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 1, 2002
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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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 126-2 of the Exchange Act of 1934. Yes No X
--- ---
As of September 30, 2002, there were outstanding 8,976,335 shares of the
registrant's common stock.
HUNT CORPORATION
INDEX
Page
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of 3
September 1, 2002 and December 2, 2001
Condensed Consolidated Statements of Operations - 4
Three Months and Nine Months Ended
September 1, 2002 and September 2, 2001
Consolidated Statements of Comprehensive Income (Loss) - 5
Three Months and Nine Months Ended
September 1, 2002 and September 2, 2001
Condensed Consolidated Statements of Cash Flows - 6
Nine Months Ended September 1, 2002 and September 2, 2001
Notes to Condensed Consolidated Financial 7 - 10
Statements
Item 2 - Management's Discussion and Analysis of Financial Condition 11-18
and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 19
Item 4 - Controls and Procedures 20
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 21
Item 5 - Other Information 21
Item 6 - Exhibits and Reports on Form 8-K 22
Signatures 23
Certifications 24-25
Part I - FINANCIAL INFORMATION Page 3
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Item 1. Financial Statements
Hunt Corporation
Condensed Consolidated Balance Sheets
(In thousands except share and per share amounts)
September 1, December 2,
ASSETS 2002 2001
---------------- ----------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 27,098 $ 25,966
Accounts receivable, less allowance for doubtful
accounts: 2002, $625; 2001, $1,031 22,087 17,486
Inventories:
Raw materials 3,521 2,973
Work in process 1,618 1,440
Finished goods 6,526 4,976
---------------- ----------------
Total inventories 11,665 9,389
Deferred income taxes 3,804 5,834
Prepaid expenses and other current assets 6,809 14,101
---------------- ----------------
Total current assets 71,463 72,776
Property, plant and equipment, less accumulated depreciation and amortization:
2002, $42,981; 2001, $42,548 21,870 24,188
Goodwill 754 754
Intangible assets 65 65
Other assets 7,417 8,604
---------------- ----------------
Total assets $ 101,569 $ 106,387
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 5,000 $ 5,000
Accounts payable 2,799 4,428
Accrued expenses 18,687 22,776
---------------- ----------------
Total current liabilities 26,486 32,204
Long-term debt, less current portion 17,000 22,000
Deferred income taxes 189 1,004
Other non-current liabilities 14,267 14,106
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 (18) -
Retained earnings 135,086 129,695
---------------- ----------------
144,095 138,722
Less cost of treasury stock:
2002 - 7,175,987 shares; 2001 - 7,248,347 shares; (100,468) (101,649)
---------------- ----------------
Total stockholders' equity 43,627 37,073
---------------- ----------------
Total liabilities and stockholders' equity $ 101,569 $ 106,387
================ ================
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 1, September 2, September 1, September 2,
2002 2001 2002 2001
---------------- ---------------- ---------------- ----------------
Net sales $41,970 $42,743 $122,786 $124,141
Cost of sales 25,267 27,054 73,185 75,288
---------------- ---------------- ---------------- ----------------
Gross profit 16,703 15,689 49,601 48,853
Selling, general and administrative expenses 12,523 13,292 37,392 39,015
Restructuring and other (170) (207) 32 (115)
---------------- ---------------- ---------------- ----------------
Income from operations 4,350 2,604 12,177 9,953
Interest expense 545 1,052 1,678 3,107
Interest and other income, net (342) (31) (1,319) (389)
---------------- ---------------- ---------------- ----------------
Income from continuing operations
before income taxes 4,147 1,583 11,818 7,235
Provision for income taxes 1,354 432 4,078 2,405
---------------- ---------------- ---------------- ----------------
Income from continuing operations 2,793 1,151 7,740 4,830
---------------- ---------------- ---------------- ----------------
Discontinued operations:
Loss from discontinued business, net
of tax benefit of $115 and $194 in 2001 - (1,132) - (2,149)
Gain (loss) on disposal of discontinued
business, net of tax benefit
of $554 in 2002 and $2,495 in 2001, respectively 934 (27,715) 934 (27,715)
---------------- ---------------- ---------------- ----------------
Net income (loss) $3,727 ($27,696) $8,674 ($25,034)
================ ================ ================ ================
Basic earnings per common share:
Income from continuing operations $0.31 $0.13 $0.86 $0.54
Loss from discontinued business - (0.13) - (0.24)
Gain (loss) on disposal of discontinued business 0.11 (3.11) 0.11 (3.10)
---------------- ---------------- ---------------- ----------------
Net income (loss) per share - Basic $0.42 ($3.11) $0.97 ($2.80)
================ ================ ================ ================
Diluted earnings per common share:
Income from continuing operations $0.31 $0.13 $0.85 $0.54
Loss from discontinued business - (0.13) - (0.24)
Gain (loss) on disposal of discontinued business 0.10 (3.09) 0.11 (3.08)
---------------- ---------------- ---------------- ----------------
Net income (loss) per share - Diluted $0.41 ($3.09) $0.96 ($2.78)
================ ================ ================ ================
Dividends per common share $0.1025 $0.1025 $0.3075 $0.3075
================ ================ ================ ================
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 1, September 2, September 1, September 2,
2002 2001 2002 2001
-------------- -------------- -------------- --------------
Net income (loss) $ 3,727 $(27,696) $ 8,674 $ (25,034)
Other comprehensive income (loss):
Foreign currency translation adjustments, net of
income tax expense of $2,631 and $3,242 - 7,017 - 6,509
Currency hedging adjustments, net of income tax
expense (benefit) of $12 and ($9) 24 - (18) -
-------------- -------------- -------------- --------------
Other comprehensive income (loss) 24 7,017 (18) 6,509
-------------- -------------- -------------- --------------
Comprehensive income (loss) $ 3,751 $(20,679) $ 8,656 $ (18,525)
============== ============== ============== ==============
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 1, September 2,
2002 2001
---------------- ----------------
Cash flows from operating activities:
Net income (loss) $ 8,674 $ (25,034)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,516 5,964
Deferred income taxes 1,215 1,256
Loss on disposals of property, plant and equipment 284 22
(Gain) loss on business divestitures (589) 27,715
Payment for patent infringement litigation - (3,919)
Payments/credits for special charges (1,296) (715)
Issuance of stock under management incentive bonus
and stock grant plans 71 60
Changes in operating assets and liabilities (1,722) (4,797)
---------------- ----------------
Net cash provided by operating activities 10,153 552
---------------- ----------------
Cash flows from investing activities:
Additions to property, plant and equipment (1,475) (2,960)
Other, net (175) (321)
---------------- ----------------
Net cash used for investing activities (1,650) (3,281)
---------------- ----------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt - 4,751
Payments on long-term debt, including current maturities (5,000) (4,680)
Book overdrafts (356) (2,692)
Proceeds from exercise of stock options 599 -
Purchases of treasury stock - (3,680)
Dividends paid (2,749) (2,734)
Other, net (22) 8
---------------- ----------------
Net cash used for financing activities (7,528) (9,027)
---------------- ----------------
Effect of exchange rate changes on cash 157 12
---------------- ----------------
Net increase (decrease) in cash and cash equivalents 1,132 (11,744)
Cash and cash equivalents, beginning of period 25,966 23,878
---------------- ----------------
Cash and cash equivalents, end of period $ 27,098 $ 12,134
================ ================
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 1, 2002 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 Quarterly Reports on Form 10-Q and do not
contain certain information included in the Company's annual consolidated
financial statements and notes. This Quarterly Report on Form 10-Q should be
read in conjunction with the Company's consolidated financial statements and
notes included in its 2001 Annual Report on Form 10-K. The results of operations
for any interim period are not necessarily indicative of results for the full
year.
2. Effective October 1, 2001, the Company sold its commercial Graphics Products
business and related assets. The divested business had net sales of
approximately $12.3 million and $40.4 million and after-tax losses of $1.1
million and $2.1 million for the three months and nine months ended September 2,
2001, respectively. The divested business is presented as a discontinued
operation in the accompanying Condensed Consolidated Statements of Income.
However, the Consolidated Statements of Comprehensive Income for the three
months and nine months ended September 2, 2001 and Condensed Consolidated
Statements of Cash Flows for the nine months ended September 2, 2001 have not
been restated to reflect the discontinued operation.
During the third quarter of fiscal 2001, the Company recorded an estimated
after-tax loss of $28.2 million, or $3.16 per share, related to this sale. The
charge included 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 also 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.
During the third quarter of fiscal 2002, the Company recorded a tax benefit of
$.7 million resulting from additional tax benefit realized at the time of the
fiscal 2001 federal income tax filing and resolution of a prior year tax
exposure in connection with the commercial Graphics Products business. The
Company also reduced by $.2 million after-tax certain of its accruals
established in connection with a 1997 divestiture.
3. 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):
Page 8
Hunt Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Three Months Ended
---------------------------------
Sept. 1, Sept. 2,
2002 2001
--------------- --------------
Average common shares outstanding-basic 8,976 8,895
Add: common equivalent shares representing shares
issuable upon exercise of stock options and vesting of
stock grants 175 65
--------------- --------------
Average common shares and dilutive securities outstanding 9,151 8,960
=============== ==============
Nine Months Ended
---------------------------------
Sept. 1, Sept. 2,
2002 2001
--------------- --------------
Average common shares outstanding-basic 8,940 8,949
Add: common equivalent shares representing shares
issuable upon exercise of stock options and vesting
of stock grants 141 43
--------------- --------------
Average common shares and dilutive securities outstanding 9,081 8,992
=============== ==============
4. The following table sets forth the details and the cumulative activity in the
various accruals and reserves associated with the Company's 2001 cost reduction
plan (which resulted primarily from the sale of the commercial Graphics Products
business) in the Condensed Consolidated Balance Sheet at September 1, 2002 (in
thousands):
Balance at Balance at
December 2, Provision/ Cash Non-Cash September 1,
2001 (Credit) Activity Activity 2002
-----------------------------------------------------------------------------------------
Lease obligations $256 - (220) - $36
Severance 3,513 (20) (971) - 2,522
Fixed assets 38 (11) - (27) -
Other 51 31 (82) - -
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Total $3,858 - (1,273) (27) $2,558
=========================================================================================
The Company expects the cash payments of these accruals and reserves to be
completed by the end of fiscal 2004.
Page 9
Hunt Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 September 1, 2002 (in
thousands):
Balance at Balance at
December 2, Cash Non-Cash September 1,
2001 Credit Activity Activity 2002
-----------------------------------------------------------------------------------------
Lease obligations $249 - - 22 $271
Severance 23 (10) (13) - -
-----------------------------------------------------------------------------------------
Total $272 (10) (13) 22 $271
=========================================================================================
5. As a result of the sale of the commercial Graphics Products business in
fiscal 2001 (see Note 2 above) and its impact on the Company's internal
organizational structure, the Company now has only a single reportable segment:
Consumer Products. All of the Company's long-lived assets are located in North
America.
6. Effective December 3, 2001, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets." Under this SFAS, goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized, but will be
subject to periodic reviews for impairment. As a result, effective December 3,
2001, the Company no longer amortizes goodwill or intangible assets with
indefinite lives. The Company has completed a transitional impairment review to
identify whether there is an impairment to goodwill or indefinite-lived
intangible assets using a fair value methodology. No such impairment loss was
identified.
The Company's indefinite-lived intangible assets consist of trademarks, and the
Company has no amortizable intangible assets.
In conformity with SFAS No. 142, the results of prior periods have not been
restated. The following is a reconciliation of the Company's net income and
earnings per share for the three months and nine months ended September 1, 2002
and September 2, 2001:
Page 10
Hunt Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
Sept. 1, Sept. 2, Sept. 1, Sept. 2,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net income (loss):
As reported $3,727 ($27,696) $8,674 ($25,034)
Amortization expense - goodwill - 299 - 795
Amortization expense - intangible assets - 25 - 74
------------- ------------- ------------- -------------
Adjusted net income (loss) $3,727 ($27,372) $8,674 ($24,165)
============= ============= ============= =============
Basic earnings per share:
As reported $.42 ($3.11) $.97 ($2.80)
Amortization expense - goodwill - .03 - .09
Amortization expense - intangible assets - - - -
------------- ------------- ------------ -------------
Adjusted earnings (loss) per share - Basic $.42 ($3.08) $.97 ($2.71)
============= ============= ============ =============
Diluted earnings per share:
As reported $.41 ($3.09) $.96 ($2.78)
Amortization expense - goodwill - .03 - .09
Amortization expense - intangible assets - - - -
------------- ------------- ------------ -------------
Adjusted earnings (loss) per share - Diluted $.41 ($3.06) $.96 ($2.69)
============= ============= ============ =============
Page 11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
Certain statements contained in this report are 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 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 and duration 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; dependence on maintaining key customers; competitive and
other pressures in the marketplace; acts of terrorism; and other risks and
uncertainties set forth herein and in the Company's 2001 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.
(Note: All earnings per share amounts in Management's Discussion and Analysis,
including the paragraph immediately below, are presented on an after-tax,
diluted basis.)
In November 2001, the Company initiated a cost reduction plan (the "2001 cost
reduction plan") designed to reduce the Company's cost structure. This plan
resulted primarily from the sale of the commercial Graphics Products business to
Neschen AG in October 2001 and related actions and is expected to generate
approximately $3.6 million of annualized pre-tax cost savings in fiscal 2002 and
annualized pre-tax cost savings of approximately $4.7 million in future years.
Pre-tax cost savings realized in the third quarter and first nine months of 2002
were approximately $1.1 million ($.08 per share) and $2.5 million ($.18 per
share), respectively. Although the Company expects to realize such future cost
savings, there is no assurance that they will actually be achieved. The adoption
of the 2001 cost reduction plan in the fourth quarter of fiscal 2001 resulted in
the recognition of charges totaling $3.9 million pre-tax ($.30 per share) in
that quarter which included employee severance costs (including certain
separation costs for Donald L. Thompson, the Chairman of the Board and former
Chief Executive Officer of the Company), recognition of future lease
obligations, and other related costs. In addition to the fiscal 2001 fourth
quarter charges related to this plan, the Company expects to spend a total of
approximately $1.0 million for plan implementation costs (which will be recorded
as period costs as incurred) over the next three fiscal years. During the first
nine months of fiscal 2002, the Company recognized $.1 million ($.01 per share)
of such implementation costs, consisting primarily of outplacement expenses. See
Notes 2 and 4 to the Condensed Consolidated Financial Statements herein.
As a result of the sale of the commercial Graphics Products business and the
subsequent cost reduction plan described in the preceding paragraph, management
believes that the Company has simplified its operations and expects to improve
the overall profitability and financial strength of the Company's continuing
operations. Additionally, the Company's management and Board of Directors
continue to review and evaluate various possible strategies that the Company
might pursue to strengthen the Company and enhance shareholder value. Such
potential strategies range from growing the Company through internal
development, joint ventures, and/or acquisitions, to selling some or all of the
Company.
Page 12
Results of Operations
- ---------------------
The following discussion is on a continuing operations basis.
Net Sales
- ---------
Net sales from continuing operations of $42.0 million for the fiscal 2002 third
quarter decreased 1.8% from the fiscal 2001 third quarter, while net sales from
continuing operations of $122.8 million for the first nine months of fiscal 2002
decreased 1.1% from the first nine months of fiscal 2001. These net sales
decreases were largely due to lower sales of office supplies products (down 8.9%
for the third quarter and 6.8% year-to-date), partially offset by higher sales
of art/framing supplies products (up 5.2% for the third quarter and 3.5%
year-to-date). Export sales decreased 1.0% and 2.2% in the fiscal 2002 third
quarter and first nine months, respectively, compared to the same prior year
periods. The net decreases were primarily due to lower sales in Canada,
partially offset by higher sales of consumer and art/framing products in Europe.
Management believes that the third quarter decrease in sales was largely
attributable to softness experienced by retailers in "back-to-school" sales, to
the current uncertain economic situation in the U.S., and to product sales
promotions offered in fiscal 2001 but not repeated in fiscal 2002.
Gross Profit
- ------------
The Company's gross profit percentage increased to 39.8% of net sales in the
third quarter of fiscal 2002 from 36.7% in the third quarter of fiscal 2001, and
increased to 40.4% of net sales for the first nine months of fiscal 2002 from
39.4% in the same period of fiscal 2001. Gross margin dollars increased $1.0
million and $.7 million in the fiscal 2002 third quarter and first nine months,
respectively, from the same prior year periods. The increases in the gross
profit percentages and gross profit dollars relative to the prior year periods
were primarily the result of lower raw material and product costs, lower
manufacturing costs, and lower unfavorable inventory adjustments.
Selling, General, and Administrative Expenses
- ---------------------------------------------
Selling, general, and administrative expenses decreased $.8 million, or 5.8%, in
the third quarter and $1.6 million, or 4.2%, in the first nine months of fiscal
2002 compared to the same prior year periods. The third quarter decrease was
primarily due to lower general and administrative expenses due principally to
reduced salaries and benefits and rent expenses resulting from the 2001 cost
reduction plan, reductions in accounts receivable reserves, and decreases in
reserves for customer deductions, partially offset by increases in accrued
incentive compensation expenses. The decrease for the first nine months of
fiscal 2002 was due primarily to lower marketing and selling expenses
Page 13
(principally lower salaries and benefits and other expenses as a result of the
2001 cost reduction plan), and lower general and administrative expenses due to
the reasons discussed above for the third quarter, partially offset by market
value decreases in the cash surrender value of officers' life insurance
policies.
Selling, general, and administrative expenses, as a percentage of net sales,
were 29.8% and 30.5% in the third quarter and first nine months of fiscal 2002,
respectively, and 31.1% and 31.4%, respectively, in the same prior year periods.
Restructuring and Other
- -----------------------
During the fiscal 2002 third quarter, the Company reduced by $.2 million a
reserve established in connection with a 1997 business divestiture. This reserve
reduction was related to lower than expected inventory returns. During the first
nine months of fiscal 2002, the Company also reduced by $10,000 a reserve
related to its 1999 restructuring plan, and reversed an accrual of $33,000
established in connection with the implementation of the 1999 restructuring
plan.
During the fiscal 2001 third quarter, the Company reduced by $.2 million a
reserve related to its 1999 restructuring plan, reflecting lower than
anticipated severance expense. During the first nine months of fiscal 2001, the
Company recorded interest charges of $.1 million in connection with a previously
reported patent infringement suit judgment, and during the third quarter of
fiscal 2001, the Company paid approximately $3.9 million to the plaintiff with
respect to this judgment.
The Company recorded net losses on disposals of property, plant and equipment of
$39,000 and $284,000 during the third quarter and first nine months of fiscal
2002, respectively, and recorded net losses of $23,000 and $13,000 during the
third quarter and first nine months of fiscal 2001, respectively.
Interest Expense
- ----------------
Interest expense in the fiscal 2002 third quarter and first nine months
decreased to $.5 million and $1.7 million, respectively, from $1.1 million and
$3.1 million in the fiscal 2001 third quarter and first nine months,
respectively, due primarily to a principal repayment of $25 million on the
Company's senior notes during the fourth quarter of fiscal 2001 and the first of
five annual principal repayments of $5.0 million during the third quarter of
fiscal 2002 with respect to the Company's senior debt notes.
Interest and Other Income, net
- ------------------------------
Interest and other income, net increased to $.3 million and $1.3 million in the
fiscal 2002 third quarter and first nine months, respectively, from $31,000 and
$.4 million in the same prior year periods. The third quarter increase was due
primarily to favorable foreign currency translation adjustments. The increase
for the first nine months was due principally to favorable foreign currency
Page 14
translation adjustments, as well as management and other net fees of $.6 million
for transition services rendered by the Company to Neschen AG in connection with
the sale of its commercial Graphics Products business, partially offset by lower
interest income due to lower interest rates.
Provision for Income Taxes
- --------------------------
The Company's effective income tax rate for continuing operations was 32.7% and
34.5% for the fiscal 2002 third quarter and first nine months, respectively,
compared to 27.3% and 33.2% for the same prior year periods. These increases
were due principally to the effect of lower tax credits and lower favorable
resolutions of prior years' tax exposures in fiscal 2002.
Financial Condition
- -------------------
The Company's overall financial condition improved during the first nine months
of fiscal 2002. The Company's working capital increased to $45.0 million from
$40.6 million, and its current ratio increased to 2.7 from 2.3 at the end of the
third quarter of fiscal 2002 from the end of fiscal 2001. The Company's
debt/capitalization percentage was 34% at the end of the fiscal 2002 third
quarter compared to 42% at the end of fiscal 2001. Funds from operations and
available cash balances were sufficient during the first nine months of fiscal
2002 to make a principal repayment of $5.0 million with respect to its senior
notes, to fund additions to property, plant and equipment of $1.5 million, to
pay cash dividends of $2.7 million, and to make cash payments of $1.3 million
related to the 2001 cost reduction plan.
Current assets decreased to $71.5 million at the end of the third quarter of
fiscal 2002 from $72.8 million at the end of fiscal 2001, largely as a result of
lower prepaid and other assets and deferred tax assets, partially offset by
higher accounts receivable and inventories. The decrease of $7.2 million in
prepaid and other assets was principally due to the receipt of amounts due to
the Company from Neschen AG for transition services, receipt of income tax
refunds, and to a reclassification of an income tax refund position to a
deferred tax asset as a result of a net operating loss tax carryforward election
in fiscal 2002. The decrease in deferred tax assets was due primarily to the
current deductibility of reserves related to the divested commercial Graphics
Products business and the 2001 cost reduction plan, and utilization of net
operating loss carryforwards. Accounts receivable increased $4.6 million from
the $17.5 million balance at the end of fiscal 2001 due to seasonal dating and
back-to-school promotion programs, as well as lower bad debt reserve balances in
the first nine months of 2002. The increase in inventories was due principally
to the timing of purchases by the Company of finished goods inventories.
Current liabilities decreased to $26.5 million at the end of the third quarter
of fiscal 2002 from $32.2 million at the end of fiscal 2001. This decrease was
largely attributable to reductions of accruals associated with the Company's
2001 divestiture of its commercial Graphics Products business ($3.2 million),
reductions of accounts payable ($1.6 million), settlement of amounts owed to
Neschen AG ($1.5 million) in connection with the Company's 2001 divested
business, reductions in accruals associated with the Company's 2001 cost
reduction plan ($.7 million), and reductions in reserves established in
connection with 1997 business divestitures ($.6 million), partially offset by an
increase in accrued incentive compensation ($2.3 million).
Page 15
Although the Company currently has a revolving credit facility of $25 million,
there were no outstanding borrowings under this facility at September 1, 2002.
The Company's ability to comply with various of its debt covenants under its
credit facility and outstanding senior notes will depend largely on the
achievement of the Company's business plan, which, in turn, could be adversely
affected by the economic climate, competitive uncertainties, and other factors.
In the event that non-compliance with such debt covenants should occur or appear
to be likely, the Company would pursue various alternatives to successfully
resolve the non-compliance, which might include, among other things, seeking
debt covenant waivers or amendments, refinancing of debt, restricting payments
of future cash dividends, and/or reducing future capital expenditures. Although
the Company believes that it would be successful in resolving any such actual or
potential non-compliance with its debt covenants, there can be no assurance that
such would be the case.
Management believes that funds generated from operations, combined with its
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. While subject to change, management currently
expects that total fiscal 2002 expenditures for additions to property, plant and
equipment to increase capacity and productivity will be approximately $2.0
million, of which approximately $1.5 million has been expended through the first
nine months of fiscal 2002.
Outlook
- -------
The Company is optimistic about the outlook for its business for the fourth
quarter of fiscal 2002 and anticipates stronger sales and earnings growth
compared to the prior year fourth quarter. However, management expects such
sales and earnings for the fiscal 2002 fourth quarter to be lower than the
current reported results for the fiscal 2002 third quarter. While management
anticipates modest sales growth and stronger earnings for the 2002 full fiscal
year, the economy remains uncertain and could adversely affect the anticipated
results. In addition, the Company's ten largest customers account for a
significant portion of its net sales and the loss of, or a reduction in net
sales of the Company's products to, one or more of these customers could have a
material adverse effect on the Company's future sales and earnings. Although the
Company has experienced some cost reductions for certain of its raw materials
during the first nine months of fiscal 2002, the Company has experienced some
cost increases for some of these raw materials during the fourth quarter of
fiscal 2002. As a result of the Company's 2001 cost reduction plan, the Company
expects to generate $1.1 million of additional pre-tax cost savings in the
fourth quarter of fiscal 2002 and annualized pre-tax cost savings of
approximately $4.7 million in future years, but there is no assurance that such
future cost savings will actually be achieved. Furthermore, the Company
anticipates considerable increases in its employee benefit costs (i.e., pension
and medical) in fiscal 2003, expected to be partially offset by an incentive
based cost reduction program.
Page 16
In addition, management and the Board of Directors continue to review and
evaluate various potential strategies that the Company might pursue to
strengthen the Company and enhance shareholder value, ranging from growing the
Company through internal development, joint ventures, and/or acquisitions, to
selling some or all of the Company.
Critical Accounting Policies and Estimates
- ------------------------------------------
Critical accounting policies are those that involve subjective or complex
judgments, often as a result of the need to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues, expenses, and
related disclosures of contingent assets and liabilities. On an ongoing basis,
management evaluates its estimates, including those related to customer
programs, product returns, bad debts, inventories, valuation of long-lived
assets, assets held for sale, intangible assets, cash surrender value of life
insurance policies, a deferred cash account, income taxes, warranty obligations,
restructuring, business divestitures, pensions and other employee benefit plans
or arrangements, environmental matters, and contingencies and litigation.
Management bases its estimates on historical experience and on various other
factors that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates.
The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements:
o The Company records estimated reductions to revenue for customer programs,
including special promotions and other volume-based incentives.
o The Company maintains allowances for doubtful accounts for estimated
losses resulting from the Company's review and assessment of its
customers' ability to make required payments. If the financial condition
of the Company's customers were to deteriorate, resulting in an impairment
of their ability to make payments, additional allowances might be
required.
o The Company provides for estimated costs of future anticipated product
returns and warranty obligations based on historical experience.
o The Company maintains reserves for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand and
market conditions. If actual market conditions are less favorable than
those projected by management, additional inventory write-downs may be
required.
o The Company holds life insurance policies for most of its officers in
connection with the Company's Supplemental Executive Benefits Plan. The
carrying value of these policies is subject to changes in investment
market conditions. During the first nine months of fiscal 2002, the
Company has experienced significant decreases in the market value of these
policies, aggregating $.8 million.
Page 17
o The Company maintains an accrual for a deferred cash account in connection
with a long-term incentive compensation agreement with the Company's
Chairman and former Chief Executive Officer, Donald L. Thompson. The value
of this deferred cash account is tied to the Company's stock price, and
this accrual is subject to changes in the fair market value of the
Company's common stock.
o The Company records a valuation allowance to reduce its deferred tax
assets to the amount that is more likely than not to be realized. While
the Company has considered future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for the valuation
allowance, in the event that the Company were to determine that it would
be able to realize its deferred tax assets in the future in excess of its
net recorded amount, an adjustment to the deferred tax asset would
increase income in the period such determination was made. Likewise,
should the Company determine that it would not be able to realize all or
part of its net deferred tax asset in the future, an adjustment to the
deferred tax asset would be charged to income in the period such
determination was made.
o The Company accounts for its qualified defined benefit pension plans and
Supplemental Executive Benefit Plan in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 87, "Employer's Accounting for
Pensions," which requires that amounts recognized in the financial
statements be determined on an actuarial basis. SFAS No. 87 requires that
experience gains and losses, including the effects of the performance of
the plan assets and changes in pension liability discount rates on the
Company's computation of pension expense (income) be amortized over future
periods to the extent that these fall outside a defined threshold under
SFAS 87.
The most significant elements in determining the Company's pension expense
(income) in accordance with SFAS No. 87 are the expected return on plan
assets and the discount rate to be used to calculate the present value of
plan liabilities. Differences in expected returns and the actual return on
plan assets and changes in the discount rate, as well as changes in
actuarial assumptions and experience, may materially affect the pension
expense (income) year to year.
New Accounting Standards
- ------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") approved the
issuance of SFAS No. 143, "Accounting for Asset Retirement Obligations." 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.
Page 18
In August 2001, the FASB approved the issuance of SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," and certain parts of 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. SFAS No. 144 is effective for fiscal years beginning
after December 15, 2001. The Company believes this Statement will not materially
affect the Company's financial position or results of operations.
In April 2002, the FASB approved the issuance of SFAS No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 primarily affects the reporting
requirements and classification of gains and losses from the extinguishment of
debt and requires that certain lease modifications with economic effects similar
to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. SFAS No. 145 is effective for fiscal years
beginning after May 15, 2002. 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.
In June 2002, the FASB approved the issuance of SFAS No. 146, "Accounting for
Exit or Disposal Activities." SFAS No. 146 addresses significant issues
regarding the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including restructuring activities
that are currently accounted for pursuant to the guidance that the Emerging
Issues Task Force (EITF) has set forth in EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
will be effective for exit or disposal activities that are initiated after
December 31, 2002. The Company believes this Statement will not materially
affect the Company's financial position or results of operations.
Page 19
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
There have been no material changes in the Company's market risk from that set
forth in Part II, Item 7A of the Company's fiscal 2001 Form 10-K.
Page 20
Item 4 - Controls and Procedures
-----------------------
(a) Evaluation of disclosure controls and procedures
------------------------------------------------
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation
of the Company's disclosure controls and procedures. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company (including its consolidated subsidiaries) required to be included
in the Company's periodic SEC filings.
(b) Changes in internal controls
----------------------------
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to
the date of their evaluation.
(c) Asset-Backed issuers
--------------------
Not applicable.
Page 21
PART II - OTHER INFORMATION
-----------------
Item 1 - Legal Proceedings
-----------------
Reference is made to Part I, Item 3 of the Company's fiscal 2001 Form 10-K and
to Part II, Item 1 of the Company's fiscal 2002 second quarter Form 10-Q.
Item 5 - Other Information
-----------------
In addition to the Chief Executive Officer and Chief Financial Officer
Certifications required by Section 302 of the Sarbanes-Oxley Act which are
attached to this report following the signature page, the Company has submitted
to the Securities and Exchange Commission as correspondence accompanying this
report the Chief Executive Officer and Chief Financial Officer Certifications
required by Section 906 of that Act.
Page 22
Item 6 - Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the quarter for which this
report is filed.
Page 23
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 16, 2002 By /s/ Dennis S. Pizzica
-------------------- -----------------------------------------
Dennis S. Pizzica
Vice President, Chief Financial Officer
Date October 16, 2002 By /s/ Bradley P. Johnson
-------------------- -----------------------------------------
Bradley P. Johnson
Chief Executive Officer and President
Date October 16, 2002 By /s/ John Fanelli III
-------------------- -----------------------------------------
John Fanelli III
Vice President, Corporate Controller
(Principal Accounting Officer)
Page 24
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Bradley P. Johnson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hunt Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: October 16, 2002
/s/ Bradley P. Johnson
- ---------------------------------------------------
Bradley P. Johnson
Chief Executive Officer and President
Page 25
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Dennis S. Pizzica, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hunt Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: October 16, 2002
/s/ Dennis S. Pizzica
- ---------------------------------------------------
Dennis S. Pizzica
Vice President, Chief Financial Officer
Certification of Chief Executive Officer
Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
I, Bradley P. Johnson, the Chief Executive Officer of Hunt Corporation
(the "Company"), hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Form 10-Q of the Company for the quarterly period ended September 1,
2002 (the "Form 10-Q"), fully complies with requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) the information contained in the Form 10-Q fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated: October 16, 2002
/s/ Bradley P. Johnson
-------------------------------------
Bradley P. Johnson
Chief Executive Officer and President
Certification of Chief FINANCIAL Officer
Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
I, Dennis S. Pizzica, the Chief Financial Officer of Hunt Corporation
(the "Company"), hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Form 10-Q of the Company for the quarterly period ended September 1,
2002 (the "Form 10-Q"), fully complies with requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) the information contained in the Form 10-Q fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated: October 16, 2002
/s/ Dennis S. Pizzica
---------------------------------------
Dennis S. Pizzica
Vice President, Chief Financial Officer