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 30, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-17237
HOME PRODUCTS INTERNATIONAL, INC.
------------------------------------------------------
(Exact name of registrant as specified in its Charter)
Delaware 36-4147027
------------------------------- -------------------
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
4501 West 47th Street
Chicago, Illinois 60632
--------------------- ----------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number including area code (773) 890-1010.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Common shares, par value $0.01, outstanding as of August 4, 2001 - 7,773,142
HOME PRODUCTS INTERNATIONAL, INC.
INDEX
Page
Number
------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of
Operations and Retained Earnings 4
Condensed Consolidated Statements of
Cash Flows 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 12
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 19
Part II. Other Information
Items 1 through 3 and Item 5 are not applicable
Item 4. Submission of Matters to a Vote of
Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 21
Signature 22
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HOME PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
(unaudited)
June 30, December 30,
2001 2000
-------- --------
Assets
Current assets:
Cash and cash equivalents ............... $ 1,778 $ 3,152
Accounts receivable, net ................ 43,430 46,095
Inventories, net ........................ 28,414 27,388
Prepaid expenses and other current assets 3,230 4,051
-------- --------
Total current assets .................. 76,852 80,686
-------- --------
Property, plant and equipment - at cost.... 97,378 94,161
Less accumulated depreciation and
amortization............................. (44,329) (38,280)
-------- --------
Property, plant and equipment, net......... 53,049 55,881
-------- --------
Intangible, net and other assets........... 127,286 129,085
-------- --------
Total assets .......................... $ 257,187 $ 265,652
======== ========
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable ........................ $ 16,374 $ 20,521
Accrued liabilities ..................... 34,885 34,981
Current maturities of long-term
obligations............................ 7,058 6,558
-------- --------
Total current liabilities ............. 58,317 62,060
-------- --------
Long-term obligations - net of current
maturities............................... 213,475 215,051
Other liabilities.......................... 3,103 3,038
Stockholders' deficit:
Preferred Stock - authorized, 500,000
shares, $.01 par value; - None issued.. - -
Common Stock - authorized 15,000,000
shares, $.01 par value; 8,568,038 shares
issued at June 30, 2001 and 8,561,642
shares issued at December 30, 2000 ..... 86 86
Additional paid-in capital .............. 49,811 49,811
Accumulated deficit ..................... (60,565) (57,242)
Common stock held in treasury - at cost
822,394 shares at June 30, 2001 and
December 30, 2000...................... (6,528) (6,528)
Deferred compensation ................... (512) (624)
-------- --------
Total stockholders' deficit ........... (17,708) (14,497)
-------- --------
Total liabilities and stockholders'
deficit.............................. $ 257,187 $ 265,652
======== ========
The accompanying notes are an integral part of the financial statements.
HOME PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Statements of Operations and Retained Earnings
(unaudited)
(in thousands, except per share amounts)
Thirteen weeks Twenty-six weeks
ended ended
--------------------------------------
June 30, June 24, June 30, June 24,
2001 2000 2001 2000
--------------------------------------
Net sales ......................... $65,858 $70,910 $129,984 $138,999
Cost of goods sold ................ 49,954 56,026 99,872 108,196
Special charge, net ............... - - 110 -
------ ------ ------- -------
Gross profit .................... 15,904 14,884 30,002 30,803
Operating expenses:
Selling ......................... 5,032 6,129 10,401 13,235
Administrative .................. 3,788 3,769 7,718 7,641
Amortization of intangible assets 930 1,315 1,859 2,635
Restructuring and other charges.. - - 2,483 -
------ ------ ------- -------
9,750 11,213 22,461 23,511
------ ------ ------- -------
Operating profit ................ 6,154 3,671 7,541 7,292
------ ------ ------- -------
Other income (expense):
Interest income ................. 7 33 17 48
Interest (expense) .............. (5,391) (5,634) (10,870) (10,771)
Other income (expense), net ..... 21 33 87 (564)
------ ------ ------- -------
(5,363) (5,568) (10,766) (11,287)
------ ------ ------- -------
Income (loss) before income taxes 791 (1,897) (3,225) (3,995)
Income tax (expense) benefit ...... (31) 793 (98) 1,674
------ ------ ------- -------
Net income (loss) ............... $ 760 $(1,104) $ (3,323) $ (2,321)
====== ====== ======= =======
Net income (loss) per common share:
Basic ........................... $ 0.10 $ (0.15) $ (0.45) $ (0.32)
====== ====== ======= =======
Dilutive ........................ $ 0.10 $ (0.15) $ (0.45) $ (0.32)
====== ====== ======= ========
The accompanying notes are an integral part of the financial statements.
HOME PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited)
(dollars in thousands)
Twenty-six weeks ended
---------------------
June 30, June 24,
2001 2000
-------- --------
Operating activities:
Net loss ....................................... $ (3,323) $ (2,321)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization ................. 7,965 9,208
Amortization of stock compensation ............ 112 -
Other, net .................................... (52) 688
Changes in current assets and liabilities:
Decrease in accounts receivable .............. 2,665 6,645
(Increase) in inventories .................... (1,026) (12,913)
Decrease in prepaid expenses and other........ 360 2,335
Increase (decrease) in accounts payable....... (4,147) 3,882
(Decrease) in accrued liabilities ............ (1,314) (6,109)
-------- --------
Net cash provided by operating activities........ 1,240 1,415
-------- --------
Investing activities:
Proceeds from sale of building, net ............ 1,218 -
Capital expenditures, net ...................... (2,756) (7,884)
-------- --------
Net cash used for investing activities........... (1,538) (7,884)
-------- --------
Financing activities:
Payments on term loan borrowings ............... (1,500) (2,500)
Borrowings under revolving line of credit....... 500 7,750
Payment of capital lease obligation ............ (76) (92)
Exercise of stock options, issuance of common
stock under stock purchase plan and other...... - 247
-------- --------
Net cash (used) provided by financing activities (1,076) 5,405
-------- --------
Net decrease in cash and cash equivalents....... (1,374) (1,064)
Cash and cash equivalents at beginning of period 3,152 4,861
-------- --------
Cash and cash equivalents at end of period...... $ 1,778 $ 3,797
======== ========
Supplemental disclosures: Cash paid in the
period for:
Interest ....................................... $ 9,983 $ 10,130
-------- --------
Income taxes, net .............................. $ 208 $ -
-------- --------
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 include the accounts of
the Company and its subsidiary. All significant intercompany transactions
and balances have been eliminated.
The unaudited condensed financial statements included herein as of and
for the thirteen-weeks ended June 30, 2001 and June 24, 2000 reflect, in the
opinion of the Company, all adjustments (which include only normal recurring
adjustments) necessary for the fair presentation of the financial position,
the results of operations and cash flows. These unaudited financial
statements should be read in conjunction with the audited financial
statements and related notes thereto included in the Company's 2000 Annual
Report on Form 10-K. The results for the interim periods presented are not
necessarily indicative of results to be expected for the full year.
Note 2. Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year's presentation.
Note 3. New Accounting Standards and Pending Accounting Changes
In June 1998 and 1999, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133
and No. 137, respectively. The FASB issued SFAS No. 138 to amend SFAS No.
133, in June 2000. Collectively, these statements are intended to represent
the comprehensive guidance on accounting for derivatives and hedging
activities. The adoption of these new standards on December 31, 2000 did
not have an effect on the Company's results of operations as it has no
derivatives or hedging instruments.
Current and Pending Accounting Changes.
In May 2000, the FASB's Emerging Issues Task Force (EITF) reached a
consensus on Issue No. 14, "Accounting for Certain Sales Incentives". This
issue addresses the recognition, measurement, and income statement
classification of various types of sales incentives, including discounts,
coupons, rebates, and offers for free products. Upon adopting EITF No. 00-
14, which is effective with the fourth quarter of 2001, it is required that
these sales incentives be classified as deductions from sales within the
income statement. The Company's historical accounting policy has been to
include these types of sales incentives as a deduction of sales.
In January 2001, the EITF reached a consensus on Issue 3 of No. 00-22,
"Accounting for Points and Certain Other Time-Based or Volume-Based Sales
Incentive Offers, and Offers for Free Products or Services to be Delivered
in the Future". This consensus required that certain rebate offers and free
products that are delivered subsequent to a single exchange transaction be
recognized when incurred and reported as a reduction of sales. The Company
is currently in compliance with this pronouncement, which was effective the
first quarter 2001.
In April 2001, the EITF reached a consensus on Issue No. 00-25 ("EITF
00-25"), "Accounting for Consideration from a Vendor to a Retailer in
Connection with the Purchase or Promotion of the Vendor's Products," which
requires the costs of certain vendor consideration, such as slotting fees
and off-invoice arrangements, to be classified as a reduction of revenue
rather than as marketing expense. The Company will be required to adopt EITF
No. 00-25 by the fourth quarter of 2001. The Company believes that it is
currently in compliance with this pronouncement.
In July 2001 the Financial Accounting Standards Board (FASB) issued
SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other
Intangible Assets." SFAS No. 141 requires business combinations initiated
after June 30, 2001 to be accounted for using the purchase method of
accounting, and broadens the criteria for recording intangible assets
separate from goodwill. Recorded goodwill and intangibles will be evaluated
against this new criteria and may result in certain intangibles being
combined into goodwill, or alternatively, amounts initially recorded as
goodwill may be separately identified and recognized apart from goodwill.
SFAS No. 142 requires the use of a nonamortization approach to account for
purchased goodwill and certain intangibles. Under a nonamortization
approach, goodwill and certain intangibles will not be amortized into
results of operations, but instead would be reviewed for impairment and
written down and charged to results of operations only in the periods in
which the recorded value of goodwill and certain intangibles is more than
its fair value. The provisions of each statement, which apply to goodwill
and intangible assets acquired prior to June 30, 2001, will be adopted by
the Company on January 1, 2002. The adoption of these accounting standards
will reduce the Company's amortization of goodwill commencing January 1,
2002.
Note 4. Inventories
The components of the Company's inventory consists of direct labor,
direct materials and the applicable portion of the overhead required to
manufacture the goods.
June 30, December 30,
2001 2000
------ ------
Finished goods..................... $21,007 $15,420
Work-in-process.................... 2,112 2,027
Raw materials...................... 5,295 9,941
------ ------
$28,414 $27,388
====== ======
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 30, June 24, June 30, June 24,
2001 2000 2001 2000
------------------------------------
Net income (loss) .................. $ 760 $(1,104) $(3,323) $(2,321)
Weighted average common shares
outstanding: basic ............... 7,467 7,272 7,465 7,272
Impact of stock options and warrants 156 - - -
------ ------ ------ ------
Weighted average common shares
outstanding: diluted ............. 7,623 7,272 7,465 7,272
====== ====== ====== ======
Net income (loss) per share: basic.. $ 0.10 $ (0.15) $ (0.45) $ (0.32)
====== ====== ====== ======
Net income (loss) per share: diluted $ 0.10 $ (0.15) $ (0.45) $ (0.32)
====== ====== ====== ======
Stock options and warrants are not considered dilutive in the thirteen
week period ended June 24, 2000 and twenty-six week periods ended June 30,
2001 and June 24, 2000 because the effect would be anti-dilutive.
Note 6. Divestiture of the Plastics, Inc. 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 $68 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 on July 18, 2001 and Current Report
on Form 8-K/A filed on July 27, 2001.
The unaudited pro forma historical results for the thirteen weeks ended
June 30, 2001 and June 24, 2000 as well as the twenty-six weeks ended June
30, 2001 and June 24, 2000, as if the Plastics, Inc. product line had been
sold at the beginning of fiscal 2001 and 2000, respectively, are estimated
to be:
Thirteen weeks Twenty-six weeks
ended ended
---------------------------------------
June 30, June 24, June 30, June 24,
2001 2000 2001 2000
---------------------------------------
Net sales ................... $54,386 $60,054 $111,381 $121,339
====== ====== ======= =======
Net loss .................... $ (691) $(1,438) $ (3,773) $ (2,024)
====== ====== ======= =======
Net loss per common share ... $ (0.09) $ (0.20) $ (0.51) $ (0.28)
====== ====== ======= =======
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 7. 2001 Special, Restructuring and Other Charges
In 2000, the Company began implementation of a restructuring plan that
was undertaken to reduce fixed costs and better position the Company for
sustained profitability. The restructuring plan entails the closure of
the Leominster, MA facility, reconfiguration of remaining manufacturing
facilities, a reduction in headcount and a realignment of the selling
process.
The Company began to implement the restructuring plan in December 2000
and accordingly a pretax charge of $12.4 million was taken, of which $1.9
million was deemed to be Special Charges and $10.5 million as Restructuring
and Other Charges (collectively referred to herein as the "2000 Charges").
During the first quarter of 2001 the Company recorded a pretax charge of
$2.6 million, of which $0.1 million was deemed to be Special Charges and
$2.5 million as Restructuring and Other Charges (collectively referred
herein as "2001 Charges"). No additional charges were recorded during the
thirteen-week period ended June 30, 2001. The restructuring actions are
expected to be complete by the third quarter of 2001.
The Company anticipates that these restructuring actions will result in
annual pretax cash savings of $5.0-$6.0 million of which $2.0-$3.0 million
is expected to be realized in 2001.
The 2001 Charges are summarized as follows:
Thirteen Twenty-six
Weeks Ended Weeks Ended
June 30, June 30,
2001 2001
------ ------
Cost of Goods Sold:
Special Charges:
Inventory relocation and liquidation $ - $ 175
SKU reduction and inventory adjustments
related to 1999 - (65)
------ ------
Total charge to cost of goods sold - 110
------ ------
Operating Expenses:
Restructuring and other charges:
Plant and facilities:
Relocation of machinery & equipment - 1,179
Lease termination & sub-lease costs - 971
Elimination of obsolete assets - 29
Employee related costs - 341
Other costs - (37)
------ ------
Total charge to operating expenses - 2,483
------ ------
Total net charges $ - $ 2,593 (1)
------ ------
(1) The 2001 Charges of $2,593, is comprised of $2,269 in additional charges
and a change in estimate of $389 and is net of $(65) adjustment related to
1999 restructuring.
The components of the 2001 Charges were (i) $175 charge to relocate and
liquidate inventory at Leominster and other facilities, (ii) $1,179 charge
for the relocation of machinery and equipment and $971 charge for lease
termination & sub-lease costs (total net charge of $2,150), (iii) $29 charge
to write off obsolete and duplicate assets that were used at the Leominster
facility and other facilities, (iv) $341 charge for employee related
severance costs, (v) ($37) reversal of charge associated with other related
restructuring costs, and (vi) ($65) reversal of SKU reduction and inventory
adjustments relating to the 1999 Special Charges. The total 2001 Charges
were $2,658 excluding the impact of the 1999 Special Charges reversal.
A breakdown of the net charge (excluding the impact of the 1999 Special
Charges) between cash and non-cash items is summarized as follows. The
special charges are comprised of $120 of cash and $55 for non-cash items.
The restructuring and other charges are comprised of $2,311 of cash items
and $172 of charges related to non-cash items.
As a result of the closure of the Leominster facility the Company
eliminated approximately 124 hourly and salaried positions in Leominster.
Restructuring plans established in connection with the 2000/2001
charges are proceeding as planned and remaining restructuring reserves of
$8,300, as of June 30, 2001, are considered adequate to cover committed
restructuring actions. Restructuring reserve balances as of December 30,
2000, activity during the current year and restructuring reserve balances as
of June 30, 2001, were as follows:
Reserve Amounts Reserve
balance Additional Change in utilized balance
at charge estimate in at
12/30/00 2001 2001 2001 06/30/01
------ ------ ----- ------ ------
Inventory $ 2,744 $ 765 $ (590) $(1,645) $ 1,274
Plant and facilities 3,950 1,190 960 (702) (a) 5,398
Obsolete and
duplicate assets 916 - 29 (243) 702
Employee related
costs 835 278 63 (885) 291
Other 875 36 (73) (203) 635
------ ------ ----- ------ ------
$ 9,320 $ 2,269 $ 389 $(3,678) (a) $ 8,300
------ ------ ----- ------ ------
(a) The plant and facilities reserve includes cash proceeds of $1,218 from
the sale of certain assets. The proceeds were in excess of the reserve
established for the disposal of these assets, resulting in a gain of $1,218.
The gain is currently included in the plant and facilities reserve pending
the finalization/completion of the Company's remaining plant and facilities
restructuring actions as well as the restructuring reserve in total.
Amounts utilized, excluding the cash proceeds of $1,218, were $4,896 for the
twenty-six week period ended June 30, 2001. Net cash outlays were $2,330.
Certain reserve balances as of December 30, 2000 were reclassified to be
consistent with the current presentation. The reclassifications did not
effect the initial charges recorded in the fourth quarter of 2000.
Note 8. 1999 Special, Restructuring and Other Nonrecurring Charges
In the third quarter of 1999, the Company recorded a $15,000 pretax
charge, comprised of a Special Charge and a Restructuring and Other
Nonrecurring Charge (collectively referred to herein as the "1999 Charges").
The 1999 Charges were incurred in accordance with a plan adopted in July
1999 to consolidate two of the Company's wholly-owned subsidiaries and to
implement a national branding strategy.
Restructuring plans established in connection with the 1999 charges are
proceeding as planned and remaining restructuring reserves of $906 as of
June 30, 2001, are considered adequate to cover committed restructuring
actions. Restructuring reserve balances as of December 30, 2000, activity
during the current year and restructuring reserve balances as of June 30,
2001, were as follows:
Reserve Amounts Reversal Change in Reserve
balance at utilized in of reserve estimate balance at
12/30/00 2001 2001 2001 06/30/01
------ ------ ----- ------ ------
Inventory $ 212 $ (112) $ (65) $ - $ 35
Elimination of
duplicate assets 830 (90) - - 740
Employee costs 75 (25) - (50) -
Other 101 (20) - 50 131
------ ------ ----- ------ ------
$ 1,218 $ (247) $ (65) $ - $ 906
------ ------ ----- ------ ------
The total amount utilized during the twenty-six week period ended June
30, 2001 was $247, which included $135 of cash costs.
During the first quarter of 2001 the Company reversed $65 relating to
SKU reduction and inventory adjustment reserves which were no longer needed
as a result of change in estimates by management.
Amounts in the change in estimate column represent reallocation of
accruals between categories and not increases in initial charges. These
reallocations were due to reductions in employee related cost estimates
offset by higher than anticipated other transaction costs.
Note 9. Income Taxes
The Company incurred significant pre-tax losses in the fourth quarter
of 2000. Accordingly, the income tax provision primarily reflects foreign
taxes. On a tax return basis, the Company had income tax carryforwards
relating to U.S. net operating losses of approximately $34 million, which
expire in 2012 to 2020.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This commentary should be read in conjunction with the Company's
consolidated financial statements and related footnotes and management's
discussion and analysis of financial condition and results of operations
contained in the Company's Form 10-K for the year ended December 30, 2000.
Divestiture of the Plastics, Inc. Product Line
One June 7, 2001, the Company entered into a definitive agreement to
sell its commercial servingware product line, Plastics, Inc., 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 $68 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. See Note 6 of this Form 10-Q for additional
information. The following discussion of business results does not take
into account the divestiture of the Plastics, Inc. product line.
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
entails the closure of the Leominster, MA facility, reconfiguration of
remaining manufacturing facilities, a reduction in headcount and a
realignment of the selling process.
The Company began to implement the restructuring plan in December 2000
and accordingly a pretax charge of $12.4 million was taken, of which $1.9
million was deemed to be Special Charges and $10.5 million as Restructuring
and Other Charges (collectively referred to herein as the "2000 Charges").
During the first quarter of 2001 the Company recorded a pretax charge of
$2.6 million, of which $0.1 million was deemed to be Special Charges and
$2.5 million as Restructuring and Other Charges (collectively referred
herein as "2001 Charges"). No additional charges were recorded during the
thirteen-week period ended June 30, 2001. The restructuring actions are
expected to be complete by the third quarter of 2001.
As disclosed in Note 6 to the Consolidated Financial Statements of this
Form 10-Q, the 2001 Charges were comprised of (i) charge to relocate and
liquidate inventory at Leominster and other facilities, (ii) charge for the
relocation of machinery and equipment used at the Leominster facility and
other facilities, (iii) charge for lease termination and sub-lease costs,
(iv) charge to write off obsolete and duplicate assets that were used at the
Leominster facility and other facilities, (v) charge for employee related
severance costs, and (vi) charge for other related restructuring costs. The
total 2001 Charges include a reversal of $0.1 million for SKU reduction and
inventory adjustments relating to the 1999 Charges.
The Company anticipates that the result of these restructuring actions
will generate annual pretax cash savings of $5.0-$6.0 million of which $2.0-
$3.0 million is expected to be realized in 2001.
Thirteen weeks ended June 30, 2001 compared to the thirteen weeks ended June
24, 2000
In the discussion and analysis that follows, all references to the
second quarter of 2001 are to the thirteen-week period ended June 30, 2001
and all references to the second quarter of 2000 are to the thirteen-week
period ended June 24, 2000. The following discussion and analysis compares
the actual results for the second quarter of 2001 to the actual results for
the second quarter of 2000 with reference to the following (in thousands;
unaudited):
Thirteen weeks ended
---------------------------------
June 30, 2001 June 24, 2000
-------------- --------------
Net sales..................... $65,858 100.0% $70,910 100.0%
Cost of goods sold............ 49,954 75.9 56,026 79.0
------ ----- ------ -----
Gross profit................ 15,904 24.1 14,884 21.0
Operating expenses............ 8,820 13.4 9,898 14.0
Amortization of intangible
assets...................... 930 1.4 1,315 1.8
------ ----- ------ -----
Operating profit............ 6,154 9.3 3,671 5.2
Interest expense.............. (5,391) (8.1) (5,634) (8.0)
Other income (expense)........ 28 0.0 66 0.1
------ ----- ------ -----
Income (loss) before
income taxes.............. 791 1.2 (1,897) (2.7)
Income tax (expense) benefit.. (31) (0.0) 793 1.1
------ ----- ------ -----
Net income (loss)............. $ 760 1.2% $(1,104) (1.6)%
====== ===== ====== =====
Net loss per share - Basic.... $ 0.10 $ (0.15)
Net loss per share - Diluted.. $ 0.10 $ (0.15)
Weighted average common shares
Outstanding -
Basic 7,467 7,272
Diluted 7,623 7,272
Net sales. Net sales of $65.9 million in the second quarter of 2001
decreased $5.0 million or 7.1% from $70.9 million in the comparable quarter
of 2000. Approximately $4.5 million of the sales decline was due to the
bankruptcy of several customers as well as management's decision to reduce
sales to various low margin and financially challenged customers. The
discontinuation of the food storage product line by a large retailer
accounted for approximately $1.6 million of the sales decline. These
declines were partially offset by internal sales growth from a new private
label laundry product, which is sold to a major retailer. Also offsetting
the decline was an increase in sales to the Company's three largest
customers. Sales to the Company's three largest customers were $32.6
million in the second quarter 2001, a $1.8 million or 5.8% increase from the
prior year comparable quarter.
Gross profit. The Company's gross profit in the second quarter of 2001
increased to $15.9 million from $14.9 million in the comparable quarter of
2000. Gross profit margins improved to 24.1% from 21.0% in the prior year
comparable quarter. The improvement in profit margins is primarily due to a
reduction in fixed costs as well as a decrease in sales to certain low
margin customers. Overall reduction in fixed costs is primarily a result of
the successful implementation of restructuring actions (closure of the
Leominster facility and the realignment of other facilities) as well as
improved manufacturing production efficiencies. A reduction in raw material
costs (primarily plastic resin) and a decrease in sales rep commissions,
which were due to the realignment of the Company's selling process, also
positively impacted margins. These cost benefits were slightly offset by
selling price declines as compared to a year ago.
Operating expenses. Operating expenses improved to 13.4% of net sales
or $8.8 million versus 14.0% or $9.9 million in the comparable quarter of
2000. As part of the restructuring initiatives warehouse space was
consolidated resulting in decreased distribution and logistics costs in the
second quarter of 2001.
Amortization of intangible assets. Amortization of intangible assets
in the second quarter of 2001 was 1.4% of net sales or $0.9 million versus
1.8% or $1.3 million in the comparable quarter of 2000. The decrease in the
current quarter reflects the December 2000 $44.4 million asset impairment
charge to reduce the carrying value of goodwill.
Interest expense. Interest expense of $5.4 million in the second
quarter of 2001 decreased $0.2 million from $5.6 million in the second
quarter of 2000. The reduction in interest expense is a function of lower
debt balances in the current quarter.
Other income (expense). During the second quarter of 2001 the Company
generated other income of $0.03 million as compared to $0.07 million in the
prior year comparable quarter. Other income in the current quarter as well
as the prior year quarter were primarily due to gains on the disposal of
assets.
Income tax (expense) benefit. The income tax provision recorded in the
second quarter of 2001 primarily relates to foreign taxes. A significant
prior year operating loss has resulted in tax operating loss carryforwards.
The Company did not record a tax benefit in the current quarter, as there
are no assurances that future income will be sufficient to utilize the
Company's loss carryforwards. In the second quarter of 2000 a tax benefit
of $0.8 million was recorded.
Net income (loss). The Company had net income of $0.8 million, or
$0.10 per share in the second quarter of 2001, as compared to a net loss of
$1.1 million, or $(0.15) per share, in the comparable quarter of 2000. The
weighted average common shares outstanding in the second quarter 2001
increased to 7,467 from 7,272 in the second quarter 2000. The primary
contributor to the increase in weighted average common shares outstanding
was the vesting of restricted stock, which was issued by the Company during
the fourth quarter of 2000.
Twenty-six weeks ended June 30, 2001 compared to the twenty-six weeks ended
June 24, 2000
In the discussion and analysis that follows, all references to 2001 are
to the twenty-six week period ended June 30, 2001 and all references to 2000
are to the twenty-six week period ended June 24, 2000. The following
discussion and analysis compares the actual results of 2001 to the actual
results of 2000 with reference to the following (in thousands; unaudited):
Twenty-six weeks ended
---------------------------------
June 30, 2001 June 24, 2000
--------------- ---------------
Net sales...................... $129,984 100.0% $138,999 100.0%
Cost of goods sold............. 99,872 76.8 108,196 77.8
Special charges, net........... 110 0.1 - -
------- ----- ------- -----
Gross profit................. 30,002 23.1 30,803 22.2
Operating expenses............. 18,119 14.0 20,876 15.0
Amortization of intangible
assets....................... 1,859 1.4 2,635 1.9
Restructuring and other charges 2,483 1.9 - -
------- ----- ------- -----
Operating profit............. 7,541 5.8 7,292 5.3
Interest expense............... (10,870) (8.4) (10,771) (7.8)
Other income (expense)......... 104 0.1 (516) (0.4)
------- ----- ------- -----
Loss before income taxes..... (3,225) (2.5) (3,995) (3.1)
Income tax (expense) benefit... (98) (0.1) 1,674 1.2
------- ----- ------- -----
Net loss....................... $ (3,323) (2.6)% $ (2,321) (1.7)%
======= ===== ======= =====
Net loss per share - Basic..... $ (0.45) $(0.32)
Net loss per share - Diluted... $ (0.45) $(0.32)
Weighted average common shares
Outstanding -
Basic 7,465 7,272
Diluted 7,465 7,272
Net sales. Net sales of $130.0 million in 2001 decreased $9.0 million
or 6.5% from $139.0 million in 2000. The majority of the sales decrease can
be attributed to Bradlee's and several other retail customers who filed for
bankruptcy protection. The discontinuation of the food storage product line
by a large retailer accounted for approximately $2.6 million of the sales
decline. These declines were partially offset by strong sales of laundry
products to existing customers and an increase in sales to the Company's top
three customers. Sales to the Company's three largest customers were $65.0
million in 2001, a $3.7 million increase or 6.0% from 2000.
Special Charges. In 2001 the Company recorded Special Charges of $0.1
million in connection with the closure of the Leominster facility as well as
the realignment of other manufacturing facilities which began in the fourth
quarter of 2000. The primary component of the Special Charges includes
inventory reserves to relocate and liquidate inventory. The Special Charges
are net of a $0.1 million reversal of a portion of the special charge
recorded in the third quarter of 1999 to undertake a restructuring and
consolidation plan.
Gross profit before special charges. The Company's gross profit before
Special Charges in 2001 was $30.1 million as compared to $30.8 million in
2000. Gross profit margins improved to 23.2% from 22.2% in the prior year.
The closure of the Leominster facility as well as the realignment of other
facilities reduced fixed costs and increased production efficiencies
resulting in improved margins. Additional margin improvements were a result
of a decrease in raw material costs (primarily plastic resin). A decrease in
sales rep commissions, which were due to the realignment of the Company's
selling process, also positively affected margins. These benefits were
partially offset by selling price declines, which occurred in response to
various competitive pressures.
Operating expenses. Operating expenses improved to 14.0% of net sales
or $18.1 million versus 15.0% or $20.9 million in 2000. As part of the 2000
restructuring initiatives, warehouse space was consolidated resulting in a
decrease of distribution and logistics costs in 2001. Additional benefits
were achieved as a result of planned headcount reductions that were
completed in the early part of 2001.
Amortization of intangible assets. Amortization of intangible assets
in 2001 was 1.4% of net sales or $1.9 million versus 1.9% or $2.6 million in
2000. The decrease in the current year reflects the December 2000 $44.4
million asset impairment charge to reduce the carrying value of goodwill.
Restructuring and Other Charges. The Company recorded Restructuring
and Other Charges of $2.5 million in 2001 related to the continued
implementation of the fourth quarter 2000 restructuring plan. The charges
are comprised of (i) charge for the relocation of machinery and equipment,
(ii) lease termination and sub-lease costs, (iii) write off of obsolete and
duplicate assets that were used at the Leominster facility and other
facilities, (iv) employee related severance costs, and (v) reversal of other
related restructuring costs.
Interest expense. Interest expense of $10.9 million in 2001 increased
$0.1 million from $10.8 million in 2000. The increase in interest expense
is a function of higher borrowing rates partially offset by lower average
debt levels in 2000. Borrowing rates under the Company's senior loan
agreement were increased as a result of the September 2000 amendment to the
Company's Revolving Credit Agreement.
Other income (expense). During 2001 the Company generated other income
of $0.1 million primarily due to gains on sale of assets. In 2000, the
Company incurred approximately $0.5 million of fees and expenses associated
with a review of strategic alternatives in an effort to enhance shareholder
value.
Income tax (expense) benefit. The income tax provision recorded in
2001 primarily relates to foreign taxes. A significant prior year operating
loss has resulted in tax operating loss carryforwards. The Company did not
record a tax benefit in the current quarter, as there are no assurances that
future income will be sufficient to utilize the Company's loss
carryforwards. In 2000 a tax benefit of $1.7 million was recorded.
Net loss. In 2001 the Company had a net loss of $3.3 million, or $0.45
per share, as compared to a net loss of $2.3 million, or $0.32 per share in
2000. Excluding the effects of the special, restructuring and other charges,
the loss in the 2001 was $0.7 million ($0.10 per share) as compared to a
loss of $2.3 million ($0.32 per share) in 2000. The weighted average common
shares outstanding increased to 7,465 from 7,272 in 2000. The primary
contributor to the increase in weighted average common shares was the
vesting of restricted shares which were issued in the fourth quarter of
2000.
Capital Resources and Liquidity
The Company's primary sources of liquidity and capital resources
include cash provided from operations and borrowings under the Company's
revolving credit facility.
Cash and cash equivalents were $1.8 million, a decrease of $1.4 million
from December 30, 2000. The Company's total debt decreased $1.1 million in
2001 to $220.5 million. The decrease in debt is primarily due to proceeds
from the sale of a former manufacturing facility as well as positive cash
flow from operations.
The Company's working capital, excluding cash and short term debt, was
$23.8 million or $1.8 million higher than December 30, 2000.
Net cash used for restructuring activities was $2.5 million in 2001.
Such cash payments represent relocation of inventory and assets, lease
termination costs, employee termination benefits and other restructuring
expenses.
Capital spending in 2001 was $2.8 million as compared to $7.9 million
in 2000. Capital spending in the current year includes various information
technology and production facility projects as well as the replacement of
machinery and equipment. The significantly higher capital spending in 2000
was primarily due to the build out of the El Paso facility as well as
information technology projects.
On June 29, 2001, the Company reached an agreement with its principal
lenders and The Chase Manhattan Bank as administrative agent (the "Bank
Group"), to amend the Company's senior credit agreement. The amendment
became effective on July 6, 2001 when the Company completed the sale of its
Plastics Inc. product line. As a result of the asset sale and corresponding
paydown of debt, the Bank Group agreed to amend all financial covenants
through the remaining term of the credit agreement consistent with internal
Company projections. In addition, the revolving line of credit was reduced
from $85 million to $50 million. The Company believes that the credit
agreement, which has a maturity date of May 2003, will provide sufficient
funds for the Company's working capital needs during the remaining term of
the credit agreement. The Company was in compliance with all amended loan
covenants as of June 30, 2001.
The Company believes its existing financing facilities together with
its cash flow from operations will provide sufficient capital to fund
operations, make required debt repayments payments and meet anticipated
capital spending needs. Availability under the amended Revolving Credit
Agreement at July 31, 2001 was $27.2 million.
Management Outlook and Commentary
* On July 6, 2001, the Company completed the sale of its Plastics Inc.
product line for $71 million in cash. The net sale proceeds of $68
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. Although the Company expects to record a significant gain on
the sale, prior year net tax operating losses will be used to absorb
income taxes related to the gain. As part of the sale the Company will
reduce goodwill by approximately $37 million. See the Current Report on
Form 8-K filed on July 18, 2001 and Current Report on Form 8-K/A filed on
July 27, 2001 for additional information.
* The continuing weak economic conditions have negatively impacted the
Company's current year operating results. These conditions negatively
impacted sales as several of the Company's retail customers recently
filed for bankruptcy protection. The Company estimates that it has lost
approximately $6 million in sales due to these bankruptcies. As the weak
economic conditions continue the Company may encounter further
consolidation of its retail customer base through additional customer
bankruptcies. Also, further business may be lost in 2001 as the Company
evaluates its relationships with several other financially challenged
customers.
* As part of the Company's 2000 restructuring plan, management decided to
close the Leominster facility. This facility was selected because it was
highly inefficient as compared to the Company's other manufacturing
facilities. In addition, many of the customers served by this facility
were financially challenged with unacceptable profit margins. This will
likely mean that the Company will lose up to $10.0 million of annual
sales, however, management believes that the closing of an inefficient
factory and reducing sales to low margin customers may have a positive
impact on the Company's operating results. As a result of these actions
management expects to save approximately $1.0 million annually. The
closure of the Leominster facility was completed in the first quarter of
2001.
* During the second half of 2000 the Company experienced deterioration in
the selling prices of various plastic houseware products. This occurred
in response to competitive pressures from existing competition as well as
new entrants to the market. These competitive pressures forced the
Company to reduce selling prices to maintain shelf space. As a result,
third quarter year to year comparisons are expected to be negatively
impacted.
* The Company's 2000 restructuring plan also included the realignment of
several manufacturing facilities to improve production efficiency and
lower costs. During the first half of 2001 the Company centralized the
manufacturing process of several products to enable the Company to better
utilize key management and manufacturing strengths as well as balance
production that has shifted from the closure of the Leominster facility.
As part of these actions management estimates annual cost savings of
approximately $1-$2 million. The facility realignment plan was completed
in the second quarter of 2001.
* Plastic resin represents approximately 20% to 25% of the Company's cost
of goods sold. During the first half of 2001, resin prices were down
slightly to prior year (approximately $0.02 per pound) and approximated
the average cost over the last 20 years. However, there is no assurance
that the current costing levels will continue. The future cost of
plastic resin is very difficult to predict. Plastic resin costs are
impacted by several factors outside the control of the Company including
supply and demand characteristics, oil and natural gas prices and the
overall health of the economy. Any of these factors could potentially
have a positive or negative impact on plastic resin prices.
* As a result of the operating loss incurred in 2000 and the costs
associated with the Company's 2000/2001 restructuring plan, significant
tax operating loss carryforwards have been generated. As a result
management does not expect to pay any federal income tax for the
foreseeable future.
* Effective August 1, 2001 the Company began trading under the new NASDAQ
SmallCap symbol HOMZ (formerly HPII). The Company's HOMZ brand has been
in the marketplace for almost two years and has become an asset of great
value to the Company, its shareholders and customers. In recognition of
the importance of our brand in creating a true consumer franchise the
Company changed its trading symbol to HOMZ.
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 half of
2001 the Company did not experience any material changes in interest rate
risk that would affect the disclosures presented in the Company's Annual
Report on Form 10-K for the fifty-three week period ended December 30, 2000.
Commodity Risk. The Company is subject to price fluctuations in
commodity based raw materials such as plastic resin, steel and griege
fabric. Changes in the cost of these materials may have a significant impact
on the Company's operating results. Management does not anticipate
significant fluctuations in the cost of these materials during the remainder
of 2001. On the other hand the cost of these items is affected by many
factors outside of the Company's control and changes to the current trends
are possible. There have been no significant changes in the costs of plastic
resin, steel and griege fabric during the twenty-six week period ended June
30, 2001, although plastic resin prices have decreased slightly during the
first half of 2001. See " Management Outlook and Commentary" above.
The Company has entered into commitments to purchase certain minimum
annual volumes of plastic resin. These purchase commitments approximate 50%
of the Company's total annual plastic resin purchases. The Company expects
to purchase in excess of 125 million pounds of resin in 2001. The
agreements expire in May and August of 2002. The purchase commitment
pricing is not tied to fixed rates; therefore, the Company's results of
operations or financial position could be affected by significant changes in
the market cost of plastic resin.
Forward Looking Statements
This quarterly report on Form 10-Q, including "Management's Discussion
and Analysis of Financial Condition and Results of Operations", "Management
Outlook and Commentary" and "Quantitative and Qualitative Disclosures about
Market Risk" sections contain forward-looking statements within the meaning
of the "safe-harbor" provisions of the Private Securities Litigation Reform
Act of 1995. Such statements are based on management's current expectations
and are subject to a number of factors and uncertainties which could cause
actual results to differ materially from those described in the
forward-looking statements. Such factors and uncertainties include, but are
not limited to:
* the impact of the level of the Company's indebtedness
* restrictive covenants contained in the Company's various debt documents
* general economic conditions and conditions in the retail environment
* the Company's dependence on a few large customers
* price fluctuations in the raw materials used by the Company, particularly
plastic resin
* competitive conditions in the Company's markets
* the seasonal nature of the Company's business
* fluctuations in the stock market
* the extent to which the Company is able to retain and attract key
personnel
* relationships with retailers
* the impact of federal, state and local environmental requirements
(including the impact of current or future environmental claims against
the Company).
As a result, the Company's operating results may fluctuate, especially when
measured on a quarterly basis. The Company undertakes no obligation to
revise forward-looking statements to reflect events or circumstances after
the date hereof or to reflect the occurrence of unanticipated events.
Readers are also urged to carefully review and consider the various
disclosures made by the Company in this report and in the Company's periodic
reports on Forms 10-K, 10-Q and 8-K filed with the Securities and Exchange
Commission which attempt to advise interested parties of the factors which
affect the Company's business.
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
On May 24, 2001, the 2001 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
Number of Shares
----------------
Broker
Nominee For Withheld Non-Votes
--------------------- --------- -------- ---------
Charles R. Campbell 6,313,046 36,679 1,395,919
Marshall Ragir 6,251,046 98,679 1,395,919
Jeffrey C. Rubenstein 6,219,214 130,511 1,395,919
Daniel B. Shure 6,312,046 37,679 1,395,919
Joel D. Spungin 6,311,046 38,679 1,395,919
James R. Tennant 6,141,969 207,756 1,395,919
Proposal No. 2. The ratification of the 2000 Employee Stock Purchase plan
was ratified, with 2,961,547 votes for, 497,336 votes against, 9,867
abstentions and 4,276,894 broker non-votes.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits - none
(b) Reports on Current Form 8-K.
Registrant filed a Current Report on Form 8-K dated June 15, 2001, to
disclose that the Registrant had 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.
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: August 14, 2001