ITEM 1 - BUSINESS - -----------------
GENERAL DEVELOPMENT OF THE BUSINESS
WKI Holding Company Inc. (the Company or WKI) is a leading manufacturer and marketer of consumer bakeware, dinnerware, kitchen and household tools, rangetop cookware and cutlery product categories. The Company has strong positions in major channels of distribution for its products in North America and has also achieved a significant presence in certain international markets, primarily Asia, Australia, and Latin America. In North America, the Company sells both on a wholesale basis to retailers, distributors and other accounts that resell the Company's products, and on a retail basis, through Company-operated factory stores. In the international market, the Company has established its presence on a wholesale basis through an international sales force coupled with localized distribution and marketing capabilities.
The Company's business began as an unincorporated division of Corning Incorporated (Corning) in 1915 with the invention of the heat-resistant glass that has become known as Pyrex(R) glassware. In 1958, Corning introduced Corningware(R) bakeware, a versatile glass-ceramic cookware product. Corelle(R) dinnerware, a proprietary three-layer, two-glass product with high mechanical strength properties and designed for everyday use was launched in 1970. Visions(R) cookware, a lower cost, clear glass-ceramic cookware line was introduced in 1982. In 1988, Corning supplemented its cookware product lines with the acquisition of the Revere business, which distributes stainless steel and aluminum cookware and rangetop products known as Revere Ware(R).
On March 2, 1998, Corning, the Company, Borden, Inc. (Borden), and CCPC Acquisition Corp. (CCPC) entered into a Recapitalization Agreement pursuant to which on April 1, 1998 (Closing Date) CCPC acquired 92% of the outstanding shares of common stock, par value $0.01 per share of WKI from Corning for $110.4 million (Recapitalization). The stock acquisition was financed by an equity investment in CCPC by BW Holding LLC, an affiliate of Kohlberg, Kravis Roberts & Co., L.P. (KKR), the parent company of Borden and CCPC. Pursuant to the Recapitalization, the Company paid Corning a dividend of $482.8 million, which was financed through borrowings under senior facilities and the issuance of 9 5/8% Series B Senior Subordinated Notes (9 5/8% Notes) due 2008.
The Company completed the acquisitions of EKCO Group, Inc. (EKCO) effective September 13, 1999 and General Housewares Corp. (GHC) on October 21, 1999, in two separate transactions. EKCO was a manufacturer and marketer of branded consumer products including household items such as bakeware, kitchen and household tools, cleaning products, brooms, brushes and mops. The Company exited its cleaning product line in 2000. GHC manufactured and marketed consumer durable goods with principal lines of business consisting of kitchen and household tools, precision cutting tools, kitchen cutlery and cookware. The Company financed these acquisitions through the issuance of $150 million in common stock to CCPC, $50 million in junior cumulative preferred stock to Borden and additional borrowings under the Company's existing credit facilities. Additional information regarding the Company's acquisitions can be found in Note 4 to the Consolidated Financial Statements.
Since the completion of these acquisitions, the Company has been involved in various business redesign activities associated with restructuring and rationalizing processes and headcount to improve the overall efficiency, effectiveness and responsiveness of the organization.
During 2000, the Company dedicated extensive resources to the integration of the acquired businesses of EKCO and GHC. The integration included the consolidation of acquired distribution facilities into a new 700,000 square foot distribution center in Monee, Illinois, redesigning the Company's enterprise-wide computer system to accommodate the acquired facilities and new business lines, as well as combining sales, marketing, finance, executive administration, human resources and information technology efforts. By the end of 2000, most integration activities were complete. The integration process contributed to the Company's substantial increase in indebtedness in 2000, and for the period ended December 31, 2000, the Company failed to satisfy certain covenants under its existing credit facility.
In January 2001, the Company announced Steven G. Lamb as its new President and Chief Executive Officer. In addition, in 2001, the WKI Board of Directors approved plans to restructure several aspects of the Company's manufacturing and distribution operations and consolidate certain administrative functions. These measures resulted in a restructuring charge of $51.9 million and rationalization expenses of $18.5 million in 2001. (See Item 7 - Management Discussion and Analysis, Restructuring and Rationalization Programs). Additional information on the Company's restructuring and rationalization programs is included in Note 13 to the Consolidated Financial Statements. On April 12, 2001, the Company entered into the Amended and Restated Credit Agreement (the "Amended Credit Agreement"), which provided for an additional secured revolving credit facility of $25.0 million maturing on March 31, 2004.
The Company has incurred substantial losses applicable to common shares in each of the last three fiscal years, has had operating losses in each of the last three fiscal years, has had negative cash flow from operations in fiscal years 2000 and 1999 and has a significant stockholders' deficit at December 31, 2001. These losses and cash flow deficiencies were caused by interest expense on substantial indebtedness, restructuring and rationalization expenses, integration and transaction related expenses resulting from the 1999 acquisitions of EKCO and GHC, issues arising from the 1999 enterprise-wide systems implementation and consolidation of distributions centers and a weak U.S. economy in the latter part of 2000 and 2001. The general U.S. economic downturn experienced during 2001 significantly impacted consumer confidence which adversely impacted customer purchase behavior in several of the Company's key channels. This economic downturn has affected and is expected to continue to negatively impact the financial condition and results of operations of the Company. In addition, Kmart, a key WKI customer, declared bankruptcy in January 2002. As a result, the Company assessed the collectibility of its receivable from Kmart and recorded an $8.3 million charge in December 2001.
At December 31, 2001, the Company was not in compliance with certain financial covenants contained in the Amended Credit Agreement. The Company, and the covenants within its credit facilities,measures operating results using earnings before interest, taxes, depreciation and amortization as adjusted for certain restructuring, rationalization, integration and transaction costs (Adjusted EBITDA). The Company did not meet the minimum Adjusted EBITDA, ratio of debt to Adjusted EBITDA and ratio of Adjusted EBITDA to cash interest expense covenants. The default under the senior credit facility as of December 31, 2001, also results in a default under the Borden facility. Accordingly, the holders of the Company's senior credit facilities and Borden have the right to accelerate the maturity of all of the outstanding indebtedness under the respective agreements, which together totals approximately $609.0 million. The holders of the $200.0 million aggregate principal amount of 9 5/8% Notes have the right to accelerate the maturity of their notes if the banks and/or Borden accelerate their payments. The Company does not presently have the ability to fund or refinance the accelerated maturity of this indebtedness. (See Item 7 - Management's Discussion and Analysis, Liquidity and Capital Resources). In light of the
above, the Company has reclassified the long term portion of the senior credit facilities, the Borden facility and the 9 5/8% Notes to short term debt on the Consolidated Balance Sheet as of December 31, 2001.
On March 28, 2002 the Company obtained temporary waivers of these and other covenant defaults from its bank syndicate and Borden. By their terms, these waivers terminate on the earliest of (i) May 30, 2002, (ii) the date on which the cash level falls below $20.0 million or the Company delivers to the agent for the bank syndicate a certificate indicating that it projects its cash level to fall below $20 million, (iii) the date on which the Company makes any payment in respect of interest or principal on the 9 5/8% Notes, (iv) the date on which the Company informs its agent for the bank syndicate that the Company intends to make such a payment on the 9 5/8% Notes, and (v) the date the Company prepays any loans under the Borden Facility. In addition, the Borden waiver terminates on the first date the lenders or the Administrative Agent under the Amended Credit Agreement take any action to accelerate the loans thereunder or to exercise any other remedies under the "Loan Documents."
The next scheduled interest payment on the 9 5/8% Notes is due May 1, 2002. The Company currently does not anticipate making this payment as making the payment would cause the waiver of the bank covenant defaults to expire. If the Company does fail to make the interest payments, a new event of default will occur under the senior credit facility and the Borden Facility after the expiration of the applicable grace period. The Company has engaged financial advisors and is discussing various options with its bank syndicate to develop a long-term financial restructuring plan, including resolution of the defaults under the Amended Credit Agreement that will exist after the expiration of the waiver. As part of those discussions, the Company is pursuing opportunities for restructuring its indebtedness and its capital structure. In the event the Company and its lenders are unable to reach an agreement on a restructuring plan that enables the Company to meet its debt obligations, including the interest payment on the 9 5/8% Notes, the Company would need to explore other alternatives, which could include a potential reorganization or restructuring under the bankruptcy laws.
Due to the Company's continuing inability to comply with its covenants under the Amended Credit Agreement, the temporary nature of the waiver the Company obtained from its bank syndicate, the Company's history of losses and stockholders' deficit, there is substantial doubt as to the Company's ability to continue as a going concern.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
For financial reporting purposes, the Company operates in the consumer kitchenware products segment, with principal products as described below. The Company measures operating results using a calculation of earnings before interest, taxes, depreciation and amortization as adjusted for certain restructuring, rationalization, integration and transaction costs (Adjusted EBITDA). The banks use certain profitability measures, including targeted Adjusted EBITDA, to measure compliance with certain covenants within the senior credit facility.
NARRATIVE DESCRIPTION OF THE BUSINESS
PRODUCTS
The Company processes basic raw materials and partially formed materials, such as stainless steel, into products which are close to or in their end use form. The Company manufactures some products at its own facilities and outsources manufacturing of a number of key brands to third party overseas vendors.
In 2001, the Company reported net sales of $745.9 million and Adjusted EBITDA of $63.2 million. The Company's products are sold primarily in the bakeware, dinnerware, kitchen and household tools, rangetop cookware and cutlery and other similar product categories in the consumer kitchenware products segment. Principal brands related to each product category are listed below:
BAKEWARE Corningware(R). Corningware products are available in a variety of sizes and shapes including round, oval, square and rectangle. They are appropriate for baking or microwaving as well as serving and storing. Glass and plastic covers are included with the following product lines: Corningware French White(TM), Corningware Classics(TM) and Corningware Pop-Ins(TM). Corningware products are currently produced at the Company's Martinsburg, West Virginia facility, which is scheduled to close in the first quarter of 2002. The Company has outsourced production of these products to overseas vendors.
Pyrex(R). Pyrex products are made of tempered soda lime glass and are available in a number of colors, shapes and sizes for a variety of cooking functions. The Company's Pyrex products comprise six sub-brands: Pyrex Bakeware, Pyrex Prepware, Pyrex Storage, Pyrex Storage Deluxe, Pyrex Portables and Pyrex Servware. The Pyrex brands are currently manufactured at the Company's Charleroi, Pennsylvania facility.
EKCO(R). EKCO products consist of a broad line of uncoated bakeware products including cookie sheets, muffin tins, brownie pans, loaf pans and similar items.
Baker's Secret(R). Baker's Secret products consist of a broad line of metal non-stick coated and insulated "no burn" bakeware items. These products are produced at the Company's Massillon, Ohio facility.
DINNERWARE Corelle(R). Corelle, the Company's dinnerware product line developed in 1971, is produced using a proprietary manufacturing process. This manufacturing process combines three layers of glass and allows the Company to manufacture a dinnerware that is durable and break/chip resistant, as well as light, thin and stackable. Corelle products are produced in the Company's Corning, New York facility.
Other Dinnerware. Corelle(R) cups and mugs are produced in a process which involves pressing and glazing the shapes.
The Company also manufactures a glass tableware product through a pressing process sold in channels similar to those of the Corelle line. Corelle mugs are also produced from a glass ceramic substrate through a pressing process to yield a durable and aesthetically pleasing product.
RANGETOP COOKWARE Revere Ware(R). The Company's Revere Ware brand products include stainless steel, hard anodized and aluminum non-stick cookware that is sourced from global manufacturers.
The Company's Revere Ware stainless steel cookware products comprise a number of lines including the traditional Revere Copper Clad(TM) and TriPly Bottom(TM), Revere Copper Cuisine(TM), Revere Chef's Supreme(TM), Revere Gourmet Solutions(TM) and ProLine(TM) by Revere sub brands. Certain Revere Gourmet Solutions(TM) products feature patented double pour spouts and colander covers for convenient pouring and straining. ProLine(TM) by Revere Cookware is a professional quality, stainless steel product that competes at higher price points. Other Revere product lines include Revere Chef's Preference(TM), Revere Liberation(TM), and Revere Culinary Advantage(TM), which all include non-stick aluminum construction, pour spouts and straining lids, and Ultra Glide(TM) by Revere, which is a line of non-stick aluminum skillets.
EKCO(R). EKCO brand products include stainless steel and aluminum cookware that is sourced from third-party manufacturers. The Company's EKCO brand of stainless steel products are comprised of the EKCO Endura(TM), the EKCO Eterna
line, EKCO Copperelle(TM) and EKCO. The Company's EKCO brand of non-stick aluminum products comprise the EKCO Resolutions(TM) line, the EKCO Radiance(TM) line and the EKCO Generations(TM) line. The EKCO product lines are marketed through multiple channels of distribution.
Visions(R). Introduced in the United States in 1982, Visions products are made with a translucent pyroceram material that allows customers to see what they are cooking. The Company manages Visions as a specialty line and markets Visions products in areas where water-based cooking and simmering are relevant to a market's or community's culture. The Visions product line is currently being phased out in the United States and will be marketed largely in Asia in 2002.
Magnalite. The Company's Magnalite brand products consist of a line of cast aluminum cookware, Magnalite Classic, that is sourced from global manufacturers. Magnalite Classic couples the benefit of even heat distribution with extraordinary durability.
KITCHEN AND HOUSEHOLD TOOLS The Company markets and sells a broad line of kitchenware products, which it sources from third parties. The products include the following: kitchen tools and gadgets such as spoons, spatulas, ladles, peelers, corkscrews, whisks, can openers and similar cooking accessories items, marketed under the EKCO, Baker's Secret and Revere trademarks; stainless steel and porcelain-on-steel kettles and carafes under the EKCO and Corelle Coordinates trademarks; and cookware under the EKCO trademark. The Company's marketing program employs a "good, better, best" strategy, which the Company feels clearly defines packaging and product design. EKCO products are classified as "good", EKCO PRO products are classified as "better", and Revere products are classified as "best".
OXO(R). The Company markets a broad line of kitchen and household tools under the OXO Good Grips(R), OXO Softworks(TM), OXO Touchables(TM), OXO Basics(TM) and OXO Grind IT brand names. The OXO brand products are developed in the United States and sourced from global manufacturers. WKI has been expanding its assortment of OXO brand products from kitchen tools to household cleaning tools, gardening tools, hand tools and automotive cleaning tools. Many of the kitchen/household tools sold by WKI under the OXO brand utilize a proprietary handle, which is covered by patents owned by the Company that run through December 2007. OXO brand products are distributed primarily in the United States through department stores, gourmet and specialty outlets and mass merchants.
CUTLERY The company markets four brands of Cutlery; Chicago Cutlery(R), Revere(R), Regent Sheffield(R) and Wiltshire(R).
The Chicago Cutlery brand has a multi-channel marketing strategy and is sold to consumers through most trade channels ranging from department specialty stores to mass-channel retailers. Key differentiating features such as the exclusive Taper Grind(R) edge allows for maximum sharpness and easy blade maintenance. This feature combined with unique ergonomic handle designs enables Chicago Cutlery to also compete and market a full line of commercial food processing knives for the meat and poultry processing industries. In September 2001, the Wauconda manufacturing facility, which produced some of the Chicago Cutlery brands, was closed and all manufacturing and packaging was outsourced.
Revere Cutlery was introduced in 2001. This new line is targeted to mass channel retailers. The product assortment is positioned and sold as a "Good & Better" alternative to department specialty and mass channel retailers.
Regent Sheffield and Wiltshire are licensed brand names from Richardson Sheffield LTD for distribution in the United States, South America and Canada. These two brands have their primary distribution base in the Canadian market where they are sold through all class channels with a broad positioning strategy.
OTHER The Company's "Other" sales include selected kitchen accessories manufactured by third parties that are primarily sold through the Company-operated factory stores. Also included in "Other" are OLFA precision cutting tools and accessories that are sold to industrial users and through distributors as well as directly to hobby, craft, hardware and fabric stores. "Other" also includes the cleaning products line which the Company decided to exit in 1999.
NEW PRODUCT DEVELOPMENT New products are developed using a cross functional process of both internal company resources as well as external design and manufacturing firms. New products are funded based upon a comprehensive business plan that incorporates qualitative and quantitative research to leverage the brands' core equity from the consumer's perspective. New product programs are executed using cross functional teams and a disciplined management review process.
MARKETING AND DISTRIBUTION The Company's products are sold in the United States and in over 90 foreign countries. In the United States (which accounted for approximately 80% of the Company's net sales in 2001), the Company sells both on a wholesale basis to retailers, distributors and other accounts that resell the Company's products and on a retail basis through Company-operated factory stores.
DOMESTIC WHOLESALE In the United States, the Company sells to approximately 2,800 customers consisting of mass merchants, department stores and specialty retailers, as well as through other channels, including retail food stores, hardware stores, drug stores and catalog showrooms.
DOMESTIC RETAIL The Company operates 140 factory stores in 40 states, located primarily in outlet malls. The Company's factory stores, which carry an extensive range of the Company's products, enable the Company to participate in broader distribution and to profitably sell slower-moving inventory. The Company believes that its factory stores, which also sell complementary kitchen accessories, have developed marketing and pricing strategies that generate sales that supplement, rather than compete with, its wholesale customers. The Company-operated factory stores also promote and strengthen the Company's brands, enabling the Company to provide customers a broader assortment of products beyond those that are commonly stocked by third party retailers.
INTERNATIONAL The Company's international sales force, together with localized distribution and marketing capabilities, have allowed the Company to become an established marketer of bakeware and dinnerware in Canada, Korea, Australia, Japan, Singapore, Taiwan, Hong Kong and Mexico. Internationally, the Company sells through a network of distributors as well as directly to customers made up primarily of mass merchants, supermarkets, hypermarkets, department stores and specialty retailers, informal and traditional markets as well as it's own Company-operated factory stores in Australia and Canada.
SALES The Company's domestic customers are served by a combination of Company salespeople and independent, commissioned representatives. The Company's top 100 accounts are serviced by the Company's direct sales force teams, each consisting of four or five salespeople which are organized (i) by account, for the Company's most significant customers and (ii) by four channel teams, focusing on department stores, specialty stores, regional mass merchandisers, and clubs, hardware and food/continuity. The teams are directly accountable for revenues, allowances and promotional spending Members of the sales teams regularly call on the Company's customers to develop an in-depth understanding of each customer's competitive environment and opportunities. Smaller wholesale accounts are serviced by approximately 40 independent, commissioned sales representatives. The Company's international sales force, with personnel located in twelve countries, work with local retailers and distributors to optimize product assortment, consumer promotions and advertising for local preferences.
MARKETING SUPPORT The Company provides its customers with marketing support. The Company conducts research on housewares industry trends, including consumer demographics. The Company is also known for its category management skills in determining the optimal planogram layout.
COMPETITION The market for the Company's products is highly competitive and the housewares industry is trending toward consolidation. Competition in the United States is affected not only by domestic manufacturers but also by the large volume of foreign imports. The Company has experienced increased competition in the U.S. from low-cost Far-Eastern competitors and expects this trend to continue in the future. The market for housewares outside the U.S. and Europe is relatively fragmented and differs by country and region. Internationally, depending on the country or region, the Company competes with other U.S. companies operating abroad, locally manufactured goods and international companies competing in the worldwide bakeware, dinnerware and rangetop cookware categories.
A number of factors affect competition in the sale of the Company's products, including, but not limited to quality, price competition and price point parameters established by the Company's various distribution channels. Shelf space is a key factor in determining retail sales of bakeware, dinnerware and rangetop cookware products. A competitor that is able to maintain or increase the amount of retail space allocated to its product may gain a competitive advantage for that product. In addition, new product introductions are an important factor in the categories in which the Company's products compete. Other important competitive factors are brand identification, style, design, packaging and the level of service provided to customers.
The Company has, from time to time, experienced price and market share pressure from certain competitors in certain product lines, particularly in the bakeware category where metal products of competitors have created retailer price and margin pressures, and in the rangetop cookware category where non-stick aluminum products have increased their share of rangetop cookware sales at the expense of stainless steel products due to the durability and ease of cleaning of new non-stick coatings.
The importance of these competitive factors varies from customer to customer and from product to product.
SEASONAL BUSINESS While seasonal variation in demand is not a large factor in the Company's business, there is a general increase in sales demand in the second half of the year. The fourth quarter typically accounts for approximately 40% of the
Company's earnings as a result of increased consumer spending during the holiday shopping season. This trend was less evident in 2001 due to the economic downturn in the fourth quarter.
CUSTOMERS In the United States, the Company sells to approximately 2,800 customers made up primarily of mass merchants, department stores and specialty retailers, as well as through other channels, including retail food stores, hardware stores, drug stores, catalog showrooms and its Company-operated factory stores. For 2001, sales to the largest five customers accounted for over 36% of the Company's gross sales. In 2001, 2000 and 1999, Wal-Mart Stores, Inc. accounted for approximately 21%, 15% and 16%, respectively, of the Company's gross sales.
In January 2002, Kmart Corporation (Kmart), one of the Company's top five customers, filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. In its filings, the Company indicated that it will reorganize on a fast track basis and has targeted emergence from Chapter 11 in 2003. As a result of this action, the Company evaluated its current exposure and recorded an $8.3 million bad debt reserve based on an estimate of the collectibility of pre-petition accounts receivable. In addition, the Company has re-established new credit terms with Kmart and is managing its exposure closely on a go-forward basis. Company sales to Kmart in 2001 totaled approximately $57 million. Of this amount, approximately 36% of WKI products sold through an arrangement with Martha Stewart Living Omnimedia LLC. Under this contract, the Company can sell its Martha Stewart line only to specified vendors, which currently includes Kmart. Kmart has announced the closure of approximately 280 stores as part of its reorganization program. The Company continues to monitor these initiatives but cannot estimate the ultimate impact they will have on future results of operations.
MANUFACTURING AND RAW MATERIALS Sand, soda ash, borax, limestone, lithia-containing spars, alumina, cullet, stainless steel, plastic compounds, hardwood products, tin plate steel-copper and corrugated packaging materials are the principal raw materials used by the Company. The Company purchases its raw materials on the spot market and through long-term contracts with suppliers. All of these materials are available from various suppliers and the Company is not limited to any single supplier for any of these materials. Management believes that adequate quantities of these materials are and will continue to be available from various suppliers. The Company's molded plastic products and certain components of its kitchenware and household tools products are manufactured from plastic resin, which is produced from petroleum-based raw materials. Plastic resin prices may fluctuate as a result of changes in natural gas and crude oil prices and the capacity, supply and demand for resin and the petrochemical intermediates from which it is produced.
The melting units operated by the Company require either electric or natural gas energy input. Back-up procedures and systems to replace the primary source of these energy inputs are in place in each of the Company's relevant facilities. Ongoing programs exist within each of the Company's glass melting facilities to reduce energy consumption. Furthermore, rates for electric and natural gas energy have been fixed contractually in many of the Company's plants to avoid the negative impact of market fluctuations in prices. The Company does not engage in any hedging activities for commodity trading relating to its supply of raw materials.
The Company currently manufactures its finished goods in its own facilities and purchases finished goods from various vendors in Asia, Europe and Mexico. A trend towards outsourcing of manufactured products will continue into 2002, most significantly with the outsourcing of the Corningware and Visions product lines after the closure of the Company's Martinsburg, West Virginia facility. The
Company believes that alternative sources of supply at competitive prices are available from other manufacturers of substantially identical products.
The replacement of finished goods suppliers could give rise to certain transition risks, such as interruptions in supply and quality issues that are outside of the Company's control and could have a temporary adverse effect on the Company's operations and financial performance. In addition, significant increases in the cost of any of the Company's principal raw materials could have a material adverse effect on results of operations.
PATENTS AND TRADEMARKS The Company owns numerous United States and foreign trademarks and trade names and has applications for the registration of trademarks and trade names pending in the United States and abroad. The Company's most significant owned trademarks and/or trade names include Corelle(R), Revere(R), Revere Ware(R), Visions(R), EKCO(R), Baker's Secret(R), Chicago Cutlery(R), Good Grips(R) and OXO(R). Other significant trademarks used by the Company are Corningware(R), Pyrex(R), Farberware(R), and Regent Sheffield(R). Upon the consummation of the Recapitalization on April 1, 1998, Corning granted to the Company fully paid, royalty-free licenses to use the Corningware(R) trademark, servicemark and tradename and the Pyroceram(R) trademark in the field of housewares and to use the Pyrex(R) and Visions(R) trademark in the fields of housewares and durable consumer products. These exclusive licenses provide for indefinite renewable ten-year terms. Pyrex(R) licenses are subject to the prior exclusive licenses granted to Newell, a significant competitor of the Company in the United States, and certain of its subsidiaries to distribute in Europe, Russia, the Middle East and Africa. In addition, in connection with the Recapitalization, the Company entered into a license agreement with Corning under which the Company was able to use "Corning" in connection with the Company's business until April 1, 2001(or up to five years in the case of certain molds used in the manufacturing process). The Company has extended this license for one year, expiring April 1, 2002, as it relates to the use of the name "Corning Revere Factory Stores". At this time the Company will begin to use the name "Corningware Corelle Revere Factory Stores."
The Company also owns and has the exclusive right to use numerous United States and foreign patents, and has patent applications pending in the United States and abroad. In addition to its patent portfolio, the Company possesses a wide array of un-patented proprietary technology and knowledge. The Company also licenses certain intellectual property rights to or from third parties.
Concurrent with the Recapitalization, Corning granted to the Company a fully paid, royalty-free license of patents and know-how (including evolutionary improvements) owned by Corning that pertain to or have been used in the Company's business. Furthermore, the Company and Corning entered into a five-year technology support agreement (renewable at the option of the Company for an additional five years), pursuant to which Corning will provide to the Company (at the Company's option) engineering, manufacturing technology, and research and development services, among others, at Corning's standard internal rates.
The Company believes that its patents, trademarks, trade names, service marks and other proprietary rights are important to the development and conduct of its business and the marketing of its products. As such, the Company vigorously protects its intellectual property rights.
ENVIRONMENTAL MATTERS The Company's facilities and operations are subject to certain federal, state, local and foreign laws and regulations relating to environmental protection and human health and safety, including those governing wastewater discharges, air emissions, and the use, generation, storage, treatment, transportation and disposal of hazardous and non-hazardous materials and wastes and the remediation of contamination associated with such disposal. Because of the nature of its
business, the Company has incurred, and will continue to incur, capital and operating expenditures and other costs in complying with and resolving liabilities under such laws and regulations.
Certain of the Company's facilities have lengthy manufacturing histories and, over such time, have used or generated and disposed of substances, which are or may be considered hazardous. Pursuant to the terms and conditions of the Recapitalization, Corning has agreed to indemnify the Company for certain costs and expenses that may be incurred in the future by the Company arising from pre-Recapitalization environmental events, conditions or matters and as to which notice is provided within specified time periods. Corning has agreed to indemnify the Company for (i) 80% of such costs and expenses up to an aggregate of $20.0 million and (ii) 100% of such costs and expenses in excess of $20.0 million. The indemnification agreement expires on April 1, 2005.
The Company has announced its intention to shut down the Martinsburg facility as part of a broader program of restructuring activities (See Item 7 - Restructuring and Rationalization) and intends to sell the building and assets related to this property. The Company is currently working with environmental experts and representatives from state agencies to assess potential remediation requirements. The Company has also contacted Corning seeking reimbursement of its share of proposed expenditures under the environmental indemnification agreement mentioned above.
In 1999, the Ohio Environmental Protection Agency (Ohio EPA) notified the Company that its Massillon, Ohio manufacturing facility was in violation of certain federal and state clean air act regulations. In December 2000, the Company submitted a proposal listing pollution control alternatives for review by the state. The Company is currently in discussion with the State regarding various proposals and believes it is in compliance with current regulations. Should the Company be required to implement the control regulations proposed by the Ohio EPA, the Company estimates the cost of certain capital improvements to be approximately $1.2 million.
It is the Company's policy to accrue for remediation costs when it is probable that such costs will be incurred and when a range of loss can be reasonably estimated. The Company has accrued approximately $3.8 million at December 31, 2001 for probable environmental remediation and restoration liabilities. This is management's best estimate of these liabilities. Based on currently available information and analysis, the Company believes that it is reasonably possible that costs associated with such liabilities or as yet unknown liabilities may exceed current reserves in amounts or a range of amounts that cannot be estimated as of December 31, 2001. There can be no assurance that activities at these or any other facilities or future facilities may not result in additional environmental claims being asserted against the Company or additional investigations or remedial actions being required.
GOVERNMENTAL REGULATIONS The Company is subject to various federal, state and local laws affecting its business, including various environmental, health, fire and safety standards. See "Environmental Matters." The Company is also subject to the Fair Labor Standards Act and various state laws governing such matters as minimum wage requirements, overtime and other working conditions and citizenship requirements. The Company believes that its operations are in material compliance with applicable laws and regulations.
EMPLOYEES At December 31, 2001, the Company had approximately 4,200 employees worldwide, approximately 40% of which were covered by collective bargaining agreements. Approximately 6% of international employees are covered by union contracts. All collective bargaining agreements expire after December 31, 2002.
OTHER Additional information in response to Item 1 relating to geographic information is found in Note 14 to the Consolidated Financial Statements.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" and other intangibles for certain forward-looking statements. The factors discussed below, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this report, including without limitation, in "Management's Discussion and Analysis of Financial Condition and Results of Operations," in the Company's related press releases and in oral statements made by authorized officers of the Company. When used in this report, any press release or oral statement, the words "looking forward," "estimate," "project," "anticipate," "expect," "intend," "believe" and similar expressions are intended to identify a forward-looking statement. Forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors (many of which are beyond the Company's control) that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. The forward-looking statements regarding such matters are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances. Whether actual results and developments will conform with the Company's expectations and predictions, however, is subject to a number of risks and uncertainties, including the Company's ability to obtain a waiver of default under the terms of its existing credit facilities; the Company's ability to obtain additional sources of liquidity; a continuance of the global economic slowdown in any one, or all, of the Company's sales categories; loss of sales as the Company streamlines and focuses on strategic accounts; continuing weakness in the retail sector, such as the bankruptcy of Kmart; loss of shelf space at a key customer; unpredictable difficulties or delays in the development of new product programs; increasing reliance on third party manufacturers; increased difficulties in obtaining a consistent supply of basic raw materials and energy inputs at stable pricing levels; technological shifts away from the Company's technologies and core competencies; unforeseen interruptions to the Company's business with its largest customers resulting from, but not limited to, the continuation of the current economic downturn; financial instabilities or inventory excesses; the effects of extreme changes in monetary and fiscal policies in the United States and abroad, including extreme currency fluctuations and unforeseen inflationary pressures; drastic and unforeseen price pressures on the Company's products or significant cost increases that cannot be recovered through price increases or productivity improvements; significant changes in interest rates or in the availability of financing for the Company or certain of its customers; loss of any material intellectual property rights; any difficulties in obtaining or retaining the management or other human resource competencies that the Company needs to achieve its business objectives; acceptance of product changes by the consumer; and other factors, many of which are beyond the control of the Company. Consequently, all of the forward-looking statements made in this Form 10-K are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequences to or effects on the Company and its subsidiaries or their business or operations.
ITEM 2
ITEM 2 - PROPERTIES - -------------------
WKI utilizes five primary manufacturing facilities (four in the United States and one outside of the United States) and nine principal packaging and distribution centers (five in the United States and four outside of the United States). The Company's facilities are generally well maintained. The table below summarizes certain data for each of the Company's principal properties, including its manufacturing and distribution facilities:
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS - --------------------------
Litigation
WKI has been engaged in, and will continue to be engaged in, the defense of product liability claims related to products, particularly the bakeware and cookware product lines. The Company maintains product liability coverage, subject to certain deductibles and maximum coverage levels that the Company believes is adequate and in accordance with industry standards.
In addition to product liability claims, from time to time the Company is involved in various legal actions in the ordinary course of business. The Company believes, based upon information it currently possesses, and taking into account established reserves for estimated liabilities and its insurance coverage, that the ultimate outcome of the proceedings and actions is unlikely to have a material adverse effect on the Company's financial statements. It is reasonably possible, however, that some matters could be decided unfavorably to the Company and could require the Company to pay damages, or make other expenditures in amounts or a range of amounts that cannot be estimated as of December 31, 2001.
Environmental Matters
The Company's facilities and operations are subject to certain federal, state, local and foreign laws and regulations relating to environmental protection and human health and safety, including those governing wastewater discharges, air emissions, and the use, generation, storage, treatment, transportation and disposal of hazardous and non-hazardous materials and wastes and the remediation of contamination associated with such disposal. Because of the nature of its business, the Company has incurred, and will continue to incur, capital and operating expenditures and other costs in complying with and resolving liabilities under such laws and regulations.
Certain of the Company's facilities have lengthy manufacturing histories and, over such time, have used or generated and disposed of substances, which are or may be considered hazardous. Pursuant to the terms and conditions of the Recapitalization, Corning has agreed to indemnify the Company for certain costs and expenses that may be incurred in the future by the Company arising from pre-Recapitalization environmental events, conditions or matters and as to which notice is provided within specified time periods. Corning has agreed to indemnify the Company for (i) 80% of such costs and expenses up to an aggregate of $20.0 million and (ii) 100% of such costs and expenses in excess of $20.0 million. The indemnification agreement expires on April 1, 2005.
The Company has announced its intention to shut down the Martinsburg facility as part of a broader program of restructuring activities (See Item 7 - Restructuring and Rationalization) and intends to sell the building and assets related to this property. The Company is currently working with environmental experts and representatives from state agencies to assess potential remediation requirements. The Company has also contacted Corning indicating it will seek reimbursement of proposed expenditures under the environmental indemnification agreement mentioned above.
In 1999 the Ohio Environmental Protection Agency (Ohio EPA) notified the Company that its Massillon, Ohio manufacturing facility was in violation of certain federal and state clean air act regulations. In December 2000, the Company submitted a proposal listing pollution control alternatives for review by the state. The Company is currently in discussion with the State regarding various proposals and believes it is in compliance with current regulations. Should the Company be required to implement the control regulations proposed by the Ohio EPA, the Company estimates the cost of certain capital improvements to be approximately $1.2 million.
It is the Company's policy to accrue for remediation costs when it is probable that such costs will be incurred and when a range of loss can be reasonably estimated. The Company has accrued approximately $3.8 million at December 31, 2001 for probable environmental remediation and restoration liabilities. This is management's best estimate of these liabilities. Based on currently available information and analysis, the Company believes that it is reasonably possible that costs associated with such liabilities or as yet unknown liabilities may exceed current reserves in amounts or a range of amounts that cannot be estimated as of December 31, 2001. There can be no assurance that activities at these or any other facilities or future facilities may not result in additional environmental claims being asserted against the Company or additional investigations or remedial actions being required.
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------
On February 7, 2001, the Company's Board of Directors was elected in its entirety by majority vote of the Company's shareholders.
PART II
ITEM 5
ITEM 5 - MARKET FOR THE REGISTRANTS' COMMON STOCK AND RELATED STOCKHOLDER - ------------------------------------------------------------------------- MATTERS - -------
The Company's authorized common stock consists of 80,000,000 shares with a par value of $0.01 per share, 68,910,716 of which were issued and outstanding at December 31, 2001. As of March 28, 2002 there were approximately 22 holders of record of the Company's common stock. No shares of such common stock trade on any exchange or are quoted on any automated quotation system. No dividends were declared on common stock during 2001. Moreover, the Company would not currently be permitted to make dividend payments under its credit facilities.
ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - -------------------------------------------------------------------------------- OF OPERATIONS - -------------
This discussion and analysis should be read in conjunction with the Company's consolidated financial statements and related notes included elsewhere in this report.
BACKGROUND - ----------
WKI Holding Company Inc. (the Company or WKI) is a leading manufacturer and marketer of bakeware, rangetop cookware, kitchen and household tools, tabletop dinnerware, cutlery, and precision cutting tools. The Company has strong positions in major channels of distribution for its products in North America, and has also achieved a significant presence in certain international markets, primarily Asia, Australia, and Latin America. In North America, the Company sells both on a wholesale basis to retailers, distributors and other accounts that resell the Company's products, and on a retail basis, through Company-operated factory stores. In the international market, the Company has established its presence on a wholesale basis through an international sales force coupled with localized distribution and marketing capabilities.
In January 2001, the Company announced Steven G. Lamb as its new President and Chief Executive Officer. In addition, in 2001, the WKI Board of Directors approved plans to restructure several aspects of the Company's manufacturing and distribution operations and consolidate certain administrative functions. These measures resulted in a restructuring charge of $51.9 million and rationalization expenses of $18.5 million in 2001. (See Restructuring and Rationalization Programs). On April 12, 2001, the Company entered into the Amended and Restated Credit Agreement (the "Amended Credit Agreement"), which provided for an additional secured revolving credit facility of $25.0 million maturing on March 31, 2004.
The Company has incurred substantial losses applicable to common shares in each of the last three fiscal years, has had operating losses in each of the last three fiscal years, has had negative cash flow from operations in fiscal 2000 and 1999 and has a significant stockholders' deficit at December 31, 2001. These losses and cash flow deficiencies were primarily caused by interest expense on substantial indebtedness, restructuring and rationalization expenses, integration and transaction related expenses resulting from the 1999 acquisitions of EKCO and GHC, issues arising from the 1999 enterprise-wide systems implementation, consolidation of distributions centers and a weak U.S. economy in the latter part of 2001.
The general U.S. economic downturn experienced during 2001 significantly impacted consumer confidence which adversely impacted customer purchase behavior in several of the Company's key channels. This economic downturn has affected and is expected to continue to negatively impact the financial condition and results of operations of the Company. In addition, Kmart, a key WKI customer, declared bankruptcy in January 2002. As a result, the Company assessed the collectibility of its receivable from Kmart and recorded an $8.3 million charge in December 2001.
At December 31, 2001, the Company was not in compliance with certain financial covenants contained in the Amended Credit Agreement. The Company, and the covenants within its credit facilities, measures operating results using earnings before interest, taxes, depreciation and amortization as adjusted for certain restructuring, rationalization, integration and transaction costs (Adjusted EBITDA). The Company did not meet the minimum Adjusted EBITDA, ratio of debt to Adjusted EBITDA and ratio of Adjusted EBITDA to cash interest expense covenants. The default under the senior credit facility as of December 31, 2001, also results in a default under the Borden facility. Accordingly, the holders of the Company's senior credit facilities and Borden have the right to accelerate the maturity of all of the outstanding indebtedness under the respective agreements, which together totals approximately $609.0 million. The holders of the $200.0 million aggregate principal amount of 9 5/8% Notes have the right to accelerate the maturity of their notes if the banks and/or Borden accelerate their payments. The Company does not presently have the ability to fund or refinance the accelerated maturity of this indebtedness. (See Liquidity and Capital Resources). In light of the above, the Company has reclassified the
long term portion of the senior credit facilities, the Borden facility and the 9 5/8% Notes to short term debt on the Consolidated Balance Sheet as of December 31, 2001.
At December 31, 2001, the Company had fully utilized its $300.0 million senior revolving credit facility and $25.0 million Borden revolving credit facility and had cash available of $66.8 million.
On March 28, 2002 the Company obtained temporary waivers of these and other covenant defaults from its bank syndicate and Borden. By their terms, these waivers terminate on the earliest of (i) May 30, 2002, (ii) the date on which the cash level falls below $20.0 million or the Company delivers to the agent for the bank syndicate a certificate indicating that it projects its cash level to fall below $20 million, (iii) the date on which the Company makes any payment in respect of interest or principal on the 9 5/8% Notes, (iv) the date on which the Company informs its agent for the bank syndicate that the Company intends to make such a payment on the 9 5/8% Notes, and (v) the date the Company prepays any loans under the Borden Facility. In addition, the Borden waiver terminates on the first date the lenders or the Administrative Agent under the Amended Credit Agreement take any action to accelerate the loans thereunder or to exercise any other remedies under the "Loan Documents."
The next scheduled interest payment on the 9 5/8% Notes is due May 1, 2002. The Company currently does not anticipate making this payment as making the payment would cause the waiver of the bank covenant defaults to expire. If the Company does fail to make the interest payments, a new event of default will occur under the senior credit facility and the Borden Facility after the expiration of the applicable grace period. The Company has engaged financial advisors and is discussing various options with its bank syndicate to develop a long-term financial restructuring plan, including resolution of the defaults under the Amended Credit Agreement that will exist after the expiration of the waiver. As part of those discussions, the Company is pursuing opportunities for restructuring its indebtedness and its capital structure. In the event the Company and its lenders are unable to reach an agreement on a restructuring plan that enables the Company to meet its debt obligations, including the interest payment on the 9 5/8% Notes, the Company would need to explore other alternatives, which could include a potential reorganization or restructuring under the bankruptcy laws.
Due to the Company's continuing inability to comply with its covenants under the Amended Credit Agreement, the temporary nature of the waiver the Company obtained from its bank syndicate, the Company's history of losses and stockholders' deficit, there is substantial doubt as to the Company's ability to continue as a going concern. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or liabilities, other than the reclassification of debt to short term, that may result from the outcome of these uncertainties.
RESTRUCTURING, RATIONALIZATION AND INTEGRATION PROGRAMS - -------------------------------------------------------
Over the last three years, the Company has taken a number of initiatives to restructure its manufacturing and supply organization as part of its effort to reduce costs. This included the integration of EKCO and GHC into the Company.
In 1999, the Company initiated a plan to restructure its manufacturing and supply chain organization to reduce costs through the elimination of under-utilized capacity, unprofitable product lines and increased utilization of the remaining facilities. The changes improved the Company's ability to compete by opening up diverse sources of supply both in the United States and internationally. The 1999 restructuring included the discontinuation of the commercial tableware product line and closure of the related portion of the Company's manufacturing facility in Charleroi, Pennsylvania. In order to improve the utilization of the Charleroi facility, the Company moved Corelle cup production to its Martinsburg, West Virginia facility and to third party suppliers. The Company terminated its supply contract with Corning's Greenville, Ohio facility and Pyrex(R) production was consolidated at the Charleroi facility. Additionally, the Company discontinued manufacturing and distributing rangetop cookware and closed its manufacturing and distribution center in Clinton, Illinois. The Company's supply of rangetop cookware is being
sourced from third party manufacturers. In 1999, cash and non-cash elements of the restructuring charge approximated $18.2 million and $50.8 million, respectively. The Company spent $3.9 million in 2000 and $10.2 million in 1999 on the program.
In addition, the Company began the integration of EKCO and GHC into its existing business to gain administrative efficiencies and eliminate redundant costs. The Company recorded $9.2 million of expense in 1999 related to legal fees, tax and accounting services, employee compensation arrangements, facility consolidation and other integration costs.
Integration and transaction activities continued on into 2000. Integration related expenses of $26.6 million were recorded. These expenses consisted primarily of systems implementation costs, employee compensation arrangements and other benefits (such as severance, retention, outplacement, etc.), consulting services and other integration costs.
In 2001, the WKI Board of Directors approved a plan to restructure several aspects of the Company's manufacturing and distribution operations. In addition, the Company implemented several employee headcount reduction initiatives as part of the continuing business realignment and integration efforts begun in 1999 with the acquisitions of EKCO and GHC.
These programs resulted in a restructuring charge of $51.9 million, which was recorded during 2001.
In addition, $18.5 million of rationalization and other charges were recorded related to the implementation of these programs. These charges arise as a result of the Company's restructuring programs and are excluded in the computation of the Company's Adjusted EBITDA under the Amended Credit Agreement that provides for the achievement of quarterly Adjusted EBITDA targets. Generally, these costs were recorded as incurred in operating income ($13.2 million in selling, general and administrative expenses and $5.3 million in cost of sales.)
The restructuring programs include the following initiatives:
(1) The outsourcing of Corningware and Visions product lines in an effort to reduce costs while maintaining and enhancing product quality and customer satisfaction. This program will require the shutdown of the Martinsburg, West Virginia facility (Martinsburg) that is scheduled to occur in the first quarter of 2002. Closing this facility will eliminate under-utilized assets and reduce fixed costs while improving the Company's leverage buying opportunities.
(2) The outsourcing of the Chicago Cutlery product lines in an effort to reduce costs while maintaining and enhancing product quality and customer satisfaction. This product was previously produced at the Company's Wauconda, Illinois facility (Wauconda), which was idled at the end of September 2001 and sold in December 2001.
(3) The consolidation of warehousing and distribution operations at Waynesboro, Virginia and Plainfield, Indiana into the Company's state of the art distribution centers located in Monee, Illinois and Greencastle, Pennsylvania. This consolidation is expected to occur in the second quarter of 2002. This project will also reduce fixed costs as well as improve inventory management and customer service levels.
(4) The realignment of the production process at the metal bakeware manufacturing facility at Massillon, Ohio. The Company determined that streamlining the manufacturing and converting processes would improve productivity and reduce headcount.
(5) The consolidation of certain international sales and marketing and distribution operations in Canada and the United Kingdom, which occurred at the end of 2001 and in January 2002, respectively.
(6) The continuation of organizational redesign activities led to significant employee headcount reductions as a result of rationalizing staff and business support functions, upgrading key capabilities and centralizing executive administrative offices in Reston, Virginia.
The Company plans to spend approximately $15 million (net of estimated proceeds related to asset sales on closed facilities) in 2002, to pay for accrued severance and environmental costs and to fund the remaining rationalization expenses related to outsourced product development and office relocation.
CRITICAL ACCOUNTING POLICIES - ----------------------------
Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the consolidated financial statements of World Kitchen, which have been prepared in conformity with accounting principles generally accepted in the United States. The application of these principles requires that in certain instances management make estimates and assumptions regarding future events that impact the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Predicting future events is inherently an imprecise activity and as such requires the use of judgment. On an ongoing basis, management reviews the basis for its estimates and will make adjustments based on historical experience or other factors that it considers to be reasonable under the circumstances. There can be no assurance that actual results will not differ from those estimates.
The most significant accounting estimates inherent in the preparation of the Company's consolidated financial statements include estimates related to testing for the impairment of assets, recording of sales adjustments, including returns and allowances and bad debts, and quantifying and reserving for excess and obsolete inventories. In addition, a significant amount of judgment exists in defining income tax valuation allowances, restructuring charges and post-retirement and welfare plan valuations. The process of determining estimates is based on several factors, including historical experience, current and anticipated economic conditions, customer profiles and accepted actuarial valuation techniques. The Company continually reevaluates these key factors and makes adjustments to estimates where appropriate.
Management believes that the following critical accounting policies, among others, inherently require significant judgment in the estimation process.
Impairment of long-lived and intangible assets and goodwill
Under the requirements of Statement of Financial Accounting Standards (SFAS) No.121, the Company assesses the potential impairment of identifiable intangibles, long-lived assets and acquired goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In performing this evaluation, the Company evaluated current and future economic and business trends to develop business forecasts of future performance and related cash flows. Such estimates require the use of judgment and numerous subjective assumptions. On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," and will be required to analyze its goodwill for impairment using a new methodology, during the first six months of fiscal 2002, and then on a periodic basis thereafter. The Company has not determined the impact of implementing FAS 142 and there can be no assurance that at the time the review is completed a material impairment charge will not be recorded. During the year ended December 31, 2001, the Company did not record
any impairment losses related to goodwill and other intangible assets, but recorded an impairment charge of $26.5 million to reflect the net realizable of fixed assets to be sold or scrapped under its restructuring programs.
Sales returns and allowances, bad debts
The estimation of product returns and deductions for customer allowances, including rebates, incentives and other promotional payments, requires that the Company make estimates regarding the amount and timing of future returns and deductions. These estimates are based on historical return rates, current economic trends and changes in customer demand and product acceptance. Significant management judgment is used in establishing accruals for sales returns and other allowances in any given accounting period. In addition, the Company uses estimates in determining the collectibility of its accounts receivable and must rely on its evaluation of historical bad debts, customer concentration, customer credit ratings, current economic trends and changes in customer payment terms to arrive at appropriate reserves. Material differences may result in the amount and timing of earnings if actual experience differs significantly from management estimates.
Excess and obsolete inventory reserves
The Company records inventory on a first-in, first-out basis and records adjustments to the value of this inventory in situations where it appears that the Company will not be able to recover the cost of the product. This lower of cost or market analysis is based on the Company's estimate of forecasted demand by customer by product. A decrease in product demand due to changing customer tastes, consumer buying patterns or loss of shelf space to competitors could significantly impact the Company's evaluation of its excess and obsolete inventories.
The above listing is not intended to be a comprehensive list of all of the Company's accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States. There are also areas in which the Company's judgment in selecting an available accounting alternative would not produce a materially different result. The Company's accounting policies are more fully described in Item 8