UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, DC 20549
FORM 10-K
(Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE - ---------- SECURITIES EXCHANGE ACT OF 1934
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December
30, 200029, 2001OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE - ---------- SECURITIES EXCHANGE ACT OF 1934
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-2648
HON INDUSTRIES
INC. An Iowa Corporation IRS Employer No. 42-0617510 414 East Third Street P. O. Box 1109 Muscatine, IA 52761-0071 319/264-7400Inc.
An Iowa Corporation
IRS Employer No. 42-0617510
414 East Third Street
P. O. Box 1109
Muscatine, IA 52761-0071
563/264-7400
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, with par value of $1.00 per share.
Preferred Share Purchase Rights to purchase shares of Series A Junior Participating
Preferred Stock, with par value of $1.00 per share.
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
Xý No------ -----oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.____oThe aggregate market value of the voting stock held by nonaffiliates of the registrant, as of March 1,
2001,2002, was:$1,099,041,437,$1,215,982,786 assuming all 5% holders are affiliates.The number of shares outstanding of the
registrant'sregistrant’s common stock, as of March 1,2001,2002, was:59,426,775. DOCUMENTS INCORPORATED BY REFERENCE58,895,314.Documents Incorporated by Reference
Portions of the
registrant'sregistrant’s Proxy Statement dated March27,22, 2001, for the May7, 2001,6, 2002, Annual Meeting of Shareholders are incorporated by reference into Part III.Index of Exhibits is located on Page
57. -1-58. ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I-2-2
ANNUAL REPORT ON FORM 10-K
General
HON INDUSTRIES Inc.
("HON"(“HON” or the"Company"“Company”) is an Iowa corporation incorporated in 1944. The Company is a national manufacturer and marketer of office furniture and hearth products. Approximately81%76% of fiscal year20002001 net sales were in office furniture and19%24% in hearth products. A broad office furniture product offering is soldthrough a national system ofto dealers, wholesalers, warehouse clubs, retail superstores,and toend-user customers, and federal and state governments. Dealer, wholesaler, and retail superstores are the major channels based on sales. Hearth products include wood-, pellet-, and gas-burning factory-built fireplaces, fireplace inserts, stoves, and gas logs. These products are sold through a national system of dealers, wholesalers, large regional contractors, and Company-owned retail outlets. In fiscal2000,2001, the Company had net sales of$2.0$1.8 billion, of which approximately$1.6$1.4 billion was attributable to office furniture products and$.4$0.4 billion was attributable to hearth products. Please refer to Operating Segment Information in the Notes to Consolidated Financial Statements for further information about operating segments.The Company is organized into a corporate headquarters and operating units with offices, manufacturing plants, distribution centers, and sales showrooms in the United States, Canada, and Mexico. See Item 2. Properties for additional related discussion. Five operating units, marketing under various brand names, participate in the office furniture industry. These operating units include: The HON Company, Allsteel Inc., BPI Inc., The Gunlocke Company, and Holga Inc. Each of these operating units manufactures and markets products which are sold through various channels of distribution and segments of the industry.
Hearth Technologies Inc. was created in October 1996 with the acquisition of Heat-N-Glo Fireplace Products, Inc. and its subsequent integration with the
Company'sCompany’s Heatilator operation. On February 20, 1998, the Company acquired Aladdin Steel Products, Inc., a manufacturer of wood-, pellet-, and gas-burning stoves andinserts, for a purchase price of $10.2 million. This acquisition is also being operated by Hearth Technologies Inc.inserts. On February 29, 2000, the Company completed the acquisition of two leading hearth products distributors, American Fireplace Company (AFC) and the Allied Group (Allied)for a total purchase price of approximately $135 million.. AFC and Allied sell, install, and service a broad range of gas- and wood-burning fireplaces as well as fireplace mantels, surrounds, facings, and other accessories.HON International Inc. markets select products manufactured by the other various HON INDUSTRIES operating units outside the United States and Canada.
Since its inception, the Company has been committed to improvement in manufacturing and in 1992 introduced its process improvement approach known as Rapid Continuous Improvement
("RCI"(“RCI”) which focuses on streamlining design, manufacturing, and administrative processes. TheCompany'sCompany’s RCI program, in which most members participate, has contributed to increased productivity, lower manufacturing costs,andimproved product quality, and workplace safety. In addition, theCompany'sCompany’s RCI efforts enable it to offer short average lead times, from receipt of order to shipment, for most of its products.The Company distributes its products through an extensive network of independent office furniture dealers, office products dealers, wholesalers and retailers. The Company is a supplier of office furniture to each of the largest nationwide chains of office products
dealer,dealers, or"mega-dealers,"“mega-dealers,” which are Boise Cascade Corporation;U.S. Office Products Company;Corporate Express Inc., A Buhrmann Company; Office Depot Business Services Group; and Staples CommercialAdvantage, andAdvantage. The Company is also a supplier to the Office Depot, Staples, and Office Max superstores.-3-3
The
Company'sCompany’s product development efforts are focused on reducing the cost to manufacture existing products, and ondesigning new productsdeveloping solutions thatprovide additional featuresare sensitive to quality, aesthetics, style andtop quality. Over 40%purposeful design. Approximately 30% of theCompany's 2000Company’s 2001 net sales were from products introduced in the past three years.An important element of the
Company'sCompany’s success has been its ability to attract, develop and retain skilled, experienced and efficient members. Each of theCompany'sCompany’s eligible members owns stock in the Company through a number of stock-based plans, including a member stock purchase plan and a profit-sharing plan. In addition, most production members are eligible for incentive bonuses.For further financial-related information with respect to acquisitions, dispositions, and Company operations in general, refer to Item 7.
Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations, and the following captions included in the Notes to Consolidated Financial Statements, which are filed as part of this report: Nature of Operations, Business Combinations, and Operating Segment Information.Statements in this report that are not strictly historical, including statements as to plans, objectives, and future financial performance, are
"forward-looking"“forward-looking” statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks, which may cause theCompany'sCompany’s actual results in the future to differ materially from expected results. These risks include, among others, competition within the office furniture and fireplace industries; the relationship between supply and demand for value-priced office products, as well as direct vent gas- and wood-burning fireplaces; the effects of economic conditions; issues associated with the acquisition and integration of acquisitions; operating risks; the ability of the Company to realize cost savings and productivity improvements; the ability of theCompany'sCompany’s distributors to successfully market and sell theCompany'sCompany’s products; and the availability and cost of capital to finance planned growth; as well as the other risks, uncertainties, and factors described from time to time in theCompany'sCompany’s filings with the Securities and Exchange Commission.INDUSTRYIndustry
According to the Business and Institutional Furniture
Manufacturer'sManufacturer’s Association("BIFMA"(“BIFMA”), U.S. office furniture industry shipments are estimated to be approximately$13,285,000,000$10,975,000,000 in2000, an increase2001, a decrease of8.5% over 1999.17.4% compared to 2000. The Company believes that theincreasedecrease was duein parttopent-up demand resulting from companies funneling capital resources into computer-related solutions during 1999 in fear of potential Year 2000 problems.lower corporate profits and prevailing economic conditions.The U.S. office furniture market consists of two primary
segments--thesegments-the project segment and thetransactionalcommercial segment. The project segment has traditionally been characterized by sales of large quantities of office furniture to large corporations, such as for new office facilities, relocations, or department or office redesigns, which are frequently customized to meet specific client and designer preferences. Project furniture is generally purchased through office furniture dealers who typically prepare a custom-designed office layout emphasizing image and design. The process is often lengthy and generally has several manufacturers competing for the same projects. Overhead and support associated with the sales and customization efforts in this segment are major reasons why the prices for project office furniture have traditionally been relatively high.The
transactionalcommercial segment of the market, in which the Company is a leader, primarily represents smaller orders of office furniture purchased by businesses and home office users on the basis of price, quality, selection and quick delivery. Office products dealers, wholesalers and retailers, such as office products superstores, are the primary distribution channels in this market segment. Office furniture and products dealers (many of whom also participate in the project segment of the market) publish periodic catalogs that display office furniture and products from various manufacturers.GROWTH STRATEGY4
Growth Strategy
The
Company'sCompany’s strategy is to build on its position as a leading manufacturer ofvalue-pricedoffice furniture and hearth products in North America. The components of this growth strategy are to introduce newvalue-pricedproducts, continuallyimprove productivity,reduce costs, provide outstanding customer satisfaction, leverage the distribution network, and pursue complementary strategic acquisitions.-4-EMPLOYEES/MEMBERSEmployees/Members
As of December
30, 2000,29, 2001, the Company employed approximately11,5009,000 persons,11,0008,800 of whom were members and500200 of whom were temporary personnel. Of the approximately11,5009,000 persons employed by the Company,6,4004,700 were in theCompany'sCompany’s manufacturing operations. The Company employed approximately 400 members who were members of unions. The Company believes that its labor relations are good.PRODUCTS OFFICE FURNITUREProducts
Office Furniture
The Company designs, manufactures, and markets a broad range of office furniture in four basic categories: (i)
filing,storage, including vertical files, lateral files, pedestals, and high density filing; (ii) seating, including task chairs, executive desk chairs, and side chairs; (iii) office systems (typically modular and moveable workspaces with integrated work surfaces, space dividers, and lighting); and (iv) desks and related products, including tables, bookcases, and credenzas. TheCompany'sCompany’s products are sold through theCompany'sCompany’s wholly owned subsidiaries - The HON Company, Allsteel Inc., BPI Inc., The Gunlocke Company, and Holga Inc.The
Company'sCompany’s office furniture products are generally available in contemporary as well as traditional styles and are priced to sell in all channels of distribution. TheCompany'sCompany’s products are offered in many models, sizes, designs, and finishes and are constructed from both wood and nonwood materials.The following is a description of the
Company'sCompany’s major product categories and product lines:FILING CABINETSStorage
The Company offers a variety of
filingstorage options designed either to be integrated into and support theCompany'sCompany’s office systems products or to function as freestanding furniture in commercial and home offices. The Company believes it is the largest manufacturer and marketer ofmid-pricedsteelfilingstorage cabinets in the United States.The Company sells most of its freestanding
filesstorage through independent office products and office furniture dealers, nationwide chains of office products dealers, wholesalers, office products superstores, warehouse clubs, and mail order distributors. Higher pricedfiles arestorage is sold through project-oriented office furniture dealers.SEATINGSeating
The
Company'sCompany’s seating line includestaskchairs designed for different kinds of office work, such as secretarial, computer, clerical, laboratory and executive, guest chairs, conference and reception room seating, and stackable chairs. The chairs are available in a variety of frame colors,a multitude of fabrics,coverings, and a wide range of price points. Key customer criteria in seating includes superior design, ergonomics, aesthetics, comfort, and quality.OFFICE SYSTEMS5
Office Systems
The Company offers a complete line of office panel systems products in order to meet the needs of a variety of organizations. Systems may be used for team worksettings, private offices and open floor plans, and are typically modular and movable workspaces composed of adjustable partitions, work surfaces, desk extensions, storage cabinets and electrical lighting systems which can be moved, reconfigured and reused within the office. Panel systems offer a cost-effective and flexible alternative to traditional drywall office construction. The Company has experienced increased demand for furniture systems able to accommodate new work arrangements such as team workspaces and workspaces shared by several employees who are frequently out of the office. A typical installation of office panels often includes associated sales of seating,
casegoods, files,storage, and accessories.-5-The Company offers whole office solutions, movable panels, storage units, and work surfaces that can be installed easily and reconfigured to accommodate growth and change in organizations. The Company also offers consultative selling and design services for certain of its office system products. The compelling value of the
Company'sCompany’s systems lines is that these products are styled and featured similar to those of premium-priced contract systems manufacturers but are offered at competitive prices, with short lead times and superior service.DESKS AND RELATED PRODUCTSDesks and Related Products
The
Company'sCompany’s collection of desks and related products include stand-alone steel, laminate and wood furniture items, such as desks, bookshelves, credenzas andcredenzas,mobile desking, and are available in a range of designs and price points. The Company offers these products in both contemporary and traditional styles. TheCompany'sCompany’s desks and related products are sold to a wide variety of customers from those designing large office configurations to small retail and home office purchasers.The Company offers a variety of contemporary and traditional tables designed for use in conference rooms, private offices, training areas, team worksettings and open floor plans. Tables are produced in wood veneer and laminate and are available in numerous sizes, shapes and base styles.
HEARTH PRODUCTSHearth Products
The Company is the largest U.S. manufacturer and marketer of metal prefabricated
fireplacefireplaces and related products, primarily for the home, which it sells under the widely recognized Heatilator, Heat-N-Glo, Dovre, and Quadra-Fire brand names.Products bearing these brands are marketed by the Company's three hearth products companies, Heatilator, Heat-N-Glo, and Aladdin.The
Company'sCompany’s line of hearth products includes wood- and gas-burning fireplaces and stoves, fireplace inserts, chimney systems, and related accessories. Heatilator and Heat-N-Glo are brand leaders in the two largest segments of the home fireplace market: vented-gas and wood fireplaces.Heat-N-GloThe Company is the leader in"direct vent"“direct vent” fireplaces, which replace the chimney-venting system used in traditional fireplaces with a less expensive vent through an outer wall. See Business - IntellectualProperty. MANUFACTURINGProperty for additional details.Manufacturing
The HON Company manufactures office furniture in Alabama, California, Georgia, Iowa, Kentucky, North Carolina,
Pennsylvania,Virginia, and Monterrey, Mexico. Allsteel Inc. manufactures office furniture in Iowa,Mississippi,Pennsylvania, and Tennessee. Holga Inc. manufactures office furniture in California. The Gunlocke Company manufactures office furniture in New York. BPI Inc. manufactures office furniture inCalifornia,North Carolina and Washington. Hearth Technologies Inc. manufactures hearth products in Iowa, Maryland, Minnesota,Washington,andCalgary, Canada.Washington.6
The Company purchases raw materials and components from a variety of vendors, and generally most items are available from multiple sources. Major raw materials and components include coil steel, bar stock, castings, lumber, veneer, particle board, fabric, paint, lacquer, hardware, rubber products, plastic products, and shipping cartons.
Since its inception, the Company has focused on making its manufacturing facilities and processes more flexible while at the same time reducing costs and improving product quality. In 1992, the Company adopted the principles of RCI, which focus on developing flexible and efficient design, manufacturing and administrative processes that remove excess cost. To achieve flexibility and attain efficiency goals, the Company has adopted a variety of production techniques including cell manufacturing, focused factories, just-in-time inventory management and value engineering. The application of the RCI process has increased productivity by reducing set-up and processing times, square footage, inventory levels, product costs and delivery times, while improving quality and enhancing member safety. The
Company'sCompany’s RCI process involves production and administrative employees, management, customers and suppliers. The Company has facilitators, coaches and consultants dedicated to the RCI process and strives to involve all members in the RCI process. In addition, the Company has organized a group that designs, fabricates, tests and installs proprietary manufacturing equipment. Manufacturing also plays a key role in theCompany'sCompany’s concurrent product development process that primarily seeks to design new products for ease of manufacturability.-6-PRODUCT DEVELOPMENTProduct Development
The
Company'sCompany’s product development efforts are primarily focused on reducing the cost to manufacture existing products anddesigning new productsdeveloping solutions thatprovide additional featuresare sensitive to quality, aesthetics, style andquality.purposeful design. The Company accomplishes this through improving existing products, extending product lines, applying ergonomic research, improving manufacturing processes, applying alternative materials and providing engineering support and training to its operating units. The Company conducts its product development efforts at both the corporate and operating unit level. At the corporate level, the staff at theCompany'sCompany’s Stanley M. Howe Technical Center, working in conjunction with operating staff, seeks breakthrough developments in product design, manufacturability and materials usage. At the operating unit level, development efforts are focused on achieving incremental improvements in product features and manufacturing processes. The Company invested approximately $21.4 million, $18.9 million,$17.1 million,and$15.7$17.1 million in product development during fiscal 2001, 2000,1999,and1998,1999, respectively, and has budgeted in excess of$23$25 million for product development in fiscal2001. INTELLECTUAL PROPERTY2002.Intellectual Property
As of December
30, 2000,29, 2001, the Company owned198217 U.S. and128119 foreign patents and had applications pending for4158 U.S. and8373 foreign patents. In addition, the Company holds registrations for113136 U.S. and179184 foreign trademarks and has applications pending for6455 U.S. and7068 foreign trademarks.The
Company'sCompany’s principal office furniture products do not require frequent technical changes. The majority of theCompany'sCompany’s patents are design patents which expire at various times depending on thepatent'spatent’s date of issuance. The Company believes that neither any individual patent nor theCompany'sCompany’s patents in the aggregate are material to theCompany'sCompany’s business as a whole.When Hearth Technologies Inc. acquired Heat-N-Glo in October 1996, it also acquired its patent for the design of a zero-clearance direct vent gas fireplace (the
"direct‘‘direct ventpatent"patent’’). The Company currently offers numerous product designs that would not be possible without the direct vent technology. Although the Company believes that the protection afforded by the direct vent patent is not vital to sustaining HearthTechnologies'Technologies’ gross profit margins on its direct vent gas fireplaces, the technology that underlies the patent is a significant distinguishing feature for theCompany'sCompany’s products.7
The Company applies for patent protection when it believes the expense of doing so is justified, and the Company believes that the duration of its registered patents is adequate to protect these rights. The Company also pays royalties in certain instances for the use of patents on products and processes owned by others.
The Company actively protects its trademarks that it believes have significant
goodwillvalue.SALES AND DISTRIBUTION: CUSTOMERSSales and Distribution: Customers
Over the last ten years, the office products and office furniture industries have experienced substantial consolidation as larger dealers have acquired smaller local and regional dealers. Consolidation permits large dealers to benefit from economies of scale, increased purchasing power, and the elimination of redundant management and overhead expenses. Larger dealers have also been able to take advantage of more sophisticated management techniques designed to enhance customer service, lower costs and increase operating efficiency. At the same time, office products superstores have emerged and replaced local retail office supply stores. The Company believes that these trends may continue to result in fewer, larger dealers and retailers as customers for the
Company'sCompany’s products.In
2000,2001, theCompany'sCompany’s ten largest customers represented approximately38%37% of its consolidated net sales. The substantial purchasing power exercised by large customers may adversely affect the prices at which the Company can successfully offer its products. As a result of this consolidation, changes in the purchase patterns or the loss of a single customer may have a greater impact on theCompany'sCompany’s financial results than such events would have had prior to such consolidation. In addition, there can be no assurance that the Company will be able to maintain its customer relationships as consolidation of its customers occur.-7-As a result of these trends, the Company today sells its products through five principal distribution channels. The first channel, independent, local office furniture and office products dealers, specialize in the sale of a broad range of office furniture and office furniture systems, mostly to small- and medium-sized businesses, branch offices of large corporations, and home office owners. The second distribution channel comprises nationwide chains of office products dealers, or
"mega-dealers,"“mega-dealers,” including Boise Cascade Corporation;U.S. Office Products Company;Corporate Express Inc., A Buhrmann Company; Office Depot Business Services Group; and Staples Commercial Advantage. Many of the independent dealers and mega-dealer locations assist their customers with the evaluation of office space requirements, systems layout and product selection, and design and office solution services provided by professional designers.The third distribution channel, wholesalers, serve as distributors of the
Company'sCompany’s products to independent dealers, mega-dealers and superstores. The Company sells to thenation'snation’s largest wholesalers, United Stationers and S.P. Richards, as well as to regional wholesalers. Wholesalers maintainstocksinventory of standard product lines for resale to the various retailers. They also special order products from the Company in customer-selected models and colors. TheCompany'sCompany’s wholesalers maintain warehouse locations throughout the United States, which enable the Company to make its products available for rapid delivery to retailers anywhere in the country. One customer, United Stationers, accounted for approximately 14%,13%14%, and12%13% of theCompany'sCompany’s consolidated net sales in 2001, 2000, and 1999,and 1998,respectively.The fourth distribution channel is retail stores, which include office products superstores such as Office Depot, Office Max, and Staples and warehouse clubs like Costco.
The fifth distribution channel consists of government-focused dealers that sell the
Company'sCompany’s products to federal, state and local government offices.8
As of December
30, 2000,29, 2001, theCompany'sCompany’s office furniture sales force consisted of2932 regional sales managers supervising156151 salespersons, plus approximately3938 firms of independentmanufacturers'manufacturers’ representatives who collectively provided national sales coverage. Sales managers and salespersons are compensated by a combination of salary and incentive bonus.Office products dealers, national wholesalers and retailers market their products over the
world-wide webinternet and through catalogs publishedperiodically andperiodically. These catalogs are distributed to existing and potential customers.The Company's marketing objective is to gain share in its distributors' media.The Company believes that the inclusion of theCompany'sCompany’s product lines in customer catalogs and e-business offers strong potential for increased sales of the listed product items due to the exposureprovided by these publications.provided.The Company also makes export sales through HON International Inc. to approximately 150 office furniture dealers and wholesale distributors serving select foreign markets. Distributors are principally located in Latin America and the Caribbean. The Company has an international field sales organization consisting of a Vice President of Sales and Marketing and
fourfive regional managers. Sales outside of the United States and Canada represented approximately 1% of net sales in fiscal2000.2001.Limited quantities of select finished goods inventories built to order awaiting shipment are
maintainedat theCompany'sCompany’s principal manufacturing plants and at its various distribution centers.Hearth Technologies Inc. sells its fireplace and stove products through approximately
3,0004,000 dealers and520460 distributors. The Company has a field sales organization of3417 regional sales managers supervising117192 salespersons and712 firms of independentmanufacturers'manufacturers’ representatives.As of December
30, 2000,29, 2001, the Company has an order backlog of approximately$111.2$93.9 million which will be filled in the ordinary course of business within the first few weeks of the current fiscal year. This compares with $111.2 million as of December 30, 2000, and $131.2 million as of January 1,2000, and $97.8 million as of January 2, 1999.2000. Backlog, in terms of percentage of net sales, was5.4%5.2%,7.3%5.4%, and5.8%7.3% for fiscal years 2001, 2000,1999,and1998,1999, respectively. TheCompany'sCompany’s products are manufactured and shipped within a few weeks following receipt of order. The dollar amount of theCompany'sCompany’s order backlog is therefore not considered by management to be a leading indicator of theCompany'sCompany’s expected sales in any particular fiscal period.For a discussion of the seasonal nature of the
Company'sCompany’s sales, see Operating Segment Information in the Notes to Consolidated Financial Statements.-8-COMPETITIONCompetition
The office furniture industry is highly competitive, with a significant number of competitors offering similar products. The Company competes by emphasizing its ability to deliver compelling value
products.products and unsurpassed customer service. In executing this strategy, the Company has two significant classes of competitors. First, the Company competes with numerous small- and medium-sized office furniture manufacturers that focus on more limited product lines and/or end-user segments and include Global Furniture Inc. (a Canadian company);National Office Furniture, a division ofKimball Office Furniture Co.; Chromcraft; Paoli; andHigh Point Furniture Industries, Inc.Teknion (a Canadian company), as well as Asian imports. Second, the Company competes with a small number of large office furniture manufacturers which control a substantial portion of the market share in the project-oriented office furniture market, such as Steelcase Inc.; Haworth, Inc.; Herman Miller, Inc.; and Knoll, Inc. Some of these large competitors have substantially greater assets, resources and capabilities in the traditional project market than the Company. Products and brands offered by these project-oriented office furniture market participants have strong acceptance in the market place and have developed, and may continue to develop, value-priced product designs to compete with the Company. The Company also faces significant price competition from its competitors and may encounter competition from new market entrants. There can be no assurance that the Company will be able to compete successfully in its markets in the future.9
Hearth products, consisting of prefabricated metal fireplaces and related products, are manufactured by a number of national and regional competitors.
A limited number of manufacturers, however, are predominant in this industry.The Company competes primarily against the other large manufacturers which include CFM Majestic Inc. (a Canadian company),and Lennox Industries Inc. (Superior and Marco brands), Martin Industries Inc., and Fireplace Manufacturers Inc. (FMI).Both office furniture and hearth products compete on the basis of price, product performance, product quality, complete and on-time delivery to the customer, and customer service and support. The Company believes that it competes principally by providing compelling value products designed to be among the best in their price range for product quality and performance, superior customer service, and short lead-times. This is made possible, in part, by the
Company'sCompany’s significant on-going investment in product development, highly efficient and low cost manufacturing operations, and an extensive distribution network.The Company is one of the largest office furniture manufacturers in the United States, and believes that it is the largest manufacturer of
value-pricedmiddle-market furniture. The Company is also the largest manufacturer and marketer of fireplaces in the United States.For further discussion of the
Company'sCompany’s competitive situation, refer to Item 7.Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations.EFFECTS OF INFLATIONEffects of Inflation
Certain business costs may, from time to time, increase at a rate exceeding the general rate of inflation. The
Company'sCompany’s objective is to offset the effect of inflation on its costs primarily through productivity increases in combination with certain adjustments to the selling price of its products as competitive market and general economic conditions permit.Investments are routinely made in
modernmodernizing plants, equipment, support systems, and forRapid Continuous ImprovementRCI programs. These investments collectively focus on business simplification and increasing productivity which helps to offset the effect of rising material and labor costs. Ongoing cost control disciplines are also routinely employed. In addition, the last-in, first-out (LIFO) valuation method is used for most of theCompany'sCompany’s inventories, which ensures the changing material and labor costs are recognized in reported income; and more importantly, these costs are recognized in pricing decisions.-9-ENVIRONMENTALEnvironmental
The Company is subject to a variety of environmental laws and regulations governing discharges of air and water; the handling, storage, and disposal of hazardous or solid waste materials; and the remediation of contamination associated with releases of hazardous substances. Although the Company believes it is in material compliance with all of the various regulations applicable to its business, there can be no assurance that requirements will not change in the future or that the Company will not incur material costs to comply with such regulations. The Company has trained staff responsible for monitoring compliance with environmental, health, and safety requirements. The
Company'sCompany’s environmental professionals work with responsible personnel at each manufacturing facility, theCompany'sCompany’s environmental legal counsel, and consultants on the management of environmental, health and safety issues. TheCompany'sCompany’s ultimate goal is to reduce and, when practical, eliminate the creation of hazardous waste in its manufacturing processes.Compliance with federal, state, and local environmental regulations has not had a material effect on the capital expenditures, earnings, or competitive position of the Company to date. The Company does not anticipate that financially material capital expenditures will be required during fiscal year
20012002 for environmental control facilities. It ismanagement'smanagement’s judgment that compliance with current regulations should not have a material effect on theCompany'sCompany’s financial condition or results of operations. However, the uncertainty of new environmental legislation and technology in this area makes it impossible to know with confidence.For additional information about the Company's environmental matters, refer to Item 3. Legal Proceedings and the Contingencies note in the Notes to Consolidated Financial Statements. BUSINESS DEVELOPMENT10
Business Development
The development of the
Company'sCompany’s business during the fiscal years ended December 29, 2001, December 30, 2000, and January 1, 2000,and January 2, 1999,is discussed in Item 7.Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations.-10-11
The Company maintains its corporate headquarters in Muscatine, Iowa, and conducts its operations at locations throughout the United States, Canada, and Mexico which house manufacturing, distribution, and retail operations and offices totaling an aggregate of approximately
9.28.9 million square feet. Of this total, approximately2.31.8 million square feet are leased, including approximately 0.3 million square feet under a capital lease.Although the plants are of varying ages, the Company believes they are well maintained, are equipped with modern and efficient equipment, and are in good operating condition and suitable for the purposes for which they are being used. The Company has sufficient capacity to increase output at most locations by increasing the use of overtime and/or number of production shifts employed.
The
Company'sCompany’s principal manufacturing and distribution facilities (100,000 square feet in size or larger) are as follows:
Location
Approximate
Square FeetOwned or
LeasedDescription
Location Square Feet Leased
of Use-------- ----------- ------ ------Cedartown, Georgia
547,014
Owned
Manufacturing wood/nonwood casegoods office furniture (1)
Chester, Virginia
382,082
Owned/
Manufacturing nonwood casegoodsLeased(2)office furniture (1) Colville, Washington 125,000 Owned Manufacturing stoves Florence, Alabama 308,763 Owned Manufacturing wood casegoods office furniture Jackson, Tennessee 155,000 Leased Manufacturing nonwood office seating Kent, Washington 189,062 Leased Manufacturing systems office furniture Lake City, Minnesota 235,000 Leased Manufacturing metal prefabricated fireplaces (1) Louisburg, North Carolina 176,354 Owned Manufacturing wood casegoods office furniture Milan, Tennessee 358,000 Leased Manufacturing systems office furniture Monterrey, Mexico 105,000 Owned Manufacturing nonwood office seating Mt. Pleasant, Iowa 288,006 Owned Manufacturing metal prefabricated fireplaces (1) Muscatine, Iowa 286,000 OwnedManufacturing nonwood casegoods office furniture
Muscatine, Iowa 578,284(1)Colville, Washington
125,000
Owned
Warehousing office furniture (1) Muscatine, Iowa 236,100Manufacturing stoves
Florence, Alabama
308,763
Owned
Manufacturing wood casegoods office furniture
Muscatine, Iowa 142,850 OwnedJackson, Tennessee
155,000
Leased
Manufacturing nonwood office seating
Kent, Washington
189,062
Leased
Manufacturing systems office furniture
Muscatine, Iowa 342,850 OwnedLake City, Minnesota
235,000
Leased
Manufacturing
systems office furniture Muscatine, Iowa 237,800metal prefabricated fireplaces (1)Louisburg, North Carolina
176,354
Owned
Manufacturing nonwood office seating Muscatine, Iowa 210,000 Owned Warehousing office furniture Muscatine, Iowa 127,400 OwnedManufacturing wood casegoods office furniture
Milan, Tennessee
358,000
Leased
Manufacturing systems office furniture
Monterrey, Mexico
105,000
Owned
Manufacturing nonwood office seating
Mt. Pleasant, Iowa
288,006
Owned
Manufacturing metal prefabricated fireplaces (1)
Muscatine, Iowa
286,000
Owned
Manufacturing nonwood casegoods office furniture
Muscatine, Iowa
578,284
Owned
Warehousing office furniture (1)
Muscatine, Iowa
236,100
Owned
Manufacturing wood casegoods office furniture
12
Muscatine, Iowa
142,850
Owned
Manufacturing systems office furniture
Muscatine, Iowa
342,850
Owned
Manufacturing systems office furniture
Muscatine, Iowa
237,800
Owned
Manufacturing nonwood office seating
Muscatine, Iowa
210,000
Owned
Warehousing office furniture
Muscatine, Iowa
127,400
Owned
Manufacturing wood casegoods office furniture
Owensboro, Kentucky
311,575
Owned
Manufacturing wood office seating
Salisbury, North Carolina
129,000
Owned
Manufacturing systems office furniture
South Gate, California
520,270
Owned
Manufacturing nonwood casegoods and seating office furniture (1)
Wayland, New York
716,484
Owned
Manufacturing wood casegoods and seating office furniture (1)
West Hazleton, Pennsylvania
268,800
Owned
Manufacturing nonwood casegoods office furniture
Williamsport, Pennsylvania 147,265 Owned Manufacturing wood office seating and casegoods Verona, Mississippi 257,000 Owned Manufacturing systems office furniture - ----(1) Also includes a regional warehouse/distribution center
(2) A capital lease
Other Company facilities, under 100,000 square feet in size, are located in various communities throughout the United States and Canada. These facilities total approximately
1,758,0001,371,000 square feet with approximately850,000456,000 square feet used for the manufacture and distribution of office furniture and approximately908,000915,000 square feet for hearth products. Of this total, approximately994,000964,000 square feet are leased.One of theseIn addition, the Company has two facilitieshasthat have been vacated andisare in the process of being marketed for sale. The Company also leases sales showroom space in office furniture market centers in several major metropolitan areas.The Company has a 40,000 square foot leased plant in Savage, Minnesota, which is subleased.
There are no major encumbrances on Company-owned properties other than outstanding mortgages on certain properties, the amount of which is disclosed in the Long-Term Debt note in the Notes to Consolidated Financial Statements, filed as a part of this report. Refer to the Property, Plant, and Equipment note in the Notes to Consolidated Financial Statements for related cost, accumulated depreciation, and net book value data.
-12-13
The Company is involved in
certain continuing activitiesvarious kinds of disputes and legal proceedings which have arisen inPennsylvania to clean-up environmental contamination at one site formerly owned by a subsidiarythe course of its business. The Company believes theCompany. The Pennsylvania environmental authorities are supervising this activity. The costs associated with this site are primarily related to the operationoutcome ofa groundwater remediation system. These coststhese disputes and proceedings will not havenot hada material effect on the financial condition or results of operations of theCompany. Due to such factors as the wide discretionCompany, although any litigation or legal proceeding has an element ofregulatory authorities regarding clean-up levels and uncertain allocation of liability at multiple party sites, estimates made prior to the approval of a formal plan of action represent management's best judgment as to estimates of reasonably foreseeable expenses based upon average remediation costs at comparable sites. The Company, therefore, has accrued liabilities reflecting management's current, best estimate of the eventual future cost of the Company's anticipated share of remediation costs. For additional information on legal proceedings involving the Company, refer to the Contingencies note included in the Notes to Consolidated Financial Statements.uncertainty.ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-13-14
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15
PART I, TABLE I
December 29, 2001
Name
Age
Family
Relationship
Position
Position
Held Since
Other Business Experience
During Past Five YearsJack D. Michaels
64
None
Chairman of the Board
President
Chief Executive Officer
Director
1996
1990
1991
1990
Stanley A. Askren
41
None
Executive Vice President
President, Allsteel Inc.
2001
2000
President, Allsteel Group (1999), Group Vice President, Systems Furniture (1998-99), The HON Company; President, Heatilator Division (1996-98), Hearth Technologies Inc.; President (1996), Heatilator Inc.
Peter R. Atherton
49
None
Vice President and Chief
Technology Officer
2001
Manager, Manufacturing and Business Process Lab (1996-01), General Electric
David C. Burdakin
46
None
Executive Vice President
President, The HON Company
2001
2000
President, HON Group (1999), Group Vice President, Steel Casegoods (1998-99), Group Vice President, Seating (1996-98), The HON Company
Jerald K. Dittmer
44
None
Vice President and
Chief Financial Officer
2001
Vice President, Finance (2000-01); Group Vice President, Seating and Wood (1999-00), Vice President, Strategic Planning (1999), Vice President and General Manager, Oak Steel and Mt. Pleasant Plants (1998-99), Vice President, Information Technology (1997-98), The HON Company; Vice President and Controller (1995-97), The Gunlocke Company
Jeffrey D. Fick
40
None
Vice President,
Member and Community Relations
1997
Secretary and Acting General Counsel (1997); Senior Counsel (1994-97)
16
Malcolm C. Fields
40
None
Vice President and Chief Information Officer
2000
Vice President, Information Technology (1998-00), The HON Company; Manager, Technical Support Services (1997-98), Manager, Process Systems (1996-97)
Robert D. Hayes
58
None
Vice President, Business Analysis and General Auditor
2001
Vice President, Internal Audit (1999-01); Vice President and Controller (1997-99), and Controller (1991-97), The HON Company
James I. Johnson
53
None
Vice President, General Counsel and Secretary
1997
General Counsel and Secretary, Norand Corporation, a portable data computing company (1990-97)
Phillip M. Martineau
54
None
Executive Vice President
2000
President and Chief Executive Officer (1996-99), Arcsmith, Inc. (Illinois Tool Works)
William F. Snydacker
56
None
Treasurer
1980
17
ITEM 5. MARKET FOR
REGISTRANT'SREGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERSThe
Company'sCompany’s common stock is listed for trading on the New York Stock Exchange (NYSE), trading symbol HNI. The Company moved to the NYSE, effective July 2, 1998, from the Nasdaq National Market System where the stock had traded under the symbol HONI. As of year-end2000,2001, the Company had6,5636,694 stockholders of record.Computershare Investor Services, L.L.C., Chicago, Illinois, serves as the
Company'sCompany’s transfer agent and registrar of its common stock. Shareholders may report a change of address or make inquiries by writing or calling: Computershare Investor Services, L.L.C., P.O. Box 1689, Chicago, IL 60690-1689 or telephone 312/588-4991.Common Stock Market Prices and Dividends (Unaudited) and Common Stock Market Price and Price/Earnings Ratio (Unaudited) are presented in the Investor Information section which follows the Notes to Consolidated Financial Statements filed as part of this report.
The Company expects to continue its policy of paying regular cash dividends on the first business day of March, June, September, and December. Dividends have been paid each quarter since the Company paid its first dividend in 1955. The average dividend payout percentage for the most recent three-year period has been
25%26% of prior year earnings. Future dividends are dependent on future earnings, capital requirements, and theCompany'sCompany’s financial condition.-16-18
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19
HON INDUSTRIES INC. AND SUBSIDIARIES
2001
2000
1999
Per Common Share Data
Income before Cumulative Effect of Accounting Changes
$
1.26
$
1.77
$
1.44
Cumulative Effect of Accounting Changes
—
—
—
Net Income
1.26
1.77
1.44
Cash Dividends
.48
.44
.38
Book Value
10.10
9.59
8.33
Net Working Capital
1.52
1.09
1.52
Operating Results (Thousands of Dollars)
Net Sales
$
1,792,438
$
2,046,286
$
1,800,931
Cost of Products Sold
1,181,140
1,380,404
1,236,612
Gross Profit
611,298
665,882
564,319
Interest Expense
8,548
14,015
9,712
Income Before Income Taxes
116,261
165,964
137,575
Income Before Income Taxes as a % of Net Sales
6.49
%
8.11
%
7.64
%
Federal and State Income Taxes
$
41,854
$
59,747
$
50,215
Effective Tax Rate
36.0
%
36.0
%
36.5
%
Income before Cumulative Effect of Accounting Changes
$
74,407
$
106,217
$
87,360
Net Income
74,407
106,217
87,360
Net Income as a % of Net Sales
4.15
%
5.19
%
4.85
%
Cash Dividends and Share Purchase Rights Redeemed
$
28,373
$
26,455
$
23,112
Addition to (Reduction of) Retained Earnings
36,759
79,762
64,248
Net Income Applicable to Common Stock
74,407
106,217
87,360
% Return on Average Shareholders’ Equity
12.76
%
19.77
%
18.14
%
Depreciation and Amortization
$
81,385
$
79,046
$
65,453
Distribution of Net Income
% Paid to Shareholders
38.13
%
24.91
%
26.46
%
% Reinvested in Business
61.87
%
75.09
%
73.54
%
Financial Position (Thousands of Dollars)
Current Assets
$
319,657
$
330,141
$
316,556
Current Liabilities
230,443
264,868
225,123
Working Capital
89,214
65,273
91,433
Net Property, Plant, and Equipment
404,971
454,312
455,591
Total Assets
961,891
1,022,470
906,723
% Return on Beginning Assets Employed
12.04
%
19.63
%
16.94
%
Long-Term Debt and Capital Lease Obligations
$
80,830
$
128,285
$
124,173
Shareholders’ Equity
592,680
573,342
501,271
Retained Earnings
532,555
495,796
416,034
Current Ratio
1.39
1.25
1.41
Current Share Data
Number of Shares Outstanding at Year-End
58,672,933
59,796,891
60,171,753
Weighted-Average Shares Outstanding During Year
59,087,963
60,140,302
60,854,579
Number of Shareholders of Record at Year-End
6,694
6,563
6,737
Other Operational Data
Capital Expenditures — Net (Thousands of Dollars)
$
36,851
$
59,840
$
71,474
Members (Employees) at Year-End
9,029
(a)
11,543
(a)
10,095
(a)
Data has been restated to include shipping and handling costs billed to customers as revenue per EITF Issue No. 00-10. Restatement of prior years are immaterial. (b)Includes acquisitions completed during year.-19-20
1998
1997
1996
Per Common Share Data
$
1.72
$
1.45
$
1.13
Income before Cumulative Effect of Accounting Changes
—
—
—
Cumulative Effect of Accounting Changes
1.72
1.45
1.13
Net Income
.32
.28
.25
Cash Dividends
7.54
6.19
4.25
Book Value
1.19
1.53
.89
Net Working Capital
Operating Results (Thousands of Dollars)
Net Sales
$
1,706,628
$
1,362,713
$
998,135
Cost of Products Sold
1,172,997
933,157
679,496
Gross Profit
533,632
429,556
318,639
Interest Expense
10,658
8,179
4,173
Income Before Income Taxes
170,109
139,128
105,267
Income Before Income Taxes as a % of Net Sales
9.97
%
10.21
%
10.55
%
Federal and State Income Taxes
$
63,796
$
52,173
$
37,173
Effective Tax Rate
37.50%
37.50
%
35.31
%
Income before Cumulative Effect of Accounting Changes
$
106,313
$
86,955
$
68,094
Net Income
106,313
86,955
68,094
Net Income as a % of Net Sales
6.23
%
6.38
%
6.82
%
Cash Dividends and Share Purchase Rights Redeemed
$
19,730
$
16,736
$
14,970
Addition to (Reduction of) Retained Earnings
86,583
37,838
33,860
Net Income Applicable to Common Stock
106,313
86,955
68,094
% Return on Average Shareholders’ Equity
25.20
%
27.43
%
29.06
%
Depreciation and Amortization
$
52,999
$
35,610
$
25,252
Distribution of Net Income
% Paid to Shareholders
18.56
%
19.25
%
21.98
%
% Reinvested in Business
81.44
%
80.75
%
78.02
%
Financial Position (Thousands of Dollars)
Current Assets
$
290,329
$
295,150
$
205,527
Current Liabilities
217,438
200,759
152,553
Working Capital
72,891
94,391
52,974
Net Property, Plant, and Equipment
444,177
341,030
234,616
Total Assets
864,469
754,673
513,514
% Return on Beginning Assets Employed
23.74
%
28.27
%
25.93
%
Long-Term Debt and Capital Lease Obligations
$
135,563
$
134,511
$
77,605
Shareholders’ Equity
462,022
381,662
252,397
Retained Earnings
351,786
265,203
227,365
Current Ratio
1.34
1.47
1.35
Current Share Data
Number of Shares Outstanding at Year-End
61,289,618
61,659,316
59,426,530
Weighted-Average Shares Outstanding During Year
61,649,531
59,779,508
60,228,590
Number of Shareholders of Record at Year-End
5,877
5,399
5,319
Other Operational Data
Capital Expenditures - Net (Thousands of Dollars)
$
149,717
$
85,491
$
44,684
Members (Employees) at Year-End
9,824
(a)
9,390
(a)
6,502
(a)
1995
1994
1993
Per Common Share Data
Income before Cumulative Effect of Accounting Changes
$
.67
$
.87
$
.69
Cumulative Effect of Accounting Changes
—
—
.01
Net Income
.67
.87
.70
Cash Dividends
.24
.22
.20
Book Value
3.56
3.17
2.83
Net Working Capital
1.07
1.27
1.23
Operating Results (Thousands of Dollars)
Net Sales
$
893,119
$
845,998
$
780,326
Cost of Products Sold
624,700
573,392
537,828
Gross Profit
268,419
272,606
242,498
Interest Expense
3,569
3,248
3,120
Income Before Income Taxes
65,517
86,338
70,854
Income Before Income Taxes as a % of Net Sales
7.34
%
10.21
%
9.08
%
Federal and State Income Taxes
$
24,419
$
31,945
$
26,216
Effective Tax Rate
37.27
%
37.00
%
37.00
%
Income before Cumulative Effect of Accounting Changes
$
41,098
$
54,393
$
44,638
Net Income
41,098
54,156
45,127
Net Income as a % of Net Sales
4.60
%
6.43
%
5.78
%
Cash Dividends and Share Purchase Rights Redeemed
$
14,536
$
13,601
$
12,587
Addition to (Reduction of) Retained Earnings
18,863
13,563
17,338
Net Income Applicable to Common Stock
41,098
54,156
45,127
% Return on Average Shareholders’ Equity
20.00
%
28.95
%
26.35
%
Depreciation and Amortization
$
21,416
$
19,042
$
16,631
Distribution of Net Income
% Paid to Shareholders
35.37
%
25.11
%
27.89
%
% Reinvested in Business
64.63
%
74.89
%
72.11
%
Financial Position (Thousands of Dollars)
Current Assets
$
194,183
$
188,810
$
188,419
Current Liabilities
128,915
111,093
110,759
Working Capital
65,268
77,717
77,660
Net Property, Plant, and Equipment
210,033
177,844
157,770
Total Assets
409,518
372,568
352,405
% Return on Beginning Assets Employed
17.91
%
24.72
%
22.14
%
Long-Term Debt and Capital Lease Obligations
$
42,581
$
45,877
$
45,916
Shareholders’ Equity
216,235
194,640
179,553
Retained Earnings
193,505
174,642
161,079
Current Ratio
1.51
1.70
1.70
Current Share Data
Number of Shares Outstanding at Year-End
60,788,674
61,349,206
63,351,692
Weighted-Average Shares Outstanding During Year
60,991,284
62,435,450
64,181,088
Number of Shareholders of Record at Year-End
5,479
5,556
4,653
Other Operational Data
Capital Expenditures — Net (Thousands of Dollars)
$
53,879
$
35,005
$
27,541
Members (Employees) at Year-End
5,933
6,131
6,257
1992
1991
Per Common Share Data
Income before Cumulative Effect of Accounting Changes
$
.59
$
.51
Cumulative Effect of Accounting Changes
—
—
Net Income
.59
.51
Cash Dividends
.19
.18
Book Value
2.52
2.32
Net Working Capital
1.23
1.07
Operating Results (Thousands of Dollars)
Net Sales
$
706,550
$
607,710
Cost of Products Sold
479,179
411,168
Gross Profit
227,371
196,542
Interest Expense
3,441
3,533
Income Before Income Taxes
61,893
52,653
Income Before Income Taxes as a % of Net Sales
8.76
%
8.66
%
Federal and State Income Taxes
$
23,210
$
19,745
Effective Tax Rate
37.50
%
37.50
%
Income before Cumulative Effect of Accounting Changes
$
38,683
$
32,908
Net Income
38,683
32,908
Net Income as a % of Net Sales
5.47
%
5.42
%
Cash Dividends and Share Purchase Rights Redeemed
$
12,114
$
11,656
Addition to (Reduction of) Retained Earnings
26,569
18,182
Net Income Applicable to Common Stock
38,683
32,908
% Return on Average Shareholders’ Equity
24.75
%
23.41
%
Depreciation and Amortization
$
15,478
$
14,084
Distribution of Net Income
% Paid to Shareholders
31.32
%
35.42
%
% Reinvested in Business
68.68
%
64.58
%
Financial Position (Thousands of Dollars)
Current Assets
$
171,309
$
150,901
Current Liabilities
91,780
82,275
Working Capital
79,529
68,626
Net Property, Plant, and Equipment
145,849
125,465
Total Assets
322,746
280,893
% Return on Beginning Assets Employed
22.18
%
19.66
%
Long-Term Debt and Capital Lease Obligations
$
50,961
$
32,734
Shareholders’ Equity
163,009
149,575
Retained Earnings
143,741
117,172
Current Ratio
1.87
1.83
Current Share Data
Number of Shares Outstanding at Year-End
64,737,912
64,417,370
Weighted-Average Shares Outstanding During Year
65,517,990
64,742,976
Number of Shareholders of Record at Year-End
4,534
4,466
Other Operational Data
Capital Expenditures — Net (Thousands of Dollars)
$
26,626
$
13,907
Members (Employees) at Year-End
5,926
5,599
(a) Includes acquisitions completed during year.
21
The following discussion of the
Company'sCompany’s historical results of operations and of its liquidity and capital resources should be read in conjunction with the Consolidated Financial Statements of the Company and related notes.RESULTS OF OPERATIONSResults of Operations
The following table sets forth the percentage of consolidated net sales represented by certain items reflected in the
Company'sCompany’s statements of income for the periods indicated.
Fiscal 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------Net sales 100.0% 100.0% 100.0% Cost of products sold 67.5 68.7 68.7 - ------------------------------------------------------------------------------------------------------------------- Gross profit 32.5 31.3 31.3 Selling and administrative expenses 23.8 22.1 20.8 Provision for closing facilities and reorganization expense - 1.1 - - ------------------------------------------------------------------------------------------------------------------- Operating income 8.7 8.1 10.5 Interest expense (net) .6 .5 .5 - ------------------------------------------------------------------------------------------------------------------- Income before income taxes 8.1 7.6 10.0 Income taxes 2.9 2.8 3.7 Net income 5.2% 4.9% 6.2% - -------------------------------------------------------------------------------------------------------------------
Fiscal
2001
2000
1999
Net sales
100.0
%
100.0
%
100.0
%
Cost of products sold
65.9
67.5
68.7
Gross profit
34.1
32.5
31.3
Selling and administrative expenses
25.9
23.8
22.1
Provision for closing facilities and reorganization expense
1.3
-
1.1
Operating income
6.9
8.7
8.1
Interest expense (net)
0.4
0.6
0.5
Income before income taxes
6.5
8.1
7.6
Income taxes
2.3
2.9
2.8
Net income
4.2
%
5.2
%
4.9
%
The Company has two reportable core operating segments: office furniture and hearth products. The
"OperatingOperating SegmentInformation"Information note included in thenotesNotes toconsolidated financial statementsConsolidated Financial Statements provides more detailed financial data with respect to these two segments.FISCAL YEAR ENDED DECEMBERFiscal Year Ended December 29, 2001, Compared to Fiscal Year Ended December 30, 2000
COMPARED TO FISCAL YEAR ENDED JANUARYNet Sales
Net sales, on a consolidated basis, decreased by 12% to $1.8 billion in 2001 from $2.0 billion in 2000. Office furniture net sales decreased 17% in 2001 to $1.37 billion from $1.65 billion in 2000. The decline in sales occurred in the retail, commercial and contract sectors. The office furniture industry reported a decrease in shipments of 17% in 2001 compared to 2000. Net sales of hearth products increased 8% to $426.1 million in 2001 from $396.3 million in 2000. The Company’s most recent five-year compounded annual growth rate in net sales is 12%.
Gross Profit
Gross profit dollars decreased 8% to $611.3 million in 2000 from $665.9 million in the prior year. The gross margin percentage increased to 34.1% for 2001 from 32.5% in 2000. The improvement in gross margin percentage is due to new product introductions, and rapid continuous improvement, cost containment and business simplification initiatives.
Selling and Administrative Expenses
Selling and administrative expenses decreased by 5% to $464.2 million in 2001 from $487.8 million in the prior year. Selling and administrative expenses, as a percent of net sales, increased to 25.9% in 2001 from 23.8% in 2000. This increase was due to lower overall sales volume, development of new products, and continued investment in sales and marketing expenses associated with the Company’s business simplification, end-user focus and branding strategies.
22
Selling and administrative expenses include freight expense for shipments to customers, product development costs, and amortization expenses of intangible assets. The Selling and Administrative Expenses note included in the Notes to Consolidated Financial Statements provides further information regarding the comparative expense levels for these major expense items.
During the second quarter of 2001, the Company recorded a pretax charge of $24.0 million, $15.4 million after tax or $0.26 per common share for a restructuring plan that involved consolidating physical facilities, discontinuing low volume product lines, and reduction of workforce. Included in this charge was the closedown of three of its office furniture facilities located in Williamsport, Pennsylvania, Tupelo, Mississippi, and Santa Ana, California. The charge included $16.2 million of asset impairments for manufacturing equipment that will be disposed of and $7.8 million of restructuring expenses. Included in the $7.8 million is $3.1 million for severance arising from the elimination of approximately 600 plant member positions, $0.8 million for other member-related costs, and $3.9 million for certain other expenses associated with the closing of facilities.
Operating Income
Operating income decreased almost 31% to $123.1 million in 2001 from $178.0 million in 2000. Excluding a pretax charge for restructuring and impairment of $24.0 million in second quarter 2001, operating income decreased 17% to $147.1 million. Operating profit in the office furniture segment decreased in 2001 as a percent of net sales to 8.2%, or 9.9% prior to the restructuring charge, compared to 10.4% in 2000. The decrease is due to lower overall sales volume. Operating profit in the hearth products segment increased in 2001 as a percent of net sales to 9.2%, or 9.6% prior to the restructuring charge, compared to 7.6% in the prior year. This improvement is due to increased sales volume, simplification of the business structure and cost containment.
Net Income
Net income decreased by 30% to $74.4 million in 2001 from $106.2 million in the prior year. Excluding the $15.4 million after-tax charge for the restructuring plan referred to above, net income decreased by 15% to $89.8 million. The decrease is due to lower overall sales volume and increased selling and administrative expenses offset by reduced interest expense.
Net income per common share decreased by 29% to $1.26 in 2001 from $1.77 for 2000. Excluding the after-tax charge of $0.26 per share for the restructuring plan, net income per common share decreased 14% to $1.52. The Company’s net income per share performance for 2001 benefited from the Company’s common stock repurchase program.
Fiscal Year Ended December 30, 2000, Compared to Fiscal Year Ended January 1, 2000
NET SALESNet Sales
Net sales, on a consolidated basis, increased by 14% to $2.0 billion in 2000 from $1.8 billion in 1999. Office furniture net sales increased 9% in 2000 to $1.65 billion from $1.51 billion in 1999. Net sales of hearth products increased 39% to $396.3 million in 2000 from $285.9 million in 1999 due mainly to the
Company'sCompany’s acquisition of two leading hearth products distributors, American Fireplace Company (AFC) and the Allied Group (Allied), which were joined to form Hearth Services Inc., a subsidiary of Hearth Technologies Inc.. The office furniture industry reported an increase in shipments of 9% in 2000 compared to 1999. TheCompany'sCompany’s most recent five-year compounded annual growth rate in net sales is 18%.GROSS PROFITGross Profit
Gross profit dollars increased 18% to $665.9 million in 2000 from $564.3 million in the prior year. Gross margin increased to 32.5% for 2000 from 31.3% in 1999. The improvement reflects the combination of improved price realization and productivity from rapid continuous improvement programs.
SELLING AND ADMINISTRATIVE EXPENSES23
Selling and Administrative Expenses
Selling and administrative expenses increased by 23% to $487.8 million in 2000 from $398.2 million in the prior year. Selling and administrative expenses, as a percent of net sales, increased to 23.8% in 2000 from 22.1% in 1999. The largest contributor to this increase was the acquisition of Hearth Services Inc.,which is a retail distributor. Retail distribution is a different business model that has proportionally higher selling and administrative costs than manufacturing. The Company is applying rapid continuous improvement philosophies to reduce these costs.
-20-The Company also continued to experience increased investment in sales and marketing expenses associated with refocusing the Company and developing branding programs in the office furniture segment. The Company was able to reduce freight expense as a percent of net sales despite increased fuel and carrier costs.
Selling and administrative expenses include freight expense to the customer, product development costs, and amortization expenses of intangible assets. The
"Selling“Selling and AdministrativeExpenses"Expenses” note included in the Notes to Consolidated Financial Statements provides further information regarding the comparative expense levels for these major expense items.OPERATING INCOMEOperating Income
Operating income increased by
7%22% to $178.0 million in 2000 from$166.1$146.4 million(excluding a one-time pre-taxin 1999. Excluding the pretax charge for closing facilities and reorganization expense of $19.7million)million in1999.1999, operating income increased by 7 percent. The increase is due mainly to increased sales and gross margins.NET INCOMENet Income
Net income increased by
6%22% to $106.2 million in 2000 from$99.9$87.4 millionexcludingin the prior year. Excluding the $12.5 millionnonrecurringafter-tax charge for the closing of facilities and reorganization expenses,in the prior year.net income increased 6 percent. This increase is attributable primarily to increased sales and gross margins. Net income was favorably impacted by a decrease in theCompany'sCompany’s effective tax rate from 36.5% in 1999 to 36.0% in 2000 resulting from favorable state income tax initiatives.Net income per common share increased by
8%23% to $1.77 in 2000 from$1.64 (excluding a nonrecurring$1.44 in 1999. Excluding the after-tax charge of $0.20 pershare)share in1999.1999 for the closing of facilities and reorganization expenses, net income per common share increased by 8%. TheCompany'sCompany’s net income per share performance for 2000 also benefited from theCompany'sCompany’s common stock repurchase program.FISCAL YEAR ENDED JANUARY 1, 2000, COMPARED TO FISCAL YEAR ENDED JANUARY 2, 1999 NET SALES Net sales, on a consolidated basis, increased by 6% to $1.8 billion in 1999 from $1.7 billion in 1998. The Company increased sales in both core operating segments due to the continued focus on superior customer serviceLiquidity and
rapid introduction of new innovative and compelling value products. Office furniture net sales increased 4% in 1999 to $1.51 billion from $1.46 billion in 1998. Net sales of hearth products increased 16% to $285.9 million in 1999 from $246.0 million in 1998. The office furniture industry reported a decline in shipments of 1% in 1999 compared to 1998. The hearth products industry annual growth rate is estimated at 6% to 7%. The Company's most recent five-year compounded annual growth rate in net sales is 16%. GROSS PROFIT Gross profit dollars increased 6% to $564.3 million in 1999 from $533.6 million in the prior year. Gross margin held steady at 31.3% for 1999 and 1998. The Company is continuing to focus on improving gross margins. A tight labor market made it more difficult than anticipated to staff facilities, causing an increase in backlog and additional overtime, training, and expenses associated with moving production to alternate plant locations. The Company was able to fill positions in the fourth quarter and implemented plans to ensure workers are in place to meet order demands. Gross profit also included start-up costs associated with the Monterrey, Mexico, production facility. SELLING AND ADMINISTRATIVE EXPENSES Selling and administrative expenses increased by 12% to $398.2 million in 1999 from $354.5 million in the prior year. Selling and administrative expenses, as a percentage of net sales, increased to 22.1% in 1999 from 20.8% in 1998. The Company has implemented a number of internal initiatives to better serve customers through providing complete, on-time, and undamaged orders quickly. These initiatives have resulted in increased freight costs. The Company has contracted with distribution experts and is currently implementing a new logistical management system to lower freight costs while still providing excellent service execution to customers. -21-The Company also launched a strategic initiative during the fourth quarter to strengthen its office furniture market focus. Allsteel Inc, which was purchased in 1997, and The HON Company had been operating as one business unit.Capital ResourcesDuring
the fourth quarter, the two operations were split into two separate business units. The HON Company serves the open-line, middle-market segment, and Allsteel Inc. serves the project-oriented contract market. The Company incurred additional costs related to this initiative in the near-term, but these investments will be leveraged as the companies increase sales and grow their market shares. Both business units continue to be reported under the Company's office furniture segment reported in the Operating Segment Information note included in the Notes to Consolidated Financial Statements. Selling and administrative expenses for 1999 were significantly influenced by increased freight expense to the customer, product development costs, and amortization expenses of intangible assets. The Selling and Administrative Expenses note, included in the Notes to the Consolidated Financial Statements, provides further information regarding the comparative expense levels for these major expense items. OPERATING INCOME Operating income decreased by 7.3% to $166.1 million (excluding a one-time pre-tax charge for closing facilities and reorganization expense of $19.7 million) in 1999 from $179.2 million in 1998. The decrease is due principally to increased selling and administrative expenses. NET INCOME Net income, excluding the $12.5 million nonrecurring after-tax charge for the closing of facilities and reorganization expenses, decreased by 6.1% to $99.9 million in 1999 from $106.3 million in the prior year. This decrease is attributable primarily to increased selling and administrative expenses. Net income was favorably impacted by a decrease in the Company's effective tax rate from 37.5% in 1998 to 36.5% in 1999 resulting from favorable state income tax initiatives. Net income per common share decreased by 4.7% to $1.64 (excluding a nonrecurring after-tax charge of $0.20 per share) in 1999 from $1.72 for 1998. The Company's net income per share performance for 1999 also benefited from the Company's common stock repurchase program. FISCAL YEAR ENDED JANUARY 2, 1999, COMPARED TO FISCAL YEAR ENDED JANUARY 3, 1998 NET SALES Net sales, on a consolidated basis, increased by 25% to $1.71 billion in 1998 from $1.36 billion in the prior year even though fiscal year 1998 was a normal 52-week year compared to 1997 being a 53-week year. The Company increased sales in both core operating segments due to the continued focus on superior customer service, rapid introduction of new innovative and compelling value products, and acquisitions. Office furniture net sales increased 26% in 1998 to $1.5 billion from $1.16 billion in 1997. Net sales of hearth products increased 20% to $246.0 million in 1998 from $204.5 million in 1997. Both core operating segments experienced another year of strong growth during 1998. The office products industry reported an annual growth rate of 7.8%, and hearth products an estimated 10%. The Company's most recent five-year compounded annual growth rate is 17% in net sales. GROSS PROFIT Gross profit increased 24% to $533.6 million in 1998 from $429.6 million in the prior year. Gross margin decreased to 31.3% for 1998 compared to 31.5% for 1997. This decrease was due to selling price reductions on select products to increase sales volume, which were only partially offset by productivity gains, and the adverse impact of the Allsteel acquisition not achieving the Company's margin standards as rapidly as projected. -22-SELLING AND ADMINISTRATIVE EXPENSES Selling and administrative expenses increased by 25% to $354.5 million from $284.4 million in the prior year. Selling and administrative expenses, as a percentage of net sales, decreased to 20.8% in 1998 from 20.9% in 1997. Management places major emphasis on controlling and reducing selling and administrative expenses. The Company expects to leverage these costs as sales grow; however, increased costs to meet competitive conditions offset a portion of the efficiency and leveraging gains. Selling and administrative expenses include freight expense to the customer, product development costs, and amortization expenses of intangible assets. The "Selling and Administrative Expenses" note included in the Notes to Consolidated Financial Statements provides further information regarding the comparative expense levels for these major expense items. OPERATING INCOME Operating income increased by 23% to $179.2 million in 1998 from $145.2 million in 1997. The increase is due to increased sales and lower selling and administrative expenses as a percent of sales. NET INCOME Net income increased by 22% to $106.3 million in 1998 from $87.0 million in 1997. This increase is a result of the higher operating income being partially offset by an increase in interest expense associated with acquisition and capital expenditures. Net income per common share increased by 19% to $1.72 in 1998 from $1.45 in 1997. Average shares outstanding increased to 61.6 million in 1998 from 59.8 million in 1997 as a result of the weighting of the October 1997 primary stock offering. LIQUIDITY AND CAPITAL RESOURCES During 2000,2001, cash flow from operations was$204.9$227.8 million, which provided the funds necessary to meet working capital needs, help finance acquisitions, invest in capital improvements, repay long-term debt, repurchase common stock, and pay increased dividends.CASH MANAGEMENTThe Company does not have any off balance sheet financing arrangements.Cash Management
Cash, cash equivalents, and short-term investments totaled $78.8 million in 2001 compared to $3.2 million
compared toat the end of 2000 and $22.2 million at the end of1999 and $17.7 million at the end of 1998.1999. These funds, coupled with cash from future operations and additional long-term debt, if needed, are expected to be adequate to finance operations, planned improvement, and internal growth. The Company is not aware of any known trends or demands, commitments, events or uncertainties that are reasonably likely to result in its liquidity increasing or decreasing in any material way.24
The Company places special emphasis on the management and reduction of its working capital with a particular focus on trade receivables and inventory levels. The success achieved in managing receivables is in large part a result of doing business with quality customers and maintaining close communications with them. Trade receivable days outstanding have averaged
aboutapproximately 37 days over the past three years. Inventory levels and turns continue to improve as afunctionresult of reducing production cycle times. Inventory turns have been in the 17 to 18 times range over the past three years.CAPITAL EXPENDITURE INVESTMENTSCapital Expenditure Investments
Capital expenditures, net of disposals, were $36.9 million in 2001, $59.8 million in 2000, and $71.5 million in
1999, and $149.7 million in 1998.1999. Expenditures during 2001, 2000,1999,and19981999 have been consistently focused on machinery and equipmentand facility expansionthat is needed to support new products, process improvements, cost-savings initiatives, and creatingadditional andmore efficient production and warehousing capacity.ACQUISITIONSAcquisitions
During 2001, the Company completed the acquisition of three small hearth product distributors for a total purchase price of approximately $7.6 million. The acquisitions were accounted for using the purchase method, and the results of the three distributors have been included in the Company’s financial statements since the date of acquisition.
On February 29, 2000, the Company completed the acquisition
of its Hearth Services Inc. division, which consistsof two leading hearth products distributors, American Fireplace Company (AFC) and the Allied Group (Allied), establishing the Company as the leading manufacturer and distributor in the hearth products industry, for a purchase price of approximately $135 million.-23-In February 1998, the Company completed the acquisition of Aladdin Steel Products, Inc., a manufacturer of decorative gas- and wood-burning stoves, for a purchase price of approximately $10.2 million. This acquisition allowed the Company to strengthen its position in the hearth products market. LONG-TERM DEBTLong-Term Debt
Long-term debt, including capital lease obligations, was
18%12% of total capitalization at December 29, 2001, 18% at December 30, 2000, and 20% at January 1,2000, and 23% at January 2, 1999.2000. The Company does not expect future capital resources to be a constraint on planned growth.Significant additionalAdditional borrowing capacity of $200 million is available through a revolving bank credit agreement in the event cash generated from operations should be inadequate to meet future needs.CASH DIVIDENDSThe current revolving bank credit agreement expires in June 2002; however, management is in the process of negotiating a new agreement. Certain of the Company’s credit agreements include covenants that limit the assumption of additional debt and lease obligations. The Company has been and currently is in compliance with the covenants related to the debt agreements.Contractual Obligations
The following table discloses the Company’s obligations and commitments to make future payments under contracts:
Payments Due by Period
Contractual Obligations
Total
Less
than 1
1-3
years
4-5
years
After 5
years
Long-Term Debt
85,354
5,784
60,162
1,185
18,223
Capital Lease Obligations
2,935
1,078
422
422
1,013
Operating Leases
45,874
12,373
18,470
10,028
5,003
Other Long-Term Obligations
9,334
2,215
2,046
987
4,086
Total Contractual Cash
143,497
21,450
81,100
12,622
28,325
25
Related Party Transactions
The Company has convertible debentures in the amount of $58.1 million that are payable to former owners of businesses that were acquired by the Company. These individuals remain as employees of the Company following the acquisitions.
The Company has operating leases for office and production facilities with annual rentals totaling $450,000 with the former owners of a business acquired in 1996. These individuals continue as officers of a subsidiary of the Company following the acquisition.
Cash Dividends
Cash dividends were
$0.44$0.48 per common share for 2001, $0.44 for 2000, and $0.38 for1999, and $0.32 for 1998.1999. Further, the Board of Directors announced a9.1%4.2% increase in the quarterly dividend from$0.11$0.12 to$0.12$0.125 per common share effective with the March 1,2001,2002, dividendpayment.payment for shareholders of record at the close of business February 22, 2002. The previous quarterly dividend increase was from$0.095$0.11 to$0.11,$0.12, effective with the March 1,2000,2001, dividendpayment.payment for shareholders of record at the close of business February 21, 2001. A cash dividend has been paid every quarter since April 15, 1955, and quarterly dividends are expected to continue. The average dividend payout percentage for the most recent three-year period has been25%26% of prior year earnings.STOCK SPLIT OnCommon Share Repurchases
During 2001, the Company repurchased 1,472,937 shares of its common stock at a cost of approximately $35.1 million, or an average price of $23.80. As of December 29, 2001, approximately $78.6 million of the $100.0 million authorized on February
11, 1998,14, 2001, by the Board of Directorsannounced a two-for-one stock split in the form of a 100 percent stock dividend that was paid on March 27, 1998, to shareholders of record on March 6, 1998. Shareholders received one share of common stockforeach share held on record date. COMMON SHARE REPURCHASESrepurchases remained unspent. During 2000, the Company repurchased 837,552 sharesof its common stockat a cost of approximately $18.0 million, or an average price of $21.46.As of December 30, 2000, approximately $13.6 million of the $70.0 million authorized by the Board of Directors for repurchases remained unspent. On February 14, 2001, the Board authorized an additional $100 million for the Company's share repurchase program.During 1999, the Company repurchased 1,408,624 shares at a cost of approximately $30.9 million, or an average price of $21.91.During 1998, the Company repurchased 529,284 shares at a cost of approximately $12.2 million, or an average price of $23.04. LITIGATION AND UNCERTAINTIESLitigation and Uncertainties
The Company is involved in various legal actions arising in the course of business. These uncertainties are referenced in the Contingencies note included in the Notes to Consolidated Financial Statements.
LOOKING AHEADCritical Accounting Policies
The Company’s critical accounting policies include:
Revenue recognition - The Company
believesrecognizes revenue upon thesoftnessshipment of goods. Revenue includes freight charged to customers; related costs are included in selling and administrative expense.Allowance for doubtful accounts - The allowance for receivables is developed based on several factors including overall customer credit quality, historical write-off experience and specific account analyses that project the ultimate collectibility of the account. As such, these factors may change over time causing the reserve level to adjust accordingly.
Inventory valuation - The Company values its inventory at the lower of cost or market by the last in, first out (LIFO) method. Additionally, the Company evaluates its inventory reserves in terms of excess and obsolete exposures. This evaluation includes such factors as anticipated usage, inventory turnover, inventory levels and ultimate product sales value. As such, these factors may change over time causing the reserve level to adjust accordingly.
26
Self-insurance reserves - The Company is partially self-insured for general liability, workers’ compensation, and certain employee health benefits. The general and workers’ compensation liabilities are managed through a wholly owned insurance captive; the related liabilities are included in the
economy may have an adverse effectaccompanying financial statements. The Company’s policy is to accrue amounts equal to the actuarially determined liabilities. The actuarial valuations are based onnet saleshistorical information along with certain assumptions about future events. Changes in assumptions for such matters as legal actions, medical costs, andoperating incomechanges in actual experience could cause these estimates to change in thefirst halfnear term.Recent Accounting Pronouncements
During 2001, the Financial Accounting Standards Board finalized Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” The Company implemented SFAS No. 141 on July 1, 2001.
However,SFAS No. 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method of accounting. The Company intends to adopt SFAS No. 142 on December 30, 2001, the beginning of its 2002 fiscal year. With the adoption of SFAS No. 142, goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill will be assessed for impairment by applying a fair-value-based test. The Company does not anticipate recognizing any impairment of goodwill upon adoption. The Company will stop recording, on an annual basis, approximately $9.5 million of goodwill amortization upon adoption.The Financial Accounting Standards Board also finalized SFAS No. 143, “Accounting for Asset Retirement Obligations,” and SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” during 2001. The Company intends to adopt Statement No. 143 on December 29, 2002, the beginning of its 2003 fiscal year and Statement No. 144 on December 30, 2001, the beginning of its 2002 fiscal year. The adoption of these Statements is not expected to have a material impact on the Company’s financial statements.
Looking Ahead
Due to the current economic environment, the Company anticipates that 2002 will be an extremely challenging year, especially during the first six months. DRI-WEFA, the Business and Institutional Furniture Manufacturer’s Association’s (BIFMA) forecasting consultant, is
cautiously optimistic aboutprojecting theresultsoffice furniture industry to be down 13 percent in 2002 over 2001. The Company continues to focus on new product development and streamlining processes and operations through simplification and rapid continuous improvement. An announcement was made of the closing of an office furniture facility in January 2002, in Jackson, Tennessee, to help reduce the Company’s permanent cost structure. The Company is also continuing its focus on long-term shareholder value by making investments for thesecond half of the year based on economic improvement,future. These investments include innovative newproduct introductions,products, technology, end user focus, brand building andimproved price realization. -24-increased distribution. 27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no material financial exposure to the various financial instrument market risks covered under this rule. Currently, the Company has no derivative financial instruments or off-balance sheet financing arrangements. For information related to the
Company'sCompany’s long-term debt, refer to the Long-Term Debt disclosure in the Notes to Consolidated Financial Statements filed as part of this report.ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements listed under Item 14 (a)(1) and (2) are filed as part of this report.
The Summary of Unaudited Quarterly Results of Operations follows the Notes to Consolidated Financial Statements filed as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
-25-28
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information under the caption
"Election“Election ofDirectors"Directors” of theCompany'sCompany’s Proxy Statement for the Annual Meeting of Shareholders to be held on May7, 2001,6, 2002, is incorporated herein by reference. For information with respect to executive officers of the Company, see Part I, Table I"Executive“Executive Officers of the Registrant."”The information under the caption
"Section“Section 16(a) Beneficial Ownership ReportingCompliance"Compliance” of theCompany'sCompany’s Proxy Statement for the Annual Meeting of Shareholders to be held on May7, 2001,6, 2002, is incorporated herein by reference.ITEM 11. EXECUTIVE COMPENSATION
The information under the captions
"Election“Election ofDirectors"Directors” and"Executive Compensation"“Executive Compensation” of theCompany'sCompany’s Proxy Statement for the Annual Meeting of Shareholders to be held on May7, 2001,6, 2002, is incorporated herein by reference.ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the captions
"Election“Election ofDirectors"Directors” and"Beneficial“Beneficial Owners of CommonStock"Stock” of theCompany'sCompany’s Proxy Statement for the Annual Meeting of Shareholders to be held on May7, 2001,6, 2002, is incorporated herein by reference.The information under the caption
"Section“Section 16(a) Beneficial Ownership ReportingCompliance"Compliance” of theCompany'sCompany’s Proxy Statement for the Annual Meeting of Shareholders to be held on May7, 2001,6, 2002, is incorporated herein by reference.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption
"Certain“Certain Relationships and RelatedTransactions"Transactions” of theCompany'sCompany’s Proxy Statement for the Annual Meeting of Shareholders to be held on May7, 2001,6, 2002, is incorporated herein by reference.-26-29
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1)
FINANCIAL STATEMENTSFinancial StatementsThe following consolidated financial statements of HON INDUSTRIES Inc. and Subsidiaries included in the
Company's 2000Company’s 2001 Annual Report to Shareholders are filed as a part of this report pursuant to Item 8:
Page ----Report of Independent Public Accountants
........................................ 33Notes to Consolidated Financial Statements
...................................... 38-27-(2) Financial Statement Schedules
The following consolidated financial statement schedule of the Company and subsidiaries is attached pursuant to Item 14(d):
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
(b) Reports on Form 8-K
There are no reports on Form 8-K filed during the last quarter of the period covered by this report.
30
(c)
EXHIBITSExhibitsAn exhibit index of all exhibits incorporated by reference into, or filed with, this Form 10-K appears on Page
57.58. The following exhibits are filed herewith:Exhibit ------- (3ii) By-Laws (10i) 1995 Stock-Based Compensation Plan (10xv) HON INDUSTRIES Inc. Long-Term Performance Plan (21) Subsidiaries of the Registrant (23) Consent of Independent Public Accountants (99B) Executive Deferred Compensation Plan (d) Financial Statement Schedules See Item 14(a)(2). -28-
Exhibit(10vi)
1994 Member Stock Purchase Plan
(10xiv)
HON INDUSTRIES Inc. Profit-Sharing Retirement Plan
(21)
Subsidiaries of the Registrant
(23)
Consent of Independent Public Accountants
(99C)
Letter to Securities and Exchange Commission — Arthur Andersen LLP
31
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
HON INDUSTRIES Inc. Date: March 27, 2001 By: /s/ Jack D. Michaels ----------------------------- Jack D. Michaels Chairman, President and CEO
HON INDUSTRIES Inc.
Date: March 22, 2002
By:
/s/ Jack D. Michaels
Jack D. Michaels
Chairman, President and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Each Director whose signature appears below authorizes and appoints Jack D. Michaels as his or her attorney-in-fact to sign and file on his or her behalf any and all amendments and post-effective amendments to this report.
Signature
Title
Date
--------- ----- ----/s//s/ Jack D. Michaels
Chairman, President and CEO,
3/
27/01 - --------------------------------------------22/02Jack D. Michaels
Principal Executive Officer,
Jack D. Michaelsand Director
/s//s/ Jerald K. Dittmer
Vice President,
Finance and3/
27/01 - -------------------------------------------- Controller, and Principal22/02Jerald K. Dittmer
Accounting Officer /s/ David C. Stuebe Vice President and 3/27/01 - --------------------------------------------Chief Financial Officer,
David C. Stuebe /s/andPrincipal Accounting Officer
/s/ Gary M. Christensen
Director
3/
27/01 - --------------------------------------------22/02Gary M. Christensen
/s//s/ Robert W. Cox
Director
3/
27/01 - --------------------------------------------22/02Robert W. Cox
/s//s/ Cheryl A. Francis
Director
3/
27/01 - --------------------------------------------22/02Cheryl A. Francis
/s/ W August Hillenbrand/s/ M. Farooq Kathwari
Director
3/
27/01 - -------------------------------------------- W August Hillenbrand /s/22/02M. Farooq Kathwari
/s/ Robert L. Katz
Director
3/
27/01 - --------------------------------------------22/02Robert L. Katz
/s//s/ Dennis J. Martin
Director
3/
27/01 - --------------------------------------------22/02Dennis J. Martin
/s/32
Signature
Title
Date
/s/ Abbie J. Smith
Director
3/
27/01 - --------------------------------------------22/02Abbie J. Smith
/s//s/ Richard H. Stanley
- --------------------------------------------Director
3/22/02
Richard H. Stanley
Director 3/27/01 /s//s/ Brian E. Stern
Director
3/
27/01 - --------------------------------------------22/02Brian E. Stern
/s//s/ Lorne R. Waxlax
Director
3/
27/01 - --------------------------------------------22/02Lorne R. Waxlax
-31-33
(THIS PAGE INTENTIONALLY LEFT BLANK)
34
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of HON INDUSTRIES Inc.
We have audited the accompanying consolidated balance sheets of HON
IndustriesINDUSTRIES Inc. and subsidiaries as of December 29, 2001, December 30, 2000, and January 1, 2000,and January 2, 1999,and the related consolidated statements of income,shareholders'shareholders’ equity, and cash flows for each of the fiscal years then ended. These financial statements are the responsibility of theCompany'sCompany’s management. Our responsibility is to express an opinion on theseconsolidatedfinancial statements based on ouraudit.audits.We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
consolidatedfinancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in theconsolidatedfinancial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overallconsolidatedfinancial statement presentation. We believe that our audits provide a reasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of HON INDUSTRIES Inc. and subsidiaries as of December 29, 2001, December 30, 2000, and January 1, 2000,
and January 2, 1999,and the results of its operations and its cash flows for each of the three fiscal years then ended in conformity with accounting principles generally accepted in the United States.Arthur Andersen LLP
Chicago, Illinois
February
5, 2001 -33-1, 2002 35
HON
INDUSTRIESINDUSTRIES INC.AND SUBSIDIARIESANDSUBSIDIARIES
For the Years
2001
2000
1999
(Amounts in thousands, except for per share data)
Net sales
$
1,792,438
$
2,046,286
$
1,800,931
Cost of products sold
1,181,140
1,380,404
1,236,612
Gross Profit
611,298
665,882
564,319
Selling and administrative expenses
464,206
487,848
398,197
Provision for closing facilities and reorganization expenses
24,000
—
19,679
Operating Income
123,092
178,034
146,443
Interest income
1,717
1,945
844
Interest expense
8,548
14,015
9,712
Income Before Income Taxes
116,261
165,964
137,575
Income taxes
41,854
59,747
50,215
Net Income
$
74,407
$
106,217
$
87,360
Net Income Per Common Share - Basic & Diluted
$
1.26
$
1.77
$
1.44
The accompanying notes are an integral part of the consolidated financial statements.
36
HON
INDUSTRIESINDUSTRIES INC.AND SUBSIDIARIESANDSUBSIDIARIES
As of Year-End
2001
2000
1999
(Amounts in thousands)
Assets
Current Assets
Cash and cash equivalents
$
78,838
$
3,181
$
22,168
Receivables
161,390
211,243
196,730
Inventories
50,140
84,360
74,937
Deferred income taxes
14,940
19,516
13,471
Prepaid expenses and other current assets
14,349
11,841
9,250
Total Current Assets
319,657
330,141
316,556
Property, Plant, and Equipment
404,971
454,312
455,591
Goodwill
214,337
216,371
113,116
Other Assets
22,926
21,646
21,460
Total Assets
$
961,891
$
1,022,470
$
906,723
Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable and accrued expenses
$
216,184
$
240,540
$
217,110
Income taxes
6,112
12,067
—
Note payable and current maturities of long-term debt
6,715
10,408
6,106
Current maturities of other long-term obligations
1,432
1,853
1,907
Total Current Liabilities
230,443
264,868
225,123
Long-Term Debt
79,570
126,093
119,860
Capital Lease Obligations
1,260
2,192
4,313
Other Long-Term Liabilities
18,306
18,749
18,015
Deferred Income Taxes
39,632
37,226
38,141
Commitments and Contingencies
Shareholders’ Equity
Common stock
58,673
59,797
60,172
Additional paid-in capital
891
17,339
24,981
Retained earnings
532,555
495,796
416,034
Accumulated other comprehensive income
561
410
84
Total Shareholders’ Equity
592,680
573,342
501,271
Total Liabilities and Shareholders’ Equity
$
961,891
$
1,022,470
$
906,723
The accompanying notes are an integral part of the consolidated financial statements.
37
HON
INDUSTRIESINDUSTRIES INC.AND SUBSIDIARIESANDSUBSIDIARIES
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Total
Shareholders’
Equity
(Amounts in thousands)
Balance, January 2, 1999
$
61,290
$
48,348
$
351,786
$
598
$
462,022
Comprehensive income:
Net income
87,360
87,360
Other comprehensive income
(514
)
(514
)
Comprehensive income
86,846
Cash dividends
(23,112
)
(23,112
)
Common shares — treasury:
Shares purchased
(1,409
)
(29,457
)
(30,866
)
Shares issued under Members Stock Purchase Plan and stock awards
291
6,090
6,381
Balance, January 1, 2000
60,172
24,981
416,034
84
501,271
Comprehensive income:
Net income
106,217
106,217
Other comprehensive income
326
326
Comprehensive income
106,543
Cash dividends
(26,455
)
(26,455
)
Common shares — treasury:
Shares purchased
(838
)
(17,135
)
(17,973
)
Shares issued under Members Stock Purchase Plan and stock awards
463
9,493
9,956
Balance, December 30, 2000
59,797
17,339
495,796
410
573,342
Comprehensive Income:
Net income
74,407
74,407
Other comprehensive income
151
151
Comprehensive income
74,558
Cash dividends
(28,373
)
(28,373
)
Common shares — treasury:
Shares purchased
(1,473
)
(24,311
)
(9,275
)
(35,059
)
Shares issued under Members Stock Purchase Plan and stock awards
349
7,863
8,212
Balance, December 29, 2001
$
58,673
$
891
$
532,555
$
561
$
592,680
The accompanying notes are an integral part of the consolidated financial statements.
38
HON
INDUSTRIESINDUSTRIES INC.AND SUBSIDIARIESANDSUBSIDIARIES
For the Years
2001
2000
1999
(Amounts in thousands)
Net Cash Flows From (To) Operating Activities:
Net income
$
74,407
$
106,217
$
87,360
Noncash items included in net income:
Depreciation and amortization
81,385
79,046
65,453
Other postretirement and postemployment benefits
1,757
1,572
2,329
Deferred income taxes
6,962
(7,213
)
6,033
Asset impairment
16,200
—
—
Other — net
109
90
(121
)
Changes in working capital, excluding acquisition and disposition:
Receivables
47,897
3,961
(13,154
)
Inventories
35,048
6,410
(7,712
)
Prepaid expenses and other current assets
(1,661
)
(1,616
)
391
Accounts payable and accrued expenses
(26,149
)
5,483
19,838
Income taxes
(5,957
)
11,808
(2,178
)
Increase in other liabilities
(2,198
)
(838
)
(2,054
)
Net cash flows from (to) operating activities
227,800
204,920
156,185
Net Cash Flows From (To) Investing Activities:
Capital expenditures — net
(36,851
)
(59,840
)
(71,474
)
Capitalized software
(1,757
)
(2,192
)
(3,530
)
Acquisition spending, net of cash acquired
(8,748
)
(134,696
)
(8,932
)
Short-term investments — net
-
-
169
Other — net
343
(3
)
(290
)
Net cash flows from (to) investing activities
(47,013
)
(196,731
)
(84,057
)
Net Cash Flows From (To) Financing Activities:
Purchase of HON INDUSTRIES common stock
(35,059
)
(17,973
)
(30,866
)
Proceeds from long-term debt
36,218
155,181
147,055
Payments of note and long-term debt
(87,365
)
(147,458
)
(167,052
)
Proceeds from sale of HON INDUSTRIES common stock to members
9,449
9,529
6,515
Dividends paid
(28,373
)
(26,455
)
(23,112
)
Net cash flows from (to) financing activities
(105,130
)
(27,176
)
(67,460
)
Net increase (decrease) in cash and cash equivalents
75,657
(18,987
)
4,668
Cash and cash equivalents at beginning of year
3,181
22,168
17,500
Cash and cash equivalents at end of year
78,838
3,181
22,168
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest
$
8,646
$
13,395
$
9,803
Income taxes
$
40,916
$
54,634
$
46,822
The accompanying notes are an integral part of the consolidated financial statements.
39
HON
INDUSTRIESINDUSTRIES INC.AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NATURE OF OPERATIONSANDSUBSIDIARIESNotes to Consolidated Financial Statements
Nature of Operations
HON INDUSTRIES Inc., with its subsidiaries (the Company), is a national manufacturer and marketer of office furniture and hearth products. Both industries are reportable segments; however, the
Company'sCompany’s office furniture business is its principal line of business. Refer to the"OperatingOperating SegmentInformation"Information note for further information. Office furniture products are sold through a national system of dealers, wholesalers, mass merchandisers, warehouse clubs, retail superstores,and toend-user customers, and to federal and state governments. Dealer, wholesaler, and retail superstores are the major channels based on sales. Hearth products include wood-, pellet-, and gas-burning factory-built fireplaces, fireplace inserts, stoves, and gas logs. These products are sold through a national system of dealers, wholesalers, large regional contractors, and Company-owned retail outlets. TheCompany'sCompany’s products are marketed predominantly in the United States and Canada. The Company exports select products to a limited number of markets outside North America, principally Latin America and the Caribbean, through its export subsidiary; however, based on sales, these activities are not significant.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND FISCAL YEAR-ENDSummary of Significant Accounting Policies
Principles of Consolidation and Fiscal Year-End
The consolidated financial statements include the accounts and transactions of the Company and its subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
The
Company'sCompany’s fiscal year ends on the Saturday nearest December 31. Fiscal year 2001 ended on December 29, 2001; 2000 ended on December 30, 2000; and 1999 ended on January 1,2000;2000.Cash and
1998 ended on January 2, 1999. CASH AND CASH EQUIVALENTSCash EquivalentsCash and cash equivalents generally consist of cash and commercial paper. These securities have original maturity dates not exceeding three months from date of purchase.
SHORT-TERM INVESTMENTS Short-term investments are classified as available-for-sale and are highly liquid debt and equity securities. RECEIVABLESReceivables
Accounts receivables are presented net of an allowance for doubtful accounts of $16,576,000, $11,237,000, and $3,568,000 for 2001, 2000, and
$2,816,000 for 2000,1999,and 1998,respectively.INVENTORIESInventories
Inventories are valued at the lower of cost or market, determined principally by the last-in, first-out (LIFO) method.
PROPERTY, PLANT, AND EQUIPMENTProperty, Plant, and Equipment
Property, plant, and equipment are carried at cost. Depreciation has been computed
byusing the straight-line method over estimated useful lives: land improvements, 10-20 years; buildings, 10- 40 years; and machinery and equipment, 3 - 12 years.-38-GOODWILL AND PATENTSGoodwill and Patents
Goodwill represents the excess of cost over the fair value of net identifiable assets of acquired companies. Goodwill is being amortized on a straight-line basis over 20-40 years. Patents are being amortized on a straight-line basis over their estimated useful lives, which range from 7 to 16 years. Patents are reported by the Company as
"Other Assets."Other Assets in the accompanying balance sheet.40
The carrying value of goodwill and patents is reviewed by the Company whenever significant events or changes occur which might impair recovery of recorded costs. Based on its most recent analysis,
the Company believesno material impairment of these intangible assets exists at December30, 2000.
(In thousands) 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------Goodwill $233,348 $121,846 $113,812 Patents 16,450 16,450 16,450 Less accumulated amortization 23,342 13,585 8,570 --------------------------------------------- $226,456 $124,711 $121,692 - -------------------------------------------------------------------------------------------------------------------REVENUE RECOGNITION29, 2001.
2001
2000
1999
(In thousands)
Goodwill
$
240,916
$
233,348
$
121,846
Patents
16,450
16,450
16,450
Less accumulated amortization
34,455
23,342
13,585
$
222,911
$
226,456
$
124,711
Revenue Recognition
Revenue is recognized upon shipment of goods to customers.
PRODUCT DEVELOPMENT COSTSRevenue includes freight charged to customers; related costs are in selling and administrative expense.Product Development Costs
Product development costs relating to the development of new products and processes, including significant improvements and refinements to existing products, are expensed as incurred. The amounts charged against income were $21,415,000 in 2001, $18,911,000 in 2000, and $17,117,000 in
1999, and $15,707,000 in 1998. STOCK-BASED COMPENSATION1999.Stock-Based Compensation
The Company accounts for its stock option plan using Accounting Principles Board Opinion No. 25,
"Accounting“Accounting for Stock Issued to Employees,"” which results in no charge to earnings when options are issued at fair market value. The Company has adopted the disclosure requirements of Statement of Financial Accounting Standards (SFAS) No. 123,"Accounting“Accounting for Stock-Based Compensation." USE OF ESTIMATES”Income Taxes
The Company accounts for income taxes under SFAS No. 109, “Accounting for Income Taxes.” This Statement uses an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. Deferred income taxes are provided to reflect the differences between the tax bases of assets and liabilities and their reported amounts in the financial statements.
Earnings Per Share
Basic earnings per share are based on the weighted-average number of common shares outstanding during the year. Shares potentially issuable under options have been considered outstanding for purposes of the diluted earnings per share calculation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
accounting principlesin the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The more significant areas requiring the use of management estimates relate to allowance forreceivables,doubtful accounts, inventory reserves, accruals for self-insured medicalworkersclaims, workers’ compensation,andgeneral liability and auto insurance claims, and useful lives for depreciation and amortization. Actual results could differ from those estimates.GENERALLY ACCEPTED ACCOUNTING PRINCIPLES41
Self-Insurance
The Company is partially self-insured for general liability, workers’ compensation, and certain employee health benefits. The general and workers’ compensation liabilities are managed through a wholly owned insurance captive; the related liabilities are included in the accompanying consolidated financial statements. The Company’s policy is to accrue amounts equal to the actuarially determined liabilities. The actuarial valuations are based on historical information along with certain assumptions about future events. Changes in assumptions for such matters as legal actions, medical costs, and changes in actual experience could cause these estimates to change in the near term.
Recent Accounting Pronouncements
During 2001, the Financial Accounting Standards Board finalized SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” The Company implemented SFAS No. 141 on July 1, 2001. SFAS No. 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method of accounting. The Company intends to adopt SFAS No. 142 on December 30, 2001, the beginning of its 2002 fiscal year. With the adoption of SFAS No. 142, goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill will be assessed for impairment by applying a fair-value-based test. The Company does not anticipate recognizing any impairment of goodwill upon adoption. The Company will stop recording, on an annual basis, approximately $9.5 million of goodwill amortization upon adoption.
The Financial Accounting Standards Board also finalized SFAS No. 143, “Accounting for Asset Retirement Obligations,” and SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” during 2001. The Company intends to adopt Statement No. 143 on December 29, 2002, the beginning of its 2003 fiscal year and Statement No. 144 on December 30, 2001, the beginning of its 2002 fiscal year. The adoption of these Statements is not expected to have a material impact on the Company’s financial statements.
In 2000, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-10,
"Accounting“Accounting for Shipping and Handling Fees and Costs,"” that all amounts billed to a customer in a sale transaction related to shipping and handling, if any, represent revenues earned for the goods provided and should be classified as revenue. The Company implemented the above EITF consensus effective with the fourth quarter 2000 and has restated prior periods to reflect the change. The adoption of this consensus did not have a material impact on theCompany'sCompany’s financial statements. In 1998, the Financial Accounting Standards Board issuedStatement of Financial Accounting StandardsSFAS No. 133,"Accounting“Accounting for Derivative Instruments and HedgingActivities."Activities,” which was amended in June 2000 by SFAS No. 138. The Companyintends to adoptadopted this Statement in January 2001 as required by the Statement.AdoptionThe adoption of this Statementisdid notexpected tohavea materialany impact on theCompany'sCompany’s financial statements.-39-RECLASSIFICATIONSReclassifications
Certain prior year
information hasamounts have been reclassified to conform to the current year presentation.PROVISION FOR FACILITIES CLOSING AND REORGANIZATION EXPENSESProvision for Facilities Closing and Reorganization Expenses
During the second quarter of 2001, the Company recorded a pretax charge of $24.0 million or $0.26 per diluted share for a restructuring plan that involved consolidating physical facilities, discontinuing low-volume product lines, and reductions of workforce. Included in the charge was the closedown of three of its office furniture facilities located in Williamsport, Pennsylvania, Tupelo, Mississippi, and Santa Ana, California. The charge included $16.2 million of asset impairments for manufacturing equipment that will be disposed of and $7.8 million of restructuring expenses. Included in the $7.8 million is $3.1 million for severance arising from the elimination of approximately 600 plant member positions, $0.8 million for other member-related costs, and $3.9 million for certain other expenses associated with the closing of facilities.
42
During 2001, $5.1 million of pretax exit costs were paid and charged against the liability. It included $2.4 million for severance for 469 plant member positions, $0.4 million for other member-related costs and $2.3 million for certain other expenses associated with the closing of facilities. The primary costs not yet incurred relate to costs associated with the closed buildings. Management believes the remaining reserve for restructuring expenses to be adequate to cover these obligations.
On February 11, 1999, the Company adopted a plan to close three of its office furniture facilities located in Winnsboro, South Carolina; Sulphur Springs, Texas; and Mt. Pleasant, Iowa. A
pre-taxpretax charge of $19.7 million or $0.20 per diluted share was recorded during the first quarter of 1999. The charge includes$12.5$12.6 million for write-offs of plant and equipment, $2.6 million for severance arising from the elimination of approximately 360 positions, $2.1 million for otheremployee-relatedmember-related costs, and $2.4 million for certain other expenses associated with the closing of the facilities. All significant activities with respect to this reorganization have been completed except for the pending disposition of the Winnsboro, South Carolina, property.Business Combinations
During 2001, the Company completed the acquisition of three small hearth product distributors for a total purchase price of approximately $7.6 million. The
primary costs not yet incurred relate to costs associated withacquisitions were accounted for using theclosed buildings. Management believespurchase method, and theremaining reserve for facilities closing and reorganization expenses to be adequate to cover these obligations. BUSINESS COMBINATIONSresults of the three distributors have been included in the Company’s financial statements since the date of acquisition.On February 29, 2000, the Company completed the acquisition of its Hearth Services division, which consists of two leading hearth products distributors, American Fireplace Company (AFC) and the Allied Group (Allied), establishing the Company as the leading manufacturer and distributor in the hearth products industry. The Company acquired AFC and Allied for approximately $135 million in cash and debt including acquisition costs. The acquisition has been accounted for using the purchase method, and the results of AFC and Allied have been included in the
Company'sCompany’s financial statements since the date of acquisition. Management finalized its integration plan related to the acquisition during the first quarter of 2001. The excess of the consideration paid over the fair value of the business of$23$21 million was recorded as goodwill andiswas being amortized on a straight-line basis over 20 years.As a result of the acquisition, the Company is in the process of finalizing its integration plan related to incremental exit costs and consolidation activities for acquired locations and activities. These costs which are not associated with the generation of future revenues and have no future economic benefits will be reflected as assumed liabilities in the allocation of purchase price to the net assets acquired. Management expects these amounts to be finalized in the first quarter of 2001. The Company acquired Aladdin Steel Products, Inc. on February 20, 1998, for approximately $10.2 million. Aladdin is a manufacturer of wood-, pellet-, and gas-burning stoves and inserts. Aladdin is being operated by Hearth Technologies Inc., the Company's hearth products subsidiary. The transaction was accounted for under the purchase method.Assuming the acquisition of American Fireplace Company and Allied Group
and Aladdin Steel Products, Inc.had occurred on January4, 1998,3, 1999, the beginning of theCompany's 1998Company’s 1999 fiscal year, instead of the actual dates reported above, theCompany'sCompany’s pro forma consolidated net sales would have been approximately $2.1 billion$1.9 billion,and$1.8$1.9 billion for 20001999,and1998,1999, respectively. Pro forma consolidated net income and net income per share for 20001999,and19981999 would not have been materially different than the reported amounts.INVENTORIES
(In thousands) 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------Finished products $48,990 $29,663 $24,955 Materials and work in process 46,497 55,737 53,320 LIFO allowance (11,127) (10,463) (11,050) ------------------------------------------- $84,360 $74,937 $67,225 - --------------------------------------------------------------------------------------------------------------------40-PROPERTY, PLANT, AND EQUIPMENT
(In thousands) 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------Land and land improvements $18,808 $17,114 $12,156 Buildings 202,189 181,080 144,559 Machinery and equipment 514,293 469,268 411,238 Construction and equipment installation in progress 27,547 37,819 85,782 ------------------------------------------- 762,837 705,281 653,735 Less allowances for depreciation 308,525 249,690 209,558 ------------------------------------------ $454,312 $455,591 $444,177 - ------------------------------------------------------------------------------------------------------------------- ACCOUNTS PAYABLE AND ACCRUED EXPENSES (In thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Trade accounts payable $67,540 $77,907 $75,895 Compensation 15,781 10,820 11,450 Profit sharing and retirement expense 25,041 22,705 20,355 Vacation pay 14,560 12,093 11,751 Marketing expenses 65,931 58,832 45,833 Casualty self-insurance expense 12,216 7,428 6,271 Other accrued expenses 39,471 27,325 26,965 -------------------------------------------- $240,540 $217,110 $198,520 - ------------------------------------------------------------------------------------------------------------------- LONG-TERM DEBT (In thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Industrial development revenue bonds, various issues, payable through 2018 with interest at 3.96-8.125% per annum $23,977 $24,608 $25,293 Note payable to bank, revolving credit agreement with interest at a variable rate (6.6875-6.9625% at year-end 2000)* 46,000 85,000 95,000 Convertible debenture payable to individuals, due in 2003 with interest at 5.5% per annum 53,000 5,074 -- Other notes and amounts 3,116 5,178 7,776 -------------------------------------------- $126,093 $119,860 $128,069 - -------------------------------------------------------------------------------------------------------------------Inventories
2001
2000
1999
(In thousands)
Finished products
$
33,280
$
48,990
$
29,663
Materials and work in process
26,469
46,497
55,737
LIFO reserve
(9,609
)
(11,127
)
(10,463
)
$
50,140
$
84,360
$
74,937
43
Property, Plant, and Equipment
2001
2000
1999
(In thousands)
Land and land improvements
$
21,678
$
18,808
$
17,114
Buildings
212,352
202,189
181,080
Machinery and equipment
494,458
514,293
469,268
Construction and equipment installation in progress
14,247
27,547
37,819
742,735
762,837
705,281
Less allowances for depreciation
337,764
308,525
249,690
$
404,971
$
454,312
$
455,591
Accounts Payable and Accrued Expenses
2001
2000
1999
(In thousands)
Trade accounts payable
$
53,660
$
67,540
$
77,907
Compensation
13,663
15,781
10,820
Profit sharing and retirement expense
26,020
25,041
22,705
Vacation pay
13,881
14,560
12,093
Marketing expenses
54,861
65,931
58,832
Casualty self-insurance expense
17,189
12,216
7,428
Other accrued expenses
36,910
39,471
27,325
$
216,184
$
240,540
$
217,110
Long-Term Debt
2001
2000
1999
(In thousands)
Industrial development revenue bonds, various issues, payable through 2018 with interest at 1.42-8.125% per annum
$
23,995
$
24,633
$
25,319
Note payable to bank, revolving credit agreement with interest at a variable rate*
—
46,000
85,000
Convertible debentures payable to individuals, due in 2003 with interest at 5.5% per annum
58,074
58,074
5,074
Other notes and amounts
3,285
5,673
5,275
Total debt
85,354
134,380
120,668
Less: current portion
5,784
8,287
808
Long-term debt
$
79,570
$
126,093
$
119,860
*
THE REVOLVING BANK CREDIT AGREEMENT IS PAYABLE IN THE YEARThe revolving bank credit agreement was paid off in 2001 but is available until June 2002WITH A MAXIMUM BORROWING LIMIT OFwith a maximum borrowing limit of $200,000,000.-41-Management is in the process of negotiating a new agreement. Aggregate maturities of long-term debt are as follows (in thousands):
- -------------------------------------------------------------------------------------------------------------------2001 $8,287 2002 46,773 2003 53,866 2004 553 2005 558 Thereafter 24,343 - -------------------------------------------------------------------------------------------------------------------
2002
$
5,784
2003
53,986
2004
6,176
2005
602
2006
583
Thereafter
18,223
44
The convertible
debenture payable to individuals at the end of 2000 isdebentures are payable to the former owners of businesses that were acquired by theCompany in 2000.Company. These individuals continue as employees ofa subsidiary ofthebusinessCompany following themerger.acquisitions. The convertibledebenture isdebentures are convertible into cash.Certain of the above borrowing arrangements include covenants which limit the assumption of additional debt and lease obligations. The Company has been and currently is in compliance with the covenants related to these debt agreements. The fair value of the
Company'sCompany’s outstanding long-term debt obligations at year-end20002001 approximates the recorded aggregate amount.Property, plant, and equipment, with net carrying values of approximately
$58,940,000$53,471,000 at the end of2000,2001, aremortgaged. SELLING AND ADMINISTRATIVE EXPENSES
(In thousands) 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------Freight expense to customer* $137,197 $131,085 $106,453 Amortization of intangible assets 10,679 5,362 4,789 Product development costs 18,911 17,117 15,707 General selling and administrative expense 321,061 244,633 227,505 ------------------------------------------- $487,848 $398,197 $354,454 - -------------------------------------------------------------------------------------------------------------------* FREIGHT EXPENSE HAS BEEN RESTATED PER EITF ISSUE NO. 00-10. INCOME TAXESmortgaged with maturities through 2021.Selling and Administrative Expenses
2001
2000
1999
(In thousands)
Freight expense for shipments to customers
$
103,489
$
137,197
$
131,085
Amortization of intangible assets
12,646
10,679
5,362
Product development costs
21,415
18,911
17,117
Other selling and administrative expenses
326,656
321,061
244,633
$
464,206
$
487,848
$
398,197
Income Taxes
Significant components of the provision for income taxes are as follows:
(In thousands) 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------Current: Federal $62,172 $40,744 $44,525 State 3,931 3,046 5,363 ------------------------------------------ 66,103 43,790 49,888 Deferred (6,356) 6,425 13,908 ------------------------------------------ $59,747 $50,215 $63,796 - --------------------------------------------------------------------------------------------------------------------42-
2001
2000
1999
(In thousands)
Current:
Federal
$
32,393
$
62,172
$
40,744
State
2,442
3,931
3,046
34,835
66,103
43,790
Deferred
7,019
(6,356
)
6,425
$
41,854
$
59,747
$
50,215
A reconciliation of the statutory federal income tax rate to the
Company'sCompany’s effective income tax rate is as follows:
2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------Federal statutory tax rate 35.0% 35.0% 35.0% State taxes, net of federal tax effect 1.5 1.7 2.6 Federal tax credits - - (.1) Other-- net (.5) (.2) - ------------------------------------------- Effective tax rate 36.0% 36.5% 37.5% - -------------------------------------------------------------------------------------------------------------------
2001
2000
1999
Federal statutory tax rate
35.0
%
35.0
%
35.0
%
State taxes, net of federal tax effect
1.6
1.5
1.7
Other — net
(0.6
)
(0.5
)
(0.2
)
Effective tax rate
36.0
%
36.0
%
36.5
%
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the
Company'sCompany’s deferred tax liabilities and assets are as follows:
(In thousands) 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------Net long-term deferred tax liabilities: Tax over book depreciation $(37,509) $(38,133) $(33,118) OPEB obligations 3,157 3,430 3,305 Goodwill (4,183) (2,959) (1,805) Other-- net 1,309 (479) (239) --------------------------------------------- Total net long-term deferred tax liabilities (37,226) (38,141) (31,379) - ------------------------------------------------------------------------------------------------------------------- Net current deferred tax assets: Workers' compensation, general, and product liability accruals 4,183 2,984 2,315 Vacation accrual 4,632 3,492 2,531 Integration accruals (3,205) (3,263) (2,235) Inventory obsolescence reserve 2,404 1,287 1,026 Other-- net 11,502 8,971 8,840 ----------------------------------------- Total net current deferred tax assets 19,516 13,471 12,477 ------------------------------------------- Net deferred tax (liabilities) assets $(17,710) $(24,671) $(18,902) - ------------------------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Common Stock, $1 Par Value Authorized 200,000,000 200,000,000 200,000,000 Issued and outstanding 59,796,891 60,171,753 61,289,618 Preferred Stock, $1 Par Value Authorized 1,000,000 1,000,000 1,000,000 Issued and outstanding - - - - --------------------------------------------------------------------------------------------------------------------43-On February 11, 1998, the Company's Board of Directors declared a two-for-one stock split in the form of a 100% stock dividend paid on March 27, 1998, to shareholders of record on the close of business on March 6, 1998. In May 1998, shareholders authorized an increase of capital stock of the Company from 101,000,000 shares to 201,000,000 shares, consisting of 200,000,000 shares of common stock, $1.00 par value,45
2001
2000
1999
(In thousands)
Net long-term
deferred tax liabilities:
Tax over book depreciation
$
(38,759
)
$
(37,509
)
$
(38,133
)
OPEB obligations
3,197
3,157
3,430
Compensation
2,519
2,079
1,681
Goodwill
(5,550
)
(4,183
)
(2,959
)
Other — net
(1,039
)
(770
)
(2,160
)
Total net long-term deferred tax liabilities
(39,632
)
(37,226
)
(38,141
)
Net current deferred tax assets:
Workers’ compensation, general, and product liability accruals
1,119
4,183
2,984
Vacation accrual
4,002
4,632
3,492
Integration accruals
(3,766
)
(3,205
)
(3,263
)
Inventory obsolescence reserve
1,969
2,404
1,287
Plant closing accruals
3,302
—
—
Other — net
8,314
11,502
8,971
Total net current deferred tax assets
14,940
19,516
13,471
Net deferred tax (liabilities) assets
$
(24,692
)
$
(17,710
)
$
(24,671
)
Shareholders’ Equity and
1,000,000 shares of preferred stock, $1.00 par value.Earnings Per Share
2001
2000
1999
Common Stock, $1 Par Value
Authorized
200,000,000
200,000,000
200,000,000
Issued and outstanding
58,672,933
59,796,891
60,171,753
Preferred Stock, $1 Par Value
Authorized
1,000,000
1,000,000
1,000,000
Issued and outstanding
—
—
—
The Company purchased
837,552,1,472,937; 837,552; and 1,408,624and 529,284shares of its common stock during 2001, 2000,1999,and1998,1999, respectively. The par value method of accounting is used for common stock repurchases. The excess of the cost of shares acquired over their par value is allocated to Additional Paid-In Capital with the excess charged to Retained Earnings.The Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," as of January 4, 1998, the beginning of its 1998 fiscal year. The Company has changed the format of its consolidated statements of shareholders' equity to present comprehensive income.Components of other comprehensive income (loss) consist of the following:
(In thousands) 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------Foreign currency translation adjustments - net of tax $118 $(79) $42 Change in unrealized gains on marketable securities - net of tax 208 (435) 563 Other comprehensive income (loss) $326 $(514) $605 - -------------------------------------------------------------------------------------------------------------------
2001
2000
1999
(In thousands)
Foreign currency translation adjustments - net of tax
$
109
$
118
$
(79
)
Change in unrealized gains on marketable securities - net of tax
42
208
(435
)
Other comprehensive income (loss)
$
151
$
326
$
(514
)
46
In May 1997, the Company registered 400,000 shares of its common stock under its 1997 Equity Plan for Non-Employee
Directors, which was approved by shareholders at the May 1997 annual shareholders' meeting.Directors. This plan permits the Company to issue to its non-employee directors options to purchase shares of Company common stock, restricted stock of the Company, and awards of Company stock. The plan also permits non-employee directors to elect to receive all or a portion of their annual retainers and other compensation in the form of shares of Company common stock. During 2001, 2000, and 1999, 7,446; 6,948; and1998, 6,948,12,758and 10,664shares of Company common stock were issued under the plan, respectively.Cash dividends declared and paid per share for each year are:
(In dollars) 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------Common shares $.44 $.38 $.32 - -------------------------------------------------------------------------------------------------------------------
2001
2000
1999
(In dollars)
Common shares
$
.48
$
.44
$
.38
Pursuant to the 1994 Members Stock Purchase Plan, 1,000,000 shares of the
Company'sCompany’s common stock were registered for issuance to participating members. Members who have one year of employment eligibility and work a minimum of 20 hours per week have rights to purchase stock on a quarterly basis. The price of the stock purchased under the plan is 85% of the closing price on the applicable purchase date. No member may purchase stock under the plan in an amount which exceeds the lesser of 20% of his or her gross earnings or 4,000 shares, with a maximum fair market value of $25,000 in any calendar year. An additional214,047128,662 shares were available for issuance under the plan at December30, 2000. The effect of the application of adopting Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation," was not material to the Company.29, 2001. Shares of common stock were issued in 2001, 2000,1999,and19981999 pursuant to a members stock purchase plan as follows:
2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------Shares issued 90,059 115,354 101,108 Average price per share $21.10 $19.16 $23.58 - --------------------------------------------------------------------------------------------------------------------44-
2001
2000
1999
Shares issued
85,385
90,059
115,354
Average price per share
$
20.51
$
21.10
$
19.16
The Company has a shareholders rights plan which will expire August 20, 2008. The plan becomes operative if certain events occur involving the acquisition of 20% or more of the
Company'sCompany’s common stock by any person or group in a transaction not approved by theCompany'sCompany’s Board of Directors. Upon the occurrence of such an event, each right entitles its holder to purchase an amount of common stock of the Company with a market value of$400$400 for $200, unless the Board authorizes the rights be redeemed. The rights may be redeemed for $0.01 per right at any time before the rights become exercisable. In certain instances, the right to purchase applies to the capital stock of the acquirer instead of the common stock of the Company. The Company has reserved preferred shares necessary for issuance should the rights be exercised.The Company has entered into change in control employment agreements with corporate officers and certain other key
employees.employees. According to the agreements, a change in control occurs when a third person or entity becomes the beneficial owner of 20% or more of theCompany'sCompany’s common stock or when more than one-third of theCompany'sCompany’s Board of Directors is composed of persons not recommended by at least three-fourths of the incumbent Board of Directors. Upon a change in control, a key employee is deemed to have a two-year employment with the Company, and all his or her benefits are vested under Company plans. If, at any time within two years of the change in control, his or her position, salary, bonus, place of work, or Company-provided benefits are modified, or employment is terminated by the Company for any reason other than cause or by the key employee for good reason, as such terms are defined in the agreement, then the key employee is entitled to receive a severance payment equal to two times annual salary and the average of the prior twoyears'years’ bonuses.STOCK OPTIONS47
Stock Options
Under the
Company'sCompany’s 1995 Stock-Based Compensation Plan, as amended and restated effective November 10, 2000, the Company may award options to purchase shares of theCompany'sCompany’s common stock and grant other stock awards to executives, managers, and key personnel. The Plan is administered by the Human Resources and Compensation Committee of the Board of Directors. Stock options awarded under the Plan must be at exercise prices equal to or exceeding the fair market value of theCompany'sCompany’s common stock on the date of grant. Stock options are generally subject to four-year cliff vesting and must be exercised within 10 years from the date of grant.The Company accounts for executive stock options issued under this Plan using Accounting Principles Board Opinion No. 25, which results in no charge to earnings when options are issued at fair market value. The Company has elected the disclosure requirements of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation."If compensation costs had been determined based on the fair value at the grant dates for awards under this Plan, consistent with SFAS No.123, the
impact onCompany’s pro-forma net earnings and both basic and diluted earnings per share wouldbe less than one centhave been reduced by $1,369,000 or $0.02 pershare.share for 2001, $1,122,000 or $0.02 per share for 2000, and $531,000 or $0.01 per share for 1999. The weighted-average fair value of options granted during 2001, 2000,1999,and19981999 estimated on the date of grant using the Black-Scholes option-pricing model was $9.70, $9.25,$10.01,and$15.51,$10.01, respectively. The fair value of 2001, 2000,1999,and19981999 options granted is estimated on the date of grant using the following assumptions: dividend yield of0.90%1.46% to1.97%2.06%, expected volatility of31.04%34.09% to 35.89%, risk-free interest rate of 4.90% to 6.56%, and an expected life of 10 to 12 years depending on grant date.-45-The status of the
Company'sCompany’s stock option plans is summarized below:
Number of Weighted-Average Shares Exercise Price - -------------------------------------------------------------------------------------------------------------------Outstanding at January 3, 1998 156,000 $24.74 Granted 20,000 32.50 Exercised - - Forfeited - - - ------------------------------------------------------------------------------------------------------------------- Outstanding at January 2, 1999 176,000 $25.62 Granted 328,750 23.47 Exercised - - Forfeited (97,000) 23.86 - ------------------------------------------------------------------------------------------------------------------- Outstanding at January 1, 2000 407,750 $24.30 Granted 532,500 20.13 Exercised (22,000) 23.80 Forfeited - - - ------------------------------------------------------------------------------------------------------------------- Outstanding at December 30, 2000 918,250 $21.90 Options exercisable at: December 30, 2000 - - January 1, 2000 - - January 2, 1999 - - - -------------------------------------------------------------------------------------------------------------------
Number of
Shares
Weighted-Average
Exercise Price
Outstanding at January 2, 1999
176,000
$25.62
Granted
328,750
23.47
Exercised
—
—
Forfeited
(97,000
)
23.86
Outstanding at January 1, 2000
407,750
$24.30
Granted
532,500
20.13
Exercised
(22,000
)
23.80
Forfeited
—
—
Outstanding at December 30, 2000
918,250
$21.90
Granted
266,500
23.39
Exercised
(17,500
)
18.31
Forfeited
(37,000
)
21.57
Outstanding at December 29, 2001
1,130,250
22.32
Options exercisable at:
December 29, 2001
105,000
24.86
December 30, 2000
—
—
January 1, 2000
—
—
48
The following table summarizes information about fixed stock options outstanding at December
30, 2000:
Options Options Outstanding Exercisable ------------------- ------------ Weighted- Number Average Weighted- Exercisable Range of Number Remaining Average at December 30, Exercise Prices Outstanding Contractual Life Exercise Price 2000 - -------------------------------------------------------------------------------------------------------------------$24.50-$28.25 112,000 6.5 years $24.83 0 $32.50 20,000 7.1 years $32.50 0 $23.31-$23.47 253,750 8.1 years $23.47 0 $18.31-$26.69 532,500 9.6 years $20.13 0 - -------------------------------------------------------------------------------------------------------------------RETIREMENT BENEFITS29, 2001:
Options Outstanding
Options
Exercisable
Range of
Exercise Prices
Number
Outstanding
Weighted-
Average
Remaining
Contractual Life
Weighted-
Average
Exercise Price
Number
Exercisable
at December 29,
2001
$ 24.50-$28.25
105,000
5.5 years
$
24.86
105,000
$ 32.50
20,000
6.1 years
$
32.50
0
$ 23.31-$23.47
238,750
7.1 years
$
23.47
0
$ 18.31-$26.69
500,000
8.6 years
$
20.25
0
$ 23.32-$25.27
266,500
9.1 years
$
23.39
0
Retirement Benefits
The Company has defined contribution profit-sharing plans covering substantially all employees who are not participants in certain defined benefit plans. The
Company'sCompany’s annual contribution to the defined contribution plans is based on employee eligible earnings and results of operations and amounted to $24,826,000, $24,400,000, and $21,297,000 in 2001, 2000, and$20,101,000 in 2000,1999,and 1998,respectively.-46-The Company sponsors defined benefit plans which include a limited number of salaried and hourly employees at certain subsidiaries.
The
Company'sCompany’s funding policy is generally to contribute annually the minimum actuarially computed amount. The Company adoptedStatement of Financial Accounting Standards (SFAS)SFAS No. 132,"Employer's“Employer’s Disclosures about Pensions and Other Postretirement Benefits,"” as of January 4, 1998, the beginning of its 1998 fiscal year. Net pension costs relating to these plans were$-0-, $-0-,$0 for 2001, 2000, and$-0- for 2000, 1999, and 1998, respectively.1999. The actuarial present value of obligations, less related plan assets at fair value, is not significant.The Company also participates in a multiemployer plan, which provides defined benefits to certain of the
Company'sCompany’s union employees. Pension expense for this plan amounted to $310,000, $308,500, and $329,000 in 2001, 2000, and$306,000 in 2000,1999,and 1998,respectively.Postretirement Health Care
In
1992,accordance with theCompany established a trust to administer a leveraged employee stock ownership plan (ESOP), the HON Members Company Ownership Plan. Company contributions based on employee eligible earnings and dividends on the shares are used to make loan interest and principal payments. As the loan is repaid, shares are distributed to the ESOP trust for allocation to participants. During 1998, the final shares in the Plan were allocated to participants, and the Plan was subsequently merged into the Company's defined contribution profit-sharing plan. Selected financial data pertaining to the ESOP is as follows:
(In thousands, except share data) 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------Company contribution to ESOP - - $656 Dividend incomeguidelines ofESOP - - 533 Shares of common stock allocated to ESOP participant accounts - - 96,304 Closing market price of common stock as of year-end - - $23.94 - -------------------------------------------------------------------------------------------------------------------POSTRETIREMENT HEALTH CARE The Company adopted Statement of Financial Accounting Standards (SFAS) No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," as of January 4, 1998. The Company adoptedSFAS No. 106,"Employers'“Employers’ Accounting for Postretirement Benefits Other Than Pensions," as of January 3, 1993, and recorded” thecumulative effect of the accounting change on the deferred recognition basis. -47-Thefollowing table sets forth the funded status of the plan, reconciled to the accrued postretirement benefits cost recognized in theCompany'sCompany’s balance sheet at:
(In thousands) 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------Reconciliation of benefit obligation Obligation at beginning of year $20,237 $17,341 $15,409 Service cost 182 529 419 Interest cost 882 1,137 1,045 Benefit payments (981) (1,013) (974) Actuarial (gains) losses (5,888) 2,243 1,442 Current year prior service cost (2,203) - - Obligation at end of year $12,229 $20,237 $17,341 - ------------------------------------------------------------------------------------------------------------------- Funded status Funded status at end of year $12,229 $20,237 $17,341 Unrecognized transition obligation (7,103) (9,362) (10,075) Unrecognized prior-service cost (1,813) (2,338) (2,484) Unrecognized gain (loss) 5,457 862 4,031 Net amount recognized $8,770 $9,399 $8,813 - ------------------------------------------------------------------------------------------------------------------- Net periodic postretirement benefit cost include: Service cost $182 $529 $419 Interest cost 882 1,137 1,045 Amortization of transition obligation over 20 years 581 713 713 Amortization of prior service cost - 146 146 Amortization of (gains) and losses (539) (629) (767) Net periodic postretirement benefit cost $1,106 $1,896 $1,556 - -------------------------------------------------------------------------------------------------------------------49
2001
2000
1999
(In thousands)
Reconciliation of benefit obligation
Obligation at beginning of year
$
12,229
$
20,237
$
17,341
Service cost
278
182
529
Interest cost
941
882
1,137
Benefit payments
(952
)
(981
)
(1,013
)
Actuarial (gains) losses
3,042
(5,888
)
2,243
Current year prior service cost
1,813
(2,203
)
—
Obligation at end of year
$
17,351
$
12,229
$
20,237
Funded status
Funded status at end of year
$
17,351
$
12,229
$
20,237
Unrecognized transition obligation
(6,523
)
(7,103
)
(9,362
)
Unrecognized prior-service cost
(1,582
)
(1,813
)
(2,338
)
Unrecognized gain (loss)
(364
)
5,457
862
Net amount recognized
$
8,882
$
8,770
$
9,399
Net periodic postretirement benefit cost include:
Service cost
$
278
$
182
$
529
Interest cost
941
882
1,137
Amortization of transition obligation over 20 years
581
581
713
Amortization of prior service cost
230
—
146
Amortization of (gains) and losses
(474
)
(539
)
(629
)
Net periodic postretirement benefit cost
$
1,556
$
1,106
$
1,896
The discount rates at fiscal year-end 2001, 2000, and 1999
and 1998were 6.5%, 8.0%,7.5%,and6.75%7.5%, respectively. The pre-65 2001 gross trend rates begin at8.0%9.0% for the medical and prescription drug coverages and grade down to 5.0% insixeight years and remain at this level for all future years. The post-64 gross trend rates begin at 7.25% for the medical coverage and decrease until the maximum Company subsidy (cap) is reached in 2006. For the prescription drug coverage, the20012002 gross trend rates begin at8.0%9.0% and decrease until the cap is reached in 2006. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A 1% change in assumed health care cost trend rates would have the following effects:
(In thousands) 1% Increase 1% Decrease - -------------------------------------------------------------------------------------------------------------------Effect on total of service and interest cost components of net periodic postretirement health care benefit cost $54 $(22) Effect on the health care component of the accumulated postretirement benefit obligation $519 $(325) - --------------------------------------------------------------------------------------------------------------------48-LEASES
1% Increase
1% Decrease
(In thousands)
Effect on total of service and interest cost components
of net periodic postretirement health care benefit cost
$
84
$
(49
)
Effect on the health care component of the accumulated
postretirement benefit obligation
$
8,099
$
(6,182
)
50
Leases
The Company leases certain warehouse, plant facilities and equipment. Commitments for minimum rentals under noncancelable leases at the end of
20002001 are as follows:
Capitalized Operating (In thousands) Leases Leases - ------------------------------------------------------------------------------------2001 $2,398 $13,318 2002 1,078 11,316 2003 211 9,509 2004 211 7,818 2005 211 4,893 Thereafter 1,224 10,584 ---------------------- Total minimum lease payments 5,333 $57,438 ======= Less amount representing interest 1,020 ----- Present value of net minimum lease payments, including current maturities of $2,121,000 $4,313 - --------------------------------------------------------------------------------------
Capitalized
Operating
Leases
Leases
(In thousands)
2002
$
1,078
$
12,373
2003
211
10,128
2004
211
8,342
2005
211
5,848
2006
211
4,180
Thereafter
1,013
5,003
Total minimum lease payments
2,935
$
45,874
Less amount representing interest
743
Present value of net minimum lease payments,
including current maturities of $932,000
$
2,192
Property, plant, and equipment at year-end include the following amounts for capitalized leases:
(In thousands) 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------Buildings $3,299 $3,299 $3,299 Machinery and equipment 15,805 15,805 15,805 ----------------------------------------- 19,104 19,104 19,104 Less allowances for depreciation 14,655 11,816 8,978 ----------------------------------------- $4,449 $7,288 $10,126 - -------------------------------------------------------------------------------------------------------------------
2001
2000
1999
(In thousands)
Buildings
$
3,299
$
3,299
$
3,299
Machinery and equipment
15,805
15,805
15,805
19,104
19,104
19,104
Less allowances for depreciation
17,052
14,655
11,816
$
2,052
$
4,449
$
7,288
Rent expense for the years 2001, 2000,
1999,and19981999 amounted to approximately $13,387,000, $15,428,000,$10,403,000,and$10,150,000,$10,403,000, respectively. The Company has operating leases for office and production facilities with annual rentals totaling $450,000 with the former owners of a business acquired in 1996. These individuals continue as officers of a subsidiary of the Company following themerger.acquisition. Contingent rent expense under both capitalized and operating leases (generally based on mileage of transportation equipment) amounted to $869,000, $941,000,$755,000,and$596,000$755,000 for the years 2001, 2000, and 1999,and 1998,respectively.CONTINGENCIESContingencies
The Company
is involved in various legal actionshas contingent liabilities which have arisen in the course ofbusiness. Managementits business, including pending litigation, environmental remediation, taxes, and other claims. The Company believes the outcome of these matters will not have a material adverse effect ontheits consolidated financialcondition orposition, results of operations, or cash flows.Significant Customer
One office furniture customer accounted for approximately 14%, 14%, and 13% of
the Company. OPERATING SEGMENT INFORMATION The Company adopted Statement of Financial Accounting Standards (SFAS)consolidated net sales in 2001, 2000, and 1999, respectively.51
Operating Segment Information
In accordance with SFAS No. 131,
"Disclosures“Disclosures about Segments of an Enterprise and Related Information," effective with its 1998 fiscal year beginning January 4, 1998. This segment disclosure is essentially unchanged from the format used by the Company historically in complying with SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," and SFAS No. 30, "Disclosures of Information about Major Customers." That is,” management views the Company as being in two operating segments: office furniture and hearth products, with the former being the principal segment.-49-The office furniture segment manufactures and markets a broad line of metal and wood commercial and home office furniture which includes file cabinets,storage products, desks, credenzas, chairs,storage cabinets,tables, bookcases, freestanding office partitions and panel systems, and other related products. The hearth products segment manufactures and markets a broad line of manufactured gas-, pellet-, and wood-burning fireplaces and stoves, fireplace inserts, gas logs, and chimney systems principally for the home.The
Company's two operating segments areCompany’s hearth products segment is somewhat seasonal with the third (July-September) and fourth (October-December) fiscal quarters historically having higher sales than the prior quarters. In fiscal2000, 51% of the Company's consolidated net sales of office furniture were generated in the third and fourth quarters and 54%2001, 53% of consolidated net sales of hearth products were generated in the third and fourth quarters.For purposes of segment reporting, intercompany sales transfers between segments are not material, and operating profit is income before income taxes exclusive of certain unallocated corporate expenses. These unallocated corporate expenses include the net costs of the
Company'sCompany’s corporate operations, interest income, and interest expense. Management views interest income and expense as corporate financing costs and not as an operating segment cost. In addition, management applies an effective income tax rate to its consolidated income before income taxes so income taxes are not reported or viewed internally on a segment basis. Identifiable assets by segment are those assets applicable to the respective industry segments. Corporate assets consist principally of cash and cash equivalents, short-term investments, and corporate office real estate and related equipment.No geographic information for revenues from external customers or for long-lived assets is disclosed since
astheCompany'sCompany’s primary market and capital investments are concentrated in the United States.Reportable segment data reconciled to the consolidated financial statements for the years ended 2001, 2000,
1999,and19981999 is as follows:
(In thousands) 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------Net sales: Office furniture $1,649,937 $1,514,991 $1,460,668 Hearth products 396,349 285,940 245,960 ---------------------------------------------- $2,046,286 $1,800,931 $1,706,628 - ------------------------------------------------------------------------------------------------------------------- Operating profit: Office furniture* $171,647 $131,607 $165,314 Hearth products 30,232 34,588 31,478 -------------------------------------------- Total operating profit 201,879 166,195 196,792 Unallocated corporate expenses (35,915) (28,620) (26,683) ------------------------------------------- Income before income taxes $165,964 $137,575 $170,109 - ------------------------------------------------------------------------------------------------------------------- Identifiable assets: Office furniture $638,075 $678,503 $660,626 Hearth products 327,528 174,386 154,817 General corporate 56,867 53,834 49,026 ---------------------------------------------- $1,022,470 $906,723 $864,469 - ------------------------------------------------------------------------------------------------------------------- Depreciation and amortization expense: Office furniture $58,926 $52,483 $42,562 Hearth products 18,109 11,065 9,120 General corporate 2,011 1,905 1,317 ------------------------------------------- $79,046 $65,453 $52,999 - ------------------------------------------------------------------------------------------------------------------- -50-Capital expenditures -- net: Office furniture $39,361 $48,565 $128,482 Hearth products 17,643 16,489 18,162 General corporate 2,836 6,420 3,073 ------------------------------------------ $59,840 $71,474 $149,717 - -------------------------------------------------------------------------------------------------------------------*1999 INCLUDES A ONE-TIME PRE-TAX CHARGE OF $19.7 MILLION FOR THE CLOSING OF FACILITIES AND REORGANIZATION EXPENSES. One
2001
2000
1999
(In thousands)
Net sales:
Office furniture
$
1,366,312
$
1,649,937
$
1,514,991
Hearth products
426,126
396,349
285,940
$
1,792,438
$
2,046,286
$
1,800,931
Operating profit:
Office furniture*
$
112,405
$
171,647
$
131,607
Hearth products*
39,282
30,232
34,588
Total operating profit
151,687
201,879
166,195
Unallocated corporate expenses
(35,426
)
(35,915
)
(28,620
)
Income before income taxes
$
116,261
$
165,964
$
137,575
Identifiable assets:
Office furniture
$
526,712
$
638,075
$
678,503
Hearth products
320,199
327,528
174,386
General corporate
114,980
56,867
53,834
$
961,891
$
1,022,470
$
906,723
Depreciation and amortization expense:
Office furniture
$
58,658
$
58,926
$
52,483
Hearth products
20,389
18,109
11,065
General corporate
2,338
2,011
1,905
$
81,385
$
79,046
$
65,453
Capital expenditures — net:
Office furniture
$
29,785
$
39,361
$
48,565
Hearth products
7,149
17,643
16,489
General corporate
(83
)
2,836
6,420
$
36,851
$
59,840
$
71,474
*Included in operating profit for the office furniture
customer accountedsegment are a pretax charge of $22.5 million forapproximately 14%, 13%,closing of facilities and12%impairment charges in 2001 and a pretax charge ofconsolidated net sales$19.7 million for the closing of facilities and reorganization expense in2000, 1999,1999. Included in operating profit for the hearth products segment is a pretax charge of $1.5 million for closing of facilities and1998, respectively. -51-SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONSimpairment charges in 2001.52
Summary of Unaudited Quarterly Results of Operations
The following table presents certain unaudited quarterly financial information for each of the past 12 quarters. In the opinion of the
Company'sCompany’s management, this information has been prepared on the same basis as the consolidated financial statements appearing elsewhere in this report and includes all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial results set forth herein. Results of operations for any previous quarter are not necessarily indicative of results for any future period.
First Second Third Fourth (In thousands, except per share data) Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------------------------------------------YEAR-END 2000 (a)(b): Net sales $481,523 $509,649 $535,322 $519,792 Cost of products sold 329,416 343,842 354,367 352,779 --------------------------------------------------- Gross profit 152,107 165,807 180,955 167,013 Selling and administrative expenses 111,214 125,513 124,197 126,924 --------------------------------------------------- Operating income 40,893 40,294 56,758 40,089 Interest income (expense)-- net (2,550) (3,688) (3,303) (2,529) ---------------------------------------------------- Income before income taxes 38,343 36,606 53,455 37,560 Income taxes 13,803 13,188 19,234 13,522 --------------------------------------------------- Net income $24,540 $23,418 $34,221 $24,038 ================================================== Net income per common share $.41 $.39 $.57 $.40 Weighted-average common shares outstanding 60,186 60,145 60,162 60,069 AS A PERCENTAGE OF NET SALES Net sales 100.0% 100.0% 100.0% 100.0% Gross profit 31.6 32.5 33.8 32.1 Selling and administrative expenses 23.1 24.6 23.2 24.4 Operating income 8.5 7.9 10.6 7.7 Income taxes 2.9 2.6 3.6 2.6 Net income 5.1 4.6 6.4 4.6 YEAR-END 1999 (a): Net sales $427,660 $422,377 $478,609 $472,285 Cost of products sold 295,222 292,077 327,243 322,070 --------------------------------------------------- Gross profit 132,438 130,300 151,366 150,215 Selling and administrative expenses 92,465 92,454 104,105 109,173 Provision for closing facilities and reorganization expenses 19,679 - - - ---------------------------------------------------- Operating income 20,294 37,846 47,261 41,042 Interest income (expense)-- net (2,045) (2,399) (2,160) (2,264) --------------------------------------------------- Income before income taxes 18,249 35,447 45,101 38,778 Income taxes 6,661 12,938 16,462 14,154 --------------------------------------------------- Net income $11,588 $22,509 $28,639 $24,624 ================================================== Net income per common share $.19 $.37 $.47 $.41 Weighted-average common shares outstanding 61,154 61,169 60,921 60,159 AS A PERCENTAGE OF NET SALES Net sales 100.0% 100.0% 100.0% 100.0% Gross profit 31.0 30.8 31.6 31.8 Selling and administrative expenses 21.6 21.9 21.8 23.1 Provision for closing facilities and reorganization expenses 4.6 - - - Operating income 4.7 9.0 9.9 8.7 Income taxes 1.6 3.1 3.5 3.0 Net income 2.7 5.3 6.0 5.2-52-
YEAR-END 1998 (a)(c):Net sales $420,791 $403,809 $451,320 $430,708 Cost of products sold 291,571 278,107 309,080 294,239 --------------------------------------------------- Gross profit 129,220 125,702 142,240 136,469 Selling and administrative expenses 91,091 85,605 90,803 86,955 ---------------------------------------------------- Operating income 38,129 40,097 51,437 49,514 Interest income (expense)-- net (2,172) (2,691) (2,025) (2,180) ---------------------------------------------------- Income before income taxes 35,957 37,406 49,412 47,334 Income taxes 13,484 14,027 18,530 17,755 --------------------------------------------------- Net income $22,473 $23,379 $30,882 $29,579 ================================================== Net income per common share $.36 $.38 $.50 $.48 Weighted-average common shares outstanding 61,648 61,663 61,691 61,596 AS A PERCENTAGE OF NET SALES Net sales 100.0% 100.0% 100.0% 100.0% Gross profit 30.7 31.1 31.5 31.7 Selling and administrative expenses 21.6 21.2 20.1 20.2 Operating income 9.1 9.9 11.4 11.5 Income taxes 3.2 3.5 4.1 4.1 Net income 5.4 5.8 6.8 6.9
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(In thousands, except per share data)
Year-End 2001:
Net sales
$
461,997
$
444,196
$
459,352
$
426,893
Cost of products sold
311,711
292,789
298,427
278,213
Gross profit
150,286
151,407
160,925
148,680
Selling and administrative expenses
119,050
118,983
114,759
111,414
Restructuring and impairment charges
—
24,000
—
—
Operating income
31,236
8,424
46,166
37,266
Interest income (expense) – net
(2,700
)
(1,832
)
(1,375
)
(924
)
Income before income taxes
28,536
6,592
44,791
36,342
Income taxes
10,273
2,373
16,125
13,083
Net income
$
18,263
$
4,219
$
28,666
$
23,259
Net income per common share
$
.31
$
.07
$
.48
$
.40
Weighted-average common shares outstanding
59,448
59,205
59,048
58,651
As a Percentage of Net Sales
Net sales
100.0
%
100.0
%
100.0
%
100.0
%
Gross profit
32.5
34.1
35.0
34.8
Selling and administrative expenses
25.8
26.8
25.0
26.1
Provision for closing facilities and reorganization expenses
—
5.4
—
—
Operating income
6.8
1.9
10.1
8.7
Income taxes
2.2
0.5
3.5
3.1
Net income
4.0
0.9
6.2
5.4
Year-End 2000 (a):
Net sales
481,523
509,649
535,322
519,792
Cost of products sold
329,416
343,842
354,367
352,779
Gross profit
152,107
165,807
180,955
167,013
Selling and administrative expenses
111,214
125,513
124,197
126,924
Operating income
40,893
40,294
56,758
40,089
Interest income (expense) – net
(2,550
)
(3,688
)
(3,303
)
(2,529
)
Income before income taxes
38,343
36,606
53,455
37,560
Income taxes
13,803
13,188
19,234
13,522
Net income
$
24,540
$
23,418
$
34,221
$
24,038
Net income per common share
$
.41
$
.39
$
.57
$
.40
Weighted-average common shares outstanding
60,186
60,145
60,162
60,069
As a Percentage of Net Sales
Net sales
100.0
%
100.0
%
100.0
%
100.0
%
Gross profit
31.6
32.5
33.8
32.1
Selling and administrative expenses
23.1
24.6
23.2
24.4
Operating income
8.5
7.9
10.6
7.7
Income taxes
2.9
2.6
3.6
2.6
Net income
5.1
4.6
6.4
4.6
Year-End 1999:
Net sales
$
427,660
$
422,377
$
478,609
$
472,285
Cost of products sold
295,222
292,077
327,243
322,070
Gross profit
132,438
130,300
151,366
150,215
Selling and administrative expenses
92,465
92,454
104,105
109,173
Provision for closing facilities and reorganization expenses
19,679
—
—
—
Operating income
20,294
37,846
47,261
41,042
Interest income (expense) – net
(2,045
)
(2,399
)
(2,160
)
(2,264
)
Income before income taxes
18,249
35,447
45,101
38,778
Income taxes
6,661
12,938
16,462
14,154
Net income
$
11,588
$
22,509
$
28,639
$
24,624
Net income per common share
$
.19
$
.37
$
.47
$
.41
Weighted-average common shares outstanding
61,154
61,169
60,921
60,159
As a Percentage of Net Sales
Net sales
100.0
%
100.0
%
100.0
%
100.0
%
Gross profit
31.0
30.8
31.6
31.8
Selling and administrative expenses
21.6
21.9
21.8
23.1
Provision for closing facilities and reorganization expenses
4.6
—
—
—
Operating income
4.7
9.0
9.9
8.7
Income taxes
1.6
3.1
3.5
3.0
Net income
2.7
5.3
6.0
5.2
(a)
DATA HAS BEEN RESTATED TO INCLUDE SHIPPING AND HANDLING COSTS BILLED TO CUSTOMERS AS REVENUE PER EITF ISSUE NO. 00-10. (b) FIRST QUARTERFirst quarter 2000INCLUDES PARTIAL QUARTERLY RESULTS OF OPERATION OF AMERICAN FIREPLACE COMPANY AND THE ALLIED GROUP ACQUISITIONS ACQUIRED FEBRUARYincludes partial quarterly results of operation of American Fireplace Company and the Allied Group acquisitions acquired February 29,2000. (c) FIRST QUARTER 1998 INCLUDES PARTIAL QUARTERLY RESULTS OF OPERATION OF ALADDIN STEEL PRODUCTS, INC. ACQUISITION ACQUIRED FEBRUARY 20, 1998. -53-2000 Subsequent Event
In January 2002, the Company announced the closing of one office furniture manufacturing operation in Jackson, Tennessee. The operation will close following an orderly transition of production to other facilities which is expected to be completed during the second quarter of 2002. The Company expects to realize savings equal to the costs incurred in closing the facility during 2002.
54
INVESTOR INFORMATION
COMMON STOCK MARKET PRICES AND DIVIDENDS (UNAUDITED) QUARTERLYCommon Stock Market Prices and Dividends
Quarterly 2001 – 2000
- 1999
2000 by Dividends Quarter High Low per Share - -------------------------------------------------------------------------------------------------------------------1st $25 3/4 $15 9/16 $.11 2nd 27 7/8 23 .11 3rd 27 7/8 23 3/16 .11 4th 27 1/8 21 .11 --- Total Dividends Paid $.44 ===
1999 by Dividends Quarter High Low per Share - -------------------------------------------------------------------------------------------------------------------1st $24 1/2 $19 3/4 $.095 2nd 29 7/8 21 5/8 .095 3rd 28 1/8 19 1/16 .095 4th 23 3/4 18 3/4 .095 ---- Total Dividends Paid $ .38 =====COMMON STOCK MARKET PRICE AND PRICE/EARNINGS RATIO (UNAUDITED) FISCAL YEARS 2000 - 1990
Market Price* Price/earnings Ratio ------------------------- -------------------------- Earnings per Year High Low Share* High Low - ---- ---- --- ------ ---- ---2000 27 7/8 15 9/16 1.77 16 9 1999 29 7/8 18 3/4 1.44 21 13 1998 37 3/16 20 1.72 22 12 1997 32 1/8 15 7/8 1.45 22 11 1996 21 3/8 9 1/4 1.13 19 8 1995 15 5/8 11 1/2 .67 23 17 1994 17 12 .87 20 14 1993 14 5/8 10 3/4 .70 21 15 1992 11 3/4 8 1/4 .59 20 14 1991 10 1/4 6 5/8 .51 20 13 1990 11 1/2 6 3/4 .65 18 10 -- -- Eleven-Year Average 20 12 - -------------------------------------------------------------------------------------------------------------------*ADJUSTED FOR THE EFFECT OF STOCK SPLITS -54-
2001 by
Quarter
High
Low
Dividends
per Share
(Unaudited)
1st
$
26.50
$
22.00
$
.12
2nd
26.45
22.44
.12
3rd
26.15
19.96
.12
4th
28.85
20.00
.12
Total Dividends Paid
$
.48
2001 by
Quarter
High
Low
Dividends
per Share
1st
$
25.75
$
15.56
$
.11
2nd
27.88
23.00
.11
3rd
27.88
23.19
.11
4th
27.13
21.00
.11
Total Dividends Paid
$
.44
Common Stock Market Price and Price/Earnings Ratio
Fiscal Years 2001 – 1991
Market Price*
Price/Earnings Ratio
Year
High
Low
Earnings
per
Share*
High
Low
(Unaudited)
2001
28.85
19.96
1.26
23
16
2000
27.88
15.56
1.77
16
9
1999
29.88
18.75
1.44
21
13
1998
37.19
20.00
1.72
22
12
1997
32.13
15.88
1.45
22
11
1996
21.38
9.25
1.13
19
8
1995
15.63
11.50
.67
23
17
1994
17.00
12.00
.87
20
14
1993
14.63
10.75
.70
21
15
1992
11.75
8.25
.59
20
14
1991
10.25
6.63
.51
20
13
Eleven-Year Average
21
13
* Adjusted for the effect of stock splits
55
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of HON INDUSTRIES Inc.
We have audited in accordance with auditing standards generally accepted in the United States, the financial statements of HON INDUSTRIES Inc. included in this registration statement and have issued our report thereon dated February 1, 2002. Our audit was
conductedmade for the purpose of forming an opinion onthe consolidated financialthose statements taken as a whole. Thevaluationamounts included in Schedule II in this Form 10-K are the responsibility of the Company’s management andqualifying accounts as of and for the three fiscal years ended December 30, 2000; January 1, 2000; and January 2, 1999,are presented for purposes of complying with thepurpose of additional analysisSecurities and Exchange Commission’s rules and are nota requiredpart of the consolidated financialstatements of HON INDUSTRIES Inc. Such information hasstatements. These supporting schedules have been subjected to the auditing procedures applied inour auditsthe audit of the consolidated financial statements and, in our opinion,isfairlystatedstate in all material respects the financial data required to be set forth therein in relation to the consolidated financial statements taken as a whole.Arthur Andersen LLP
Chicago, Illinois
February
5, 2001 -55-1, 2002 56
SCHEDULE II
--– VALUATION AND QUALIFYING ACCOUNTSHON INDUSTRIES INC. AND SUBSIDIARIES
DECEMBER 30, 2000
- ---------------------------------------------------------------- -------------------------------------------- ---------------------- COL. A COL. B COL. C COL. D COL. E - ---------------------------------------------------------------- -------------------------------------------- ---------------------- ADDITIONS - ---------------------------------------------------------------- ---------------------- --------------------- ---------------------- DESCRIPTION BALANCE AT (1) (2) DEDUCTIONS BALANCE AT BEGINNING OF CHARGED TO CHARGED TO (DESCRIBE) END OF PERIOD PERIOD COSTS AND OTHER EXPENSES ACCOUNTS (DESCRIBE) - ---------------------------------------------------------------- ---------------------- --------------------------------- -------- (In thousands)Reserves deducted in the consolidated balance sheet from the assets to which they apply: Year ended December 30, 2000: Allowance for doubtful accounts $3,568 $8,726 $1,057 (A) $11,237 ====== ====== ====== ======= Year ended January 1, 2000: Allowance for doubtful accounts $2,816 $2,114 $1,362 (A) $3,568 ====== ====== ====== ====== Year ended January 2, 1999: Allowance for doubtful accounts $3,277 $1,288 $1,749 (A) $2,816 ====== ====== ====== ======December 29, 2001
COL. A
COL. B
COL. C
COL. D
COL. E
ADDITIONS
DESCRIPTION
BALANCE AT
BEGINNING OF
PERIOD
(1)
CHARGED TO
COSTS AND
EXPENSES)
(2)
CHARGED TO
OTHER ACCOUNTS
(DESCRIBE)
DEDUCTIONS
(DESCRIBE)
BALANCE AT
END OF PERIOD
(In thousands)
Reserves deducted in the consolidated balance sheet from the assets to which they apply:
Year ended December 29, 2001: Allowance for doubtful accounts
$
11,237
$
7,287
$
1,948 (A
)
$
16,576
Year ended December 30, 2000: Allowance for doubtful accounts
$
3,568
$
8,726
$
1,057 (A
)
$
11,237
Year ended January 1, 2000: Allowance for doubtful accounts
$
2,816
$
2,114
$
1,362 (A
)
$
3,568
Note A: Excess of accounts written off over recoveries
57
Exhibit Number
Description of Document
(3i)
Articles of Incorporation of the Registrant, incorporated by reference to Exhibit 3(i) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended April 3, 1999
(3ii)
By-Laws of the Registrant, incorporated by reference to Exhibit 3(ii) to the Registrant’s Annual Report on Form 10-K for the year ended December 30, 2000
(4i)
Rights Agreement dated as of August 13, 1998, by and between the Registrant and Harris Trust and Savings Bank, as Rights Agent, incorporated by reference to Exhibit 4.1 to Registration Statement on Form 8-A filed August 14, 1998, as amended by Form 8-A/A filed September 14, 1998, incorporated by reference to Exhibit 4.1 on Form 8-K filed August 10, 1998
(10i)
1995 Stock-Based Compensation Plan, as amended effective November 10, 2000, incorporated by reference to Exhibit 10(i) to the Registrant’s Annual Report on Form 10-K for the year ended December 30, 2000
(10ii)
1997 Equity Plan for Non-Employee Directors, incorporated by reference to Exhibit B to the Registrant’s proxy statement dated March 28, 1997, related to the Registrant’s Annual Meeting of Shareholders held on May 13, 1997
(10iii)
Form of Registrant’s Change in Control Agreement, incorporated by reference to Exhibit 10 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1994
(10iv)
Executive Long-Term Incentive Compensation Plan of the Registrant, incorporated by reference to Exhibit 99B to the Registrant’s Annual Report on Form 10-K for the year ended December 30, 1995
(10v)
ERISA Supplemental Retirement Plan of the Registrant, incorporated by reference to Exhibit 99C to the Registrant’s Annual Report on Form 10-K for the year ended December 30, 1995
(10vi)
1994 Members Stock Purchase Plan of the Registrant, as amended effective July 1, 2001, incorporated by reference to Exhibit 10(vi) to the Registrant’s Annual Report on 10-K filed for the year ended December 29, 2001
(10vii)
Agreement as Consultant and Director, dated November 15, 1995, between the Registrant and Robert L. Katz, incorporated by reference to the same numbered exhibit filed with the Registrant’s Annual Report on Form 10-K/A for the fiscal year ended December 28, 1996
(10viii)
Form of Director and Officer Indemnification Agreement of the Registrant, incorporated by reference to the same numbered exhibit filed with the Registrant’s Annual Report on Form 10-K/A for the fiscal year ended December 28, 1996
(10ix)
Form of Common Stock Grant Agreement of the Registrant, incorporated by reference to the same numbered exhibit filed with the Registrant’s Annual Report on Form 10-K/A for the fiscal year ended December 28, 1996
58
(10x)
Form of HON INDUSTRIES Inc. Stock-Based Compensation Plan Stock Option Award Agreement of the Registrant, incorporated by reference to the same numbered exhibit filed with the Registrant’s Annual Report on Form 10-K/A for the fiscal year ended December 28, 1996
(10xi)
Stock Purchase Agreement of the Registrant, dated September 18, 1985, as amended by amendment dated February 11, 1991, between the Registrant and Stanley M. Howe, incorporated by reference to Exhibit 10(xi) to the Registrant’s Annual Report on Form 10-K for the year ended January 3, 1998
(10xii)
Real Estate Contract of the Registrant, dated November 15, 1997, between the Registrant and Terrence L. and Loretta B. Mealy, incorporated by reference to Exhibit 10(xii) to the Registrant’s Annual Report on Form 10-K for the year ended January 3, 1998
(10xiii)
$200,000,000 Credit Agreement, dated June 11, 1997; First Amendment to Credit Agreement and Waiver, dated October 20, 1997; and Second Amendment to Credit Agreement, dated January 18, 2000, by and between the Registrant and Bankers Trust Company, as Syndication Agent and Administrative Agent, and various lending institutions, incorporated by reference to Exhibit 10(xiii) to the Registrant’s Annual Report on Form 10-K for the year ended January 1, 2000
(10xiv)
HON INDUSTRIES Inc. Profit-Sharing Retirement Plan of the Registrant as amended effective January 1, 2001, incorporated by reference to Exhibit 10(xiv) to the Registrant’s Annual Report on 10-K for the year ended December 29, 2001
(10xv)
HON INDUSTRIES Inc. Long-Term Performance Plan of the Registrant, incorporated by reference to the same numbered exhibit filed with the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 30, 2000
(16)
Letter of Former Accountant, incorporated by reference to the Registrant’s Report on Form 8-K dated May 14, 1996
(21)
Subsidiaries of the Registrant
(23)
Consent of Independent Public Accountants
(99A)
Executive Bonus Plan of the Registrant as amended and restated on May 1, 2000, incorporated by reference to the same numbered exhibit filed with the Registrant’s Quarterly Report on Form 10-Q for the quarter ended April 1, 2000
(99B)
Executive Deferred Compensation Plan of the Registrant as amended and restated on November 10, 2000, incorporated by reference to the same numbered exhibit filed with the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 30, 2000
(99C)
Letter to Securities and Exchange Commission — Arthur Andersen LLP
59