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 March 29, 1997
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 March 29, 1997
Common Shares, $1 Par Value 29,705,828 shares
Exhibit Index is on page 13.
Page 1 of 14
HON INDUSTRIES Inc. and SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets --
March 29, 1997, and December 28, 1996 3-4
Condensed Consolidated Statements of Income --
Three Months Ended March 29, 1997, and March 30, 1996 5
Condensed Consolidated Statements of Cash Flows --
Three Months Ended March 29, 1997, and March 30, 1996 6
Notes to Condensed Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 12
EXHIBIT INDEX 13
(27) Financial Data Schedule 14
Page 2 of 14
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 29,
1997 December 28,
(Unaudited) 1996
ASSETS (In thousands)
CURRENT ASSETS
Cash and cash equivalents $ 13,902 $ 31,196
Short-term investments 1,504 1,502
Receivables 110,341 109,095
Inventories (Note B) 40,216 43,550
Deferred income taxes 9,216 9,046
Prepaid expenses and other
current assets 12,894 11,138
------- -------
188,073 205,527
Total Current Assets
PROPERTY, PLANT, AND EQUIPMENT, at cost
Land and land improvements 9,191 9,114
Buildings 96,078 92,509
Machinery and equipment 244,224 231,780
Construction in progress 43,054 42,507
------- -------
392,547 375,910
Less accumulated depreciation 146,121 141,294
------- -------
Net Property, Plant, and Equipment 246,426 234,616
GOODWILL 50,634 51,213
OTHER ASSETS 22,354 22,158
------- -------
Total Assets $507,487 $513,514
======= =======
See accompanying notes to condensed consolidated financial statements.
Page 3 of 14
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 29,
1997 December 28,
(Unaudited) 1996
LIABILITIES AND SHAREHOLDERS' EQUITY (In thousands)
CURRENT LIABILITIES
Accounts payable and accrued expenses $115,787 $127,910
Income taxes 11,732 2,574
Note payable and current maturities
of long-term obligations 10,762 22,069
------- -------
Total Current Liabilities 138,281 152,553
LONG-TERM DEBT AND OTHER LIABILITIES 86,710 91,468
CAPITAL LEASE OBLIGATIONS 6,050 6,320
DEFERRED INCOME TAXES 11,513 10,726
MINORITY INTEREST IN SUBSIDIARY 38 50
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 -- 29,706 29,713
1997 - 29,705,828 shares;
1996 - 29,713,265 shares
Paid-in capital 456 360
Retained earnings 239,774 227,365
Receivable from HON Members Company
Ownership Plan (5,041) (5,041)
------- -------
Total Shareholders' Equity 264,895 252,397
Total Liabilities and Shareholders'
Equity $507,487 $513,514
======= =======
See accompanying notes to condensed consolidated financial statements.
Page 4 of 14
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 29, March 30,
1997 1996
(In thousands, except
per share data)
Net sales (Note E) $282,859 $233,477
Cost of products sold 194,194 160,006
Gross Profit 88,665 73,471
Selling and administrative expenses 60,453 49,846
Gain on sale of subsidiary (Note C) - 3,200
------- -------
Operating Income 28,212 26,825
Interest income 411 741
Interest expense 1,553 860
------- -------
Income Before Income Taxes 27,070 26,706
Income taxes 10,152 9,881
------- -------
Net Income 16,918 16,825
======= =======
Net income per common share (Note D) $.57 $.55
======= =======
Average number of common shares
outstanding 29,699,911 30,345,172
========== ==========
Cash dividends per common share $.14 $.12
======= =======
See accompanying notes to condensed consolidated financial statements.
Page 5 of 14
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 29, March 30,
1997 1996
(In thousands)
Net Cash Flows From (To) Operating Activities:
Net income $ 16,918 $ 16,825
Noncash items included in net income:
Depreciation and amortization 7,439 5,586
Gain on sale of subsidiary,
net of tax (Note C) - (2,016)
Other postretirement and postemployment
benefits 799 618
Deferred income taxes 617 -
Other - net 256 -
Net increase (decrease) in noncash operating
assets and liabilities (6,605) (2,006)
Increase (decrease) in other liabilities (3,307) (1,520)
------- -------
Net cash flows from operating
activities 16,117 17,487
------- -------
Net Cash Flows From (To) Investing Activities:
Capital expenditures - net (18,412) (8,190)
Acquisition spending, net of cash acquired (262) -
Net proceeds from sale of subsidiary
(Note C) - 7,336
Short-term investments - net (802) 1,498
Long-term investments 800 (64)
Other - net (455) -
------- -------
Net cash flows (to) investing
activities (19,131) 580
------- -------
Net Cash Flows (To) Financing Activities:
Purchase of HON INDUSTRIES common stock (1,171) (3,416)
Payments of note and long-term debt (9,859) (1,348)
Proceeds from sales of HON INDUSTRIES common
stock to members and stock-based
compensation 908 576
Dividends paid (4,158) (3,642)
------- -------
Net cash flows (to) financing
activities (14,280) (7,830)
------- -------
Net increase (decrease) in cash and
cash equivalents (17,294) 10,237
Cash and cash equivalents at beginning
of period 31,196 32,231
------- -------
Cash and cash equivalents at end of
period $ 13,902 $ 42,468
======= =======
See accompanying notes to condensed consolidated financial statements.
Page 6 of 14
HON INDUSTRIES Inc. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 29, 1997
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 March 29, 1997, are not necessarily indicative of the results
that may be expected for the year ending January 3, 1998. 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 28, 1996.
Note B. Inventories
Inventories of the Company and its subsidiaries are summarized as follows:
March 29, 1997
($000) (Unaudited) December 28, 1996
Finished products $13,926 $15,793
Materials and work in process 26,290 27,757
------ ------
$40,216 $43,550
====== ======
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.
Note D. Net Income per Common Share
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (FAS) No. 128, "Earnings per Share." The
Statement requires the current primary earnings per share calculation to be
replaced with a new basic earnings per share calculation. This Statement will
become effective for public companies for financial statements issued after
December 15, 1997, and early adoption is not permitted. Management estimates
the impact of adopting FAS 128 will have no effect on the calculation of the
Company's reported year-end 1997 earnings per share given its current capital
structure of common stock and no potentially dilutive securities.
Page 7 of 14
Note E. Business Combinations
Assuming the acquisition of Heat-N-Glo Fireplace Products, Inc., had occurred
on December 31, 1995, the beginning of the Company's 1996 fiscal year, instead
of on October 2, 1996, when it actually occurred, the Company's pro forma
consolidated net sales for the first quarter ended March 30, 1996, would have
been approximately $253.1 million instead of the reported $233.5 million. Pro
forma consolidated net income and net income per share for the first quarter
of 1996 would not have been materially different from the reported amounts.
Page 8 of 14
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 March 29, 1997 & March 29, 1997 &
March 30, 1996 December 28, 1996
Net sales $49,382 21.2% $(7,286) (2.5)%
Cost of products sold 34,187 21.4 1,333 0.7
Selling & Administrative
expenses 10,608 21.3 (2,235) (3.6)
Gain on sale of subsidiary (3,200) (100.0) - -
Interest income (329) (44.4) (530) (56.3)
Interest expense 693 80.6 (278) (15.2)
Income taxes 271 2.7 (2,488) (19.7)
Net income 93 0.6 (4,148) (19.7)
The Company reported record first quarter sales and earnings for its first
fiscal quarter of 1997. This is the fifth consecutive quarter of record
results from the operations.
For the quarter ended March 29, 1997, consolidated net sales were $282.9
million compared to $233.5 million in 1996, an increase of 21.2%. Net income
for the first quarter of 1997 was $16.9 million, a 14.2% increase over net
income generated in the same quarter in 1996, excluding a nonrecurring gain.
Net income per share for the quarter increased to $0.57 per share, an increase
of 18.8% when measured against $0.48 earned from ongoing operations last year.
The reported results for the first quarter of 1996 included a $2 million
after-tax, nonrecurring gain on the sale of a subsidiary, Ring King Visibles,
Inc., which contributed an additional $0.07 per share to 1996 first quarter
net income which, accordingly, totaled $16.8 million, or $0.55 per share.
As a result of the October 1996 acquisition of Heat-N-Glo Fireplace Products,
Inc., the Company now has two reportable core business segments: office
furniture and hearth products. Hearth products include a broad line of
manufactured gas- and wood-burning fireplaces and stoves, fireplace inserts,
and chimney systems principally for the home.
For the first quarter of 1997, office furniture comprised 85% of consolidated
net sales and hearth products 15%. Net sales for office furniture were up 11%
for the quarter compared to the same quarter a year ago, which basically
mirrors the reported growth of the overall office furniture industry. Hearth
products sales increased 155%, due primarily to contributions from the Heat-N-
Glo division of Hearth Technologies Inc. Management is pleased with the
Page 9 of 14
integration progress being shown by Hearth Technologies which is the new
subsidiary formed by the merger of Heatilator and Heat-N-Glo. This new
subsidiary has a stream of new products under development, and its overall
growth prospects continue to look promising.
Office furniture contributed 93% of consolidated operating profit before
unallocated corporate expenses and hearth products 7% as defined by the
prevailing Financial Accounting Standards Board Statements for segment
reporting. The first quarter of the fiscal year is historically the weakest
sales and earnings quarter for the hearth products segment.
The consolidated gross profit margin for the first quarter of 1997 was 31.3%
compared to 31.5% for the same period in 1996. Consolidated selling and
administrative expenses for the first quarter of 1996 were 21.4% of net sales
compared to 21.3% in the comparable quarter of 1996. Selling and administrative
expenses for 1997 include goodwill amortization associated with the Company's
acquisition of Heat-N-Glo, which amounted to a $0.02 per share charge to
earnings in the first quarter.
Interest expense increased from $.9 million in the first quarter of 1996 to
$1.6 million for the first quarter of 1997 as the result of new debt incurred
to finance the acquisition of Heat-N-Glo.
The Company increased its estimated annual effective tax rate to 37.5% for the
1997 quarter from 37.0% a year earlier to reflect higher estimated state
income taxes.
Liquidity and Capital Resources
As of March 29, 1997, cash and short-term investments decreased to $15.4
million compared to a $32.7 million balance at year-end 1996. The decrease is
due to marketing program payments, note payable payment, and capital
expenditures.
Net capital expenditures for the first quarter of 1997 quarter were $18.4
million and primarily represent investment in new, more-efficient machinery
and equipment. These investments were funded by cash reserves and cash from
operations.
A $0.14 per share quarterly dividend on common stock was paid on February 28,
1997, to shareholders of record on February 24, 1997. This was the 168th
consecutive quarterly dividend paid by the Company.
In the first quarter, the Company repurchased 32,573 shares of its common
stock at a cost of approximately $1.2 million or an average price of $35.94
per share. As of March 29, 1997, approximately $7.6 million of the Board's
current repurchase authorization remained unspent.
10 of 14
Looking Ahead
Management's goal is to achieve double-digit growth in sales and earnings for
1997. New products in existing and new category offerings through multiple
channels of distribution will continue to be a major contributor to results.
The Company will also continue to focus on cost control by aggressive
purchasing policies, efficient use of resources, and reducing distribution
costs.
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. The following are some of the important factors that could cause
actual results or outcomes to differ materially from those discussed in the
forward-looking statements: 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 improvements in the Company's operations, impact of future
acquisitions, as well as the risks, uncertainties, and other factors described
from time to time in the Company's SEC filings and reports.
Page 11 of 14
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 have been 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.
HON INDUSTRIES Inc.
Dated: May 9, 1997 By /s/ David C. Stuebe
David C. Stuebe
Vice President and
Chief Financial Officer
By /s/ Melvin L. McMains
Melvin L. McMains
Controller
Page 12 of 14
PART II. EXHIBITS
EXHIBIT INDEX
Page
(27) Financial Data Schedule 14
Page 13 of 14