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 4, 1998
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 April 4, 1998
Common Shares, $1 Par Value 61,667,683 shares
Exhibit Index is on page 16.
Page 1 of 17
HON INDUSTRIES Inc. and SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets --
April 4, 1998, and January 3, 1998 3-4
Condensed Consolidated Statements of Income --
Three Months Ended April 4, 1998, and March 29, 1997 5
Condensed Consolidated Statements of Cash Flows --
Three Months Ended April 4, 1998, and March 29, 1997 6
Notes to Condensed Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-13
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
EXHIBIT INDEX 16
(27) Financial Data Schedule 17
Page 2 of 17
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 4,
1998 January 3,
(Unaudited) 1998
ASSETS (In thousands)
CURRENT ASSETS
Cash and cash equivalents $ 10,752 $ 46,080
Short-term investments 262 260
Receivables 178,351 158,408
Inventories (Note B) 62,461 60,182
Deferred income taxes 13,810 14,391
Prepaid expenses and other current
assets 13,983 15,829
Total Current Assets 279,619 295,150
PROPERTY, PLANT, AND EQUIPMENT, at cost
Land and land improvements 10,275 10,059
Buildings 113,389 111,387
Machinery and equipment 342,728 333,216
Construction in progress 84,628 60,832
551,020 515,494
Less accumulated depreciation 178,197 174,464
Net Property, Plant, and Equipment 372,823 341,030
GOODWILL 106,444 98,720
OTHER ASSETS 19,523 19,773
Total Assets $778,409 $754,673
See accompanying notes to condensed consolidated financial
statements.
Page 3 of 17
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 4,
1998 January 3,
(Unaudited) 1998
LIABILITIES AND SHAREHOLDERS' EQUITY (In thousands)
CURRENT LIABILITIES
Accounts payable and accrued expenses $166,738 $183,738
Income taxes 16,156 8,133
Note payable and current maturities
of long-term debt 2,496 2,545
Current maturities of other long-term
obligations 1,255 6,343
Total Current Liabilities 186,645 200,759
LONG-TERM DEBT 143,266 123,487
CAPITAL LEASE OBLIGATIONS 10,399 11,024
OTHER LONG-TERM LIABILITIES 18,927 18,601
DEFERRED INCOME TAXES 19,683 19,140
SHAREHOLDERS' EQUITY (Note C)
Capital Stock:
Preferred, $1 par value; authorized
1,000,000 shares; no shares outstanding - -
Common, $1 par value; authorized
100,000,000 shares; outstanding -- 61,667 61,659
1998 - 61,667,683 shares;
1997 - 61,659,316 shares
Paid-in capital 56,180 55,906
Retained earnings 282,747 265,203
Receivable from HON Members Company
Ownership Plan (1,099) (1,099)
Equity adjustment from foreign currency
translation (6) (7)
Total Shareholders' Equity 399,489 381,662
Total Liabilities and
Shareholders' Equity $778,409 $754,673
See accompanying notes to condensed consolidated financial
statements.
Page 4 of 17
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
April 4, March 29,
1998 1997
(In thousands, except
per share data)
Net sales $418,263 $282,859
Cost of products sold 291,571 194,194
Gross Profit 126,692 88,665
Selling and administrative expenses 88,563 60,453
Operating Income 38,129 28,212
Interest income 435 411
Interest expense 2,607 1,553
Income Before Income Taxes 35,957 27,070
Income taxes 13,484 10,152
Net Income 22,473 16,918
Net income per common share (Note C) $.36 $.28
Average number of common shares
outstanding 61,647,784 59,399,822
Cash dividends per common share $.08 $.07
See accompanying notes to condensed consolidated financial
statements.
Page 5 of 17
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
April 4, March 29,
1998 1997
(In thousands)
Net Cash Flows From (To) Operating
Activities:
Net income $ 22,473 $ 16,918
Noncash items included in net income:
Depreciation and amortization 11,911 7,439
Other postretirement and postemployment
benefits 354 799
Deferred income taxes 1,125 617
Other - net (12) 256
Net increase (decrease) in noncash
operating assets and liabilities (32,712) (6,605)
Increase (decrease) in other liabilities (1,326) (3,307)
Net cash flows from operating activities 1,813 16,117
Net Cash Flows From (To) Investing
Activities:
Capital expenditures - net (40,067) (18,412)
Acquisition spending, net of cash acquired (11,523) (262)
Short-term investments - net (2) (802)
Long-term investments (1) 800
Other - net 1 (455)
Net cash flows (to) investing activities (51,592) (19,131)
Net Cash Flows From (To) Financing
Activities:
Purchase of HON INDUSTRIES common stock (940) (1,171)
Proceeds from long-term debt 35,050 -
Payments of note and long-term debt (15,952) (9,859)
Proceeds from sales of HON INDUSTRIES
common stock to members and stock-based
compensation 1,226 908
Dividends paid (4,933) (4,158)
Net cash flows from (to) financing
activities 14,451 (14,280)
Net increase (decrease) in cash and
cash equivalents (35,328) (17,294)
Cash and cash equivalents at beginning
of period 46,080 31,196
Cash and cash equivalents at end of period $ 10,752 $ 13,902
See accompanying notes to condensed consolidated financial
statements.
Page 6 of 17
HON INDUSTRIES Inc. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
April 4, 1998
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 4, 1998, are not necessarily indicative of the
results that may be expected for the year ending January 2, 1999.
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 3, 1998.
Note B. Inventories
Inventories of the Company and its subsidiaries are summarized as
follows:
April 4, 1998
($000) Unaudited) January 3,1998
Finished products $ 29,198 $ 26,352
Materials and work in process 54,542 48,186
LIFO Allowance (21,279) (14,356)
$ 62,461 $ 60,182
Note C. Shareholders' Equity
The Board of Directors approved a two-for-one common stock split
in the form of a 100 percent stock dividend, paid on March 27,
1998, to shareholders of record on March 6, 1998. All reported
net income per share and share outstanding amounts have been
adjusted to retroactively reflect the split.
Note D. Business Combinations
The Company acquired Aladdin Steel Products Inc. on February 20,
1998. The transaction has been accounted for under the purchase
method. The cash purchase price of Aladdin was $10.4 million
which has been preliminarily allocated as follows:
(In millions)
Working capital, other than cash $1.8
Property, plant, and equipment 1.8
Goodwill 6.8
Page 7 of 17
Assuming the acquisition of Allsteel Inc., Bevis Custom Furniture
Inc., Panel Concepts Inc., and Aladdin Steel Products Inc. had
occurred on December 29, 1996, the beginning of the Company's
1997 fiscal year, instead of June 17, 1997, November 13, 1997,
December 1, 1997, and February 20, 1998, when they actually
occurred, the Company's pro forma consolidated net sales for the
first quarter ended April 4, 1998, would have been approximately
$419.4 million instead of the reported $418.3 million, and first
quarter ended March 29, 1997, would have been approximately
$341.5 million instead of the reported $282.9 million. Pro forma
consolidated net income and net income per share for both
quarters would not have been materially different from the
reported amounts.
Note E. New Accounting Standards
The Company adopted Statement of Financial Accounting Standards
(SFAS) No. 130, Reporting Comprehensive Income, as of January 4,
1998, the beginning of its 1998 fiscal year; SFAS No. 128,
Earnings Per Share; and SFAS No. 129, Disclosure of Information
about Capital Structure, as of January 3, 1998, year-end 1997.
Their adoption had no material effect on financial condition or
results of operations.
Note F. Reclassifications
Certain prior year information has been reclassified to conform
to the current year presentation.
Note G. Business Segment Information
The Company adopted Statement of Financial Accounting Standards
(SFAS) No. 131, Disclosures about Segments of an Enterprise and
Related Information, effective with its 1998 fiscal year
beginning January 4, 1998. 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 products
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
Page 8 of 17
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 income 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 4, 1998, and
March 29, 1997, is as follows:
Three Months Ended
Apr. 4, 1998 Mar. 29, 1997
Net sales:
Office furniture $366,836 $239,638
Hearth products 51,427 43,221
$418,263 $282,859
Operating profit:
Office furniture $ 36,663 $ 28,548
Hearth products 2,931 2,054
Total operating profit 39,594 30,602
Unallocated corporate expenses (3,637) (3,532)
Income before income taxes $ 35,957 $ 27,070
Identifiable assets:
Office furniture $591,18 $340,176
Hearth products 145,917 124,440
General corporate 41,374 42,871
$778,409 $507,487
Depreciation & amortization
expense:
Office furniture $ 9,650 $ 5,466
Hearth products 1,942 1,632
General corporate 319 341
$ 11,911 $ 7,439
Capital expenditures, net:
Office furniture $ 35,694 $ 14,036
Hearth products 4,526 4,211
General corporate (153) 165
$ 40,067 $ 18,412
Page 9 of 17
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 April 4, 1998 & April 4, 1998 &
March 29, 1997 January 3, 1998
Net sales $135,404 47.9% $26,324 6.7%
Cost of products sold 97,377 50.1 21,724 8.1
Selling & administrative
expenses 28,110 46.5 9,563 12.1
Interest income 24 5.8 (260) (37.4)
Interest expense 1,054 67.9 373 16.7
Income taxes 3,332 32.8 (2,098) (13.5)
Net income 5,555 32.8 (3,498) (13.5)
All per share information in this report reflects a two-for-one
stock split effective March 27, 1998.
The Company reported record first quarter sales and earnings for
its fiscal quarter ended April 4, 1998, representing the highest
net sales for any quarter in the company's history. This is the
ninth consecutive quarter of record results from operations.
Consolidated net sales for the first quarter ending April 4,
1998, were $418.3 million, a 48% increase from the $282.9 million
in the first quarter of 1997. Net income was $22.5 million, or
$0.36 per share, an increase of 29% for the first quarter of
1998, compared to $16.9 million, or $0.28 per share for the year-
ago period. This sales increase is the result of offering
compelling value products, pursuing aggressive marketing
programs, and offering new product features often at no
additional cost to customers, although at some sacrifice of gross
margin.
For the first quarter of 1998, office furniture comprised 88% of
consolidated net sales and hearth products 12%. Net sales for
office furniture were up 53% for the quarter compared to the same
quarter a year ago. Proforma first quarter 1998 net sales of
office furniture, excluding 1997-98 acquisitions of Allsteel,
Bevis, and Panel Concepts, increased 34% over first quarter 1997.
Hearth products sales increased 19% for the quarter compared to
the same quarter a year ago. Proforma first quarter 1998 hearth
products sales, excluding the February 1998 acquisition of
Aladdin Steel Products Inc., increased 16% for the quarter.
Office furniture contributed 93% of first quarter 1998
Page 10 of 17
consolidated operating profit before unallocated corporate
expenses and hearth products 7%. 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
1998 was 30.3% compared to 31.3% for the same period in 1997
which reflects several business factors. The Company continues
to improve margin levels of recently acquired businesses and
expects that margins will be in line with other core businesses
when integration is complete. The Company believes that its Rapid
Continuous Improvement Program will improve gross margins from
current levels by the end of 1998.
Selling and administrative expenses for the first quarter of 1998
were 21.2% of net sales compared to 21.4% in the comparable
quarter of 1997. Management places major emphasis on controlling
and reducing selling and administrative expenses as a percent of
net sales. Selling and administrative expenses also include
freight and distribution expenses incurred to get the product to
the customer.
Liquidity and Capital Resources
As of April 4, 1998, cash and short-term investments decreased to
$11.0 million compared to a $46.3 million balance at year-end
1997. The decrease is due to marketing program payments, capital
expenditures, and acquisition spending.
Net capital expenditures for the first quarter of 1998 were $40.1
million and primarily represent investment for new machinery and
equipment and warehouse and production facility expansion to
increase capacity and to facilitate more efficient and productive
operations. Approximately 700,000 square feet of facility
expansion is currently in various stages of construction. These
investments were funded by a combination of cash reserves, cash
from operations and a revolving credit agreement.
As referenced earlier, on February 20, 1998, the Company
completed an acquisition of the assets of Aladdin Steel Products
Inc., located in Colville, Washington. Aladdin is a manufacturer
of wood-, pellet- and gas-burning stoves and inserts under the
Quadra-Fire brand name with annual sales of approximately $16
million. A new division, Aladdin Hearth Products, has been
formed under the Hearth Technologies operating company to
manufacture and distribute the Company's Quadra-Fire, Arrow and
Dovre brand stoves.
Page 11 of 17
The Board of Directors approved a 14.3% increase in the common
stock quarterly dividend from $.07 per share to $.08 per share.
The dividend was paid on February 28, 1998 to shareholders of
record on February 23, 1998. This was the 172nd consecutive
quarterly dividend paid by the Company.
The Board of Directors also declared a two-for-one stock split in
the form of a 100 percent stock dividend paid on March 27, 1998,
to shareholders of record on March 6, 1998. Shareholders
received one share of common stock for each share held on the
record date.
In the first quarter, the Company repurchased 30,795 post-split
shares of its common stock at a cost of approximately $.9 million
or an average price of $30.24 per share. As of April 4, 1998,
approximately $3.7 million of the Board's current repurchase
authorization remained unspent.
The Company is continuing to assess and address its various Year
2000 information technology compliance issues. Based on the
assessment effort to date, the Company continues to believe that
any required maintenance or modification costs will be expensed
as incurred and will not be material to its business, operations,
or financial condition. Any replacement software required will
be capitalized and amortized over the software's useful life.
On May 11, 1998, the Board of Directors declared an $.08 per
common share cash dividend to shareholders of record on May 21,
1998, to be paid on June 1, 1998. The Board also passed a
resolution to appoint Harris Trust and Savings Bank, Chicago,
Illinois, as the Company's transfer agent and registrar of its
common stock. The transition to Harris will occur over the next
six to eight weeks. This function previously had been performed
in-house by the Company. In addition, the Company announced it
has completed the clearance process and is filing an application
to list its common stock on the New York Stock Exchange (NYSE).
The Company's shares will continue to be traded on the NASDAQ
National Market System until it becomes listed on the NYSE under
the symbol HNI, which is anticipated to be in early July 1998.
Looking Ahead
Management's goal is to achieve double-digit growth in sales and
earnings for 1998. This will be achieved by continually
improving the cost structure, introducing new value-priced
products, and providing the best customer service in the two
industries.
Page 12 of 17
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: 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 in the Company's
operations, the Company's ability to improve margins of acquired
businesses, 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 13 of 17
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 12 1998, for purposes of electing four Directors to
the Board of Directors, and to amend the Articles of
Incorporation to increase the authorized shares of the Company's
common stock from 100,000,000 to 200,000,000. As of March 13,
1998, the record date for the meeting, there were 30,826,307
shares of common stock issued and outstanding and entitled to
vote at the meeting. The first proposal voted upon was the
election of four Directors for a term of three years and until
their successors are elected and shall qualify. The four persons
nominated by the Company's Board of Directors received the
following votes and were elected:
For Withheld Against
W. August Hillenbrand 26,895,244 216,034 1,806
or 87% or 1% or 0%
Jack D. Michaels 26,888,931 219,054 2,949
or 87% or 1% or 0%
Moe S. Nozari 26,894,408 216,084 1,972
or 87% or 1% or 0%
Frank S. Ptak 26,894,408 215,229 1,550
or 87% or 1% or 0%
The second proposal voted upon was the approval of the Amendment
of the Articles of Incorporation. The proposal was approved with
26,645,291 votes, or 86%, voting for; 418,512 votes, or 1%,
voting against; and 49,770 votes, or 0%, voting withheld.
As to both proposals, there were 1,635,533 broker non-votes.
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.
Page 14 of 17
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 19, 1998 By /s/ David C. Stuebe
David C. Stuebe
Vice President and
Chief Financial Officer
By /s/ Melvin L. McMains
Melvin L. McMains
Controller
Page 15 of 17
PART II. EXHIBITS
EXHIBIT INDEX
Page
(27) Financial Data Schedule 17
Page 16 of 17