UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 30, 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 May 4, 2002 - 7,837,438
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
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 18
Part II. Other Information
Items 1 through 5 are not applicable n/a
Item 6. Exhibits and Reports on Form 8-K 20
Signature 21
PART I FINANCIAL INFORMATION.
Item 1. Financial Statements
HOME PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
(Unaudited)
March 30, December 29,
2002 2001
-------- --------
Assets
Current assets:
Cash and cash equivalents ................... $ 1,380 $ 1,091
Accounts receivable, net .................... 36,395 36,577
Inventories, net ............................ 19,802 17,043
Prepaid expenses and other current assets 1,809 2,275
-------- --------
Total current assets ...................... 59,386 56,986
-------- --------
Property, plant and equipment - at cost ....... 88,328 87,502
Less accumulated depreciation and amortization (47,326) (44,871)
-------- --------
Property, plant and equipment, net ............ 41,002 42,631
-------- --------
Patents and non-compete agreements, net ....... 1,490 1,616
Goodwill, net ................................. 74,759 74,759
Other non-current assets ...................... 11,179 11,351
-------- --------
Total assets .............................. $ 187,816 $187,343
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ............................ $ 15,546 $ 16,834
Accrued liabilities ......................... 34,978 33,916
Current maturities of long-term obligations 158 158
-------- --------
Total current liabilities ................. 50,682 50,908
-------- --------
Long-term obligations - net of current
maturities .................................. 129,539 130,447
Other liabilities ............................. 3,200 3,168
Stockholders' equity (deficit):
Preferred Stock - authorized, 500,000 shares,
$.01 par value; - None issued ............. - -
Common Stock - authorized 15,000,000 shares,
$.01 par value; 8,659,832 shares issued at
March 30, 2002 and 8,641,338 shares issued
at December 29, 2001....................... 87 87
Additional paid-in capital .................. 50,010 49,920
Accumulated deficit ......................... (38,833) (40,262)
Common stock held in treasury - at cost
822,394 shares at March 30, 2002 and
December 29, 2001 ......................... (6,528) (6,528)
Deferred compensation ....................... (341) (397)
-------- --------
Total stockholders' equity ................ 4,395 2,820
-------- --------
Total liabilities and stockholders' equity $ 187,816 $ 187,343
======== ========
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
ended
---------------------
March 30, March 31,
2002 2001
-------- --------
Net sales .......................... $ 51,007 $ 64,126
Cost of goods sold ................. 38,234 49,918
Special charge, net ................ - 110
-------- --------
Gross profit .................... 12,773 14,098
Operating expenses:
Selling.......................... 4,317 5,369
Administrative................... 3,309 3,930
Amortization of intangible assets 130 929
Restructuring and other charges.. - 2,483
-------- --------
7,756 12,711
-------- --------
Operating profit................. 5,017 1,387
-------- --------
Other income (expense):
Interest income ................. 49 10
Interest (expense) .............. (3,484) (5,479)
Other income (expense), net ..... (28) 66
-------- --------
(3,463) (5,403)
-------- --------
Income (loss) before income taxes 1,554 (4,016)
Income tax (expense) ............... (124) (67)
-------- --------
Net income (loss) ............... $ 1,430 $ (4,083)
======== ========
Net income (loss) per common share:
Basic ........................... $ 0.19 $ (0.55)
======== ========
Dilutive ........................ $ 0.18 $ (0.55)
======== ========
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)
Thirteen weeks ended
---------------------
March 30, March 31,
2002 2001
-------- --------
Operating activities:
Net income (loss)............................. $ 1,430 $ (4,083)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization ............... 2,585 3,996
Amortization of stock compensation .......... 56 56
Loss on the abandonment of assets ........... 167 -
Other, net .................................. 198 197
Changes in current assets and liabilities:
Decrease in accounts receivable ........... 182 2,505
(Increase) in inventories ................. (2,759) (1,372)
Decrease in prepaid expenses and other 466 272
(Decrease) in accounts payable ............ (1,288) (1,534)
Increase (decrease) in accrued liabilities. 1,062 (334)
-------- --------
Net cash provided (used) by operating activities 2,099 (297)
-------- --------
Investing activities:
Capital expenditures, net..................... (993) (1,676)
-------- --------
Net cash used for investing activities ......... (993) (1,676)
-------- --------
Financing activities:
Payments under loan and security agreement... (859) -
Net borrowings on revolving line of credit... - 2,750
Payments on term loan borrowings............. - (1,500)
Payment of capital lease obligation.......... (49) (37)
Exercise of stock options, issuance of common
stock under stock purchase plan and other.. 91 -
-------- --------
(817) 1,213
-------- --------
Net cash (used) provided by financing activities
Net increase (decrease) in cash and cash
equivalents.................................. 289 (760)
Cash and cash equivalents at beginning of
period....................................... 1,091 3,152
-------- --------
Cash and cash equivalents at end of period $ 1,380 $ 2,392
======== ========
Supplemental disclosures - Cash paid in the
period for:
Interest..................................... $ 85 $ 1,751
-------- --------
Income taxes, net............................ $ 15 $ 2
-------- --------
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 March 30, 2002 and March 31, 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 March 30, 2002 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 29, 2001. The results of operations for the thirteen weeks ended
March 30, 2002 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 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 1. 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.
Note 2. Advertising Costs.
In accordance with Statement of Position ("SOP") 93-7, "Reporting on
Advertising Costs," advertising done on the Company's behalf by retailers is
negotiated with each retailer as part of an overall trade allowance program
and is paid through advertising allowances. All trade allowance program
costs (including advertising allowances) are expensed and accrued as sales
are recorded. Trade allowance program costs (including advertising
allowances) in first quarter of 2002 and 2001 were $5,191 and $7,413,
respectively.
Note 3. New Accounting Standards
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 adoption of these new standards did not
have an effect on the Company's results of operations as its historical
accounting policy has been to include these types of sales incentives as a
deduction from sales.
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 sales
rather than as marketing expense. The Company adopted EITF No. 00-25 in the
fourth quarter of 2001. The adoption of these new standards did not have an
effect on the Company's results of operations as its historical accounting
policy has been to include these types of sales arrangements as a deduction
of sales.
Note 4. Goodwill and Other Intangibles
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 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 each statement, which apply to goodwill
and intangible assets acquired prior to June 30, 2001, were adopted by the
Company on December 30, 2001.
Upon adoption of SFAS No. 142, the Company performed an impairment test
of its goodwill 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 its adoption have not been restated.
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
ended
----------------------
March 30, March 31,
2002 2001
------ --------
Net income (loss), as reported ...... $ 1,430 $ (4,083)
Goodwill amortization, as reported... - 799
------ --------
Net income (loss), as adjusted ...... $ 1,430 $ (3,284)
====== ========
Basic earnings (loss) per share, as
reported .......................... $ 0.19 $ (0.55)
Goodwill amortization, as reported... 0.00 0.11
------ --------
Basic earnings (loss) per share, as
adjusted .......................... $ 0.19 $ (0.44)
====== ========
Diluted earnings (loss) per share, as
reported .......................... $ 0.18 $ (0.55)
Goodwill amortization, as reported... 0.00 0.11
------ --------
Diluted earnings (loss) per share, as
adjusted .......................... $ 0.18 $ (0.44)
====== ========
Note 5. Long-Lived Assets
The FASB issued SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", dated August 2001. This statement supercedes SFAS 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 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 144 on December
29, 2001. As of March 30, 2002, the Company determined that no impairment
of long-lived assets existed.
Note 6. 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.
March 30, December 29,
2002 2001
------ ------
Finished goods..................... $14,029 $12,016
Work-in-process.................... 1,769 1,717
Raw materials...................... 4,004 3,310
------ ------
$19,802 $17,043
====== ======
Note 7. Net Income (Loss) Per Share
The following information reconciles net income (loss) per share basic
and diluted:
Thirteen weeks
ended
-----------------------
March 30, March 31,
2002 2001
---------------------
Net income (loss) ......................... $ 1,430 $ (4,083)
Weighted average common shares outstanding:
basic.................................... 7,702 7,429
Impact of stock options, warrants and
restricted stock ........................ 373 -
------ --------
Weighted average common shares outstanding:
diluted.................................. 8,075 7,429
====== ========
Net income (loss) per share: basic $ 0.19 $ (0.55)
====== ========
Net income (loss) per share: diluted $ 0.18 $ (0.55)
====== ========
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. In the
first quarter 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.
Note 8. 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 and
$2.5 million as 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-week period ended March 30, 2002.
The 2001 Charges are summarized as follows:
Q1-2001 Q1-2001 Q1-2001
Additional 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 & 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 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 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 March 30, 2002 all of these employees had been
terminated.
Restructuring plans established in connection with the 2000/2001
charges are proceeding as planned and remaining restructuring reserves of
$4,070, as of March 30, 2002, are considered adequate. Total net cash
outlays were $107 in the first quarter 2002. Restructuring reserve balances
as of December 29, 2001, activity during the current year and restructuring
reserve balances as of March 30, 2002, were as follows:
Amounts
Reserve Utilized Reserve
balance at in balance at
12/29/01 2002 03/30/02
------- ----- ------
Inventory $ 278 $ (52) $ 226
Plant and facilities 3,116 (86) 3,030
Obsolete and duplicate assets 373 (21) 352
Employee related costs 50 - 50
Other 412 - 412
------- ----- ------
$ 4,229 $ (159) $ 4,070
======= ===== ======
Note 9. 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. 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 weeks ended
March 31, 2001, as if the Plastics, Inc. product line had been sold at the
beginning of fiscal 2001, are estimated to be:
Thirteen weeks
ended
---------------------
March 30, March 31,
2002 2001
------------------
Net sales ........................... $ 51,007 $ 56,995
======= =======
Net income (loss), excluding the 2001
Charges ........................... $ 1,430 $ (489)
======= =======
Net income (loss) per common share,
excluding the 2001 Charges ........ $ 0.18 $ (0.07)
======= =======
EBITDA, excluding the 2001 Charges $ 7,574 $ 6,810
======= =======
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 10. 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 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 29, 2001.
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 and
$2.5 million as 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-week period ended March 30, 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 March 30, 2002 compared to the thirteen weeks ended
March 31, 2001
In the discussion and analysis that follows, all references to the
first quarter of 2002 are to the thirteen-week period ended March 30, 2002
and all references to the first quarter of 2001 are to the thirteen-week
period ended March 31, 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;
unaudited):
Thirteen weeks ended
--------------------------------------
March 30, 2002 March 31, 2001
----------------- -----------------
Net sales ........................ $ 51,007 100.0% $ 64,126 100.0%
Cost of goods sold ............... 38,234 75.0 49,918 77.8
Special charges, net ............. - - 110 0.2
------- ----- ------- -----
Gross profit .................... 12,773 25.0 14,098 22.0
Operating expenses ............... 7,626 15.0 9,299 14.5
Amortization of intangible assets. 130 0.3 929 1.4
Restructuring and other charges... - - 2,483 3.9
------- ----- ------- -----
Operating profit ................ 5,017 9.7 1,387 2.2
Interest expense ................. (3,484) (6.8) (5,479) (8.5)
Other income ..................... 21 0.0 76 0.1
------- ----- ------- -----
Income (loss) before income taxes 1,554 2.9 (4,016) (6.2)
Income tax (expense) ............. (124) (0.2) (67) (0.1)
------- ----- ------- -----
Net income (loss) ............... $ 1,430 2.7% $ (4,083) (6.3)%
======= ===== ======= =====
Net income (loss) per share - Basic $0.19 $(0.55)
Net income (loss) per share - Diluted $0.18 $(0.55)
Weighted average common shares
Outstanding -
Basic 7,702 7,429
Diluted 8,075 7,429
Net sales. Net sales of $51.0 million in 2002 decreased $13.1 million
from $64.1 million in 2001. Approximately $4.0 million of the sales decline
was due to the bankruptcy of several customers, primarily Ames. Kmart sales
were down $2 million to a year ago as they balanced inventory to accommodate
their announced store closings. Also impacting comparisons to 2001 was the
divestiture of the servingware product line which accounted for $7.1 million
of the sales decrease. Sales to the Company's top three customers were 70%
of total sales in 2002 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 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 in the quarter was $12.8
million as compared to $14.1 million in 2001 and gross profit margins
improved to 25.0% from 22.0% a year ago. The divested servingware product
line contributed $2.5 million of gross profit in 2001. Excluding the
servingware product line, gross margins were 25.0% as compared to 20.6% 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 $7.6 million
versus $9.3 million in 2001. The sale of PI reduced operating expenses by
$1.6 million. During the quarter, a bad debt provision of $0.5 million was
recorded relating to January 2002 sales prior to the Kmart bankruptcy
filing. In 2001, bad debt expense was $0.3 million.
Amortization of intangible assets. Amortization of intangible assets
in 2002 was 0.3% of net sales or $0.1 million versus 1.4% or $0.9 million in
2001. The decrease in 2001 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 non-compete agreements.
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 $3.5 million in 2002 decreased
$2.0 million from $5.5 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 March 30, 2002 was $93.1 million lower than a
year ago. Debt paydowns are due to the proceeds from the sale of PI as well
as over $22 million of positive cash flow from operating results.
Other income. Other income in both years is due to small amounts of
interest income and 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 taxes were recognized in either
year due to the Company's significant tax loss carryforwards.
Net income (loss). In 2002 the Company had net income of $1.4 million,
or $0.18 per diluted share, as compared to a net loss of $4.1 million, or
$0.55 per share in 2001. On a pro forma basis that excludes the results of
PI from 2001 as well as the 2001 Charges, the net loss in 2001 would have
been $0.5 million, $0.07 per share.
The weighted average number of shares outstanding increased to
8,075,198 from 7,428,549 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.
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) was reduced in the first quarter. Net debt was $128.3 million on
March 30, 2002 as compared to $129.5 million at December 29, 2001. The
decrease of $1.2 million was due to positive operating results offset by an
increase in working capital.
The Company's working capital, excluding cash and short term debt, was
$7.5 million or $2.4 million higher than December 29, 2001. The increase in
working capital was due to higher inventories in anticipation of the
Company's seasonally higher sales in the second quarter.
Capital spending in the first quarter was $1.0 million as compared to
$1.7 million a year ago. Capital spending in the current year is primarily
related to new product development.
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 debt repayments and meet anticipated capital
spending needs. There were no borrowings outstanding under the line of
credit at March 30, 2002 and our borrowing availability was approximately
$38 million.
The Company was in compliance with all loan covenants as of March 30,
2002.
Management Outlook and Commentary
* The first quarter sales 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.
* 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, Kmart has been unable to estimate the likely impact of the store
closings on our sales.
* 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. Management does not
expect to see a significant change in the cost of these materials as
compared to 2001. However the cost of these items is affected by many
variables outside the control of the Company and changes to the current
perceived trends are possible. During the first quarter, market prices
for resin were about the same as in the fourth quarter of 2001.
* 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. There is no assurance that the current costing levels
will continue or 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 quarter of 2002
and will continue through the second quarter.
* 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 2 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 quarter of 2002, the Company operated
well within its financial and operating covenants and expects to operate
within the covenants in 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.
* Over the past 4 years, the Company's growth has come 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.
Critical Accounting Policies
In the Company's Form 10-K for the year ended December 29, 2001, the
Company's most critical accounting policies and estimates upon which our
financial status depends upon were identified as those relating to revenue
recognition, inventory valuation and restructuring reserves. The Company
reviewed its policies and determined that those policies remain our most
critical accounting policies for the quarter ended March 30, 2002. The
Company did not make any changes in those policies during the quarter.
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 quarter
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 first 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 120 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Index
99.1 Press release dated February 26, 2002
99.2 Press release dated April 30, 2002
(b) Reports on Current Form 8-K.
Registrant filed a Current Report on Form 8-K dated February 26,
2002, to disclose that the Registrant issued a press release
disclosing its financial results for its fourth quarter and fiscal
year end 2001 results.
Registrant filed a Current Report on Form 8-K dated May 2, 2002,
to disclose that the Registrant issued a press release disclosing
its financial results for its first quarter 2002.
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: May 7, 2002