UNITED STATES
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 Period Ended September 25, 1999
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
Common shares, par value $0.01, outstanding as of October 31, 1999 -
7,223,702
<PAGE>
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 and Retained Earnings 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 10
Item 3. Quantitative and Qualitative
Disclosures About Market Risk 19
Part II. Other Information
Items 1 through 5 are not applicable
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
<PAGE>
PART I Financial Information
ITEM 1. Financial
Statements
<TABLE>
HOME PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
September 25, December 26,
1999 1998
(unaudited)
------- -------
<S> <C> <C>
Assets
Current assets:
Cash ....................................... $ 3,286 $ 4,986
Accounts receivable, net ................... 54,790 50,238
Inventories, net ........................... 28,616 25,296
Prepaid expenses and other current assets .. 1,703 6,880
------- -------
Total current assets ..................... 88,395 87,400
Property, plant and equipment - at cost....... 97,038 87,854
Less accumulated depreciation................. (29,601) (27,654)
Property, plant and equipment, net............ 67,437 60,200
Intangible and other assets................... 188,696 192,443
------- -------
Total assets.................................. $344,528 $340,043
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term obligations $ 5,558 $ 3,549
Accounts payable ........................... 27,852 20,510
Accrued liabilities ........................ 39,023 35,664
------- -------
Total current liabilities ................ 72,433 59,723
Long-term obligations - net of current
maturities................................... 215,312 219,536
Other liabilities............................. 2,876 2,783
Stockholders' equity:
Preferred Stock - authorized, 500,000
shares, $.01 par value; None issued ....... - -
Common Stock - authorized 15,000,000 shares,
$.01 par value; 8,046,096 shares issued at
September 25, 1999 and 8,024,123 shares
issued at December 26, 1998 ............... 81 80
Additional paid-in capital ................. 48,790 48,455
Retained earnings .......................... 11,564 12,259
Common Stock held in treasury - at cost;
822,394 shares September 25, 1999 and
376,462 shares issued at December 26, 1998 (6,528) (2,642)
Currency translation adjustments ........... - (151)
------- -------
Total stockholders' equity ............... 53,907 58,001
------- -------
Total liabilities and stockholders' equity.... $344,528 $340,043
======= =======
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
HOME PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Statements of Operations and Retained Earnings
(unaudited)
(in thousands, except per share amounts)
<CAPTION>
Thirteen Weeks Thirty-nine
Ended Weeks Ended
------------------- ------------------
Sept 25, Sept 26, Sept 25, Sept 26,
1999 1998 1999 1998
------ ------ ------- -------
<S> <C> <C> <C> <C>
Net sales ...................... $79,737 $68,243 $220,103 $175,637
Cost of goods sold ............. 52,917 45,874 144,144 118,435
Special charge ................. 8,947 - 8,947 -
------ ------ ------- -------
Gross profit ................ 17,873 22,369 67,012 57,202
Operating expenses
Selling ..................... 10,491 8,182 30,093 20,720
Administrative .............. 3,840 3,817 12,806 10,713
Amortization of intangible
assets ..................... 1,341 1,203 4,082 3,068
Restructuring and other
charges .................... 5,610 - 5,610 -
Other nonrecurring charges . 443 - 443 -
------ ------ ------- -------
21,725 13,202 53,034 34,501
------ ------ ------- -------
Operating profit ............ (3,852) 9,167 13,978 22,701
Other income (expense)
Interest income ............. 39 41 143 96
Interest (expense) .......... (5,091) (3,872) (15,019) (10,260)
Other income (expense), net . 128 1 239 53
------ ------ ------- -------
(4,924) (3,830) (14,637) (10,111)
------ ------ ------- -------
Earnings (loss) before income
taxes and extraordinary charge (8,776) 5,337 (659) 12,590
Income tax benefit (expense) ... 3,363 (2,223) (36) (5,201)
------ ------ ------- -------
Earnings (loss) before
extraordinary charge .......... (5,413) 3,114 (695) 7,389
Extraordinary charge for early
retirement of debt, net of tax
benefit of $3,698 ............. - - - (5,107)
------ ------ ------- -------
Net earnings (loss) ............ (5,413) 3,114 (695) 2,282
Retained earnings at beginning
of period ..................... 16,977 7,784 12,259 8,616
------ ------ ------- -------
Retained earnings at end of
period ........................ $11,564 $10,898 $ 11,564 $ 10,898
====== ====== ======= =======
<PAGE>
Net earnings (loss) per common
share - basic ($0.74) $ 0.39 ($0.09) $ 0.29
====== ====== ======= =======
Net earnings (loss) per common
share-diluted .................. ($0.74) $ 0.38 ($0.09) $ 0.28
====== ====== ======= =======
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
HOME PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
<CAPTION>
Thirty-nine Weeks Ended
Sept 25, Sept 26,
1999 1998
------ -------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) ....................... $ (695) $ 2,282
Adjustments to reconcile net earnings to
Net cash provided (used) by operating
activities:
Depreciation and amortization ............ 12,021 9,314
Changes in assets and liabilities:
(Increase) in accounts receivable ...... (5,604) (9,755)
(Increase) decrease in inventories ..... (4,160) 1,854
Decrease (increase) in prepaids and other
current assets ........................ 5,141 (2,023)
Increase in accounts payable ........... 7,747 3,061
(Increase) decrease in accrued
liabilities ............................ (156) 3,596
Other operating activities, net .......... (1,698) 5,604
------ -------
Net cash provided by operating activities.. 12,596 13,933
------ -------
Cash flows from investing activities:
Proceeds on sale of business .............. 4,692 -
Proceeds on sale of building .............. 977 -
Seymour acquisition, net of cash acquired . - (14,882)
Tenex acquisition, net of cash acquired .. - (16,725)
Prestige Plastics acquisition, net of cash
acquired ................................. - (78,321)
Capital expenditures ...................... (14,061) (7,729)
------ -------
Net cash (used) for investing activities.... (8,392) (117,657)
------ -------
Cash flows from financing activities:
Payments on borrowings .................... (2,250) (219,218)
Net proceeds from borrowings and warrants . - 286,672
Net proceeds from borrowings under revolving
line of credit ............................ 300 41,931
Purchase of treasury stock ................. (3,886) -
Payment of capital lease obligation ........ (265) (184)
Exercise of common stock options and
issuance of common stock under stock
purchase plan ............................ 197 211
------ -------
Net cash provided (used) by financing
activities................................. (5,904) 109,412
------ -------
Net increase in cash and cash equivalents . (1,700) 5,688
Cash and cash equivalents at beginning of
period ................................... 4,986 583
------ -------
Cash and cash equivalents at end of period $ 3,286 $ 6,271
====== =======
<PAGE>
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest .................................. $10,698 $ 359
Income taxes .............................. 3,478 817
The accompanying notes are an integral part of the financial
statements.
</TABLE>
<PAGE>
HOME PRODUCTS INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(in thousands except per share amounts)
Note 1. 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 housewares products. The
Company's products are marketed principally through mass market trade
channels throughout the United States and internationally.
The condensed consolidated financial statements include the
accounts of the Company and its subsidiary companies. All significant
intercompany transactions and balances have been eliminated.
The unaudited condensed consolidated financial statements
included herein as of September 25, 1999 and for the thirteen and
thirty-nine weeks ended September 25, 1999 and September 26, 1998
reflect, in the opinion of the Company, all adjustments (which include
only normal recurring adjustments) necessary for the fair presentation
of the financial position, the results of operations and cash flows.
These unaudited financial statements should be read in conjunction
with the audited financial statements and related notes thereto
included in the Company's 1998 Annual Report on Form 10-K. The
results for the interim periods presented are not necessarily
indicative of results to be expected for the full year.
Note 2. Inventories are summarized as follows:
September December
25, 1999 26, 1998
------ ------
Finished goods ................... $17,715 $15,771
Work-in-process .................. 3,829 3,487
Raw materials .................... 7,072 6,038
------ ------
$28,616 $25,296
<PAGE>
Note 3. The following information reconciles earnings per share -
basic and earnings per share - diluted:
<TABLE>
Thirteen Weeks Thirty-nine Weeks
Ended Ended
----------------- -----------------
Sept 25, Sept 26, Sept 25, Sept 26,
1999 1998 1999 1998
------ ----- ------ -----
<S> <C> <C> <C> <C>
Net earnings (loss) ............. $(5,413) $3,114 $ (695) $2,282
Weighted average common shares
outstanding - basic ............ 7,272 7,961 7,465 7,946
Impact of stock options and
warrants ....................... 197 211 185 311
------ ----- ------ -----
Weighted average common shares
outstanding - diluted .......... 7,469 8,172 7,650 8,257
====== ===== ====== =====
Net earnings (loss) per share -
basic .......................... $(0.74) $0.39 $(0.09) $0.29
Net earnings (loss) per share -
diluted ........................ $(0.74) $0.38 $(0.09) $0.28
</TABLE>
As a result of the net loss in the thirteen and thirty-nine week
periods ended September 25, 1999, the basic weighted average shares
outstanding value is used for both the basic and diluted calculation
to prevent diluted earnings per share from being antidilutive.
Note 4. The provision for income taxes is determined by applying an
estimated annual effective tax rate (federal, state and foreign
combined) to income before taxes. The estimated annual effective
income tax rate is based upon the most recent annualized forecast of
pretax income and permanent book/tax differences.
<PAGE>
Note 5. Special, restructuring and other nonrecurring charges
<TABLE>
Expected Non cash
Cash charge Totals
charge
------- ------- -------
<S> <C> <C> <C>
Cost of
goods sold:
Special SKU reduction and
charges: inventory adjustments $ 1,515 $ 5,555 $ 7,070
Production and
distribution facilities 830 149 979
Discontinued molds - 898 898
------- ------- -------
Subtotal $ 2,345 $ 6,602 $ 8,947
Operating Exp.:
Restructuring
and other
charges Employee related costs $ 1,369 $ - $ 1,369
Write-off of assets 166 3,557 3,723
Transaction costs 444 74 518
------- ------- -------
Subtotal $ 1,979 $ 3,631 $ 5,610
Other
nonrecurring
charges Employee related costs $ 293 $ - $ 293
HOMZ brand 150 - 150
------- ------- -------
Subtotal $ 443 $ - $ 443
------- ------- -------
Total Charges $ 4,767 $ 10,233 $ 15,000
Tax benefit - 40% (6,000)
-------
Net (benefit) charge $ 9,000
</TABLE>
In July 1999, the Company announced a restructuring plan to
further maximize its marketing and operational productivity and to
further strengthen relationships with its key retail partners. The
major elements of the restructuring focus on a newly created national
branding strategy, elimination of low volume stock keeping units,
(sku's) and the consolidation of sales, marketing and administrative
functions. The Company's commitment is to become a "one company, one
brand" supplier to its customers.
<PAGE>
When fully implemented all products will go to market under the
HOMZ brand. Along with this change, the Company has consolidated its
Tamor and Selfix-Seymour operations into a unified entity. This
change has resulted in the downsizing of certain duplicated functions,
such as the selling, marketing and administrative departments.
During the Company's third quarter, management began to implement
the restructuring plan. Accordingly, special, restructuring and other
nonrecurring charges (cumulatively the "Charges") were determined and
recorded.
As a part of the restructuring, an extensive product line and sku
review was performed. As a result, approximately one-third of the
company's total sku's (representing less than 10% of consolidated
sales) have been eliminated.
The utilization of reserves established in connection with the
Charges in Q3 1999 was as follows (before tax benefit):
<TABLE>
Q3 Activity in Reserve Balance
1999 Charge Q3 1999 at Sept. 25, 1999
------- ------ ------
<S> <C> <C> <C>
Inventory $ 7,070 $ 806 $ 6,264
Molds 898 402 496
Plant and facilities 979 - 979
Asset write-offs 3,723 3,150 573
Employee costs 1,662 631 1,031
Other 668 224 444
------- ------ ------
$ 15,000 $ 5,213 $ 9,787
</TABLE>
<PAGE>
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 footnotes 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 26, 1998.
Third Quarter 1999 Charges.
In July 1999 the Company announced a restructuring plan to
further maximize its marketing and operational productivity and to
further strengthen relationships with its key retail partners. The
major elements of the restructuring focus on a newly created national
branding strategy, elimination of low volume sku's and the
consolidation of sales, marketing and administrative functions. The
Company's commitment is to become a "one company, one brand" supplier
to its custmers.
As disclosed in Note 5 to the Condensed Consolidated Financial
Statements, the Company recorded special, restructuring and other
nonrecurring charges (the "Charges") in the third quarter of 1999
totaling $15.0 million, (before tax benefit of $6,000). The total
pretax charge has been allocated $8.9 million to cost of goods sold
and $6.1 million to operating expenses.
Details of the Charges are discussed later within this section.
Third Quarter 1998 Acquisitions.
The Company made two acquisitions within its third quarter of
1998 (the "Third Quarter 1998 Acquisitions") and the actual results
have been combined with the Company's since the date of the respective
acquisition. The Third Quarter 1998 Acquisitions are as follows:
Entity Date Acquired
------ -------------
Tenex Corporation's consumer product
storage line ("TCPS")........... August 14, 1998
Prestige Plastics, Inc.*.......... September 8, 1998
* Prestige Plastics, Inc. is
comprised of two operating
divisions; Anchor Hocking Plastics
("AHP") and Plastics, Inc. ("PI").
<PAGE>
Thirteen weeks ended September 25, 1999 compared to the thirteen weeks
ended September 26, 1998
In the discussion and analysis that follows, all references to
the third quarter of 1999 are to the thirteen week period ended
September 25, 1999 and all references to the third quarter of 1998 are
to the thirteen week period ended September 26, 1998. The following
discussion and analysis compares the actual results for the third
quarter of 1999 to the actual results for the third quarter of 1998
with reference to the following (in thousands, except per share
amounts; unaudited):
<TABLE>
Thirteen weeks ended
September 25, September 26,
1999 1998
---- ----
<S> <C> <C> <C> <C>
Net sales..................... $ 79,737 100.0% $ 68,243 100.0%
Cost of goods sold............ 52,917 66.4 45,874 67.2
Special charge................ 8,947 11.2 - -
------- ----- ------- -----
Gross profit................ 17,873 22.4 22,369 32.8
Operating expenses............ 15,672 19.7 13,202 19.4
Restructuring and other charges 5,610 6.9 - -
Other nonrecurring charges.... 443 0.6 - -
------- ----- ------- -----
Operating profit............ (3,852) (4.8) 9,167 13.4
Interest expense.............. (5,091) (6.4) (3,872) (5.7)
Other income (expense)........ 167 0.2 42 0.1
Earnings (loss) before income
taxes....................... (8,776) (11.0) 5,337 7.8
Income tax benefit (expense).. 3,363 4.2 (2,223) (3.2)
------- ----- ------- -----
Net earnings (loss)........... $ (5,413) (6.8)% $ 3,114 4.6%
======= ===== ======= =====
Net earnings (loss) per share
- basic.................... $(0.74) $0.39
Net earnings (loss) per share
- diluted.................. $(0.74) $0.38
Weighted average common shares
outstanding - basic......... 7,272 7,961
Weighted average common shares
outstanding - diluted....... 7,469 8,172
</TABLE>
<PAGE>
Net sales. Net sales of $79.7 million in the third quarter of
1999 increased $11.5 million, or 16.8%, from net sales of $68.2
million in the third quarter of 1998. The sales increase is
attributable to a solid "back-to-school" season and significant
contributions from product lines acquired in the Third Quarter 1998
Acquisitions, specifically in the storage and servingware products.
The third quarter of 1999 benefited from a full 13 weeks of net sales
from the Third Quarter 1998 Acquisitions, whereas the third quarter of
1998 contained less than 13 weeks (6 weeks for TCPS and 3 weeks for
AHP and PI). The Third Quarter 1998 Acquisitions contributed
$12.2 million to the increase and internal growth and new product
development generated $5.0 million. Included in new product
development are sales generated from molds and inventory acquired by
the Company in June 1999. The total purchase price for the molds and
inventory acquired was less than $5.0 million. The product lines
acquired compliment the Company's storage and laundry product lines
and are sold to the Company's current customer base. Negatively
impacting sales in the quarter was the loss of sales to Caldor, a
regional retailer in the northeast, due to their Chapter 7 bankruptcy
filing and the divestiture of Shutters, Inc. in early 1999 which
combined to generate a decrease in net sales of $5.7 million.
Gross profit. As disclosed in Note 5 to the Condensed
Consolidated Financial Statements, the Company recorded a special
charge in the third quarter of 1999 to undertake a restructuring and
consolidation plan. The total charge incurred as a component of cost
of goods sold was $8.9 million. The majority of the special charge
was established to cover the elimination of under performing sku's.
The Company has discontinued approximately one-third of its total
sku's (which represents less than 10% of consolidated sales) and this
charge is to adjust the carrying values of certain inventory and
molds associated with the discontinued products.
Gross profit before impact of the special charge increased from
$22.4 million in the third quarter of 1998 to $26.8 million in the
third quarter of 1999 while gross profit margins, before impact of the
special charge, increased from 32.8% in the third quarter of 1998 to
33.6% in the third quarter of 1999. The increase in margin is
primarily attributable to an elimination of under performing sku's
across all product lines (largest benefit achieved within the
laundry/bathware product lines), improved margins on the product lines
acquired in the Third Quarter 1998 Acquisitions and favorable purchase
price variances on steel and fabrics as compared to the prior period.
In addition, margins were negatively impacted in 1999 by an increase
in plastic resin costs as compared to the prior year.
<PAGE>
Operating expenses. As discussed in Note 5 to the Condensed
Consolidated Financial Statements, the Company recorded a $5.6 million
restructuring and other charge and a $0.5 million other nonrecurring
charge in the third quarter 1999. These charges primarily relate to
employee related costs such as severance and relocation costs,
adjustments to obsolete assets and transaction costs to implement the
consolidation and restructuring plan.
Operating expenses, excluding the impact of the restructuring
and other nonrecurring charges, increased $2.5 million from $13.2
million in 1998 to $15.7 million in the third quarter of 1999.
Operating expenses as a percent of net sales slipped slightly from
19.4% in 1998 to 19.7% in 1999. The overall increase in expenses is
primarily related to the Third Quarter 1998 Acquisitions which were
included for a full 13 week period in 1999 as compared to less than 13
weeks in 1998. Further contributing to the increase are costs related
to a computer system conversion at one of the Company's subsidiaries.
Slightly offsetting the increase was the positive effect of
consolidating selling, marketing and administrative functions of two
of the Company's subsidiaries. Additionally, 1999 amortization
expense contained a full 13 weeks of amortization related to goodwill
from the Third Quarter 1998 Acquisitions as opposed to less than 13
weeks recorded in 1998.
Interest expense. Interest expense of $5.1 million in the third
quarter of 1999 increased $1.2 million from $3.9 million in the third
quarter of 1998. The increase is primarily attributable to debt
related to the Third Quarter 1998 Acquisitions which was outstanding
for the full 13 weeks of the third quarter of 1999 as compared to less
than the full 13 week period in the third quarter of 1998. Further
contributing to the increase, the Company purchased 763,632 shares of
treasury stock at a total cost of $6.3 million since the third quarter
of 1998.
Income tax expense. Income taxes have been accrued in both 1999
and 1998 based upon estimated effective tax rates. Tax expense for
1999 reflects the $6.0 million benefit from the $15.0 million
Charges.
Net earnings. The Company had net earnings of $3.6 million in
the third quarter of 1999, before impact of the $15.0 million ($9.0
million net of tax benefit) restructuring charge, or $0.48 per common
share - diluted, based on 7,469,000 weighted average common shares
outstanding. This compares to net earnings of $3.1 million in the
third quarter of 1998, or $0.38 per common share - diluted, based on
8,172,000 weighted average common shares outstanding. The decrease in
weighted average common shares outstanding was primarily the result of
treasury stock purchased since the third quarter of 1998.
The net loss for the third quarter of 1999, after inclusion of
the special, restructuring and other nonrecurring charges, was $5.4
million or $0.74 per common share - diluted.
<PAGE>
Thirty-nine weeks ended September 25, 1999 compared to the thirty-nine
weeks ended September 26, 1998
In the discussion and analysis that follows, all references to
1999 are to the thirty-nine week period ended September 25, 1999 and
all references to 1998 are to the thirty-nine week period ended
September 26, 1998. The following discussion and analysis compares
the actual results for 1999 to the actual results for 1998 with
reference to the following (in thousands, except per share amounts;
unaudited):
<TABLE>
Thirty-nine weeks ended
September 25, September 26,
1999 1998
---- ----
<S> <C> <C> <C> <C>
Net sales..................... $220,103 100.0% $175,637 100.0%
Cost of goods sold............ 144,144 65.5 118,435 67.4
Special charge................ 8,947 4.1 - 67.4
------- ----- ------- -----
Gross profit................ 67,012 30.4 57,202 32.6
Operating expenses............ 46,981 21.4 34,501 19.7
Restructuring and other charges 5,610 2.4 - -
Other nonrecurring charges.... 443 0.2 - -
------- ----- ------- -----
Operating profit............ 13,978 6.4 22,701 12.9
Interest expense.............. (15,019) (6.9) (10,260) (5.8)
Other income.................. 382 0.2 149 0.1
------- ----- ------- -----
Earnings (loss) before
income taxes............... (659) (0.3) 12,590 7.2
Income tax (expense).......... (36) (0.0) (5,201) (3.0)
------- ----- ------- -----
Earnings (loss) before
extraordinary charge ........ (695) (0.3) 7,389 4.2
Extraordinary charge.......... - - (5,107) (2.9)
------- ----- ------- -----
Net earnings (loss)........... $ (695) (0.3)% $ 2,282 1.3%
======= ===== ======= =====
Net earnings (loss)per share
- basic.................... $ (0.09) $ 0.29
Net earnings (loss) per share
- diluted $ (0.09) $ 0.28
Weighted average common shares
outstanding - basic......... 7,465 7,946
Weighted average common shares
outstanding - diluted....... 7,650 8,257
</TABLE>
<PAGE>
Net sales. Net sales of $220.1 million in 1999 increased $44.5
million, or 25.3% from net sales of $175.6 million in 1998. The
largest contributor to the increase was the Third Quarter 1998
Acquisitions, which contributed $49.2 million in net sales in the 39
week period. Internal growth and new product development, excluding
the incremental impact of the Third Quarter 1998 Acquisitions,
contributed $11.7 million to net sales in the quarter. Included in
new product development are sales generated from molds and inventory
acquired by the company in June 1999. The total purchase price for
the molds and inventory acquired was less than $5.0 million. The
product lines acquired compliment the Company's storage and
laundry product lines and are sold to the Company's current customer
base. The loss of sales to Caldor, a regional retailer in the
northeast, due to their Chapter 7 bankruptcy filing and the
divestiture of Shutters, Inc. combine to negatively impact net sales
by $16.4 million.
Gross profit. As disclosed in Note 5 to the Condensed
Consolidated Financial Statements, the Company recorded a special
charge in the third quarter of 1999 to undertake a restructuring and
consolidation plan. The total charge incurred as a component of cost
of goods sold was $8.9 million. The majority of the special charge
was established to cover the elimination of under performing sku's.
The Company has discontinued approximately one-third of its total
sku's (which represents less than 10% of consolidated sales) and this
charge is to adjust the carrying values of certain inventory and
molds associated with the discontinued products.
Gross profit, excluding the impact of the special charge, for
1999 was $76.0 million or 34.5% as compared to $57.2 million or 32.6%
for 1998. This represents an increase of 1.9 percentage points over
the prior period. The elimination of under performing sku's, a change
in product mix, and favorable purchase price variances on all major
raw materials contributed to the margin improvement as compared to the
prior period. Margins continue to benefit from the elimination of
lower margin sku's. The Company has experienced a reduction in sales
of certain lower margin laundry products and an increase in higher
margin bath and servingware products. The Company has incurred
favorable variances on steel, fabric and resin; however, increasing
resin costs in the third quarter of 1999 have begun to diminish the
favorable impact from resin.
Operating expenses. As disclosed in Note 5 to the Condensed
Consolidated Financial Statements, the Company recorded restructuring
and other charges in the amount of $5.6 million and other nonrecurring
charges in the amount of $0.5 million in the third quarter of 1999 to
undertake a restructuring and consolidation plan. These charges
primarily relate to employee related costs such as severance and
relocation costs, adjustments to obsolete assets and transaction costs
to implement the consolidation and restructuring plan.
Operating expenses, excluding the impact of the above charges,
increased $12.5 million from $34.5 million in 1998 to $47.0 million in
1999. Operating expenses as a percent of net sales increased slightly
from 19.7% in 1998 to 21.4% in 1999. The Third Quarter 1998
Acquisitions, which incurred 39 weeks of activity in 1999 as
compared to less than 13 weeks in 1998, were the primary driver in the
increased operating expenses.
<PAGE>
Interest expense. Interest expense of $15.0 million in 1999
increased $4.7 million from $10.3 million in 1998. Debt issued in
connection with the Third Quarter 1998 Acquisitions generated the
majority of the increase. Further contributing to the increase, the
Company purchased 763,632 shares of treasury stock at a total cost of
$6.3 million since the third quarter of 1998.
Income tax expense. Income taxes have been accrued in both 1999
and 1998 based upon estimated effective tax rates. Tax expense in
1999 includes a $6.0 million benefit from the $15.0 million
Charges.
Extraordinary charge. An extraordinary charge, net of tax, for
the early retirement of debt of $5.1 million, or $0.61 per common
share - diluted was recorded in 1998.
Net earnings. The Company had net earnings, excluding the impact
of the special, restructuring and other nonrecurring charges, of $8.3
million in 1999, or $1.09 per common share - diluted, based on
7,650,000 weighted average common shares outstanding. This compares
to net earnings in 1998 of $2.3 million, or $0.28 per common share -
diluted, based on 8,257,320 weighted average common shares outstanding.
The net loss for 1999, after inclusion of the special,
restructuring and nonrecurring charges, was $0.7 million or $0.09 per
common share - diluted.
Capital Resources and Liquidity
Cash at September 25, 1999 was $3.3 million as compared to $5.0
million at December 26, 1998. Cash provided by operating activities
was $12.6 million and the Company has generated EBITDA of $41.2
million for the thirty-nine week period. Availability under the
Company's $100.0 million revolving line of credit was $47.8 million
and the Company was in compliance with all covenants as of September
25, 1999.
The Company has spent a total of $3.9 million to purchase 445,932
shares of its common stock in the thirty-nine weeks ended September
25, 1999. Since October 1998 the Company has purchased a total of
763,632 shares at a total cost of $6.3 million. The average cost per
share repurchased is $8.20/share.
The Company believes its financing facilities together with its
cash flow from operations will provide sufficient capital to fund
operations, make the required debt repayments and meet the anticipated
capital spending needs.
Year 2000 Compliance
Many currently installed computer systems and software products
are coded to only accept two-digit entries in the date code field and
can not distinguish 21st century dates from 20th century dates and, as
a result, many companies' software and computer systems may need to be
upgraded or replaced in order to comply with such "Year 2000"
requirements.
<PAGE>
State of readiness. The Company has finalized its evaluation of
its Year 2000 readiness (the "Project"). The Project reviewed the
readiness of its information technology systems ("IT") and its non IT
Systems, ("Non IT") such as building security, heating and cooling,
telephones, voicemail, and other similar items. The Project covered
the following phases: (i) identification of all IT and non IT systems
(completed), (ii) assessment of the repair or replacement requirements
(completed), (iii) repair or replacement (in process), (iv) testing
(in process), (v) implementation (in process) and (vi) creation of
contingency plans in the event of year 2000 failures (completed). The
Company is scheduled to have reached Year 2000 compliance for all IT
and non IT Systems prior to December 1999.
The Company is also working with its major suppliers and
customers to determine whether the year 2000 problem will have an
adverse effect on the Company's relationships with them. The Company
does not control its suppliers or customers, and relies on a variety
of utilities, telecommunication companies, banks and other suppliers
in order to continue its business. There is no assurance that such
parties will not suffer a year 2000 business interruption, which,
could have a material adverse effect on the Company's financial
condition and its results of operations.
Costs. To date, the Company has not incurred significant
expenditures in connection with the identification and evaluation of
the Year 2000 compliance issues. Management estimates that the Year
2000 compliance costs will be approximately $0.5 million to $1.0
million. Funds for the Year 2000 compliance will be obtained from
current operations or the Company's revolving credit facility.
Contingency plan. The Company has finalized its Year 2000
contingency plan. In addition, if further year 2000 compliance issues
are discovered, the Company will evaluate the need for one or more
contingency plans relating to such issues.
Outlook
<PAGE>
Some of the opportunities and strategic initiatives planned for
the remainder of 1999 and beyond are as follows:
* As of November 1999 the Selfix-Seymour and Tamor consolidation plan
is on schedule and it is still anticipated that the restructuring
will result in annual pre-tax savings of $3.0 to $4.0 million,
beginning in the second half of 1999.
* In conjunction with the restructuring program, the Company also
announced the creation of a new national brand name - HOMZ.
Beginning in the first quarter of 2000, all products from the
Company, except servingware products, will be marketed under this
new brand name.
* Due to the seasonal nature of the Company's product lines, fourth
quarter sales are expected to be below sales in the second and
third quarters. Additionally, it is also anticipated that margins
will be lower in the fourth quarter due to unfavorable absorption
of fixed overhead costs.
* The cost of plastic resin, a significant raw material for the
company, has been increasing compared to prior quarters in 1999 and
this trend is anticipated to continue throughout the remainder of
1999.
* The Company has begun construction of a 400,000 square foot
manufacturing and warehouse facility in El Paso, TX which should be
completed in mid 2000. This facility will be leased by the Company
and should be available for occupancy in January 2000, but will not
begin production until spring 2000. This facility will enable the
Company to tap into markets located in the Southwest which were
previously cost prohibitive to enter.
* Throughout the remainder of 1999 the Company will allocate
resources to focus upon new product development (the Company's goal
is 10% annual growth from new products and product line
improvements), expansion of manufacturing capacity and organic
sales growth.
* The Company opperates on a 52/53 week year ending on the Saturday
closest to the end of the calendar year. Fiscal 1999 will be a 53
week year.
* The Company will continue to explore acquisitions that will be
accretive to earnings. Management intends to pursue acquisitions
at attractive multiples of cash flow and achieve operational and
distribution efficiencies through integration of complementary
businesses.
<PAGE>
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
For the thirty-nine week period ended September 25, 1999, the
Company did not experience any material changes in market risk
exposure that affect the quantitative and qualitative disclosures
presented in the Company's Annual Report on Form 10-K for the 52 week
period ended December 26, 1998.
Forward Looking Statements
This quarterly report on Form 10-Q, including "Management's
Discussion and Analysis of Financial Condition and Results of
Operations", "Year 2000 Compliance", "Management Outlook and
Commentary" 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. Such statements are based on management's current
expectations and are subject to a number of factors and uncertainties
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: (i) the anticipated
effects of the Third Quarter 1998 Acquisitions on the Company's sales
and earnings; (ii) the impact of the level of the Company's
indebtedness; (iii) restrictive covenants contained in the Company's
various debt documents; (iv) general economic conditions and
conditions in the retail environment; (v) the Company's dependence on
a few large customers; (vi) price fluctuations in the raw materials
used by the Company (vii) competitive conditions in the Company's
markets; (viii) the seasonal nature of the Company's business; (ix)
the Company's ability to execute its acquisition strategy; (x)
fluctuations in the stock market; (xi) the extent to which the Company
is able to retain and attract key personnel; (xii) relationships with
retailers; and (xiii) the impact of federal, state and local
environmental requirements (including the impact of current or future
environmental claims against the Company). As a result, 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 which attempt to advise
interested parties of the factors which affect the Company's business,
in this report, as well as the Company's periodic reports on Forms 10-
K, 10-Q and 8-K filed with the Securities and Exchange Commission.
<PAGE>
PART II. Other Information
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
27.1 Financial Data Schedule (only filed
electronically with the SEC).
(a) Reports on Form 8-K. - None issued in the period
<PAGE>
SIGNATURE PAGE
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
Chief Financial Officer
Dated: November 9, 1999
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