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, 1996
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,
1996 1995
____ ____
Shares Outstanding:
Common Stock with
Associated Rights 18,403,186 18,808,715
Total number of pages
contained herein 40
Index to Exhibits is
on page 19
-1-
PART I. FINANCIAL INFORMATION
------------------------------
STANHOME INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 1996 and DECEMBER 31, 1995
(Unaudited)
March 31, December 31,
1996 1995
---- ----
ASSETS
CURRENT ASSETS:
Cash and certificates of deposit $ 18,386,143 $ 23,053,926
Notes and accounts receivable, net 155,176,985 158,572,959
Inventories 122,869,950 114,294,928
Prepaid advertising 37,082,995 39,665,306
Other prepaid expenses 9,271,693 6,784,465
------------ ------------
Total current assets 342,787,766 342,371,584
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, at cost 130,692,939 131,795,141
Less - Accumulated depreciation and
amortization 70,933,379 70,947,871
------------ ------------
59,759,560 60,847,270
------------ ------------
OTHER ASSETS:
Goodwill and other intangibles, net 119,865,243 119,826,382
Other 10,352,710 11,420,987
------------ ------------
130,217,953 131,247,369
------------ ------------
$532,765,279 $534,466,223
============ ============
<FN>
The accompanying notes are an integral part of these condensed financial
statements.
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STANHOME INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 1996 and DECEMBER 31, 1995
(Unaudited)
March 31, December 31,
1996 1995
---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes and loans payable $ 91,194,441 $ 74,864,065
Accounts payable 52,977,804 64,880,028
Federal, state and foreign taxes
on income 30,877,123 28,758,277
Accrued expenses--
Payroll and commissions 8,516,247 13,658,026
Royalties 7,879,132 8,587,986
Vacation, sick and postretirement
benefits 7,726,399 6,979,623
Pensions and profit sharing 5,355,379 8,610,616
Other 36,773,513 36,106,020
------------ ------------
Total current liabilities 241,300,038 242,444,641
------------ ------------
LONG-TERM LIABILITIES:
Foreign employee severance obligations 12,330,670 12,482,097
Postretirement benefits 12,335,857 12,749,258
------------ ------------
Total long-term liabilities 24,666,527 25,231,355
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock 3,153,530 3,153,530
Capital in excess of par value 44,419,723 43,098,856
Retained earnings 384,204,976 385,008,394
Cumulative translation adjustments ( 28,219,302) ( 27,409,482)
------------ ------------
403,558,927 403,851,298
Less - Shares held in treasury, at cost 136,760,213 137,061,071
------------ ------------
Total shareholders' equity 266,798,714 266,790,227
------------ ------------
$532,765,279 $534,466,223
============ ============
<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, 1996 and 1995 (Unaudited)
1996 1995
---- ----
NET SALES $183,039,727 $184,869,162
COST OF SALES 78,092,565 77,425,988
------------ ------------
GROSS PROFIT 104,947,162 107,443,174
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSE 94,552,037 93,673,069
------------ ------------
OPERATING PROFIT 10,395,125 13,770,105
Interest expense ( 1,846,058) ( 1,342,297)
Other expense, net ( 799,725) ( 157,467)
------------ ------------
INCOME BEFORE INCOME TAXES 7,749,342 12,270,341
Income taxes 3,679,010 5,820,000
------------ ------------
NET INCOME 4,070,332 6,450,341
RETAINED EARNINGS, beginning of
period 385,008,394 362,946,840
Cash dividends, $.265 per share in
1996 and 1995 ( 4,873,750) ( 5,028,695)
------------ ------------
RETAINED EARNINGS, end of period $384,204,976 $364,368,486
============ ============
EARNINGS PER COMMON SHARE:
Primary and fully diluted $ .22 $ .34
===== =====
<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, 1996 and 1995 (Unaudited)
1996 1995
---- ----
OPERATING ACTIVITIES:
Net cash used by operating activities ($16,555,248) ($16,375,129)
----------- -----------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment ( 2,046,210) ( 3,142,870)
Proceeds from sales of property, plant and
equipment 2,304,153 500,339
Payments for acquisition of businesses,
net of cash acquired ( 1,200,000) ( 208,042)
Other, principally marketable securities - ( 416,052)
----------- -----------
Net cash used by investing activities ( 942,057) ( 3,266,625)
----------- -----------
FINANCING ACTIVITIES:
Cash dividends ( 4,873,750) ( 5,028,695)
Exchanges and purchases of common stock - ( 10,301,359)
Notes and loans payable 16,044,359 46,537,740
Exercise of stock options 1,429,364 265,299
Other common stock issuance 192,361 239,185
----------- -----------
Net cash provided by financing activities 12,792,334 31,712,170
----------- -----------
Effect of exchange rate changes on cash
and cash equivalents 37,188 44,638
----------- -----------
Increase/(decrease) in cash and
cash equivalents ( 4,667,783) 12,115,054
Cash and cash equivalents,
beginning of year 23,051,926 19,349,839
----------- -----------
Cash and cash equivalents, end of quarter $18,384,143 $31,464,893
=========== ===========
SUPPLEMENTAL CASH FLOW DATA
Cash paid for:
Interest $ 1,238,572 $ 763,854
Income taxes $ 1,608,128 $12,558,705
<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, 1995 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, 1995.
1. ACCOUNTING POLICIES:
The Company's financial statements for the three months ended March
31, 1996 have been prepared in accordance with the accounting policies
described in Note 1 to the December 31, 1995 consolidated financial
statements included in the Company's 1995 Annual Report on Form 10-K. The
Company considers all highly liquid securities, including certificates of
deposit with maturities of three months or less, when purchased, to be cash
-6-
equivalents. Notes and accounts receivable were net of reserves for
uncollectible accounts, returns and allowances of $20,903,000 at March 31,
1996 and $20,741,000 at December 31, 1995.
The Company recognizes revenue as merchandise is turned over to the
shipper and a provision for anticipated merchandise returns and allowances
is recorded based upon historical experience. Amounts billed to customers
for shipping and handling orders are netted against the associated costs.
2. INVENTORY CLASSES:
The major classes of inventories at March and December 3l were as
follows (in thousands):
March 31, December 31,
1996 1995
---- ----
Raw materials and supplies $ 7,358 $ 7,312
Work in process 693 1,237
Finished goods in transit 14,372 16,215
Finished goods 100,447 89,531
-------- --------
$122,870 $114,295
======== ========
3. OTHER EXPENSE, NET:
Other expense, net for the three months ended March 31, 1996 and 1995
consists of the following (in thousands):
1996 1995
---- ----
Interest income $ 493 $ 745
Amortization of other assets ( 1,153) ( 1,009)
Other, net ( 140) 106
------ ------
($ 800) ($ 158)
====== ======
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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 18,479,861 and 19,033,574 shares for 1996 and 1995, respectively,
including common share equivalents of 122,818 in 1996 and 19,174 in 1995.
The lower average number of shares for 1996 primarily resulted from the
repurchase of shares in the latter part of 1995 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 protect the Company from 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, 1996, 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
-8-
and utilizes agreements to fully hedge these transactions against currency
fluctuations. The cost of these agreements is included in the interest
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. All of the outstanding agreements as of March 31, 1996 are to
hedge intercompany loans. The Company receives dividends, technical
service fees, royalties and other payments from its subsidiaries and
licensees. 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, 1996, net
deferred amounts on outstanding agreements were not material. The
outstanding agreement amounts (notional value) at March 31, 1996, are as
follows (in thousands):
Canada $ 6,621
Germany 4,070
U.S. 875
-------
Total $11,566
=======
-9-
STANHOME INC.
THREE MONTHS ENDED MARCH 31, 1996
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BUSINESS SEGMENTS of the Company's operations are summarized on Page
16. A discussion and analysis of the segments follows:
GIFTWARE
Giftware Group sales decreased 6% in the first quarter from lower
sales in the United States and in international markets due principally to
soft retail environments. International sales represented 16% of total
1996 first quarter sales compared to 17% in 1995. The Precious Moments
line represented 42% of total 1996 sales compared to 48% in 1995 and the
Cherished Teddies line represented 16% of total sales in 1996 compared to
13% in 1995. Operating profit as a percentage of sales was 8% in 1996
compared to 10.9% in 1995. The decrease was due to higher cost of sales
(approximately 2%) from an unfavorable product mix with less sales of
collectible lines and to a higher percentage of selling, general and
administrative expenses resulting from the impact of lower sales on fixed
expenses.
DIRECT RESPONSE
Direct Response Group sales increased 15%, in a very competitive
market, due to unit volume growth from increased product offerings
primarily in the figural categories. Doll sales decreased to 19% of 1996
sales compared to 31% in 1995 and plate sales decreased to 36% of 1996
-10-
sales compared to 48% in 1995. International sales decreased and operating
losses increased. International sales represented 7% of total 1996 first
quarter Group sales compared to 10% in 1995. The Precious Moments line
represented 13% of 1996 sales compared to 10% in 1995 and the Cherished
Teddies line represented 12% of 1996 sales compared to 13% in 1995.
Operating profit improved to 1.9% of sales compared to a slight loss in
1995 due principally to a lower percentage of advertising expense to sales
in 1996 of 47% compared to 51% in 1995. The lower advertising percent
benefited from a more favorable product mix and a higher percentage of
sales from existing customer lists. Partially offsetting the improved
advertising ratio was a higher cost of sales due to product mix and a
higher level of selling, general and administrative expenses.
DIRECT SELLING
European sales for the first quarter increased 1% and represented 90%
of total 1996 Direct Selling sales. European operating profit increased
3% and represented 98% of total 1996 Direct Selling operating profit.
Operating profit benefited from a lower cost of sales due to a more
favorable product mix. The Italian government has introduced new social
benefit taxes that are planned to become effective during the second
quarter of 1996. This additional tax burden is expected to unfavorably
impact the Italian subsidiary's independent Dealer force and its ability
to recruit and retain Dealers. European local currency sales and
operating profit translated at 1995 average exchange rates would have
resulted in a 3% sales decrease and a 2% operating profit decrease. Sales
in the first quarter for the Mexican and Venezuelan Group decreased 7% and
-11-
operating profit decreased 81% due to the Mexican peso and Venezuelan
bolivar currency devaluations and the resulting unfavorable local economic
impacts.
UNALLOCATED EXPENSES increased in the first quarter due to
higher compensation, benefits and general expenses consistent with the
Company's programs. Unallocated expenses are corporate expenses and other
items not directly related to the operations of the Groups.
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 1996 compared to 1995. 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.
-12-
INTEREST EXPENSE AND OTHER INCOME, NET
Interest expense increased due to higher interest rates and borrowing
levels. Notes and loans payable going into 1996 were approximately $35.9
million higher than at the start of 1995. Other assets amortization
of goodwill increased due to the continuing impact from the 1994
acquisitions. The amortization for Giftware in 1996 was $1.0 million
compared to $.8 million in 1995 and the amortization for Direct Response
was $.2 million in 1996 and $.2 million in 1995.
THE EFFECTIVE TAX RATE of 47% was the same as 1995 despite higher non
deductible goodwill in 1996. 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 1996 were from net income, depreciation, amortization, lower
net accounts receivable (from lower sales) and prepaid expense (from less
spending in the media) and higher accrued tax levels (due to timing of
payments). The major uses were increased inventories from lower sales and
lower accounts payable and accrued expenses due principally to lower sales
and to timing and the payment of year end payrolls and benefits. The
first quarter 1996 increases in receivables and inventories compared to
-13-
the first quarter of 1995 reflect timing differences and increases to
support higher levels of sales.
The major use of cash in investing activities in the first quarter of
1996 was for capital expenditures and the acquisition of a small French
giftware company. The acquisition was accounted for using the purchase
method with basically all of the purchase pricing allocated to goodwill.
The Company has an acquisition program, and may utilize funds for this
purpose in the future. Capital expenditure commitments for $19 million
are forecasted for 1996. Proceeds from the sale of property, plant and
equipment was primarily from the sale of a distribution center in
Charlotte, North Carolina. As of March 31, 1996, two other distribution
centers in the United States with a book value of $622 thousand remain to
be sold. 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 use of cash in financing activities in the first quarter of
1996 was for dividends to shareholders. 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, 1996, 1.3 million
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. Total stock options outstanding at the
-14-
exercise price amounted to $77 million at March 31, 1996 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 $810,000 increased the cumulative translation component
which reduced the shareholders' equity increase in the first three months
of 1996. The translation adjustments to the March 31, 1996 balance sheet
that produced the 1996 change in the cumulative translation component of
shareholders' equity were increases in working capital by $520,000;
decreases in net property, plant and equipment and other assets by
$1,156,000; and increases in long-term liabilities by $174,000. 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.
The Company currently believes that cash from operations and available
financing alternatives are adequate to meet anticipated requirements for
working capital, dividends, capital expenditures, the stock repurchase
program and other needs. No liquidity problems are anticipated.
-15-
STANHOME INC.
SALES AND OPERATING PROFIT BY BUSINESS SEGMENT
FOR THE FIRST THREE MONTHS ENDED MARCH 31, 1996 AND 1995 (Unaudited)
(In Thousands)
1996 1995 Percent
Actual Actual Change
------ ------ -------
Net Sales:
Giftware $ 99,612 $105,955 ( 6%)
Direct Response 36,687 31,806 15
Direct Selling 47,648 47,759 -
Eliminations ( 907) ( 651)
-------- --------
Total Net Sales $183,040 $184,869 ( 1%)
======== ========
Operating Profit:
Giftware $ 8,010 $ 11,499 (30%)
Direct Response 707 ( 16)
Direct Selling 4,503 4,749 ( 5)
Unallocated Expense ( 2,825) ( 2,462) (15)
-------- --------
Total Operating Profit $ 10,395 $ 13,770 (25%)
======== ========
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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 25, 1996.
(c) The first matter voted upon at the meeting was the election of
Directors. The members of Class I were standing for election
to a three-year term expiring at the Annual Meeting in 1999.
Upon motion duly made and seconded, it was voted to elect
Judith R. Haberkorn, Thomas R. Horton, and H. L. Tower as Class
I Directors for a three-year term expiring at the Annual
Meeting in 1999 and until their successors are elected and
qualified. The votes for each of the candidates were reported
as follows:
Judith R. Haberkorn For: 14,573,141
Withheld: 267,177
Thomas R. Horton For: 14,550,018
Withheld: 290,300
H. L. Tower For: 14,385,991
Withheld: 454,327
The second matter voted upon at the meeting was the
ratification of the Board's appointment of Arthur Andersen LLP
as independent accountants for 1996. Upon motion duly made and
seconded, it was voted that the appointment by the Board of
Directors at its March 6, 1996 meeting of Arthur Andersen LLP,
independent certified public accountants, as independent
accountants for the Company for its fiscal year ending December
31, 1996 be ratified and approved. The votes for the
independent accountants were reported as follows:
Arthur Andersen LLP For: 14,709,111
Against: 62,186
Abstain: 69,021
The third matter voted upon at the meeting was the approval of
the Stanhome Inc. 1996 Stock Option Plan. Upon motion duly
made and seconded, it was voted that the 1996 Stock Option Plan
adopted by the Board of Directors at its January 24, 1996
meeting be approved. The votes for the approval of the 1996
Stock Option Plan were reported as follows:
1996 Stock Option Plan For: 8,850,285
Against: 4,197,367
Abstain: 859,481
ITEM 5. OTHER INFORMATION
In connection with the "safe harbor" provision of the Private
Securities Litigation Reform Act of 1995, the Company is hereby
-17-
filing cautionary statements identifying some of the important
factors that could cause the Company's actual results to differ
materially from those projected in forward-looking statements
made by or on behalf of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
- Stanhome Supplemental Investment Savings Plan, as amended and
restated through April 23, 1996
- 1996 Stock Option Plan
- John J. Dur Severance Arrangement, as amended and restated
through May 7, 1996
- Financial Data Schedule
- Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of
1995
(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 14, 1996 /s/G. William Seawright
_____________________________________
G. William Seawright
President and Chief Executive Officer
Date: May 14, 1996 /s/Allan G. Keirstead
_____________________________________
Allan G. Keirstead
Chief Administrative and Financial
Officer
-18-
EXHIBIT INDEX
Reg. S-K
Item 601 Exhibit 10-Q Page No.
_________ _______ _____________
10(a) Stanhome Supplemental Investment 20
Savings Plan, as amended and restated
through April 23, 1996
10(b) 1996 Stock Option Plan 31
10(c) John J. Dur Severance Arrangement, 38
as amended and restated through
May 7, 1996
27 Financial Data Schedule 39
99 Cautionary Statement for Purposes 40
of the "Safe Harbor" Provisions
of the Private Securities Litigation
Reform Act of 1995
-19-