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 June 30, 2001
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: 563/264-7400
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 June 30, 2001
Common Shares, $1 Par Value 59,160,247 shares
HON INDUSTRIES Inc. and SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
June 30, 2001, and December 30, 2000 3-4
Condensed Consolidated Statements of Income -
Three Months Ended June 30, 2001, and July 1, 2000 5
Condensed Consolidated Statements of Income -
Six Months Ended June 30, 2001, and July 1, 2000 6
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2001, and July 1, 2000 7
Notes to Condensed Consolidated Financial Statements 7-10
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
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 30,
2001 2000
(Unaudited)
ASSETS (In thousands)
CURRENT ASSETS
Cash and cash equivalents $ 35,101 $ 3,181
Receivables 181,664 211,243
Inventories (Note B) 71,088 84,360
Deferred income taxes 18,538 19,516
Prepaid expenses and other current
assets 11,063 11,841
Total Current Assets 317,454 330,141
PROPERTY, PLANT, AND EQUIPMENT, at cost
Land and land improvements 21,833 18,808
Buildings 208,950 202,189
Machinery and equipment 510,972 514,293
Construction in progress 24,506 27,547
766,261 762,837
Less accumulated depreciation 340,396 308,525
Net Property, Plant, and Equipment 425,865 454,312
GOODWILL 219,048 216,371
OTHER ASSETS 21,904 21,646
Total Assets $984,271 $1,022,470
See accompanying notes to condensed consolidated financial
statements.
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 30,
2001 2000
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY (In thousands)
CURRENT LIABILITIES
Accounts payable and accrued expenses $200,490 $ 240,418
Accrued facilities closing and
reorganization expense 7,498 122
Income taxes 8,396 12,067
Note payable and current maturities
of long-term debt 61,211 10,408
Current maturities of other long-term
obligations 615 1,853
Total Current Liabilities 278,210 264,868
LONG-TERM DEBT 79,621 126,093
CAPITAL LEASE OBLIGATIONS 2,124 2,192
OTHER LONG-TERM LIABILITIES 20,103 18,749
DEFERRED INCOME TAXES 38,750 37,226
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 - 59,160 59,797
2001 - 59,160,247 shares;
2000 - 59,796,891 shares
Paid-in capital 2,013 17,339
Retained earnings 504,030 495,796
Accumulated other comprehensive income 260 410
Total Shareholders' Equity 565,463 573,342
Total Liabilities and
Shareholders' Equity $984,271 $1,022,470
See accompanying notes to condensed consolidated financial
statements.
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
June 30, July 1,
2001 2000
(In thousands, except
per share data)
Net Sales $444,196 $509,649
Cost of products sold 292,789 343,842
Gross Profit 151,407 165,807
Selling and administrative expenses 118,983 125,513
Restructuring and impairment charges 24,000 -
Operating Income 8,424 40,294
Interest income 486 434
Interest expense 2,318 4,122
Income Before Income Taxes 6,592 36,606
Income taxes 2,373 13,188
Net Income $ 4,219 $ 23,418
Net income per common share $0.07 $0.39
Average number of common shares
outstanding 59,204,849 60,144,502
Cash dividends per common share $0.12 $0.11
See accompanying notes to condensed consolidated financial
statements.
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Six Months Ended
June 30, July 1,
2001 2000
(In thousands, except
per share data)
Net Sales $906,193 $991,172
Cost of products sold 604,500 673,258
Gross Profit 301,693 317,914
Selling and administrative expenses 238,033 236,727
Restructuring and impairment charges 24,000 -
Operating Income 39,660 81,187
Interest income 708 723
Interest expense 5,240 6,961
Income Before Income Taxes 35,128 74,949
Income taxes 12,646 26,991
Net Income $ 22,482 $ 47,958
Net income per common share $0.38 $0.80
Average number of common shares
outstanding 59,326,535 60,165,177
Cash dividends per common share $0.24 $0.22
See accompanying notes to condensed consolidated financial
statements.
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30, July 1,
2001 2000
(In thousands)
Net Cash Flows From (To) Operating
Activities:
Net income $ 22,482 $ 47,958
Noncash items included in net income:
Depreciation and amortization 41,199 38,832
Other postretirement and postemployment
benefits 742 914
Deferred income taxes 2,626 300
Asset impairment 16,200 -
Other - net 64 (3)
Net increase (decrease) in noncash operating
assets and liabilities 3,758 (20,739)
Increase (decrease) in other liabilities 613 (915)
Net cash flows from operating activities 87,684 66,347
Net Cash Flows From (To) Investing
Activities:
Capital expenditures - net (23,921) (29,651)
Capitalized software (89) (230)
Acquisition spending (6,332) (134,648)
Other - net (711) -
Net cash flows (to) investing activities (31,053) (164,529)
Net Cash Flows From (To) Financing
Activities:
Purchase of HON INDUSTRIES common stock (22,730) (7,239)
Proceeds from long-term debt 36,000 150,059
Payments of note and long-term debt (31,736) (42,487)
Proceeds from sales of HON INDUSTRIES
common stock to members and stock-based
compensation 8,004 8,009
Dividends paid (14,249) (13,233)
Net cash flows from financing activities (24,711) 95,109
Net increase (decrease) in cash and
cash equivalents 31,920 (3,073)
Cash and cash equivalents at beginning
of period 3,181 22,168
Cash and cash equivalents at end of period $ 35,101 $ 19,095
See accompanying notes to condensed consolidated financial
statements.
HON INDUSTRIES Inc. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2001
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 six-month period
ended June 30, 2001, are not necessarily indicative of the
results that may be expected for the year ending December 29,
2001. 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 December 30, 2000.
Note B. Inventories
Inventories of the Company and its subsidiaries are summarized as
follows:
June 30, December 30,
2001 2000
($000) (Unaudited)
Finished products $ 49,985 $ 48,990
Materials and work in process 32,011 46,497
LIFO allowance (10,908) (11,127)
$ 71,088 $ 84,360
Note C. Restructuring and Impairment Charge
During the quarter ended June 30, 2001, the Company recorded a
pretax charge of $24.0 million or $0.26 per diluted share for a
restructuring plan that involves consolidating physical
facilities, discontinuing low volume product lines, and
reductions of workforce. Costs related to the closedown of three
office furniture facilities, including Williamsport, Pennsylvania
and Tupelo, Mississippi, are included in this charge. The charge
includes $16.2 million for write-offs of machinery and equipment,
$3.1 million for severance arising from the elimination of
approximately 600 positions, $0.8 million for other employee
related costs, $2.2 million for idle facility costs, and $1.7
million for certain other expenses associated with the closing of
facilities. During the quarter ended June 30, 2001, $0.4 million
of pretax exit costs were paid and charged against the liability.
Note D. Business Combinations
The Company completed the acquisitions of two small hearth
product distributors during the first quarter of 2001. On
January 12, 2001, the Company purchased the assets of M. H.
Seifert Construction Inc. for a purchase price of approximately
$1.9 million. On February 9, 2001, the Company purchased the
stock of Heating Alternatives, Ltd. for approximately $3.4
million. The excess of the consideration paid over the fair
value of the businesses or approximately $4 million was recorded
as goodwill and is being amortized on a straight-line basis over
20 years.
During the first quarter of 2001, management finalized its
integration plan related to the acquisition of its Hearth
Services division. Costs related to severance and consolidation
of facilities of approximately $2.4 million have been recorded
and reflected as an adjustment to goodwill. Of this amount, $1.1
million has been utilized as of June 30, 2001. Management
expects these activities to be completed within the year.
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 six-month period ended June
30, 2001, and July 1, 2000, is as follows:
Three Months Ended Six Months Ended
June 30, July 1, June 30, July 1,
2001 2000 2001 2000
(In thousands)
Net Sales:
Office furniture $ 338,578 $ 408,681 $ 705,087 $ 806,969
Hearth products 105,618 100,968 201,106 184,203
$ 444,196 $ 509,649 $ 906,193 $ 991,172
Operating Profit:
Office furniture
Normal operations $ 32,366 $ 40,840 $ 64,890 $ 79,412
Restructuring and impairment
charges (22,500) - (22,500) -
Office Furniture - net 9,866 40,840 42,390 79,412
Hearth products
Normal operations 9,519 5,473 12,757 10,243
Restructuring and impairment
charges (1,500) (1,500)
Hearth products - net 8,019 5,473 11,257 10,243
Total operating profit 17,885 46,313 53,647 89,655
Unallocated corporate expense (11,293) (9,707) (18,519) (14,706)
Income before income taxes $ 6,592 $ 36,606 $ 35,128 $ 74,949
Identifiable Assets:
Office furniture $ 575,470 $ 660,339
Hearth products 339,483 336,887
General corporate 69,318 67,034
$ 984,271 $1,064,260
Depreciation & Amortization Expense:
Office furniture $ 14,877 $ 14,880 $ 29,754 $ 29,254
Hearth products 5,160 4,962 10,286 8,561
General corporate 579 491 1,159 1,017
$ 20,616 $ 20,333 $ 41,199 $ 38,832
Capital Expenditure, Net:
Office furniture $ 9,260 $ 6,768 $ 18,976 $ 17,246
Hearth products 1,600 5,704 4,522 10,258
General corporate 341 1,156 423 2,147
$ 11,201 $ 13,628 $ 23,921 $ 29,651
Note G. New Accounting Standards
The Financial Accounting Standards Board finalized Statement of
Financial Accounting Standards (SFAS) No. 141 "Business
Combinations" and No. 142 "Goodwill and Other Intangible Assets"
on June 30, 2001. The Company will be required to adopt both
statements on December 30, 2001, the beginning of its 2002 fiscal
year.
SFAS No. 141 requires all business combinations initiated after
June 30, 2001, to be accounted for using the purchase method of
accounting. 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
million of goodwill amortization upon adoption.
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 Six Months Ended Three Months Ended
Dollars in Thousands June 30, 2001 & June 30, 2001 & June 30, 2001 &
July 1, 2000 July 1, 2000 March 31, 2001
Net Sales $(65,453) (12.8)% $(84,979) (8.6)% $(17,801) (3.9)%
Cost of products sold (51,053) (14.8) (68,758) (10.2) (18,922) (6.1)
Selling & administrative
expenses (6,530) (5.2) 1,306 0.6 (67) (0.1)
Restructuring and
impairment charges 24,000 24,000 24,000
Interest income 52 12.0 (15) (2.1) 264 118.9
Interest expense (1,804) (43.8) (1,721) (24.7) (604) (20.7)
Income taxes (10,815) (82.0) (14,345) (53.1) (7,900) (76.9)
Net Income (19,199) (82.0) (25,476) (53.1) (14,044) (76.9)
Consolidated net sales for the second quarter ending June 30,
2001, were $444.2 million, a 12.8% decrease from the $509.6
million in the second quarter of 2000. The Company recorded a
restructuring and impairment charge in the second quarter.
Accounting for the one-time charge of $24.0 million against
pretax earnings, net income for the quarter was $4.2 million or
$0.07 per share. Net income, before the charge, was $19.6
million, a decrease of 16.4% from $23.4 million for the same
period a year ago. Prior to the one-time charge, net income per
share was $0.33 per diluted share compared to $0.39 per share in
second quarter 2000.
For the first six months of 2001, consolidated net sales
decreased 8.6% to $906.2 million from $991.2 million last year.
Net income was $37.8 million or $0.64 per share, excluding the
after-tax restructuring charge of $15.4 million or $0.26 per
share. Earnings per share before the one-time charge were down
20.0% from $0.80 for the same period a year ago. Net income
after the restructuring reserve was $22.5 million or $0.38 per
share.
For the second quarter of 2001, office furniture comprised 76% of
consolidated net sales and hearth products comprised 24%. Net
sales for office furniture were down 17.2%. Hearth products
sales increased 4.6% for the quarter compared to the same quarter
a year ago. Office furniture contributed 77% of second quarter
2001 consolidated operating profit before unallocated corporate
expenses and the one-time charge and hearth products contributed
23%.
The consolidated gross profit margin for the second quarter of
2001 increased to a new second quarter record of 34.1% compared
to 32.5% for the same period in 2000. This increase in margin
was due to improved price realization, cost containment, and
business simplification.
Selling and administrative expenses for the second quarter of
2001, excluding the one-time charge, were 26.8% of net sales
compared to 24.6% in the comparable quarter of 2000. This
increase was due to lower overall sales volume. Actual selling
and administrative dollars for the quarter, prior to the one-time
charge, decreased 5.2% or $6.5 million from the same quarter a
year ago.
During the quarter ended June 30, 2001, the Company recorded a
pretax restructuring charge of $24.0 million or $0.26 per diluted
share. The plan involves consolidating physical facilities,
discontinuing low volume product lines and reductions of
workforce. Costs related to the closedown of three office
furniture facilities, including Williamsport, Pennsylvania and
Tupelo, Mississippi, are included in this charge. The charge
includes $16.2 million of asset impairments per Financial
Accounting Standards Board Statement No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of."
The remaining $7.8 million of the charge is classified as
restructuring expenses in accordance with EITF 94-3 of the
Financial Accounting Standards Board and Staff Accounting
Bulletin (SAB 100) of the Securities and Exchange Commission.
The charge includes $3.1 million for severance arising from the
elimination of approximately 600 positions, $0.8 million for
other employee related costs, $2.2 million for idle facility
costs, and $1.7 for certain other expenses associated with the
closing of facilities. During the quarter ended June 30, 2001,
$0.4 million of pretax exit costs were paid and charged against
the liability. The restructuring is expected to save
approximately $12 million annually.
Liquidity and Capital Resources
As of June 30, 2001, cash and short-term investments increased to
$35.1 million compared to a $3.2 million balance at year-end
2000. Net cash flows from operations contributed to the
improvement.
Net capital expenditures for the first six months of 2001 were
$23.9 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.
During the first quarter of 2001, the Company completed the
acquisition of two small hearth products distributors for a total
purchase price of approximately $5.3 million.
The Board of Directors declared a regular quarterly cash dividend
of $0.12 per share on its common stock on May 7, 2001, to
shareholders of record at the close of business on May 17, 2001.
It was paid on June 1, 2001, and represented the 185th
consecutive quarterly dividend paid by the Company.
For the first six months ended June 30, 2001, the Company
repurchased 922,837 shares of its common stock at a cost of
approximately $22.7 million or an average price of $24.63 per
share. As of June 30, 2001, approximately $90.9 million of the
Board's current repurchase authorization remained unspent.
On August 6, 2001, the Board of Directors declared a $0.12 per
common share cash dividend to shareholders of record on August
16, 2001, to be paid on August 31, 2001.
Looking Ahead
The Company anticipates that the remainder of 2001 will be
challenging in both sales and profits due to the current economic
environment. The Company is focused on optimizing their 2001
performance, while continuing to follow their long-term value
creation strategies.
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. These risks include, among others: the
Company's ability to realize financial benefits from reducing its
cost structure, to introduce and obtain sales from new 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. None
(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: August 9, 2001 HON INDUSTRIES Inc.
By /s/ Jerald K. Dittmer
Jerald K. Dittmer
Vice President, Finance
and Controller