SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to _________. Commission File Number 0-1349 Stanhome Inc. ___________________________________________________________________________ (Exact name of registrant as specified in its charter) Massachusetts 04-1864170 ____________________________________ _______________________ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 333 Western Avenue, Westfield, Massachusetts 01085 ___________________________________________________________________________ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 413-562-3631 ___________________________________________________________________________ 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 [_] March 31, 1995 1994 ____ ____ Shares Outstanding: Common Stock with Associated Rights 18,808,715 19,470,555 Total number of pages contained herein 24 Index to Exhibits is on page 20 PART I. FINANCIAL INFORMATION ------------------------------ STANHOME INC. CONSOLIDATED CONDENSED BALANCE SHEETS MARCH 31, 1995 and DECEMBER 31, 1994 (Unaudited) March 31, December 31, 1995 1994 ---- ---- ASSETS CURRENT ASSETS: Cash and certificates of deposit $ 20,983,249 $ 19,349,839 Marketable securities, at cost (which approximates market value) 10,483,644 2,000 Notes and accounts receivable, net 146,237,945 140,696,603 Inventories 112,602,291 116,015,060 Prepaid advertising 45,561,709 40,099,913 Other prepaid expenses 9,939,130 6,513,723 ------------ ------------ Total current assets 345,807,968 322,677,138 ------------ ------------ PROPERTY, PLANT AND EQUIPMENT, at cost 128,740,431 125,995,626 Less - Accumulated depreciation and amortization 70,345,961 68,036,607 ------------ ------------ 58,394,470 57,959,019 ------------ ------------ OTHER ASSETS: Goodwill and other intangibles, net 124,166,945 121,586,984 Other 9,435,604 9,899,491 ------------ ------------ 133,602,549 131,486,475 ------------ ------------ $537,804,987 $512,122,632 ============ ============ <FN> The accompanying notes are an integral part of these condensed financial statements. -2- STANHOME INC. CONSOLIDATED CONDENSED BALANCE SHEETS MARCH 31, 1995 and DECEMBER 31, 1994 (Unaudited) March 31, December 31, 1995 1994 ---- ---- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Notes and loans payable $ 88,579,082 $ 39,022,890 Accounts payable 59,070,473 63,072,000 Federal, state and foreign taxes on income 29,988,637 37,062,510 Accrued expenses-- Payroll and commissions 14,644,926 17,423,516 Vacation, sick and postretirement benefits 10,160,227 9,435,495 Royalties 7,668,208 7,974,606 Pensions and profit sharing 6,528,816 9,055,259 Other 37,999,140 37,171,244 ------------ ------------ Total current liabilities 254,639,509 220,217,520 ------------ ------------ LONG-TERM LIABILITIES: Foreign employee severance obligations 12,236,081 13,207,097 Pensions 9,472,474 9,302,239 ------------ ------------ Total long-term liabilities 21,708,555 22,509,336 ------------ ------------ SHAREHOLDERS' EQUITY Common stock 3,153,530 3,153,530 Capital in excess of par value 37,788,508 37,376,690 Retained earnings 364,368,486 362,946,840 Cumulative translation adjustments ( 27,224,351) ( 27,660,727) ------------ ------------ 378,086,173 375,816,333 Less - Shares held in treasury, at cost 116,629,250 106,420,557 ------------ ------------ Total shareholders' equity 261,456,923 269,395,776 ------------ ------------ $537,804,987 $512,122,632 ============ ============ <FN> The accompanying notes are an integral part of these condensed financial statements. -3- STANHOME INC. CONSOLIDATED CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE THREE MONTHS ENDED MARCH 31, 1995 and 1994 (Unaudited) 1995 1994 ---- ---- NET SALES $184,869,162 $171,769,005 COST OF SALES 77,425,988 69,806,121 ------------ ------------ GROSS PROFIT 107,443,174 101,962,884 SELLING, GENERAL AND ADMINISTRATIVE EXPENSE 93,673,069 86,982,547 ------------ ------------ OPERATING PROFIT 13,770,105 14,980,337 Interest expense ( 1,342,297) ( 156,920) Other income, net ( 157,467) 664,328 ------------ ------------ INCOME BEFORE INCOME TAXES 12,270,341 15,487,745 Income taxes 5,820,000 7,354,813 ------------ ------------ NET INCOME 6,450,341 8,132,932 RETAINED EARNINGS, beginning of period 362,946,840 338,753,939 Cash dividends, $.265 per share in 1995 and $.25 per share in 1994 ( 5,028,695) ( 4,863,437) ------------ ------------ RETAINED EARNINGS, end of period $364,368,486 $342,023,434 ============ ============ EARNINGS PER COMMON SHARE: Primary and fully diluted $ .34 $ .41 ===== ===== <FN> The accompanying notes are an integral part of these condensed financial statements. -4- STANHOME INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1995 and 1994 (Unaudited) 1995 1994 ---- ---- OPERATING ACTIVITIES: Net cash provided/(used) by operating activities ($16,375,129) $17,164,172 ----------- ----------- INVESTING ACTIVITIES: Purchase of property, plant and equipment ( 3,142,870) ( 1,321,591) Proceeds from sale of property, plant and equipment 500,339 605,699 Acquisition of businesses, net of cash acquired, including additional contingent cash payments ( 208,042) - Other, principally marketable securities ( 416,052) ( 630) ----------- ----------- Net cash used by investing activities ( 3,266,625) ( 716,522) ----------- ----------- FINANCING ACTIVITIES: Cash dividends ( 5,028,695) ( 4,863,437) Exchanges and purchases of common stock ( 10,301,359) ( 108,891) Notes and loans payable 46,537,740 ( 56,515) Exercise of stock options 265,299 1,954,489 Other common stock issuance 239,185 230,674 ----------- ----------- Net cash provided/(used) by financing activities 31,712,170 ( 2,843,680) ----------- ----------- Effect of exchange rate changes on cash and cash equivalents 44,638 187,903 ----------- ----------- Increase/(decrease) in cash and cash equivalents 12,115,054 13,791,873 Cash and cash equivalents, beginning of year 19,349,839 53,333,754 ----------- ----------- Cash and cash equivalents, end of quarter $31,464,893 $67,125,627 =========== =========== SUPPLEMENTAL CASH FLOW DATA Cash paid for: Interest $ 763,854 $ 190,717 Income taxes $12,558,705 $ 1,709,357 <FN> The accompanying notes are an integral part of these condensed financial statements. -5- STANHOME INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS The consolidated condensed financial statements and related notes included herein have been prepared by the Company, without audit except for the December 31, 1994 condensed balance sheet, which was derived from the Annual Report on Form 10-K, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. The information furnished reflects all normal recurring adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods. It is suggested that these condensed financial statements be read in conjunction with the financial statements and related notes to consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 1. ACCOUNTING POLICIES: The Company's financial statements for the three months ended March 31, 1995 have been prepared in accordance with the accounting policies described in Note 1 to the December 31, 1994 consolidated financial statements included in the Company's 1994 Annual Report on Form 10-K. Marketable securities with maturities of three months or less are considered to be cash equivalents and amounted to $10,482,000 at March 31, -6- 1995 versus none at December 31, 1994. Except for $2,000 of other investments with terms in excess of 90 days, the cash flows' cash and cash equivalents at March 31, 1995 are equal to the cash and certificates of deposit and the marketable securities on the March 31, 1995 balance sheet. Notes and accounts receivable were net of allowance for doubtful accounts of $15,322,000 at March 31, 1995 and $15,249,000 at December 31, 1994. The impact of adopting the AICPA's SOP 93-7 (Reporting on Advertising Costs) in 1994 was immaterial to the Company as the Company was already in compliance with all the Statement's accounting provisions. The Company recognizes revenue as merchandise is turned over to the shipper. 2. INVENTORY CLASSES: The major classes of inventories at March and December 3l were as follows (in thousands): March 31, December 31, 1995 1994 ---- ---- Raw materials and supplies $ 7,988 $ 7,071 Work in process 1,144 818 Finished goods in transit 10,470 9,949 Finished goods 93,000 98,177 -------- -------- $112,602 $116,015 ======== ======== 3. OTHER INCOME, NET: Other income, net for the three months ended March 31, 1995 and 1994 consists of the following (in thousands): 1995 1994 ---- ---- Interest income $ 745 $ 846 Amortization of other assets ( 1,009) ( 598) Other, net 106 417 ------ ------ ($ 158) $ 665 ====== ====== -7- 4. EARNINGS PER COMMON SHARE (BASIS OF CALCULATION): Earnings per common share are based on the average number of common shares outstanding and common share equivalents for the period covered. For both years, there was no difference in earnings per share between primary and fully diluted earnings per share computations. For the first quarter fully diluted computation, the average number of shares utilized was 19,033,574 and 19,754,901 shares for 1995 and 1994, respectively, including common share equivalents of 19,174 in 1995 and 332,288 in 1994. The lower average number of shares for 1995 primarily resulted from the repurchase of shares as part of the Company's repurchase program. 5. FINANCIAL INSTRUMENTS: The Company enters into various short-term foreign exchange agreements during the year, all of which are held for purposes other than trading. The purpose of the Company's foreign currency hedging activities is to reduce the risk that the eventual settlement of foreign currency transactions will be adversely affected by changes in exchange rates. The Company's various subsidiaries import products in foreign currencies and from time to time will enter into agreements or build foreign currency deposits as a partial hedge against currency fluctuations on inventory purchases. Gains and losses on these agreements are deferred and recorded as a component of cost of sales when the related inventory is sold. At March 31, 1995, there were no open inventory purchase agreements and deferred amounts were not material. The Company makes short-term foreign currency intercompany loans to various international subsidiaries and utilizes agreements to fully hedge these transactions against currency fluctuations. The cost of these agreements is included in the interest -8- charged to the subsidiaries and expensed monthly as the interest is accrued. The intercompany interest eliminates upon consolidation and any gains and losses on the agreements are recorded as a component of other income. The Company receives dividends, technical service fees, royalties and other payments from its subsidiaries. From time to time, the Company will enter into foreign currency forward agreements as a partial hedge against currency fluctuations on these current receivables. Gains and losses are recognized or the credit or debit offsets the foreign currency payables. As of March 31, 1995, net deferred amounts on outstanding agreements were not material and all current agreements have expiration dates in 1995. The outstanding agreement amounts (notional value) at March 31, 1995, are as follows (in thousands): Canada $ 6,076 Germany 5,381 Italy 3,816 United Kingdom 2,594 France 2,186 U.S. 2,000 ------- Total $22,053 ======= 6. LICENSE AGREEMENT: In January 1995, the Company entered into an agreement with a third party to license the domestic operations of its Worldwide Direct Selling Group. The business licensed, known as Stanley Home Products ("SHP"), marketed home care, personal care and cosmetic items to consumers through direct selling programs. SHP recorded net sales of approximately $9 million in the first quarter of 1994 and produced operating losses for the past several years. These sales represented approximately 15% of the -9- Worldwide Direct Selling Group's first quarter 1994 net sales and 5% of the Company's consolidated net sales. For the first quarter of 1994, SHP's operating loss in the U.S. and Puerto Rico was approximately $800 thousand. The agreement calls for the third party to license the trademarks and formulas of SHP for use in the U.S., Puerto Rico and Canada, and remit to the Company royalties based on sales of the related products. The transfer of the SHP business is on schedule to be completed by the second quarter of 1995. In connection with this agreement, the Company closed administrative and distribution facilities in the U.S. and Puerto Rico during the first quarter of 1995. Management believes that the total costs to exit the SHP operations, including employee severance benefits, will be offset in 1995 by a comparable amount of gains, approximately $6 million, primarily from the sale of SHP's distribution facilities. The costs to exit the SHP operations therefore have not had and are not expected to have a material adverse impact on the Company's future operating results or financial condition. As of March 31, 1995 the net book value of assets of the business to be disposed of or transferred were net inventories of $6.4 million and net property, plant and equipment of $1.8 million. -10- STANHOME INC. THREE MONTHS ENDED MARCH 31, 1995 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS SEGMENTS of the Company's operations are summarized on Page 17. A discussion and analysis of the segments follows: GIFTWARE Giftware Group sales increased 22% in the first quarter of 1995 due principally to 12% volume growth from existing lines and 10% from new businesses acquired in 1994. International results increased and including the new businesses, international sales represented 17% of total 1995 first quarter sales compared to 12% in 1994. The Precious Moments line represented 48% of total 1995 sales compared to 52% in 1994 and the Cherished Teddies line represented 13% of total sales in 1995 compared to 14% in 1994. Operating profit in the first quarter increased 12% and was less than the sales increase due principally to lower operating profits from the new businesses and higher cost of sales due in part to sales mix. DIRECT RESPONSE Direct Response Group sales increased 22% in the first quarter of 1995 due to unit volume growth in dolls and figurines in the United States. Doll sales amounted to 31% of 1995 sales compared to 27% in 1994, while plate sales accounted for 48% of sales in 1995 compared to 62% in 1994. All other categories of sales, which are mostly figurines, increased to 21% of sales compared to 11% in 1994. Market conditions in the direct response -11- business continue to be very competitive. International sales decreased and operating losses increased. The Group recorded a small operating loss in the first quarter of 1995 compared to an operating profit in 1994 of 6% of sales. The decrease in operating profit was due primarily to increased advertising expense in 1995 compared to 1994. Advertising expenses increased to 51% of sales in 1995 versus 45% in 1994 due to lower sales response rates to programs reflecting the very competitive market condition. Operating expense also increased due to postal rate and paper cost increases. DIRECT SELLING Comparable Direct Selling results for the first quarter excluding the United States and Puerto Rico operations, which in 1995 have been licensed to a third party, are as follows: 1995 1994 % Change Sales $47,759 $49,861 ( 4) Operating profit 4,749 6,138 ( 23) European sales increased 2% on lower unit volume and represented 90% of 1995 first quarter sales while operating profit decreased 22% and accounted for 91% of first quarter operating profit. Lower sales in Italy combined with higher selling, general and administrative expenses in Italy and Spain reduced operating margins. European local currency 1995 sales and operating profit translated at 1994 average first quarter exchange rates would have resulted in a 4% sales decrease and a 27% operating profit decrease. Sales for the Mexican and Venezuelan Group in the first quarter decreased 37% due to a 45% decrease in Mexico, resulting from the devaluation of the Mexican peso, while Group operating profit decreased -12- due to the peso devaluation and higher selling, general and administrative expenses. The United States and Puerto Rico direct selling operations in 1995 have been assumed by a third party. The assets of these businesses, not assumed by the third party, have been and are being disposed during 1995. The severance and other exit costs are expected to approximate $6 million, and to be offset by gains on the sale of assets of the business. GENERAL CORPORATE EXPENSE increased in the first quarter due to higher compensation and benefits consistent with the Company programs. INTERNATIONAL ECONOMIES AND CURRENCY The Latin American operations in Mexico and Venezuela have experienced highly inflationary economies with rapidly changing prices in local currencies. These conditions, with the resulting adverse impact on local economies, have made it difficult for operations in these locations to achieve adequate operating margins. In addition, the strengthening of the dollar versus Latin American currencies has resulted in lower U.S. dollar results for these operations. European operations were favorably impacted by higher currency translation rates in 1995 compared to 1994. The value of the U.S. dollar versus international currencies where the Company conducts business will continue to impact the future results of these businesses. In addition to the currency risks, the Company's international operations, including sources of imported products, are subject to other risks of doing business abroad, including import or export restrictions and changes in economic and political climates. The fluctuations in net sales and operating profit margins from quarter to quarter are partially due to the seasonal characteristics of the Company's business segments. -13- INTEREST EXPENSE AND OTHER INCOME, NET Interest expense increased due to higher borrowing levels principally for the 1994 acquisitions. Other assets amortization of goodwill increased due to the impact from the 1994 acquisitions. The amortization for Giftware in 1995 was $.8 million compared to $.4 million in 1994 and the amortization for Direct Response was $.2 million in 1995 and $.2 million in 1994. Other income, net last year includes a $.4 million gain on the sale of a U.S. distribution center. THE EFFECTIVE TAX RATE of 47% was the same as 1994 despite international rate increases, and higher non deductible goodwill in 1995. This was due principally to earnings mix with a lower ratio of foreign income to United States income, which has a lower rate. FINANCIAL CONDITION The Company has historically satisfied its capital requirements with internally generated funds and short-term loans. Working capital requirements have seasonal variations during the year and are generally greatest during the third quarter. The major sources of funds from operating activities in the first quarter of 1995 were from net income, depreciation, amortization and lower inventory levels. The major uses were increased accounts receivable which increased due to the higher sales volume and marketing programs; increased prepaid expenses from higher advertising in direct response; lower accounts payable and accrued expenses due principally to timing and the payment of year end payrolls and benefits; and lower accrued taxes due to timing of payments. The first quarter 1995 working capital increases -14- in receivables, inventories and prepaids compared to the first quarter of 1994 reflect increases to support higher levels of sales. The major use of cash in investing activities in the first quarter of 1995 was for capital expenditures. Capital expenditure commitments for $20 million are forecasted for 1995. Due to the Company's exit from the United States direct selling business, the Company has for sale four United States distribution facilities with a total appraised value of approximately $7 million. The Company has an acquisition program, and may utilize funds for this purpose in the future. The Italian subsidiary invests excess cash in short-term investments which change from time to time based on availability and rates. The level of changes of marketable securities from period to period principally represents investment alternatives versus certificates of deposit, time deposits, and intercompany loans. The major uses of cash in financing activities were for dividends to shareholders and purchases of common stock. Purchases of common stock principally included shares repurchased by the Company. During the first quarter of this year, the Company repurchased 360,600 shares for $10,302,000. The Company has an authorized program to purchase shares of stock for the Company treasury from time to time in the open market, depending on market conditions, and may utilize funds for this purpose in the future. As of March 31, 1995, 655,000 shares remained available for purchase under the program. The Company's earnings, cash flow, and available debt capacity have made and make stock repurchases, in the Company's view, one of its best investment alternatives. The major source of funds from financing activities was from higher seasonal borrowings, which also increased due to reduced intercompany loans which fluctuate -15- depending on market condition rates. Total stock options outstanding at the exercise price amounted to $88 million at March 31, 1995 and the Company could receive these funds in the future if the options are exercised. Fluctuations in the value of the U.S. dollar versus international currencies affect the U.S. dollar translation value of international currency denominated balance sheet items. The changes in the balance sheet dollar values due to international currency translation fluctuations are recorded as a component of shareholders' equity. International currency fluctuations of $436,000 reduced the cumulative translation component which reduced the shareholders' equity decrease in the first three months of 1995. The translation adjustments to the March 31, 1995 balance sheet that produced the 1995 change in the cumulative translation component of shareholders' equity were decreases in working capital by $2,508,000; increases in net property, plant and equipment and other assets by $2,353,000; and decreases in long-term liabilities by $591,000. The Company depends upon its international operations to pay dividends and to make other payments to the Company. The Company's international operations are subject to the risks of doing business abroad including currency, economic and political. With the level of funds generated from operations, the level of working capital and the unused lines of credit, no liquidity problems are anticipated. -16- STANHOME INC. SALES AND OPERATING PROFIT BY BUSINESS SEGMENT FOR THE FIRST THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (Unaudited) (In Thousands) 1995 1994 Percent Actual Actual Change ------ ------ ------- Net Sales: Giftware $105,955 $ 86,745 22% Direct Response 31,806 26,074 22 Direct Selling 47,759 59,439 (20) Eliminations ( 651) ( 489) -------- -------- Total Net Sales $184,869 $171,769 8% ======== ======== Operating Profit: Giftware $ 11,499 $ 10,288 12% Direct Response ( 16) 1,549 Direct Selling 4,749 5,315 (11) Corporate ( 2,462) ( 2,172) (13) -------- -------- Total Operating Profit $ 13,770 $ 14,980 ( 8%) ======== ======== -17- PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Annual Meeting of Stockholders was held on April 27, 1995. (c) The first matter voted upon at the meeting was the election of Directors. The members of Class III were standing for election to a three-year term expiring at the Annual Meeting in 1998. Upon motion duly made and seconded, it was voted to elect John F. Cauley, Jr., Homer G. Perkins, G. William Seawright, and Anne-Lee Verville as Class III Directors for a three-year term expiring at the Annual Meeting in 1998 and until their successors are elected and qualified. The votes for each of the candidates were reported as follows: John F. Cauley, Jr. For: 16,059,457 Withheld: 239,629 Homer G. Perkins For: 16,011,924 Withheld: 287,162 G. William Seawright For: 16,044,449 Withheld: 254,637 Anne-Lee Verville For: 16,048,450 Withheld: 250,636 The second matter voted upon at the meeting was the ratification of the Board's appointment of Arthur Andersen LLP as independent accountants for 1995. Upon motion duly made and seconded, it was voted that the appointment by the Board of Directors at its March 1, 1995 meeting of Arthur Andersen LLP independent certified public accountants, as independent accountants for the Company for its fiscal year ending December 31, 1995 be ratified and approved. The votes for the independent accountants were reported as follows: Arthur Andersen LLP For: 16,228,390 Against: 35,175 Abstain: 35,521 The third matter voted upon at the meeting was the approval of the Stanhome Inc. Non-Employee Director Stock Plan. Upon motion duly made and seconded, it was voted that the Non- Employee Director Stock Plan adopted by the Board of Directors at its December 7, 1994 meeting be approved. The votes for the approval of the Non-Employee Director Stock Plan were reported as follows: Non-Employee Director For: 14,814,182 Stock Plan Against: 963,039 Abstain: 521,865 -18- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - Non-Employee Director Stock Plan. - Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the Quarter for which this report is filed. All other items hereunder are omitted because either such item is inapplicable or the response to it is negative. Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. STANHOME INC. (Registrant) Date: May 15, 1995 /s/ G. William Seawright _____________________________________ G. William Seawright President and Chief Executive Officer Date: May 15, 1995 /s/ Allan G. Keirstead _____________________________________ Allan G. Keirstead Chief Administrative and Financial Officer -19- EXHIBIT INDEX Reg. S-K Item 601 Exhibit 10-Q Page No. _________ _______ _____________ 10 Non-Employee Director Stock Plan 21 27 Financial Data Schedule 24 -20-