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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 27, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-17237
HOME PRODUCTS INTERNATIONAL, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-4147027
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4501 West 47th Street
Chicago, Illinois 60632
--------------------- ----------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number including area code (773) 890-1010.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
Common shares, par value $0.01, outstanding as of
November 1, 2003 - 7,865,434
HOME PRODUCTS INTERNATIONAL, INC.
INDEX
Page
Number
------
Part I. Financial Information
---------------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 20
Item 4. Controls and Procedures 21
Part II. Other Information
-----------------
Items 1, 2, 3, 4 and 5 n/a
Item 6. Exhibits and Reports on Form 8-K 23
Signature 24
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HOME PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Balance Sheets
(Amounts in thousands, except share amounts)
(Unaudited)
September 27, December 28,
2003 2002
-------- --------
Assets
Current assets:
Cash and cash equivalents .................. $ 2,841 $ 3,974
Accounts receivable, net ................... 34,905 48,937
Inventories ................................ 29,418 25,357
Deferred income taxes ...................... - 2,559
Prepaid expenses and other current assets... 3,393 1,879
-------- --------
Total current assets ..................... 70,557 82,706
-------- --------
Property, plant and equipment - at cost ...... 94,881 91,917
Less accumulated depreciation ................ (60,973) (54,728)
-------- --------
Property, plant and equipment, net ........... 33,908 37,189
-------- --------
Deferred income taxes ........................ - 5,207
Other intangibles, net ....................... 733 1,111
Goodwill, net ................................ 73,752 73,752
Other non-current assets ..................... 4,423 3,553
-------- --------
Total assets ............................... $ 183,373 $ 203,518
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term obligations. $ 158 $ 158
Accounts payable ........................... 26,690 22,986
Accrued liabilities ........................ 25,665 28,993
-------- --------
Total current liabilities .................. 52,513 52,137
-------- --------
Long-term obligations - net of current
maturities.................................. 126,052 129,621
Other liabilities ............................ 4,400 4,293
Stockholders' equity:
Preferred Stock - authorized, 500,000
shares, $.01 par value; - None issued .... - -
Common Stock - authorized 15,000,000 shares,
$.01 par value; 8,687,828 shares issued at
September 27, 2003 and 8,671,079 shares
issued at December 28, 2002 .............. 87 87
Additional paid-in capital ................. 50,077 50,036
Accumulated deficit ........................ (43,228) (25,958)
Common stock held in treasury - at cost;
822,394 shares at September 27, 2003 and
December 28, 2002 ........................ (6,528) (6,528)
Unearned employee benefits ................. - (170)
-------- --------
Total stockholders' equity ............... 408 17,467
-------- --------
Total liabilities and stockholders' equity $ 183,373 $ 203,518
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
HOME PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
(Amounts in thousands, except per share amounts)
Thirteen weeks Thirty-nine weeks
ended ended
-----------------------------------------------------
September 27, September 28, September 27, September 28,
2003 2002 2003 2002
-----------------------------------------------------
Net sales .......................... $ 61,432 $ 67,799 $ 164,610 $ 178,429
Cost of goods sold ................. 54,492 51,271 141,376 133,597
Special (income), net .............. - (73) - (73)
-------- -------- -------- --------
Gross profit ..................... 6,940 16,601 23,234 44,905
Operating expenses:
Selling and marketing ............ 4,372 4,362 12,777 13,182
General and administrative ....... 2,804 3,098 10,013 9,783
Amortization of intangible assets. 126 127 378 380
-------- -------- -------- --------
Operating profit (loss) ........ (362) 9,014 66 21,560
-------- -------- -------- --------
Non-operating income (expense):
Interest income .................. 2 7 64 61
Interest expense ................. (3,384) (3,432) (10,312) (10,370)
Other income, net ................ 735 637 742 440
-------- -------- -------- --------
Net non-operating expense....... (2,647) (2,788) (9,506) (9,869)
-------- -------- -------- --------
Earnings (loss) before
income taxes.................. (3,009) 6,226 (9,440) 11,691
Income tax expense ................. (7,786) (133) (7,830) (433)
-------- -------- -------- --------
Net earnings (loss) ........... $ (10,795) $ 6,093 $ (17,270) $ 11,258
======== ======== ======== ========
Net earnings (loss) per common share:
Basic .......................... $ (1.35) $ 0.78 $ (2.17) $ 1.45
======== ======== ======== ========
Diluted ........................ $ (1.35) $ 0.74 $ (2.17) $ 1.37
======== ======== ======== ========
Weighted average common shares
outstanding-basic................. 7,978 7,796 7,973 7,785
======== ======== ======== ========
Weighted average common shares
outstanding-diluted............... 7,978 8,259 7,973 8,217
======== ======== ======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
HOME PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Amounts in thousands)
Thirty-nine weeks ended
---------------------------
September 27, September 28,
2003 2002
-------- --------
Operating activities:
Net earnings (loss) ............................. $ (17,270) $ 11,258
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation and amortization .................. 7,540 7,868
Amortization of restricted stock compensation .. 170 170
Gain on the sale of servingware product line ... - (663)
(Gain) loss on the disposal of assets........... (15) 186
Gain on the repurchase of bonds ................ (900) -
Deferred income taxes .......................... 7,766 -
Other, net ..................................... 494 (317)
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable .... 13,947 (4,299)
Increase in inventories ....................... (5,104) (15,719)
(Increase) decrease in prepaid expenses
and other ................................... (471) 523
Increase in accounts payable .................. 3,704 8,688
Increase (decrease) in accrued liabilities .... (3,328) 869
-------- --------
Net cash provided by operating activities ........ 6,533 8,564
-------- --------
Investing activities:
Capital expenditures, net ....................... (5,038) (3,578)
-------- --------
Net cash used in investing activities ............ (5,038) (3,578)
-------- --------
Financing activities:
Net borrowings under loan and security agreement - (859)
Repayments of long-term debt .................... (2,600) -
Payments of capital lease obligation ............ (69) (68)
Exercise of stock options, issuance of common
stock under stock purchase plan and other ..... 41 114
-------- --------
Net cash used in financing activities (2,628) (813)
-------- --------
Net increase (decrease) in cash and
cash equivalents .............................. (1,133) 4,173
Cash and cash equivalents at beginning of period 3,974 1,091
-------- --------
Cash and cash equivalents at end of period ...... $ 2,841 $ 5,264
======== ========
Supplemental disclosures
Cash paid in the period:
Interest ........................................ $ 7,017 $ 6,979
-------- --------
Income taxes, net ............................... $ 54 $ 230
-------- --------
Non-cash financing activities:
Capital lease obligation ........................ $ - $ 73
-------- --------
The accompanying notes are an integral part of the condensed consolidated
financial statements.
HOME PRODUCTS INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in thousands, except per share amounts)
Note 1. General Information
Home Products International, Inc. (the "Company"), based in Chicago, is
a leading designer, manufacturer and marketer of a broad range of value-
priced, quality consumer houseware products. The Company's products are
marketed principally through mass-market trade channels in the United States
and internationally.
The condensed consolidated financial statements for the thirteen and
thirty-nine weeks ended September 27, 2003 and September 28, 2002, include,
in the opinion of management, all adjustments (consisting of normal
recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows as of September 27, 2003 and for all
periods presented.
Certain information and note disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted.
These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
incorporated by reference in the Company's Form 10-K for the year ended
December 28, 2002. The results of operations for the thirteen and thirty-
nine weeks ended September 27, 2003 are not necessarily indicative of the
operating results to be expected for the full year.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Note 2. Stock-Based Compensation Plans
The Company has a stock-based compensation plan under which stock
options are granted to key employees and Directors. There were no stock
options granted during the first, second and third quarters of 2003. Stock
options were granted during the first quarter of 2002 under stock-based
compensation plans approved by shareholders in 1999. The stock options
granted during the first quarter of 2002 are fully exercisable after four
years and have a ten-year life. The Company also issued shares in 2003 and
2002 under the Company's employee stock purchase plan relating to the
Company's first purchase period (January through June).
Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation" encourages companies to adopt a
fair value approach to valuing stock-based compensation that would require
compensation cost to be recognized based upon the fair value of the stock-
based instrument issued. The Company has elected, as permitted by SFAS No.
123, to apply the provisions of Accounting Principles Board ("APB") Opinion
No. 25 "Accounting for Stock Based Compensation" and the related
interpretations in accounting for stock option awards under the stock option
plans. Under APB Opinion No. 25, compensation expense is recognized if the
market price of stock options on the date of grant exceeds the exercise
price. All options granted by the Company have been granted at market price
on the date of grant. The following table illustrates the effect on net
earnings (loss) and earnings (loss) per share as if the Company had applied
the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation.
Thirteen weeks Thirty-nine weeks
ended ended
--------------------------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
2003 2002 2003 2002
------- ------- ------- -------
Net earnings (loss) $(10,795) $ 6,093 $(17,270) $ 11,258
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all
awards, net of related tax effects (46) (46) (141) (149)
------- ------- ------- -------
Pro forma net earnings (loss) $(10,841) $ 6,047 $(17,411) $ 11,109
======= ======= ======= =======
Earnings (loss) per share:
Basic-as reported $ (1.35) $ 0.78 $ (2.17) $ 1.45
======= ======= ======= =======
Basic-pro forma $ (1.36) $ 0.78 $ (2.18) $ 1.43
======= ======= ======= =======
Diluted-as reported $ (1.35) $ 0.74 $ (2.17) $ 1.37
======= ======= ======= =======
Diluted-pro forma $ (1.36) $ 0.73 $ (2.18) $ 1.35
======= ======= ======= =======
The assumptions used to calculate the fair value of options granted are
evaluated and revised, as necessary, to reflect market conditions and
experience.
Note 3. Net Earnings (Loss) Per Share
The following information presents net earnings (loss) per share basic
and diluted (in thousands, except share and per share data):
Thirteen weeks Thirty-nine weeks
ended ended
---------------------------------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
2003 2002 2003 2002
------- ------- ------- -------
Net earnings (loss) $(10,795) $ 6,093 $(17,270) $ 11,258
======= ======= ======= =======
Weighted average shares
outstanding - basic 7,978,326 7,795,873 7,973,434 7,785,076
Impact of stock options,
warrants and restricted
stock - 462,643 - 431,707
--------- --------- --------- -------
Weighted average shares
outstanding - diluted 7,978,326 8,258,516 7,973,434 8,216,783
========= ========= ========= =========
Net earnings (loss)
per share - basic $ (1.35) $ 0.78 $ (2.17) $ 1.45
======= ======= ======= =======
Net earnings (loss)
per share - diluted $ (1.35) $ 0.74 $ (2.17) $ 1.37
======= ======= ======= =======
Anti-dilutive stock options,
warrants and restricted
stock excluded from
calculation 7,667 - 307,561 -
======= ======= ======= =======
Net earnings (loss) per share - basic is computed based on the weighted
average number of outstanding common shares. Net earnings (loss) per share
- diluted includes the weighted average effect of dilutive stock options,
warrants and restricted stock on the weighted average shares outstanding.
There were no stock options, warrants and restricted stock included in the
computation of diluted earnings per share during the thirteen and thirty-
nine weeks ended September 27, 2003 because the assumed exercise of such
common stock equivalents would have been anti-dilutive.
Note 4. Goodwill and Other Intangibles
Goodwill and other intangibles principally relate to the excess of the
purchase price over the fair value of tangible assets acquired. Goodwill
and intangible assets that have indefinite useful lives are no longer
amortized, but rather are tested at least annually for impairment.
Intangible assets with indefinite lives are evaluated annually to determine
whether events and circumstances continue to support an indefinite useful
life. Intangible assets that have definite useful lives are amortized over
their useful lives, and are evaluated annually to determine whether events
and circumstances warrant a revision to the remaining period of
amortization.
During the first quarter of 2003 the Company performed its annual
impairment test, which indicated that the Company's goodwill was not
impaired. As of September 27, 2003 and December 28, 2002, the carrying
amount of goodwill was $73,752.
Other intangibles consist of the following:
September 27, 2003 December 28, 2002
---------------------- ----------------------
Average Gross Gross
Life Carrying Accumulated Carrying Accumulated
(Yrs.) Amount Amortization Amount Amortization
------------------------------------------------------
Amortized intangible
assets:
Patents 7 to 14 $ 1,008 $ (783) $ 1,008 $ (710)
Non-compete
agreements 10 2,928 (2,420) 2,928 (2,115)
------ -------- ------- --------
Total $ 3,936 $ (3,203) $ 3,936 $ (2,825)
====== ======== ======= ========
Aggregate amortization expense in the third quarter of 2003 and 2002
was $126 and $127, respectively. Aggregate amortization expense for the
thirty-nine weeks ended September 27, 2003 and September 28, 2002 was $378
and $380, respectively.
Estimated amortization expense for the remaining three months of fiscal
2003 and the next two fiscal years based on intangible assets at September
27, 2003 is as follows:
Estimated
Amortization
Fiscal Year Expense
----------- -------
2003 $127
2004 $505
2005 $101
Note 5. Recent Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds
SFAS No. 4, which required that all gains and losses from extinguishment of
debt be reported as an extraordinary item. The provisions of SFAS No. 145
related to the rescission of SFAS No. 4 must be applied in fiscal years
beginning after May 15, 2002. Previously recorded losses on the early
extinguishment of debt that were classified as an extraordinary item in
prior periods will be reclassified to other income (expense), net. The
adoption of SFAS No. 145 had no effect on the Company's financial position,
results of operations, or liquidity but will result in a reclassification on
the Company's consolidated statement of operations for 2001.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment to an exit or
disposal plan. SFAS No. 146 replaces previous accounting guidance provided
by Emerging Issues Task Force ("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)," and
was effective for the Company for exit or disposal activities initiated
after December 28, 2002. The Company adopted this statement effective
December 29, 2002 and has accounted for the Eagan facility shutdown in
accordance with SFAS No. 146.
In November 2002, the FASB issued FASB Interpretation No. ("FIN") 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others". This
Interpretation clarifies that a guarantor is required to recognize a
liability for the fair value of the obligation undertaken in issuing a
guarantee and requires certain related disclosures after December 31, 2002.
The Company has not guaranteed the indebtedness or obligations of others and
therefore the adoption of FIN 45 has had no impact on the Company's
financial position, results of operations, or liquidity.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation - Transition and Disclosure". This Statement amends SFAS
No. 123 to provide alternative methods of transition for a voluntary change
to the fair value method of accounting for stock-based employee
compensation. The statement permits two transition methods for companies
that adopt the fair value method of accounting for stock-based compensation,
which include the modified prospective and retroactive restatement methods.
The modified prospective method recognizes stock-based employee compensation
cost from the beginning of the fiscal year in which the provisions are first
applied, as if the fair value method had been used to account for all
employee awards granted, modified, or settled in fiscal years beginning
after December 15, 1994. Under the retroactive restatement method, all
periods presented are restated to reflect stock-based employee compensation
cost under the fair value method for all employee awards granted, modified,
or settled in fiscal years beginning after December 15, 1994. In addition,
this Statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about
the method of accounting for stock-based employee compensation and the
effect of the method used on reported results with a prescribed specific
tabular format and disclosure in the "Summary of Significant Accounting
Policies" or its equivalent. The Company adopted the new disclosure
requirements in 2002 and the effects of adoption are disclosed in Note 2 of
the Company's condensed consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133
on Derivative Instruments and Hedging Activities". This statement amends
and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. SFAS No. 149 is effective for derivative
contracts entered into or modified after June 30, 2003. As the Company does
not currently have any derivative instruments the adoption of the statement
had no impact on its financial position, results of operations, or
liquidity.
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity".
This statement changes the accounting for mandatorily redeemable shares, put
options, forward purchase contracts and obligations that can be settled with
shares. As the Company does not currently have any interests in such types
of instruments the adoption of this statement had no impact on its financial
position, results of operations, or liquidity.
Note 6. Inventories
The components of the Company's inventories consist of direct labor,
direct materials and the applicable portion of the overhead required to
manufacture the goods.
September 27, December 28,
2003 2002
------- -------
Finished goods..................... $ 24,155 $ 17,611
Work-in-process.................... 1,670 1,891
Raw materials...................... 3,593 5,855
------- -------
$ 29,418 $ 25,357
======= =======
Note 7. 2001 and 2000 Special, Restructuring and Other Charges Update
During 2000 and 2001 the Company implemented a restructuring plan
to reduce fixed costs and better position the Company for sustained
profitability. The restructuring plan entailed the closure of the
Leominster, Massachusetts manufacturing and warehouse facilities,
reconfiguration of remaining manufacturing facilities, a reduction in
headcount and a realignment of the selling process. The restructuring
charges were accounted for under EITF No. 94-3. The Company identified a
total of 124 hourly and salaried Leominster employees to be terminated in
accordance with the 2001 restructuring initiatives. All planned
restructuring initiatives were completed in 2001.
Restructuring reserves were determined based on estimates prepared at
the time the restructuring actions were approved by management and also
reflect any subsequent changes in management estimates. Restructuring
reserves of $1,616, as of September 27, 2003, are considered adequate. Total
net cash outlays were $546 in the thirty-nine week period ended September
27, 2003. Restructuring reserve balances as of December 28, 2002, activity
during the current period and restructuring reserve balances as of September
27, 2003, were as follows:
Reserve Reserve
balance at Amounts balance at
Dec. 28, utilized Sept. 27,
2002 in 2003 2003
------- ------- -------
Inventory $ 27 $ (27) $ -
Leased plant and facilities 1,821 (487) 1,334
Obsolete and duplicate leased assets 289 (57) 232
Employee related costs 52 (2) 50
------- ------- -------
$ 2,189 $ (573) $ 1,616
======= ======= =======
As of September 27, 2003, leased plant and facilities reserves of
$1,334 are primarily related to future minimum lease payments on a partially
vacated facility; obsolete and duplicate leased assets reserves of $232 are
related to future minimum lease payments on machinery and equipment no
longer used in the Company's manufacturing process and employee related
reserves of $50 are primarily related to employee severance and benefits.
Note 8. Eagan Shutdown
On July 29, 2003, the Company announced its intention to close its
Eagan, Minnesota manufacturing and warehouse facility as of January 31, 2004
("Eagan Shutdown"). This closure is being done to reduce operating costs
and utilize capacity in the Company's other injection molding plants. The
Company identified a total of approximately 130 hourly and salaried
employees to be terminated as part of the Eagan Shutdown. The total cost
of the Eagan Shutdown is expected to be about $3.8 million of which
$1.8 million is associated with the accelerated depreciation of property,
plant and equipment that will be sold or abandoned at the time the Company
exits the Eagan facility. Remaining expenditures relate primarily to
employee severance and the relocation of equipment and inventory. Eagan
Shutdown charges for the thirteen and thirty-nine weeks ended September 27,
2003 are included in cost of goods sold.
Thirteen Thirty-nine
weeks ended weeks ended Reserve
Sept. 27, Sept. 27, balance at
2003 2003 Sept. 27,
Charge Charge 2003
-------- -------- --------
Employee separations $ 552 $ 552 $ 552
Other 16 16 12
-------- -------- --------
Total costs $ 568 $ 568 $ 564
-------- -------- --------
Accelerated depreciation 729 969 -
-------- -------- --------
Total Eagan Shutdown charges $ 1,297 $ 1,537 $ 564
======== ======== ========
The components of the charge for the thirty-nine weeks ended September
27, 2003 included:
* Employee separation charges associated with approximately 130 salaried
and hourly employees. The majority of the separations are expected to be
completed during the fourth quarter of 2003;
* Other costs primarily relate to minor costs associated with the Eagan
plant closure and costs associated with the relocation of equipment and
inventory that have been incurred; and
* Charges associated with the accelerated depreciation of property, plant
and equipment that will be sold or abandoned at the time the Company exits
the Eagan facility.
Eagan Shutdown reserves will be re-evaluated as plans are being executed.
As a result, there may be changes in estimates.
Note 9. Income Taxes
The Company uses the asset and liability method of SFAS No. 109 in
accounting for income taxes. Under this method deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, tax credits
and operating loss carryforwards. Deferred tax assets and liabilities are
measured using the enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered
or settled.
SFAS No. 109 requires that a valuation allowance be established when it
is more likely than not that all or a portion of deferred tax assets will
not be realized. A review of all available positive and negative evidence
needs to be considered, including historical earnings and projected
operating results, applicable net operating loss carryforward expiration
dates, and identified actions under the control of the Company in realizing
the associated carryforward benefits. It further states that forming a
conclusion that a valuation allowance is not needed is difficult when there
is negative evidence such as cumulative losses in recent years and current
operating losses. Therefore, cumulative and current operating losses weigh
heavily in the overall assessment. The Company identified several
significant developments which it considered in determining the need for a
full valuation allowance recorded in the third quarter of 2003. As a result
of the review undertaken at September 27, 2003, the Company concluded that
it was appropriate to establish a full valuation allowance for its net
deferred tax assets. Accordingly, the valuation allowance for deferred tax
assets increased from $22.6 million at December 28, 2002, to approximately
$30.4 million at September 27, 2003. In addition, the Company expects to
provide a full valuation allowance on future tax benefits until it can
sustain a level of profitability that demonstrates its ability to utilize
the deferred tax assets.
Note 10. Segment of an Enterprise
The Company consists of a single operating segment that designs,
manufactures and markets quality consumer housewares products. This
segmentation is based on the financial information presented to the chief
operating decision maker. The following table sets forth the net sales by
product category within the Company's single operating segment.
Product Category Information - Net Sales
Thirteen weeks Thirty-nine weeks
ended ended
---------------------------------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
2003 2002 2003 2002
------- ------- -------- --------
General storage .......... $ 25,786 $ 27,077 $ 67,399 $ 61,289
Laundry management ....... 20,847 24,866 57,298 69,977
Closet storage ........... 9,023 8,490 22,463 23,643
Bathware ................. 3,336 5,122 10,643 15,501
Kitchen storage .......... 2,440 2,244 6,807 8,019
------- ------- -------- --------
Total net sales ......... $ 61,432 $ 67,799 $ 164,610 $ 178,429
======= ======= ======== ========
Major Customers
The Company is dependent upon a few customers for a large portion of
its net sales. In the third quarter of 2003, three customers each accounted
for more than 10% of consolidated net sales. The Company's top three
customers, Walmart, Kmart and Target accounted for 30.6%, 30.5% and 11.4% of
consolidated net sales, respectively, in the third quarter of 2003. These
same three customers accounted for 30.2%, 30.4% and 11.2% of consolidated
net sales, respectively, during the thirty-nine weeks ended September 27,
2003. In the third quarter of 2002 three customers each accounted for more
than 10% of consolidated net sales. Walmart, Kmart, and Target accounted
for 32.4%, 28.2% and 14.7% of the Company's consolidated net sales,
respectively, in the third quarter of 2002. These same three customers
accounted for 32.0%, 25.5% and 14.2% of consolidated net sales,
respectively, during the thirty-nine weeks ended September 28, 2002. The
loss of one of these customers could have a material effect on the Company.
No other customer accounted for more than 10% of consolidated net sales in
either 2003 or 2002.
Note 11. Insurance Claim
On September 23, 2003 the Company's Reynosa, Mexico facility sustained
damage due to a fire. At September 27, 2003 prepaid expenses and other
current assets include $1,043 and other non-current assets include $1,172 of
receivables related to expected insurance recoveries.
Note 12. Long-Term Debt
On November 5, 2003 the Company entered into a contract to repurchase
a portion of its high yield bonds. Bonds with a face value of $5.5 million
were purchased at a total cost of $4.0 million on November 10, 2003.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This commentary should be read in conjunction with the Company's
consolidated financial statements and related notes and management's
discussion and analysis of financial condition and results of operations
contained in the Company's Form 10-K for the year ended December 28, 2002.
Critical Accounting Policies
The Company has identified the most critical accounting policies upon
which its financial status depends. The Company determined the critical
policies by considering accounting policies that involve the most complex
or subjective decisions or assessments. The Company states these accounting
policies in the notes to the annual consolidated financial statements and at
relevant sections in this discussion and analysis. This discussion and
analysis should be read in conjunction with the Company's condensed
consolidated financial statements and related notes included elsewhere in
this report and in the Form 10-K.
The Company's most critical accounting policies are those relating to
revenue recognition, allowance for doubtful accounts, inventory valuation,
restructuring reserves, valuation of deferred income tax assets and
valuation of long-lived and intangible assets. A summary of the critical
accounting policies is as follows:
* Revenue recognition. The Company recognizes revenues and freight billed
to customers upon shipment and after the transfer of all substantial
risks of ownership. Allowances for estimated returns, discounts and
retailer programs are recognized when sales are recorded and are based on
various market data, historical trends and information from customers.
Although the best available information is used to establish the
allowances, such information is often based on estimates of retailer
recovery rates. Retailer recovery can sometimes take up to several years
depending on the particular program. Allowances are reviewed quarterly
and are adjusted based on current estimates of retailer recovery. Due to
changes in estimates, changes in retailer activity and the length of time
required for many programs to run their course, it is possible for
allowance activity to impact earnings in either a positive or negative
manner in any given period.
* Allowance for Doubtful Accounts. The Company evaluates the
collectibility of its accounts receivable based upon an analysis of
historical trends, aging of accounts receivable, write-off experience and
credit evaluations of selected high risk customers. Delinquent accounts
are written off to selling, general and administrative expense when
circumstances make further collection unlikely. In the event of a
specific customer bankruptcy or reorganization, specific allowances are
established to write down accounts receivable to the level of anticipated
recovery. The Company may consult with third-party purchasers of
bankruptcy receivables when establishing specific allowances.
* Inventory valuation. The Company values inventory at cost (not in excess
of market) determined by the first-in, first-out (FIFO) method.
Inventory costs are based on standard costs, adjusted for actual
manufacturing and raw material purchase price variances. The Company
includes materials, labor and manufacturing overhead in the cost of
inventories. Management regularly reviews inventory for salability and
has established obsolescence allowances to absorb expected losses. The
Company also maintains allowances for inventory shrinkage. At a minimum,
the Company takes an annual physical inventory verifying the items on
hand and adjusting its inventory to physical counts. Periodic cycle
counting procedures are used to verify inventory accuracy between
physical inventories. In the interim periods, an allowance for shrinkage
is established based upon historical experience and recent physical
inventory results. Inventory obsolescence and shrinkage are charged to
cost of sales.
* Restructuring reserves. The Company's historical policy has been to
record restructuring charges for certain costs associated with plant
closures and business reorganization activities upon approval by
management with the appropriate level of authority in accordance with
Emerging Issues Task Force ("EITF") Issue no. 94-3, "Liability
Recognition for Costs to Exit an Activity (Including Certain Costs
Incurred in a Restructuring)". Such costs were recorded as a liability
and include lease termination costs, employee severance and certain
employee termination benefits. These costs were neither associated with
nor do they benefit continuing business activities. Inherent in the
determination of these costs were assessments related to the most likely
expected outcome of the significant actions to accomplish the
restructuring. The Company reviews the status of restructuring activities
on an ongoing basis and, if appropriate, records changes based on
such activities. In July 2002, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities". This standard requires costs associated with exit or
disposal activities to be recognized when they are incurred. The
requirements of SFAS No. 146 apply prospectively to activities that were
initiated after December 31, 2002. The Company adopted this standard in
fiscal year 2003 and has accounted for the Eagan facility shutdown in
accordance with SFAS No. 146.
* Valuation of Deferred Income Tax Assets. The Company regularly evaluates
its ability to recover the reported amount of our deferred tax assets.
The evaluation considers several factors, including our estimate of the
likelihood that we will generate sufficient taxable income in future
years in which temporary differences reverse. This evaluation is based
primarily on our historical earnings and projected operating results,
applicable net operating loss carryforward expiration dates, and
identified actions under the control of the Company in realizing the
associated carryforward benefits.
The Company currently has significant deferred tax assets resulting from
net operating loss carryforwards, anticipated net operating losses and
other deductible temporary differences, which may reduce taxable income
in future periods to the extent the Company generates profits. Because
the realization of the deferred tax assets was not considered more likely
than not, the Company established a full valuation allowance for its
remaining deferred tax assets and recognized a $7.8 million charge during
the third quarter of 2003.
* Valuation of Long-Lived and Intangible Assets. The Company assesses the
recoverability of long-lived assets whenever it determines that events
or changes in circumstances indicate that their carrying amount may
not be recoverable. In accordance with generally accepted accounting
principles, indefinite lived intangible assets are subject to annual
impairment tests. The Company's assessments and impairment testing are
primarily based upon management estimates of future cash flows associated
with these assets. Based on the Company's assessments, we have
determined that there has not been a material impairment of any of our
long-lived assets or intangible assets. However, should the Company's
operating results deteriorate, we may determine that some portion of
our long-lived tangible or intangible assets are impaired. Such
determination could result in non-cash charges that could materially
affect the Company's consolidated financial position or results of
operations for that period.
Thirteen weeks ended September 27, 2003 compared to the thirteen weeks ended
September 28, 2002
In the discussion and analysis that follows, all references to 2003 are
for the thirteen week period ended September 27, 2003 and all references to
2002 are for the thirteen week period ended September 28, 2002.
The following discussion and analysis compares the actual results for
the third quarter of 2003 to the actual results for the third quarter of
2002 with reference to the following (in thousands, except earnings (loss)
per share; unaudited):
Thirteen weeks ended
--------------------------------------
September 27, 2003 September 28, 2002
------------------ ------------------
Net sales ........................... $ 61,432 100.0% $ 67,799 100.0%
Cost of goods sold .................. 54,492 88.7 51,271 75.6
Special (income), net ............... - - (73) (0.1)
------- ----- ------- -----
Gross profit ...................... 6,940 11.3 16,601 24.5
Selling, general and
administrative expenses............ 7,176 11.7 7,460 11.0
Amortization of intangible assets.... 126 0.2 127 0.2
Restructuring and other charges, net. - - - -
------- ----- ------- -----
Operating profit (loss) ........... (362) (0.6) 9,014 10.3
Interest expense .................... (3,384) (5.5) (3,432) (5.1)
Other income, net ................... 737 1.2 644 0.9
------- ----- ------- -----
Earnings (loss) before income taxes (3,009) (4.9) 6,226 9.1
Income tax expense .................. (7,786) (12.7) (133) (0.2)
------- ----- ------- -----
Net earnings (loss) .............. $(10,795) (17.6%) $ 6,093 8.9%
======= ===== ======= =====
Net earnings (loss) per share:
Basic ............................ $(1.35) $0.78
Diluted .......................... $(1.35) $0.74
Weighted average common shares
outstanding:
Basic ............................ 7,978 7,796
Diluted .......................... 7,978 8,259
Net sales. Net sales of $61.4 million in 2003 were down 9.4% as
compared to net sales in 2002 of $67.8 million. Net sales declined between
periods due primarily to Kmart store closures, selling price declines in
response to competitive pressures and a decline in shelf space at other
customers. In January 2003, Kmart announced the closure of 326 stores,
approximately 18% of their total store count. Most of the stores had been
closed by the end of April. This resulted in a reduction in net sales
between periods of about $2.7 million. Selling prices were $2.0 million
lower than in the third quarter of 2002 due to competitive price challenges.
In addition, shelf space was lost at certain customers as we failed to meet
price challenges on low margin items. Laundry sales in the third quarter of
2003 were down 16% compared to a year ago due in part to lost market share
and pricing actions related to far east imports. Changes in estimates
related to retailer recovery of deductions and customer programs resulted in
a reduction of sales allowances between periods. Such program and deduction
expenses, which are recorded as a reduction of gross sales, were 5.7% of
gross sales in 2003 and 8.4% of gross sales in 2002. The Company's customer
concentration improved slightly from a year ago. Sales to the top three
customers were 72.5% of net sales in 2003 as compared to 75.3% in the prior
period.
Gross profit. The Company's gross profit in the third quarter was $6.9
million in 2003 as compared to $16.6 million in 2002 and gross profit
margins decreased to 11.3% of net sales from 24.5% a year ago. Contributing
factors to the decline in margins were as follows:
* The increased cost of plastic resin. Plastic resin increased $0.06 per
pound in the third quarter as compared to the third quarter of 2002,
resulting in a $3.1 million cost increase (500 basis point decline in
margins).
* Selling price decreases of $2.0 million.
* Changes in product mix towards lower margin general storage products.
General storage products accounted for 42% of total sales, up from 40%
a year ago. General storage is our largest sales product line and also
has the lowest margins. The continuing mix shift towards general
storage and away from laundry and bath had a negative impact on
margins.
* Lower sales levels in the period meant reduced production volume over
which to absorb fixed manufacturing costs.
* Costs related to the closure of the Eagan, Minnesota manufacturing
facility were $1.3 million. These costs include employee separation
charges of $0.6 million, and $0.7 million of charges associated with
the accelerated depreciation of property, plant and equipment that will
be sold or abandoned at the time the Company exits the facility.
Special (income), net. No such income was recorded in the third
quarter of 2003. In the third quarter of 2002, the company recorded income
from Special Charges of $0.1 million. The income resulted from the final
closeout of discontinued inventories related to the 2001 closure of the
Company's former Leominster manufacturing facility.
Selling, general, administrative expenses and amortization of
intangible assets. Selling, general, administrative expenses and
amortization of intangible assets decreased to $7.3 million in 2003 from
$7.6 million in 2002. As a percentage of net sales, selling, general,
administrative expenses and amortization of intangible assets increased to
11.9% in 2003 from 11.2% in 2002. Selling, general and administrative
expenses decreased primarily due to reduced incentive compensation.
Amortization of intangible assets in 2003 was unchanged from a year ago.
Restructuring and other charges, net. There were no such charges
recorded in the third quarter of 2003. In connection with the Company's
2000 restructuring plan, which was announced during the fourth quarter of
2000, changes in management estimates were recorded in the third quarter of
2002. Charges of $0.3 million and $0.1 million were recorded related to
litigation on the early termination of a lease and employee benefit related
costs respectively. Other costs of $0.4 million were reversed to income due
to the favorable resolution of customer accruals.
Interest expense. Interest expense of $3.4 million in 2003 was flat to
the prior year period. There were no variable rate borrowings outstanding
during the third quarter.
Other income. Other income of $0.7 million in 2003 primarily relates
to a $0.9 million gain on the purchase of the Company's high yield bonds.
The Company used its revolving line of credit to buyback bonds at a discount
to face value. In 2002, other income relates to the final purchase price
settlement of the 2001 sale of the Company's servingware product line ($0.7
million).
Income tax expense. The income tax provision in 2003 includes a $7.8
million increase in the Company's valuation allowance for deferred tax
assets. The increase in the valuation allowance means that the Company's
deferred tax assets are now completely reserved. Such allowance reflects
the uncertain nature of future taxable income and management's determination
that it is more likely than not that all of the deferred tax assets may not
be realized. In 2002, the tax provision relates to state and foreign taxes.
No federal income tax expense was recorded in either period due to the
Company's significant tax loss carryforwards. At December 28, 2002 the
Company had tax loss carryforwards of $35 million, which expire in years
2010 through 2020, which may be used to reduce taxes in the future.
However, there is no assurance that future income will be sufficient to
utilize these tax loss carryforwards.
Net earnings (loss). In the third quarter of 2003, the Company had
a net loss of $10.8 million primarily due to increased valuation allowances
for deferred tax assets, increased raw material costs and lower net sales.
This resulted in a loss per diluted share of ($1.35). In the third quarter
of 2002, the Company had net earnings of $6.1 million, or $0.74 per diluted
share.
The diluted weighted average number of shares outstanding decreased to
7,978,326 in 2003 from 8,258,516 in 2002. In 2003, dilutive options,
warrants and restricted stock are not included in the computation of diluted
weighted average shares outstanding because the assumed exercise of such
equivalents would have reduced the loss per share.
Thirty-nine weeks ended September 27, 2003 compared to the thirty-nine weeks
ended September 28, 2002
In the discussion and analysis that follows, all references to 2003 are
for the thirty-nine week period ended September 27, 2003 and all references
to 2002 are for the thirty-nine week period ended September 28, 2002.
The following discussion and analysis compares the actual results for
2003 to the actual results for 2002 with reference to the following (in
thousands, except earnings (loss) per share; unaudited):
Thirty-nine weeks ended
--------------------------------------
September 27, 2003 September 28, 2002
------------------ ------------------
Net sales ........................... $164,600 100.0% $178,429 100.0%
Cost of goods sold .................. 141,376 85.9 133,597 74.9
Special (income), net ............... - - (73) (0.0)
------- ----- ------- -----
Gross profit ...................... 23,234 14.1 44,905 25.1
Selling, general and
administrative expenses............ 22,790 13.8 22,965 12.9
Amortization of intangible assets.... 378 0.2 380 0.2
Restructuring and other charges, net. - - - -
------- ----- ------- -----
Operating profit .................. 66 0.1 21,560 12.0
Interest expense .................... (10,312) (6.3) (10,370) (5.7)
Other income, net ................... 806 0.5 501 0.3
------- ----- ------- -----
Earnings (loss) before income taxes (9,440) (5.7) 11,691 6.5
Income tax expense .................. (7,830) (4.8) (433) (0.2)
------- ----- ------- -----
Net earnings (loss) ............... $(17,270) (10.5%) $ 11,258 6.3%
======= ===== ======= =====
Net earnings (loss) per share:
Basic ............................. $(2.17) $1.45
Diluted ........................... $(2.17) $1.37
Weighted average common shares
outstanding:
Basic ............................. 7,973 7,785
Diluted ........................... 7,973 8,217
Net sales. Net sales of $164.6 million in 2003 were down 7.7% as
compared to net sales in 2002 of $178.4 million. Net sales declined between
periods due primarily to Kmart store closures, selling price declines in
response to competitive pressures, a decline in shelf space at other
customers, and a weak retailer environment in the first quarter of 2003. In
January 2003, Kmart announced the closure of 326 stores, approximately 18%
of their total store count. Most of the stores had been closed by the end
of April. This resulted in a reduction in net sales between periods of
about $8.0 million. Selling prices were $4.0 million lower than in the year
ago period due to competitive price challenges. In addition, shelf space
was lost at certain customers as we failed to match low price challenges on
low margin items. Laundry sales in the first nine months were down 18%
compared to a year ago due in part to lost market share and pricing actions
related to far east imports. Changes in estimates related to retailer
recovery of deductions and customer programs resulted in a reduction of
sales allowances between periods. Such program and deduction expenses,
which are recorded as a reduction of gross sales, were 6.6% of gross
sales in 2003 and 8.8% of gross sales in 2002. The Company's customer
concentration was unchanged from a year ago. Sales to the top three
customers were 72% of net sales in both periods.
Gross profit. The Company's gross profit in the thirty-nine week period
was $23.2 million in 2003 as compared to $44.8 million in 2002 and gross
profit margins decreased to 14.1% of net sales from 25.1% a year ago.
Contributing factors to the decline in margins were as follows:
* The increased cost of plastic resin. Plastic resin increased $0.07 per
pound in the nine-month period as compared to the same period a year
ago, resulting in a $9.6 million cost increase (580 basis point decline
in margins).
* Selling price decreases of $4.0 million.
* Changes in product mix towards lower margin general storage products.
General storage products accounted for 41% of total sales, up from 34%
a year ago. General storage is our largest sales product line and also
has the lowest margins. The continuing mix shift towards general
storage and away from laundry and bath had a negative impact on
margins.
* Lower sales levels in the period also meant reduced production volume
over which to absorb fixed manufacturing costs.
* Costs related to the closure of the Eagan, Minnesota manufacturing
facility were $1.5 million. These costs include employee separation
charges of $0.6 million, and $0.9 million of charges associated with
the accelerated depreciation of property, plant and equipment that will
be sold or abandoned at the time the Company exits the facility.
Special (income), net. No such income was recorded in 2003. In 2002,
the Company recorded income from Special Charges of $0.1 million. The
income resulted from the final closeout of discontinued inventories related
to the 2001 closure of the Company's former Leominster manufacturing
facility.
Selling, general, administrative expenses and amortization of
intangible assets. Selling, general, administrative expenses and
amortization of intangible assets decreased to $23.2 million in 2003 from
$23.3 million in 2002. As a percentage of net sales, selling, general,
administrative expenses and amortization of intangible assets increased to
14.0% in 2003 from 13.1% in 2002. Selling, general and administrative
expenses were impacted by premiums associated with accounts receivable
insurance as well as professional fees related to corporate governance,
Sarbanes-Oxley matters and the pursuit of antidumping relief. Offsetting
these expense increases were declines in incentive compensation expense,
warehousing costs and bad debt expense. Amortization of intangible assets
in 2003 was unchanged from a year ago.
Restructuring and other charges, net. There were no such charges
recorded in 2003. In connection with the Company's 2000 restructuring plan,
which was announced during the fourth quarter of 2000, changes in management
estimates were recorded in the third quarter of 2002. Charges of $0.3
million and $0.1 million were recorded related to litigation on the early
termination of a lease and employee benefit related costs respectively.
Other costs of $0.4 million were reversed to income due to the favorable
resolution of customer accruals.
Interest expense. Interest expense of $10.3 million in the thirty-nine
week period was essentially unchanged from the prior year period. There
were no variable rate borrowings outstanding during the first thirty-nine
weeks of 2003.
Other income. Other income of $0.8 million in 2003 primarily relates
to a $0.9 million gain on the repurchase of the Company's high yield bonds.
The Company used its revolving line of credit to buyback bonds at a discount
to face value. In 2002, other income relates to the final purchase price
settlement of the 2001 sale of the Company's servingware product line ($0.7
million).
Income tax expense. The income tax provision in 2003 includes a $7.8
million increase in the Company's valuation allowance for deferred tax
assets. The increase in the valuation allowance means that the Company's
deferred tax assets are now completely reserved. Such allowance reflects
the uncertain nature of future taxable income and management's determination
that it is more likely than not that all of the deferred tax assets may not
be realized. In 2002, the tax provision relates to state and foreign taxes.
No federal income tax expense was recorded in either period due to the
Company's significant tax loss carryforwards. At December 28, 2002 the
Company had tax loss carryforwards of $35 million, which expire in years
2010 through 2020, which may be used to reduce taxes in the future.
However, there is no assurance that future income will be sufficient to
utilize these tax loss carryforwards.
Net earnings (loss). In the first thirty-nine weeks of 2003 the
Company had a net loss of $17.3 million primarily due to increased valuation
allowances for deferred tax assets, increased raw material costs and lower
net sales. This resulted in a loss per diluted share of ($2.17). In the
comparable period of 2002, the Company had net earnings of $11.3 million,
or $1.37 per diluted share.
The diluted weighted average number of shares outstanding decreased to
7,973,434 in 2003 from 8,216,783 in 2002. In 2003, dilutive options,
warrants and restricted stock are not included in the computation of diluted
weighted average shares outstanding because the assumed exercise of such
equivalents would have reduced the loss per share.
Capital Resources and Liquidity
The Company's primary sources of liquidity and capital resources
include cash provided from operations and borrowings under the Company's
credit facility.
The Company's cash and cash equivalents decreased to $2.8 million at
September 27, 2003 from $4.0 million at December 28, 2002. The decrease in
cash since December 28, 2002 is primarily the result of the Company's buy
back of high yield bonds and the Company's year-to-date operating loss.
Bonds with a face value of $3.5 million have been purchased at a total cost
of $2.6 million. Although the Company reported a $17.3 million loss for the
first thirty-nine weeks, $15.3 million of the loss relates to non-cash
charges for depreciation, amortization and valuation allowances for deferred
tax assets. Most of the cash reduction caused by the decline in earnings
was offset by reductions in working capital. Working capital (excluding
cash and short term debt) at September 27, 2003 was down $11.4 million from
December 28, 2002. Receivables decreased $14.0 million due to lower sales
in the third quarter of 2003 as compared to the fourth quarter of 2002
primarily attributable to a seasonal reduction in the Company's sales.
Inventories increased $5.1 million in the thirty-nine week period due to
seasonal builds for the higher fourth quarter shipping period. Accounts
payable increased $3.7 million in line with inventory increases and higher
raw material costs. Accrual balances declined $3.3 million during the
thirty-nine week period due to the payment of various annual volume rebates
and other sales program incentives.
Capital spending in the thirty-nine week period was $5.0 million as
compared to $3.6 million in the comparable period of 2002. Capital spending
was primarily related to new product tooling and normal replacement of
equipment.
The Company believes its $50 million line of credit, together with its
existing cash and cash flow from operations, will provide sufficient capital
to fund operations, make required interest payments and meet anticipated
capital spending needs for the next 12 months. No line of credit borrowings
were outstanding at September 27, 2003, but there were approximately $3
million in issued letters of credit. Total borrowing availability under the
line of credit was $47 million. There are no required debt principal
repayments until May 2008.
The Company was in compliance with all loan covenants as of September
27, 2003.
During the third quarter of 2003 the Company's Board of Directors
authorized the buyback of up to $15 million of the Company's outstanding
high yield bonds. As of September 27, 2003 the Company had repurchased
bonds at a cost of $2.6 million.
On July 31, 2003, the Company and Fleet Capital Corporation entered
into several amendments to the Company's existing $50 million asset based
senior loan facility. The amendments extend the life of the facility by 29
months to March 31, 2008 and also provide expanded definitions of
availability. The amendments added approximately $13 million to net
availability under the senior loan facility.
On September 19, 2003, the Company and Fleet Capital Corporation
entered into a fourth amendment to the Company's existing $50 million asset
based senior loan facility. The amendment significantly decreased the
Company's one financial covenant, cash interest coverage ratio, to
accommodate management's forecast of future operating results. The cash
interest coverage ratio was reduced from 1.25 to 0.70 as of September 27,
2003, the end of the Company's third fiscal quarter. The cash interest
coverage ratio will remain at 0.70 until June 2004 at which point the ratio
begins a quarterly increase until it returns to the 1.25 level in June 2005.
The amendment had no impact on the Company's borrowing base, line of credit
or interest rates. For a definition of cash interest coverage ratio as it
is used in the senior loan facility refer, to the Company's Current Report
on Form 8-K filed on September 24, 2003.
The following is a table providing the aggregate annual contractual
obligations of the Company including debt, capital lease obligations and
future minimum rental commitments under operating leases at September 27,
2003 and the effect such obligations are expected to have on our liquidity
and cash flows in future periods.
Payments due by period
----------------------
(in thousands)
After
Contractual Obligations Total 1 year 2-3 years 4-5 years 5 years
----------------------- ------- ----- ------ ------- ------
Long-term debt $121,500 $ - $ - $121,500 $ -
Capital lease obligations 14,127 949 1,873 1,847 9,458
Minimum rental commitments
under operating leases 21,070 5,742 8,677 4,730 1,921
------- ----- ------ ------- ------
Total contractual
cash obligations $156,697 $6,691 $10,550 $128,077 $11,379
======= ===== ====== ======= ======
Financing commitments expiring by period
----------------------------------------
(in thousands)
After
Total 1 year 2-3 years 4-5 years 5 years
----- ----- ------ ------- ------
Standby letters of credit $3,000 $3,000 $ - $ - $ -
===== ===== ====== ======= ======
The Company has entered into commitments to purchase certain minimum
annual volumes of plastic resin at formula-based prices. The agreements
expire in December 2003 and December 2004. Future related minimum
commitments to purchase plastic resin, assuming current price levels, are
$13 million in 2003 and $35 million in 2004. The purchase commitment
pricing is not tied to fixed rates; therefore, the Company's results of
operations or financial position could be affected by significant changes in
the market cost of plastic resin. See "Item 3 Quantitative and Qualitative
Disclosures About Market Risk" - Commodity Risk, which is incorporated by
reference to this section, for further details.
Management Outlook and Business Risks
* The Company's largest customer in 2002 and during the first thirty-nine
weeks of 2003 was Kmart. The Company's net sales to Kmart were $74
million in fiscal year 2002 and $50.1 million in the first thirty-nine
weeks of 2003. In January 2003, Kmart announced the closure of 326
stores, approximately 18% of their total store count. The store closings
have resulted and will likely continue to result in a reduction in net
sales to Kmart in 2003 as compared to 2002. In May 2003, Kmart emerged
from bankruptcy with secured financing of $2 billion. As in 2002,
opportunities exist to further expand our business with Kmart. These
will be considered in light of Kmart's financial situation, our
manufacturing capacity levels and other factors deemed appropriate by
management. Given the dynamic nature and the size of the Company's sales
to Kmart, future results may be either favorably or unfavorably impacted
by any number of factors related to the retailer.
* Historically, plastic resin has represented approximately 20% to 25% of
the Company's cost of goods sold. In the first thirty-nine weeks of
2003, the percentage increased to 31% due to higher plastic resin costs
and usage. Plastic resin costs are impacted by several factors outside
the control of the Company including supply and demand characteristics,
oil and natural gas prices and the overall health of the economy. Any of
these factors could potentially have a positive or negative impact on
plastic resin prices and the Company's profitability. Resin costs in the
first thirty-nine weeks of 2003 were approximately $0.07 per pound higher
than our 5 year historic averages and $0.08 per pound over last year's
comparable period. Resin costs are expected to increase slightly during
the remainder of 2003 and into 2004. We expect that fourth quarter costs
could be $0.07-$0.09 per pound over historic averages and $0.03-$0.04 per
pound over last year's fourth quarter. We expect that fourth quarter
results in 2003 as compared to the fourth quarter of 2002 will be
negatively affected. While we will make every effort to recover the
higher cost of plastic resin, there is no assurance that future resin
cost increases can be passed on to customers
* On July 29, 2003, the Company announced its intention to close its Eagan,
Minnesota manufacturing and warehouse facility as of January 31, 2004.
This closure is being done to reduce operating costs and utilize capacity
in the Company's other injection molding plants. The total cost of the
closing is expected to be about $3.8 million of which $1.8 million will
relate to non-cash net asset writedowns. Remaining expenditures relate
primarily to employee severance and the relocation of equipment and
inventory. The Company expects to realize annual cash savings as a
result of the plant closing and currently estimates that the cash savings
in the first year will be approximately $2 million (excluding plant
closing costs). However, the process of closing facilities, moving
equipment and reallocating production and sourcing capabilities often
involves unforeseen difficulties and may require a disproportionate
amount of the Company's financial and other resources, including
management time. Accordingly, there can be no assurance that the Company
will not incur unanticipated plant closing costs or experience
unanticipated difficulties and costs associated with the relocation of
equipment or the manufacture or sourcing of products, any of which could
have a material adverse effect on the Company's anticipated cash savings.
* The Company currently manufacturers the majority of its laundry products
in the U.S. and Mexico. Management believes that its current
manufacturing structure provides increased flexibility to meet customer
needs. All of the Company's laundry competitors rely heavily on foreign
sourced products. Such products are sourced from several countries,
including a significant portion from China. These foreign sourced
competitive products have been introduced at selling prices below ours.
This has caused our profit margins and market share to decline. We have
initiated many cost cutting and other steps to protect our market share
and profit margins and have begun to aggressively explore and increase
the importation of certain laundry products. We will continue to analyze
the competitiveness of our North American based laundry manufacturing
operations. In addition to continuing cost cutting measures, the Company
filed an action with the U.S. International Trade Commission and the U.S.
Department of Commerce on June 30, 2003 seeking relief from a surge
in the importation of illegally priced Chinese ironing boards. The
Company's petition demands the imposition of antidumping duties on the
imported Chinese ironing boards. The Company intends to vigorously
pursue this matter, which may require it to devote financial and other
resources, including management time and increased legal expense. There
can be no assurance as to the timing or outcome of this proceeding.
* During 2002, Congress enacted legislation designed to provide higher
standards of corporate governance. While the legislation provides many
good measures to protect shareholders, it also will add to our cost
of operations and the cost of retaining competent Board members. We
estimate that the cost of compliance with the new legislation and the
increased costs associated with our Board of Directors will add
approximately $0.5 million to our operating expenses in 2003.
* As a result of operating losses and restructuring write-offs in prior
years, the Company has significant tax loss carryforwards. These
carryforwards may be used to reduce taxable income in future periods.
The Company had tax loss carryforwards of $35 million (amount includes
carryforwards of $9 million subject to annual limitation) as of December
28, 2002. The tax loss carryforwards are expected to increase in 2003.
* The Company is highly leveraged with total debt representing over two
times our net tangible assets. Although all of the Company's outstanding
debt at September 27, 2003 is at fixed rates, any deterioration in our
business could lead to additional borrowings at adjustable rates. Thus a
deterioration of our business combined with a significant change in
interest rates could materially impact earnings and cash flow.
Furthermore, the financial and operating covenants related to the
Company's debt agreements place some restrictions on operations. During
all of 2002 and during the first thirty-nine weeks of 2003, the Company
operated within its financial and operating covenants, which were amended
during the third quarter of 2003, and expects to continue to operate
within the covenants during the fourth quarter of 2003 and fiscal year
2004.
* The Company's financing arrangements and financial covenants with Fleet
Capital take into account seasonal fluctuations and changes to the
Company's collateral base. Because the financing is asset based,
availability of funds to borrow is dependent on the quality of the
Company's asset base, primarily its receivables and inventory. Should
Fleet Capital determine that such assets do not meet the bank's credit
tests, availability can be restricted. Given the Company's retail
customer base, it is possible that certain customers could be excluded
from the asset base thus reducing credit availability.
* Given the Company's line of credit availability, management may from
time-to-time look at opportunities to buy its high yield bonds. A
buyback might be done if such transactions are accretive to shareholders
through either a reduction of interest expense or a buyback of bonds at a
discount.
* Management believes that acquisitions provide an opportunity to
meaningfully grow the Company's sales and profits. We expect to consider
acquisition opportunities that are synergistic to existing operations.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's primary market risk is impacted by changes in interest
rates and price volatility of certain commodity based raw materials.
Interest Rate Risk. The Company's revolving credit agreement is LIBOR-
based and is subject to interest rate movements. During the thirteen and
thirty-nine weeks ended September 27, 2003, the Company did not experience
any material changes in interest rate risk that would affect the disclosures
presented in the Company's Annual Report on Form 10-K for the fifty-two week
period ended December 28, 2002.
Commodity Risk. The Company is subject to price fluctuations in
commodity based raw materials such as plastic resin, steel and griege
fabric. Changes in the cost of these materials may have a significant impact
on the Company's operating results. The cost of these items is affected by
many factors outside of the Company's control and changes to the current
trends are possible. See "Management Outlook and Business Risks" above.
The Company has entered into commitments to purchase certain minimum
annual volumes of plastic resin at formula-based prices. The agreements
expire in December 2003 and December 2004. Future related minimum
commitments to purchase plastic resin, assuming current price levels, are
$13 million in 2003 and $35 million in 2004. The purchase commitment pricing
is not tied to fixed rates; therefore, the Company's results of operations
or financial position could be affected by significant changes in the market
cost of plastic resin. In the event there is a major change in economic
conditions affecting the Company's overall annual plastic resin volume
requirements, the Company and the vendor will mutually agree on how to
mitigate the effects on both parties. Mitigating actions include deferral
of product delivery within the agreement term, agreement term extension
and/or elimination of excess quantities without liability.
Item 4. Controls and Procedures
Maintenance of Disclosure Controls and Procedures. The Company
maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in the Company's Exchange Act
reports is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and Exchange
Commission, and that such information is accumulated and communicated to
Company management, including its principal executive officer and principal
financial officer, as appropriate, to allow timely decisions regarding
required disclosure.
Limitations of Disclosure Controls and Procedures. In designing and
evaluating the disclosure controls and procedures, the Company's management,
including its principal executive officer and principal financial officer,
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the
control system's objectives will be met. Because of the inherent limitations
in all control systems, no controls and no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud,
if any, within the Company have been detected. These inherent limitations
include the realities that judgments in designing, implementing and
evaluating controls can be faulty, and that breakdowns can occur because of
simple error or mistake. Controls can also be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the controls. The design of any system of controls is based in
part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, controls may
become inadequate because of changes in conditions or deterioration in the
degree of compliance with policies or procedures. Because of the inherent
limitations in a cost-effective control system, misstatements due to error
or fraud may occur and may not be detected.
Quarterly Review. Under the supervision and with the participation of
the Company's management, including the Company's principal executive
officer and principal financial officer, the Company conducted an evaluation
of its disclosure controls and procedures, as such term is defined under
Rule 12a-14 promulgated under the Securities Exchange Act of 1934, as
amended, as of September 27, 2003. Based on that evaluation, the Company's
principal executive officer and principal financial officer concluded that,
as of the date of such evaluation, the Company's disclosure controls and
procedures were adequate and designed to ensure that material information
relating to the Company and its consolidated subsidiary would be made known
to them by others within those entities, particularly during the periods
when periodic reports under the Exchange Act are being prepared.
Changes in internal control over financial reporting. There were no
changes in the Company's internal control over financial reporting,
identified in connection with the evaluation of such control, that occurred
during the fiscal quarter covered by this report that has materially
affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
Forward Looking Statements
This quarterly report on Form 10-Q, including the "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
"Management Outlook and Business Risks" and "Quantitative and Qualitative
Disclosures about Market Risk" sections, contain forward-looking statements
within the meaning of the "safe-harbor" provisions of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements generally may be
identified by the use of terminology such as "may," "will," "could,"
"should," "potential," "continue," "expect," "intend," "plan," "estimate,"
"anticipate," "believe," or similar phrases or the negatives of such terms.
Such statements are based on management's current expectations and are
subject to risks, uncertainties and assumptions, including those identified
below and in the foregoing "Business Risks," as well as other matters not
yet known to the Company or not currently considered material by the
Company, which could cause actual results to differ materially from those
described in the forward-looking statements. Such factors and uncertainties
include, but are not limited to:
* the Company's dependence on a few large customers
* price fluctuations in the raw materials used by the Company,
particularly plastic resin
* unanticipated plant closing costs
* unanticipated difficulties and costs associated with the relocation
of equipment and the manufacture or sourcing of products
* competitive conditions in the Company's markets
* general economic conditions and conditions in the retail environment
* the impact of the level of the Company's indebtedness
* restrictive covenants contained in the Company's various debt
documents
* the seasonal nature of the Company's business
* fluctuations in the stock market
* the extent to which the Company is able to retain and attract key
personnel
* relationships with retailers
* the impact of federal, state and local environmental requirements
(including the impact of current or future environmental claims
against the Company)
* our ability to develop and introduce new products and product
modifications necessary to remain competitive
* other factors discussed in "Management Outlook and Business Risks"
above
Given these risks and uncertainties, investors are cautioned not to
place undue reliance on such forward-looking statements. Forward-looking
statements do not guarantee future performance. The Company's operating
results may fluctuate, especially when measured on a quarterly basis. The
Company undertakes no obligation to republish revised forward-looking
statements to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events. Readers are also urged to
carefully review and consider the various disclosures made by the Company in
this report and in the Company's periodic reports on Forms 10-K, 10-Q and 8-
K filed with the Securities and Exchange Commission. Such reports attempt
to advise interested parties of the factors that affect the Company's
business.
PART II. OTHER INFORMATION
Items 1, 2, 3, 4 and 5 of this Part II are either inapplicable or are
answered in the negative and are omitted pursuant to the instructions to
Part II.
Item 5. Other Information
On November 7, 2003, Jeffrey C. Rubenstein resigned from his position
as a director serving on the Company's Board of Directors. Mr. Rubenstein
did not resign because of a disagreement on any matter relating to the
Company's operations, policies or practices.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Fourth Amendment to Loan and Security Agreement made as of
September 19, 2003 by and among Home Products International -
North America, Inc. and Fleet Capital Corporation.
Incorporated by reference from Exhibit 10.1 to Form 8-K
filed on September 24, 2003.
31.1 Certification of James R. Tennant, Chief Executive Officer
and Chairman of the Board, dated November 11, 2003 pursuant
to Section 302 of The Sarbanes-Oxley Act of 2002.
31.2 Certification of James E. Winslow, Executive Vice President
and Chief Financial Officer, dated November 11, 2003 pursuant
to Section 302 of The Sarbanes-Oxley Act of 2002.
32.1 Certification of James R. Tennant, Chief Executive Officer
and Chairman of the Board, dated November 11, 2003 pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of The Sarbanes-Oxley Act of 2002.
32.2 Certification of James E. Winslow, Executive Vice President
and Chief Financial Officer, dated November 11, 2003 pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of The Sarbanes-Oxley Act of 2002.
(b) Current reports on Form 8-K.
Registrant filed a Current Report on Form 8-K dated June 30, 2003 to
disclose that the Registrant issued a press release disclosing that
it filed an action with the U.S. International Trade Commission and
the U.S. Department of Commerce.
Registrant filed a Current Report on Form 8-K dated July 29, 2003 to
disclose that the Registrant issued a press release disclosing its
financial results for its second quarter 2003.
Registrant filed a Current Report on Form 8-K dated September 24,
2003 to disclose that on September 19, 2003 the Registrant reached an
agreement with Fleet Capital Corporation, to amend the registrant's
loan and security agreement.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Home Products International, Inc.
By: /s/ James E. Winslow
--------------------------------
James E. Winslow
Executive Vice President and
Chief Financial Officer
Dated: November 11, 2003