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 September 30, 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 common stock, as of the latest practical date.
Class Outstanding at September 30, 2000
Common Shares, $1 Par Value 60,202,276 shares
Exhibit Index is on Page 16.
HON INDUSTRIES Inc. and SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
September 30, 2000, and January 1, 2000 3-4
Condensed Consolidated Statements of Income -
Three Months Ended September 30, 2000, and October 2, 1999 5
Condensed Consolidated Statements of Income -
Nine Months Ended September 30, 2000, and October 2, 1999 6
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2000, and October 2, 1999 7
Notes to Condensed Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
EXHIBIT INDEX 16
(27) Financial Data Schedule 17
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Sept. 30, Jan. 1,
2000 2000
(Unaudited)
ASSETS (In thousands)
CURRENT ASSETS
Cash and cash equivalents $ 18,551 $ 22,168
Receivables 234,130 196,730
Inventories (Note B) 96,873 74,937
Deferred income taxes 13,791 13,471
Prepaid expenses and other current assets 12,857 9,250
Total Current Assets 376,202 316,556
PROPERTY, PLANT, AND EQUIPMENT, at cost
Land and land improvements 18,233 17,114
Buildings 192,179 181,080
Machinery and equipment 504,929 469,268
Construction in progress 34,288 37,819
749,629 705,281
Less accumulated depreciation 292,365 249,690
Net Property, Plant, and Equipment 457,264 455,591
GOODWILL 220,731 113,116
OTHER ASSETS 20,668 21,460
Total Assets $1,074,865 $906,723
See accompanying notes to condensed consolidated financial
statements.
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Sept. 30, Jan. 1,
2000 2000
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY (In thousands)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 222,812 $213,072
Income taxes 11,088 -
Note payable and current maturities
of long-term debt 5,977 6,106
Current maturities of other long-term
obligations 5,327 5,945
Total Current Liabilities 245,204 225,123
LONG-TERM DEBT 203,218 119,860
CAPITAL LEASE OBLIGATIONS 2,341 4,313
OTHER LONG-TERM LIABILITIES 18,358 18,015
DEFERRED INCOME TAXES 39,949 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 - 60,202 60,172
2000 - 60,202,276 shares;
1999 - 60,171,753 shares
Paid-in capital 26,639 24,981
Retained earnings 478,362 416,034
Accumulated other comprehensive income 592 84
Total Shareholders' Equity 565,795 501,271
Total Liabilities and Shareholders'
Equity $1,074,865 $906,723
See accompanying notes to condensed consolidated financial
statements.
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
Sept. 30, Oct. 2,
2000 1999
(In thousands, except
per share data)
Net sales $532,091 $475,738
Cost of products sold 354,367 327,243
Gross Profit 177,724 148,495
Selling and administrative expenses 120,966 101,234
Operating Income 56,758 47,261
Interest income 493 233
Interest expense 3,796 2,393
Income Before Income Taxes 53,455 45,101
Income taxes 19,234 16,462
Net Income $ 34,221 $ 28,639
Net income per common share $0.57 $0.47
Average number of common shares
outstanding 60,162,183 60,921,268
Cash dividends per common share $0.11 $0.095
See accompanying notes to condensed consolidated financial
statements.
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine Months Ended
Sept. 30, Oct. 2,
2000 1999
(In thousands, except
per share data)
Net sales $1,517,244 $1,319,905
Cost of products sold 1,027,625 914,542
Gross Profit 489,619 405,363
Selling and administrative expenses 351,674 280,283
Provision for closing facilities (Note C) - 19,679
Operating Income 137,945 105,401
Interest income 1,216 619
Interest expense 10,757 7,223
Income Before Income Taxes 128,404 98,797
Income taxes 46,225 36,061
Net Income $ 82,179 $ 62,736
Net income per common share $1.37 $1.03
Average number of common shares
outstanding 60,164,179 61,081,451
Cash dividends per common share $0.33 $0.285
See accompanying notes to condensed consolidated financial
statements.
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
Sept. 30, Oct. 2,
2000 1999
(In thousands)
Net Cash Flows From (To) Operating
Activities:
Net income $ 82,179 $ 62,736
Noncash items included in net income:
Depreciation and amortization 58,953 48,136
Other postretirement and postemployment
benefits 1,109 1,532
Deferred income taxes 1,091 (2,775)
Other - net 28 (115)
Net increase (decrease) in noncash
operating assets and liabilities (25,866) (8,757)
Increase (decrease) in other liabilities (1,266) (1,866)
Net cash flows from operating activities 116,228 98,891
Net Cash Flows From (To) Investing Actvities:
Capital expenditures - net (46,871) (62,828)
Capitalized software (261) (3,059)
Acquisition spending, net of cash acquired (134,688) (8,932)
Short-term investments - net - 169
Long-term investments (3) (519)
Other - net - (226)
Net cash flows (to) investing activities (181,823) (75,395)
Net Cash Flows From (To) Financing
Activities:
Purchase of HON INDUSTRIES common stock (7,807) (26,360)
Proceeds from long-term debt 155,059 67,026
Payments of note and long-term debt (74,491) (51,218)
Proceeds from sales of HON INDUSTRIES
common stock to members and stock-based
compensation 9,068 5,901
Dividends paid (19,851) (17,398)
Net cash flows from (to) financing
activities 61,978 (22,049)
Net increase (decrease) in cash and
cash equivalents (3,617) 1,447
Cash and cash equivalents at beginning
of period 22,168 17,500
Cash and cash equivalents at end of period $ 18,551 $ 18,947
See accompanying notes to condensed consolidated financial
statements.
HON INDUSTRIES Inc. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 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 nine-month period
ended September 30, 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:
Sept. 30, 2000 Jan. 1, 2000
($000) (Unaudited)
Finished products $ 59,724 $ 29,663
Materials and work in process 47,704 55,737
LIFO allowance (10,555) (10,463)
$ 96,873 $ 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 September
30, 2000, the primary costs not yet incurred relate to costs
associated with the closed buildings and workers' compensation
claims. Management believes the remaining reserve of
approximately $2.5 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), 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's
financial statements since the date of acquisition. The excess
of the consideration paid over the fair value of the business or
approximately $114 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 resolution
of the fair value of contracts acquired.
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
cost 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 and nine-month period ended
September 30, 2000, and October 2, 1999, is as follows:
Three Months Ended Nine Months Ended
Sept. 30, Oct. 2, Sept. 30, Oct. 2,
2000 1999 2000 1999
(In thousands)
Net Sales:
Office furniture $431,056 $403,276 $1,232,531 $1,113,071
Hearth products 101,035 72,462 284,713 206,834
$532,091 $475,738 $1,517,244 $1,319,905
Operating Profit:
Office furniture
Normal operations $ 54,458 $ 45,281 $ 133,870 $ 114,367
Facility closedown
provision - - - (19,679)
Office furniture - net 54,458 45,281 133,870 94,688
Hearth products 9,128 8,684 19,371 24,707
Total operating profit 63,586 53,965 153,241 119,395
Unallocated corporate expense (10,131) (8,864) (24,837) (20,598)
Income before income taxes $ 53,455 $ 45,101 $ 128,404 $ 98,797
Identifiable Assets:
Office furniture $ 661,477 $ 695,825
Hearth products 341,008 176,782
General corporate 72,380 60,462
$1,074,865 $ 933,069
Depreciation & Amortization
Expense
Office furniture $ 14,960 $ 13,286 $ 44,214 $ 38,559
Hearth products 4,665 2,817 13,226 8,136
General corporate 496 599 1,513 1,441
$ 20,121 $ 16,702 $ 58,953 $ 48,136
Capital Expenditure, Net:
Office furniture $ 11,565 $ 10,575 $ 28,811 $ 45,050
Hearth products 4,236 3,416 14,494 12,203
General corporate 1,419 (885) 3,566 5,575
$ 17,220 $ 13,106 $ 46,871 $ 62,828
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 Nine Months Three Months
Ended Ended Ended
Dollars in Thousands Sept. 30, 2000 & Sept. 30, 2000 & Sept. 30, 2000 &
Oct. 2, 1999 Oct. 2, 1999 Jul. 1, 2000
Net sales $ 56,353 11.8% $197,339 15.0% $ 25,539 5.0%
Cost of products sold 27,124 8.3 113,083 12.4 10,525 3.1
Selling &
Administrative
expenses 19,732 19.5 71,391 25.5 (1,450) (1.2)
Provision for closing
facilities - - (19,679) N/M - -
Interest income 260 111.6 597 96.4 59 13.6
Interest expense 1,403 58.6 3,534 48.9 (326) (7.9)
Income taxes 2,772 16.8 10,164 28.2 6,046 45.8
Net income 5,582 19.5 19,443 31.0 10,803 46.1
The Company reported its highest net sales and net income for any
quarter in the Company's history. Consolidated net sales for the
third quarter ending September 30, 2000, were $532.1 million, up
11.8%, compared to $475.7 million for the same quarter a year
ago. Net income reached $34.2 million, compared to $28.6 million
for third quarter 1999, an increase of 19.5%. Net income per
common share for the quarter was $0.57 per diluted share, an
increase of 21.3% from $0.47 per diluted share earned in third
quarter 1999.
For the first nine months of 2000, consolidated net sales rose
15.0% to $1.52 billion from $1.32 billion last year. Net income
was $82.2 million, compared to $75.2 million for the same period
a year ago prior to a $12.5 million after-tax charge for plant
closings in 1999. Net income per common share for the first nine
months of 2000 was $1.37 per diluted share, a 11.4% increase from
$1.23 per share from ongoing operations for the same period in
1999. Results for 1999 included a $0.20 per share provision for
the closing of three plants. After the charge, 1999 net income
for the first nine months was $62.7 million or $1.03 per share.
For the third quarter of 2000, office furniture comprised 81% of
consolidated net sales and hearth products comprised 19%. Net
sales for office furniture were up 6.9%. Hearth products sales
increased 39.4% for the quarter compared to the same quarter a
year ago. Proforma third quarter 2000 hearth product sales,
excluding the February 29, 2000, acquisition of American
Fireplace Company and the Allied Group, decreased 3.4% for the
quarter. Office furniture contributed 86% of third quarter 2000
consolidated operating profit before unallocated corporate
expenses and hearth products contributed 14%.
The consolidated gross profit margin for third quarter 2000 was
33.4% compared to 31.2% for the same period in 1999. The gross
profit improvement reflects the combination of improved price
realization and productivity from rapid continuous improvement
programs.
Selling and administrative expenses for third quarter 2000 were
22.7% of net sales compared to 21.3% in the comparable quarter of
1999. The acquisition of Hearth Services contributed to the
increase in selling and administrative expenses. 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.
Freight expense, which is included in selling and administrative
expenses, declined as a percent of net sales despite rising fuel
costs.
The Company decreased its estimated annual effective tax rate to
36.0% for fiscal year 2000 from 36.5% in 1999 to reflect lower
estimated state income taxes.
Liquidity and Capital Resources
As of September 30, 2000, cash and short-term investments
decreased to $18.6 million from $22.2 million balance at year-end
1999. The decrease is principally due to capital expenditures
and payments made on the revolving credit agreement. Net cash
flows from operations were strong at $116.2 million for the first
nine months, an improvement of 17.5% for the same period a year
ago. Cash flow and working capital management are major focuses
of management to ensure the Company is poised for continued
future growth.
Net capital expenditures for the first nine months of 2000 were
$46.9 million compared to $62.8 million for the same nine-month
period in 1999. These expenditures 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 approximately $200
million, have been joined to form Hearth Services Inc., a
subsidiary of Hearth Technologies Inc. Approximately one-fourth
to one-third of Hearth Services sales are products manufactured
by Hearth Technologies.
The Board of Directors declared a regular quarterly cash dividend
of $0.11 per share on its common stock on August 7, 2000, to
shareholders of record at the close of business on August 17,
2000. It was paid on September 1, 2000, and represented the
182nd consecutive quarterly dividend paid by the Company.
For the nine months ended September 30, 2000, the Company
repurchased 410,807 shares of its common stock at a cost of
approximately $7.8 million or an average price of $19.00 per
share. As of September 30, 2000, approximately $23.8 million of
the Board's current repurchase authorization remained unspent.
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
Management's goal is to achieve improved profitability and record
results for 2000. Management believes the earnings outlook for
the year to be in the range of $1.87-$1.92 per diluted share.
Although the retail market for office furniture and hearth
products continues to be soft, expected strong customer demand in
other markets for the Company's products should make the goal
attainable.
Statements in this report that are not strictly historical,
including statements as to plans, objectives, and future
financial performance, are "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 the
Company's actual results in the future to differ materially from
expected results, particularly those with respect to expected
earnings for the remainder of the fiscal year. These risks
include, among others: the Company's ability to realize financial
benefits of operating The HON Company and Allsteel Inc. as
separate businesses, to continue to outpace industry growth
rates, to reduce freight costs, to improve returns in its wood
business, to obtain sales from new products and to realize
operating improvements from the integration of the retail
distribution and the manufacturing operations of Hearth
Technologies; the realization of strong demand for the Company's
products; and other factors described in the Company's annual and
quarterly reports filed with the Securities and Exchange
Commission on Forms 10-K and 10-Q.
PART II. OTHER INFORMATION
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 were filed
during the quarter for which this report is filed.
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: November 6, 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 Page
(27) Financial Data Schedule 17