UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended AprilJuly 4, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________________ to _____________________________
Commission File Number 0-2648
HON INDUSTRIES Inc.
(Exact name of Registrant as specified in its charter)
Iowa 42-0617510
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
P.O. Box 1109, 414 East Third Street, Muscatine, Iowa 52761-7109
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 319-264-7400
Indicate by check mark whether the registrant (1) has filed all
required reports to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Class Outstanding at AprilJuly 4, 1998
Common Shares, $1 Par Value 61,667,68361,683,334 shares
Exhibit Index is on page 16.18.
Page 1 of 1719
HON INDUSTRIES Inc. and SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets --
AprilJuly 4, 1998, and January 3, 1998 3-4
Condensed Consolidated Statements of Income --
Three Months Ended AprilJuly 4, 1998, and March 29,June 28, 1997 5
Condensed Consolidated Statements of Income --
Six Months Ended July 4, 1998, and June 28, 1997 6
Condensed Consolidated Statements of Cash Flows --
ThreeSix Months Ended AprilJuly 4, 1998, and March 29,June 28, 1997 67
Notes to Condensed Consolidated Financial Statements 7-98-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-1312-15
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 1416
SIGNATURES 1517
EXHIBIT INDEX 1618
(27) Financial Data Schedule 1719
Page 2 of 1719
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 4,
1998 January 3,
(Unaudited) 1998
ASSETS (In thousands)
CURRENT ASSETS
Cash and cash equivalents $ 10,752 $ 46,080
Short-term investments 262 260
Receivables 178,351 158,408
Inventories (Note B) 62,461 60,182
Deferred income taxes 13,810 14,391
Prepaid expenses and other current
assets 13,983 15,829
Total Current Assets 279,619 295,150
PROPERTY, PLANT, AND EQUIPMENT, at cost
Land and land improvements 10,275 10,059
Buildings 113,389 111,387
Machinery and equipment 342,728 333,216
Construction in progress 84,628 60,832
551,020 515,494
Less accumulated depreciation 178,197 174,464
Net Property, Plant, and Equipment 372,823 341,030
GOODWILL 106,444 98,720
OTHER ASSETS 19,523 19,773
Total Assets $778,409HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 4,
1998 January 3,
(Unaudited) 1998
ASSETS (In thousands)
CURRENT ASSETS
Cash and cash equivalents $ 29,605 $ 46,080
Short-term investments 265 260
Receivables 169,426 158,408
Inventories (Note B) 64,905 60,182
Deferred income taxes 13,849 14,391
Prepaid expenses and other current
assets 9,327 15,829
Total Current Assets 287,377 295,150
PROPERTY, PLANT, AND EQUIPMENT, at cost
Land and land improvements 10,649 10,059
Buildings 122,180 111,387
Machinery and equipment 355,644 333,216
Construction in progress 99,662 60,832
588,135 515,494
Less accumulated depreciation 187,747 174,464
Net Property, Plant, and Equipment 400,388 341,030
GOODWILL 110,175 98,720
OTHER ASSETS 23,270 19,773
Total Assets $821,210 $754,673
See accompanying notes to condensed consolidated financial
statements.
Page 3 of 17
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 4,
1998 January 3,
(Unaudited) 1998
LIABILITIES AND SHAREHOLDERS' EQUITY (In thousands)
CURRENT LIABILITIES
Accounts payable and accrued expenses $166,738 $183,738
Income taxes 16,156 8,133
Note payable and current maturities
of long-term debt 2,496 2,545
Current maturities of other long-term
obligations 1,255 6,343
Total Current Liabilities 186,645 200,759
LONG-TERM DEBT 143,266 123,487
CAPITAL LEASE OBLIGATIONS 10,399 11,024
OTHER LONG-TERM LIABILITIES 18,927 18,601
DEFERRED INCOME TAXES 19,683 19,140
SHAREHOLDERS' EQUITY (Note C)
Capital Stock:
Preferred, $1 par value; authorized
1,000,000 shares; no shares outstanding - -
Common, $1 par value; authorized
100,000,000 shares; outstanding -- 61,667 61,659
1998 - 61,667,683 shares;
1997 - 61,659,316 shares
Paid-in capital 56,180 55,906
Retained earnings 282,747 265,203
Receivable from HON Members Company
Ownership Plan (1,099) (1,099)
Equity adjustment from foreign currency
translation (6) (7)
Total Shareholders' Equity 399,489 381,662
Total Liabilities and
Shareholders' Equity $778,40919
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 4,
1998 January 3,
(Unaudited) 1998
LIABILITIES AND SHAREHOLDERS' EQUITY (In Thousands)
CURRENT LIABILITIES
Accounts payable and accrued expenses $187,228 $183,738
Income taxes 6,535 8,133
Note payable and current maturities
of long-term debt 2,496 2,545
Current maturities of other long-term
obligations 2,641 6,343
Total Current Liabilities 198,900 200,759
LONG-TERM DEBT 150,462 123,487
CAPITAL LEASE OBLIGATIONS 10,384 11,024
OTHER LONG-TERM LIABILITIES 18,972 18,601
DEFERRED INCOME TAXES 21,687 19,140
SHAREHOLDERS' EQUITY (Note C)
Capital Stock:
Preferred, $1 par value; authorized
1,000,000 shares; no shares outstanding - -
Common, $1 par value; authorized
200,000,000 shares; outstanding 61,683 61,659
1998 - 61,683,334 shares;
1997 - 61,659,316 shares
Paid-in capital 56,555 55,906
Retained earnings 301,191 265,203
Accumulated other comprehensive income 2,475 (7)
(Note F)
Receivable from HON Members Company
Ownership Plan (1,099) (1,099)
Total Shareholders' Equity 420,805 381,662
Total Liabilities and Shareholders'
Equity $821,210 $754,673
See accompanying notes to condensed consolidated financial
statements.
Page 4 of 17
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
April 4, March 29,
1998 1997
(In thousands, except
per share data)
Net sales $418,263 $282,859
Cost of products sold 291,571 194,194
Gross Profit 126,692 88,665
Selling and administrative expenses 88,563 60,453
Operating Income 38,129 28,212
Interest income 435 411
Interest expense 2,607 1,553
Income Before Income Taxes 35,957 27,070
Income taxes 13,484 10,152
Net Income 22,473 16,918
Net income per common share (Note C) $.36 $.28
Average number of common shares
outstanding 61,647,784 59,399,822
Cash dividends per common share $.08 $.07
19
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
July 4, June 28,
1998 1997
(In thousands, except
per share data)
Net sales $401,417 $296,567
Cost of products sold 278,107 200,969
Gross Profit 123,310 95,598
Selling and administrative expenses 83,213 64,303
Operating Income 40,097 31,295
Interest income 213 441
Interest expense 2,904 1,582
Income Before Income Taxes 37,406 30,154
Income taxes 14,027 11,307
Net Income $ 23,379 $ 18,847
Net income per common share (Note C) $ 0.38 $ 0.32
Average number of common shares
outstanding 61,663,050 59,384,154
Cash dividends per common share $ 0.08 $ 0.07
See accompanying notes to condensed consolidated financial
statements.
Page 5 of 17
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
April 4, March 29,
1998 1997
(In thousands)
Net Cash Flows From (To) Operating
Activities:
Net income $ 22,473 $ 16,918
Noncash items included in net income:
Depreciation and amortization 11,911 7,439
Other postretirement and postemployment
benefits 354 799
Deferred income taxes 1,125 617
Other - net (12) 256
Net increase (decrease) in noncash
operating assets and liabilities (32,712) (6,605)
Increase (decrease) in other liabilities (1,326) (3,307)
Net cash flows from operating activities 1,813 16,117
Net Cash Flows From (To) Investing
Activities:
Capital expenditures - net (40,067) (18,412)
Acquisition spending, net of cash acquired (11,523) (262)
Short-term investments - net (2) (802)
Long-term investments (1) 800
Other - net 1 (455)
Net cash flows (to) investing activities (51,592) (19,131)
Net Cash Flows From (To) Financing
Activities:
Purchase of HON INDUSTRIES common stock (940) (1,171)
Proceeds from long-term debt 35,050 -
Payments of note and long-term debt (15,952) (9,859)
Proceeds from sales of HON INDUSTRIES
common stock to members and stock-based
compensation 1,226 908
Dividends paid (4,933) (4,158)
Net cash flows from (to) financing
activities 14,451 (14,280)
Net increase (decrease) in cash and
cash equivalents (35,328) (17,294)
Cash and cash equivalents at beginning
of period 46,080 31,196
Cash and cash equivalents at end of period $ 10,752 $ 13,902
19
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Six Months Ended
July 4, June 28,
1998 1997
(In thousands, except
per share data)
Net sales $819,680 $579,426
Cost of products sold 569,678 395,163
Gross Profit 250,002 184,263
Selling and administrative expenses 171,776 124,756
Operating Income 78,226 59,507
Interest income 648 852
Interest expense 5,511 3,135
Income Before Income Taxes 73,363 57,224
Income taxes 27,511 21,459
Net Income $ 45,852 $ 35,765
Net income per common share (Note C) $ 0.74 $ 0.60
Average number of common shares
outstanding 61,655,604 59,391,988
Cash dividends per common share $ 0.16 $ 0.14
See accompanying notes to condensed consolidated financial
statements.
Page 6 of 1719
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
July 4, June 28,
1998 1997
(In thousands)
Net Cash Flows From (To) Operating Activities:
Net income $ 45,852 $ 35,765
Noncash items included in net income:
Depreciation and amortization 24,650 15,084
Other postretirement and postemployment
benefits 49 686
Deferred income taxes 3,090 1,234
Other - net (24) 12
Net increase (decrease) in noncash operating
assets and liabilities (13,530) (6,674)
Increase (decrease) in other liabilities (751) (2,356)
Net cash flows from operating activities 59,336 43,751
Net Cash Flows From (To) Investing Activities:
Capital expenditures - net (80,016) (34,222)
Acquisition spending, net of cash acquired (11,310) (66,292)
Short-term investments - net (4) 446
Long-term investments (8) 1,045
Other - net 4 (194)
Net cash flows (to) investing activities (91,334) (99,217)
Net Cash Flows From (To) Financing Activities:
Purchase of HON INDUSTRIES common stock (1,387) (2,535)
Proceeds from long-term debt 45,781 100,000
Payments of note and long-term debt (21,064) (42,249)
Proceeds from sales of HON INDUSTRIES common
stock to members and stock-based compensation 2,061 1,505
Dividends paid (9,868) (8,314)
Net cash flows from (to) financing activities 15,523 48,407
Net increase (decrease) in cash and
cash equivalents (16,475) (7,059)
Cash and cash equivalents at beginning
of period 46,080 31,196
Cash and cash equivalents at end of period $ 29,605 $ 24,137
See accompanying notes to condensed consolidated financial
statements.
Page 7 of 19
HON INDUSTRIES Inc. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
AprilJuly 4, 1998
Note A. Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three-monthsix-month period
ended AprilJuly 4, 1998, are not necessarily indicative of the results
that may be expected for the year ending January 2, 1999. For
further information, refer to the consolidated financial
statements and footnotes included in the Company's annual report
on Form 10-K for the year ended January 3, 1998.
Note B. Inventories
Inventories of the Company and its subsidiaries are summarized as
follows:
April 4, 1998
($000) Unaudited) January 3,1998
Finished products $ 29,198 $ 26,352
Materials and work in process 54,542 48,186
LIFO Allowance (21,279) (14,356)
$ 62,461 $ 60,182
July 4, 1998 January 3,
($000) (Unaudited) 1998
Finished products $26,411 $26,352
Materials and work in process 51,505 48,186
LIFO Allowance (13,011) (14,356)
$64,905 $60,182
Note C. Shareholders' Equity
The Board of Directors approved a two-for-one common stock split
in the form of a 100 percent stock dividend, paid on March 27,
1998, to shareholders of record on March 6, 1998. All reported
net income per share and share outstanding amounts have been
adjusted to retroactively reflect the split.
Note D. Business Combinations
During June 1998, the Company finalized its purchase price
allocation for the stock purchase of Allsteel Inc.
Page 8 of 19
The final purchase price and allocation for the Allsteel Inc.
acquisition is shown below:
(In Millions)
Purchase Price $66.0
Final Allocation of Purchase Price:
Working capital, other than cash 24.3
Property, plant, and equipment 38.4
Goodwill 9.9
Other liabilities 6.6
The Company acquired Aladdin Steel Products Inc. on February 20,
1998. The transaction has been accounted for under the purchase
method. The cash purchase price and preliminary allocation is
shown below:
(In Millions)
Purchase Price $10.2
Preliminary Allocation of Aladdin was $10.4 million
which has been preliminarily allocated as follows:
(In millions)Purchase Price:
Working capital, other than cash $1.8.3
Property, plant, and equipment 1.8
Goodwill 6.8
Page 7 of 178.1
Assuming the acquisition of Allsteel Inc., Bevis Custom Furniture
Inc., Panel Concepts Inc., and Aladdin Steel Products Inc. had
occurred on December 29, 1996, the beginning of the Company's
1997 fiscal year, instead of June 17, 1997, November 13, 1997,
December 1, 1997, and February 20, 1998, when they actually
occurred, the Company's pro forma consolidated net sales for the
firstsecond quarter ended April 4, 1998,June 28, 1997 would have been approximately
$419.4$347.6 million instead of the reported $418.3 million, and first
quarter$296.6 million. Pro forma
consolidated net sales for the six months ended March 29,June 28, 1997,
would have been approximately $341.5$689.1 million instead of the
reported $282.9$579.4 million. Pro forma consolidated net income and
net income per share for both
quartersthe second quarter and first six months
of 1997 would not have been materially different from the
reported amounts.
Note E. New Accounting Standards
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; SFAS No. 128, Earnings Per Share;Share and SFAS No. 129, Disclosure
of Information about Capital Structure, as of January 3, 1998,
year-end 1997. Their adoption had no material effect on
financial condition or results of operations.
Note F. Comprehensive Income
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. In its first fiscal
quarter ended April 4, 1998, the adoption of SFAS No. 130 had no
material effect on financial condition or results of operations.
The only comprehensive income transactions during the quarter
were nominal foreign currency adjustments recorded under SFAS No.
52, Foreign Currency Translation.
Page 9 of 19
In its second fiscal quarter ended July 4, 1998, the Company
converted a private equity securities investment held as a long-
term investment to newly issued publicly traded securities
following an initial public offering by the issuer. As
a result of this conversion, the securities automatically became
securities available-for-sale under SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities. The Company
anticipates selling the new securities at such time as it
believes they are fairly valued. The current comprehensive
income effect of the unrealized holding gain on these equity
securities and on-going nominal foreign currency translation
adjustments, for the three- and six-month periods ended July 4,
1998, is approximately $2,481,000 and $2,482,000, respectively.
Note G. Reclassifications
Certain prior year information has been reclassified to conform
to the current year presentation.
Note G.H. Business Segment Information
The Company adopted Statement of Financial Accounting Standards
(SFAS) No. 131, Disclosures about Segments of an Enterprise and
Related Information, effective with its 1998 fiscal year
beginning January 4, 1998. ManagementThis 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 No. 30, Disclosures of
Information about Major Customers. That is, management views the
Company as being in two business segments: office furniture and
hearth products with the former being the principal business
segment.
The office furniture segment manufactures and markets a broad
line of metal and wood commercial and home office furniture which
includes file cabinets, 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, and chimney systems principally for the home.
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 Page 8 of 17
costs of the Company's corporate operations, interest income, and
interest expense. Management views interest income and expense
as corporate financing costs and not as a business segment cost.
In addition, management applies one effective income tax rate to
its consolidated income before income taxes so income taxes are
not reported or viewed internally on a segment basis.
No geographic information for revenues from external customers or
for long-lived assets is disclosed inasmuch as the Company's
primary market and capital investments are concentrated in the
United States.
Page 10 of 19
Reportable segment data reconciled to the consolidated financial
statements for the three month and six month period ended AprilJuly 4,
1998, and March 29,June 28, 1997, is as follows:
Three Months Ended
Apr. 4, 1998 Mar. 29, 1997
Net sales:
Office furniture $366,836 $239,638
Hearth products 51,427 43,221
$418,263 $282,859
Operating profit:
Office furniture $ 36,663 $ 28,548
Hearth products 2,931 2,054
Total operating profit 39,594 30,602
Unallocated corporate expenses (3,637) (3,532)
Income before income taxes $ 35,957 $ 27,070
Identifiable assets:
Office furniture $591,18 $340,176
Hearth products 145,917 124,440
General corporate 41,374 42,871
$778,409 $507,487
Depreciation & amortization
expense:
Office furniture $ 9,650 $ 5,466
Hearth products 1,942 1,632
General corporate 319 341
$ 11,911 $ 7,439
Capital expenditures, net:
Office furniture $ 35,694 $ 14,036
Hearth products 4,526 4,211
General corporate (153) 165
$ 40,067 $ 18,412
Three Months Ended Six Months Ended
July 4, June 28, July 4, June 28,
1998 1997 1998 1997
(In thousands)
Net Sales:
Office furniture $343,493 $244,725 $710,329 $484,363
Hearth products 57,924 51,842 109,351 95,063
$401,417 $296,567 $819,680 $579,426
Operating Profit:
Office furniture $ 39,295 $ 29,663 $ 75,958 $ 58,211
Hearth products 6,725 6,604 9,656 8,658
Total operating profit 46,020 36,267 85,614 66,869
Unallocated corporate expenses (8,614) (6,113) (12,251) (9,645)
Income before income taxes $ 37,406 $ 30,154 $ 73,363 $ 57,224
Identifiable Assets:
Office furniture $606,765 $437,737
Hearth products 150,645 135,320
General corporate 63,800 62,335
$821,210 $635,392
Depreciation & Amortization
Expense:
Office furniture $ 10,093 $ 5,853 $ 19,743 $ 11,319
Hearth products 2,318 1,447 4,260 3,079
General corporate 328 345 647 686
$ 12,739 $ 7,645 $ 24,650 $ 15,084
Capital Expenditure, Net:
Office furniture $ 34,058 $ 12,630 $ 69,752 $ 26,666
Hearth products 4,415 3,048 8,941 7,259
General corporate 1,476 132 1,323 297
$ 39,949 $ 15,810 $ 80,016 $ 34,222
Page 911 of 1719
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
A summary of the period-to-period changes in the principal items
included in the Condensed Consolidated Statements of Income is
shown below:
Comparison of
Increases (Decreases) Three Months Ended Three Months Ended
Dollars in Thousands April 4, 1998 & April 4, 1998 &
March 29, 1997 January 3, 1998
Net sales $135,404 47.9% $26,324 6.7%
Cost of products sold 97,377 50.1 21,724 8.1
Selling & administrative
expenses 28,110 46.5 9,563 12.1
Interest income 24 5.8 (260) (37.4)
Interest expense 1,054 67.9 373 16.7
Income taxes 3,332 32.8 (2,098) (13.5)
Net income 5,555 32.8 (3,498) (13.5)
Comparison of
Increases (Decreases) Three Months Ended Six Months Ended Three Months Ended
Dollars in Thousands July 4, 1998 & July 4, 1998 & July 4, 1998 &
June 28, 1997 June 28, 1997 April 4, 1998
Net sales $104,850 35.4% $240,254 41.5% $(16,846) (4.0)%
Cost of products sold 77,138 38.4 174,515 44.2 (13,464) (4.6)
Selling & Administrative
expenses 18,910 29.4 47,020 37.7 (5,350) (6.0)
Interest income (228)(51.7) (204)(23.9) (222)(51.0)
Interest expense 1,322 83.6 2,376 75.8 297 11.4
Income taxes 2,720 24.1 6,052 28.2 543 4.0
Net income 4,532 24.0 10,087 28.2 906 4.0
All per share information in this report reflects a two-for-one
stock split in the form of a 100% stock dividend effective
March 27, 1998.
The Company reported its tenth consecutive quarterly record first quarternet
sales and earnings for
its fiscal quarter ended April 4, 1998, representing the highest
net sales for any quarter in the company's history. This is the
ninth consecutive quarter of record results from operations.earnings. Consolidated net sales for the firstsecond
quarter ending Aprilended July 4, 1998, were $418.3$401.4 million, a 48% increase from the $282.9 million
in the first quarter of 1997. Net income was $22.5 million, or
$0.36 per share, an increase of 29% for the first quarter of
1998,up 35.4%,
compared to $16.9$296.6 million or $0.28 per share for the year-
ago period. This sales increase is the result of offering
compelling value products, pursuing aggressive marketing
programs, and offering new product features often at no
additional cost to customers, although at some sacrifice of gross
margin.
For the first quarter of 1998, office furniture comprised 88% of
consolidated net sales and hearth products 12%. Net sales for
office furniture were up 53% for the quarter compared to the same quarter a year ago. Proforma firstFor
second quarter 1998, net sales of
office furniture, excluding 1997-98 acquisitions of Allsteel,
Bevis, and Panel Concepts,income increased 34% over first quarter24.0% to $23.4 million,
compared to $18.8 million in 1997. Hearth products sales increased 19%Net income per share for the
quarter rose to $0.38 per diluted share, an increase of 18.8%
from $0.32 per diluted share earned in second quarter 1997.
For the first six months of 1998, consolidated net sales rose
41.5% to $819.7 million from $579.4 million last year. Net
income was $45.9 million, up 28.2% from $35.8 million in the
first half of 1997. Earnings per share for the six months were
$0.74, an increase of 23.3% compared to $0.60 in 1997. Earnings
per share for both the samesecond quarter and six-month period of
1998 reflect the addition of 2,300,000 shares of common stock
issued in fourth quarter 1997 under a year ago. Proformaprimary offering.
The Company experienced strong growth in both its value-priced
office furniture and hearth products core business segments. It
is continuing to outperform industry sales estimates for both
office furniture and hearth products. Acquisitions completed
during 1997 and 1998 also contributed to current quarterly and
six-month results of operations. See Note D. Business Combinations
for related pro forma data. The office furniture trade association
is currently estimating the overall U.S. office furniture industry
grew 10% in the first half of 1998. The Company believes that
the hearth products industry has grown at a comparable rate.
Page 12 of 19
Second quarter 1998 hearth
productsoffice furniture net sales excluding the February 1998 acquisitionrepresented 86% of
Aladdin Steel Products Inc., increased 16% for the quarter.
Office furnituretotal quarterly net sales and contributed 93%85% of first quarter 1998
Page 10 of 17
consolidated operating profit
before unallocated corporate expenses and hearth products 7%. The first quarterexpenses. Hearth product sales made
up the balance of the fiscal
year is historically the weakestnet sales and earnings quarter for
the hearthoperating profit.
The Company's strategies to offer customers innovative products
segment.and superior service, coupled with a commitment to operational
excellence through a Rapid Continuous Improvement (RCI) program,
are believed to be contributing to its strong sales growth. The
consolidatedquick delivery of a broad selection of quality, value-priced
products is a key driver to increasing orders.
Consolidated gross profit margin formargins improved from 30.3% in the
first quarter of 1998 was 30.3% compared to 31.3% for30.7% in the same periodsecond quarter. This
improvement is consistent with management's expectations.
Margins have been reduced in 1997the short-term as acquisitions
are in various stages of integration, which reflects several business factors.is typically an eighteen-
to twenty-four-month process with larger acquisitions. Integrations
become complex endeavors often involving product-line
rationalization, realignment of sales programs and support,
implementation of production and capacity efficiencies, reduction
of production cycle times, enhancement of product quality, and
improvement of complete and on-time shipment of product. The
Company continues
to improve margin levelshas a goal of recently acquired businessesmaintaining consolidated gross profit
margins in the 31-32% range and expects that margins willto be in line with other core businesses
when integration is complete. The Company believes that its Rapid
Continuous Improvement Program will improve gross margins from
current levelsapproaching this
goal by the end ofyear-end 1998.
Selling and administrative expenses continue to be a cost-reduction
target. These costs were reduced to 20.7% of net sales for the
second quarter from 21.2% in the first quarter of 1998
were 21.2%1998. The
Company expects to leverage these costs as sales grow; however,
necessary increased costs to meet competitive conditions offset a portion
of net sales compared to 21.4% in the comparable
quarter of 1997. Management places major emphasis on controllingefficiency and reducing selling and administrative expenses as a percent of
net sales. Selling and administrative expenses also include
freight and distribution expenses incurred to get the product to
the customer.leveraging gains.
Liquidity and Capital Resources
As of AprilJuly 4, 1998, cash and short-term investments decreasedincreased to
$29.9 million from $11.0 million comparedat the end of first quarter
1998. Net cash flows from operations contributed to a $46.3 million balance at year-end
1997. The decreasethe
improvement. Cash flow and working capital management are major
focuses of management to ensure the Company is due to marketing program payments, capital
expenditures, and acquisition spending.poised for
continued future growth.
Net capital expenditures for the firstsecond quarter of 1998and six-month
period continue at an accelerated level. First quarter net
expenditures were $40.1 million and primarily represent investment$39.9 million in the second quarter
for a total of $80.0 million compared to $34.2 million for the same
six-month period in 1997. These expenditures are supporting new
products, construction of new facility capacity, and cost reduction
initiatives through the purchase and customization of production-
related machinery and equipment and warehouse and production facility expansion to
increase capacity and to facilitate more efficient and productive
operations. Approximately 700,000 square feet of facility
expansion is currently in various stages of construction.equipment. These investments were funded by
a combination of cash reserves, cash from operations, and a revolving
credit agreement.
As referenced earlier, on Page 13 of 19
On February 20, 1998, the Company completed an acquisition of the
assets of Aladdin Steel Products Inc., located in Colville,
Washington. Aladdin is a manufacturer of wood-, pellet-, and
gas-burning stoves and inserts under the Quadra-Fire brand name
with annual sales of approximately $16 million. A new division,
Aladdin Hearth Products, has been formed under the Hearth
Technologies Inc. operating company to manufacture and distributemarket the
Company's Quadra-Fire, Arrow, and Dovre brand stoves. Page 11 of 17
The Board of Directors approved a 14.3% increase inPlease
refer to Note D. Business Combinations for related information.
On March 27, 1998, the common
stock quarterly dividend from $.07 per share to $.08 per share.
The dividend wasCompany paid on February 28, 1998 to shareholders of
record on February 23, 1998. This was the 172nd consecutive
quarterly dividend paid by the Company.
The Board of Directors also declared a two-for-one stock split, in
the form of a 100 percent100% stock dividend, paid on March 27, 1998, to shareholders of record on
March 6, 1998. Shareholders received one share of common stock
for each share held on the record date.
InThe Board of Directors declared a regular quarterly cash dividend
of $0.08 per share on its common stock on May 11, 1998, to
shareholders of record at the close of business on May 21. It
was paid on June 1, 1998, and represented the 173rd consecutive
dividend paid by the Company since its first quarter,shareholder dividend
in 1955.
The Company filed a Form 8-A on June 12, 1998, with the U.S.
Securities and Exchange Commission to register its common stock
and preferred share purchase rights in preparation for them being
traded on the New York Stock Exchange (NYSE). Effective July 2,
1998, HON INDUSTRIES common stock began trading on the NYSE under
the ticker symbol HNI. The Company's common stock previously had
been traded on the NASDAQ National Market System under the symbol
HONI. The move to the NYSE was initiated in the interest of the
anticipated longer-term benefits to the Company's shareholders.
Effective June 26, 1998, Harris Trust and Savings Bank, Chicago,
Illinois, began serving as the Company's transfer agent and
registrar of its common stock.
For the six months ended July 4, 1998, the Company repurchased
30,79543,795 post-split shares of its common stock at a cost of
approximately $.9$1.4 million or an average price of $30.24$31.16 per
share. As of AprilJuly 4, 1998,
approximately $3.7$3.3 million of the Board's
current repurchase authorization remained unspent.
Year 2000
The Company is continuing to assess and address its variouspursue a two-phase Year 2000 information technology(Y2K)
assessment and remediation program. Phase I is an internal
assessment and remediation plan encompassing the critical functions
of the business. This phase was launched in the fall of 1997, is
ongoing, and is anticipated to be complete in the first quarter
of 1999. Phase II consists of review and monitoring of the
critical functions of the business using a third-party Y2K planning
and assessment guide. Phase II is scheduled for rollout in
August-September 1998 and targeted for completion in mid-1999.
Assessment and remediation findings, to date, consist of Y2K
business issues mostly concentrated with older computer hardware
and software. While the Y2K assessment efforts are not complete,
a significant number of the Company's computer business systems
have been assessed and any remediation required has been completed
Page 14 of 19
or is underway. Assessment of Y2K compliance issues.with key suppliers,
customers, and service providers is also part of both Phase I and
Phase II plans. Based on the
assessment effortefforts to date, the Company continues
to believe that
any required maintenance or modification costsits ultimate consolidated Y2K remediation cost will
not be financially material and will be expensed or capitalized,
depending upon its nature, as incurred and willincurred.
Management believes the Company's primary business risks, in the
event of significant failure caused by the Y2K issue, would include,
but not be limited to, delays in shipment of products or delivery
of services leading to lost revenues, increased operating costs,
loss of customers or suppliers, or other business interruptions of
a material to its business, operations,nature, as well as claims of mismanagement, misrepresentation,
or financial condition. Any replacement software required will
be capitalized and amortized over the software's useful life.
On May 11, 1998, the Boardbreach of Directors declared an $.08 per
common share cash dividend to shareholders of record on May 21,
1998, to be paid on June 1, 1998. The Board also passed a
resolution to appoint Harris Trust and Savings Bank, Chicago,
Illinois, as the Company's transfer agent and registrar of its
common stock. The transition to Harris will occur over the next
six to eight weeks. This function previously hadcontract.
No need for contingency planning has been performed
in-house by the Company. In addition,identified at this point,
but the Company announced it
has completed the clearance processis prepared to do so if and is filing an application
to list its common stock on the New York Stock Exchange (NYSE).
The Company's shares will continue to be traded on the NASDAQ
National Market System until it becomes listed on the NYSE under
the symbol HNI, which is anticipated to be in early July 1998.when such circumstances
are identified.
Looking Ahead
Management's goal isfinancial goals for fiscal year 1998 continue to be
to achieve double-digit growth in both sales and earnings for 1998. This will be achieved by continually
improving the cost structure, introducing new value-priced
products, and providing the best customer service in the two
industries.
Page 12 of 17earnings.
Except for the historical information contained herein, the
matters discussed in this Form 10-Q are forward-looking
statements. Such forward-looking statements involve risks and
uncertainties which could cause actual results or outcomes to
differ materially from those discussed in the forward-looking
statements including:including but not limited to: competitive conditions,
pricing trends in the office furniture and hearth products markets,
acceptance of the Company's new product introductions, the overall
growth rate of the office furniture and hearth products industries, the
achievement of cost reductions and productivity in the Company's
operations, the Company's ability to improve margins of acquired
businesses, impact of future acquisitions, the Company's ability
to identify and correct or implement contingency plans to deal with
the Y2K issue, as well as the risks, uncertainties, and other factors
described from time to time in the Company's SEC filings and reports.
Page 1315 of 1719
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of HON INDUSTRIES Inc. was
held on May 12 1998, for purposes of electing four Directors to
the Board of Directors, and to amend the Articles of
Incorporation to increase the authorized shares of the Company's
common stock from 100,000,000 to 200,000,000. As of March 13,
1998, the record date for the meeting, there were 30,826,307
shares of common stock issued and outstanding and entitled to
vote at the meeting. The first proposal voted upon was the
election of four Directors for a term of three years and until
their successors are elected and shall qualify. The four persons
nominated by the Company's Board of Directors received the
following votes and were elected:
For Withheld Against
W. August Hillenbrand 26,895,244 216,034 1,806
or 87% or 1% or 0%
Jack D. Michaels 26,888,931 219,054 2,949
or 87% or 1% or 0%
Moe S. Nozari 26,894,408 216,084 1,972
or 87% or 1% or 0%
Frank S. Ptak 26,894,408 215,229 1,550
or 87% or 1% or 0%
The second proposal voted upon was the approval of the Amendment
of the Articles of Incorporation. The proposal was approved with
26,645,291 votes, or 86%, voting for; 418,512 votes, or 1%,
voting against; and 49,770 votes, or 0%, voting withheld.
As to both proposals, there were 1,635,533 broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. See Exhibit Index.
(b) Reports on Form 8-K. No reports on Form 8-K
have beenwere filed during the quarter for which this
report is filed.
Page 1416 of 1719
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
HON INDUSTRIES Inc.
Dated: May 19,August 13, 1998 By /s/ David C. Stuebe
David C. Stuebe
Vice President and
Chief Financial Officer
By /s/ Melvin L. McMains
Melvin L. McMains
Controller
Page 1517 of 1719
PART II. EXHIBITS
EXHIBIT INDEX
Page
(27) Financial Data Schedule 1719
Page 1618 of 1719