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 April 1, 2000
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 52761-0071
(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 share outstanding of each of the issuer's
classes of commons tock, as of the latest practical date.
Class Outstanding at April 1, 2000
Common Shares, $1 Par Value 60,149,888 shares
Exhibit Index is on Page 15.
HON INDUSTRIES Inc. and SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
April 1, 2000, and January 1, 2000 3-4
Condensed Consolidated Statements of Income -
Three Months Ended April 1, 2000, and April 3, 1999 5
Condensed Consolidated Statements of Cash Flows -
Three Months Ended April 1, 2000, and April 3, 1999 6
Notes to Condensed Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-12
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
EXHIBIT INDEX 15
(27) Financial Data Schedule
(99A) Executive Bonus Plan of Registrant,
as amended and restated on May 1, 2000,
effective as of January 1, 2000
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 1, January 1,
2000 2000
(Unaudited)
(In thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 23,433 $ 22,168
Short-term investments - -
Receivables 213,396 196,730
Inventories (Note B) 93,381 74,937
Deferred income taxes 13,805 13,471
Prepaid expenses and other current assets 11,213 9,250
Total Current Assets 355,228 316,556
PROPERTY, PLANT, AND EQUIPMENT, at cost
Land and land improvements 17,515 17,114
Buildings 187,153 181,080
Machinery and equipment 484,206 469,268
Construction in progress 37,802 37,819
726,676 705,281
Less accumulated depreciation 263,885 249,690
Net Property, Plant, and Equipment 462,791 455,591
GOODWILL 225,650 113,116
OTHER ASSETS 20,634 21,460
Total Assets $1,064,303 $906,723
See accompanying notes to condensed consolidated financial
statements.
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 1, January 1,
2000 2000
(Unaudited)
(In thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $211,069 $213,072
Income taxes 15,525 -
Note payable and current maturities
of long-term debt 6,316 6,106
Current maturities of other long-term
obligations 2,402 5,945
Total Current Liabilities 235,312 225,123
LONG-TERM DEBT 250,011 119,860
CAPITAL LEASE OBLIGATIONS 3,931 4,313
OTHER LONG-TERM LIABILITIES 17,760 18,015
DEFERRED INCOME TAXES 37,605 38,141
SHAREHOLDERS' EQUITY
Capital Stock:
Preferred, $1 par value; authorized
2,000,000 shares; no shares outstanding - -
Common, $1 par value; authorized
200,000,000 shares; outstanding - 60,150 60,172
2000 - 60,149,888 shares;
1999 - 60,171,753 shares
Paid-in capital 25,518 24,981
Retained earnings 433,959 416,034
Accumulated other comprehensive income 57 84
Total Shareholders' Equity 519,684 501,271
Total Liabilities and Shareholders'
Equity $1,064,303 $906,723
See accompanying notes to condensed consolidated financial
statements.
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
April 1, April 3,
2000 1999
(In thousands, except
per share data)
Net sales $478,601 $424,459
Cost of products sold 329,416 295,222
Gross Profit 149,185 129,237
Selling and administrative expenses 108,292 89,264
Provision for closing facilities (Note C) - 19,679
Operating Income 40,893 20,294
Interest income 289 184
Interest expense 2,839 2,229
Income Before Income Taxes 38,343 18,249
Income taxes 13,803 6,661
Net Income 24,540 11,588
Net income per common share $.41 $.19
Average number of common shares 60,185,851 61,154,027
outstanding
Cash dividends per common share $.11 $.095
See accompanying notes to condensed consolidated financial
statements.
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
April 1, April 3,
2000 1999
(In thousands)
Net Cash Flows From (To) Operating
Activities:
Net income $ 24,540 $ 11,588
Noncash items included in net income:
Depreciation and amortization 18,499 15,396
Other postretirement and postemployment
benefits 519 494
Deferred income taxes (1,002) (636)
Other - net (34) (44)
Net increase (decrease) in noncash
operating assets and liabilities (13,209) (13,425)
Increase (decrease) in other liabilities (492) (1,264)
Net cash flows from operating activities 28,821 12,109
Net Cash Flows From (To) Investing
Activities:
Capital expenditures - net (16,023) (30,006)
Capitalized software (72) (138)
Acquisition spending (134,473) (1,637)
Short-term investments - net - 169
Long-term investments - (9)
Other - net (115) -
Net cash flows (to) investing activities (150,683) (31,621)
Net Cash Flows From (To) Financing
Activities:
Purchase of HON INDUSTRIES common stock (6,897) (5,126)
Proceeds from long-term debt 149,999 41,651
Payments of note and long-term debt (20,772) (22,593)
Proceeds from sales of HON INDUSTRIES
common stock to members and stock-based
compensation 7,412 4,598
Dividends paid (6,615) (5,796)
Net cash flows from financing activities 123,127 12,734
Net increase (decrease) in cash and
cash equivalents 1,265 (6,778)
Cash and cash equivalents at beginning
of period 22,168 17,500
Cash and cash equivalents at end of period $ 23,433 $ 10,722
See accompanying notes to condensed consolidated financial
statements.
HON INDUSTRIES Inc. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
April 1, 2000
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-month period
ended April 1, 2000, are not necessarily indicative of the
results that may be expected for the year ending December 30,
2000. 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 1, 2000.
Note B. Inventories
Inventories of the Company and its subsidiaries are summarized as
follows:
April 1, 2000 January 1,
($000) (Unaudited) 2000
Finished products $ 55,240 $ 29,663
Materials and work in process 48,672 55,737
LIFO Allowance (10,531) (10,463)
$ 93,381 $ 74,937
Note C. Provision for Closing Facilities
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
pretax charge of $19.7 million or $0.20 per diluted share was
recorded during the quarter ended April 3, 1999. As of April 1,
2000, the primary costs not yet incurred relate to costs
associated with the closed buildings and worker's compensation
claims. Management believes the remaining reserve of $3.8
million to be adequate to cover these obligations.
Note D. Business Combinations
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). The Company acquired AFC and Allied for
approximately $134 million in cash and debt. The acquisition has
been accounted for using the purchase method, and the results of
AFC and Allied have been included in the Company's financial
statements since the date of acquisition. The excess of the
consideration paid over the fair value of the business of $21
million was recorded as goodwill and is being amortized on a
straight-line basis over 20 years. This allocation of purchase
price is preliminary and subject to change as additional
information is obtained related to the fair values of the
acquired net assets.
Note E. Comprehensive Income
The Company's comprehensive income consists of an unrealized
holding gain or loss on equity securities available-for-sale
under SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," and nominal foreign currency adjustments.
Note F. Business Segment Information
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 product
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
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 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.
Reportable segment data reconciled to the consolidated financial
statements for the three month period ended April 1, 2000, and
April 3, 1999, is as follows:
Three Months Ended
April 1, April 3,
2000 1999
Net Sales:
Office furniture $ 395,637 $359,981
Hearth products 82,964 64,478
$ 478,601 $424,459
Operation Profit:
Office furniture
Normal operations $ 38,572 $ 36,294
Facility closedown provision - (19,679)
Office furniture - net 38,572 16,615
Hearth products 4,770 5,784
Total operating profit 43,342 22,399
Unallocated corporate expense (4,999) (4,150)
Income before income taxes $ 38,343 $ 18,249
Identifiable Assets:
Office furniture $ 671,284 $666,632
Hearth products 336,274 159,143
General corporate 56,745 46,763
$1,064,303 $872,538
Depreciation & Amortization
Expense:
Office furniture $ 14,374 $ 12,458
Hearth products 3,599 2,607
General corporate 526 331
$ 18,499 $ 15,396
Capital Expenditure, Net:
Office furniture $ 10,478 $ 20,291
Hearth products 4,554 4,165
General corporate 991 5,550
$ 16,023 $ 30,006
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 Three Months
Ended Ended
Dollars in Thousands April 1, 2000 & April 1, 2000 &
April 3, 1999 January 1, 2000
Net sales $54,142 12.8% $9,225 2.0%
Cost of products sold 34,194 11.6 7,346 2.3
Selling & administrative
expenses 19,028 21.3 2,028 1.9
Provision for closing
facilities (19,679) N/M - -
Interest income 105 57.1 64 28.4
Interest expense 610 27.4 350 14.1
Income taxes 7,142 107.2 (351) (2.5)
Net income 12,952 111.8 (84) (0.3)
The Company reported record first quarter sales and earnings for
its fiscal quarter ended April 1, 2000. This sales increase
marks the 17th consecutive quarter of record sales growth.
Consolidated net sales for the first quarter ending April 1,
2000, were $478.6 million, a 12.8% increase from the $424.5
million in the first quarter of 1999. Net income was $24.5
million, compared to $24.1 million for the same period a year ago
prior to a $12.5 million after-tax charge for plant closings.
Net income per common share for first quarter 2000 was $0.41 per
diluted share, a 5.1% increase from $0.39 per share from ongoing
operations in first quarter 1999. Results for first quarter 1999
included a $0.20 per share provision for the closing of three
plants. After the charge, first quarter 1999 net income was $11.6
million or $0.19 per share.
For the first quarter of 2000, office furniture comprised 83% of
consolidated net sales and hearth products comprised 17%. Net
sales for office furniture were up 9.9%. Hearth products sales
increased 28.7% for the quarter compared to the same quarter a
year ago. Proforma first quarter 2000 hearth products sales,
excluding the February 29, 2000, acquisition of American
Fireplace Company and the Allied Group, increased 7.3% for the
quarter. Office furniture contributed 89% of first quarter 2000
consolidated operating profit before unallocated corporate expenses
and hearth products contributed 11%.
The consolidated gross profit margin for the first quarter of
2000 was 31.2% compared to 30.4% for the same period in 1999.
The Company is continuing to focus on improving gross margins by
improving the net selling price of products and reducing
production costs.
Selling and administrative expenses for the first quarter of 2000
were 22.6% of net sales compared to 21.0% in the comparable
quarter of 1999, excluding the one-time charge. The Company
experienced increased costs to establish and promote the HON and
Allsteel brands in their respective market segments including
increased sales and administrative support and new literature.
Rising fuel and carrier costs during the first quarter of 2000
offset efforts to reduce freight expense. These factors combined
with the amortization expense associated with the acquisition of
Hearth Services led to increased selling and administrative
expenses. Management continues to focus on controlling and
reducing selling and administrative expenses as a percent of net
sales.
The Company decreased its estimated annual effective tax rate to
36% for the first quarter of 2000 from 36.5% a year earlier to
reflect lower estimated state income taxes.
Liquidity and Capital Resources
As of April 1, 2000, cash and short-term investments increased to
$23.4 million compared to a $22.2 million balance at year-end
1999. Net cash flows from operations contributed to the
improvement. Cash flow and working capital management are major
focuses of management to ensure the Company is poised for growth.
Net capital expenditures for the first quarter of 2000 were $16.0
million and primarily represent investment in new, more-efficient
machinery and equipment. These investments were funded by a
combination of cash reserves, cash from operations and a
revolving credit agreement.
As referenced earlier, on February 29, 2000, the Company
completed the acquisition of two leading hearth products
distributors, American Fireplace Company (AFC) and the Allied
Group (Allied). 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. AFC
and Allied, with combined 1999 sales of nearly $200 million, will
be joined to form Hearth Services Inc., a subsidiary of Hearth
Technologies Inc.
On February 16, 2000, the Board approved a 15.8% increase in the
common stock quarterly cash dividend from $0.095 per share to $0.11
per share. The dividend was paid on March 1, 2000, to
shareholders of record on February 23, 2000. This was the 180th
consecutive quarterly dividend paid by the Company.
In the first quarter, the Company repurchased 374,255 of its
common stock at a cost of approximately $6.9 million or an
average price of $18.43 per share. As of April 1, 2000,
approximately $24.7 million of the Board's current repurchase
authorization remained unspent.
On February 29, 2000, the Company filed a Form S-8 Registration
Statement. This filing registered 3,000,000 shares of HON
INDUSTRIES common stock to be issued over time under the HON
INDUSTRIES Inc. Profit-Sharing Retirement Plan.
On May 2, 2000, the Board of Directors declared an $0.11 per
common share cash dividend to shareholders of record on May 12,
2000, to be paid on June 1, 2000.
Based on operations since January 1, 2000, the Company has not
experienced any adverse operational impact to its ongoing business
as a result of the "Year 2000" issue.
Looking Ahead
The Company is optimistic about its business outlook for fiscal
year 2000. Management's goal is to achieve improved
profitability and record results for 2000. This will be achieved
by continually improving the cost structure, providing the best
customer service in the two industries, and introducing new
products.
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 but not limited to: competitive conditions,
pricing trends in the office furniture and hearth products
markets, acceptance of the Company's new products, 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 realize
financial benefits of operating The HON Company and Allsteel Inc.
as separate businesses, the Company's ability to obtain expected
profits from acquired businesses, as well as the risks,
uncertainties, and other factors described from time to time in
the Company's SEC filings and reports.
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 1, 2000, for purposes of electing three Directors to
the Board of Directors, and to adopt the First Amendment to the
HON INDUSTRIES Inc. Executive Bonus Plan to permit certain awards
granted under the Plan to be exempt from the $1 million deduction
limit set forth in Section 162(m) of the Internal Revenue Code.
As of March 1, 2000, the record date for the meeting, there were
60,164,262 shares of common stock issued and outstanding and
entitled to vote at the meeting. The first proposal voted upon
was the election of three Directors for a term of three years and
until their successors are elected and shall qualify. The three
persons nominated by the Company's Board of Directors received
the following votes and were elected:
For Withheld Against
Gary M. Christensen 49,929,006 483,794 -0-
or 83.0% or 0.8% or 0.0%
Robert W. Cox 49,947,821 465,038 -0-
or 83.0% or 0.8% or 0.0%
Lorne R. Waxlax 49,935,773 477,087 -0-
or 83.0% or 0.8% or 0.0%
The second proposal voted upon was the adoption of the First
Amendment to the HON INDUSTRIES Inc. Executive Bonus Plan. The
proposal was approved with 46,142,431 votes, or 76.7% voting for;
3,049,997 votes, or 5.1% voting against; and 1,220,428 votes, or
2.0% voting withheld.
As to the second proposal, there were 3 or 0% broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. See Exhibit Index.
(b) Reports on Form 8-K.
The Company filed a periodic report on Form 8-K dated
February 2, 2000, to report the Company had signed a
purchase agreement to acquire American Fireplace
Company and the Allied group on January 31, 2000.
The Company filed a periodic report on Form 8-K dated
March 15, 2000, to report the acquisition of American
Fireplace Company and the Allied Group on February 29,
2000.
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.
Dated: May 11, 2000 HON INDUSTRIES Inc.
By /s/ David C. Stuebe
David C. Stuebe
Vice President and
Chief Financial Officer
By /s/ Melvin L. McMains
Melvin L. McMains
Vice President and
Controller
PART II. EXHIBITS
EXHIBIT INDEX
(27) Financial Data Schedule
(99A) Executive Bonus Plan of the Registrant, as amended and
restated on May 1, 2000, effective as of January 1, 2000.