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 June 29, 2002
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 August 3, 2002 - 7,847,435
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 4
Condensed Consolidated Statements of Cash 5
Flows
Notes to Condensed Consolidated Financial 6
Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 21
Part II. Other Information
Items 1 through 3 and Item 5 are not applicable n/a
Item 4. Submission of Matters to a Vote of Security 24
Holders
Item 6. Exhibits and Reports on Form 8-K 24
Signature 25
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HOME PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
(Unaudited)
June 29, December 29,
2002 2001
-------- --------
Assets
Current assets:
Cash and cash equivalents ............... $ 501 $ 1,091
Accounts receivable, net ................ 39,914 36,577
Inventories ............................. 26,183 17,043
Prepaid expenses and other current assets 1,372 2,275
-------- --------
Total current assets .................. 67,970 56,986
-------- --------
Property, plant and equipment - at cost ... 89,498 87,502
Less accumulated depreciation and
amortization ............................ (50,042) (44,871)
-------- --------
Property, plant and equipment, net ........ 39,456 42,631
-------- --------
Patents and non-compete agreements, net ... 1,363 1,616
Goodwill, net ............................. 74,759 74,759
Other non-current assets .................. 12,043 11,351
-------- --------
Total assets ......................... $ 195,591 $ 187,343
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ........................ $ 19,640 $ 16,834
Accrued liabilities ..................... 33,304 33,916
Current maturities of long-term
obligations ........................... 158 158
-------- --------
Total current liabilities ............ 53,102 50,908
-------- --------
Long-term obligations - net of current
maturities .............................. 131,069 130,447
Other liabilities ......................... 3,233 3,168
Stockholders' equity:
Preferred Stock - authorized, 500,000
shares, $.01 par value; - None issued.. - -
Common Stock - authorized 15,000,000
shares, $.01 par value; 8,659,832 shares
issued at June 29, 2002 and 8,641,338
shares issued at December 29, 2001 ..... 87 87
Additional paid-in capital .............. 50,010 49,920
Accumulated deficit ..................... (35,098) (40,262)
Common stock held in treasury - at cost
822,394 shares at June 29, 2002 and
December 29, 2001 ..................... (6,528) (6,528)
Deferred compensation ................... (284) (397)
-------- --------
Total stockholders' equity ............ 8,187 2,820
-------- --------
Total liabilities and stockholders'
equity .............................. $ 195,591 $ 187,343
======== ========
The accompanying notes are an integral part of the financial statements.
HOME PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Statements of Operations
(unaudited)
(in thousands, except per share amounts)
Thirteen weeks Twenty-six weeks
ended ended
--------------------------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
--------------------------------------
Net sales ......................... $59,623 $65,858 $110,630 $129,984
Cost of goods sold ................ 44,092 49,954 82,326 99,872
Special charge, net ............... - - - 110
------ ------ ------- -------
Gross profit .................... 15,531 15,904 28,304 30,002
Operating expenses:
Selling ......................... 4,503 5,032 8,820 10,401
Administrative .................. 3,376 3,788 6,685 7,718
Amortization of intangible assets 123 930 253 1,859
Restructuring and other charges.. - - - 2,483
------ ------ ------- -------
8,002 9,750 15,758 22,461
------ ------ ------- -------
Operating profit ................ 7,529 6,154 12,546 7,541
------ ------ ------- -------
Other income (expense):
Interest income ................. 5 7 54 17
Interest expense ................ (3,454) (5,391) (6,938) (10,870)
Other income (expense), net ..... (169) 21 (197) 87
------ ------ ------- -------
(3,618) (5,363) (7,081) (10,766)
------ ------ ------- -------
Income (loss) before income taxes 3,911 791 5,465 (3,225)
Income tax expense ................. (176) (31) (300) (98)
------ ------ ------- -------
Net income (loss) ............... $ 3,735 $ 760 $ 5,165 $ (3,323)
====== ====== ======= =======
Net income (loss) per common share:
Basic ........................... $ 0.48 $ 0.10 $ 0.67 $ (0.45)
====== ====== ======= =======
Diluted ......................... $ 0.45 $ 0.10 $ 0.63 $ (0.45)
====== ====== ======= =======
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)
Twenty-six weeks ended
---------------------
June 29 June 30,
2002 2001
-------- --------
Operating activities:
Net income (loss) .............................. $ 5,165 $ (3,323)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization ................. 5,422 7,965
Amortization of stock compensation ............ 113 112
Loss on the abandonment of assets ............. 186 -
Other, net .................................... (627) (52)
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable... (3,337) 2,665
Increase in inventories...................... (9,140) (1,026)
Decrease in prepaid expenses and other....... 903 360
Increase (decrease) in accounts payable...... 2,806 (4,147)
Decrease in accrued liabilities.............. (612) (1,314)
-------- --------
Net cash provided by operating activities........ 879 1,240
-------- --------
Investing activities:
Proceeds from sale of building, net ............ - 1,218
Capital expenditures, net ...................... (2,059) (2,756)
-------- --------
Net cash used for investing activities .......... (2,059) (1,538)
-------- --------
Financing activities:
Net borrowings under loan and security agreement 592 -
Net borrowings on revolving line of credit...... - 500
Payments on term loan borrowings ............... - (1,500)
Payments of capital lease obligation ........... (93) (76)
Exercise of stock options, issuance of common
stock under stock purchase plan and other...... 91 -
-------- --------
Net cash provided (used) by financing activities 590 (1,076)
-------- --------
Net decrease in cash and cash equivalents....... (590) (1,374)
Cash and cash equivalents at beginning of year.. 1,091 3,152
-------- --------
Cash and cash equivalents at end of period...... $ 501 $ 1,778
======== ========
Supplemental disclosures
Cash paid in the period:
Interest ....................................... $ 6,178 $ 9,983
-------- --------
Income taxes, net .............................. $ 155 $ 208
-------- --------
Non-cash financing activities:
Capital lease obligation ....................... $ 123 $ -
-------- --------
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 for the thirteen weeks
ended June 29, 2002 and June 30, 2001, 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 June 29, 2002 and for all periods
presented.
Certain information and note 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 29, 2001. The results of operations for the thirteen and twenty-six
weeks ended June 29, 2002 are not necessarily indicative of the operating
results to be expected for the full year. Certain amounts in prior period
financial statements and related notes have been reclassified to conform to
the 2002 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. Goodwill and Other Intangibles
In June 2001 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards ("SFAS") No. 141 "Business
Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS
No. 141 requires business combinations initiated after July 1, 2001 to be
accounted for using the purchase method of accounting, and broadens the
criteria for recording intangible assets separate from goodwill. Previously
recorded goodwill and other 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 non-amortization approach to account for purchased goodwill and certain
intangibles. Under a non-amortization 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 SFAS No.
141 and SFAS No. 142 were adopted by the Company on July 1, 2001 and
December 30, 2001, respectively.
Upon adoption of SFAS No. 142, the Company performed an impairment test of
its goodwill in the first quarter of 2002 and determined that no impairment
of the recorded goodwill existed. Under SFAS No. 142, goodwill will be
tested for impairment at least annually and more frequently if an event
occurs which indicates that goodwill may be impaired. As required by SFAS
No. 142, the results for periods prior to adoption have not been restated.
Estimated amortization expense for the next five fiscal years and
thereafter from December 30, 2001 based on intangible assets at June 29,
2002 is as follows (in thousands):
Estimated
Amortization
Fiscal Year Expense
----------- -------
2002 $505
2003 $505
2004 $505
2005 $ 3
2006 $ -
Thereafter $ -
The following table provides comparative earnings and earnings per
share as if the non-amortization provisions of SFAS No. 142 had been adopted
for all periods presented:
Thirteen weeks Twenty-six weeks
ended ended
--------------------------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
--------------------------------------
Net income (loss), as reported ... $ 3,735 $ 760 $ 5,165 $ (3,323)
Goodwill amortization, as reported - 770 - 1,540
------ ------ ------- -------
Net income (loss), as adjusted ... $ 3,735 $ 1,530 $ 5,165 $ (1,783)
====== ====== ======= =======
Basic earnings (loss) per share,
as reported .................... $ 0.48 $ 0.10 $ 0.67 $ (0.45)
Goodwill amortization, as reported - 0.10 - 0.21
------ ------ ------- -------
Basic earnings (loss) per share,
as adjusted .................... $ 0.48 $ 0.20 $ 0.67 $ (0.24)
====== ====== ======= =======
Diluted earnings (loss) per share,
as reported .................... $ 0.45 $ 0.10 $ 0.63 $ (0.45)
Goodwill amortization, as reported - 0.10 - 0.21
------ ------ ------- -------
Diluted earnings (loss) per share,
as adjusted .................... $ 0.45 $ 0.20 $ 0.63 $ (0.24)
====== ====== ======= =======
Note 3. Long-Lived Assets
The FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", dated August 2001. This statement
supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-lived Assets to be Disposed of", and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting Results of Operations
- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions".
SFAS No. 144 requires that one accounting model be used for long-lived
assets to be disposed of by sale, whether previously held and used or newly
acquired, and it broadens the presentations of discontinued operations to
include more disposal transactions. The Company adopted the provisions of
SFAS No. 144 on December 29, 2001. No impairment of long-lived assets has
been recorded under SFAS No. 144.
Note 4. New Accounting Standards
In June 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. This Statement applies to all entities and applies to legal
obligations associated with the retirement of long-lived assets that result
from the acquisition, construction, development and (or) the normal
operation of a long-lived asset, except for certain obligations of lessees.
It requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset
retirement costs would be capitalized as part of the carrying amount of the
long-lived asset. SFAS No. 143 is effective for financial statements issued
for fiscal years beginning after June 15, 2002. The Company has not yet
determined the effects SFAS No. 143 will have on its financial position,
results of operations or cash flows.
In June 2002, the Financial Accounting Standards Board issued SFAS No.
146, " Accounting for Costs Associated with Exit or Disposal Activities."
SFAS No. 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. Prior
guidance required that a liability for an exit cost be recognized at the
date of an entity's commitment to an exit plan. This Statement also
establishes that fair value is the objective for initial measurement of the
liability. SFAS No. 146 is effective for exit or disposal activities that
are initiated after December 31, 2002. The Company is currently evaluating
the potential impact, if any, the adoption of SFAS No. 146 will have on its
results of operations, cash flows or financial position.
Note 4. 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.
June 29, December 29,
2002 2001
------ ------
Finished goods..................... $17,793 $12,016
Work-in-process.................... 2,428 1,717
Raw materials...................... 5,962 3,310
------ ------
$26,183 $17,043
====== ======
Note 5. Net Income (Loss) Per Share
The following information reconciles net income (loss) per share basic
and diluted:
Thirteen weeks Twenty-six weeks
ended ended
--------------------------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
--------------------------------------
Net income (loss) $ 3,735 $ 760 $ 5,165 $ (3,323)
Weighted average common shares
outstanding: basic 7,750 7,467 7,744 7,465
Impact of stock options, warrants
and restricted stock 462 156 417 -
====== ====== ======= =======
Weighted average common shares
outstanding: diluted 8,212 7,623 8,161 7,465
====== ====== ======= =======
Net income (loss) per share: basic $ 0.48 $ 0.10 $ 0.67 $ (0.45)
====== ====== ======= =======
Net income (loss) per share: diluted $ 0.45 $ 0.10 $ 0.63 $ (0.45)
====== ====== ======= =======
Earnings per common share - basic is computed based on the weighted
average number of outstanding common shares. Earnings per common share -
diluted includes the weighted average effect of dilutive options, warrants
and restricted stock on the weighted average shares outstanding. For the
twenty-six weeks ended June 30, 2001 dilutive options, warrants and
restricted stock were not included in the computation of diluted earnings
per share because the assumed exercise of such equivalents would have been
antidilutive. The antidilutive stock options, warrants and restricted stock
not included above is 78.
Note 6. 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.
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
(included in cost of goods sold) and $2.5 million was Restructuring and
Other Charges (collectively referred herein as the "2001 Charges"). All
planned restructuring initiatives were completed in 2001 and no additional
charges were recorded during the thirteen and twenty-six weeks ended June
29, 2002.
The 2001 Charges are summarized as follows:
2001 2001
2001 Change in Net
Charge estimate charge
------ ------ ------
Cost of Goods Sold:
Special Charges:
Inventory relocation and liquidation $ 765 $ (590) $ 175
SKU reduction and inventory
adjustments related to 1999 - (65) (65)
------ ------ ------
Total charge to cost of goods sold 765 (655) 110
------ ------ ------
Operating Expenses:
Restructuring and other charges:
Plant and facilities:
Relocation of machinery & equipment 1,179 - 1,179
Lease termination & sub-lease costs 11 960 971
Elimination of obsolete assets - 29 29
Employee related costs 278 63 341
Other costs 36 (73) (37)
------ ------ ------
Total charge to operating expenses 1,504 979 2,483
------ ------ ------
Total net charges $ 2,269 $ 324 $ 2,593
====== ====== ======
The 2001 Charges were comprised of (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 and 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 restructuring plan that was
undertaken to further maximize the Company's marketing and operational
productivity and to strengthen relationships with its key retail partners
("1999 Special Charges"). The total 2001 Charges were $2,658 excluding the
impact of the 1999 Special Charges reversal.
A breakdown of the 2001 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 a $172 of charges related to non-cash
items.
The Company identified a total of 124 hourly and salaried Leominster
employees to be terminated in accordance with the 2001 restructuring
initiatives. As of June 29, 2002 all of these employees had been
terminated.
Restructuring plans established in connection with the 2001 Charges are
proceeding as planned and remaining restructuring reserves of $3,920, as of
June 29, 2002, are considered adequate. Total net cash outlays were $222 in
the twenty-six week period ended June 29, 2002. Restructuring reserve
balances as of December 29, 2001, activity during the current year and
restructuring reserve balances as of June 29, 2002, were as follows:
Reserve Amounts Reserve
balance at Utilized balance at
12/29/01 in 2002 06/29/02
------- ----- -------
Inventory $ 278 $ (87) $ 191
Leased plant and facilities 3,116 (172) 2,944
Obsolete and duplicate
leased assets 373 (42) 331
Employee related costs 50 - 50
Other 412 (8) 404
------- ----- -------
$ 4,229 $ (309) $ 3,920
======= ===== =======
Note 7. Divestiture of Product Line
On 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 (including transaction costs and other
related costs) were used to retire the Company's term debt and a portion of
its revolving credit borrowings. For more information about the divestiture
see the Current Report on Form 8-K filed with the Securities and Exchange
Commission 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 and twenty-
six weeks ended June 30, 2001, as if the Plastics, Inc. product line had
been sold at the beginning of fiscal 2001, are estimated to be:
Thirteen Twenty-six
weeks weeks
ended ended
--------------------
June 30, June 30,
2001 2001
--------------------
Net sales $ 54,386 $111,381
======= =======
Net income (loss) $ (691) $(3,773)
======= =======
Net income (loss) per common share $ (0.09) $(0.51)
======= =======
The pro forma results reflect the elimination of PI related goodwill
amortization and a reduction of interest expense on the retirement of debt
due to the divestiture for fiscal 2001. 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 8. Income Taxes
As of fiscal year end 2001 the Company had income tax loss
carryforwards relating to U.S. net operating losses of approximately $39
million which expire in 2010 to 2020. Accordingly, the income tax provision
primarily reflects foreign taxes.
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 notes 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 29, 2001.
Critical Accounting Policies
The Company's most critical accounting policies and estimates upon
which its financial position and results of operations depend are those
relating to revenue recognition, inventory valuation and restructuring
reserves. Since the end of the first quarter of fiscal year 2002, the
Company added the policy for allowance for doubtful accounts to its list of
critical accounting policies. During the second quarter, the Company did not
change those policies or adopt any new polices. The Company summarizes its
most critical accounting policies below.
* Revenue recognition. Revenue from the sale of products is recognized upon
shipment of products to customers. Allowances for estimated returns,
discounts and retailer incentives and promotions are recognized when
sales are recorded and are based on various market data, historical
trends and information from customers. Actual returns, discounts and
retailer incentives and promotions have not been materially different
from estimates.
* Allowance for Doubtful Accounts. The Company evaluates the collectibility
of its accounts receivable based upon an analysis of historical trends,
aging of accounts receivable, write-off experience and expectations of
future performance. Delinquent accounts are written off to selling,
general and administrative expense when circumstances make further
collection unlikely. In the event of a specific customer bankruptcy or
reorganization, specific reserves are established to write down accounts
receivable to the level of anticipated recovery. The Company may consult
with third-party purchases of bankruptcy receivables when establishing
specific reserves.
* Inventory valuation. The Company values inventory at cost (not in excess
of market) determined by the first-in, first-out (FIFO) method.
Inventory costs are based on standard costs, which are updated
periodically and supported by actual cost data. The Company includes
materials, labor and manufacturing overhead in the cost of inventories.
Management regularly reviews inventory for salability and has established
obsolescence reserves to absorb estimated losses. The Company also
maintains reserves against inventory shrinkage. At a minimum, the
Company takes a physical inventory verifying the items on hand and
comparing its perpetual records to physical counts. Periodic cycle
counting procedures are used to verify inventory accuracy between
physical inventories. In the interim periods, a reserve for shrinkage is
established based upon historical experience and recent physical
inventory results. Inventory obsolescence and shrinkage are charged to
cost of sales.
* Restructuring reserves. Upon approval of a restructuring plan by
management with the appropriate level of authority, the Company records
restructuring reserves for certain costs associated with plant closures
and business reorganization activities. Such costs are recorded as a
liability and include lease termination costs, employee severance and
certain employee termination benefits. These costs are not associated
with nor do they benefit continuing business activities. Inherent in the
estimation of these costs are assessments related to the most likely
expected outcome of the significant actions to accomplish the
restructuring. The Company reviews the status of restructuring activities
on an ongoing basis and, if appropriate, records changes based on updated
estimates.
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.
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
(included in cost of goods sold) and $2.5 million was Restructuring and
Other Charges (collectively referred herein as the "2001 Charges"). All
planned restructuring initiatives were completed in 2001 and no additional
charges were recorded during the thirteen and twenty-six week periods ended
June 29, 2002.
Divestiture of the Plastics, Inc. Product Line
On July 6, 2001, the Company completed the sale of its commercial
servingware product line, Plastics, Inc. ("PI"), to A & E Products Group LP,
an affiliate of Tyco International (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 affects the comparability of financial results between
periods.
Thirteen weeks ended June 29, 2002 compared to the thirteen weeks ended June
30, 2001
In the discussion and analysis that follows, all references to the
second quarter of 2002 are to the thirteen week period ended June 29, 2002
and all references to the second quarter of 2001 are to the thirteen week
period ended June 30, 2001. The following discussion and analysis compares
the actual results for the first quarter of 2002 to the actual results for
the first quarter of 2001 with reference to the following (in thousands,
except per share amounts; unaudited):
Thirteen weeks ended
---------------------------------
June 29, 2002 June 30, 2001
-------------- --------------
Net sales ....................... $59,623 100.0% $65,858 100.0%
Cost of goods sold .............. 44,092 74.0 49,954 75.9
------ ----- ------ -----
Gross profit .................. 15,531 26.0 15,904 24.1
Operating expenses .............. 7,879 13.2 8,820 13.4
Amortization of intangible assets 123 0.2 930 1.4
------ ----- ------ -----
Operating profit .............. 7,529 12.6 6,154 9.3
Interest expense ................ (3,454) (5.8) (5,391) (8.1)
Other income, net ............... (164) (0.3) 28 0.0
------ ----- ------ -----
Income before income taxes .... 3,911 6.5 791 1.2
Income tax ................... (176) (0.3) (31) (0.0)
------ ----- ------ -----
Net income ................... $ 3,735 6.2% $ 760 1.2%
====== ===== ====== =====
Net income per share - Basic $ 0.48 $ 0.10
Net income per share - Diluted $ 0.45 $ 0.10
Weighted average common shares
Outstanding -
Basic 7,750 7,467
Diluted 8,212 7,623
Net sales. Net sales of $59.6 million in 2002 decreased $6.2 million
from $65.9 million in 2001. The divestiture of the servingware product line
resulted in a sales reduction of $11.5 million leaving a sales increase of
$5.3 million for the remaining product lines. Sales increases were the
result of additional product placement at the Company's top three customers.
Sales to the top three customers were $41.4 million in 2002 and $32.4
million in 2001. The Company's primary selling season is during the second
and third quarters of the calendar year. Growth rates in any individual
quarter may not be indicative of the entire year or coming quarters.
Gross profit. The Company's gross profit in the quarter was $15.5
million as compared to $15.9 million in 2001 and gross profit margins
improved to 26.0% from 24.1% a year ago. The divested servingware product
line contributed $4.5 million of gross profit in 2001. Excluding the
servingware product line, gross margins were 26.0% as compared to 20.9% in
the prior year. Gross margins benefited from productivity and efficiency
initiatives as well as other factory cost reduction programs. Additional
margin improvements were the result of favorable raw material prices as well
as lower freight and selling commission costs.
Operating expenses. Operating expenses in 2002 were $7.9 million
versus $8.8 million in 2001. The sale of PI reduced operating expenses by
$1.3 million. During the 2002 quarter, a bad debt provision of $0.4 million
was recorded related to certain export receivables.
Amortization of intangible assets. Amortization of intangible assets
in 2002 was 0.2% of net sales or $0.1 million versus 1.4% or $0.9 million in
2001. The decrease in 2002 reflects the reduction of goodwill relating to
the disposition of PI as well as a change in accounting principles that
eliminates goodwill amortization. Remaining amortization of intangible
assets relates to patents and trademarks.
Interest expense. Interest expense of $3.5 million in 2002 decreased
$1.9 million from $5.4 million in 2001. The decrease in interest expense is
primarily due to the significant retirement of debt during the last twelve
months. Outstanding debt at June 29, 2002 was $89.3 million lower than a
year ago. Debt paydowns are due to the proceeds from the sale of PI,
improved operating results and reductions in working capital.
Other income (expense). Other income (expense) in both years is due to
small amounts of interest income and the gain or loss on the sale of retired
fixed assets. Such amounts are insignificant to total operating results.
Income tax expense. The income tax provision recorded in both years
relates to foreign taxes. No federal income tax expense was recorded in
either year due to the Company's significant tax loss carryforwards.
Net income (loss). In 2002 the Company had net income of $3.7 million,
or $0.45 per diluted share, as compared to net income of $0.8 million, or
$0.10 per diluted share in 2001. On a pro forma basis that excludes the 2001
earnings from PI and the impact of the change in accounting for goodwill,
the net loss in 2001 would have been $0.2 million, a loss of $0.02 per
share. Improved results on a pro forma basis are due to increased sales,
improved margins and reduced interest expense.
The diluted weighted average number of shares outstanding increased to
8,212,095 from 7,750,251 a year ago. The increase in the weighted average
number of shares outstanding was due to increases in the Company's stock
price and the resulting dilutive impact of stock options on the number of
shares outstanding.
Twenty-six weeks ended June 29, 2002 compared to the twenty-six weeks ended
June 30, 2001
In the discussion and analysis that follows, all references to 2002 are
to the twenty-six week period ended June 29, 2002 and all references to 2001
are to the twenty-six week period ended June 30, 2001. The following
discussion and analysis compares the actual results for 2002 to the actual
results for 2001 with reference to the following (in thousands, except per
share amounts; unaudited):
Twenty-six weeks ended
---------------------------------
June 29, 2002 June 30, 2001
-------------- --------------
Net sales ........................... $110,630 100.0% $129,984 100.0%
Cost of goods sold .................. 82,326 74.4 99,872 76.8
Special charges, net ................ - - 110 0.1
------- ----- ------- -----
Gross profit ...................... 28,304 25.6 30,002 23.1
Operating expenses .................. 15,505 14.0 18,119 14.0
Amortization of intangible assets 253 0.2 1,859 1.4
Restructuring and other charges - - 2,483 1.9
------- ----- ------- -----
Operating profit .................. 12,546 11.4 7,541 5.8
Interest expense .................... (6,938) (6.3) (10,870) (8.4)
Other income (expense), net ......... (143) (0.1) 104 0.1
------- ----- ------- -----
Income (loss) before income taxes.. 5,465 5.0 (3,225) (2.5)
Income tax (expense) ................ (300) (0.3) (98) (0.1)
------- ----- ------- -----
Net income (loss) ................... $ 5,165 4.7% $ (3,323) (2.6)%
======= ===== ======= =====
Net income (loss) per share - Basic.. $ 0.67 $ (0.45)
Net income (loss) per share - Diluted $ 0.63 $ (0.45)
Weighted average common shares
Outstanding -
Basic 7,744 7,465
Diluted 8,161 7,465
Net sales. Net sales of $110.6 million in 2002 decreased $19.4 million
from $130.0 million in 2001. The divestiture of the servingware product
line resulted in a sales reduction of $18.6 million. An additional $6.0
million of sales was lost due to the bankruptcy of several customers,
primarily Ames. More than offsetting the lost sales to bankrupt customers
was favorable sales gains at the Company's largest three customers. Sales to
the top three customers totaled $76.9 million in 2002 as compared to $64.9
million in 2001, an increase of 18%. The higher sales at these customers
are the result of increased product placement as well as the shift in sales
that has occurred as a result of several retailer bankruptcies.
Special Charges. In 2001, the Company recorded Special Charges of $0.1
million in connection with the closure of the Leominster facility and the
realignment of other manufacturing facilities. The primary component of the
Special Charges included inventory reserves to relocate and liquidate
inventory.
Gross profit. The Company's gross profit year to date was $28.3
million as compared to $30.0 million in 2001 and gross profit margins
improved to 25.6% from 23.1% a year ago. The divested servingware product
line, which had higher margins than the housewares product lines,
contributed $7.0 million of gross profit in 2001. Excluding the servingware
product line, gross margins were 25.6% in 2002 as compared to 20.8% in the
prior year. Gross margins benefited from productivity and efficiency
initiatives as well as other factory cost reduction programs. Additional
margin improvements were the result of favorable raw material prices as well
as lower freight and selling commission costs.
Operating expenses. Operating expenses in 2002 were $15.5 million
versus $18.1 million in 2001. The sale of PI reduced operating expenses
by $3.0 million. Pro forma operating expenses, which exclude PI, have
increased between years due to higher bad debt charges on export and Kmart
receivables.
Amortization of intangible assets. Amortization of intangible assets
in 2002 was 0.2% of net sales or $0.3 million versus 1.4% or $1.9 million in
2001. The decrease in 2002 reflects the reduction of goodwill relating to
the disposition of PI as well as a change in accounting principles that
eliminates goodwill amortization. Remaining amortization of intangible
assets relates to patents and trademarks.
Restructuring and Other Charges. In 2001, the Company recorded
Restructuring and Other Charges of $2.5 million 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 $6.9 million in 2002 decreased
$4.0 million from $10.9 million in 2001. The decrease in interest expense is
primarily due to the significant retirement of debt during the last twelve
months. Debt paydowns are due to the proceeds from the sale of PI, improved
operating results and reductions in working capital.
Other income (expense). Other income (expense) in both years is due to
small amounts of interest income and the gain or loss on the sale of retired
fixed assets. Such amounts are insignificant to total operating results.
Income tax expense. The income tax provision recorded in both years
relates to foreign taxes. No federal income tax expense was recorded in
either year due to the Company's significant tax loss carryforwards.
Net income (loss). In 2002 the Company had net income of $5.2 million,
or $0.63 per diluted share, as compared to a net loss of $3.3 million, or
$0.45 per diluted share in 2001. On a pro forma basis that excludes the 2001
earnings from PI, the 2001 Charges and the impact of the change in
accounting for goodwill, the net loss in 2001 would have been $0.1 million,
a loss of $0.02 per share.
The diluted weighted average number of shares outstanding increased to
8,161,168 from 7,465,369 a year ago. The increase in the weighted average
number of shares outstanding was due to increases in the Company's stock
price and the resulting dilutive impact of stock options on the number of
shares outstanding. For 2001 dilutive options, warrants and restricted stock
were not included in the diluted weighted average number of shares due to
the loss in the period.
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.
The Company's net debt position (short and long term debt, net of cash
on hand) increased during the second quarter. Net debt at June 29, 2002 was
$130.7 million as compared to $128.3 million on March 30, 2002 and $129.5
million at December 29, 2001. Negative cash flow during the second quarter
was $2.5 million as receivables and inventory increased to meet the
seasonally higher sales levels of the second and third quarters. In
addition, semi annual high yield bond interest payments of $6 million were
funded during the quarter. The Company's current working capital, excluding
cash and short term debt, was $14.5 million or $7.0 million higher than
March 30, 2002.
Capital spending in the second quarter was $1.3 million which brings
capital spending for the first six months of the year to $2.2 million.
Capital spending in the first six months of 2001 was $2.8 million. Capital
spending in the current year is primarily related to new product tooling.
The Company will make a payment of approximately $2.4 million to A & E
Products Group LP, an affiliate of Tyco International, in the third quarter
of 2002. This payment represents a final post-closing adjustment related to
the sale of the Company's Plastics, Inc. servingware product line to A & E
Products Group LP, which was completed on July 6, 2001.
The Company believes its $50 million line of credit together with its
cash flow from operations will provide sufficient capital to fund
operations, make required interest payments and meet anticipated capital
spending needs. Borrowings of $1.5 million were outstanding at June 29,
2002 and our borrowing availability was $42.8 million.
The Company was in compliance with all loan covenants as of June 29,
2002.
Management Outlook and Commentary
* In January 2002, Kmart announced that it had filed for bankruptcy
protection. Kmart is the Company's second largest customer and did $50
million of business with the Company in 2001. The Company's receivable
from Kmart at the time of the bankruptcy filing was $6.7 million. The
Company does not expect to collect this money in 2002 but is hopeful that
some portion will be recovered in 2003 when Kmart expects to emerge from
bankruptcy. As part of Kmart's recovery plan, they have announced the
closure of 284 stores, approximately 13% of their total store count. To
date, our sales to Kmart have increased over prior years despite the
store closings and reduced sales volumes in stores that have remained
open. Given the dynamic nature and size of the Kmart bankruptcy filing,
future results may be either favorably or unfavorably impacted by any
number of factors related to Kmart.
* The Company's primary selling season is during the second and third
quarters of the calendar year. Growth rates in any individual quarter
may not be indicative of the entire year or coming quarters.
* The sales in the first six months were below a year ago due to customer
bankruptcies. As we continue through the year, comparisons will be
negatively impacted as a result of the lost sales such bankruptcies
represent. Third and fourth quarter comparisons will be less impacted
than were the first six months.
* The Company's primary raw materials are plastic resin, steel, fabric and
corrugated packaging. Fluctuations in the cost of these materials can
have a significant impact on reported results.
* Plastic resin currently represents approximately 15% to 20% of the
Company's cost of goods sold. Although last year's divestiture of the
Servingware product line 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 2001, resin prices were down
slightly to the prior year and were lower than historical averages.
These cost decreases were largely passed on to customers through selling
price reductions. During the first six months of 2002, market prices for
resin have increased. Second half costs are expected to exceed the costs
paid a year ago. There is no assurance that future resin price increases
can be passed on to customers. 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.
* Recently announced steel tariffs will likely have a negative impact on
the Company's steel costs. The Company currently uses domestic steel in
its ironing boards. Due to the protection afforded by the 30% tariff,
domestic steel suppliers have already announced price increases.
* During the first half of 2001, the Company completed all of its
restructuring initiatives including the closure of its east coast
operations and the realignment of several manufacturing facilities.
These changes were made to improve production efficiency and lower costs.
Savings as compared to 2001 were realized in the first half of 2002 and
the improved processes remain in place. As we begin to anniversary the
changed processes, incremental savings between years will be less.
* As a result of operating losses and restructuring write-offs incurred in
2000, the Company has significant tax loss carryforwards. These
carryforwards can be used to reduce taxable income in future periods.
The Company estimates that its tax loss carryforwards as of December 29,
2001 are in excess of $39 million.
* The Company is highly leveraged with total debt representing over two
times our net tangible assets. Accordingly, earnings and cash flow could
be materially impacted by changes in interest rates or other business
factors. Furthermore, the financial and operating covenants related to
the Company's debt agreement place some restrictions on operations.
During all of 2001 and the first half of 2002, the Company operated well
within its financial and operating covenants and expects to operate
within the covenants in the remainder of 2002.
* The Company's 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. The
covenants take into account seasonal fluctuations and give recognition to
the Company's collateral base. Because the financing is asset based,
availability of funds to borrow is dependent on the quality of the
Company's asset base, primarily its receivables and inventory. Should
Fleet Capital determine that such assets do not meet the bank's credit
tests, availability can be restricted. Given the Company's retail
customer base, it is possible that certain customers could be excluded
from the asset base thus reducing credit availability.
* Over the past four years, the Company's growth has come primarily via
acquisition. The Company still believes that acquisitions provide the
best opportunity to meaningfully grow the Company's sales and profits.
However, until we are able to significantly increase our cash position or
reduce our debt levels, we will not pursue any major acquisitions.
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 thirteen and
twenty-six weeks ended June 29, 2002 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-two week
period ended December 29, 2001.
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 2002. 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 second quarter 2002 as compared to
the fourth quarter 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 64%
of the Company's total annual plastic resin purchases. The Company expects
to purchase in excess of 140 million pounds of resin in 2002. The
agreements expire in December 2002 and December 2003. 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
* 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
* financial condition of our retail customers
* relationships with retailers
* the impact of federal, state and local environmental requirements
(including the impact of 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. Such reports attempt to advise interested parties of the
factors which affect the Company's business.
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
On May 23, 2002, the 2002 Annual Meeting of Stockholders of the Company was
held. The following is a brief description of the matters voted upon at the
meeting and tabulation of the voting therefor:
Proposal No. 1. The election of the following directors, who will serve
until the next annual meeting of stockholders, or until their successors are
elected and qualified, or their earlier death or resignation:
Nominee For Withheld
------- --- --------
Charles R. Campbell 7,671,793 20,506
Marshall Ragir 7,604,293 88,006
Jeffrey C. Rubenstein 7,585,932 106,367
Daniel B. Shure 7,671,793 20,506
Joel D. Spungin 7,645,799 46,500
James R. Tennant 7,660,658 31,641
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits - none
(b) Current reports on Form 8-K.
Registrant filed a Current Report on Form 8-K dated May 13, 2002,
to disclose that the Registrant terminated the engagement of
Arthur Andersen LLP as its independent accountant. The decision
to terminate the engagement of Arthur Andersen LLP was recommended
by the Company's Audit Committee and approved by its Board of
Directors.
Registrant filed a Current Report on Form 8-K dated May 20, 2002,
to disclose that the Registrant named KPMG LLP as the Company's
independent accountant to audit the Company's financial statements.
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 thereunto duly authorized.
Home Products International, Inc.
By: /s/ James E. Winslow
--------------------------------
James E. Winslow
Executive Vice President and
Chief Financial Officer
Dated: August 13, 2002