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 3, 1999
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 commons tock, as of the latest practical date.
Class Outstanding at April 3,1999
Common Shares, $1 Par Value 61,256,914 shares
Exhibit Index is on Page 18.
HON INDUSTRIES Inc. and SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
April 3, 1999, and January 2, 1999 3-4
Condensed Consolidated Statements of Income -
Three Months Ended April 3, 1999, and April 4, 1998 5
Condensed Consolidated Statements of Cash Flows -
Three Months Ended April 3, 1999, and April 4, 1998 6
Notes to Condensed Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
EXHIBIT INDEX 18
(3i) Articles of Incorporation,
as amended and restated, on May 11, 1999
(10i) 1995 Stock-Based Compensation Plan,
as amended and restated, on February 10, 1999
(27) Financial Data Schedule
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLITATED BALANCE SHEETS
April 3, January 2,
1999 1999
(Unaudited)
ASSETS (In thousands)
CURRENT ASSETS
Cash and cash equivalents $10,722 $ 17,500
Short-term investments - 169
Receivables 178,625 183,576
Inventories (Note B) 66,587 67,225
Deferred income taxes 14,285 12,477
Prepaid expenses and other current assets 12,685 9,382
Total Current Assets 282,904 290,329
PROPERTY, PLANT, AND EQUIPMENT, at cost
Land and land improvements 14,724 12,156
Buildings 157,908 144,559
Machinery and equipment 438,314 411,238
Construction in progress 72,453 85,782
683,399 653,735
Less accumulated depreciation 223,359 209,558
Net Property, Plant, and Equipment 460,040 444,177
GOODWILL 109,368 108,586
OTHER ASSETS 20,226 21,377
Total Assets $872,538 $864,469
See accompanying notes to condensed consolidated financial
statements.
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLITATED BALANCE SHEETS
April 3, January 2,
1999 1999
(Unaudited)
(In thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $173,491 $193,859
Income taxes 8,803 1,921
Note payable and current maturities
of long-term debt 14,310 15,769
Current maturities of other long-term
obligations 3,373 5,889
Total Current Liabilities 199,977 217,438
LONG-TERM DEBT 147,952 128,069
CAPITAL LEASE OBLIGATIONS 7,478 7,494
OTHER LONG-TERM LIABILITIES 17,585 18,067
DEFERRED INCOME TAXES 32,462 31,379
SHAREHOLDERS' EQUITY
Capital Stock:
Preferred, $1 par value; authorized
1,000,000 shares; no shares outstanding - -
Common, $1 par value; authorized
200,000,000 shares; outstanding - 61,257 61,290
1999 - 61,256,914 shares;
1998 - 61,289,618 shares
Paid-in capital 47,817 48,348
Retained earnings 357,579 351,786
Accumulated other comprehensive income 431 598
Total Shareholders' Equity 467,084 462,022
Total Liabilities and Shareholders'
Equity $872,538 $864,469
See accompanying notes to condensed consolidated financial
statements.
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
April 3, April 4,
1999 1998
(In thousands, except
per share data)
Net sales $424,459 $418,263
Cost of products sold 295,222 291,571
Gross Profit 129,237 126,692
Selling and administrative expenses 89,264 88,563
Provision for closing facilities (Note C) 19,679 -
Operating Income 20,294 38,129
Interest income 184 435
Interest expense 2,229 2,607
Income Before Income Taxes 18,249 35,957
Income taxes 6,661 13,484
Net Income 11,588 22,473
Net income per common share $.19 $.36
Average number of common shares
outstanding 61,154,027 61,647,784
Cash dividends per common share $.095 $.08
See accompanying notes to condensed consolidated financial
statements.
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLITATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
April 3, April 4,
1999 1998
(In thousands)
Net Cash Flows From (To) Operating
Activities:
Net income $ 11,588 $ 22,473
Noncash items included in net income:
Depreciation and amortization 15,396 11,911
Other postretirement and postemployment
benefits 494 354
Deferred income taxes (636) 1,125
Other - net (44) (12)
Net increase (decrease) in noncash
operating assets and liabilities (13,425) (32,712)
Increase (decrease) in other liabilities (1,264) (1,326)
Net cash flows from operating activities 12,109 1,813
Net Cash Flows From (To) Investing
Activities:
Capital expenditures - net (30,144) (40,067)
Acquisition spending, net of cash acquired (1,637) (11,523)
Short-term investments - net 169 (2)
Long-term investments (9) (1)
Other - net - 1
Net cash flows (to) investing activities (31,621) (51,592)
Net Cash Flows From (To) Financing
Activities:
Purchase of HON INDUSTRIES common stock (5,126) (940)
Proceeds from long-term debt 41,651 35,050
Payments of note and long-term debt (22,593) (15,952)
Proceeds from issuance of stock 4,598 1,226
Dividends paid (5,796) (4,933)
Net cash flows from financing activities 12,734 14,451
Net increase (decrease) in cash and
cash equivalents (6,778) (35,328)
Cash and cash equivalents at beginning
of period 17,500 46,080
Cash and cash equivalents at end of period $ 10,722 $ 10,752
See accompanying notes to condensed consolidated financial statements.
HON INDUSTRIES Inc. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
April 3, 1999
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 3, 1999, are not necessarily indicative of the
results that may be expected for the year ending January 1, 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 2, 1999.
Note B. Inventories
Inventories of the Company and its subsidiaries are summarized as
follows:
April 3, 1999 January 2,
($000) (Unaudited) 1999
Finished products $ 23,882 $ 24,955
Materials and work in process 53,766 53,320
LIFO Allowance (11,061) (11,050)
$ 66,587 $ 67,225
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. The
operations will close following an orderly transition of
production to other facilities, which is expected to be completed
during the second and third quarter of 1999. A pretax charge of
$19.7 million or $0.20 per diluted share was recorded during the
quarter ended April 3, 1999. The charge includes $12.5 million
for write-offs of plant and equipment, $2.6 million for severance
arising from the elimination of approximately 360 positions, $2.1
million for other employee related costs, and $2.4 million for
certain other expenses associated with the closing of the
facility.
During the first quarter ended April 3, 1999, $2.9 million of
pretax exit costs were paid and charged against the liability.
It included $1.6 million for write-off of plant and equipment,
$1.1 million for severance for 210 positions, $.1 million for
other employee related expenses and $.1 million for certain other
expenses associated with the closing of the facility.
Note D. New Accounting Standards
In March 1998, the Accounting Standards Executive Committee of
the AICPA issued Statement of Position (SOP) 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for
Internal Use". The SOP, which was adopted as of January 3, 1999,
the beginning of the Company's 1999 fiscal year, requires the
capitalization of certain costs incurred in connection with
developing or obtaining internal use software. Prior to the
adoption of SOP 98-1, the Company expensed all internal use
software related costs as incurred. The effect of adopting the
SOP was immaterial on the Company's financial condition or
results of operation during the quarter ended April 3, 1999.
Note E. Comprehensive Income
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. For the three-
month periods ended April 3, 1999 and April 4, 1998, the change
in comprehensive income is approximately ($167,000) and $1,000,
respectively.
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
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 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
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 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 3, 1999, and
April 4, 1998, is as follows:
Three Months Ended
April 3, April 4,
1999 1998
Net Sales:
Office furniture $359,981 $366,836
Hearth products 64,478 51,427
$424,459 $418,263
Operation Profit:
Office furniture
Normal operations $ 36,294 $ 36,663
Facility closedown provision (19,679) -
Office furniture - net 16,615 36,663
Hearth products 5,784 2,931
Total operating profit 22,399 39,594
Unallocated corporate expense (4,150) (3,637)
Income before income taxes $ 18,249 $ 35,957
Identifiable Assets:
Office furniture $666,632 $591,118
Hearth products 159,143 145,917
General corporate 46,763 41,374
$872,538 $778,409
Depreciation & Amortization
Expense:
Office furniture $ 12,458 $ 9,650
Hearth products 2,607 1,942
General corporate 331 319
$ 15,396 $ 11,911
Capital Expenditure, Net:
Office furniture $ 20,291 $ 35,694
Hearth products 4,303 4,526
General corporate 5,550 (153)
$ 30,144 $ 40,067
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 Consolidate Statements of Income is
shown below:
Comparison of
Increases (Decreases) Three Months Three Months
Ended Ended
Dollars in Thousands April 3, 1999 & April 3, 1999 &
April 4, 1998 January 2, 1999
Net sales $ 6,196 1.5% $(3,615) (0.8)%
Cost of products sold 3,651 1.3 983 0.3
Selling & Administrative
expenses 701 0.8 4,943 5.9
Provision for closing
facilities 19,679 N/M 19,679 N/M
Interest income (251) (57.7) (173) (48.5)
Interest expense (378) (14.5) (308) (12.1)
Income taxes (6,823) (50.6) (11,094) (62.5)
Net income (10,885) (48.4) (17,991 (60.8)
The Company reported record first quarter sales and earnings for
its fiscal quarter ended April 3, 1999, prior to a one-time
charge for a cost savings initiative. This is the 13th
consecutive quarter of record results from operations.
Consolidated net sales for the first quarter ending April 3,
1999, were $424.5 million, a 1.5% increase from the $418.3
million in the first quarter of 1998. The closing of three
plants, a cost savings initiative to increase long-term
profitability, was announced in first quarter with an anticipated
annualized savings of $11.6 million upon completion of the
closings. Accounting for a one-time charge of $19.7 million
against pre-tax earnings, net income for the quarter was $11.6
million or $0.19 per share. Net income, before the charge,
reached $24.1 million, an increase of 7.2% from $22.5 million for
the same period a year ago. Prior to the one-time charge, net
income per share was $0.39 per diluted share compared to $0.36
per share in first quarter 1998.
For the first quarter of 1999, office furniture comprised 85% of
consolidated net sales and hearth products comprised 15%. Net
sales for office furniture were down 2% for the quarter compared
to the same quarter a year ago. Due to the unusually strong
office furniture industry growth rate in 1997 of 15%, the Company
ended fiscal year 1997 with a higher than normal order backlog
which further strengthened first quarter 1998 net sales. While
backlog is normally not a consideration because of the Company's
short delivery times, it is a factor when comparing first quarter
1998 and 1999 shipments. Hearth products sales increased 25% for
the quarter compared to the same quarter a year ago. Office
furniture contributed 86% of first quarter 1999 consolidated
operating profit before unallocated corporate expenses and the
one-time charge and hearth products 14%.
The consolidated gross profit margin for the first quarter of
1999 was 30.4% compared to 30.3% for the same period in 1998.
The Company is continuing to focus on improving gross margins.
The focus is on improving the net selling price of products and
on reducing production costs.
Selling and administrative expenses for the first quarter of
1999, excluding the one-time charge, were 21.0% of net sales
compared to 21.2% in the comparable quarter of 1998. Management
places 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.
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 on February 11, 1999. The
operations will close following an orderly transition of
production to other facilities which is expected to be completed
during the second and third quarters of 1999. Upon completion of
the closedowns, the Company is anticipating annualized savings of
$11.6 million mainly from reduced salaries and benefits,
depreciation, and other costs related to operating the three
facilities. A pretax charge of $19.7 million or $0.20 per
diluted share was recorded during the quarter ended April 3,
1999. The charge includes $12.5 million for write-offs of plant
and equipment, $2.6 million for severance arising from the
elimination of approximately 360 positions, $2.1 million for
other employee related costs, and $2.4 million for certain other
expenses associated with the closing of the facilities. During
the first quarter ended April 3, 1999, $2.9 million of pretax
exit costs were paid and charged against the liability. It
included $1.6 million for write-off of plant and equipment, $1.1
million for severance for 210 positions, $.1 million for other
employee related expenses and $.1 million for certain other
expenses associated with the closing of the facility.
The Company decreased its estimated annual effective tax rate to
36.5% for the first quarter of 1999 from 37.5% a year earlier to
reflect lower estimated state income taxes.
Liquidity and Capital Resources
As of April 3, 1999, cash and short-term investments decreased to
$10.7 million compared to a $17.7 million balance at year-end
1998. The decrease is due to marketing program payments
typically made in the first quarter and capital expenditures.
Net capital expenditures for the first quarter of 1999 were $30.1
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.
The Board of Directors approved an 18.8% increase in the common
stock quarterly dividend from $.08 per share to $.095 per share.
The dividend was paid on March 1, 1999 to shareholders of record
on February 19, 1999. This was the 176th consecutive quarterly
dividend paid by the Company.
In the first quarter, the Company repurchased 231,405 of its
common stock at a cost of approximately $5.1 million or an
average price of $22.15 per share. As of April 3, 1999,
approximately $57.3 million of the Board's current repurchase
authorization remained unspent.
On May 10, 1999, the Board of Directors declared an $.095 per
common share cash dividend to shareholders of record on May 20,
1999, to be paid on June 1, 1999.
Year 2000
The Company is continuing to work on its comprehensive Year 2000
("Y2K") Compliance Plan. The primary mission of the Plan is to
maintain business continuity by giving priority remediation and
resolution to any Year 2000 issue that could compromise normal
business operations.
The project is focused on three business fronts: (1) information
technology, which encompasses traditional computer hardware,
software and related networks; (2) operations, which encompasses
material suppliers, equipment vendors, and embedded chips used by
facility, production, and distribution machinery, equipment, and
support processes; and (3) customers and other nonoperational
service providers.
All three project focus initiatives are on schedule to be
completed during the second and third quarters of 1999, leaving
fourth quarter of 1999 primarily for follow-up compliance testing
and contingency planning as needed. The Company plans to engage
an independent review of its Y2K compliance plan and follow-
through effort during June-September to further assess its
quality and comprehensiveness. The Company still estimates its
total incremental out-of-pocket project costs will not exceed the
$1 million range, including some costs that, because of their
nature, will be capitalized. All internal and external costs
associated with this project are being expensed or capitalized in
the period incurred. Through the fiscal quarter ended April 3,
1999, the Company has incurred and recorded costs of
approximately $125,000.
At this point, the Company assesses its Y2K issues to be
comparatively modest and routine in nature. Current efforts are
being concentrated on internal compliance testing of equipment
and processes. While the Company does not anticipate any
material business interruptions due to Year 2000 issues that are
within its control, this outcome is also dependent on many other
business and service partners having their Year 2000 house in
order. These partners include among others: utility service
providers, key suppliers, including a few foreign suppliers; key
customers; banking system; equipment vendors; and software and
other related system and service providers. In these cases, the
Company is relying principally on individual Y2K readiness
statements. The Company maintains an electronic copy of its
latest Year 2000 Readiness Disclosure at its website location at
www.honi.com.
So, given the unusual nature of the Y2K challenge, even with a
comprehensive and responsive due diligence effort, business risk
can not be totally avoided. Management views the Company's
business risks to include, but not necessarily limited to the
following: higher than expected remediation costs, exclusion of
coverage by insurers for losses/damages attributable to Year 2000
issues, loss of production, loss of sales, and litigation risk.
Looking Ahead
The Company is optimistic about its business outlook for fiscal
year 1999. If the U.S. economy remains healthy, 1999 is expected
to be another record year in terms of earnings. This optimism is
based on the Company's ability to continue improving its cost
structure, increase sales through the introduction of new value-
priced products, and provide outstanding customer service and
support.
Except for the historic 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 but
not limited to: 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 product industries, the achievement
of cost reductions and productivity in the Company's operations,
the impact of future acquisitions, the Company's ability to identify
and correct or implement contingency plans to deal with the Y2K
issues, as well as the risks, uncertainties, and other factors
described from time to time in the Company's SEC filings and reports.
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 11, 1999, 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
preferred stock from 1,000,000 to 2,000,000. As of March 12,
1999, the record date for the meeting, there were 61,083,054
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
Cheryl A. Francis 54,725,131 123,263 -0-
or 89.6% or .2% or 0%
Robert L. Katz 54,732,710 115,684 -0-
or 89.6% or .2% or 0%
Richard H. Stanley 54,673,402 174,992 -0-
or 89.5% or .3% or 0%
Brian E. Stern 54,764,243 84,151 -0-
or 89.7% 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
33,770,694 votes, or 55.3% voting for; 11,223,189 votes, or 18.4%
voting against; and 207,145 votes, or .3% voting withheld.
As to the second proposal, there were 9,647,365 or 15.8% 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 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: May 14, 1999 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
(3i) Articles of Incorporation, as amended and
restated, on May 11, 1999
(10i) 1995 Stock-Based Compensation Plan, as amended and
restated, on February 10, 1999
(27) Financial Data Schedule