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 29, 1996
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 June 29, 1996
- ----------------------------- --------------------------------------
Common Shares, $1 Par Value 30,106,990 shares
Exhibit Index is on page 14.
Page 1 of 15
HON INDUSTRIES Inc. and SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited) ----
Condensed Consolidated Balance Sheets --
June 29, 1996, and December 30, 1995 3-4
Condensed Consolidated Statements of Income --
Three Months Ended June 29, 1996, and July 1, 1995 5
Condensed Consolidated Statements of Income --
Six Months Ended June 29, 1996, and July 1, 19956
Condensed Consolidated Statements of Cash Flows --
Six Months Ended June 29, 1996, and July 1, 1995 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 13
EXHIBIT INDEX 14
(27) Financial Data Schedule 15
Page 2 of 15
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 29,
1996 December 30,
(Unaudited) 1995
----------- ------------
ASSETS (In thousands)
CURRENT ASSETS
Cash and cash equivalents $ 34,856 $ 32,231
Short-term investments 14,498 14,694
Receivables 85,300 88,178
Inventories (Note B) 31,117 36,601
Deferred income taxes 14,912 14,180
Prepaid expenses and other
current assets 6,485 8,299
------- -------
Total Current Assets 187,168 194,183
PROPERTY, PLANT, AND EQUIPMENT, at cost
Land and land improvements 9,778 9,701
Buildings 96,307 95,310
Machinery and equipment 213,698 208,707
Construction in progress 35,014 30,036
------- -------
354,797 343,754
Less accumulated depreciation 136,943 133,721
------- -------
Net Property, Plant, and Equipment 217,854 210,033
OTHER ASSETS 4,828 5,302
------- -------
Total Assets $409,850 $409,518
======= =======
See accompanying notes to condensed consolidated financial statements.
Page 3 of 15
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 29,
1996 December 30,
(Unaudited) 1995
----------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY (In thousands)
CURRENT LIABILITIES
Accounts payable and accrued expenses $105,966 $117,273
Income taxes 2,668 5,361
Note payable and current maturities
of long-term obligations 12,799 6,281
------- -------
Total Current Liabilities 121,433 128,915
LONG-TERM DEBT AND OTHER LIABILITIES 38,705 45,911
CAPITAL LEASE OBLIGATIONS 7,219 7,700
DEFERRED INCOME TAXES 11,376 10,757
SHAREHOLDERS' EQUITY
Capital Stock:
Preferred, $1 par value; authorized -- --
1,000,000 shares; no shares outstanding
Common, $1 par value; authorized
100,000,000 shares; outstanding --
1996 - 30,106,990 shares;
1995 - 30,394,337 shares 30,107 30,394
Paid-in capital 364 550
Retained earnings 208,860 193,505
Receivable from HON Members Company
Ownership Plan (8,214) (8,214)
------- -------
Total Shareholders' Equity 231,117 216,235
Total Liabilities and
Shareholders' Equity $409,850 $409,518
======= =======
See accompanying notes to condensed consolidated financial statements.
Page 4 of 15
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
June 29, July 1,
1996 1995
-------- -------
(In thousands, except
per share data)
Net sales $219,260 $206,604
Cost of products sold 150,227 146,246
------- -------
Gross Profit 69,033 60,358
Selling and administrative expenses 49,507 47,688
Gain on sale of subsidiary (Note C) - -
------- -------
Operating Income 19,526 12,670
Interest income 759 587
Interest expense 767 891
------- -------
Income Before Income Taxes 19,518 12,366
Income taxes 7,222 4,638
------- -------
Net Income $ 12,296 $ 7,728
======= =======
Net income per common share $ 0.41 $ 0.25
======= =======
Average number of common
shares outstanding 30,170,014 30,542,565
========== ==========
Cash dividends per common share $ 0.12 $ 0.12
======= =======
See accompanying notes to condensed consolidated financial statements.
Page 5 of 15
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Six Months Ended
June 29, July 1,
1996 1995
-------- -------
(In thousands, except
per share data)
Net sales $452,737 $423,102
Cost of products sold 310,233 293,802
------- -------
Gross Profit 142,504 129,300
Selling and administrative expenses 99,353 96,253
Gain on sale of subsidiary (Note C) 3,200 -
------- -------
Operating Income 46,351 33,047
Interest income 1,500 1,277
Interest expense 1,627 1,839
------- -------
Income Before Income Taxes 46,224 32,485
Income taxes 17,103 12,182
------- -------
Net Income $ 29,121 $ 20,303
======= =======
Net income per common share $ 0.96 $ 0.66
======= =======
Average number of common
shares outstanding 30,257,593 30,593,396
========== ==========
Cash dividends per common share $ 0.24 $ 0.24
======= =======
See accompanying notes to condensed consolidated financial statements.
Page 6 of 15
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 29, July 1,
1996 1995
-------- -------
(In thousands)
Net Cash Flows From (To) Operating Activities:
Net income $ 29,121 $ 20,303
Noncash items included in net income:
Depreciation and amortization 11,392 10,240
Gain on sale of subsidiary,
net of tax (Note C) (2,016) -
Other postretirement and postemployment
benefits 1,205 968
Deferred income taxes (113) (210)
Other - net 248 21
Net increase (decrease) in noncash operating
assets and liabilities (6,281) 2,814
Increase in other liabilities (519) (1,607)
------- -------
Net cash flows from
operating activities 33,037 32,529
------- -------
Net Cash Flows From (To) Investing Activities:
Capital expenditures - net (20,928) (24,914)
Net proceeds from sale of
subsidiary (Note C) 7,336 -
Short-term investments - net (604) (1,090)
Long-term investments (95) (1)
Other - net - (6)
------- -------
Net cash flows (to)
investing activities (14,291) (26,011)
------- -------
Net Cash Flows (To) Financing Activities:
Purchase of HON INDUSTRIES common stock (7,971) (5,278)
Payments of note and long-term debt (1,883) (1,778)
Proceeds from sales of HON INDUSTRIES
common stock to members and
stock-based compensation 991 1,036
Dividends paid (7,258) (7,339)
------- -------
Net cash flows (to)
financing activities (16,121) (13,359)
------- -------
Net increase (decrease) in cash and
cash equivalents 2,625 (6,841)
------- -------
Cash and cash equivalents at beginning
of period 32,231 27,659
------- -------
Cash and cash equivalents
at end of period $ 34,856 $ 20,818
======= =======
See accompanying notes to condensed consolidated financial statements.
Page 7 of 15
HON INDUSTRIES Inc. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 29, 1996
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 29, 1996, are not necessarily indicative of the results that
may be expected for the year ending December 28, 1996. 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, 1995.
Note B. Inventories
Inventories of the Company and its subsidiaries are summarized as follows:
June 29, 1996
($000) (Unaudited) December 30, 1995
------------------------------
Finished products $11,054 $11,265
Materials and work in process 20,063 25,336
------ ------
$31,117 $36,601
====== ======
Note C. Gain on Sale of Subsidiary
During the first quarter of 1996, the Company sold all outstanding shares of
its subsidiary, Ring King Visibles, Inc., for a sale price of $8,000,000 in
cash and the forgiveness of intercompany receivables of approximately
$2,000,000. The sale resulted in an approximate $3,200,000 pretax gain.
Page 8 of 15
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 29, 1996 & June 29, 1996 & June 29, 1996 &
July 1, 1995 July 1, 1995 March 30, 1996
------------------ ---------------- ------------------
Net sales $12,656 6.1% $29,635 7.0% $(14,217) (6.1)%
Cost of products sold 3,981 2.7 16,430 5.6 (9,779) (6.1)
Selling & Administrative
expenses 1,819 3.8 3,100 3.2 (339) (.7)
Gain on sale of subsidiary - - 3,200 100.0 (3,200) (100.0)
Interest income 172 29.3 223 17.5 18 2.4
Interest expense (124) (13.9) (212) (11.5) (93) (10.8)
Income taxes 2,584 55.7 4,921 40.4 (2,659) (26.9)
Net income 4,568 59.1 8,818 43.4 (4,529) (26.9)
The Company reported record second quarter sales and earnings for its fiscal
quarter ended June 29, 1996. These results, coupled with record first quarter
results, makes January through June 1996 the best first six-month period in
the Company's history.
Consolidated net sales for the second quarter ended June 29, 1996, were $219.3
million, compared to $206.6 million in 1995, an increase of 6%. Net income
was $12.3 million, a 59% increase over 1995; and net income per share
increased to $0.41 per share, a 64% increase over the same quarter a year ago.
The Company's ongoing repurchase of its common stock during the quarter and
year-to-date also contributed to the favorable year-over-year per share
comparisons.
For the six months ended June 29, 1996, consolidated net sales were $452.7
million, up 7% from $423.1 million in the year ago period. Net income for the
first half of 1996 was $29.1 million, compared to $20.3 million a year
earlier, an increase of 43%, or $0.96 per share, an increase of 46% over the
comparable period last year.
Company net sales are continuing to outpace the 4% increase in industry
shipments reported by BIFMA, the U.S. office furniture trade association,
for the period January through May 1996. The increase in net sales is
occurring in both of the Company's core businesses: office furniture and
hearth products, in spite of continuing intense price competition in the
marketplace. Sales growth is being driven to a large extent by new products
introduced within the past three years.
Page 9 of 15
Second quarter 1996 earnings growth is in contrast to the Company's weaker
results in the second quarter of 1995. The higher earnings for 1996 shows
the solid results of the Company's committed efforts to reduce costs and
leverage its operating expenses.
The gross profit margin for the second quarter held at 31.5% compared to 29.2%
for the same quarter in 1995. On a six-month basis, the margin was 31.5% for
1996 versus 30.6% for 1995. Selling and administrative expenses for the
second quarter of 1995 were 22.6% of net sales compared to 23.1% in the
comparable quarter of 1995. On a six-month basis, they were 21.9% in 1996
versus 22.7% in 1995. The improvement in gross margin and selling and
administrative expenses are being driven by increases in volume, stringent
cost control, and increased productivity.
In the first quarter of 1996, the Company recorded a $3.2 million pretax gain
on the sale of its subsidiary, Ring King Visibles, Inc., a manufacturer of a
variety of personal computer accessories. The after-tax effect of this sale
was $2.0 million or $0.07 per share.
Liquidity
- ---------
As of June 29, 1996, cash, cash equivalents, and short-term investments
increased to $49.4 million compared to a $46.9 million balance at year-end
1995.
Net capital expenditures for the first six months of 1996 were $20.9 million
and primarily represent investment in new, more-efficient machinery and
equipment. These investments are key enablers in aiding the Company to reduce
costs, improve productivity, reduce production cycle time, and reduce customer
order lead times.
A $0.12 per share quarterly dividend on common stock was paid on May 31, 1996,
to shareholders of record on May 23, 1996. This was the 165th consecutive
quarterly dividend paid by the Company.
The Company continued its common stock repurchases during the second quarter.
During the period, 173,847 shares were acquired at an average price of $26.20.
For the six months of fiscal year 1996, 332,966 shares were acquired at a cost
of approximately $8.0 million, or an average price of $23.94.
Looking Ahead
- -------------
Management is pleased with the Company's year-over-year improvement in
operating performance. These results suggest the Company is doing the right
things and gives management a basis for being cautiously optimistic about the
Company's performance in the remaining six months of fiscal year 1996. The
typical business cycle for the office furniture industry normally produces
stronger sales and earnings growth for the last six months of the year than
for the first six months.
Page 10 of 15
Certain statements by management may include forward-looking information that
is based on current expectations and subject to a number of risks and
uncertainties. Actual results could differ materially from current
expectations due to a number of factors, including competitive conditions,
pricing trends in the office furniture market, acceptance of the Company's
new product introductions, the overall growth rate of the office furniture
industry, and the achievement of cost reductions in the Company's manufacturing
and distribution operations, as well as the risks, uncertainties and other
factors described from time to time in the Company's SEC filings and reports.
Subsequent Event
- ----------------
On July 30, 1996, the Company announced that it had entered into an agreement
in principle to combine its Heatilator Inc. unit with Heat-N-Glo Fireplace
Products, Inc., headquartered in Savage, Minnesota, a manufacturer of hearth
and heating products. The combined entity will be a subsidiary of the Company
and is expected to have an initial annual sales rate in excess of $160 million.
The transaction is subject to the execution of a definitive agreement, approval
by both companies' Boards of Directors, and regulatory clearance.
Page 11 of 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
The Company is a guarantor of certain leases for showroom space at the
International Design Center (IDC) in Long Island City, New York. On
June 26, 1992, the Company filed an action in the New York Supreme Court
claiming wrongful eviction and breach of representations and warranties
that the IDC would be maintained as a showroom facility. The IDC has
counterclaimed for back rent and other damages. The parties filed cross-
motions for summary judgment. On June 7, 1996, the court denied the
Company's motion for summary judgment and held the Company is liable for
back rent, subject to possible reductions in amounts to be determined at
trial for landlord's asserted breaches of certain restrictive covenants
in the leases. The Company plans to appeal the decision.
On December 28, 1995, Haworth Inc. filed a complaint in Federal District
Court in Kalamazoo, Michigan, alleging that certain products sold by the
Company and its subsidiaries infringed its patents covering electrified
panel systems and asking for damages in an unspecified amount. These
patents expired November 29, 1994, and no claim has been made with
respect to Company products sold after that date. On July 19, 1996,
the parties entered into a tolling agreement pursuant to which the
lawsuit was dismissed on July 25, 1996, subject to Haworth's right to
refile the action after one year if the parties have not otherwise
amicably resolved their dispute.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
The Annual Meeting of Shareholders of HON INDUSTRIES Inc. was held on May 14,
1996, for the purpose of electing three Directors to the Board of Directors.
At the meeting, 82% of the voting stock was represented in person or by
proxy. The proposal voted upon was the election of three Directors for terms
expiring at the annual meeting in 1999. The three persons nominated by the
Company's Board of Directors received the following votes and were elected:
For Withheld
---------- --------
Robert L. Katz 24,510,591 341,856
or 81% or 1%
Celeste C. Michalski 24,644,067 208,371
or 81% or 1%
Richard H. Stanley 24,658,602 193,826
or 81% or 1%
As to the proposal, there were no broker non-votes.
Page 12 of 15
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits. See Exhibit Index.
(b) Reports on Form 8-K. The Company filed a current report on Form 8-K
dated May 14, 1996, to disclose a change in certifying accountant from
Ernst & Young LLP to Arthur Andersen LLP. There were no disagreements
with the former auditor leading up to the change and no consultations
with the new auditor prior to the change and their approval by the
Company's Board of Directors.
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: By /s/ David C. Stuebe
-----------------------
David C. Stuebe
Vice President and
Chief Financial Officer
By /s/ Melvin L. McMains
-----------------------
Melvin L. McMains
Controller
Page 13 of 15
PART II. EXHIBITS
EXHIBIT INDEX
Page
(27) Financial Data Schedule 15
Page 14 of 15