UNITED STATES
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 Period Ended September 26, 1998
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 October 31, 1998 -
7,961,760
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 9
Part II. Other Information
Items 1 through 5 are not applicable
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
PART I Financial Information
ITEM 1. Financial Statements
HOME PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
September 26, December 27,
1998 1997
(unaudited)
------- -------
Assets
Current assets:
Cash and cash equivalents $ 6,271 $ 583
Accounts receivable, net 50,261 20,802
Inventories, net 33,435 12,797
Prepaid expenses and other current assets 2,570 508
------- -------
Total current assets 92,537 34,690
Property, plant and equipment - at cost 82,883 47,634
Less accumulated depreciation and amortization (25,157) (19,254)
------- -------
Property, plant and equipment, net 57,726 28,380
Intangible and other assets 192,200 36,273
------- -------
Total assets $342,463 $ 99,343
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term obligations $ 3,194 $ 3,850
Accounts payable 19,407 9,664
Accrued liabilities 33,548 12,913
------- -------
Total current liabilities 56,149 26,427
Long-term obligations - net of current 220,261 30,700
maturities
Other liabilities 7,058 -
Stockholders' equity:
Preferred Stock - authorized, 500,000
shares, $.01 par value; none issued - -
Common Stock - authorized 15,000,000 shares,
$.01 par value; 8,020,522 shares issued at
September 26, 1998 and 6,674,271 shares
issued at December 27, 1997 80 67
Additional paid-in capital 48,434 33,956
Retained earnings 10,898 8,616
Common Stock held in treasury - at cost
(58,762 shares) (264) (264)
Currency translation adjustments (153) (159)
------- -------
Total stockholders' equity 58,995 42,216
------- -------
Total liabilities and stockholders' equity $342,463 $ 99,343
======= =======
The accompanying notes are an integral part of the financial statements.
HOME PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Statements of Operations and Retained
Earnings
(unaudited)
(in thousands, except per share amounts)
Thirteen Weeks Thirty-nine Weeks
Ended Ended
Sept 26, Sept 27, Sept 26, Sept 27,
1998 1997 1998 1997
------ ------ ------- ------
Net sales $68,243 $32,875 $175,637 $97,636
Cost of goods sold 45,874 22,498 118,435 68,007
------ ------ ------- ------
Gross profit 22,369 10,377 57,202 29,629
Operating expenses
Selling 8,182 4,877 20,720 13,944
Administrative 3,817 1,695 10,713 5,486
Amortization of intangible assets 1,203 208 3,068 615
------ ------ ------- ------
13,202 6,780 34,501 20,045
------ ------ ------- ------
Operating profit 9,167 3,597 22,701 9,584
Other income (expense)
Interest income 41 1 96 49
Interest (expense) (3,872) (1,067) (10,260) (4,207)
Other income (expense), net 1 (42) 53 88
------ ------ ------- ------
(3,830) (1,108) (10,111) (4,070)
Earnings before income taxes and
extraordinary charge 5,337 2,489 12,590 5,514
Income tax (expense) (2,223) (68) (5,201) (271)
------ ------ ------- ------
Earnings before extraordinary charge 3,114 2,421 7,389 5,243
Extraordinary charge for early retirement
of debt, net of tax benefit of $3,698 - - (5,107) -
------ ------ ------- ------
Net earnings 3,114 2,421 2,282 5,243
Retained earnings at beginning of period 7,784 4,118 8,616 1,296
------ ------ ------- ------
Retaining earnings at end of period $10,898 $ 6,539 $ 10,898 $ 6,539
------ ------ ------- ------
Earnings before extraordinary
charge, per common share - basic $ 0.39 $ 0.37 $ 0.93 $ 1.04
Extraordinary charge for early
retirement of debt, net of tax - - (0.64) -
------ ------ ------- ------
Net earnings per common share - basic $ 0.39 $ 0.37 $ 0.29 $ 1.04
====== ====== ======= ======
Earnings before extraordinary
charge, per common share - diluted $ 0.38 $ 0.36 $ 0.89 $ 0.99
Extraordinary charge for early
retirement of debt, net of tax - - (0.61) -
------ ------ ------- ------
Net earnings per common share-diluted $ 0.38 $ 0.36 $ 0.28 $ 0.99
====== ====== ======= ======
The accompanying notes are an integral part of the financial statements.
HOME PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
Thirty-nine Weeks Ended
Sept 26, Sept 27,
1998 1997
------- -------
Cash flows from operating activities:
Net earnings $ 2,282 $ 5,243
Adjustments to reconcile net earnings to
net cash provided (used) by operating activities:
Depreciation and amortization 9,314 5,205
Changes in assets and liabilities:
(Increase) in accounts receivable (9,755) (2,809)
Decrease (increase) in inventories 1,854 (5,119)
Increase (decrease) in accounts payable 3,061 (6,477)
Increase in accrued liabilities 3,596 218
Other operating activities, net 3,581 (667)
------- -------
Net cash provided (used) by operating activities 13,933 (4,406)
------- -------
Cash flows from investing activities:
Seymour acquisition, net of cash acquired (14,882) -
Tenex acquisition, net of cash acquired (16,725) -
Prestige Plastics acquisition, net of cash acquired (78,321) -
Tamor acquisition, net of cash acquired - (27,876)
Capital expenditures, net (7,729) (5,168)
------- -------
Net cash (used) for investing activities (117,657) (33,044)
------- -------
Cash flows from financing activities:
Payments on borrowings (219,218) (33,497)
Net proceeds from borrowings and warrants 286,672 51,324
Net proceeds from borrowings under revolving
line of credit 41,931 -
Net proceeds from secondary stock offering - 20,171
Payment of capital lease obligation (184) (28)
Exercise of common stock options and issuance
of common stock under stock purchase plan 211 122
------- -------
Net cash provided by financing activities 109,412 38,092
------- -------
Net increase in cash and cash equivalents 5,688 642
Cash and cash equivalents at beginning of period 583 2,879
------- -------
Cash and cash equivalents at end of period $ 6,271 $ 3,521
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 359 $ 2,787
------- -------
Income taxes 817 1,255
------- -------
The accompanying notes are an integral part of the financial statements.
Home Products International, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Unaudited)
(in thousands except per share amounts)
Note 1. Home Products International, Inc. (the "Company") and its
subsidiary companies design, manufacture and market products in one
industry segment, houseware products. Houseware products are marketed
principally through mass market trade channels throughout the
United States and internationally.
The condensed consolidated financial statements include the accounts
of the Company and its subsidiary companies. All significant
intercompany transactions and balances have been eliminated.
The unaudited condensed financial statements included herein as of
September 26, 1998 and for the thirteen weeks and thirty-nine weeks ended
September 26, 1998 and September 27, 1997 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
1997 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. Inventories are summarized as follows (in thousands):
September December
26, 1998 27, 1997
------ ------
Finished goods ................... $18,756 $ 7,335
Work-in-process .................. 6,556 2,225
Raw materials .................... 8,123 3,237
------ ------
$33,435 $12,797
====== ======
Note 3. On August 14, 1998 the Company acquired certain assets
(inventory and molds) which comprised Tenex Corporation's consumer
product storage line for $16,400 in an all cash transaction, (the "Tenex
Asset Acquisition"). On September 8, 1998 the Company acquired from
Newell Co. certain assets and assumed certain liabilities comprising the
business of Anchor Hocking Plastics and Plastic, Inc. for $78,000 in an
all cash transaction (the "Newell Asset Acquisition").
Funding for the Tenex Asset Acquisition was obtained from the
Company's May 14, 1998 $100,000 revolving credit agreement (more fully
described in Note 4). Funding for the Newell Acquisition was partially
obtained from the Company's May 14, 1998 revolving credit agreement, as
amended on September 8, 1998, and a new $50,000 term loan (more fully
described in Note 4).
Both acquisitions were accounted for as a purchase, and as such
actual results of operations have been included in the Consolidated
Statement of Operations since the respective acquisition dates. The
Tenex Asset Acquisition and the Newell Asset Acquisition, combined,
has contributed $7,851 to net sales for the thirteen weeks ended
September 26, 1998.
For proforma information related to the Newell Asset Acquisition,
see Form 8-K/A filed by the Company on November 6, 1998. The Tenex
Asset Acquisition was not material, and thus proforma information was
not required.
Note 4. On May 14, 1998, the Company issued $125,000 of Senior
Subordinated Notes due 2008 (the "Notes"). Interest on the Notes is
payable semi-annually at a rate of 9.625% per annum. Proceeds from the
offering were used (i) to repay approximately $122,000 of outstanding
indebtedness, including the payment of certain fees, prepayment penalties
and expenses related to such repayment, (ii) to pay certain other fees
and expenses incurred in connection with the issuance of the Notes and
the refinancing of the Company's primary revolving credit facility and
(iii) for working capital and general corporate purposes.
The Company is a holding company with no assets or operations other
than its investment in its subsidiaries. The Notes are guaranteed by all
direct and indirect subsidiaries of the Company other than
inconsequential subsidiaries (the "Subsidiary Guarantors"). The
guarantee obligations of the Subsidiary Guarantors (which are all wholly
owned subsidiaries of the Company) are full, unconditional and joint and
several. There are no restrictions on the ability of the Company's
subsidiaries to pay dividends or other distributions to the Company
(other than limitations imposed by law generally on the ability of a
corporation to declare and pay dividends and distributions to its
stockholders). Separate financial statements of the Subsidiary
Guarantors are not included in the accompanying financial statements
because management of the Company has determined that separate financial
statements of the Subsidiary Guarantors would not be material to
investors.
On May 14, 1998, concurrently with the offering of the Notes, the
Company entered into a new bank revolving credit agreement in a maximum
principal amount of $100,000 (the "$100,000 Credit Agreement") which
replaced the Company's prior $20,000 revolving credit agreement.
On September 8, 1998, in conjunction with the Newell Asset
Acquisition, the Company amended and restated the May 14, 1998 $100,000
Credit Agreement to add, among other items, a $50,000 term loan, (the
"Term Loan"). The combination of the $100,000 Credit Agreement and the
Term Loan are referred to herein as the "$150,000 Credit Agreement".
Remaining availability under the $150,000 Credit Agreement as of
September 26, 1998 was approximately $52,000.
Note 5. During fiscal 1997 the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share," which established
standards for the computation and presentation of earnings per share
information. Prior period net earnings (loss) per share have been
restated. Net earnings (loss) per common share - basic, was calculated
by dividing net earnings (loss) applicable to common shares by the
weighted average number of common shares outstanding during each period.
Net earnings (loss) per common share - diluted, reflects the potential
dilution that could occur assuming exercise of all outstanding "in-the-
money" stock options. A reconciliation of the net earnings (loss) and
the number of shares used in computing basic and diluted earnings per
share was as follows:
Thirteen Weeks Thirty-nine Weeks
Ended Ended
Sept 26, Sept 27, Sept 26, Sept 27,
1998 1997 1998 1997
------ ------ ------ ------
Net earnings per common share -
basic:
Net earnings applicable to
common shares ................ $ 3,114 $ 2,421 $ 2,282 $ 5,243
====== ====== ====== ======
Weighted average common shares
Outstanding for the period .. 7,961 6,490 7,946 5,042
====== ====== ====== ======
Net earnings per common share -
basic ........................ $ 0.39 $ 0.37 $ 0.29 $ 1.04
====== ====== ====== ======
Net earnings per common share-
diluted:
Net earnings applicable to
common shares ................ $ 3,114 $ 2,421 $ 2,282 $ 5,243
====== ====== ====== ======
Weighted average common shares
Outstanding for the period .. 7,961 6,490 7,946 5,042
Increase in shares which would
result From exercise of "in-
the-money" Stock options ..... 211 303 311 233
------ ------ ------ ------
Weighted average common shares
outstanding
Assuming conversion of the
above Securities ........... 8,172 6,793 8,257 5,275
====== ====== ====== ======
Net earnings per common share -
diluted ...................... $ 0.38 $ 0.36 $ 0.28 $ 0.99
====== ====== ====== ======
Note 6. The provision for income taxes is determined by applying an
estimated annual effective tax rate (federal, state and foreign combined)
to income before taxes. The estimated annual effective income tax rate
is based upon the most recent annualized forecast of pretax income and
permanent book/tax differences.
ITEM 2.Management's Discussion and Analysis of Financial Condition and
Results of Operations
This quarterly report on Form 10-Q, including "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contains 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: (i) the anticipated effects of the 1998 Acquisitions (as
defined below) on the Company's sales and earnings; (ii) the impact of
the level of the Company's indebtedness; (iii) restrictive covenants
contained in the Company's various debt documents; (iv) general economic
conditions and conditions in the retail environment; (v) the Company's
dependence on a few large customers; (vi) price fluctuations in the raw
materials used by the Company, particularly plastic resin; (vii)
competitive conditions in the Company's markets; (viii) the seasonal
nature of the Company's business; (ix) the Company's ability to execute
its acquisition strategy; (x) fluctuations in the stock market; (xi) the
extent to which the Company is able to retain and attract key personnel;
(xii) relationships with retailers; and (xiii) 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
republish revised 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 which attempt to
advise interested parties of the factors which affect the Company's
business, in this report, as well as the Company's periodic reports on
Forms 10-K, 10-Q and 8-K filed with the Securities and Exchange
Commission.
1998 Acquisitions.
The Company made three acquisitions within its 1998 fiscal year (the
"1998 Acquisitions") and the actual results have been combined with the
Company's since the date of the respective acquisition.
Effective December 30, 1997 the Company acquired all of the
outstanding common stock of Seymour Housewares Corporation, ("Seymour") a
leading designer, manufacturer and marketer of consumer laundry care
products. Seymour manufactures and markets a full line of ironing
boards, ironing board covers and pads and numerous laundry related
accessories. Seymour was acquired for a total purchase price of $100.7
million, consisting of $16.4 million in cash, $14.3 million in common
stock (1,320,700 shares) and the assumption of $70.0 million of debt.
Effective August 14, 1998 the Company acquired certain assets,
(inventory and molds) which comprised Tenex Corporation's consumer
product storage line. This product line consists of plastic storage bins
and containers, rolling carts and stacking drawer systems. This product
line was acquired for $16.4 million in cash.
Effective September 8, 1998 the Company acquired assets and assumed
certain liabilities from Newell Co. (consisting of the business of Anchor
Hocking Plastics ("AHP") and Plastics, Inc ("PI").) a leading supplier of
food storage containers and disposable plastic servingware. AHP and PI
are collectively referred to herein as Prestige Plastics, Inc.
("Prestige"). Prestige was acquired for $78.0 million in cash.
Thirteen weeks ended September 26, 1998 compared to the thirteen weeks
ended September 27, 1997
In the discussion and analysis that follows, all references to the
third quarter of 1998 are to the thirteen week period ended September 27,
1998 and all references to the third quarter of 1997 are to the thirteen
week period ended September 27, 1997. The following discussion and
analysis compares the actual results for the third quarter of 1998
to the actual results for the third quarter of 1997 with reference to the
following (in thousands, except per share amounts; unaudited):
Thirteen weeks ended
September 26, 1998 September 27, 1997
Net sales..................... $ 68,243 100.0% $ 32,875 100.0%
Cost of goods sold............ 45,874 67.2 22,498 68.4
------- ---- ------- ----
Gross profit................ 22,369 32.8 10,377 31.6
Operating expenses............ 13,202 19.4 6,780 20.7
------- ---- ------- ----
Operating profit............ 9,167 13.4 3,597 10.9
Interest expense.............. (3,872) (5.7) (1,067) (3.2)
Other income (expense)........ 42 0.1 (41) (0.1)
------- ---- ------- ----
Earnings before income taxes 5,337 7.8 2,489 7.6
Income tax (expense).......... (2,223) (3.2) (68) (0.2)
------- ---- ------- ----
Net earnings ................. $ 3,114 4.6 % $ 2,421 7.4%
======= ==== ======= ====
Net earnings per share - basic $0.39 $0.37
Net earnings per share - diluted $0.38 $0.36
Weighted average common shares
Outstanding - basic......... 7,961 6,490
Weighted average common shares
Outstanding - diluted....... 8,172 6,793
Net sales. Net sales of $68.2 million in the third quarter of 1998
increased $35.3 million, or 107.3%, from net sales of $32.9 million in
the third quarter of 1997. The 1998 Acquisitions contributed $35.9
million to net sales in the quarter. The Company's remaining
subsidiaries experienced a slight decrease in the third quarter of 1998
totaling $0.6 million. Net sales were down as a result of the Company's
continuing effort to cutback or eliminate the sales of under performing
products. In addition, sales as compared to the prior period were
negatively impacted by the bankruptcy of several retailers during the
fourth quarter of 1997 and the first quarter of 1998. Sales to such
customers for the third quarter of 1997 totaled $0.9 million.
Gross profit. Gross profit increased from $10.4 million in the
third quarter of 1997 to $22.4 million in the third quarter of 1998 while
gross profit margins increased from 31.6% in the third quarter of 1997 to
32.8% in the third quarter of 1998. The 1998 Acquisitions contributed
$11.3 million to gross profit at a gross profit margin of 31.4%. Margins
on the acquired businesses are currently less than the Company's other
products due to existing levels of out sourced production, less than
optimal capacity utilization and too many products. During the fourth
quarter of 1998 and first half of 1999, management will be addressing
these issues. Margins on other product lines increased between years as
a result of the elimination of under performing products, new product
introductions and decreasing raw material costs. Offsetting some of
these margin improvements were competitive pricing pressures and
unfavorable overhead absorption. Various competitors have reduced
selling prices in an attempt to take market share. The Company has
responded appropriately and believes it has maintained its share of
market. However, maintaining market share has resulted in selected
selling price reductions and reduced gross profit margins. Overhead
absorption was lower than a year ago as a result of production cutbacks
to reduce inventories. While this action unfavorably impacted the
operating results, it had a very favorable impact on cash flow.
Operating expenses. Operating expenses of $13.2 million in the
third quarter of 1998 were up $6.4 million as compared to the third
quarter of 1997. Operating expenses as a percent of net sales improved
from 20.7% in the third quarter of 1997 to 19.4% in the third quarter of
1998. Excluding the impact of amortization, operating expenses as a
percent of net sales improved from 20.0% in 1997 to 17.6% in 1998.
Operating expense savings in the quarter were primarily obtained from
reduced selling and marketing expenses related to the successful
integration of the Selfix and Seymour selling and marketing functions.
Administrative expenses, as compared to the prior period, increased due
to the added expenses related to the 1998 Acquisitions.
Interest expense. Interest expense of $3.9 million in the third
quarter of 1998 increased $2.8 million from $1.1 million in the third
quarter of 1997. The issuance of approximately $180.8 million of debt in
connection with the 1998 Acquisitions caused the majority of the
increased interest expense between periods. In addition, the Company
issued $125.0 million of high yield notes in May, 1998 at a fixed
interest rate of 9.625%, which is slightly higher than the Company's
floating rate under its previous revolving credit agreement.
Income tax expense. Income tax expense increased by $2.1 million to
$2.2 million for the third quarter of 1998 from $0.1 million in the third
quarter of 1997. Income tax expense increased because of a change in the
Company's tax position. In 1997, the Company was able to use net
operating loss carryforwards which effectively eliminated federal income
tax expense. By the end of fiscal year 1997, the tax loss carryforwards
had been fully utilized, as such, the Company is now in a tax paying
position. The provision for the third quarter of 1998 included a
provision for federal, state and foreign income taxes.
Net earnings. The Company had net earnings of $3.1 million in the
third quarter of 1998, or $0.38 per common share - diluted, based on
8,172,214 weighted average common shares outstanding. This compares to
net earnings of $2.4 million in the third quarter of 1997, or $0.36 per
common share - diluted, based on 6,792,850 weighted average common shares
outstanding. The primary increase in weighted average common shares
outstanding was the result of shares issued in connection with the
Seymour Acquisition (1,320,700).
As noted above, the Company's tax position has significantly changed
since 1997. If the Company had been in a full tax paying position a year
ago, diluted earnings per share would have been $0.22 as compared to the
fully taxed earnings per share in 1998 of $0.38.
Thirty-nine weeks ended September 26, 1998 compared to the thirty-nine
weeks ended September 27, 1997
The following discussion and analysis compares the actual results
for the thirty-nine weeks ended September 26, 1998 to the actual results
for the thirty-nine weeks ended September 27, 1997 with reference to the
following (in thousands, except share and per share amounts; unaudited):
Thirty-nine weeks ended
September 26, September 27,
1998 1997
------------ -------------
Net sales..................... $175,637 100.0% $97,636 100.0%
Cost of goods sold............ 118,435 67.4 68,007 69.7
------- ---- ------ ----
Gross profit................ 57,202 32.6 29,629 30.3
Operating expenses............ 34,501 19.7 20,045 20.5
------- ---- ------ ----
Operating profit............ 22,701 12.9 9,584 9.8
Interest expense.............. (10,260) (5.8) (4,207) (4.3)
Other income.................. 149 0.1 137 0.1
------- ---- ------ ----
Earnings before income taxes 12,590 7.2 5,514 5.6
Income tax (expense).......... (5,201) (3.0) (271) (0.2)
------- ---- ------ ----
Earnings before extraordinary 7,389 4.2 5,243 5.4
charge........................
Extraordinary charge.......... (5,107) (2.9) - -
------- ---- ------ ----
Net earnings.................. $ 2,282 1.3% $ 5,243 5.4%
======= ==== ====== ====
Earnings before extraordinary
charge per share - basic..... $ 0.93 $ 1.04
Earnings before extraordinary
charge per share - diluted .. $ 0.89 $ 0.99
Net earnings per share - basic $ 0.29 $ 1.04
Net earnings per share - diluted $ 0.28 $ 0.99
Weighted average common shares
Outstanding - basic......... 7,946 5,042
Weighted average common shares
Outstanding - diluted....... 8,257 5,275
Net sales. Net sales of $175.6 million in 1998 increased $78.0
million, or 79.9% from net sales of $97.6 million in 1997. The 1998
Acquisitions contributed $84.9 million to net sales in the period. The
Company's remaining subsidiaries experienced a decrease in 1998 totaling
$6.9 million. Net sales were down primarily as a result of the Company's
continuing effort to cutback or eliminate the sales of certain under
performing products. Further impacting 1998 was a decline in juvenile
products due to a $1.0 million one time promotional order in the second
quarter of 1997. In addition, sales as compared to the prior period were
negatively impacted by the bankruptcy of several retailers during the
fourth quarter of 1997 and the first quarter of 1998. Sales to such
customers for 1997 totaled $2.7 million as compared to $0.3 million in
1998.
Gross profit. Gross profit increased from $29.6 million in 1997 to
$57.2 million in 1998 while gross profit margins increased from 30.3% in
1997 to 32.6% in 1998. The 1998 Acquisitions contributed $26.8 million to
gross profit at a gross profit margin of 31.6%. Margins on the acquired
businesses are currently less than the Company's other products due to
existing levels of out sourced production, less than optimal capacity
utilization and too many products. During the fourth quarter of 1998 and
first half of 1998, management will be addressing these issues. Margins
on other product lines increased between years as a result of the
elimination of under performing products, new product introductions and
decreasing raw material costs. Offsetting some of these margin
improvements were competitive pricing pressures and unfavorable overhead
absorption. Various competitors have reduced selling prices in an
attempt to take market share. The Company has responded appropriately
and believes it has maintained its share of market. However, maintaining
market share has resulted in selected selling price reductions. Overhead
absorption was lower than a year ago as a result of production cutbacks
to reduce inventories. While this action unfavorably impacted the
operating results, it had a very favorable impact on cash flow.
Operating expenses. Operating expenses of $34.5 million in 1998
were up $14.4 million as compared to 1997. Operating expenses as a
percent of net sales improved from 20.5% in 1997 to 19.7% in 1998.
Excluding the impact of amortization, operating expenses as a percent of
net sales improved even more from 19.9% in 1997 to 17.9% in 1998.
Operating expense savings in the period were primarily obtained from
reduced selling and marketing expenses related to the successful
integration of the Selfix and Seymour selling and marketing functions.
Administrative expenses increased due to the added expenses related to
the 1998 Acquisitions.
Interest expense. Interest expense of $10.3 million in 1998
increased $6.1 million from $4.2 million in 1997. The issuance of $165
million of debt in connection with the 1998 acquisitions caused the
majority of the increased interest expense between periods. In addition,
the Company issued $125.0 million of high yield notes in May, 1998 at a
fixed interest rate of 9.625%, which is slightly higher than the
Company's floating rate under its previous revolving credit agreement.
Income tax expense. Income taxes increased by $4.9 million to $5.2
million for 1998 from $0.3 million in 1997. Income tax expense increased
because of a change in the Company's tax position. In 1997, the Company
was able to use net operating loss carryforwards which effectively
eliminated federal income tax expense. By the end of fiscal year 1997,
the tax loss carryforwards had been fully utilized, as such, the Company
is now in a tax paying position. The provision for the third quarter of
1998 included a provision for federal, state and foreign income taxes.
Earnings before extraordinary charge. Earnings before extraordinary
charge increased to $12.6 million in 1998 from 1997 earnings of $5.5
million. Diluted earnings per share before extraordinary charge for the
thirty-nine weeks ended September 26, 1998 were $0.89 per common share
based on 8,257,320 weighted average common shares outstanding as compared
to diluted earnings per share before extraordinary charge for the thirty-
nine weeks ended September 27, 1997 of $0.99 per common share based on
5,275,436 weighted average common shares outstanding. The increase in
weighted average common shares outstanding was the result of a public
stock offering in July, 1997 (2,280,000 new shares issued) and shares
issued in connection with the Seymour Acquisition (1,320,700).
As noted the above, the Company's tax position has significantly
changed since 1997. If the Company had been in a full tax paying
position a year ago, diluted earnings per share before extraordinary
charge would have been $0.63 as compared to the fully taxed earnings per
share in 1998 of $0.89.
Extraordinary charge. An extraordinary charge, net of tax, for the
early retirement of debt of $5.1 million, or $0.61 per common share -
diluted was recorded in 1998. To fund the Seymour Acquisition, increased
financing facilities were obtained to replace and augment existing
facilities as of December 27, 1997, requiring the write-off of $1.7
million, net of tax, of capitalized costs incurred to obtain the replaced
credit facilities. In addition, in May, 1998 the Company refinanced its
existing debt and incurred an extraordinary charge of $3.4 million, net
of tax, for the write-off of previously capitalized costs relating to
the 12/30/97 Credit Agreement as well as penalties for early repayment of
debt.
Net earnings. The Company had net earnings in 1998 of $2.3
million, or $0.28 per common share - diluted, based on 8,257,320 weighted
average common shares outstanding. This compares to net earnings in 1997
of $5.2 million, or $0.99 per common share - diluted, based on 5,275,436
weighted average common shares outstanding.
Capital Resources and Liquidity
Cash and cash equivalents at September 26, 1998 were $6.3 million as
compared to $0.6 million at December 27, 1997. Working capital increased
$28.1 million, or 339%, to $36.4 million at September 26, 1998. The
increase in working capital is a result of the 1998 Acquisitions. Cash
provided by operating activities was $13.9 million for the thirty-nine
week period. During the thirteen-week period ended September 26, 1998,
the Company generated positive cash flow of $9.3 million (excluding the
additional debt required to fund third quarter acquisitions).
In the third quarter of 1998 the Company added Term debt totaling
$50 million and increased their borrowings under the $100.0 million
senior revolving credit facility by $38.2 million. At September 26,
1998, the Company had total short and long term debt outstanding of
$223.5 million and unused availability under the revolving credit
facility of $52.0. During the fourth quarter of 1998, $1.6 million of
debt will come due.
The Company's capital spending needs in 1998 are expected to be
between $12.0 and $14.0 million. Most of the spending relates to new
injection molding presses to expand existing capacity and to replace old,
inefficient machines. The replacement machines are expected to reduce
manufacturing cycle times and ongoing maintenance costs. In addition,
the Company exercised an option in the first quarter of 1998 to purchase
the leased manufacturing and warehouse facility in Missouri at an
approximate cost of $1.4 million. The Company expects to spend between
$4.0 and $6.0 million in the fourth quarter primarily for the set up of
the Company's Tenex manufacturing facility in Chicago. Where possible,
management will pursue alternative means of financing such as capital
leases and other purchase money transactions. In addition, operating
leases will be pursued to the extent they represent attractive economic
alternatives.
The Company believes its financing facilities together with its cash
flow from operations will provide sufficient capital to fund operations,
make the required debt repayments and meet the anticipated capital
spending needs.
Year 2000 Compliance
Many currently installed computer systems and software products are
coded to only accept two-digit entries in the date code field and can not
distinguish 21st century dates from 20th century dates and, as a result,
many companies' software and computer systems may need to be upgraded or
replaced in order to comply with such "Year 2000" requirements.
State of readiness. The Company is in the process of finalizing its
evaluation of the Year 2000 readiness (the "Project") of its information
technology systems ("IT") and its non IT Systems, ("Non IT") such as
building security, heating and cooling, telephones, voicemail, and other
similar items. The Company currently anticipates that the Project will
cover the following phases: (i) identification of all IT and non IT
systems, (ii) assessment of the repair or replacement requirements, (iii)
repair or replacement, (iv) testing, (v) implementation and (vi) creation
of contingency plans in the event of year 2000 failures. The Company
is scheduled to have reached Year 2000 compliance for all IT and non IT
Systems prior to December 1999.
The Company is also working with its major suppliers and customers
to determine whether the year 2000 problem will have an adverse effect on
the Company's relationships with them. The Company does not control
its suppliers or customers, and relies on a variety of utilities,
telecommunication companies, banks and other suppliers in order to
continue its business. There is no assurance that such parties will not
suffer a year 2000 business interruption, which, could have a material
adverse effect on the Company's financial condition and its results of
operations.
Costs. To date, the Company has not incurred significant
expenditures in connection with the identification and evaluation of the
Year 2000 compliance issues. Management estimates that the Year 2000
compliance costs will be approximately $.25 million to $.75 million.
Funds for the Year 2000 compliance will be obtained from current
operations or the Company's revolving credit facility.
Contingency plan. The Company has not yet finalized its Year 2000
contingency plan. The Company intends to finalize its contingency plan
prior to December 1999. In addition, if further year 2000 compliance
issues are discovered, the Company will evaluate the need for one or more
contingency plans relating to such issues.
Outlook
The outlook section contains a number of forward-looking statements
which are based upon current expectations. Actual results may differ
materially. These statements do not take into account the potential
effects of future mergers or acquisitions.
Earnings in the fourth quarter are expected to be below the earnings
levels achieved in the second and third quarters. This is due to
seasonality factors particularly in the laundry care product lines. The
1998 Acquisitions will cause a change in the historical earnings patterns
of the company. As a result, the Company will be a strong performer in
the second and third quarters with reduced profit levels in the first and
fourth quarters. Management expects that 70-75% of its annual profits
will be earned in the second and third quarters as compared to the 58%
that was earned in the same quarters in 1997. As a result of the changes
in seasonality, earnings per share in the fourth quarter are expected to
be less than last year's fully taxed results of $0.18 per diluted share.
In addition, the acquisitions of Tenex and Prestige Plastics are not
expected to be accretive to earnings in 1998 although they will provide
additional sales and market penetration in the fourth quarter.
Fourth quarter 1998 margins are expected to decline from the third
quarter. This is due to seasonality issues as well as the impact of the
newly acquired Tenex and Prestige Plastics product lines. The acquired
product lines have lower margins than the Company's other storage and
laundry care products. The lower margins are a result of outsourcing
arrangements, excess productive capacity and market conditions. During
the fourth quarter of 1998 and first half of 1999, management will be
determining and implementing strategic initiatives to address these
issues. Such initiatives will include reconfiguring existing
manufacturing capacity to increase production, balancing production among
facilities to encourage better utilization, adding capacity and warehouse
space in Chicago and selected product line reductions. This will result
in a reduction of out sourced product as well as reduced manufacturing
costs. These actions are expected to favorably impact gross product
margins by the second half of 1999.
During the fourth quarter of 1998 and all of 1999, management
expects to see the continuation of competitive pricing pressures begun
during the third quarter. Management expects to vigorously contest such
pressures and to maintain its market position. Such competitive threats,
however, are expected to erode some of the margin gains the Company
expects to make through the cost reduction efforts discussed above.
Plastic resin costs are expected to remain at current levels through the
fourth quarter. Although this will help control costs, it will not
necessarily result in improved margins due to the competitive nature of
the current market place.
Management will continue to evaluate opportunities to reduce
operating expenses, particularly in regard to the most recent
acquisitions. Part of the Company's acquisition strategy is to combine
selling, marketing and administrative functions where appropriate. This
is an ongoing effort.
In addition to the Company's goal of 10% annual growth from new
products and product line improvements, the Company will continue to
aggressively pursue acquisitions that are accretive to earnings.
Management anticipates that the fragmented nature of the housewares
industry will continue to provide significant opportunities for growth
through strategic acquisitions of complementary businesses. Management
intends to acquire businesses at attractive multiples of cash flow and
achieve operational and distribution efficiencies through integration of
complementary businesses.
The Company, consistent with its acquisition strategy, acquired
Prestige from Newell Co. and the certain assets (inventory and molds)
comprising Tenex Corporation's consumer product storage line in the third
quarter of 1998. Management estimates that both transactions will be
accretive to earnings in 1999 and that the addition of these businesses
to the Company's existing subsidiaries will result in combined revenues
of approximately $300 million in 1999. The addition of these entities
and their respected brands reaffirms the Company's commitment to leading
the consolidation in its industry by building a portfolio of companies
with established positions in the mass market channels.
PART II. Other Information
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
2.1 Asset Purchase and Sale Agreement among Plastics,
Inc and Home Products International, Inc. and Newell
Co. dated as of July 31, 1998. Incorporated by
Reference to Form 8-K/A filed on November 6, 1998.
2.2 Asset Purchase Agreement among Tenex Corporation,
and Home Products International, Inc., dated July
24, 1998.
10.1 $150,000,000 Amended and Restated Credit Agreement
among Home Products International, Inc. as Borrower,
the Several Lenders from time to time parties
hereto, and The Chase Manhattan Bank, as
Administrative Agent dated September 8, 1998.
Incorporated by Reference to Form 8-K/A filed on
November 6, 1998.
10.2 Assignment and Assumption Agreement by and between
Home Products International, Inc. and Prestige
Plastics, Inc. Incorporated by Reference to Form 8-
K/A filed on November 6, 1998.
27.1 Financial Data Schedule (only filed electronically
with the SEC).
(a) Reports on Form 8-K.
(1) On September 3, 1998 the Registrant filed a Form
8-K to report the acquisition of certain assets from Tenex
Corporation. No financial statements were included in the
filing.
(2) On September 23, 1998 the Registrant filed a Form
8-K to report the acquisition of assets from Newell Co.
No financial Statements were included in this filing, as
it was impractical to provide financial statements at that
time. Form 8-K/A was filed on November 6, 1998 so as to
include the required financial statements.
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
HOME PRODUCTS INTERNATIONAL, INC.
By: /s/ James E. Winslow
James E. Winslow
Executive Vice President
Chief Financial Officer
Dated: November 10, 1998