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 March 31, 2001
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 May 5, 2001 - 7,428,549
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 11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 16
Part II. Other Information
Items 1 through 5 are not applicable
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
PART I FINANCIAL INFORMATION.
Item 1. Financial Statements
HOME PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
(unaudited)
March 31, December 30,
2001 2000
-------- --------
Assets
Current assets:
Cash and cash equivalents ................... $ 2,392 $ 3,152
Accounts receivable, net .................... 43,590 46,095
Inventories, net ............................ 28,760 27,388
Prepaid expenses and other current assets 3,332 4,051
-------- --------
Total current assets ...................... 78,074 80,686
-------- --------
Property, plant and equipment - at cost........ 96,284 94,161
Less accumulated depreciation and amortization (41,289) (38,280)
-------- --------
Property, plant and equipment, net............. 54,995 55,881
-------- --------
Intangible, net and other assets............... 127,933 129,085
-------- --------
Total assets .............................. $ 261,002 $ 265,652
======== ========
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable ............................ $ 18,987 $ 20,521
Accrued liabilities ......................... 34,647 34,981
Current maturities of long-term obligations.. 7,058 6,558
-------- --------
Total current liabilities ................. 60,692 62,060
-------- --------
Long-term obligations - net of current
maturities................................... 215,764 215,051
Other liabilities.............................. 3,070 3,038
Stockholders' deficit:
Preferred Stock - authorized, 500,000 shares,
$.01 par value; - None issued.............. - -
Common Stock - authorized 15,000,000 shares,
$.01 par value; 8,568,038 shares issued at
March 31, 2001 and 8,561,642 shares issued
at December 30, 2000 ...................... 86 86
Additional paid-in capital .................. 49,811 49,811
Accumulated deficit ......................... (61,325) (57,242)
Common stock held in treasury - at cost
822,394 shares at March 31, 2001 and
December 30, 2000.......................... (6,528) (6,528)
Deferred compensation ....................... (568) (624)
-------- --------
Total stockholders' deficit ............... (18,524) (14,497)
-------- --------
Total liabilities and stockholders' deficit $ 261,002 $ 265,652
======== ========
The accompanying notes are an integral part of the financial statements.
HOME PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Statements of Operations and Retained Earnings
(unaudited)
(in thousands, except per share amounts)
Thirteen-Weeks
Ended
---------------------
March 31, March 25,
2001 2000
-------- --------
Net sales ......................... $ 64,126 $ 68,089
Cost of goods sold ................ 49,918 52,170
Special charges, net .............. 110 -
-------- --------
Gross profit .................... 14,098 15,919
Operating expenses
Selling ......................... 5,369 7,106
Administrative .................. 3,930 3,872
Amortization of intangible assets 929 1,320
Restructuring and other charges.. 2,483 -
-------- --------
12,711 12,298
-------- --------
Operating profit ................ 1,387 3,621
-------- --------
Other income (expense)
Interest income ................. 10 15
Interest (expense) .............. (5,479) (5,137)
Other income (expense), net ..... 66 (597)
-------- --------
(5,403) (5,719)
-------- --------
Loss before income taxes ...... (4,016) (2,098)
Income tax (expense) benefit ...... (67) 881
-------- --------
Net loss ...................... $ (4,083) $ (1,217)
======== ========
Net loss per common share: basic... $ (0.55) $ (0.17)
======== ========
Net loss per common share: dilutive $ (0.55) $ (0.17)
======== ========
The accompanying notes are an integral part of the financial statements.
HOME PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited)
(dollars in thousands)
Thirteen-weeks Ended
---------------------
March 31, March 25,
2001 2000
-------- --------
Operating activities:
Net loss ...................................... $ (4,083) $ (1,217)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization ................ 3,996 4,568
Amortization of stock compensation ........... 56 -
Other, net ................................... 197 470
Changes in current assets and liabilities:
Decrease in accounts receivable ............ 2,505 6,514
(Increase) in inventories .................. (1,372) (1,664)
Decrease (increase) in prepaid
expenses and other ....................... 272 (5,134)
(Decrease) increase in accounts payable...... (1,534) 3,778
(Decrease) in accrued liabilities ........... (334) (1,977)
-------- --------
Net cash (used) provided by operating
activities.................................... (297) 5,338
-------- --------
Investing activities:
Capital expenditures, net .................... (1,676) (5,660)
-------- --------
Net cash used for investing activities.......... (1,676) (5,660)
-------- --------
Financing activities:
Payments on term loan borrowings ............. (1,500) (1,750)
Borrowings under revolving line of credit..... 2,750 -
Payment of capital lease obligation .......... (37) (35)
Exercise of stock options, issuance of common
stock under stock purchase plan and other... - 99
-------- --------
Net cash provided (used) by financing
activities.................................... 1,213 (1,686)
-------- --------
Net decrease in cash and cash equivalents...... (760) (2,008)
Cash and cash equivalents at beginning of
period ...................................... 3,152 4,861
-------- --------
Cash and cash equivalents at end of period..... $ 2,392 $ 2,853
======== ========
Supplemental disclosures: Cash paid in the
period for:
Interest ...................................... $ 1,751 $ 1,990
-------- --------
Income taxes, net ............................. $ 2 $ -
-------- --------
The accompanying notes are an integral part of the financial statements.
HOME PRODUCTS INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(dollars 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 include the accounts of
the Company and its subsidiary. All significant intercompany transactions
and balances have been eliminated.
The unaudited condensed financial statements included herein as of and
for the thirteen-weeks ended March 31, 2001 and March 25, 2000 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
2000 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. Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year's presentation.
Note 3. New Accounting Standards and Pending Accounting Changes
In June 1998 and 1999, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") 133 and
No. 137, respectively. The FASB issued SFAS No. 138 to amend SFAS No. 133,
in June 2000. Collectively, these statements are intended to represent the
comprehensive guidance on accounting for derivatives and hedging activities.
The adoption of these new standards on December 31, 2000 did not have an
effect on the Company's results of operations as it has no derivatives or
hedging instruments.
Current and Pending Accounting Changes.
In May 2000, the FASB's Emerging Issues Task Force (EITF) reached a
consensus on Issue No. 14, "Accounting for Certain Sales Incentives". This
issue addresses the recognition, measurement, and income statement
classification of various types of sales incentive, including discounts,
coupons, rebates, and offers for free products. Upon adopting EITF No. 00-
14, which is required effective with the first quarter of 2002, it is
required that these sales incentives be classified as deductions from sales
within the income statement. The Company's historical accounting policy has
been to include these types of sales incentives as a deduction of sales.
In January 2001, the EITF reached a consensus on Issue 3 of No. 00-22,
"Accounting for Points and Certain Other Time-Based or Volume-Based Sales
Incentive Offers, and Offers for Free Products or Services to be Delivered
in the Future". This consensus required that certain rebate offers and free
products that are delivered subsequent to a single exchange transaction be
recognized when incurred and reported as a reduction of sales. The Company
is currently in compliance with this pronouncement.
In April 2001, the EITF reached a consensus on Issue No. 00-25 ("EITF
00-25"), "Accounting for Consideration from a Vendor to a Retailer in
Connection with the Purchase or Promotion of the Vendor's Products," which
requires the costs of certain vendor consideration, such as slotting fees
and off-invoice arrangements, to be classified as a reduction of revenue
rather than as marketing expense. As required, the company anticipates
adopting the provisions of EITF 00-25 during the first quarter of 2002. The
Company believes that it is currently in compliance with this pronouncement.
Note 4. Inventories
The components of the Company's inventory consists of direct labor,
direct materials and the applicable portion of the overhead required to
manufacture the goods.
March 31, December 30,
2001 2000
------ ------
Finished goods..................... $18,803 $15,420
Work-in-process.................... 2,948 2,027
Raw materials...................... 7,009 9,941
------ ------
$28,760 $27,388
====== ======
Note 5. Earnings Per Share
The following information reconciles earnings per share - basic and
earnings per share - diluted:
Thirteen-Weeks
Ended
---------------------
March 31, March 25,
2001 2000
------- -------
Net loss ........................ $ (4,083) $ (1,217)
Weighted average common shares
outstanding: basic ............ 7,429 7,277
Impact of stock options and warrants - -
------- -------
Weighted average common shares
outstanding: diluted .......... 7,429 7,277
======= =======
Net loss per share: basic ....... $ (0.55) $ (0.17)
======= =======
Net loss per share: diluted ..... $ (0.55) $ (0.17)
======= =======
Stock options and warrants are not considered dilutive in the first
quarters of 2001 and 2000 because the share price at the end of each quarter
has fallen below the lowest option value.
Note 6. 2001 Special, Restructuring and Other Charges
In 2000, the Company began implementation of a restructuring plan that
was undertaken to reduce fixed costs and better position the Company for
sustained profitability. The restructuring plan entails the closure of the
Leominster, MA facility, reconfiguration of remaining manufacturing
facilities, a reduction in headcount and a realignment of the selling
process.
The Company began to implement the restructuring plan in December 2000
and accordingly a pretax charge of $12.4 million was taken, of which $1.9
million was deemed to be Special Charges and $10.5 million as Restructuring
and Other Charges (collectively referred to herein as the "2000 Charges").
During the first quarter of 2001 the Company recorded a pretax charge of
$2.6 million, of which $0.1 million was deemed to be Special Charges and
$2.5 million as Restructuring and Other Charges (collectively referred
herein as "2001 Charges"). The restructuring actions are expected to be
complete by the third quarter of 2001.
The Company anticipates that these restructuring actions will result in
annual pretax cash savings of $5.0-$6.0 million of which $2.0-$3.0 million
is expected to be realized in 2001.
The 2001 Charges are summarized as follows:
Q1-2001 Q1-2001 Q1-2001
Additional Change in Net
charge estimate charge
------ ------ ------
Cost of Goods Sold:
Special charges:
Inventory relocation and liquidation $ 765 $ (590) $ 175
SKU reduction and inventory
adjustments related to 1999 - (65) (65)
------ ------ ------
Total charge to cost of goods sold 765 (655) 110
------ ------ ------
Operating Expenses:
Restructuring and other charges:
Plant and facilities:
Relocation of machinery & equipment 1,179 - 1,179
Lease termination & sub-lease costs 11 960 971
Elimination of obsolete assets - 29 29
Employee related costs 278 63 341
Other costs 36 (73) (37)
------ ------ ------
Total charge to operating expenses 1,504 979 2,483
------ ------ ------
Total net charges $ 2,269 $ 324 $ 2,593
====== ====== ======
The 2001 Charges were comprised of (i) $175 charge to relocate and
liquidate inventory at Leominster and other facilities, (ii) $1,179 charge
for the relocation of machinery and equipment and $971 charge for lease
termination & sub-lease costs (total net charge of $2,150), (iii) $29 charge
to write off obsolete and duplicate assets that were used at the Leominster
facility and other facilities, (iv) $341 charge for employee related
severance costs, (v) ($37) reversal of charge associated with other related
restructuring costs, and (vi) ($65) reversal of SKU reduction and inventory
adjustments relating to the 1999 Special Charges. The total 2001 Charges
were $2,658 excluding the impact of the 1999 Special Charges reversal.
A breakdown of the net charge (excluding the impact of the 1999 Special
Charges) between cash and non-cash items is summarized as follows. The
special charges are comprised of $120 of cash and $55 for non-cash items.
The restructuring and other charges are comprised of $2,311 of cash items
and a $172 of charges related to non-cash items.
The Company identified a total of 124 hourly and salaried Leominster
employees to be terminated in accordance with the Closure. As of March 31,
2001 all of these employees had been terminated.
The first quarter 2001 utilization of the reserve established in
connection with the 2001/2000 Charges was as follows:
Reserve Amounts Reserve
balance Additional Change in utilized balance
at charge estimate in at
12/30/00 Q1-2001 Q1-2001 Q1-2001 03/31/01
------ ------ ------ ------ ------
Inventory $ 2,744 $ 765 $ (590) $(1,471) $ 1,448
Plant and facilities 3,950 1,190 960 (1,453) 4,647
Obsolete and duplicate
assets 916 - 29 (205) 740
Employee related costs 835 278 63 (632) 544
Other 875 36 (73) (166) 672
------ ------ ------ ------ ------
$ 9,320 $ 2,269 $ 389 $(3,927) $ 8,051
====== ====== ====== ====== ======
The total amounts utilized during the first quarter of 2001 were
$3,927, of which $1,076 were non-cash costs.
Certain reserve balances as of December 30, 2000 were reclassifed to be
consistent with the current presentation. The reclassifications did not
effect the initial charges recorded in the fourth quarter of 2000.
Note 7. 1999 Special, Restructuring and Other Nonrecurring Charges
In the third quarter of 1999, the Company recorded a $15,000 pretax
charge, comprised of a Special Charge and a Restructuring and Other
Nonrecurring Charge (collectively referred to herein as the "1999 Charges").
The Charges were incurred in accordance with a plan adopted in July 1999 to
consolidate two of the Company's wholly-owned subsidiaries and to implement
a national branding strategy.
The first quarter 2001 utilization of the reserve established in
connection with the 1999 Charges was as follows:
Reserve Amounts Reversal Change in Reserve
balance at utilized in of reserve estimate balance at
12/30/00 Q1-2001 Q1-2001 Q1-2001 03/31/01
------ ------ ------ ------ ------
Inventory $ 212 $ (107) $ (65) $ - $ 40
Elimination of
duplicate assets 830 (27) - - 803
Employee costs 75 (25) - (50) -
Other 101 (20) - 50 131
------ ------ ----- ----- ------
$ 1,218 $ (179) $ (65) $ - $ 974
====== ====== ===== ===== ======
The total amounts utilized during the first quarter of 2001 were $179,
of which $107 were non cash costs.
During the first quarter of 2001 the Company reversed $65 relating to
SKU reduction and inventory adjustment reserves which were no longer needed
as a result of change in estimates by management.
Amounts in the change in estimate column represent reallocation of
accruals between categories and not increases in initial charges. These
reallocations were due to reductions in employee related cost estimates
offset by higher than anticipated other transaction costs.
Note 8. The Company incurred significant pre-tax losses in the fourth
quarter of 2000. Accordingly, the income tax provision primarily reflects
foreign taxes. On a tax return basis, the Federal operating loss
carryforwards were in excess of $33.0 million.
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 30, 2000.
2001 Special, Restructuring and Other Charges
In fiscal year 2000, the Company began implementation of a
restructuring plan that was undertaken to reduce fixed costs and better
position the Company for sustained profitability. The restructuring plan
entails the closure of the Leominster, MA facility, reconfiguration of
remaining manufacturing facilities, a reduction in headcount and a
realignment of the selling process.
The Company began to implement the restructuring plan in December 2000
and accordingly a pretax charge of $12.4 million was taken, of which $1.9
million was deemed to be Special Charges and $10.5 million as Restructuring
and Other Charges (collectively referred to herein as the "2000 Charges").
During the first quarter of 2001 and the Company recorded a pretax charge of
$2.6 million, of which $0.1 million was deemed to be Special Charges and
$2.5 million as Restructuring and Other Charges (collectively referred
herein as "2001 Charges"). The restructuring actions are expected to be
complete by the third quarter of 2001.
As disclosed in Note 6 to the Consolidated Financial Statements of this
Form 10-Q, the 2001 Charges were comprised of (i) charge to relocate and
liquidate inventory at Leominster and other facilities, (ii) charge for the
relocation of machinery and equipment used at the Leominster facility and
other facilities, (iii) charge for lease termination and sub-lease costs,
(iv) charge to write off obsolete and duplicate assets that were used at the
Leominster facility and other facilities, (v) charge for employee related
severance costs, and (vi) charge for other related restructuring costs. The
total 2001 Charges include a reversal of $0.1 million for SKU reduction and
inventory adjustments relating to the 1999 Charges.
The Company anticipates that the result of these restructuring actions
will generate annual pretax cash savings of $5.0-$6.0 million of which $2.0-
$3.0 million is expected to be realized in 2001.
Thirteen-weeks ended March 31, 2001 compared to the thirteen-weeks ended
March 25, 2000
In the discussion and analysis that follows, all references to the
first quarter of 2001 are to the thirteen-week period ended March 31, 2001
and all references to the first quarter of 2000 are to the thirteen-week
period ended March 25, 2000. The following discussion and analysis compares
the actual results for the first quarter of 2001 to the actual results for
the first quarter of 2000 with reference to the following (in thousands;
unaudited):
Thirteen-weeks ended
---------------------------------
March 31, March 25,
2001 2000
---- ----
Net sales .................... $ 64,126 100.0% $ 68,089 100.0%
Cost of goods sold ........... 49,918 77.8 52,170 76.6
Special charges, net ......... 110 0.2 - -
------- ----- ------- -----
Gross profit ............... 14,098 22.0 15,919 23.4
Operating expenses ........... 9,299 14.5 10,978 16.2
Amortization of intangible
assets ..................... 929 1.4 1,320 1.9
Restructuring and other charges 2,483 3.9 - -
------- ----- ------- -----
Operating profit ........... 1,387 2.2 3,621 5.3
Interest expense ............. (5,479) (8.5) (5,137) (7.5)
Other income (expense) ....... 76 0.1 (582) (0.9)
------- ----- ------- -----
Loss before income taxes (4,016) (6.2) (2,098) (3.1)
Income tax (expense) benefit . (67) (0.1) 881 1.3
------- ----- ------- -----
Net loss ..................... $ (4,083) (6.3)% $ (1,217) (1.8)%
======= ===== ======= =====
Net loss per share - Basic ... $ (0.55) $ (0.17)
Net loss per share - Diluted . $ (0.55) $ (0.17)
Weighted average common shares
Outstanding -
Basic 7,429 7,277
Diluted 7,429 7,277
Net sales. Net sales of $64.1 million in the first quarter of 2001
decreased $4.0 million or 5.8% from $68.1 million in the comparable quarter
of 2000. The decrease in net sales is primarily a result of lost sales to
Bradlee's, a regional retailer in the northeast, due to its recent
bankruptcy filing as well as a loss of sales to several other customers who
recently declared bankruptcy. The closure of a manufacturing facility
(Leominster, MA), which was completed during the first quarter of 2001, also
negatively affected net sales as management decided to reduce sales to low
margin and financially challenged customers who were served by this
facility.
Special Charges. In 2001 the Company recorded Special Charges of $0.1
million in connection with the closure of the Leominster facility as well as
the realignment of other manufacturing facilities which began in the fourth
quarter of 2000. The primary component of the Special Charges includes
inventory reserves to relocate and liquidate inventory. The Special Charges
are net of a $0.1 million reversal of a portion of the special charge
recorded in the third quarter of 1999 to undertake a restructuring and
consolidation plan.
Gross profit before special charges. The Company's gross profit before
Special Charges in the first quarter of 2001 decreased to $14.2 million from
$15.9 million in the comparable quarter of 2000. Gross profit margins
declined to 22.2% from 23.4% in the prior year comparable quarter. The
decline in profit margins is primarily due to deterioration in selling
prices of many of the Company's plastic housewares products. The selling
price reductions are a result of competitive pressures. Partially offsetting
the above was the positive impact of the realignment of several
manufacturing facilities which improved production efficiencies in the
current quarter. The cost of resin during the first quarter of 2001 was
flat to the first quarter of 2000.
Operating expenses. Operating expenses improved to 14.5% of net sales
or $9.3 million versus 16.2% or $11.0 million in the comparable quarter of
2000. The improvement is primarily a result of a decrease in warehousing
costs. Additional benefits were achieved as a result of planned headcount
reductions that were completed by the end of the first quarter 2001.
Restructuring and Other Charges. The Company recorded Restructuring
and Other Charges of $2.5 million in the first quarter of 2001 related to
the continued implementation of the fourth quarter 2000 restructuring plan.
The charges are comprised of (i) charge for the relocation of machinery and
equipment, (ii) lease termination and sub-lease costs, (iii) write off of
obsolete and duplicate assets that were used at the Leominster facility and
other facilities, (iv) employee related severance costs, and (v) reversal of
other related restructuring costs.
Amortization of intangible assets. Amortization of intangible assets
in the first quarter of 2001 was 1.4% of net sales or $0.9 million versus
1.9% or $1.3 million in the comparable quarter of 2000. The decrease in the
current quarter reflects the December 2000 $44.4 million asset impairment
charge to reduce the carrying value of goodwill.
Interest expense. Interest expense of $5.5 million in the first
quarter of 2001 increased $0.4 million from $5.1 million in the first
quarter of 2000. The increase in interest expense is a function of higher
borrowing rates. Borrowing rates under the Company's senior loan agreement
were increased as a result of the September 2000 amendment to the Company's
Revolving Credit Agreement.
Other income (expense). During the first quarter of 2001 the Company
generated other income of $0.08 million primarily due to gains on sale of
assets. In 2000, the Company incurred approximately $0.6 million of fees
and expenses associated with a review of strategic alternatives to enhance
shareholder value.
Income tax expense. The income tax provision recorded in the first
quarter of 2001 primarily relates to foreign taxes. A significant prior year
operating loss has resulted in tax operating loss carryforwards. The
Company did not record a tax benefit in the current quarter, as there are no
assurances that future income will be sufficient to utilize these loss
carryforwards. In the first quarter of 2000 a tax benefit of $0.9 million
was recorded.
Net earnings (loss). The Company had a net loss of $4.1 million, or
$0.55 per share, as compared to a net loss of $1.2 million, or $0.17 per
share, in the comparable quarter of 2000. Excluding the effects of the
special, restructuring and other charges, the loss in the first quarter of
2001 was $1.5 million ($0.20 per share) as compared to a loss of $1.2
million ($0.17 per share) in the first quarter of 2000. The weighted shares
outstanding increased to 7,429 from 7,277 in the first quarter 2000. The
primary contributor to the increase in weighted average common shares
outstanding was the Company's issuance of restricted stock in the fourth
quarter of 2000.
Capital Resources and Liquidity
The Company's primary sources of liquidity and capital resources
include cash provided from operations and use of available borrowing under
the Company's revolving credit facilities.
Cash and cash equivalents were $2.4 million, a decrease of $0.8 million
from December 30, 2000. The Company's total debt increased $1.2 million in
the first quarter of 2001 to $222.8 million. The increase in debt is
primarily attributable to equipment and inventory relocations in connection
with restructuring actions. There was also a slight build up of inventory
in anticipation of second quarter seasonal sales increases.
The Company's working capital, excluding cash and short term debt, of
$22.0 million was essentially flat to December 30, 2000.
Capital spending in the quarter was $1.7 million as compared to $5.7
million in the comparable quarter of 2000. Capital spending in the current
quarter included $0.5 million for information technology and $1.2 million
for a variety of production facility projects as well as the replacement of
machinery and equipment. Capital spending in the first quarter 2000 was
primarily due to the build out of the El Paso facility.
The Company was in compliance with all amended loan covenants as of
March 31, 2001.
The Company believes its existing financing facilities together with
its cash flow from operations will provide sufficient capital to fund
operations, make required debt repayments payments and meet anticipated
capital spending needs. Availability under the Revolving Credit Agreement
at March 31, 2001 was $28.3 million.
Management Outlook and Commentary
* During the second half of 2000 the Company experienced deterioration in
the selling prices of various plastic houseware products. This occurred
in response to competitive pressures from existing competition as well as
new entrants to the market. These competitive pressures forced the
Company to reduce selling prices to maintain shelf space. The first
quarter margins were negatively impacted by these factors. It is
expected that the second quarter selling prices will also be below second
quarter 2000 levels. Consequently, margins in the second quarter of 2001
are expected to be below those in the second quarter of 2000. For the
remainder of the year the Company believes that selling prices will be at
levels consistent with the second half of 2000.
* The continuing weak economic conditions have negatively impacted the
Company's current quarter operating results. These conditions negatively
impacted sales as several of the Company's retail customers recently
filed for bankruptcy protection. The Company estimates that it has lost
approximately $10.0 million in annual sales due to these bankruptcies. As
the weak economic conditions continue the Company may encounter further
consolidation of its retail customer base through additional customer
bankruptcies. Also, further business may be lost in 2001 as the Company
evaluates its relationships with several other financially challenged
customers.
* Management continued to implement the Company's restructuring plan during
the first quarter. As part of the restructuring plan management decided
to close the Leominster facility. This facility was selected because of
the following reasons. The factory was highly inefficient as compared to
the Company's other manufacturing facilities and many of the customers
served by this facility were financially challenged with unacceptable
profit margins. This will likely mean that the Company will lose up to
$10.0 million of annual sales, however, management believes that the
closing of an inefficient factory and reducing sales to low margin
customers may have a positive impact on the Company's operating results.
As a result of these actions management expects to save approximately
$1.0 million annually. The closure of the Leominster facility was
completed in the first quarter of 2001.
* The Company's restructuring plan also included the realignment of several
manufacturing facilities to improve production efficiency and lower
costs. During the first quarter of 2001 the Company began centralizing
the manufacturing process of several products to enable the Company to
better utilize key management and manufacturing strengths as well as
balance production that has shifted from the closure of the Leominster
facility. As part of these actions management estimates annual cost
savings of approximately $1.0 to $2.0 million. The facility realignment
plan is expected to be complete by June 2001.
* During the first quarter, management completed the realignment of the
Company's selling process. Historically all sales were made through the
assistance of manufacturing rep groups. The rep groups received
commissions of 1% to 5% of sales. During the fourth quarter of 2000
several rep groups were terminated and in some instances others had their
commission rates reduced. Through some incremental spending the Company
has been able to replicate the rep group services with an in-house
selling effort. The implementation has been completed during the first
quarter and management projects savings in 2001 of approximately $1.0
million.
* The Company's primary raw materials are plastic resin, steel, fabric and
corrugated packaging. Changes in the cost of these materials may have a
significant impact on the Company's operating results. Management does
not anticipate significant fluctuations in the cost of these materials
during the remainder of 2001. On the other hand the cost of these items
is affected by many factors outside of the Company's control and changes
to the current trends are possible.
* Plastic resin represents approximately 20% to 25% of the Company's cost
of goods sold. First quarter resin prices were essentially flat to prior
year and approximate the average cost over the last 20 years. However,
there is no assurance that the current costing levels will continue. The
future cost of plastic resin is very difficult to predict. 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.
* Management believes that its cost cutting initiatives along with a focus
on improved selling margins will provide adequate cash flow to meet its
operating obligations, debt service and capital spending needs for the
remainder of 2001. If these efforts or other business factors cause an
adverse change in this assessment then the Company may consider selling
selective assets to significantly reduce debt levels.
* The Company is highly leveraged with total debt being approximately three
times its net tangible assets. Consequently earnings and cash flow could
be materially affected by increases in interest rates or other business
factors. The Company expects to be in compliance with its financial and
operating covenants during the remainder of 2001.
* As a result of the operating loss incurred in 2000 and the costs
associated with the Company's 2000/2001 restructuring plan significant
tax loss carryforwards have been generated. As a result management does
not expect to pay any federal income tax for the next several years.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's primary market risk is impacted by changes in interest
rates and certain commodity based raw materials.
Interest Rate Risk. The Company's revolving credit agreement and term
loan are LIBOR-based and are subject to interest rate movements. During the
first quarter of 2001 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-three week period ended
December 30, 2000.
Commodity Risk. The Company is subject to fluctuations in commodity
based raw materials such as plastic resin, steel and griege fabric. There
have been no significant changes in the costs of plastic resin, steel and
griege fabric during the first quarter of 2001.
The Company has entered into commitments to purchase certain minimum
annual volumes of plastic resin. These purchase commitments approximate 50%
of the Company's total annual plastic resin purchases. The Company expects
to purchase in excess of 150 million pounds of resin in 2001. The
agreements expire in May and August of 2002. 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.
Forward Looking Statements
This quarterly report on Form 10-Q, including "Management's Discussion
and Analysis of Financial Condition and Results of Operations", "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 impact of the level of the Company's indebtedness;
(ii) restrictive covenants contained in the Company's various debt
documents; (iii) general economic conditions and conditions in the retail
environment; (iv) the Company's dependence on a few large customers;
(v) price fluctuations in the raw materials used by the Company,
particularly plastic resin; (vi) competitive conditions in the Company's
markets; (vii) the seasonal nature of the Company's business;
(viii) fluctuations in the stock market; (ix) the extent to which the
Company is able to retain and attract key personnel; (x) relationships with
retailers; and (xi) 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 revise 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 which attempt to advise interested
parties of the factors which affect the Company's business.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits - none
(b) Reports on Form 8-K - not applicable.
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 hereunto duly authorized.
Home Products International, Inc.
By: /s/ James E. Winslow
----------------------------
James E. Winslow
Executive Vice President and
Chief Financial Officer
Dated: May 11, 2001