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 September 28, 1996
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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
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HON INDUSTRIES Inc.
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(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
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 319-264-7400
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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 September 28, 1996
- --------------------------- ---------------------------------------
Common Shares, $1 Par Value 30,052,624 shares
Exhibit Index is on page 14.
Page 1 of 15<PAGE>
HON INDUSTRIES Inc. and SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited)
- -----------------------------
Condensed Consolidated Balance Sheets --
September 28, 1996, and December 30, 1995 3-4
Condensed Consolidated Statements of Income --
Three Months Ended September 28, 1996, and September 30, 1995 5
Condensed Consolidated Statements of Income --
Nine Months Ended September 28, 1996, and September 30, 19956
Condensed Consolidated Statements of Cash Flows --
Nine Months Ended September 28, 1996, and September 30, 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
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Item 6. Exhibits and Reports on Form 8-K 12
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SIGNATURES 13
EXHIBIT INDEX 14
(27) Financial Data Schedule 15
Page 2 of 15<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 28,
1996 December 30,
(Unaudited) 1995
------------- ------------
ASSETS (In thousands)
CURRENT ASSETS
Cash and cash equivalents $ 50,420 $ 32,231
Short-term investments 4,501 14,694
Receivables 99,161 88,178
Inventories (Note B) 34,066 36,601
Deferred income taxes 15,393 14,180
Prepaid expenses and
other current assets 8,235 8,299
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Total Current Assets 211,776 194,183
PROPERTY, PLANT, AND EQUIPMENT, at cost
Land and land improvements 9,335 9,701
Buildings 94,415 95,310
Machinery and equipment 219,218 208,707
Construction in progress 40,613 30,036
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363,581 343,754
Less accumulated depreciation 138,745 133,721
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Net Property, Plant, and Equipment 224,836 210,033
OTHER ASSETS 4,995 5,302
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Total Assets $441,607 $409,518
======= =======
See accompanying notes to condensed consolidated financial statements.
Page 3 of 15<PAGE>
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 28,
1996 December 30,
(Unaudited) 1995
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LIABILITIES AND SHAREHOLDERS' EQUITY (In thousands)
CURRENT LIABILITIES
Accounts payable and accrued expenses $122,843 $117,273
Income taxes 3,548 5,361
Note payable and current maturities
of long-term obligations 12,732 6,281
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Total Current Liabilities 139,123 128,915
LONG-TERM DEBT AND OTHER LIABILITIES 39,758 45,911
CAPITAL LEASE OBLIGATIONS 7,207 7,700
DEFERRED INCOME TAXES 11,744 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 - 30,052,624 shares;
1995 - 30,394,337 shares 30,053 30,394
Paid-in capital 333 550
Retained earnings 221,603 193,505
Receivable from HON Members Company
Ownership Plan (8,214) (8,214)
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Total Shareholders' Equity 243,775 216,235
Total Liabilities and
Shareholders' Equity $441,607 $409,518
======= =======
See accompanying notes to condensed consolidated financial statements.
Page 4 of 15<PAGE>
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
---------------------------
September 28, September 30,
1996 1995
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(In thousands, except
per share data)
Net sales $255,254 $228,195
Cost of products sold 176,403 160,319
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Gross Profit 78,851 67,876
Selling and administrative expenses 53,605 48,084
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Operating Income 25,246 19,792
Interest income 806 473
Interest expense 715 817
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Income Before Income Taxes 25,337 19,448
Income taxes (Note D) 7,430 7,209
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Net Income (Note D) $ 17,907 $ 12,239
======= =======
Net income per common share (Note D) $0.60 $0.41
======= =======
Average number of common
shares outstanding 30,063,124 30,416,469
========== ==========
Cash dividends per common share $0.12 $0.12
======= =======
See accompanying notes to condensed consolidated financial statements.
Page 5 of 15<PAGE>
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine Months Ended
----------------------------
September 28, September 30,
1996 1995
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(In thousands, except
per share data)
Net sales $707,991 $651,297
Cost of products sold 486,636 454,121
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Gross Profit 221,355 197,176
Selling and administrative expenses 152,958 144,337
Gain on sale of subsidiary (Note C) 3,200 -
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Operating Income 71,597 52,839
Interest income 2,306 1,750
Interest expense 2,342 2,656
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Income Before Income Taxes 71,561 51,933
Income taxes (Note D) 24,533 19,391
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Net Income (Note D) $ 47,028 $ 32,542
======= =======
Net income per common share (Note D) $1.56 $1.07
======= =======
Average number of common
shares outstanding 30,192,770 30,534,420
========== ==========
Cash dividends per common share $0.36 $0.36
======= =======
See accompanying notes to condensed consolidated financial statements.
Page 6 of 15<PAGE>
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
----------------------------
September 28, September 30,
1996 1995
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(In thousands)
Net Cash Flows From (To) Operating Activities:
Net income $ 47,028 $ 32,542
Noncash items included in net income:
Depreciation and amortization 17,460 15,596
Gain on sale of subsidiary,
net of tax (Note C) (2,016) -
Other postretirement and postemployment
benefits 1,828 1,484
Deferred income taxes (226) (421)
Other - net 247 30
Net increase (decrease) in noncash operating
assets and liabilities (6,497) 9,215
Increase (decrease) in other liabilities 791 (1,452)
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Net cash flows from
operating activities 58,615 56,994
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Net Cash Flows From (To) Investing Activities:
Capital expenditures - net (34,770) (37,704)
Net proceeds from sale of
subsidiary (Note C) 7,336 -
Short-term investments - net 9,394 (551)
Long-term investments 148 (1)
Other - net (189) (273)
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Net cash flows (to)
investing activities (18,081) (38,529)
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Net Cash Flows (To) Financing Activities:
Purchase of HON INDUSTRIES common stock (9,991) (9,478)
Payments of note and long-term debt (2,857) (2,309)
Proceeds from sales of HON INDUSTRIES common
stock to members and stock-based
compensation 1,368 1,516
Dividends paid (10,865) (10,984)
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Net cash flows (to)
financing activities (22,345) (21,255)
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Net increase (decrease) in cash and
cash equivalents 18,189 (2,790)
Cash and cash equivalents at beginning
of period 32,231 27,659
------- -------
Cash and cash equivalents
at end of period $ 50,420 $ 24,869
======= =======
See accompanying notes to condensed consolidated financial statements.
Page 7 of 15<PAGE>
HON INDUSTRIES Inc. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 28, 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 nine-month
period ended September 28, 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:
September 28, 1996
($000) (Unaudited) December 30, 1995
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Finished products $12,806 $11,265
Materials and work in process 21,260 25,336
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$34,066 $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.
Note D. Tax Credits
During the third quarter of 1996, the Company recorded one-time federal
research and development and state new jobs tax credits totaling approximately
$2.1 million, or $0.07 per share. These tax credits were for eligible
business events occurring in fiscal years prior to 1996.
Page 8 of 15<PAGE>
Item 2. Management's Discussion and Analysis of
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Financial Condition and Results of Operations
---------------------------------------------
Results of Operations
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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
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Increases (Decreases) Three Months Ended Nine Months Ended Three Months Ended
Dollars in Thousands Sept. 28, 1996 & Sept. 28, 1996 & Sept. 28, 1996 &
Sept. 30, 1995 Sept. 30, 1995 June 29, 1996
------------------ ----------------- ------------------
Net sales $27,059 11.9% $56,694 8.7% $35,994 16.4%
Cost of products sold 16,084 10.0 32,515 7.2 26,176 17.4
Selling & Administrative
expenses 5,521 11.5 8,621 6.0 4,098 8.3
Gain on sale of subsidiary - - 3,200 100.0 - -
Interest income 333 70.4 556 31.8 47 6.2
Interest expense (102) (12.5) (314) (11.8) (52) (6.8)
Income taxes 221 3.1 5,142 26.5 208 2.9
Net income 5,668 46.3 14,486 44.5 5,611 45.6
The Company reported record third quarter sales and earnings for its fiscal
quarter ended September 28, 1996. These results, coupled with record first
and second quarter results, make January through September 1996 the best first
nine-month period in the Company's history.
Consolidated net sales for the third quarter ending September 28, 1996, were
$255.3 million, an 11.9% increase from the $228.2 million in the third quarter
of 1995. Net income was $17.9 million, or $0.60 per share, an increase of
46.3%, for the third quarter of 1996, compared to $12.2 million, or $0.41 per
share for the year-ago period.
For the nine months ended September 28, 1996, consolidated net sales were
$708.0 million, up 8.7% from $651.3 million for the year-ago period. Net
income for the nine months of 1996 was $47.0 million, or $1.56 per share, an
increase of 45.8%, compared to $32.5 million, or $1.07 per share for the
comparable period in 1995.
The gross profit margin for the third quarter was 30.9% compared to 29.7% for
the same quarter in 1995. On a nine-month basis, the margin was 31.3% for
1996 versus 30.3% for 1995. Selling and administrative expenses for the third
quarter of 1996 were 21.0% of net sales compared to 21.1% in the comparable
quarter of 1995. On a nine-month basis, they were 21.6% in 1996 versus 22.2%
in 1995.
Page 9 of 15<PAGE>
Office furniture industry growth is continuing to outpace the general U.S.
economy. However, the favorable influence of this growth is being partially
offset by the competitive pricing pressures of rapidly consolidating
distribution. Management believes the Company s strong 1996 sales performance
indicates a gain in market share as customers search for compelling value
products. The improved gross margin is being driven by increased production
volume and productivity improvements but being adversely impacted by the
aforementioned pricing pressures on net sales. Operating costs are being
managed through aggressive cost control measures, a focus on the continuous
improvement of productivity and product quality, and a steady stream of new
products.
The Company increased its estimated annual effective tax rate to 37.5% for the
third quarter of 1996 from 37.0% a year earlier. The Company recognized one-
time federal and state income tax credits of $2.1 million, or $0.07 per share,
in the third quarter of 1996.
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 September 28, 1996, cash, cash equivalents, and short-term investments
increased to $54.9 million compared to a $46.9 million balance at year-end
1995.
Net capital expenditures for the first nine months of 1996 were $34.8 million
and primarily represent investment in new, more efficient machinery and
equipment.
A $0.12 per share quarterly dividend on common stock was paid on August 30,
1996, to shareholders of record on August 22, 1996. This was the 166th
consecutive quarterly dividend paid by the Company.
In the third quarter, the Company repurchased 65,665 shares of its common
stock at a cost of approximately $2.0 million or an average price of $30.75
per share. For the nine months of fiscal year 1996, 398,631 shares were
acquired at a cost of approximately $10.0 million, or an average price of
$25.06. The Board of Directors authorized the Company to spend up to an
additional $20.0 million to acquire common stock of the Company at its August
12, 1996, meeting. Prior to the additional authorization, the Company had
spent all but $1.3 million of the $20.0 million which the Board authorized on
February 13, 1995.
Looking Ahead
- -------------
Management believes that, while the Company had record earnings for its first
nine months, consolidation of sales distribution within the office furniture
industry is and will continue to result in pricing pressures, which the
Company plans to offset through productivity increases, aggressive marketing
programs, and strategic new product introductions.
Page 10 of 15<PAGE>
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 Events
- -----------------
On October 2, 1996, the Company acquired Heat-N-Glo Fireplace Products, Inc.,
located in Savage, Minnesota, through a merger with its wholly owned
Heatilator Inc. subsidiary, which has been renamed Hearth Technologies Inc.
The Heat-N-Glo and Heatilator businesses will operate as divisions of Hearth
Technologies Inc.
The Company paid approximately $76 million, in a combination of cash and debt,
for the acquisition. This transaction will be accounted for under the
purchase method.
Hearth Technologies manufactures and markets broad lines of manufactured gas-
and wood-burning fireplaces and stoves, fireplace inserts, and chimney systems
principally for the home. It is not expected that the merger of Heatilator
and Heat-N-Glo will change the business relationships with their respective
dealers and customers.
During November, the Company settled two previously disclosed contingent
liability matters which totaled $4.8 million. The financial resolution of
both litigation issues was as anticipated by management. Consequently, their
settlement amounts have been fully reserved. Please refer to Item 1. Legal
Proceedings on page 12 for further information regarding these matters.
Page 11 of 15<PAGE>
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 counterclaimed for back
rent and other damages. The parties then 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. Following an appeal
of the decision on August 28, 1996, the parties engaged in negotiations and on
November 8, 1996, settled this matter for $1.8 million, which has already
been fully reserved on the Company's books.
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.
Subsequently, on November 7, 1996, the Company settled this matter for $3
million, which has already been fully reserved on the Company's books. The
Company is undertaking certain legal actions to obtain contribution from
electrical wiring contractors who supplied wiring sets to the Company that
were the subject of the Haworth complaint.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits. See Exhibit Index.
(b) Reports on Form 8-K. After third quarter-end, but before filing the
Form 10-Q for the period, HON INDUSTRIES Inc. filed a current report on
Form 8-K on October 17, 1996, to disclose the merger of Heat-N-Glo
Fireplace Products, Inc., into Heatilator Inc., a wholly owned
subsidiary, which changed its name to Hearth Technologies Inc. Both
the Heatilator and Heat-N-Glo businesses will continue as divisions of
Hearth Technologies Inc. and will manufacture and market hearth and
heating products. The transaction will be accounted for under the
purchase method.
Page 12 of 15<PAGE>
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: November 11, 1996 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<PAGE>
PART II. EXHIBITS
EXHIBIT INDEX
Page
(27) Financial Data Schedule 15
Page 14 of 15<PAGE>
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<NAME> HON INDUSTRIES INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-START> DEC-31-1995
<PERIOD-END> SEP-28-1996
<CASH> 50,420
<SECURITIES> 4,501
<RECEIVABLES> 101,018
<ALLOWANCES> (1,857)
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<PP&E> 363,581
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<CURRENT-LIABILITIES> 139,123
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0
0
<COMMON> 30,053
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<TOTAL-LIABILITY-AND-EQUITY> 441,607
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<TOTAL-COSTS> 486,636
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<INCOME-TAX> 24,533
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