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 October 2, 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 common stock, as of the latest practical date.
Class Outstanding at October 2,1999
Common Shares, $1 Par Value 60,355,398 shares
Exhibit Index is on Page 17.
<PAGE>
HON INDUSTRIES Inc. and SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
October 2, 1999, and January 2, 1999 3-4
Condensed Consolidated Statements of Income -
Three Months Ended October 2, 1999, and October 3, 1998 5
Condensed Consolidated Statements of Income -
Nine Months Ended October 2, 1999, and October 3, 1998 6
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended October 2, 1999, and October 3, 1998 7
Notes to Condensed Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
EXHIBIT INDEX 17
(27) Financial Data Schedule 18
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
October 2, January 2,
1999 1999
(Unaudited)
ASSETS (In thousands)
CURRENT ASSETS
Cash and cash equivalents $ 18,947 $ 17,500
Short-term investments - 169
Receivables 218,308 183,576
Inventories (Note B) 67,990 67,225
Deferred income taxes 18,253 12,477
Prepaid expenses and other current 9,430 9,382
assets
Total Current Assets 332,928 290,329
PROPERTY, PLANT, AND EQUIPMENT, at cost
Land and land improvements 16,697 12,156
Buildings 177,828 144,559
Machinery and equipment 464,703 411,238
Construction in progress 53,604 85,782
712,832 653,735
Less accumulated depreciation 250,024 209,558
Net Property, Plant, and Equipment 462,808 444,177
GOODWILL 114,920 108,586
OTHER ASSETS 22,413 21,377
Total Assets $933,069 $864,469
See accompanying notes to condensed consolidated financial
statements.
<PAGE>
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
October 2, January 2,
1999 1999
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY (In thousands)
CURRENT LIABILITIES
Accounts payable and accrued expenses $210,967 $193,859
Income taxes 11,963 1,921
Note payable and current maturities
of long-term debt 8,843 15,769
Current maturities of other long-term
obligations 5,808 5,889
Total Current Liabilities 237,581 217,438
LONG-TERM DEBT 152,586 128,069
CAPITAL LEASE OBLIGATIONS 4,686 7,494
OTHER LONG-TERM LIABILITIES 17,449 18,067
DEFERRED INCOME TAXES 34,228 31,379
SHAREHOLDERS' EQUITY
Capital Stock:
Preferred, $1 par value; authorized
2,000,000 shares; no shares outstanding - -
Common, $1 par value; authorized
200,000,000 shares; outstanding - 60,355 61,290
1999 - 60,355,398 shares;
1998 - 61,289,618 shares
Paid-in capital 28,788 48,348
Retained earnings 397,124 351,786
Accumulated other comprehensive income 272 598
Total Shareholders' Equity 486,539 462,022
Total Liabilities and Shareholders' $933,069 $864,469
Equity
See accompanying notes to condensed consolidated financial
statements.
<PAGE>
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
October 2, October 3,
1999 1998
(In thousands, except
per share data)
Net sales $475,738 $448,679
Cost of products sold 327,243 309,080
Gross Profit 148,495 139,599
Selling and administrative expenses 101,234 88,162
Operating Income 47,261 51,437
Interest income 233 585
Interest expense 2,393 2,610
Income Before Income Taxes 45,101 49,412
Income taxes 16,462 18,530
Net Income $ 28,639 $ 30,882
Net income per common share $ 0.47 $ 0.50
Average number of common shares 60,921,268 61,691,164
outstanding
Cash dividends per common share $ 0.095 $ 0.08
See accompanying notes to condensed consolidated financial
statements.
<PAGE>
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine Months Ended
October 2, October 3,
1999 1998
(In thousands, except
per share data)
Net sales $1,319,905 $1,268,359
Cost of products sold 914,542 878,758
Gross Profit 405,363 389,601
Selling and administrative expenses 280,283 259,938
Provision for closing facilities (Note C) 19,679 -
Operating Income 105,401 129,663
Interest income 619 1,233
Interest expense 7,223 8,121
Income Before Income Taxes 98,797 122,775
Income taxes 36,061 46,041
Net Income $ 62,736 $ 76,734
Net income per common share $ 1.03 $ 1.24
Average number of common shares 61,081,451 61,667,458
outstanding
Cash dividends per common share $ 0.285 $ 0.24
See accompanying notes to condensed consolidated financial
statements.
<PAGE>
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
October 2, October 3,
1999 1998
(In thousands)
Net Cash Flows From (To) Operating
Activities:
Net income $ 62,736 $ 76,734
Noncash items included in net income:
Depreciation and amortization 48,136 38,039
Other postretirement and postemployment
benefits 1,532 1,167
Deferred income taxes (2,775) 4,993
Other - net (115) 3
Net increase (decrease) in noncash
operating assets and liabilities (8,757) (24,610)
Increase (decrease) in other liabilities (1,866) (1,549)
Net cash flows from operating activities 98,891 94,777
Net Cash Flows From (To) Investing
Activities:
Capital expenditures - net (62,828) (123,324)
Capitalized software (3,059) -
Acquisition spending, net of cash acquired (8,932) (11,310)
Short-term investments - net 169 93
Long-term investments (519) (35)
Other - net (226) 132
Net cash flows (to) investing activities (75,395) (134,444)
Net Cash Flows From (To) Financing
Activities:
Purchase of HON INDUSTRIES common stock (26,360) (1,573)
Proceeds from long-term debt 67,026 66,287
Payments of note and long-term debt (51,218) (27,635)
Proceeds from sales of HON INDUSTRIES
common stock to members and stock-based 5,901 2,723
compensation
Dividends paid (17,398) (14,805)
Net cash flows from (to) financing (22,049) 24,997
activities
Net increase (decrease) in cash and
cash equivalents 1,447 (14,670)
Cash and cash equivalents at beginning
of period 17,500 46,080
Cash and cash equivalents at end of period $ 18,947 $ 31,410
See accompanying notes to condensed consolidated financial statements.
<PAGE>
HON INDUSTRIES Inc. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
October 2, 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 nine-month period
ended October 2, 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 of the Company and its subsidiaries are summarized as
follows:
October 2, January 2,
($000) 1999 1999
(Unaudited)
Finished products $ 27,152 $ 24,955
Materials and work in process 52,023 53,320
LIFO Allowance (11,185) (11,050)
$ 67,990 $ 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. 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 nine-month period ended October 3, 1999, $6.8 million
of pretax exit costs were paid and charged against the liability.
It included $3.5 million for write-off of plant and equipment,
$1.9 million for severance for 326 positions, $0.5 million for
other employee-related expenses, and $0.9 million for certain
other expenses associated with the closing of the facilities.
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 Company capitalized
approximately $3.1 million of computer software during the nine-
month period ended October 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. 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 and nine-month period ended
October 3, 1999, and October 4, 1998, is as follows:
Three Months Ended Nine Months Ended
Oct. 2, Oct. 3, Oct. 2, Oct. 3,
1999 1998 1999 1998
(In thousands)
Net Sales:
Office furniture $403,276 $383,409 $1,113,071 $1,093,738
Hearth products 72,462 65,270 206,834 174,621
$475,738 $448,679 $1,319,905 $1,268,359
Operation Profit:
Office furniture
Normal operations $ 45,281 $ 50,594 $ 114,367 $ 126,552
Facility closedown provision - - (19,679) -
Office furniture - net 45,281 50,594 94,688 126,552
Hearth products 8,684 9,835 24,707 19,491
Total operating profit 53,965 60,429 119,395 146,043
Unallocated corporate expense (8,865) (11,017) (20,598) (23,268)
Income before income
taxes $ 45,100 $ 49,412 $ 98,797 $ 122,775
Identifiable Assets:
Office furniture $ 695,825 $ 661,760
Hearth products 176,782 161,155
General corporate 60,462 61,600
$ 933,069 $ 884,515
Depreciation & Amortization
Expense
Office furniture $ 13,286 $ 10,757 $ 38,559 $ 30,500
Hearth products 2,817 2,296 8,136 6,556
General corporate 599 336 1,441 983
$ 16,702 $ 13,389 $ 48,136 $ 38,039
Capital Expenditure, Net:
Office furniture $ 10,572 $ 37,817 $ 45,050 $ 107,569
Hearth products 3,240 4,246 12,203 13,187
General corporate (885) 1,245 5,575 2,568
$ 12,927 $ 43,308 $ 62,828 $ 123,324
<PAGE>
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 Nine Months Three Months
Ended Ended Ended
Dollars in Thousand October 2, 1999 October 2, 1999 October 2, 1999
& & &
October 3, 1998 October 3, 1998 July 3, 1999
Net sales $ 27,059 6.0% $ 51,546 4.1% $ 56,030 13.3%
Cost of products sold 18,163 5.9 35,784 4.1 35,166 12.0
Selling &
administrative
expenses 13,072 14.8 20,345 7.8 11,449 12.8
Provision for closing
facilities - - 19,679 - - -
Interest income (352)(60.2) (614)(49.8) 31 15.3
Interest expense (217) (8.3) (898)(11.1) (208) (8.0)
Income taxes (2,068)(11.2) (9,980)(21.7) 3,524 27.2
Net income (2,243) (7.3) (13,998)(18.2) 6,130 27.2
The Company reported its fifteenth consecutive quarterly record
net sales. Consolidated net sales for the third quarter ended
October 2, 1999, were $475.7 million, up 6.0%, compared to $448.7
million for the same quarter a year ago. Net income reached
$28.6 million, compared to $30.9 million for third quarter 1998,
a decrease of 7.3%. Net income per share for the quarter was
$0.47 per diluted share, a decrease of 6.0% from $0.50 per
diluted share earned in third quarter 1998.
For the first nine months of 1999, consolidated net sales rose
4.1% to $1.32 billion from $1.27 billion last year. Accounting
for a one-time charge for closing three plants announced in first
quarter of $19.7 million against pre-tax earnings, net income for
the first nine months was $62.7 million or $1.03 per share. Net
income, before the charge, reached $75.2 million, a decrease of
2.0% from $76.7 million in the first nine months of 1998. Prior
to the one-time charge, net income per share was $1.23 per
diluted share compared to $1.24 per share in 1998. Please refer
to Note C for additional information regarding the one-time plant
closing charge.
For the third quarter of 1999, office furniture comprised 85% of
consolidated net sales and hearth products comprised 15%. Net
sales for office furniture were up 5% and hearth products sales
increased 11% for the quarter compared to the same quarter a year
ago. Office furniture contributed 84% and hearth products
contributed 16% of third quarter 1999 consolidated operating
profit before unallocated corporate expenses.
Consolidated gross profit margin for the third quarter of 1999
was 31.2% compared to 31.1% for the same period in 1998. The
Company is continuing to focus on improving gross margins. A
tight labor market has made it more difficult than anticipated to
staff facilities causing an increase in backlog and additional
overtime, training, and expenses associated with moving
production to alternate plant locations. The Company is working
to hire and train manpower necessary to fulfill increased order
demand and reduce backlog.
Selling and administrative expenses for the third quarter of 1999
were 21.3% of net sales compared to 19.6% in the comparable
quarter of 1998. The Company has implemented a number of
internal initiatives to better serve customers through providing
complete, on-time and undamaged orders quickly and concentrating
on the value-oriented contract segment of the office furniture
industry. These initiatives collectively have resulted in
increased selling and administrative expenses. Excluding
freight, selling and administrative expenses for the third
quarter of 1999 were 14.4% of net sales compared to 14.1% in
third quarter 1998.
The Company decreased its estimated annual effective tax rate to
36.5% for fiscal year 1999 from 37.5% a year earlier to reflect
lower estimated state income taxes.
Liquidity and Capital Resources
As of October 2, 1999, cash and short-term investments increased
to $18.9 million compared to a $17.7 million balance at year-end
1998. Net cash flows from operations contributed to the
improvement. Cash flow and working capital management are major
focuses of management to ensure the Company is poised for growth.
Net capital expenditures for the first nine months of 1999 were
$62.8 million compared to $123.3 million for the same nine-month
period in 1998. These expenditures primarily represent
investments in new, more efficient machinery and equipment and
completion of capacity expansion projects started in 1998. These
investments were funded by a combination of cash reserves, cash
from operations, and a revolving credit agreement.
The Board of Directors declared a regular quarterly cash dividend
of $0.095 per share on its common stock on August 9, 1999, to
shareholders of record at the close of business on August 19,
1999. It was paid on September 1, 1999, and represented the
178th consecutive quarterly dividend paid by the Company.
For the nine months ended October 2, 1999, the Company
repurchased 1,195,925 shares of its common stock at a cost of
approximately $26.4 million or an average price of $22.04 per
share. As of October 2, 1999, approximately $36.1 million of the
Board's current repurchase authorization remained unspent.
On November 8, 1999, the Board of Directors declared a $.095 per
common share cash dividend to shareholders of record on November
18, 1999, to be paid on December 1, 1999.
Year 2000
The Company is in the final stages of completing its Year 2000
(Y2K) Readiness and Contingency Plans. The primary mission of
these Plans is to maintain business continuity by giving priority
remediation and resolution to Year 2000 issues that could
compromise normal business operations.
The Year 2000 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, freight
carriers, and embedded chips used by facility, production, and
distribution machinery, equipment, and support processes; and (3)
customers and other nonoperational service providers.
The Company's Year 2000 readiness and contingency plans are
nearing completion with the current minor unfinished work
scheduled for completion by November 30, 1999. The remediation
and testing costs associated with this project remain on target
at approximately $1.0 million, including some costs which,
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 October 2, 1999, the Company has incurred and recorded
project related costs of approximately $600,000.
The Year 2000 issues identified and addressed by the Company
through its Year 2000 program can be characterized as a normal
array of issues including the need to roll clocks forward,
remediate hardware and software, and selectively replace problem
hardware and software. 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.
So, given the unusual nature of the Year 2000 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
Management expects to continue to exceed industry sales growth
for the balance of the year in both segments in which it
participates. Management is encouraged by strong customer demand
for its products and customer reaction to the Company's continued
focus on service.
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 Company's ability to attract and retain qualified
workers, the impact of future acquisitions, the Company's ability
to identify and correct or implement contingency plans to deal
with the Year 2000 issues, as well as the risks, uncertainties,
and other factors described from time to time in the Company's
SEC filings and reports.
<PAGE>
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 were filed
during the quarter for which this report is filed.
<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.
Dated: November 12, 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
<PAGE>
PART II. EXHIBITS
EXHIBIT INDEX Page
(27) Financial Data Schedule 18
<PAGE>
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