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 September 2, 2001
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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 Identification No.)
incorporation or organization)
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 September 30, 2001, there were outstanding 8,895,569 shares of the
registrant's common stock.
Page 2
HUNT CORPORATION
INDEX
Page
------
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of 3
September 2, 2001 and December 3, 2000
Condensed Consolidated Statements of Operations - 4
Three Months and Nine Months Ended
September 2, 2001 and September 3, 2000
Consolidated Statements of Comprehensive Income (Loss) 5
- Three Months and Nine Months Ended
September 2, 2001 and September 3, 2000
Condensed Consolidated Statements of Cash Flows - 6
Nine Months Ended September 2, 2001 and September 3,
2000
Notes to Condensed Consolidated Financial 7 - 10
Statements
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations 11-17
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 18
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 19
Item 6 - Exhibits and Reports on Form 8-K 20
Signatures 21
Page 3
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Hunt Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands except share and per share amounts)
September 2, December 3,
ASSETS 2001 2000
------------ -----------
Current assets:
Cash and cash equivalents $ 12,134 $ 23,878
Estimated net proceeds from business to be divested 26,643 --
Accounts receivable, less allowance for doubtful
accounts: 2001, $709; 2000, $873 32,120 35,058
Inventories:
Raw materials 3,165 8,446
Work in process 1,388 2,784
Finished goods 4,004 10,593
--------- ---------
Total inventories 8,557 21,823
Deferred income taxes 2,421 4,966
Prepaid expenses and other current assets 9,123 2,590
--------- ---------
Total current assets 90,998 88,315
Property, plant and equipment, at cost, less accumulated depreciation and
amortization:
2001, $41,970; 2000, $46,007 25,104 41,216
Excess of acquisition costs over net assets acquired, net 1,224 22,117
Other assets 9,288 11,884
--------- ---------
Total assets $ 126,614 $ 163,532
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 27,870 $ --
Accounts payable 5,371 7,876
Accrued expenses:
Salaries, wages and commissions 2,032 2,460
Income taxes 329 1,297
Other 11,647 20,274
--------- ---------
Total current liabilities 47,249 31,907
Long-term debt, less current portion 27,000 54,682
Deferred income taxes 1,152 2,434
Other non-current liabilities 14,122 12,539
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.10 par value, authorized 1,000,000
shares; none issued -- --
Common stock, $.10 par value, 40,000,000 shares
authorized; issued: 2001 and 2000 -16,152,322 shares 1,615 1,615
Capital in excess of par value 7,412 7,412
Accumulated other comprehensive loss (331) (6,840)
Retained earnings 130,181 158,044
--------- ---------
138,877 160,231
Less cost of treasury stock:
2001 - 7,256,753 shares; 2000 - 6,324,933 shares; (101,786) (98,261)
--------- ---------
Total stockholders' equity 37,091 61,970
--------- ---------
Total liabilities and stockholders' equity $ 126,614 $ 163,532
========= =========
See accompanying notes to condensed consolidated financial statements.
Page 4
Hunt Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands except per share amounts)
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 2, September 3, September 2, September 3,
2001 2000 2001 2000
(13 weeks) (14 weeks) (39 weeks) (40 weeks)
------------ ------------ ----------- -----------
Net sales $ 42,712 $ 46,750 $124,041 $132,226
Cost of sales 27,054 28,047 75,288 80,604
---------- --------- --------- ---------
Gross profit 15,658 18,703 48,753 51,622
Selling, administrative and general expenses 13,261 14,059 38,915 40,336
Restructuring and other (207) 3,631 (115) 3,530
---------- --------- --------- ---------
Income from operations 2,604 1,013 9,953 7,756
Interest expense 1,052 1,055 3,107 3,245
Interest and other income, net (31) (251) (389) (816)
---------- --------- --------- ---------
Income from continuing operations
before income taxes 1,583 209 7,235 5,327
Provision (benefit) for income taxes 432 (93) 2,405 1,809
---------- --------- --------- ---------
Income from continuing operations 1,151 302 4,830 3,518
---------- --------- --------- ---------
Discontinued operations:
Loss from discontinued business,
net of tax benefit of $115 and $194 in 2001,
and $641 and $810 in 2000, respectively (1,132) (1,590) (2,149) (1,589)
Estimated loss on disposal of discontinued
business, net of tax benefit of $2,495 (27,715) -- (27,715) --
---------- --------- --------- ---------
Net income (loss) ($ 27,696) ($ 1,288) ($ 25,034) $ 1,929
========== ========= ========= =========
Basic earnings per common share:
Income from continuing operations $ 0.13 $ 0.03 $ 0.54 $ 0.35
Loss from discontinued business ($ 0.13) ($ 0.16) ($ 0.24) ($ 0.16)
Estimated loss on disposal of discontinued business ($ 3.11) -- ($ 3.10) --
---------- --------- --------- ---------
Net income (loss) per share - Basic ($ 3.11) ($ 0.13) ($ 2.80) $ 0.19
========== ========= ========= =========
Diluted earnings per common share:
Income from continuing operations $ 0.13 $ 0.03 $ 0.54 $ 0.35
Loss from discontinued business ($ 0.13) ($ 0.16) ($ 0.24) ($ 0.16)
Estimated loss on disposal of discontinued business ($ 3.11) -- ($ 3.10) --
---------- --------- --------- ---------
Net income (loss )per share - Diluted ($ 3.11) ($ 0.13) ($ 2.80) $ 0.19
========== ========= ========= =========
Dividends per common share $ 0.103 $ 0.103 $ 0.205 $ 0.308
========== ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
Page 5
Hunt Corporation
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
(In thousands)
Three Months Ended Nine Months Ended
---------------------------- --------------------------
September 2, September 3, September 2, September 3,
2001 2000 2001 2000
(13 weeks) (14 weeks) (39 weeks) (40 weeks)
------------ ------------ ------------ ------------
Net income (loss) $(27,696) $ (1,288) $(25,034) $ 1,929
Other comprehensive income (loss):
Foreign currency translation adjustments,
net of income tax expense (benefit) of $2,631 and
$3,242 in 2001, and $(375) and $(2,059) in 2000,
respectively 7,017 (661) 6,509 (3,980)
-------- -------- -------- --------
Other comprehensive income (loss) 7,017 (661) 6,509 (3,980)
-------- -------- -------- --------
Comprehensive income (loss) $(20,679) $ (1,949) $(18,525) $ (2,051)
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
Page 6
Hunt Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Nine Months Ended
----------------------------
September 2, September 3,
2001 2000
(39 weeks) (40 weeks)
------------ ------------
Cash flows from operating activities:
Net income (loss) $(25,034) $ 1,929
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 5,964 6,692
Deferred income taxes 1,256 453
Gain on disposals of property, plant and equipment 22 66
(Gain) loss on business divestitures 27,715 (133)
Payment for patent infringement litigation (3,919) --
Payments/credits for special charges (715) (3,654)
Issuance of stock under management incentive bonus
and stock grant plans 60 58
Changes in operating assets and liabilities (4,797) (17,499)
-------- --------
Net cash provided by (used for) operating activities 552 (12,088)
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment (2,960) (4,762)
Other, net (321) (108)
-------- --------
Net cash used for investing activities (3,281) (4,870)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 4,751 9,215
Payments on long-term debt, including current maturities (4,680) (10,676)
Book overdrafts (2,692) (1,498)
Purchases of treasury stock (3,680) (2,981)
Dividends paid (2,734) (3,059)
Other, net 8 (75)
-------- --------
Net cash used for financing activities (9,027) (9,074)
-------- --------
Effect of exchange rate changes on cash 12 (102)
-------- --------
Net decrease in cash and cash equivalents (11,744) (26,134)
Cash and cash equivalents, beginning of period 23,878 36,897
-------- --------
Cash and cash equivalents, end of period $ 12,134 $ 10,763
======== ========
See accompanying notes to condensed consolidated financial statements.
Page 7
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 September 2, 2001 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. On October 9, 2001, the Company completed the previously announced intended
sale of its commercial Graphics Products business and related assets in the
United States, United Kingdom, Netherlands, and Hong Kong to Neschen AG, a
German manufacturer of self adhesive products. For accounting purposes, the sale
was effective October 1, 2001. The purchase price, which was determined by arms'
length negotiation between the parties, is expected to total approximately $33
million, subject to certain closing adjustments primarily relating to inventory.
The Company plans to use $25 million of the proceeds to reduce the $50 million
senior debt notes currently outstanding. In addition, the Company plans to repay
the outstanding lines of credit facilities balances (totaling approximately $2.9
million as of September 2, 2001) at its foreign operations, since these
operations were part of the commercial Graphics Products business sold. (See
Note 3.) The Company recorded an estimated after-tax loss of $28.2 million, or
$3.16 per share, related to this sale. This charge includes the loss on the sale
of assets (net of the expected proceeds), severance costs, recognition of future
lease obligations, and other related costs.
The Company has retained $4.4 million of assets related to the divested business
not included in the sale to Neschen. These assets have been reclassified from
property, plant and equipment to assets held for sale (included in prepaid
expenses and other current assets in the Condensed Consolidated Balance Sheet).
The Company is actively pursuing the disposition of these non-strategic assets
and expects to achieve their sale within the next twelve months.
The divested business had net sales of approximately $12.3 million and $16.9
million in the third quarters of fiscal 2001 and 2000, respectively. Net sales
for the divested business were $40.4 million and $55.0 million in the first nine
months of 2001 and 2000, respectively.
The divested business has been accounted for as a discontinued operation, and
accordingly, has been segregated in the accompanying Condensed Consolidated
Statements of Operations, and prior periods have been reclassified to conform to
the current year's presentation. However, prior periods' Condensed Consolidated
Balance Sheets, Consolidated Statements of Comprehensive Income (Loss), and
Condensed Consolidated Statements of Cash Flows have not been reclassified.
Page 8
During the third quarter of 2001, the Company recorded a tax benefit of $.5
million after-tax ($.05 per share) resulting from a resolution of a prior year
tax exposure in connection with a 1997 divestiture. This item is included in the
total tax benefit recorded for loss on disposal of discontinued business.
3. As a result of the sale of the commercial Graphics Products business, the
Company is required to modify its existing debt arrangements with its senior
note holders and banks. The Company has reached an understanding with its senior
note holders to modify, in certain respects, the terms of the senior notes,
subject to, among other things, the Company's securing and maintaining a $25
million bank credit facility. Additional modifications regarding the senior
notes include: (1) a principal prepayment on the senior notes of $25 million at
par, (2) an increase in the interest rate on the remaining balance of the senior
notes from 7.86% to 8.36%, (3) changes to certain covenant requirements, and (4)
certain restrictions on the Company's ability to repurchase its common stock.
The Company plans to use $25 million of the proceeds from the sale of the
divested business to reduce the $50 million senior note debt currently
outstanding. In addition, the Company plans to repay the outstanding balance
under its $50 million bank credit facility ($2.9 million at September 2, 2001).
The Company has received a commitment from two banks for a new $25 million bank
credit facility to replace the existing $50 million credit facility. The terms
of the new credit facility are expected to include, among other things, LIBOR
based loans, covenant requirements substantially similar to the existing bank
credit facility, and limitations on borrowings based on levels of accounts
receivable, inventory, and fixed assets.
4. 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
-------------------
Sept. 2, Sept. 3,
2001 2000
-------- --------
Average common shares outstanding - basic 8,895 9,857
Add: common equivalent shares representing
shares issuable upon exercise of stock options
and stock grants -- --
----- -----
Average common shares and dilutive
securities outstanding (antidilutive in 2001 and 2000) 8,895 9,857
===== =====
Page 9
Nine Months Ended
-------------------
Sept. 2, Sept. 3,
2001 2000
-------- --------
Average common shares outstanding - basic 8,949 9,930
Add: common equivalent shares representing
shares issuable upon exercise of stock options
and stock grants -- 18
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Average common shares and dilutive
securities outstanding (antidilutive in 2001) 8,949 9,948
===== =====
5. The following table sets forth the details and the cumulative activity for
the nine months ended September 2, 2001 in the various accruals and reserves
associated with the Company's 1999 restructuring plan included in the Condensed
Consolidated Balance Sheet at September 2, 2001 (in thousands):
Balance at Cash Non-Cash Balance at
December 3, 2000 Credits Activity Activity September 2, 2001
----------------- ------- -------- -------- -----------------
Severance $ 790 $ (344) $ (353) $ 1 $ 94
Lease Obligations 249 -- -- -- 249
Fixed Assets 20 (7) (11) (2) --
------ ------ ------ ------ ------
Total $1,059 $ (351) $ (364) $ (1) $ 343
====== ====== ====== ====== ======
During the third quarter of fiscal 2001, the Company reduced by $.4 million
pre-tax some of its reserves in connection with the Company's implementation of
its 1999 restructuring plan. These reserve reductions related primarily to lower
than anticipated severance costs. Approximately $.1 million of this amount is
included in the loss from discontinued business, while the remaining balance is
included in restructuring and other in the Condensed Consolidated Statements of
Operations.
6. Several years ago, the Company was sued for patent infringement with respect
to one of its minor products. After a jury trial in 1998, a judgment was entered
against the Company in the amount of $3.3 million, plus interest and costs. The
verdict was appealed, and, contrary to the expectations of the Company and its
patent counsel, a three-judge panel of the U. S. Court of Appeals affirmed the
judgment in July 2000. Subsequently, a request filed with the Court of Appeals
by the Company to have the case reconsidered by all twelve judges of the Court
of Appeals was denied in October 2000. As a result, the Company recorded a
liability of $3.8 million pre-tax (including interest and costs) in fiscal 2000.
The Company then petitioned for a review of the decision by the Supreme Court of
Page 10
the United States, which petition was denied in April 2001. The Company recorded
an additional liability of $.1 million pre-tax for interest costs during the
first half of fiscal 2001, which is included in the accompanying fiscal 2001
Condensed Consolidated Statements of Operations under Restructuring and other.
During the fiscal 2001 third quarter, the Company made a payment to the
plaintiff in the amount of approximately $3.9 million in satisfaction of this
judgment. However, the Company and its patent counsel continue to pursue other
options for overturning the verdict.
7. As a result of the sale of the commercial Graphics Products business (see
Note 2) and its impact on the internal organizational structure of the Company,
management believes it now has a single reportable segment: Consumer Products.
8. In fiscal 2001 the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities." This standard requires that all
derivative instruments be recorded on the balance sheet at fair value and
establishes criteria for designation and effectiveness of the hedging
relationships. There was no cumulative effect of adopting SFAS No. 133 on the
Company's condensed consolidated financial statements as of September 2, 2001,
since the Company had no outstanding derivatives as of December 3, 2000.
During the second and third quarters of fiscal 2001, the Company entered into
foreign exchange forward contracts to reduce its risk from exchange rate
fluctuations associated with receivables and payables denominated in foreign
currencies that arise primarily as a result of its operations outside the United
States of America. The fair value of these contracts, which typically have
maturities of approximately thirty days, was not material at September 2, 2001.
Gains and losses on these instruments are recorded in other income, net in the
Company's Condensed Consolidated Statement of Operations. Principal foreign
currencies included the euro, the British pound sterling and the Canadian
dollar. The Company does not hold or purchase any foreign currency contracts for
trading purposes.
Page 11
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, including those related to future financial and business
performance, 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 benefits, of its restructuring and cost reduction plans on a timely
basis; the effect of, and changes in, worldwide general economic conditions
including the severity of any economic slowdown; price and availability of raw
materials; foreign exchange rates; technological and other changes affecting the
manufacture of and demand for the Company's products; competitive and other
pressures in the marketplace; acts of terrorism; and other risks and
uncertainties set forth herein and in the Company's 2000 Form 10-K and as may be
set forth in the Company's subsequent press releases and/or Forms 10-Q, 8-K and
other filings with the Securities and Exchange Commission.
In October 2001, the Company sold its commercial Graphics Products business and
related assets to Neschen AG. The Company believes that the sale of the divested
business will allow the Company to focus on its profitable Consumer Products
business and substantially reduce its cost structure, and further, that it will
expand the range of possible strategic options open to the Company to enhance
shareholder value. The decision to sell the commercial Graphics Products
business resulted from an internal strategic assessment of the Company's
business, assisted by outside advisors. The proceeds of this sale are expected
to approximate $33 million, subject to certain closing adjustments principally
relating to inventory. The Company plans to use $25 million of the proceeds to
reduce the $50 million senior debt notes currently outstanding. In addition, the
Company plans to repay the outstanding lines of credit facilities at its foreign
operations, since these operations are part of the commercial Graphics Products
business. The Company recorded an estimated after-tax loss of $28.2 million, or
$3.16 per share, on this sale. The divested business had net sales of
approximately $12.3 million in the fiscal 2001 third quarter and $40.4 million
in the first nine months of 2001, and $16.9 million and $55.0 million in the
corresponding fiscal 2000 periods. This divested business is presented as a
discontinued operation in the accompanying Condensed Consolidated Statements of
Operations. (See Note 2.)
In addition, the Company is in the process of finalizing a plan designed to
reduce its cost structure. The Company expects to record a pre-tax charge of $3
million to $4 million, principally relating to severance, outplacement, and
other costs, in the fiscal 2001 fourth quarter in connection with the
implementation of this plan. The annualized pre-tax cost savings to be generated
from this plan are expected to range between $2.5 million and $3.0 million,
although there can be no assurance that such future cost savings actually will
be achieved.
The following tables provide a comparison of the Company's reported results and
the results excluding restructuring related items, estimated loss from
Page 12
discontinued business, loss on disposal of discontinued business, and other
special items for the three months and nine months ended September 2, 2001 and
September 3, 2000 (in millions except per share data):
Three Months Ended
September 2, 2001
-----------------------------------------------------------------------
Gross Income from Net Per Share
Profit Operations Income Amount
------------- ---------------- ---------- ---------------
Reported results $15.7 $ 2.6 $(27.7) $(3.11)
Loss from discontinued business -- -- 1.1 .13
Estimated loss on disposal of
discontinued business -- -- 27.7 3.11
1999 restructuring plan
reversals -- (.2) (.2) (.02)
1999 restructuring plan
implementation costs -- .1 .1 .01
------------- ---------------- ---------- ---------------
Results excluding special
items $15.7 $ 2.5 $ 1.0 $ .12
============= ================ ========== ===============
Three Months Ended
September 3, 2000
-----------------------------------------------------------------------
Gross Income from Net Per Share
Profit Operations Income Amount
------------- ---------------- ---------- ---------------
Reported results $18.7 $ 1.0 $ (1.3) $ (.13)
Loss from discontinued business -- -- 1.6 .16
1999 restructuring plan
implementation costs -- .1 -- --
Patent infringement
litigation costs -- 3.6 2.4 .25
------------- ---------------- ---------- ---------------
Results excluding special items
$18.7 $ 4.7 $ 2.7 $ .28
============= ================ ========== ===============
Page 13
Nine Months Ended
September 2, 2001
-----------------------------------------------------------------------
Gross Income from Net Per Share
Profit Operations Income Amount
------------- ---------------- ---------- ---------------
Reported results $48.8 $10.0 $ (25.0) $(2.80)
Loss from discontinued business -- -- 2.1 .24
Estimated loss on disposal of
discontinued business -- -- 27.7 3.10
1999 restructuring plan
reversals -- (.2) (.2) (.02)
1999 restructuring plan
implementation costs -- .3 .3 .03
Patent infringement
litigation interest -- .1 .1 .01
------------- ---------------- ---------- ---------------
Results excluding special
items $48.8 $10.2 $ 5.0 $ .56
============= ================ ========== ===============
Nine Months Ended
September 3, 2000
-----------------------------------------------------------------------
Gross Income from Net Per Share
Profit Operations Income Amount
------------- ---------------- ---------- ---------------
Reported results $51.6 $ 7.8 $ 1.9 $ .19
Loss from discontinued business -- -- 1.6 .16
1999 restructuring plan
implementation costs -- .4 .3 .03
Patent infringement
litigation costs -- 3.6 2.4 .24
Gain on sale of business
divestitures -- (.1) (.1) (.01)
------------- ---------------- ---------- ---------------
Results excluding special
items $51.6 $11.7 $ 6.1 $ .61
============= ================ ========== ===============
Results of Operations
---------------------
The Company's 2001 fiscal year is comprised of 52 weeks compared to 53 weeks for
fiscal 2000. The third quarter of fiscal 2001 and fiscal 2000 contained 13 weeks
and 14 weeks, respectively, while the first nine months of fiscal 2001 and
fiscal 2000 contained 39 weeks and 40 weeks, respectively.
The following discussion is on a continuing operations basis. All earnings per
share amounts included in Management's Discussion and Analysis are presented on
an after-tax, diluted basis.
Page 14
Net Sales
---------
Net sales from continuing operations of $42.7 million for the third quarter and
$124.0 million for the first nine months of fiscal 2001 decreased 9% and 6%,
respectively, from the corresponding periods of fiscal 2000. These decreases
were largely due to lower sales of X-Acto brand knives, blades, and kits (down
19% for the third quarter and 11% for the first nine months), Bienfang brand
paper products (down 19% for the third quarter and 10% for the first nine
months), board products (down 9% for the third quarter and 5% for the first nine
months), and framing products (down 27% for the third quarter and 22% for the
first nine months). Export sales decreased 18% and 13% in the fiscal 2001 third
quarter and first nine months, respectively, compared to the same prior year
periods due to lower sales in Canada and Latin America.
Management believes that the fiscal 2001 third quarter and nine month sales
decreases were largely the result of a continuing slowdown in the U.S. and world
economy, which slowdown was exacerbated by the September 11, 2001 terrorist
attacks in the U.S. Thus far in the fourth fiscal 2001 quarter, the Company is
continuing to experience softness in demand for some of its products, and
management is uncertain how long this trend will continue.
Gross Profit
------------
The Company's gross profit percentage decreased to 36.7% of net sales in the
third quarter of fiscal 2001 from 40.0% in the third quarter of fiscal 2000 but
was largely unchanged in the first nine months of fiscal 2001 compared to the
same period of fiscal 2000. However, gross margin dollars decreased $3.0 million
and $2.9 million in the third quarter and first nine months of fiscal 2001,
respectively, from the same prior year periods. The decreases in gross margin
dollars in fiscal 2001 were due largely to lower sales volume compared to the
same prior year periods. The decrease in the third quarter gross profit
percentage relative to the prior year period was primarily the result of lower
net selling prices, unfavorable net inventory adjustments, and higher net
pension costs versus a year ago. Since the end of fiscal 2000, the Company has
experienced some cost reductions for certain of its raw materials. Management is
uncertain if this trend will continue.
Selling, Administrative and General Expenses
--------------------------------------------
Selling, administrative and general expenses decreased $.8 million, or 6%, in
the third quarter of fiscal 2001 and $1.4 million, or 4%, in the first nine
months of fiscal 2001 compared to the same prior year periods. The decrease was
partially due to lower marketing and selling expenses (e.g., lower sales volume,
and recruiting and relocation expenses, partially offset by higher net
promotional advertising and product display expenses). The decreases in
marketing and selling expenses were partially offset by higher general and
administrative expenses, due principally to a decrease in the cash surrender
value of officers' life insurance policies, higher deferred compensation account
expense, and higher professional services expenses, partially offset by lower
bonus expense.
Selling, administrative and general expenses, as a percentage of net sales,
totaled 31.0% and 31.4% in the third quarter and first nine months of fiscal
2001, respectively, and 30.1% and 30.5%, respectively, in the same prior year
periods.
Page 15
Restructuring and Other
-----------------------
The Company recorded interest cost of $.1 million in the first nine months of
fiscal 2001 in connection with a previously reported patent infringement suit
judgment for which the Company had recorded a liability of $3.8 million in
fiscal 2000. During the third quarter of fiscal 2001, the Company made a payment
to the plaintiff in the amount of approximately $3.9 million with respect to
this judgment.
In addition, during the third quarter and first nine months of fiscal 2001, the
Company reduced by $.2 million a reserve related to its 1999 restructuring plan.
This reserve reduction reflected lower than anticipated severance expenses.
Provision (Benefit) for Income Taxes
------------------------------------
The Company's effective income tax rate on a continuing operations basis was
27.3% and 33.2% for the third quarter and first nine months of fiscal 2001,
respectively. The Company realized an income tax benefit of $.1 million in the
third quarter of fiscal 2000 due primarily to resolutions of prior year tax
exposures, but recorded an income tax provision of $1.8 million for the first
nine months of fiscal 2000. The Company's effective income tax rate on a
continuing operations basis was 44.5% and 34.0% for the third quarter and first
nine months of fiscal 2000, respectively.
Net Income (Loss) and Earnings Per Share
----------------------------------------
Net loss was $27.7 million for the third quarter of fiscal 2001 compared to net
loss of $1.3 million for the third quarter of fiscal 2000, and net loss was
$25.0 million for the fiscal 2001 first nine months compared to net income of
$1.9 million in the first nine months of fiscal 2000. Excluding the effects of
special items recorded during the third quarter and first nine months of fiscal
2001 in connection with the discontinued operations, patent infringement
litigation, implementation of the 1999 restructuring plan, and reduction of
reserves related to its 1997 business divestitures, earnings per share on a
continuing operations basis would have been $.12 and $.56 per share for the
third quarter and first nine months of fiscal 2001, respectively, compared to
$.28 and $.61 per share, respectively, for the same prior year periods. These
decreases were due primarily to lower sales, lower net selling prices,
unfavorable inventory adjustments, and higher administrative expenses, partially
offset by the favorable impact of lower average common shares outstanding as a
result of the Company's stock repurchase program (average diluted common shares
outstanding were 8,895,000 and 8,949,000 in the third quarter and first nine
months of fiscal 2001, respectively, and were 9,857,000 and 9,948,000,
respectively, for the same prior year periods).
Financial Condition
-------------------
The Company's working capital decreased to $43.7 million from $56.4 million, and
its current ratio decreased to 1.9 from 2.8, at the end of the third quarter of
fiscal 2001 from the end of fiscal 2000, respectively. These decreases were
largely due to the reclassification of $28.0 million of long-term debt to
Page 16
current liabilities. (See Note 3.) The Company's debt/capitalization percentage
increased to 60% at the end of the fiscal 2001 third quarter from 47% at the end
of fiscal 2000 due primarily to the loss on the sale of the commercial Graphics
Products business. (See Note 2.) Funds from operations and available cash
balances were sufficient during the first nine months of fiscal 2001 to fund the
repurchase of $3.7 million of the Company's common shares, to fund additions to
property, plant and equipment of $3.0 million, and to pay cash dividends of $2.7
million.
Current assets increased slightly to $91.0 million at the end of the third
quarter of fiscal 2001 from $88.3 million at the end of fiscal 2000. Cash and
cash equivalents decreased $11.7 million largely due to the items discussed in
the preceding paragraph. The decreases in accounts receivable and inventories
were due principally to the sale of the commercial Graphics Products business.
In addition, the Company recorded a receivable for estimated net proceeds of
$26.6 million in connection with the sale of the divested business. Prepaid
expenses and other current assets increased $6.5 million from the $2.6 million
balance at the end of fiscal 2000 due to an increase in income tax refund
receivable and a reclassification from property, plant and equipment to assets
held for sale of certain assets ($4.4 million) relating to the divested business
(but not included in the sale to Neschen). The Company is actively pursuing the
disposition of these non-strategic assets.
Current liabilities increased to $47.2 million at the end of the third quarter
of fiscal 2001 from $31.9 million at the end of fiscal 2000. This increase was
largely attributable to the reclassification of $28.0 million of long-term debt
to current liabilities, partially offset by lower raw material purchases ($2.5
million), a decrease in income tax liability ($1.0 million) due to timing of
payments and expected receipt of income tax refunds, and a decrease in other
liabilities ($7.8 million) due principally to the sale of the divested business.
The $6.5 million decrease in the accumulated other comprehensive loss account in
stockholders' equity was due to the elimination of the foreign currency
translation adjustments account as a result of the sale of the divested
business.
As of September 2, 2001, the Company had a revolving credit agreement of $50
million and lines of credit facilities at its foreign operations of 1.5 million
British pounds sterling (approximately $2.2 million) and 1.1 million Euros
(approximately $1.0 million). There were outstanding borrowings totaling $2.9
million under these credit facilities at September 2, 2001. As a result of the
sale of the divested business in October 2001, the Company is required to modify
its existing debt arrangements with its senior note holders and banks. The
Company plans to replace its $50 million revolving credit agreement with a new
$25 million bank credit facility, and the outstanding line of credit facilities
at the foreign operations are expected to be repaid from the proceeds of the
sale of the divested business. (See Note 3.)
Management believes that funds generated from operations and funds available
under the anticipated new bank credit facility will be sufficient to meet the
Company's 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. While subject
to change, management currently expects that total fiscal 2001 expenditures for
additions to property, plant and equipment to increase capacity and productivity
will be approximately $4.0 million, of which approximately $3.0 million has been
expended through the first nine months of fiscal 2001.
Page 17
New Accounting Pronouncements
-----------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") approved its
proposed Statements of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations"; SFAS No. 142, "Goodwill and Other Intangible Assets";
and SFAS No. 143, "Accounting for Asset Retirement Obligations."
SFAS No. 141 supercedes Accounting Principles Board (APB) Opinion No. 16,
"Business Combinations." The most significant changes made by SFAS No. 141 are
requiring the purchase method of accounting for all business combinations
initiated after June 30, 2001, establishing specific criteria for the
recognition of intangible assets separately from goodwill, and requiring that
unallocated negative goodwill be written off immediately as an extraordinary
gain. The Company does not expect a material impact from the adoption of SFAS
No. 141 on its consolidated financial statements.
SFAS No. 142 supercedes APB 17, "Intangible Assets," and primarily addresses
accounting for goodwill and intangible assets subsequent to their acquisition
(i.e., the post-acquisition accounting). The provisions of SFAS No. 142 will be
effective for fiscal years beginning after December 15, 2001. The most
significant changes made by SFAS No. 142 are that goodwill and indefinite lived
intangible assets will no longer be amortized, goodwill will be tested for
impairment at least annually at the reporting unit level, intangible assets
deemed to have an indefinite life will be tested for impairment at least
annually, and the amortization period of intangible assets with finite lives
will no longer be limited to forty years. The Company is currently evaluating
the impact of SFAS No. 142 on its consolidated financial statements.
SFAS No. 143 requires that entities record as a liability obligations associated
with the retirement of a tangible long-lived asset when such obligations are
incurred, and capitalize the cost by increasing the carrying amount of the
related long-lived asset. SFAS No. 143 will be effective for fiscal years
beginning after June 15, 2002. The Company does not expect a material impact
from the adoption of SFAS No. 143 on its consolidated financial statements.
Additionally, in August 2001, the FASB approved its proposed SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144
supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of," and APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." SFAS No. 144 establishes an accounting model based on SFAS No.
121 for long lived assets to be disposed of by sale, previously accounted for
under APB Opinion No. 30. This Statement is effective for fiscal years beginning
after December 15, 2001. The Company is currently assessing the impact of the
adoption of this statement, but believes it will not materially affect the
Company's financial position or results of operations.
Page 18
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
The Company is exposed to the impact of foreign currency exchange rate changes.
The Company's objective in managing the exposure to these changes is to reduce
the risk on earnings and cash flow associated with foreign exchange rate
changes. As a result, the Company enters into foreign exchange forward contracts
to reduce risks associated with the value of its existing foreign currency
assets, liabilities and anticipated foreign revenues and costs. The gains and
losses on these contracts are intended to offset changes in the related
exposures. The Company does not hedge its foreign currency exposure in a manner
that would entirely eliminate the effects of changes in foreign exchange rates
on the Company's consolidated net income. The Company does not hold or purchase
any foreign currency contracts for trading purposes.
As a result of the sale of the commercial Graphics Products business in October
2001, the Company's exposure to the impact of foreign currency exchange rate
fluctuations is greatly reduced. The Company plans to continue to enter into
foreign exchange forward contracts to reduce risks associated with its Canadian
dollar transactions.
In the normal course of operations, the Company also faces other risks that are
either nonfinancial or nonquantifiable. Such risks principally include changes
in economic or political conditions, other risks associated with foreign
operations, commodity price risk and litigation risks.
Page 19
PART II - OTHER INFORMATION
-----------------
Item 1 - Legal Proceedings
-----------------
Reference is made to Part I, Item 3 of the Company's fiscal 2000 Form 10-K and
to Note 6 to the Condensed Consolidated Financial Statements herein.
Page 20
Part II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
--------------------------------
2. Certain Agreements Relating to Sale of Commercial Graphics Products
Business:*
-------------------------------------------------------------------
(a) Form of Asset Purchase Agreement (U.S.) dated October 7, 2001, between
the Company and two of its subsidiaries and Neschen AG and three of its
subsidiaries.
(b) Form of UK Asset Purchase Agreement dated October 7, 2001, between the
Company and one of its subsidiaries and Neschen AG and one of its
subsidiaries.
(c) Form of Asset Purchase Agreement (The Netherlands) dated October 9,
2001, between the Company and two of its subsidiaries and Neschen AG and
one of its subsidiaries.
(d) Form of Share Purchase Agreement (Hong Kong) dated October 9, 2001,
between Hunt Holdings Inc. and two other subsidiaries of the Company and
Neschen International B.V.
(e) Form of Employee and Employee Benefits Transitional Agreement dated
October 9, 2001, between the Company and two subsidiaries of Neschen AG.
(f) Form of Product Manufacturing and Transition Services Agreement dated
October 9, 2001, between the Company and three subsidiaries of Neschen
AG.
(g) Form of Purchase and Supply Agreement (Foamboard) dated October 9, 2001,
between the Company and three subsidiaries of Neschen AG.
(h) Form of Purchase and Supply Agreement (Framing Consumables) dated
October 9, 2001, between the Company and three subsidiaries of Neschen
AG.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the quarter for which this
report is filed.
-----------
* Certain schedules and similar attachments to, and as described in, the above
agreements 2(a) through 2(h) are not being filed herewith, but the Company
agrees to furnish supplementally to the Commission a copy of any omitted
schedule upon request.
Page 21
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 October 17, 2001 By /s/ William E. Chandler
---------------------- -------------------------------------
William E. Chandler
Senior Vice President, Finance
(Principal Financial Officer)
Date October 17, 2001 By /s/ Donald L. Thompson
---------------------- -------------------------------------
Donald L. Thompson
Chairman of the Board
and Chief Executive Officer
Date October 17, 2001 By /s/ John Fanelli III
---------------------- -------------------------------------
John Fanelli III
Vice President, Corporate Controller
(Principal Accounting Officer)