FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 27, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-8044
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HUNT CORPORATION.
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(Exact name of registrant as specified in its charter)
Pennsylvania 21-0481254
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Commerce Square 2005 Market Street, Philadelphia, PA 19103
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(Address of principal executive offices) (Zip Code)
Registrant's telephone no., including area code (215) 656-0300
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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
As of April 1, 2000, there were outstanding 9,929,939 shares of the registrant's
common stock.
Page 2
HUNT CORPORATION
INDEX
Page
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PART I - FINANCIAL INFORMATION
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Item 1 - Financial Statements
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Condensed Consolidated Balance Sheets as of
February 27, 2000 and November 28, 1999 3
Condensed Consolidated Statements of Income -
Three Months Ended February 27, 2000
and February 28, 1999 4
Consolidated Statements of Comprehensive Income -
Three Months Ended February 27, 2000
and February 28, 1999 5
Condensed Consolidated Statements of Cash Flows -
Three Months Ended February 27, 2000
and February 28, 1999 6
Notes to Condensed Consolidated Financial
Statements 7 - 10
Item 2 - Management's Discussion and Analysis of
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Financial Condition and Results of Operations 11 - 14
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Item 3 - Quantitative and Qualitative Disclosures about Market Risk 15
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PART II - OTHER INFORMATION
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Item 1 - Legal Proceedings 16
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Item 6 - Exhibits and Reports on Form 8-K 16
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Signatures 17
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Exhibit Index 18
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Part I - FINANCIAL INFORMATION
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Item 1. Financial Statements
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Hunt Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands except share and per share amounts)
February 27, November 28,
ASSETS 2000 1999
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Current assets:
Cash and cash equivalents $ 26,448 $ 36,897
Accounts receivable, less allowance for doubtful
accounts: 2000, $832; 1999, $967 33,045 33,445
Inventories:
Raw materials 9,733 6,966
Work in process 3,168 3,337
Finished goods 11,939 10,373
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Total inventories 24,840 20,676
Deferred income taxes 5,165 5,406
Prepaid expenses and other current assets 1,132 850
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Total current assets 90,630 97,274
Property, plant and equipment, at cost, less
accumulated depreciation and amortization:
2000, $45,643; 1999, $43,781 44,255 45,121
Excess of acquisition costs over net assets acquired, net 24,447 25,013
Other assets 12,581 12,221
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Total assets $ 171,913 $ 179,629
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 23 $ 23
Accounts payable 9,616 10,762
Accrued expenses:
Salaries, wages and commissions 1,243 3,584
Income taxes 2,589 1,481
Other 16,539 20,001
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Total current liabilities 30,010 35,851
Long-term debt, less current portion 55,674 56,647
Deferred income taxes 1,709 1,906
Other non-current liabilities 14,995 14,710
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.10 par value, authorized 1,000,000 shares
(including 50,000 shares of Series A Junior
Participating Preferred); none issued - -
Common stock, $.10 par value, 40,000,000 shares
authorized; issued: 2000 and 1999 -16,152,322 shares 1,615 1,615
Capital in excess of par value 6,434 6,434
Accumulated other comprehensive loss (2,948) (2,459)
Retained earnings 161,439 160,267
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166,540 165,857
Less cost of treasury stock:
2000 - 6,176,083 shares; 1999 - 5,987,383 shares (97,015) (95,342)
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Total stockholders' equity 69,525 70,515
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Total liabilities and stockholders' equity $ 171,913 $ 179,629
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See accompanying notes to condensed consolidated financial statements.
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Hunt Corporation
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands except per share amounts)
Three Months Ended
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February 27, February 28,
2000 1999
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Net sales $60,633 $60,369
Cost of sales 38,716 37,587
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Gross profit 21,917 22,782
Selling, administrative and general expenses 17,881 18,409
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Income from operations 4,036 4,373
Interest expense 1,144 1,189
Other income, net (496) (497)
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Income before income taxes 3,388 3,681
Provision for income taxes 1,186 1,288
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Net income $2,202 $2,393
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Net income per share - Basic $.22 $.22
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Net income per share - Diluted $.22 $.22
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Dividends per common share $.103 $.103
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See accompanying notes to condensed consolidated financial statements.
Page 5
Hunt Corporation
Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands)
Three Months Ended
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February 27, February 28,
2000 1999
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Net income $ 2,202 $ 2,393
Comprehensive loss:
Foreign currency translation adjustments,
net of income tax benefit of $263 and
$448 in 2000 and 1999,
respectively (489) (833)
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Other comprehensive loss (489) (833)
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Comprehensive income $ 1,713 $ 1,560
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See accompanying notes to condensed consolidated financial statements.
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Hunt Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Three Months Ended
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February 27, February 28,
2000 1999
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Cash flows from operating activities:
Net income $ 2,202 $ 2,393
Adjustments to reconcile net income to net cash
used for operating activities:
Depreciation and amortization 2,366 2,258
Deferred income taxes 47 409
Loss on disposals of property, plant and equipment - 4
Payments for special charges (801) (576)
Changes in operating assets and liabilities (8,614) (10,954)
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Net cash used for operating activities (4,800) (6,466)
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Cash flows from investing activities:
Additions to property, plant and equipment (1,242) (601)
Acquisition of business (8) -
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Net cash used for investing activities (1,250) (601)
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Cash flows from financing activities:
Proceeds from issuance of long-term debt 2,501 3,709
Payments on long-term debt, including current maturities (3,405) (3,155)
Book overdrafts (573) 962
Purchases of treasury stock (1,673) (5,168)
Dividends paid (1,030) (1,116)
Other, net (153) (62)
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Net cash used for financing activities (4,333) (4,830)
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Effect of exchange rate changes on cash (66) (72)
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Net decrease in cash and cash equivalents (10,449) (11,969)
Cash and cash equivalents, beginning of period 36,897 40,724
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Cash and cash equivalents, end of period $ 26,448 $ 28,755
========= =========
See accompanying notes to condensed consolidated financial statements.
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Hunt Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. The accompanying condensed consolidated financial statements and related
notes are unaudited; however, in management's opinion all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
the financial position at February 27, 2000 and the results of operations and
cash flows for the periods shown have been made. Such statements are presented
in accordance with the requirements of Form 10-Q and do not include all
disclosures normally required by generally accepted accounting principles or
those normally made in Form 10-K.
2. A reconciliation of weighted average common shares outstanding to weighted
average common shares outstanding assuming dilution in calculating the earnings
per share is shown below (in thousands):
Three Months Ended
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February 27, February 28,
2000 1999
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Average common shares outstanding - basic 10,024 10,794
Add: common equivalent shares representing
shares issuable upon exercise of stock options
and stock grants 17 1
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Average common shares and dilutive
securities outstanding 10,041 10,795
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3. The following table sets forth the details and the cumulative activity in the
various accruals and reserves associated with the Company's 1999 restructuring
plan in the Condensed Consolidated Balance Sheet at February 27, 2000 (in
thousands):
Balance at Current Cash Non-Cash Balance at
November 28, 1999 Provision Reductions Activity February 27, 2000
------------------ --------- ---------- -------- -----------------
Severance $ 2,539 - $ (157) $ - $ 2,382
Lease Obligations 1,766 - (2) - 1,764
Fixed Assets 1,581 - (3) - 1,578
Other 177 - (59) - 118
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Total $ 6,063 - $ (221) $ - $ 5,842
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4. The following table sets forth the details and the cumulative activity in the
various accruals and reserves associated with the Company's 1997 strategic plan
in the Condensed Consolidated Balance Sheet at February 27, 2000 (in thousands):
Balance at Current Cash Non-Cash Balance at
November 28, 1999 Provision Reductions Activity February 27, 2000
------------------ --------- ---------- -------- -----------------
Lease Obligations $ 554 - $ (548) $ - $ 6
Severance 46 - (15) - 31
Other 296 - (17) - 279
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Total $ 896 - $ (580) $ - $ 316
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5. The Company has been sued for patent infringement with respect to one of its
minor products. After a jury trial during the Company's second quarter of fiscal
1998, the U.S. District in the Western District of Wisconsin entered judgment
against the Company in this matter and awarded damages to the plaintiffs in the
amount of $3.3 million, plus interest and costs. The verdict has been appealed,
and a decision of the Court of Appeals is expected within the relatively near
future. The Company and its patent legal counsel believe that the verdict
against the Company was incorrect and that it will be reversed on appeal.
Accordingly, the Company has not recorded any liability in its financial
statements associated with this judgment. However, there can be no assurance
that the Company will prevail in this matter. In the event of an unfavorable
final judgment against the Company, management believes that it will not have a
material impact on the Company's financial position, but it could have a
material effect on quarterly or annual results of operations. (See also Note 14
to the Consolidated Financial Statements included in the Company's 1999 Form
10-K.)
Page 9
6. During fiscal 1999, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 131 requires selected information about
reportable segments in interim financial reports that is consistent with that
made available to management to assess performance. The Company operates in two
reportable business segments, each of which is a strategic business that is
managed separately because each business develops, manufactures and sells
distinct products. The business segments consist of consumer products (including
office and art supplies) and graphics products (including supplies and
equipment). The Company's management evaluates performance based on several
factors. However, the primary measurement focus is "operating income" excluding
restructuring, net gain on divestitures, costs incurred in connection with the
implementation of the 1999 restructuring plan and any other unusual items.
The following table presents information about the Company's reportable
segments. Intersegment sales are not significant. Operating income includes all
revenues and expenses of the reportable segment except for restructuring, net
gain on divestitures, costs incurred in connection with the implementation of
the 1999 restructuring plan, interest expense, interest income, other expenses,
other income, and income taxes, which are excluded from the measure of segment
profitability reviewed by Company's management. Identifiable assets are those
assets used in the operations of each business segment. Corporate assets include
cash and miscellaneous other assets not identifiable with any particular
segment.
1st Qtr Consumer Graphics
Fiscal Year 2000 Products Products Corporate Consolidated
- ---------------- -------- -------- --------- ------------
Net external sales $ 25,375 $ 35,258 $ 60,633
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Operating income $ 4,224 $ 1,688 $ (1,624) $ 4,288
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Implementation costs $ (34) $ (217) $ (1) (252)
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Income from operations $ 4,036
Interest expense (1,144)
Interest income 397
Other income, net 99
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Income from continuing
operations before
income taxes $ 3,388
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Identifiable assets $ 33,475 $ 95,992 $ 42,446 $171,913
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1st Qtr Consumer Graphics
Fiscal Year 1999 Products Products Corporate Consolidated
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Net external sales $ 26,389 $ 33,980 $ 60,369
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Operating income $ 4,041 $ 2,202 $ (1,870) $ 4,373
======== ======== ========
Implementation costs $ - $ - $ - -
======== ======== ======== --------
Income from operations $ 4,373
Interest expense (1,189)
Interest income 387
Other income, net 110
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Income from continuing
operations before
income taxes $ 3,681
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Identifiable assets $ 35,926 $ 98,517 $ 43,644 $178,087
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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The following discussion includes certain forward-looking statements within the
meaning of the Private Securities Litigation Act of 1995. Such forward-looking
statements represent management's assessment based upon information currently
available, but are subject to risks and uncertainties which could cause actual
results to differ materially from those set forth in the forward-looking
statements. These risks and uncertainties include, but are not limited to, the
Company's ability to successfully complete the implementation, and realize the
anticipated growth and other benefits, of its restructuring and strategic plans
on a timely basis; the effect of, and changes in, worldwide general economic
conditions; technological and other changes affecting the manufacture of and
demand for the Company's products; competitive and other pressures in the market
place; the outcome of litigation in which the Company is engaged (including that
referenced in Note 5 to Condensed Consolidated Financial Statements above); and
other risks and uncertainties set forth herein and in the Company's 1999 Form
10-K and as may be set forth in the Company's subsequent Forms 10-Q, 8-K and
other filings with the Securities and Exchange Commission.
In October 1999, the Company initiated a comprehensive reorganization and
restructuring plan (the "1999 restructuring plan"). The major components of the
1999 restructuring plan include (with principal emphasis on the Company's
Graphics Products business) creating manufacturing centers of excellence,
outsourcing the Company's European distribution activities and consolidating its
U. S. distribution activities, and focusing its product offering and marketing
efforts. In addition to the restructuring charges of $6.2 million relating to
this plan recognized in fiscal 1999, the Company expects to spend approximately
$3.0 million, primarily in fiscal 2000, for implementation costs of this plan.
During the first quarter of fiscal 2000, the Company recognized $.3 million, or
$.02 per share, of such implementation costs. These implementation costs consist
of employee retention bonuses, employee relocation expenses, and other costs and
are included in the Condensed Statements of Income for the three months ended
February 27, 2000 as follows: $.1 million to cost of sales and $.2 million to
selling, general and administrative expenses. The estimated pre-tax cost savings
to be generated from the 1999 restructuring plan have been upwardly revised and
are now expected to be approximately $1.5 million in fiscal 2000, principally
during the second half of the year, and are expected to grow to $5.3 million in
fiscal 2001 and $5.7 million per year thereafter. Although the Company expects
realization of such future costs savings, there can be no assurance that they
will be achieved. (Note: All earnings per share amounts included in Management's
Discussion and Analysis are presented on an after-tax, diluted basis.) (See Note
3 to Condensed Consolidated Financial Statements herein.)
As recently announced, Eastman Kodak Company has chosen the Company to be its
global partner in providing image finishing solutions. Under the Company's
agreement with Kodak, the Company will manufacture a portfolio of laminating and
adhesive products to be sold by Kodak under the Kodak name worldwide. Kodak will
also distribute lamination and substrate products under the Company's Seal(R)
brand name.
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Results of Operations
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Net Sales
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Net sales of $60.6 million for the first quarter of fiscal 2000 increased .4%
from the first quarter of fiscal 1999 due to higher sales of graphics products
(up 3.7%), partially offset by lower sales of consumer products (down 3.9%). The
increase in graphics products sales was largely the result of higher board
products sales (up 8.0%) and higher film and adhesive supplies products sales
(up 2.2%), while laminating equipment products sales were down 4.0% from the
comparable prior year period. The decrease in consumer products sales was due
primarily to the termination by Schwan-STABILO Schwanhausser GmbH & Co. of its
distribution agreement with the Company (effective September 1, 1999) relating
to highlighter markers and writing instruments, and to timing of sales orders
from large retail customers. Export sales increased 10% in the first quarter of
fiscal 2000 compared to the same prior year period due to higher sales in
Canada. Foreign sales decreased 20% in the first quarter of fiscal 2000 compared
to the prior year first quarter due to a combination of factors - lower film and
adhesive supplies and laminating equipment products sales resulting from new
products introduced in the fourth quarter of fiscal 1998 but not shipped until
the first quarter of fiscal 1999, slower start of new product introductions in
first quarter of fiscal 2000, and the effect of unfavorable exchange rates for
the Dutch guilder (the functional currency of the Company's Netherlands
operations).
Although the Company believes that it will see sales growth for the balance of
fiscal 2000 due principally to new product programs and the anticipated benefits
of the Company's previously mentioned new relationship with the Eastman Kodak
Company, there is no assurance that such sales growth will be achieved.
Gross Profit
- ------------
The Company's gross profit percentage decreased to 36.1% of net sales in the
first quarter of fiscal 2000 from 37.7% in the first quarter of fiscal 1999. The
first quarter 2000 reductions in gross profit dollars and percentage were
principally the result of higher product costs, lower net selling prices, and
unfavorable customer and product mix, primarily in the graphics products
business. Management expects the pressure on net selling prices, attributable in
large part to the growing bargaining power of the Company's largest customers
such as the office superstores, to continue during fiscal 2000. The Company has
experienced significant cost increases for some of its raw materials, such as
styrene plastic and corrugated packaging materials, during the first quarter of
fiscal 2000 and is uncertain if this trend will continue. As a result,
management has initiated cost reduction measures and other programs in an effort
to offset these cost increases. In addition, the Company expects cost savings in
the second half of fiscal 2000 from the 1999 restructuring plan to help mitigate
these cost increases as well as improve gross margins.
Selling, Administrative and General Expenses
- --------------------------------------------
Selling, administrative and general expenses decreased $.5 million, or 2.9%, in
the first quarter of fiscal 2000 compared to the prior year first quarter. This
Page 13
decrease was the net result of lower management incentive compensation costs and
bad debt expenses, and lower promotion advertising and marketing discretionary
spending, partially offset by higher freight costs, freight allowances and
distribution operating costs. During the latter part of the first quarter of
fiscal 2000, the Company has experienced increases in the cost of shipping its
products as a result of recent cost increases in petroleum based products.
Management is uncertain how long these cost increases will continue.
Provision for Income Taxes
- --------------------------
The Company's effective income tax rate was 35% for the first quarters of fiscal
2000 and 1999.
Net Income and Earnings Per Share
- ---------------------------------
Net income of $2.2 million for the first quarter of fiscal 2000 decreased $.2
million from the first quarter of fiscal 1999, while earnings per share remained
the same ($.22 per share). Excluding the effects of special items recorded
during the first quarter of fiscal 2000 in connection with the implementation of
the 1999 restructuring plan, earnings per share would have been $.24 compared to
$.22 per share during the same period last year. This increase was favorably
impacted by lower average common shares outstanding as a result of the Company's
stock repurchase program (average diluted common shares outstanding were
10,041,000 and 10,795,000 in the first quarters of fiscal 2000 and 1999,
respectively).
Financial Condition
- -------------------
The Company's working capital decreased to $60.6 million from $61.4 million, and
its current ratio increased to 3.0 from 2.7, at the end of the first quarter of
fiscal 2000 from the end of fiscal 1999, respectively. The Company's
debt/capitalization percentage was 44% and 45% at the end of the first quarter
of fiscal 2000 and at the end of fiscal 1999, respectively. Funds from
operations and available cash balances were sufficient during the first three
months of fiscal 2000 to fund additions to property, plant and equipment of $1.2
million, to pay cash dividends of $1.0 million, to fund the repurchase of $1.7
million of the Company's common shares, to fund a $1.0 million reduction of
long-term debt, and to make cash payments related to the 1999 restructuring and
1997 strategic plans of $.8 million.
Current assets decreased to $90.6 million at the end of the first quarter of
fiscal 2000 from $97.3 million at the end of fiscal 1999 largely as a result of
lower cash and cash equivalents, partially offset by higher inventory balances.
The decrease in cash and cash equivalents was largely due to items discussed in
the preceding paragraph. Inventories increased to $24.8 million at the end of
the first quarter from $20.7 million at the end of fiscal 1999 due primarily to
inventory build-up in connection with the 1999 restructuring plan and to higher
anticipated sales volume.
Current liabilities decreased to $30.0 million at the end of the first quarter
of fiscal 2000 from $35.9 million at the end of fiscal 1999. This decrease was
largely attributable to the timing of accounts payable and interest payments,
the payment of a $1.0 million special performance award to Company employees,
and reductions in the accruals associated with the Company's 1999 restructuring
plan and the 1997 strategic plan.
Page 14
The effect of unfavorable currency exchange rates for the Dutch guilder (the
functional currency of the Company's Netherlands operations) was the principal
cause for the $.5 million decrease in the accumulated other comprehensive loss
account in stockholders' equity.
The Company has a revolving credit agreement of $75 million and a line of credit
at one of its foreign operations of 1.5 million British pounds sterling
(approximately $2.4 million). There were outstanding borrowings of $3.3 million
under these credit facilities at February 27, 2000. Management believes that
funds generated from operations, combined with the existing credit facilities,
will be sufficient to meet currently anticipated working capital and other
capital and debt service requirements. Should the Company require additional
funds, management believes that the Company could obtain them at competitive
costs. Management currently expects that total fiscal 2000 expenditures for
additions to property, plant and equipment to increase capacity and productivity
will approximate $7.6 million, of which approximately $1.2 million has been
expended through the first three months of fiscal 2000.
Page 15
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
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There have been no material changes in the Company's market risk from that set
forth in the Company's fiscal 1999 Form 10-K.
Page 16
PART II - OTHER INFORMATION
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Item 1 - Legal Proceedings
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Reference is made to Part I, Item 3 of the Company's fiscal 1999 Form 10-K and
to Note 5 to the Condensed Consolidated Financial Statements herein.
Item 6 - Exhibits and Reports on Form 8-K
---------------------------------
(a) Exhibits
27 Financial Data Schedule for the quarter ended February 27, 2000.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which this
report is filed.
Page 17
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.
HUNT CORPORATION.
Date April 12, 2000 By /s/ William E. Chandler
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William E. Chandler
Senior Vice President, Finance
(Principal Financial Officer)
Date April 12, 2000 By /s/ Donald L. Thompson
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Donald L. Thompson
Chairman of the Board
and Chief Executive Officer
Date April 12, 2000 By /s/ John Fanelli III
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John Fanelli III
Vice President, Corporate Controller
(Principal Accounting Officer)
Page 18
EXHIBIT INDEX
Exhibit 27 - Financial Data Schedule for the quarter ended February 27, 2000
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