities:
Current portion of long-term debt ..................... $ 3,175 $ 2,989
Accounts payable ..................................... 19,450 18,850
Accrued expenses ..................................... 17,701 11,126
- -------------------------------------------------------------------------------------------------
Total current liabilities ................................ 40,326 32,965
Long-term debt ........................................... 102,492 102,154
Other liabilities ........................................ 13,652 14,357
Stockholders' equity (deficit):
Common stock, Class A voting, no par,
20,000 shares authorized, 6,500 shares
issued. Class B non-voting, no par,
1,000,000 shares authorized, 650,000
shares issued ..................................... 85 85
Paid in capital ...................................... 110 110
Accumulated deficit .................................. (13,649) (12,874)
Other comprehensive income - foreign currency
translation adjustment ............................ 2,382 2,055
- -------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit)...................... $(11,072) $(10,624)
- -------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity (deficit)...... $145,398 $138,852
=================================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
(Continued)
2
<PAGE> 4
SHOP VAC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
=======================================================================================
Three months ended
March 31,
- ---------------------------------------------------------------------------------------
1997 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Net sales ................................................ $ 49,938 $ 48,677
Cost of sales ............................................ 36,708 34,651
- ---------------------------------------------------------------------------------------
Gross profit ............................................. 13,230 14,026
Selling, general and administrative expense .............. 9,085 9,848
- ---------------------------------------------------------------------------------------
Income from operations ................................... 4,145 4,178
Interest expense, net .................................... 2,822 2,590
Other expense (income), net .............................. (31) (16)
- ---------------------------------------------------------------------------------------
Income before income taxes ............................... 1,354 1,604
Income tax expense ....................................... 143 829
- ---------------------------------------------------------------------------------------
Net income ............................................... $ 1,211 $ 775
- ---------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
=======================================================================================
Comprehensive Income
=======================================================================================
<S> <C> <C>
Net income ............................................... $ 1,211 $ 775
Other comprehensive income (loss):
Foreign currency translation adjustment ............... (852) (327)
- ---------------------------------------------------------------------------------------
Comprehensive income ..................................... $ 359 $ 448
=======================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
(Continued)
3
<PAGE> 5
SHOP VAC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows (Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
==================================================================================
Three months ended
March 31,
- ----------------------------------------------------------------------------------
1997 1998
- ----------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................... $ 1,211 $ 775
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization .................... 1,469 1,371
Amortization included in interest expense ........ 146 146
Restructuring charges ............................ (672) (45)
Changes in assets and liabilities:
Accounts and notes receivable ................. 3,546 896
Inventories ................................... (298) (3,126)
Prepaid expenses and other current assets ..... (493) (279)
Other assets .................................. (138) (28)
Deferred income taxes ......................... ----- 640
Accounts payable and accrued expenses ......... (2,782) (6,361)
Other liabilities ............................. 1,653 765
- ----------------------------------------------------------------------------------
Net cash provided (used) by continuing operations ........ 3,642 (5,246)
Net cash provided (used) by discontinued operations ...... 1,412 (398)
- ----------------------------------------------------------------------------------
Net cash provided (used) by operating activities ......... 5,054 (5,644)
- ----------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures ............................. (643) (1,598)
- ----------------------------------------------------------------------------------
Net cash provided (used) by investing activities ......... (643) (1,598)
- ----------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from revolving line-of-credit, net .......... ----- -----
Long-term debt and capital lease payments ............ (2,081) (478)
- ----------------------------------------------------------------------------------
Net cash provided (used) by financing activities ......... (2,081) (478)
- ----------------------------------------------------------------------------------
Effect of exchange rate changes on cash .................. (196) (34)
- ----------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents ..... 2,134 (7,754)
Cash and cash equivalents, beginning of year ............. 21,141 34,450
- ----------------------------------------------------------------------------------
Cash and cash equivalents, end of quarter ................ 23,275 26,696
- ----------------------------------------------------------------------------------
Supplemental cash flow information:
Cash paid for interest ............................... 4,484 5,128
Cash paid for income taxes ........................... 13 141
==================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 6
SHOP VAC CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(dollars in thousands)
(1) The accompanying interim unaudited consolidated financial statements
include the accounts of Shop Vac Corporation and its wholly owned
subsidiaries (the "Company"). All intercompany accounts and transactions
are eliminated in consolidation.
These financial statements have been prepared in accordance with
generally accepted accounting principles 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 generally accepted accounting principles for
complete financial statements. In the opinion of management, such
interim statements reflect all adjustments (consisting of normal
recurring accruals) necessary to present fairly the financial position
and the results of operations and cash flows for the interim periods
presented. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for the full year.
These financial statements should be read in conjunction with the
audited consolidated financial statements and footnotes included in the
Company's Annual Report on Form 10-K dated March 30, 1998 for the year
ended December 31, 1997.
(2) Inventories are classified as follows:
<TABLE>
<CAPTION>
===================================================================================
December 31, 1997 March 31, 1998
(Unaudited)
- -----------------------------------------------------------------------------------
<S> <C> <C>
Raw materials ............................... $ 8,518 $ 10,588
Work-in-process ............................. 4,821 5,645
Finished goods .............................. 9,169 9,094
- -----------------------------------------------------------------------------------
$ 22,508 $ 25,327
===================================================================================
</TABLE>
(3) Financial Instruments
The Company enters into foreign exchange forward contracts to hedge
certain foreign currency transactions. These transactions include
purchases of motors denominated in Italian lire and collection of
intercompany amounts due to the Company's Irish manufacturing subsidiary
as well as collection of intercompany amounts due from the Company's
Canadian subsidiary resulting from its purchase of product manufactured
by the Company. These contracts are purchased to reduce the impact of
foreign currency fluctuations on operating results. The Company enters
into these financial instruments utilizing over-the-counter as opposed
to exchange traded instruments. Assuming performance by the contracting
parties, these contracts do not subject the Company to risk due to
exchange rate movements as gains and losses on the contracts offset
gains and losses on the transactions being hedged. The contracts are
settled in cash upon expiration, resulting in a gain or loss measured by
the difference between the spot rate and the contract rate at
expiration. The Company does not hedge firm commitments beyond two
years. The Company reduces the risk of losses due to nonperformance by
counterparties by only entering into agreements with major international
financial institutions. At December 31, 1997 and March 31, 1998, the
Company had foreign exchange forward contracts outstanding as follows
(amount in thousands):
5
<PAGE> 7
<TABLE>
<CAPTION>
December 31, 1997 March 31, 1998
(Unaudited)
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Irish punt against Italian lira (7,200,000 ITL)........ $ 4,041 $ 4,082
Irish punt against British pound (2,867 GBP)........... 4,497 4,950
Irish punt against French franc (5,850 FF)............. 1,202 975
Irish punt against Dutch guilder (3,000 DGL)........... 1,794 1,488
Canadian dollar against U.S. dollar (12,830 CD)........ 12,872 9,003
British pound against Italian lira .................... 270 -----
- ---------------------------------------------------------------------------------------------
$24,676 $20,498
=============================================================================================
</TABLE>
The fair value of the Company's foreign exchange forward contracts are
estimated based on the difference between the contracted exchange rate
and the spot rate at each balance sheet date. The fair value of such
contracts was an asset of $311,000 and a liability of $80,000 at
December 31, 1997 and March 31, 1998, respectively. The financial
statements include no carrying amounts with respect to these contracts.
The company also entered into a contract to hedge planned purchases of
copper. At December 31, 1997 and March 31, 1998, the amounts outstanding
under contract were $1,475,000 and $1,195,000, respectively. Based upon
the spot rate at December 31, 1997 and March 31, 1998, the fair market
value of the contracts was a liability of $332,000 and $240,000,
respectively.
(4) Restructuring Charges
During 1996 the Company terminated the manufacture of steam cleaners at
its facility in France and has consolidated all of its European
manufacturing activities, including the production of steam cleaners,
into its facility in Ireland. In connection with this consolidation, the
Company incurred a pre-tax charge in 1996 of approximately $1.5 million
to cover severance, lease termination payments, shut- down, and related
expenses. The Company also restructured its distribution operations in
Austria, Germany, Hungary, the Netherlands, and Spain. In connection
with such restructuring, the Company incurred a pre-tax charge in 1996
of approximately $3.2 million to cover severance, lease termination
payments, shut-down and related expenses. In addition, the Company
recorded charges of approximately $700,000 related to accounts
receivable and general and administrative expenses and $600,000 related
to inventories at these locations. These amounts were recorded in
selling, general and administrative expenses, and cost of sales,
respectively.
The restructuring charges include approximately $1.8 million for
severance and termination benefits for substantially all employees of
the Company's steam cleaner manufacturing operations and the Company's
distribution operations in Austria, Germany, Hungary, the Netherlands,
and Spain.
The restructuring charges also included charges of approximately
$500,000 to recognize the reduction in value of leasehold improvements
at leased locations which were abandoned as a result of the
restructuring of the steam cleaner and distribution operations.
Additionally, a loss of $1.0 million was included in the restructuring
charges which recognized the decline in value to zero of goodwill
associated with the Company's Netherlands distribution operation.
The remainder of the restructuring charges represents the cost of lease
terminations and other obligations. During 1997 and the first quarter of
1998 approximately $1 million and $50,000, respectively, of cash
expenditures were made with respect to these restructuring charges. At
March 31, 1998 approximately $500,000 remains in accrued expenses and
other liabilities related to these restructuring charges. The Company
expects to pay approximately $200,000 in cash during 1998 with respect
to these charges.
6
<PAGE> 8
(5) The company adopted Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income" in the first quarter of 1998
which establishes standards for reporting and display of comprehensive
income.
(6) During March 1998 the Company entered into negotiations with a third
party for the sale of the Company's European operations. The European
operations had revenues of $66.7 million for the year ended December 31,
1997 and $12.8 million for the three months ended March 31, 1998 and had
assets of $24.3 million as of March 31, 1998.
7
<PAGE> 9
SHOP VAC CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net sales in the three months ended March 31, 1998 totaled $48.7 million, a
decrease of $1.3 million or 2.5% compared to the three months ended March 31,
1997. Net sales were $4.3 million lower than prior year in the European Group
and $3.0 million higher in the North American Group in the three months ended
March 31, 1998.
Gross profit in the three months ended March 31, 1998 totaled $14.0 million, an
increase of approximately $800,000 or 6.0% when compared to the three months
ended March 31, 1997. Gross profit as a percentage of sales increased from 26.5%
in the three months ended March 31, 1997 to 28.8% in the three months ended
March 31, 1998. This improvement was due to continued cost improvements and the
sales volume increase in North America.
Selling, general and administrative ("SG&A") expense was $9.8 million in the
three months ended March 31, 1998, an increase of approximately $800,000
compared to the three months ended March 31, 1997. SG&A expense as a percentage
of net sales increased from 18.2% in the 1997 period to 20.2% in the 1998
period. Increases in SG&A expenses were primarily due to increased advertising
and other selling expenses.
Income from operations of $4.2 million was substantially unchanged in the 1998
period compared to the 1997 period.
Net interest expense was $2.6 million in the three months ended March 31, 1998,
a decrease of $200,000 or approximately 8.2% compared to the three months ended
March 31, 1997. Interest expense is net of interest income of $258,000 and
$415,000 for the three months ended March 31, 1997 and 1998, respectively.
Income tax expense for the three months ended March 31, 1998 increased
approximately $700,000 compared to income tax expense for the three months ended
March 31, 1997. The effective tax rate for the three months ended March 31, 1998
was 51.7% which is higher than the US federal tax rate due to state income taxes
and losses in certain foreign jurisdictions. The effective tax rate for the
three months ended March 31, 1997 was 10.6% which was substantially lower than
the US federal tax rate principally due to a decrease in the valuation allowance
for deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 1998 cash and cash equivalents decreased
from $34.5 million to $26.7 million due to cash flow used by operating
activities of $5.7 million, capital expenditures of $1.6 million, and debt
reduction of $500,000.
Inventories at year end 1997 were at unusually low levels due to unexpectedly
heavy demand in December. Inventories increased substantially in the first
quarter of 1998, returning to more normal levels and consuming cash of $3.1
million. Accounts payable and accrued expenses decreased substantially during
the first quarter of 1998, consuming cash of $6.4 million, principally due to
the payment of interest on the Senior Secured Notes in March of 1998 and the
payment of amounts due to a former officer of the Company in connection with his
employment contract. Other operating activities generated cash of $3.8 million.
During the three months ended March 31, 1998, there were no significant changes
to the Company's Year 2000 assessment.
The Company believes that it will be able to satisfy its debt service
requirements and its working capital and capital expenditure requirements from
operating cash flows.
8
<PAGE> 10
FINANCIAL INSTRUMENTS
When appropriate, the Company enters into foreign exchange contracts to hedge
its foreign exchange exposures. The objective of the hedging program is to
manage the risk of adverse cash flow due to fluctuations in foreign currencies.
The Company primarily hedges the Irish punt against other European currencies
and the US dollar against the Canadian dollar. At March 31, 1998, the Company
had approximately $20.5 million in foreign exchange forward contracts
outstanding.
To protect the Company from increases in the price of copper the Company entered
into a contract to hedge planned 1998 purchases of copper. At March 31, 1998,
the Company had purchases of $1.2 million under contract.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of
an Enterprise and Related Information". In January 1998, the FASB issued SFAS
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits". These Statements establish standards for reporting information about
business segments and products in financial statements and establish new
disclosure requirements relating to pension and other postretirement benefits.
These Statements are effective for fiscal years beginning after December 15,
1997.
In March 1998, the AICPA Accounting Standards Executive Committee (AcSEC) issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use". SOP 98-1 is applicable to all
nongovernmental entities and provides guidance on accounting for the costs of
computer software developed or obtained for internal-use software be capitalized
and amortized over the estimated useful life of the software. The SOP also
requires that costs related to the preliminary project stage and the
post-implementation/operations stage (as defined in SOP 98-1) in an internal-use
computer software development project be expensed as incurred. SOP 98-1 is
effective for financial statements issued for fiscal years beginning after
December 15, 1998.
Adoption of the above statements is not expected to have a material affect on
the Company's financial statements.
FORWARD-LOOKING INFORMATION -- RISK FACTORS
To the extent the Registrant has made "forward-looking statements," certain risk
factors could cause results to differ materially from those anticipated in such
forward-looking statements. Competition from new entrants in the wet/dry vacuum
market or the loss of significant customers could adversely effect the Company's
share of the wet/dry vacuum market. Increases in raw material costs could
adversely impact the future profitability of the Company. The Company's ability
to successfully address Year 2000 issues could also adversely impact future
profits. Overall anticipated performance of the Company could be affected by any
serious economic downturns in the United States or Europe.
9
<PAGE> 11
PART II - OTHER INFORMATION
ITEMS 1 - 5. NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
27.1 Financial Data Schedule
B. Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter ended March 31, 1998.
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.
SHOP VAC CORPORATION
By / s / David A. Grill
--------------------------------
David A. Grill
Vice President and
Chief Financial Officer
Date: May 15, 1998
10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 26,696
<SECURITIES> 0
<RECEIVABLES> 26,210
<ALLOWANCES> 1,984
<INVENTORY> 25,327
<CURRENT-ASSETS> 83,639
<PP&E> 94,472
<DEPRECIATION> 58,663
<TOTAL-ASSETS> 138,852
<CURRENT-LIABILITIES> 32,965
<BONDS> 102,154
0
0
<COMMON> 85
<OTHER-SE> (10,709)
<TOTAL-LIABILITY-AND-EQUITY> 138,852
<SALES> 48,677
<TOTAL-REVENUES> 48,677
<CGS> 34,651
<TOTAL-COSTS> 34,651
<OTHER-EXPENSES> 9,848
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,590
<INCOME-PRETAX> 1,604
<INCOME-TAX> 829
<INCOME-CONTINUING> 775
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 775
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
