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 September 29, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-17237
HOME PRODUCTS INTERNATIONAL, INC.
------------------------------------------------------
(Exact name of registrant as specified in its Charter)
Delaware 36-4147027
------------------------------- -------------------
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
4501 West 47th Street
Chicago, Illinois 60632
--------------------- ----------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number including area code (773) 890-1010.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Common shares, par value $0.01, outstanding
as of November 3, 2001 - 7,773,142
HOME PRODUCTS INTERNATIONAL, INC.
INDEX
Page
Number
------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of
Operations and Retained Earnings 4
Condensed Consolidated Statements of
Cash Flows 5
Notes to Condensed Consolidated Financial 6
Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 19
Part II. Other Information
Items 1 through 5 are not applicable
Item 6. Exhibits and Reports on Form 8-K 21
Signature 22
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HOME PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
(unaudited)
September 29, December 30,
2001 2000
-------- --------
Assets
Current assets:
Cash and cash equivalents ................ $ 3,722 $ 3,152
Accounts receivable, net ................. 48,133 46,095
Inventories, net ......................... 20,974 27,388
Prepaid expenses and other current assets. 3,087 4,051
-------- --------
Total current assets ................... 75,916 80,686
-------- --------
Property, plant and equipment - at cost .... 79,211 94,161
Less accumulated depreciation and
amortization.............................. (35,990) (38,280)
-------- --------
Property, plant and equipment, net ......... 43,221 55,881
-------- --------
Intangible, net and other assets ........... 88,686 129,085
-------- --------
Total assets .......................... $ 207,823 $ 265,652
======== ========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable ......................... $ 17,585 $ 20,521
Accrued liabilities ...................... 42,217 34,981
Current maturities of long-term
obligations............................. 558 6,558
-------- --------
Total current liabilities ............. 60,360 62,060
-------- --------
Long-term obligations - net of current
maturities................................ 142,419 215,051
Other liabilities .......................... 3,135 3,038
Stockholders' equity (deficit):
Preferred Stock - authorized, 500,000
shares, $.01 par value; - None issued... - -
Common Stock - authorized 15,000,000
shares, $.01 par value; 8,592,536 shares
issued at September 29, 2001 and
8,561,642 shares issued at December 30,
2000 ................................... 86 86
Additional paid-in capital ............... 49,923 49,811
Accumulated deficit ...................... (41,118) (57,242)
Common stock held in treasury - at cost
822,394 shares at September 29, 2001
and December 30, 2000 .................. (6,528) (6,528)
Deferred compensation .................... (454) (624)
-------- --------
Total stockholders' equity (deficit) .. 1,909 (14,497)
-------- --------
Total liabilities and stockholders'
equity (deficit) .................... $ 207,823 $ 265,652
======== ========
The accompanying notes are an integral part of the financial statements.
HOME PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Statements of Operations and Retained Earnings
(unaudited)
(in thousands, except per share amounts)
Thirteen weeks Thirty-nine weeks
ended ended
--------------------------------------
September September September September
29, 23, 29, 23,
2001 2000 2001 2000
--------------------------------------
Net sales ..................... $66,064 $83,566 $196,048 $222,565
Cost of goods sold ............ 48,002 67,625 147,874 175,821
Special charge, net ........... - - 110 -
------ ------ ------- -------
Gross profit ............... 18,062 15,941 48,064 46,744
Operating expenses:
Selling .................... 4,155 6,105 14,556 19,340
Administrative ............. 4,331 2,937 12,049 10,578
Amortization of intangible
assets ................... 665 1,327 2,524 3,962
Restructuring and other
charges .................. - - 2,483 -
------ ------ ------- -------
9,151 10,369 31,612 33,880
------ ------ ------- -------
Operating profit ........... 8,911 5,572 16,452 12,864
------ ------ ------- -------
Other income (expense):
Interest income ............ 12 17 29 65
Interest (expense) ......... (3,828) (5,664) (14,698) (16,435)
Other income (expense), net. 14,446 19 14,533 (545)
------ ------ ------- -------
10,630 (5,628) (136) (16,915)
------ ------ ------- -------
Income (loss) before income
taxes .................... 19,541 (56) 16,316 (4,051)
Income tax (expense) benefit .. (93) 24 (191) 1,698
------ ------ ------- -------
Net income (loss) .......... $19,448 $ (32) $ 16,125 $ (2,353)
====== ====== ======= =======
Net income (loss) per common
share:
Basic....................... $ 2.57 $ (0.00) $ 2.14 $ (0.32)
====== ====== ======= =======
Dilutive ................... $ 2.49 $ (0.00) $ 2.10 $ (0.32)
====== ====== ======= =======
The accompanying notes are an integral part of the financial statements.
HOME PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited)
(dollars in thousands)
Thirty-nine weeks ended
---------------------
September 29, September 23,
2001 2000
-------- --------
Operating activities:
Net income (loss) ............................... $ 16,125 $ (2,353)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization .................. 10,648 13,890
Amortization of stock compensation ............. 170 -
Gain on the sale of servingware product line.... (14,489) -
Other, net ..................................... 749 929
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable..... (4,829) 2,693
(Increase) decrease in inventories ............ 3,307 (8,308)
Decrease in prepaid expenses and other......... 252 1,563
Increase (decrease) in accounts payable........ (1,438) 3,579
Increase (decrease) in accrued liabilities..... 1,619 (3,856)
-------- --------
Net cash provided by operating activities.......... 12,114 8,137
-------- --------
Investing activities:
Proceeds from sale of servingware product
line, net...................................... 69,501 -
Proceeds from sale of building, net ............. 1,218 -
Capital expenditures, net ....................... (3,742) (11,129)
-------- --------
Net cash provided (used) for investing activities.. 66,977 (11,129)
-------- --------
Financing activities:
Net (payments) borrowings on revolving
line of credit ................................ (38,020) 5,750
Payments on term loan borrowings ................ (40,500) (5,000)
Payment of capital lease obligation ............. (112) (111)
Exercise of stock options, issuance of common
stock under stock purchase plan and other....... 111 271
-------- --------
(78,521) 910
-------- --------
Net cash (used) provided by financing activities
Net increase (decrease) in cash and cash
equivalents ................................... 570 (2,082)
Cash and cash equivalents at beginning of period. 3,152 4,861
-------- --------
Cash and cash equivalents at end of period....... $ 3,722 $ 2,779
======== ========
Supplemental disclosures - Cash paid in the period
for:
Interest ........................................ $ 10,612 $ 11,868
-------- --------
Income taxes, net ............................... $ 209 $ -
-------- --------
The accompanying notes are an integral part of the financial statements.
HOME PRODUCTS INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(dollars in thousands, except per share amounts)
Note 1. General Information
Home Products International, Inc. (the "Company"), based in Chicago, is
a leading designer, manufacturer and marketer of a broad range of value-
priced, quality consumer houseware products. The Company's products are
marketed principally through mass-market trade channels in the United States
and internationally.
The condensed consolidated financial statements as of September 29,
2001 and for the thirteen weeks and thirty-nine weeks ended September
29, 2001 and September 23, 2000, include, in the opinion of management,
all adjustments (consisting of normal recurring adjustments and
reclassifications) necessary to present fairly the financial position,
results of operations and cash flows as of September 29, 2001 and for all
periods presented.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
incorporated by reference in the Company's Form 10-K for the year ended
December 30, 2000. The results of operations for the thirteen weeks and
thirty-nine weeks ended September 29, 2001 are not necessarily indicative of
the operating results to be expected for the full year. Certain amounts in
prior periods' financial statements and related notes have been reclassified
to conform to the 2001 presentation.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Note 2. New Accounting Standards and Pending Accounting Changes
In June 1998 and 1999, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133
and No. 137, respectively. The FASB issued SFAS No. 138 to amend SFAS No.
133, in June 2000. Collectively, these statements are intended to represent
the comprehensive guidance on accounting for derivatives and hedging
activities. The adoption of these new standards on December 31, 2000 did
not have an effect on the Company's results of operations as it has no
derivatives or hedging instruments.
In May 2000, the FASB's Emerging Issues Task Force (EITF) reached a
consensus on Issue No. 14, "Accounting for Certain Sales Incentives" ("EITF
No. 00-14"). This issue addresses the recognition, measurement, and income
statement classification of various types of sales incentives, including
discounts, coupons, rebates, and offers for free products. Upon adopting
EITF No. 00-14, which is effective with the fourth quarter of 2001, it is
required that these sales incentives be classified as deductions from sales
within the income statement. The Company's historical accounting policy has
been to include these types of sales incentives as a deduction of sales.
In January 2001, the EITF reached a consensus on Issue 3 of No. 00-22,
"Accounting for Points and Certain Other Time-Based or Volume-Based Sales
Incentive Offers, and Offers for Free Products or Services to be Delivered
in the Future". This consensus required that certain rebate offers and free
products that are delivered subsequent to a single exchange transaction be
recognized when incurred and reported as a reduction of sales. The Company
is currently in compliance with this pronouncement, which was effective the
first quarter 2001.
In April 2001, the EITF reached a consensus on Issue No. 00-25 ("EITF
00-25"), "Accounting for Consideration from a Vendor to a Retailer in
Connection with the Purchase or Promotion of the Vendor's Products," which
requires the costs of certain vendor consideration, such as slotting fees
and off-invoice arrangements, to be classified as a reduction of revenue
rather than as marketing expense. The Company will be required to adopt EITF
No. 00-25 by the fourth quarter of 2001. The Company's historical accounting
policy has been to include these types of sales arrangements as a reduction
of sales.
In July 2001 the Financial Accounting Standards Board (FASB) issued
SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other
Intangible Assets." SFAS No. 141 requires business combinations initiated
after June 30, 2001 to be accounted for using the purchase method of
accounting, and broadens the criteria for recording intangible assets
separate from goodwill. Recorded goodwill and intangibles will be evaluated
against this new criteria and may result in certain intangibles being
combined into goodwill, or alternatively, amounts initially recorded as
goodwill may be separately identified and recognized apart from goodwill.
SFAS No. 142 requires the use of a nonamortization approach to account for
purchased goodwill and certain intangibles. Under a nonamortization
approach, goodwill and certain intangibles will not be amortized into
results of operations, but instead would be reviewed for impairment and
written down and charged to results of operations only in the periods in
which the recorded value of goodwill and certain intangibles is more than
its fair value. The provisions of each statement, which apply to goodwill
and intangible assets acquired prior to June 30, 2001, will be adopted by
the Company on January 1, 2002. The adoption of these accounting standards
will reduce the Company's amortization of goodwill and other intangible
assets commencing January 1, 2002.
Note 3. Inventories
The components of the Company's inventory consist of direct labor,
direct materials and the applicable portion of the overhead required to
manufacture the goods.
September 29, December 30,
2001 2000
------ ------
Finished goods..................... $16,082 $15,420
Work-in-process.................... 1,968 2,027
Raw materials...................... 2,924 9,941
------ ------
$20,974 $27,388
====== ======
Note 4. Net Income (Loss) Per Share
The following information reconciles net income (loss) per share basic
and diluted:
Thirteen weeks Thirty-nine weeks
ended ended
------------------------------------
September September September September
29, 23, 29, 23,
2001 2000 2001 2000
------------------------------------
Net income (loss) ............... $19,448 $ (32) $ 16,125 $(2,353)
Weighted average common shares
outstanding: basic ............ 7,556 7,278 7,525 7,274
Impact of stock options and
warrants ...................... 268 - 140 -
------ ------ ------ ------
Weighted average common shares
outstanding: diluted .......... 7,824 7,278 7,665 7,274
====== ====== ====== ======
Net income (loss) per share:
basic ......................... $ 2.57 $ (0.00) $ 2.14 $ (0.32)
====== ====== ====== ======
Net income (loss) per share:
diluted ......................... $ 2.49 $ (0.00) $ 2.10 $ (0.32)
====== ====== ====== ======
Stock options and warrants are not considered dilutive in the thirteen
week period ended September 23, 2000 and thirty-nine week period ended
September 23, 2000 because the effect would be anti-dilutive.
Note 5. Divestiture of Product Line
On June 7, 2001, the Company entered into a definitive agreement to
sell its commercial servingware product line, Plastics, Inc., to A & E
Products Group LP, an affiliate of Tyco International. The company
completed the sale on July 6, 2001 for $71 million in cash (the "Sale"). The
net sale proceeds of $69.5 million (including transaction costs and other
related costs) were used to retire the Company's term debt and a portion of
its revolving credit borrowings. The sale resulted in a gain of
approximately $14.5 million, which was recorded in other income during the
third quarter of 2001. For more information about the divestiture see the
Current Report on Form 8-K filed on July 18, 2001 and Current Report on Form
8-K/A filed with the Securities and Exchange Commission on July 27, 2001.
The unaudited pro forma historical results for the thirteen weeks ended
September 29, 2001 and September 23, 2000 as well as the thirty-nine weeks
ended September 29, 2001 and September 23, 2000, as if the Plastics, Inc.
product line had been sold at the beginning of fiscal 2001 and 2000,
respectively, are estimated to be:
Thirteen weeks Thirty-nine weeks
ended ended
-----------------------------------------
September September September September
29, 23, 29, 23,
2001 2000 2001 2000
-----------------------------------------
Net sales ................... $ 65,499 $ 74,458 $176,880 $195,797
======= ======= ======= =======
Net income (loss) excluding
gain on the sale of PI ..... $ 4,878 $ (268) $ 1,105 $ (2,292)
======= ======= ======= =======
Net income (loss) per common
share excluding gain on the
sale of PI ................. $ 0.62 $ (0.04) $ 0.14 $ (0.32)
======= ======= ======= =======
The pro forma results reflect a decrease in goodwill amortization and a
reduction of interest expense on the retirement of debt due to the
divestiture. The pro forma results are not necessarily indicative of what
actually would have occurred if the divestiture had been completed as of the
beginning of each of the fiscal periods presented, nor are they necessarily
indicative of future consolidated results.
Note 6. 2001 Special, Restructuring and Other Charges
In 2000, the Company began implementation of a restructuring plan that
was undertaken to reduce fixed costs and better position the Company for
sustained profitability. The restructuring plan entailed the closure of the
Leominster, MA facility, reconfiguration of remaining manufacturing
facilities, a reduction in headcount and a realignment of the selling
process.
The Company began to implement the restructuring plan in December 2000
and accordingly a pretax charge of $12.4 million was taken, of which $1.9
million was deemed to be Special Charges and $10.5 million as Restructuring
and Other Charges (collectively referred to herein as the "2000 Charges").
During the first quarter of 2001 the Company recorded a pretax charge of
$2.6 million, of which $0.1 million was deemed to be Special Charges and
$2.5 million as Restructuring and Other Charges (collectively referred
herein as "2001 Charges"). No additional charges were recorded during the
thirteen week period ended September 29, 2001.
The Company anticipates that these restructuring actions will result in
annual pretax cash savings of $5.0-$6.0 million of which $4.0-$5.0 million
is expected to be realized in 2001.
The 2001 Charges are summarized as follows:
Thirteen Thirty-nine
Weeks Ended Weeks Ended
September 29, September 29,
2001 2001
------ ------
Cost of Goods Sold:
Special Charges:
Inventory relocation and liquidation $ - $ 175
SKU reduction and inventory
adjustments related to 1999 - (65)
------ ------
Total charge to cost of goods sold - 110
------ ------
Operating Expenses:
Restructuring and other charges:
Plant and facilities:
Relocation of machinery & equipment - 1,179
Lease termination & sub-lease costs - 971
Elimination of obsolete assets - 29
Employee related costs - 341
Other costs - (37)
------ ------
Total charge to operating expenses - 2,483
------ ------
Total net charges $ - $ 2,593 (1)
====== ======
(1) The 2001 Charges of $2,593, are comprised of $2,269 in additional
charges, a change in estimate of $389 and are net of a $(65) adjustment
related to the 1999 restructuring.
The components of the 2001 Charges were (i) $175 charge to relocate and
liquidate inventory at Leominster and other facilities, (ii) $1,179 charge
for the relocation of machinery and equipment and $971 charge for lease
termination & sub-lease costs (total net charge of $2,150), (iii) $29 charge
to write off obsolete and duplicate assets that were used at the Leominster
facility and other facilities, (iv) $341 charge for employee related
severance costs, (v) ($37) reversal of charge associated with other related
restructuring costs, and (vi) ($65) reversal of SKU reduction and inventory
adjustments relating to the 1999 Special Charges. The total 2001 Charges
were $2,658 excluding the impact of the 1999 Special Charges reversal.
A breakdown of the net charge (excluding the impact of the 1999 Special
Charges) between cash and non-cash items is summarized as follows. The
special charges are comprised of $120 of cash and $55 for non-cash items.
The restructuring and other charges are comprised of $2,311 of cash items
and $172 of charges related to non-cash items.
As a result of the closure of the Leominster facility the Company
eliminated approximately 124 hourly and salaried positions in Leominster.
Restructuring plans established in connection with the 2000/2001
charges are proceeding as planned and remaining restructuring reserves of
$7,752, as of September 29, 2001, are considered adequate. Restructuring
reserve balances as of December 30, 2000, activity during the current year
and restructuring reserve balances as of September 29, 2001, were as
follows:
Reserve Amounts Reserve
balance Additional Change in utilized balance
at charge estimate in at
12/30/00 2001 2001 2001 09/29/01
------ ------ ----- ------ ------
Inventory $ 2,744 $ 765 $ (590) $(1,727) $ 1,192
Plant and facilities 3,950 1,190 960 (910) (a) 5,190
Obsolete and
duplicate assets 916 - 29 (281) 664
Employee related
costs 835 278 63 (982) 194
Other 875 36 (73) (326) 512
------ ------ ----- ------ ------
$ 9,320 $ 2,269 $ 389 $(4,226) (a) $ 7,752
====== ====== ===== ====== ======
(a) The plant and facilities reserve includes cash proceeds of $1,218
received in the second quarter of 2001 from the sale of certain assets. The
proceeds were in excess of the reserve established for the disposal of these
assets, resulting in a gain of $1,218. The gain is currently included in the
plant and facilities reserve pending the finalization/completion of the
Company's remaining plant and facilities restructuring actions as well as
the restructuring reserve in total. Total amounts utilized, excluding the
cash proceeds of $1,218, were $5,444 for the thirty-nine week period ended
September 29, 2001. Net cash outlays were $2,809.
Certain reserve balances as of December 30, 2000 were reclassifed to be
consistent with the current presentation. The reclassifications did not
affect the initial charges recorded in the fourth quarter of 2000.
Note 7. 1999 Special, Restructuring and Other Nonrecurring Charges
In the third quarter of 1999, the Company recorded a $15,000 pretax
charge, comprised of a Special Charge and a Restructuring and Other
Nonrecurring Charge (collectively referred to herein as the "1999 Charges").
The 1999 Charges were incurred in accordance with a plan adopted in July
1999 to consolidate two of the Company's wholly-owned subsidiaries and to
implement a national branding strategy.
Restructuring plans established in connection with the 1999 charges are
proceeding as planned and remaining restructuring reserves of $790 as of
September 29, 2001, are considered adequate. Restructuring reserve balances
as of December 30, 2000, activity during the current year and restructuring
reserve balances as of September 29, 2001, were as follows:
Reserve Amounts Reversal Change in Reserve
balance at utilized in of reserve estimate balance at
12/30/00 2001 2001 2001 09/29/01
------ ------ ----- ------ ------
Inventory $ 212 $ (116) $ (65) $ - $ 31
Elimination of
duplicate assets 830 (93) - - 737
Employee costs 75 (25) - (50) -
Other 101 (129) - 50 22
------ ------ ----- ------ ------
$ 1,218 $ (363) $ (65) $ - $ 790
====== ====== ===== ====== ======
The total amount utilized during the thirty-nine week period ended
September 29, 2001 was $363, which included $247 of cash costs.
During the first quarter of 2001 the Company reversed $65 relating to
SKU reduction and inventory adjustment reserves which were no longer needed
as a result of change in estimates by management.
Amounts in the change in estimate column represent reallocation of
accruals between categories and not increases in initial charges. These
reallocations were due to reductions in employee related cost estimates
offset by higher than anticipated other transaction costs.
Note 8. Income Taxes
The Company incurred significant pre-tax losses in the fourth quarter
of 2000. Accordingly, the income tax provision primarily reflects foreign
taxes. As of fiscal year end 2000 the Company had income tax carryforwards
relating to U.S. net operating losses of approximately $34 million which
expire in 2012 to 2020.
Note 9. New Loan and Security Agreement
On November 1, 2001, the Company entered into a new four year, $50
million asset-based credit facility with Fleet Capital Corporation as its
sole lender. The facility replaces the $50 million senior credit agreement
with its principal lenders and The Chase Manhattan Bank as administrative
agent (the "Bank Group"). The new facility provides lower interest rates
and more favorable financial covenants than the facility it replaces. In
addition, the new facility allows for increased flexibility in the use of
funds, including the ability to pursue acquisitions and buy back the
Company's high yield bonds. Such transactions were prohibited under the
senior credit agreement with the Bank Group.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This commentary should be read in conjunction with the Company's
consolidated financial statements and related footnotes and management's
discussion and analysis of financial condition and results of operations
contained in the Company's Form 10-K for the year ended December 30, 2000.
Divestiture of the Plastics, Inc. Product Line
One June 7, 2001, the Company entered into a definitive agreement to
sell its commercial servingware product line, Plastics, Inc. ("PI"), to A &
E Products Group LP, an affiliate of Tyco International. The Company
completed the sale on July 6, 2001 for $71 million in cash (the "Sale"). The
net Sale proceeds of $69.5 million, net of transaction costs and other
related costs, were used to retire the Company's term debt and a portion
of its revolving credit borrowings. The Sale resulted in a gain of
approximately $14.5 million, which was recorded as other income during the
third quarter of 2001. See Note 5 to the Company's Consolidated Financial
Statements in Item 1. of this Form 10-Q for additional information.
2001 Special, Restructuring and Other Charges
In fiscal year 2000, the Company began implementation of a
restructuring plan that was undertaken to reduce fixed costs and better
position the Company for sustained profitability. The restructuring plan
entailed the closure of the Leominster, MA facility, reconfiguration of
remaining manufacturing facilities, a reduction in headcount and a
realignment of the selling process.
The Company began to implement the restructuring plan in December 2000
and accordingly a pretax charge of $12.4 million was taken, of which $1.9
million was deemed to be Special Charges and $10.5 million as Restructuring
and Other Charges (collectively referred to herein as the "2000 Charges").
During the first quarter of 2001 the Company recorded a pretax charge of
$2.6 million, of which $0.1 million was deemed to be Special Charges and
$2.5 million as Restructuring and Other Charges (collectively referred
herein as "2001 Charges"). No additional charges were recorded during the
thirteen-week period ended September 29, 2001.
As disclosed in Note 6 to the Company's Consolidated Financial
Statements in Item 1. of this Form 10-Q, the 2001 Charges were comprised of
(i) charge to relocate and liquidate inventory at Leominster and other
facilities, (ii) charge for the relocation of machinery and equipment used
at the Leominster facility and other facilities, (iii) charge for lease
termination and sub-lease costs, (iv) charge to write off obsolete and
duplicate assets that were used at the Leominster facility and other
facilities, (v) charge for employee related severance costs, and (vi) charge
for other related restructuring costs. The total 2001 Charges include a
reversal of $0.1 million for SKU reduction and inventory adjustments
relating to the 1999 Charges.
The Company anticipates that the result of these restructuring actions
will generate annual pretax cash savings of $5.0-$6.0 million of which $4.0-
$5.0 million is expected to be realized in 2001.
Thirteen weeks ended September 29, 2001 compared to the thirteen weeks ended
September 23, 2000
In the discussion and analysis that follows, all references to the
third quarter of 2001 are to the thirteen-week period ended September 29,
2001 and all references to the third quarter of 2000 are to the thirteen-
week period ended September 23, 2000. The following discussion and analysis
compares the actual results for the third quarter of 2001 to the actual
results for the third quarter of 2000 with reference to the following (in
thousands; unaudited):
Thirteen weeks ended
---------------------------------
September 29, September 23,
2001 2000
-------------- --------------
Net sales .................... $66,064 100.0% $83,566 100.0%
Cost of goods sold ........... 48,002 72.7 67,625 80.9
------ ----- ------ -----
Gross profit ............... 18,062 27.3 15,941 19.1
Operating expenses ........... 8,486 12.8 9,042 10.9
Amortization of intangible
assets...................... 665 1.0 1,327 1.6
------ ----- ------ -----
Operating profit ........... 8,911 13.5 5,572 6.6
Interest expense ............. (3,828) (5.8) (5,664) (6.8)
Other income (expense) ....... 14,458 21.9 36 0.1
------ ----- ------ -----
Income (loss) before income taxes 19,541 29.6 (56) (0.1)
Income tax (expense) benefit . (93) (0.1) 24 0.0
------ ----- ------ -----
Net income (loss) ............ $19,448 29.5% $ (32) (0.1)%
====== ===== ====== =====
Net loss per share - Basic ... $ 2.57 $ (0.00)
Net loss per share - Diluted . $ 2.49 $ (0.00)
Weighted average common shares
Outstanding -
Basic 7,556 7,278
Diluted 7,824 7,278
Net sales. Net sales of $66.1 million in the third quarter of 2001
decreased $17.5 million from $83.6 million in the comparable quarter of
2000. The bankruptcy of several customers as well as management's decision
to reduce sales to various low margin customers negatively affected sales by
approximately $9.0 million in the third quarter quarter of 2001. Also
impacting comparisons for the third quarter of 2001 was the divestiture of
PI which contributed sales of $9.1 million in the third quarter of 2000. The
discontinuation of the food storage product line at a large retailer
accounted for an additional $0.6 million of the sales decline.
Gross profit. The Company's gross profit in the third quarter of 2001
increased to $18.1 million from $15.9 million in the comparable quarter of
2000. Gross profit margins improved to 27.3% from 19.1% in the prior year
comparable quarter. Excluding PI, gross margins were 27.3% versus 16.2% in
the third quarter of 2000. Gross margin benefits were achieved through
improved manufacturing production performance as well as favorable sales
product mix. Margins also benefited from a reduction in raw material costs
(primarily plastic resin) in the third quarter of 2001. Additional margin
improvement came from a reduction in freight costs, which was primarily due
to a higher mix of shipments paid for by customers in the third quarter of
2001.
Operating expenses. Operating expenses in the third quarter of 2001
were 12.8% of net sales or $8.5 million versus 10.9% or $9.0 million in the
comparable quarter of 2000. As part of the Company's restructuring actions
distribution and logistics costs decreased as warehouse space was
consolidated during 2001. Partially offsetting these benefits was an
increase in bad debt charges to cover bankruptcy exposures. Furthermore,
additional compensation benefits, which are based on the current year
operating results, were incurred in the current quarter. Operating expenses
in the third quarter of 2000 were affected by a reversal of certain benefit
and compensation accruals.
Amortization of intangible assets. Amortization of intangible assets
in the third quarter of 2001 was 1.0% of net sales or $0.7 million versus
1.6% of net sales or $1.3 million in the comparable quarter of 2000. The
decrease in the current quarter reflects the writeoff of goodwill relating
to the disposition of PI as well as the fourth quarter 2000 asset impairment
charge to reduce the carrying value of goodwill.
Interest expense. Interest expense of $3.8 million in the third
quarter of 2001 decreased $1.8 million from $5.7 million in the third
quarter of 2000. The decrease in interest expense in the third quarter of
2001 was due to the significant retirement of debt (primarily due to
proceeds from the PI divestiture) as well as favorable interest rates.
Other income (expense). During the third quarter of 2001 the Company
generated other income of $14.5 million primarily due to the gain realized
on the sale of PI.
Income tax (expense) benefit. The income tax provision recorded in the
third quarter of 2001 relates to foreign taxes. A significant prior year
operating loss has resulted in tax operating loss carryforwards, which
exceeds the third quarter of 2001 income. During the third quarter 2000 a
small tax benefit was recorded.
Net income (loss). The Company had net income of $19.4 million,
including a gain on the sale of PI of $14.5 million. The third quarter of
2001 dilutive earnings per share was $2.49, as compared to a loss per share
of ($0.00) in the comparable quarter of 2000. Excluding the gain on the
sale of PI earnings were $4.9 million or $0.63 per dilutive share in the
third quarter of 2001, compared to breakeven results in the third quarter of
2000.
Thirty-nine weeks ended September 29, 2001 compared to the thirty-nine weeks
ended September 23, 2000
In the discussion and analysis that follows, all references to 2001 are
to the thirty-nine week period ended September 29, 2001 and all references
to 2000 are to the thirty-nine week period ended September 23, 2000. The
following discussion and analysis compares the actual results of 2001 to the
actual results of 2000 with reference to the following (in thousands;
unaudited):
Thirty-nine weeks ended
---------------------------------
September 29, September 23,
2001 2000
-------------- --------------
Net sales ..................... $196,048 100.0% $222,565 100.0%
Cost of goods sold ............ 147,874 75.4 175,821 79.0
Special charges, net .......... 110 0.1 - -
------- ----- ------- ----
Gross profit ................ 48,064 24.5 46,744 21.0
Operating expenses ............ 26,605 13.6 29,918 13.5
Amortization of intangible
assets ...................... 2,524 1.3 3,962 1.9
Restructuring and other charges 2,483 1.3 - -
------- ----- ------- ----
Operating profit ............ 16,452 8.3 12,864 5.7
Interest expense .............. (14,698) (7.5) (16,435) (7.4)
Other income (expense) ........ 14,562 7.4 (480) (0.2)
------- ----- ------- ----
Loss before income taxes .... 16,316 8.2 (4,051) (1.9)
Income tax (expense) benefit .. (191) (0.1) 1,698 0.8
------- ----- ------- ----
Net loss ..................... $ 16,125 8.1% $ (2,353) (1.1)%
======= ===== ======= ====
Net loss per share - Basic ... $2.14 $ (0.32)
Net loss per share - Diluted . $2.10 $ (0.32)
Weighted average common shares
Outstanding -
Basic 7,525 7,274
Diluted 7,665 7,274
Net sales. Net sales of $196.0 million in 2001 decreased $26.6 million
from $222.6 million in 2000. Approximately $15.0 million of the sales
decline was due to the bankruptcy of several customers as well as
management's decision to reduce sales to various low margin and financially
challenged customers. Also impacting comparisons to 2001 was the
divestiture of PI in July 2001 which accounted for $9.1 million of the
decrease. The discontinuation of the food storage product line by a large
retailer accounted for an additional $3.5 million of the sales decline.
Sales to the Company's top three customers were 62% in 2001 as compared to
51% in the prior year.
Special Charges. In 2001 the Company recorded Special Charges of $0.1
million in connection with the closure of the Leominster facility as well as
the realignment of other manufacturing facilities which began in the fourth
quarter of 2000. The primary component of the Special Charges includes
inventory reserves to relocate and liquidate inventory. The Special Charges
are net of a $0.1 million reversal of a portion of the special charge
recorded in the third quarter of 1999 to undertake a restructuring and
consolidation plan.
Gross profit before special charges. The Company's gross profit before
Special Charges in 2001 was $48.1 million as compared to $46.7 million in
2000. Gross profit margins improved to 24.5% from 21.0% in the prior year.
Excluding PI, gross margins were 23.2% as compared to 18.3% in the prior
year. Gross margins benefited from savings generated from productivity and
efficiency initiatives as well as other cost reduction programs. Additional
margin improvements were a result of favorable raw material prices
(primarily plastic resin). A decrease in sales rep commissions, which were
due to the realignment of the Company's selling process, also positively
affected margins.
Operating expenses. Operating expenses in 2001 were 13.6% of net sales
or $26.6 million versus 13.5% or $29.9 million in 2000. As part of the 2000
restructuring initiatives, warehouse space was consolidated resulting in a
decrease of distribution and logistics costs in 2001. Additional benefits
were achieved as a result of planned headcount reductions that were
completed in the early part of 2001. These savings were partially offset by
an increase in bad debt expense which was needed to cover several customer
bankruptcies in 2001.
Amortization of intangible assets. Amortization of intangible assets
in 2001 was 1.3% of net sales or $2.5 million versus 1.9% or $4.0 million in
2000. The decrease in 2001 reflects the reduction of goodwill relating to
the disposition of PI (which occurred in July 2001) as well as the fourth
quarter 2000 asset impairment charge to reduce the carrying value of
goodwill.
Restructuring and Other Charges. The Company recorded Restructuring
and Other Charges of $2.5 million in 2001 related to the continued
implementation of the fourth quarter 2000 restructuring plan. The charges
are comprised of (i) charge for the relocation of machinery and equipment,
(ii) lease termination and sub-lease costs, (iii) write off of obsolete and
duplicate assets that were used at the Leominster facility and other
facilities, (iv) employee related severance costs, and (v) reversal of other
related restructuring costs.
Interest expense. Interest expense of $14.7 million in 2001 decreased
$1.7 million from $16.4 million in 2000. The decrease in interest expense in
2001 is primarily due to the significant retirement of debt (primarily due
to proceeds from the PI divestiture). Outstanding debt at September 29,
2001 was $84.6 million lower than the amount outstanding at September 23,
2000. Also contributing to the decrease in expense from last year was a
decrease in the weighted average interest rate versus the same periods of a
year ago.
Other income (expense). During 2001 the Company generated other income
of $14.6 million as compared to other expense of $0.5 million in the prior
year. The primary contributor to the improvement was a gain totaling $14.5
million realized on the sale of PI. In 2000, the Company incurred
approximately $0.5 million of fees and expenses associated with a review of
strategic alternatives in an effort to enhance shareholder value.
Income tax (expense) benefit. The income tax provision recorded in
2001 relates to foreign taxes. A significant prior year operating loss has
resulted in tax operating loss carryforwards, which exceeds the current year
taxable income. In 2000 a tax benefit of $1.7 million was recorded.
Net income (loss). In 2001 the Company had net income of $16.1
million, or $2.10 per dilutive share, as compared to a net loss of $2.4
million, or $0.32 per share in 2000. Excluding the effects of the gain on
sale of PI as well as special, restructuring and other charges, net income
in 2001 was $4.2 million or $0.55 per dilutive share as compared to a loss
of $2.4 million or ($0.32 per share) in 2000.
Capital Resources and Liquidity
The Company's primary sources of liquidity and capital resources
include cash provided from operations and borrowings under the Company's
credit facility.
Cash and cash equivalents were $3.7 million, an increase of $0.6
million from December 30, 2000. The Company's total outstanding debt during
2001 has decreased $78.6 million to $143.0 million. The decrease in debt is
primarily due to proceeds from the July 2001 sale of the Company's Plastics,
Inc. ("PI") product line as well as positive cash flow from operations. The
PI sale provided $69.5 million of cash, after expenses.
The Company's working capital, excluding cash and short term debt, was
$12.4 million or $9.6 million lower than on December 30, 2000. The decrease
in working capital was due to the sale of PI, which had $4.0 million of
working capital at December 30, 2000, a reduction in inventories and an
increase in accrued liabilities.
Net cash used for restructuring activities was $3.1 million in the
thirty-nine week period ended September 29, 2001. Such cash payments
represent relocation of inventory and assets, lease termination costs,
employee termination benefits and other restructuring expenses.
Capital spending year-to-date was $3.7 million as compared to $11.1
million in the first nine months of 2000. Capital spending in the current
year includes various information technology and production facility
projects as well as the replacement of machinery and equipment. The
significantly higher capital spending in 2000 was primarily due to the build
out of the El Paso facility as well as information technology projects.
On June 29, 2001, the Company reached an agreement with its principal
lenders and The Chase Manhattan Bank as administrative agent (the "Bank
Group"), to amend the Company's senior credit agreement. The amendment
became effective on July 6, 2001 when the Company completed the sale of PI.
As a result of the PI sale and corresponding paydown of debt, the Bank Group
agreed to amend all financial covenants through the remaining term of the
credit agreement consistent with internal Company projections. In addition,
the revolving line of credit was reduced from $85 million to $50 million.
The Company was in compliance with all amended loan covenants as of
September 29, 2001.
On November 1, 2001, the Company entered into a new four year, $50
million asset-based credit facility with Fleet Capital Corporation ("Fleet
Capital") as its sole lender. The facility replaces the $50 million senior
credit agreement with the Bank Group. The new facility provides lower
interest rates and more favorable financial covenants than the facility it
replaces. In addition, the new facility allows for increased flexibility in
the use of funds, including the ability to pursue acquisitions and buy back
the Company's high yield bonds. Such transactions were prohibited under the
senior credit agreement with the Bank Group.
The Company believes its new financing facilities together with its
cash flow from operations will provide sufficient capital to fund
operations, make required debt repayments and meet anticipated capital
spending needs. Availability at November 1, 2001 under the new facility was
$45 million and the Company's defined borrowing base exceeded $50 million.
Management Outlook and Commentary
* The continuing weak economic conditions have negatively impacted the
Company's current year operating results. These conditions negatively
impacted sales as several of the Company's retail customers have filed
for bankruptcy protection in the last twelve months. The Company
estimates that it has lost approximately $15 million of sales due to
these bankruptcies during the first nine months of the year. Fourth
quarter comparisons will also be negatively impacted. As the weak
economic conditions continue, the Company may encounter further
consolidation of its retail customer base through additional customer
bankruptcies. In addition, the weak economy may result in reduced
consumer traffic at the Company's primary customers. This would likely
result in further sales declines. Also, further business may be lost in
2001 or 2002 as the Company evaluates its relationships with several
other financially challenged customers.
* Since mid 2000, the Company has experienced a consistent deterioration in
the selling prices of many of its products. This occurred in response to
competitive pressures from existing competition, customers' demands for
lower prices and new entrants to the market. As a result, future year to
year comparisons are expected to be negatively impacted. In response to
these selling price pressures, the Company will continue to pursue means
by which to reduce costs and maintain profitability.
* Plastic resin currently represents approximately 15% to 20% of the
Company's cost of goods sold. Although the sale of PI has reduced the
Company's exposure to resin price fluctuations, resin costs continue to
be a meaningful element of the Company's cost structure. During the
first nine months of 2001, resin prices were down slightly to the prior
year (approximately $0.03 per pound) and were slightly lower than
historical averages. However, there is no assurance that the current
costing levels will continue. The future cost of plastic resin is very
difficult to predict. Plastic resin costs are impacted by several
factors outside the control of the Company including supply and demand
characteristics, oil and natural gas prices and the overall health of the
economy. Any of these factors could potentially have a positive or
negative impact on plastic resin prices and the Company's profitability.
* The Company's 2000 restructuring plan included the realignment of several
manufacturing facilities to improve production efficiency and lower
costs. During the first half of 2001 the Company centralized the
manufacturing process of several products to enable the Company to better
utilize key management and manufacturing strengths as well as balance
production that has shifted from the closure of the Leominster facility.
As part of these actions management estimates annual cost savings of
approximately $1-$2 million.
* As a result of the operating loss incurred in 2000 and the costs
associated with the Company's 2000/2001 restructuring plan, significant
tax operating loss carryforwards were generated. A major portion of the
tax losses will be used to reduce any taxes payable on the sale of PI.
The Company estimates that its tax loss carryforwards as of September 29,
2001 are less than $5 million.
* The Company's new financing arrangements with Fleet Capital provide
increased flexibility for the use of borrowed funds. The Company is now
free to pursue selected acquisitions that would increase shareholder
value. In addition, the financial covenants related to the financing are
fewer in number and are less restrictive than the Company's prior
financing arrangements. The new covenants take into account seasonal
fluctuations and give recognition to the Company's collateral base.
* Effective August 1, 2001 the Company began trading under the new NASDAQ
SmallCap symbol HOMZ (formerly HPII). The Company's HOMZ brand has been
in the marketplace for almost two years and has become an asset of great
value to the Company, its shareholders and customers. In recognition of
the importance of our brand in creating a true consumer franchise, the
Company changed its trading symbol to HOMZ.
* The Company intends to repurchase from time to time its 9.625% Senior
Subordinated Notes. The Company issued $125 million of the 10 year
9.625% fixed rate notes during 1998. The timing, amount and type of
transaction will depend upon prevailing market conditions, alternative
uses of capital and other factors. The repurchase will be funded from
the Company's new financing arrangements.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's primary market risk is impacted by changes in interest
rates and price volatility of certain commodity based raw materials.
Interest Rate Risk. The Company's revolving credit agreement is LIBOR-
based and is subject to interest rate movements. During the first three
quarters of 2001 the Company did not experience any material changes in
interest rate risk that would affect the disclosures presented in the
Company's Annual Report on Form 10-K for the fifty-three week period ended
December 30, 2000.
Commodity Risk. The Company is subject to price fluctuations in
commodity based raw materials such as plastic resin, steel and griege
fabric. Changes in the cost of these materials may have a significant impact
on the Company's operating results. Management does not anticipate
significant fluctuations in the cost of these materials during the remainder
of 2001. On the other hand the cost of these items is affected by many
factors outside of the Company's control and changes to the current trends
are possible. There have been no significant changes in the costs of plastic
resin, steel and griege fabric during the thirty-nine week period ended
September 29, 2001, although plastic resin prices have decreased slightly
during the first half of 2001. See " Management Outlook and Commentary"
above.
The Company has entered into commitments to purchase certain minimum
annual volumes of plastic resin. These purchase commitments approximate 50%
of the Company's total annual plastic resin purchases. The Company expects
to purchase in excess of 110 million pounds of resin in 2001. The
agreements expire in May and August of 2002. The purchase commitment
pricing is not tied to fixed rates; therefore, the Company's results of
operations or financial position could be affected by significant changes in
the market cost of plastic resin.
Forward Looking Statements
This quarterly report on Form 10-Q, including the "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
"Management Outlook and Commentary" and "Quantitative and Qualitative
Disclosures about Market Risk" sections, contain forward-looking statements
within the meaning of the "safe-harbor" provisions of the Private Securities
Litigation Reform Act of 1995. Such statements are based on management's
current expectations and are subject to a number of factors and
uncertainties which could cause actual results to differ materially from
those described in the forward-looking statements. Such factors and
uncertainties include, but are not limited to:
* the impact of the level of the Company's indebtedness
* restrictive covenants contained in the Company's various debt documents
* general economic conditions and conditions in the retail environment
* the Company's dependence on a few large customers
* price fluctuations in the raw materials used by the Company, particularly
plastic resin
* competitive conditions in the Company's markets
* the seasonal nature of the Company's business
* fluctuations in the stock market
* the extent to which the Company is able to retain and attract key
personnel
* relationships with retailers
* the impact of federal, state and local environmental requirements
(including the impact of current or future environmental claims against
the Company)
As a result, the Company's operating results may fluctuate, especially when
measured on a quarterly basis. The Company undertakes no obligation to
revise forward-looking statements to reflect events or circumstances after
the date hereof or to reflect the occurrence of unanticipated events.
Readers are also urged to carefully review and consider the various
disclosures made by the Company in this report and in the Company's periodic
reports on Forms 10-K, 10-Q and 8-K filed with the Securities and Exchange
Commission which attempt to advise interested parties of the factors which
affect the Company's business.
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Index
-------------
10.1 Loan and Security Agreement dated as of October 31, 2001,
among Home Products International - North America, Inc. and Fleet
Capital Corporation.
99.1 Press release dated November 6, 2001
(b) Reports on Current Form 8-K.
Registrant filed a Current Report on Form 8-K dated July 18, 2001, to
disclose that the Registrant completed the sale of its Plastics,
Inc. servingware product line, to A & E Products Group LP, an
affiliate of Tyco International. The Company also disclosed that it
reached an agreement with its principal lenders and The Chase
Manhattan Bank as administrative agent, to amend the Company's senior
credit agreement.
Registrant filed a Current Report on Form 8-K/A dated July 27, 2001,
to disclose that the Registrant completed the sale of its Plastics,
Inc. servingware product line, to A & E Products Group LP, an
affiliate of Tyco International.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Home Products International, Inc.
By: /s/ James E. Winslow
----------------------------
James E. Winslow
Executive Vice President and
Chief Financial Officer
Dated: November 13, 2001