SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________.
Commission File Number 0-1349
Stanhome Inc.
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(Exact name of registrant as specified in its charter)
Massachusetts 04-1864170
- ------------------------------------ ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 Western Avenue, Westfield, Massachusetts 01085
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(Address of principal executive offices) (Zip Code)
413-562-3631
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(Registrant's telephone number, including area code)
N/A
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(Former name or former address, if changed since last report)
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 [_]
September 30,
1997 1996
---- ----
Shares Outstanding:
Common Stock with
Associated Rights 17,419,333 17,899,443
Total number of pages contained herein 26
Index to Exhibits is on page 25
PART I. FINANCIAL INFORMATION
------------------------------
ITEM. 1. FINANCIAL STATEMENTS
STANHOME INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1997 and DECEMBER 31, 1996
(Unaudited)
(In Thousands)
September 30, December 31,
1997 1996
---- ----
ASSETS
CURRENT ASSETS:
Cash and certificates of deposit $ 16,287 $ 10,308
Notes and accounts receivable, net 175,632 127,987
Inventories 104,619 84,018
Prepaid expenses 3,025 3,500
-------- --------
Total current assets 299,563 225,813
-------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost 80,895 80,813
Less - Accumulated depreciation and
amortization 46,313 43,626
-------- --------
34,582 37,187
-------- --------
OTHER ASSETS:
Goodwill and other intangibles, net 90,503 101,327
Other 21,575 13,053
-------- --------
112,078 114,380
-------- --------
NET RECEIVABLES FROM DISCONTINUED OPERATIONS - 26,463
-------- --------
NET ASSETS OF DISCONTINUED OPERATIONS 21,994 74,866
-------- --------
$468,217 $478,709
======== ========
The accompanying notes are an integral part of these condensed financial
statements.
STANHOME INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1997 and DECEMBER 31, 1996
(Unaudited)
(In Thousands)
September 30, December 31,
1997 1996
---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes and loans payable $119,264 $ 78,577
Accounts payable 30,595 33,916
Federal, state and foreign taxes on income 23,889 16,676
Accrued expenses--
Royalties 8,981 9,725
Payroll and commissions 4,670 8,843
Vacation, sick and postretirement benefits 4,012 4,241
Pensions and profit sharing 2,713 7,716
Other 44,383 25,803
-------- --------
Total current liabilities 238,507 185,497
-------- --------
LONG-TERM LIABILITIES:
Postretirement benefits 15,567 14,384
-------- --------
Total long-term liabilities 15,567 14,384
-------- --------
SHAREHOLDERS' EQUITY:
Common stock 3,154 3,154
Capital in excess of par value 46,729 44,862
Retained earnings 365,377 403,805
Cumulative translation adjustments ( 32,243) ( 21,121)
-------- --------
383,017 430,700
Less - Shares held in treasury, at cost 168,874 151,872
-------- --------
Total shareholders' equity 214,143 278,828
-------- --------
$468,217 $478,709
======== ========
The accompanying notes are an integral part of these condensed financial
statements.
STANHOME INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
FOR THE QUARTERS ENDED SEPTEMBER 30, 1997 and 1996 (Unaudited)
(In thousands, except per share amounts)
1997 1996
---- ----
NET SALES $128,261 $144,756
COST OF SALES 72,570 76,958
-------- --------
GROSS PROFIT 55,691 67,798
SELLING, DISTRIBUTION, GENERAL
AND ADMINISTRATIVE EXPENSES 55,951 42,771
-------- --------
OPERATING PROFIT (LOSS) ( 260) 25,027
Interest expense ( 1,678) ( 2,363)
Other expense, net ( 978) ( 897)
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES
FROM CONTINUING OPERATIONS ( 2,916) 21,767
Income taxes ( 164) 9,577
-------- --------
INCOME (LOSS) OF CONTINUING OPERATIONS, NET OF TAXES ( 2,752) 12,190
INCOME (LOSS) OF DISCONTINUED OPERATIONS, NET OF TAXES ( 700) ( 737)
NET LOSS ON SALE OF DIRECT RESPONSE - -
-------- --------
NET INCOME (LOSS) ($ 3,452) $ 11,453
======== ========
EARNINGS (LOSS) PER COMMON SHARE,
(Primary and fully diluted):
CONTINUING OPERATIONS ($ .16) $ .68
DISCONTINUED OPERATIONS ( .04) ( .04)
SALE OF DIRECT RESPONSE - -
----- -----
TOTAL EARNINGS (LOSS) PER COMMON SHARE ($ .20) $ .64
===== =====
The accompanying notes are an integral part of these condensed financial
statements.
STANHOME INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 and 1996 (Unaudited)
(In thousands, except per share amounts)
1997 1996
---- ----
NET SALES $367,323 $375,191
COST OF SALES 198,406 200,257
-------- --------
GROSS PROFIT 168,917 174,934
SELLING, DISTRIBUTION, GENERAL
AND ADMINISTRATIVE EXPENSES 143,077 125,058
-------- --------
OPERATING PROFIT 25,840 49,876
Interest expense ( 5,368) ( 6,165)
Other expense, net ( 2,044) ( 2,065)
-------- --------
INCOME BEFORE INCOME TAXES
FROM CONTINUING OPERATIONS 18,428 41,646
Income taxes 9,228 18,324
-------- --------
INCOME OF CONTINUING OPERATIONS, NET OF TAXES 9,200 23,322
INCOME OF DISCONTINUED OPERATIONS, NET OF TAXES 2,158 3,152
NET LOSS ON SALE OF DIRECT RESPONSE ( 35,000) -
-------- --------
NET INCOME (LOSS) ( 23,642) 26,474
RETAINED EARNINGS, beginning of period 403,805 385,008
Cash dividends, $.84 per share in 1997 and
$.81 per share in 1996 ( 14,786) ( 14,628)
-------- --------
RETAINED EARNINGS, end of period $365,377 $396,854
======== ========
EARNINGS (LOSS) PER COMMON SHARE:
(Primary and fully diluted)
CONTINUING OPERATIONS $ .51 $1.29
DISCONTINUED OPERATIONS .12 .17
SALE OF DIRECT RESPONSE ( 1.96) -
----- -----
TOTAL EARNINGS (LOSS) PER COMMON SHARE ($1.33) $1.46
===== =====
The accompanying notes are an integral part of these condensed financial
statements.
STANHOME INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 and 1996 (Unaudited)
(In Thousands)
1997 1996
---- ----
OPERATING ACTIVITIES:
Net income ($23,642) $26,474
Less- Net income discontinued operations ( 2,158) ( 3,152)
- Loss on sale of Direct Response 35,000 -
Adjustments to reconcile continuing operations net
income to net cash provided by operating activities ( 62,600) ( 40,914)
Operating activities of discontinued operations 47,178 ( 7,280)
------- -------
Net cash provided (used) by operating activities ( 6,222) ( 24,872)
------- -------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment ( 3,122) ( 3,723)
Proceeds from sales of property, plant and equipment 722 575
Payments for acquisition of businesses,
net of cash acquired ( 53) ( 1,566)
Investing activities of discontinued operations ( 1,195) ( 655)
------- -------
Net cash used by investing activities ( 3,648) ( 5,369)
------- -------
FINANCING ACTIVITIES:
Cash dividends ( 14,786) ( 14,628)
Exchanges and purchases of common stock ( 17,376) ( 15,178)
Notes and loans payable 40,856 58,945
Exercise of stock options 2,005 1,692
Other common stock issuance 237 293
Financing activities of discontinued operations 6,071 706
------- -------
Net cash provided (used) by financing activities 17,007 31,830
------- -------
Effect of exchange rate changes on cash
and cash equivalents ( 1,158) ( 418)
------- -------
Increase/(decrease) in cash and cash equivalents 5,979 1,171
Cash and cash equivalents, beginning of year 10,306 12,871
------- -------
Cash and cash equivalents, end of quarter $16,285 $14,042
======= =======
The accompanying notes are an integral part of these condensed financial
statements.
STANHOME INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The consolidated condensed financial statements and related notes
included herein have been prepared by the Company, without audit except for
the December 31, 1996 condensed balance sheet, which was derived from the
Company's Annual Report on Form 10-K for the year ended December 31, 1996,
pursuant to the rules and regulations of the Securities and Exchange
Commission. The audited balance sheet has been reclassified to reflect
certain subsequently discontinued operations described in Note 2. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. The information
furnished reflects all normal recurring adjustments which are, in the
opinion of management, necessary to a fair statement of the results for the
interim periods. It is suggested that these condensed financial statements
be read in conjunction with the financial statements and related notes to
consolidated financial statements included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1996.
1. ACCOUNTING POLICIES:
The Company's financial statements for the three and nine months ended
September 30, 1997 have been prepared in accordance with the accounting
policies described in Note 1 to the December 31, 1996 consolidated
financial statements included in the Company's 1996 Annual Report on Form
10-K. The Company considers all highly liquid securities, including
certificates of deposit with maturities of three months or less, when
purchased, to be cash equivalents. Notes and accounts receivable were net
of reserves for uncollectible accounts, prompt payment discounts, returns
and allowances of $13,990,000 at September 30, 1997 and $9,891,000 at
December 31, 1996.
The Company recognizes revenue as merchandise is turned over to the
shipper and a provision for anticipated merchandise returns and allowances
is recorded based upon historical experience. Amounts billed to customers
for shipping and handling orders are netted against the associated costs.
Continuing operations cash paid is as follows (in thousands):
Nine Months Ended
September 30
------------------
1997 1996
---- ----
Interest $ 4,438 $ 5,616
Income taxes $ 5,161 $ 4,325
2. DISCONTINUED OPERATIONS:
On May 22, 1997, the Company completed the previously announced sale
of the Company's United States Hamilton Direct Response businesses to The
Crestley Collection, Ltd., an affiliate of The Bradford Group, for
approximately $48 million, including repayment of intercompany debt,
subject to certain conditions. The purchase price for the stock is $17.5
million, which approximates book value. The stock purchase and sale
agreement provides for a long-term worldwide license agreement for Bradford
to sell products under license from the Company's Enesco Giftware Group
through the direct response channel. The Hamilton Group is a direct
marketer of collectible dolls, plates and figurines primarily in the United
States and in Canada, Germany and the United Kingdom. In connection with
the sale, the Company recorded, in the first quarter, a $35 million after
tax charge or $1.96 per share, based on the average shares fully diluted
for the first nine months of 1997. Bradford did not acquire the operating
businesses in Canada, Germany and the United Kingdom, but it is
facilitating the closure of these businesses by the Company. The Company is
in the process of closing these businesses by selling the assets and paying
closing costs. The approximate components of the charge were as follows (in
thousands):
Write down of goodwill $23,000
Write down of international current
assets due to anticipated proceeds
being less than carrying value 3,000
Anticipated before tax loss until closing 1,000
Closing costs of international operations
and termination indemnities 8,000
Transaction fees 2,000
-------
Before tax charge 37,000
Anticipated tax benefit 2,000
-------
After tax charge $35,000
=======
The anticipated income tax benefit is limited, since most of the
international closing costs will not result in a tax benefit and the loss
charged will be primarily capital in nature and the Company is unable to
quantify the portion of such capital loss benefit which may ultimately be
realized. The charge reflects the Company's best estimate at this time.
In late April 1997, the Company's Board approved a plan to actively
seek the sale or other disposition of the Company's Direct Selling business
segment during the next twelve months. The Direct Selling Group is a
manufacturer and distributor of home care and cosmetic items in Europe and
Latin America. The gain or loss on the disposition of the Direct Selling
business segment is not anticipated to be material.
In accordance with the above, the applicable financial statements and
related notes have been reclassified to present these two business segments
as discontinued operations. Therefore, the net assets and operating results
of these two business segments have been segregated and reported as
discontinued operations in the Consolidated Balance Sheets, Statements of
Income and Statements of Cash Flows.
Operating results of discontinued operations are summarized as follows
(in thousands):
Nine Months Ended
September 30
------------------
1997 1996
---- ----
Net sales of discontinued operations $151,128 $237,337
======= =======
Income before income taxes from
discontinued operations $ 4,632 $ 5,930
Income taxes 2,474 2,778
------- -------
Net income of discontinued operations $ 2,158 $ 3,152
======= =======
Loss on sale of Hamilton before income taxes ($37,000) $ -
Income taxes (benefits) ( 2,000) -
------- -------
Net loss on sale of Hamilton ($35,000) $ -
======= =======
Net assets of discontinued operations were as follows (in thousands):
September 30, December 31,
1997 1996
----------- -----------
Cash and certificates of deposit $17,442 $17,154
Notes and accounts receivable, net 20,903 44,237
Inventories 22,917 37,382
Prepaid expenses 2,738 32,885
Net property, plant and equipment 16,286 21,468
Other assets 869 24,046
Net intercompany receivables/(payables) - ( 26,463)
Notes and loans payable ( 6,088) ( 107)
All other current liabilities ( 41,901) ( 62,994)
Long-term liabilities ( 11,172) ( 12,742)
------- -------
Net assets of discontinued operations $21,994 $74,866
======= =======
3. CORPORATE DOWNSIZING:
In September, the Company incurred an $18 million pre-tax charge
($11.2 million after tax or $.63 per share) to downsize the Westfield,
Massachusetts corporate headquarters. The charge did not include any future
operating expenses or future systems enhancements. The charge included
$10.6 million for severance, $5.7 million for pension and retirement, $1.4
million for insurance and $.3 million for out placement. The Westfield
facility will be sold.
4. INVENTORY CLASSES:
The major classes of inventories at September 30 and December 3l were
as follows (in thousands):
September 30, December 31,
1997 1996
---- ----
Raw materials and supplies $ 1,560 $ 1,678
Work in process 841 959
Finished goods in transit 14,466 14,299
Finished goods 87,752 67,082
-------- --------
$104,619 $ 84,018
======== ========
5. OTHER EXPENSE, NET:
Other expense, net for the quarters and nine months ended September
30, 1997 and 1996 consists of the following (in thousands):
Quarters Ended September 30
---------------------------
1997 1996
---- ----
Interest income $ 60 $ 391
Amortization of other assets ( 902) ( 906)
Other, net ( 136) ( 382)
------ ------
($ 978) ($ 897)
====== ======
Nine Months Ended September 30
------------------------------
1997 1996
---- ----
Interest income $1,117 $1,235
Amortization of other assets ( 2,921) ( 2,921)
Other, net ( 240) ( 379)
------ ------
($2,044) ($2,065)
====== ======
6. EARNINGS PER COMMON SHARE (BASIS OF CALCULATION):
Earnings per common share are based on the average number of common
shares outstanding and common share equivalents for the periods covered.
For both years, there was no difference in earnings per share between
primary and fully diluted earnings per share computations. For the third
quarter, the average number of shares utilized in the fully diluted
computation was 17,604,000 and 17,950,000 shares for 1997 and 1996,
respectively. The average number of shares utilized in the fully diluted
computation for the nine months ended September 30 was 17,824,000 for 1997
and 18,184,000 for 1996. Both 1997 computations included common share
equivalents of 172,000 and both 1996 computations included common share
equivalents of 51,000. The lower average number of shares for the third
quarter and first nine months of 1997 primarily resulted from the
repurchase of shares as part of the Company's repurchase program.
In February 1997, the Financial Accounting Standards Board adopted a
new standard on accounting for earnings per share (EPS). This new standard
replaces the presentation of primary EPS with a presentation of basic EPS
and changes the fully diluted terminology to diluted. It also requires dual
presentation of basic and diluted EPS on the face of the income statement.
Basic EPS excludes dilution and is computed by using the average number of
common shares outstanding. The standard will become effective for the
Company in December 1997 and will require restatement of prior years' EPS.
The pro forma average shares and EPS for the third quarter and first nine
months would be as follows (in thousands, except per share amounts):
Third Quarter First Nine Months
-------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
Pro forma:
Earnings per common share
basic ($.20) $.64 ($1.34) $1.46
diluted ($.20) $.64 ($1.33) $1.46
Average common shares
basic 17,432 17,899 17,652 18,133
diluted 17,541 17,912 17,761 18,146
7. FINANCIAL INSTRUMENTS:
The Company operates globally with various manufacturing and
distribution facilities and product sourcing locations around the world.
The Company may reduce its exposure to fluctuations in foreign interest
rates and exchange rates by creating offsetting positions through the use
of derivative financial instruments. The Company currently does not use
derivative financial instruments for trading or speculative purposes.
The notional amount of forward exchange contracts and options is the
amount of foreign currency bought or sold at maturity. The notional amount
of interest rate swaps is the underlying principal amount used in
determining the interest payments exchanged over the life of the swap. The
notional amounts are not a direct measure of the Company's exposure through
its use of derivatives.
The Company periodically uses interest rate swaps to hedge portions of
interest payable on debt. In addition, the Company may periodically employ
interest rate caps to reduce exposure, if any, to increases in variable
interest rates. In October 1996, the Company entered into a three year
interest rate swap with a notional amount of $50 million to effectively
convert variable interest on debt to a fixed rate of 6.12%.
The Company may periodically hedge foreign currency royalties, net
investments in foreign subsidiaries, firm purchase commitments, contractual
foreign currency cash flows or other obligations, including third-party and
intercompany foreign currency transactions. The Company regularly monitors
its foreign currency exposures and ensures that hedge contract amounts do
not exceed the amounts of the underlying exposures.
The Company enters into various short-term foreign exchange agreements
during the year. The purpose of the Company's foreign currency hedging
activities is to protect the Company from risk that the eventual settlement
of foreign currency transactions will be adversely affected by changes in
exchange rates. The Company's various subsidiaries import products in
foreign currencies and from time to time will enter into agreements or
build foreign currency deposits as a partial hedge against currency
fluctuations on inventory purchases. Gains and losses on these agreements
are deferred and recorded as a component of cost of sales when the related
inventory is sold. At September 30, 1997, deferred amounts were not
material. The Company makes short-term foreign currency intercompany loans
to various international subsidiaries and utilizes agreements to fully
hedge these transactions against currency fluctuations. The cost of these
agreements is included in the interest charged to the subsidiaries and
expensed monthly as the interest is accrued. The intercompany interest
eliminates upon consolidation and any gains and losses on the agreements
are recorded as a component of other income. The Company receives
dividends, technical service fees, royalties and other payments from its
subsidiaries and licensees. From time to time, the Company will enter into
foreign currency forward agreements as a partial hedge against currency
fluctuations on these current receivables. Gains and losses are recognized
or the credit or debit offsets the foreign currency payables. If
anticipated foreign currency requirements would disappear, the Company
would record any gain or loss in income. As of September 30, 1997, net
deferred amounts on outstanding agreements were not material. The
outstanding foreign currency forward agreement amounts (notional value) at
September 30, 1997 are as follows (in thousands):
U.S. $2,870
-------
Total $2,870
======
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
STANHOME INC.
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1997
DISCONTINUED OPERATIONS:
On May 22, 1997, the Company completed the previously announced sale
of the Company's United States Hamilton Direct Response businesses to The
Crestley Collection, Ltd., an affiliate of The Bradford Group, for
approximately $48 million, including repayment of intercompany debt,
subject to certain conditions. In connection with the sale, the Company
recorded in the first quarter of 1997 a $35 million after tax charge
consisting mainly of the write down of goodwill, current assets and
associated transaction and severance costs. Also, during April 1997, the
Company's Board approved a plan to actively seek the sale or other
disposition of the Company's Direct Selling business segment during the
next twelve months. With regard to this segment, the Italian government has
recently enacted increases in the value-added tax rates and has proposed
increases in the income tax rates. Historically, such increased tax burdens
have adversely impacted the Italian Direct Selling subsidiary's independent
dealer force and its ability to recruit and retain dealers. The gain or
loss on the disposition of the Direct Selling business segment is not
anticipated to be material.
Accordingly, the applicable financial statements and related notes
have been reclassified to present these two business segments as
discontinued operations. Therefore, the net assets and operating results of
these two business segments have been segregated and reported as
discontinued operations in the Consolidated Balance Sheets, Statements of
Income, and Statements of Cash Flows.
Cash proceeds from the disposition of these two business segments will
be used for share repurchases, debt repayment and acquisitions in the
giftware industry. Note 2, Discontinued Operations, to the Consolidated
Condensed Financial Statements provides additional information on the two
discontinued operations.
CONTINUING OPERATIONS:
NET SALES in 1997 decreased 11.4% in the third quarter with lower
sales in both the United States and international markets. Net sales in
1997 decreased 2.1% for the first nine months due to lower unit volumes in
the United States. Year-to-date 1997 international sales increased 7.1% and
represented 17.1% of year-to-date sales compared to 15.6% in 1996. Sales
from a new business acquired in France at the end of the first quarter last
year accounted for 27% of the year-to-date international sales increase.
Sales in the United States decreased due to a reduction in customer orders,
in part due to tightening retail inventories and to credit controls, with
increased numbers of customers at their credit limit. The Precious Moments
line sales decreased and represented 36.8% of the 1997 year-to-date sales
compared to 40.2% in 1996, while the Cherished Teddies line sales increased
and represented 20.2% of 1997 year-to-date sales compared to 17.7% in 1996.
During the past few years, the Company has been able to increase the
available supply and accelerate delivery of its products, particularly the
Precious Moments line, to retailers. Consequently, retailers have not
ordered as much product in advance. Principally reflecting the improved
supply and delivery of products, total unfilled orders as of September 30,
1997 were down approximately $10 million or 9% compared to September 30,
1996. This trend is expected to continue.
Gross profit in 1997 decreased for the third quarter and first nine
months due to lower sales and a higher cost of sales percentage. For the
first nine months of 1997, cost of sales represented 54.0% of sales
compared to 53.4% of sales in 1996. The higher cost of sales percentage was
primarily due to an unfavorable sales mix compared to 1996.
Selling, distribution, general and administrative expenses include a
third quarter $18 million pre-tax charge to downsize the Westfield,
Massachusetts corporate headquarters. The charge included the cost
associated with the resignation of the Company's then President and CEO.
This downsizing is expected to reduce 1998 overhead expenses substantially.
The Westfield facility has a book value of approximately $.8 million and
will be sold.
Excluding the $18 million downsizing charge, selling, distribution,
general and administrative expenses for 1997 decreased 11% for the third
quarter following the sales decrease and were level with last year for the
first nine months. These expenses year-to-date amounted to 34.1% of sales,
compared to 33.3% of sales in the first nine months of 1996. The 1997
expenses were a higher percentage of sales year-to-date principally due to
the lower sales and a higher level of spending, inflationary cost
increases, and a higher provision for bad debts to reflect the exposure
from the company's program of extended accounts receivable.
The Company recorded an operating loss in the third quarter and
reduced operating profit for the first nine months due to the factors
described above. The year-to-date decrease in operating profit as a
percentage of sales (excluding the downsizing charge) was due to a lower
gross profit due to sales mix, a higher percentage of selling,
distribution, general and administrative expenses due to lower sales
volume, and a higher level of fixed expenses.
INTERNATIONAL ECONOMIES AND CURRENCY
The value of the U.S. dollar versus international currencies where the
Company conducts business impacts the results of these businesses. In
addition to the currency risks, the Company's international operations,
including sources of imported products, are subject to other risks of doing
business abroad, including import or export restrictions and changes in
economic and political climates.
The fluctuations in net sales and operating profit margins from
quarter to quarter are partially due to the seasonal characteristics of the
Company's business.
INTEREST EXPENSE decreased in the third quarter and first nine months
of 1997 compared to 1996 due to lower borrowing levels in 1997 compared to
1996. Other expense, net is principally the amortization of goodwill and
was approximately the same amount for 1997 and 1996.
THE PROVISION FOR INCOME TAXES was 44% in the third quarter and first
nine months of 1997 and 1996, excluding the tax effect on the $18 million
downsizing charge. The 38% net tax benefit provided on the $18 million
downsizing charge represents the effective United States Federal and State
tax benefits.
FINANCIAL CONDITION
The Company has historically satisfied its capital requirements with
internally generated funds and short-term loans. Working capital
requirements fluctuate during the year and are generally greatest during
the third quarter and lowest at the beginning of the first quarter.
The major sources of funds in the first nine months of 1997 from
operating activities for continuing operations were from net income,
depreciation, amortization and higher accrued expenses. The higher accrued
expenses payable were due to the $18 million accrual for downsizing and to
higher accrued taxes payable due to timing of payments. The major uses of
funds were increased accounts receivable which increased due to the
extended credit programs; increased inventories resulting from the lower
sales volume; increased other assets reflecting the addition of a long-term
escrow deposit related to the sale of Hamilton U.S. and higher levels of
funded retirement benefits; and lower accounts payable due principally to
timing and the payment of year-end payrolls and benefits. Accounts
receivable at September 30, 1997 increased 10% compared to the third
quarter of 1996, even though third quarter 1997 sales were down 11.4% due
to the impact of the expansion of the Company's program of extended
accounts receivable terms. Inventories at September 30, 1997 increased
19.2% compared to 1996 due to sales being below purchased quantities.
The major use of cash in investing activities in the first nine months
of 1997 was for capital expenditures. The Company has a capital asset
acquisition program, and may utilize funds for this purpose in the future.
Capital expenditure commitments for $11 million are forecasted for 1997.
Proceeds in 1997 from the sale of property, plant and equipment are
primarily from the sale of a plant in Easthampton, Massachusetts. The level
of changes of marketable securities from period to period principally
represents investment alternatives versus certificates of deposit, time
deposits, and intercompany loans.
The major uses of cash in financing activities in the first nine
months of 1997 were for dividends to shareholders and purchases of common
stock. Purchases of common stock principally included shares repurchased by
the Company. During the first nine months this year, the Company
repurchased 571 thousand shares for $17.3 million. The Company has an
authorized program to purchase shares of stock for the Company treasury
from time to time in the open market or in private transactions, depending
on market and business conditions, and may utilize funds for this purpose
in the future. On July 23, 1997, the Company's Board of Directors
authorized the repurchase of up to 2.5 million shares of the Company's
outstanding common stock under its ongoing stock repurchase program, to be
used for general corporate purposes or employee benefit plans. As of
September 30, 1997, 2.4 million shares remained available for purchase
under the program. Share purchases will be made from time to time in the
open market or in private transactions, depending on market and business
conditions. The Company's earnings, cash flow, and available debt capacity
have made and make stock repurchases, in the Company's view, one of its
best investment alternatives. The aggregate exercise price of the total
number of stock options outstanding was $82 million at September 30, 1997,
and the Company could receive some or all of these funds in the future if
the options are exercised.
Loans payable were reduced from September 1996 by the proceeds from
the sale of the Company's United States Hamilton Direct Response businesses
but increased in the third quarter to support the increases in accounts
receivable and inventories. Net receivables from discontinued operations
and net assets of discontinued operations decreased principally due to the
impact from the sale of the Company's United States Hamilton businesses and
the net loss on disposition.
Fluctuations in the value of the U.S. dollar versus international
currencies affect the U.S. dollar translation value of international
currency denominated balance sheet items. The changes in the balance sheet
dollar values due to international currency translation fluctuations are
recorded as a component of shareholders' equity. International currency
fluctuations of $11,122,000 increased the cumulative translation component
of shareholders' equity which contributed to the shareholders' equity
decrease in the first nine months of 1997. The translation adjustments to
the September 30, 1997 balance sheet that produced the 1997 change in the
cumulative translation component of shareholders' equity were decreases in
net discontinued operations by $3,524,000; and continuing operations
decreases in working capital by $1,401,000, decreases in net property,
plant and equipment by $166,000 and other assets by $6,031,000. The Company
depends upon its international operations to pay dividends and to make
other payments to the Company. The Company's international operations are
subject to the risks of doing business abroad including currency, economic
and political.
The Company currently believes that cash from operations and available
financing alternatives are adequate to meet anticipated requirements for
working capital, dividends, capital expenditures, the stock repurchase
program and other needs. No liquidity problems are anticipated.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
- Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
Quarter for which this report is filed.
All other items hereunder are omitted because either such item is
inapplicable or the response to it is negative.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STANHOME INC.
(Registrant)
Date: November 13, 1997
/s/ H. L. Tower
------------------------
H. L. Tower
Chairman, President and
Chief Executive Officer
Date: November 13, 1997
/s/ Allan G. Keirstead
------------------------
Allan G. Keirstead
Chief Administrative and
Financial Officer
EXHIBIT INDEX
Reg. S-K
Item 601 Exhibit 10-Q Page No.
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27 Financial Data Schedule 26