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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 2, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-2648
HON INDUSTRIES INC.
An Iowa Corporation IRS Employer No. 42-0617510
414 East Third Street
P.O. Box 1109
Muscatine, IA 52761-0071
319/264-7400
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, with Par Value of $1.00 Per Share.
Indicate by check mark whether the registrant (1) has filed all reports required
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, as of March 12, 1999, was: $1,016,107,111, assuming all 5% holders
are affiliates.
The number of shares outstanding of the registrant's common stock, as of March
12, 1999, was: 61,083,054.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement dated March 29, 1999, for the May
11, 1999, Annual Meeting of Shareholders are incorporated by reference into Part
III.
Index of Exhibits is located on Page 55.
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ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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PART I
Page
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Item 1. Business.................................................................................. 1
Item 2. Properties................................................................................ 11
Item 3. Legal Proceedings......................................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders....................................... 13
Table I - Executive Officers of the Registrant............................................ 14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..................... 15
Item 6. Selected Financial Data -- Eleven-Year Summary............................................ 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................. 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................ 24
Item 8. Financial Statements and Supplementary Data............................................... 24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................................................... 24
PART III
Item 10. Directors and Executive Officers of the Registrant........................................ 25
Item 11. Executive Compensation.................................................................... 25
Item 12. Securities Ownership of Certain Beneficial Owners and Management.......................... 25
Item 13. Certain Relationships and Related Transactions............................................ 25
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................... 26
Signatures .......................................................................................... 28
Financial Statements.................................................................................... 31
Financial Statement Schedules........................................................................... 54
Index of Exhibits....................................................................................... 55
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ANNUAL REPORT ON FORM 10-K
PART I
ITEM 1. BUSINESS
GENERAL
HON INDUSTRIES Inc. ("HON" or the "Company") is an Iowa corporation
incorporated in 1944. The Company is a national manufacturer and marketer of
office furniture and hearth products. Approximately 86% of fiscal year 1998 net
sales was in office furniture and 14% in hearth products. A broad office
furniture product offering is sold through a national system of dealers,
wholesalers, mass merchandisers, warehouse clubs, retail superstores, end-user
customers, and to federal and state governments. Dealer, wholesaler, and retail
superstores are the major channels based on sales. Hearth products include
wood-, pellet-, and gas-burning factory-built fireplaces, fireplace inserts,
stoves, and gas logs. These products are sold through a national system of
dealers, wholesalers, and large regional contractors. In fiscal 1998, the
Company had net sales of $1.7 billion, of which approximately $1.45 billion was
attributable to office furniture products and $245 million was attributable to
hearth products. Please refer to Operating Segment Information in the Notes to
the Consolidated Financial Statements for further information about operating
segments.
The Company is organized into a corporate headquarters and operating units
with offices, manufacturing plants, distribution centers, and sales showrooms in
the United States and Canada. See Item 2. Properties for additional related
discussion. Four operating units, marketing under various brand names,
participate in the office furniture industry. These operating units include: a
division, The HON Company, and three wholly owned subsidiaries, including The
Gunlocke Company, Holga Inc., and BPI Inc. Each of these operating units
manufactures and markets products which are sold through various channels of
distribution and segments of the industry.
A fourth wholly owned subsidiary, Hearth Technologies Inc., was created
in October 1996 with the acquisition of Heat-N-Glo Fireplace Products, Inc.
and its subsequent integration with the Company's Heatilator operation. On
February 20, 1998, the Company acquired Aladdin Steel Products, Inc., a
manufacturer of wood-, pellet-, and gas-burning stoves and inserts, for a
purchase price of $10.2 million. This acquisition is also being operated by
Hearth Technologies Inc.
A fifth wholly owned subsidiary, HON Export Limited, markets selected
products manufactured by the other various HON INDUSTRIES operating units
outside the United States and Canada.
During 1997, the Company completed three office furniture acquisitions:
Allsteel Inc. (June 17); Bevis Custom Furniture, Inc. (November 13); and Panel
Concepts, Inc. (December 1) for a combined total purchase price of approximately
$119.5 million. These acquisitions each added new products, product line
extensions, manufacturing and distribution capacity, new customers, and a
quality work force. Allsteel and Bevis operate under The HON Company and Panel
Concepts operates under BPI Inc.
During 1996, the Company sold its wholly owned subsidiary, Ring King
Visibles, Inc. (January 24), a manufacturer and marketer of a limited line of
personal computer accessories, and acquired Heat-N-Glo Fireplace Products, Inc.
(October 2), a leading hearth products manufacturer, noted previously. The sale
of Ring King Visibles, Inc. resulted in an after-tax gain of $2.0 million, and
the purchase price of Heat- N-Glo totaled approximately $79 million.
Since its inception, the Company has been committed to improvement in
manufacturing and in 1992 introduced its process improvement approach known as
Rapid Continuous Improvement ("RCI") which focuses on streamlining design,
manufacturing and administrative processes. The Company's RCI program, in which
most members participate, has contributed to increased productivity, lower
manufacturing costs, and improved product quality and workplace safety. In
addition, the Company's RCI efforts enable it to offer short average lead times,
from receipt of order to shipment, for most of its products. The Company's
ability to apply RCI techniques to reduce order cycle time, manufacturing costs,
and enhance value allows its products to be sold at prices lower than those
offered for competing products.
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The Company distributes its products through an extensive network of
independent office furniture dealers, office products dealers, wholesalers and
retailers. The Company is a supplier of office furniture to each of the largest
nationwide chains of office products dealers, or "mega-dealers," which are Boise
Cascade Corporation; BT Office Products International, Inc.; U.S. Office
Products Company; Corporate Express Inc.; Office Depot Inc.--Business Services
Division; and Staples Commercial Advantage, and to the Office Depot, Staples,
and Office Max superstores. The Company offers reduced freight costs and
complete order delivery, regardless of the order size or combination of
products, by manufacturing at multiple locations and cross-docking products
throughout the United States.
The Company's product development efforts are focused on reducing the cost
to manufacture existing products, and on designing new products that provide
additional features and top quality. Over 44% of the Company's 1998 net sales
were from products introduced in the past three years.
An important element of the Company's success has been its ability to
attract, develop and retain skilled, experienced and efficient members. Each of
the Company's eligible members owns stock in the Company through a number of
stock-based plans, including a member stock purchase plan, an ESOP, and a profit
sharing plan. In addition, most production members are eligible for incentive
bonuses.
For further financial-related information with respect to acquisitions,
dispositions, and Company operations in general, refer to Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations, and
the following captions included in the Notes to the Consolidated Financial
Statements, which are filed as part of this report: Nature of Operations,
Business Combinations, Business Disposition, and Operating Segment Information.
Statements in this report that are not strictly historical, including
statements as to plans, objectives, and future financial performance, are
"forward-looking" statements that are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks, which may cause the
Company's actual results in the future to differ materially from expected
results. These risks include, among others, competition within the office
furniture and fireplace industries; the relationship between supply and demand
for value-priced office products, as well as direct vent gas- and wood-burning
fireplaces; the effects of economic conditions; issues associated with the
acquisition and integration of acquisitions; operating risks; the ability of the
Company to realize cost savings and productivity improvements; the ability of
the Company's distributors to successfully market and sell the Company's
products; and the availability and cost of capital to finance planned growth; as
well as the risks, uncertainties, and other factors described from time to time
in the Company's filings with the Securities and Exchange Commission.
INDUSTRY
According to the Business and Institutional Furniture Manufacturer's
Association ("BIFMA"), U.S. office furniture industry shipments are estimated to
be approximately $12,350,000,000 in 1998, an increase of 7.8% over 1997. The
Company believes that industry growth is driven by the continuing growth of the
white collar work force, corporate profitability and the outlook for capital
investment, and by changes in office technology and work patterns.
The U.S. office furniture market consists of two primary segments--the
project segment and the transactional segment. The project segment has
traditionally been characterized by one-time sales of large quantities of office
furniture to large corporations, such as for new office facilities, relocations,
or department or office redesigns, which are frequently customized to meet
specific client and designer preferences. Project furniture is generally
purchased through office furniture dealers who typically prepare a
custom-designed office layout emphasizing image and design. The process is often
lengthy and generally has several manufacturers competing for the same projects.
Overhead and support associated with the sales and customization efforts in this
segment are major reasons why the prices for project office furniture have
traditionally been relatively high.
The transactional segment of the market, in which the Company is a leader,
primarily represents smaller orders of office furniture purchased by businesses
and home office users on the basis of price, quality, selection and quick
delivery. Office products dealers, wholesalers and retailers, such as office
products superstores, are the primary distribution channels in this market
segment. Office products dealers (many of whom also participate in the project
segment of the market) publish periodic catalogs that display office furniture
and products from various manufacturers.
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GROWTH STRATEGY
The Company's strategy is to build on its position as a leading
manufacturer of value-priced office furniture and hearth products in North
America. The components of this growth strategy are to introduce new
value-priced products, continually improve productivity, leverage the
distribution network, and pursue complementary strategic acquisitions.
EMPLOYEES/MEMBERS
As of January 2, 1999, the Company employed approximately 9,800 persons,
9,500 of whom were members and 300 of whom were temporary personnel. Of the
approximately 9,800 persons employed by the Company, 6,000 were in the Company's
manufacturing operations. The Company employed approximately 500 members who
were members of unions. The Company believes that its labor relations are good.
PRODUCTS
OFFICE FURNITURE
The Company designs, manufactures and markets a broad range of office
furniture in four basic categories: (i) filing cabinets; (ii) seating, including
task chairs, executive desk chairs and side chairs; (iii) office systems
(typically modular and moveable workspaces with integrated work surfaces, space
dividers and lighting); and (iv) desks and related products, including tables,
bookcases and credenzas. The Company's products are sold through the Company's
HON Company division ("The HON Company") and the Company's wholly-owned
subsidiaries--BPI Inc. ("BPI"), Holga Inc. ("Holga") and The Gunlocke Company
("Gunlocke").
The Company's office furniture products are generally available in
contemporary as well as traditional styles, and are priced to sell in different
channels of distribution and at different price points. The Company's products
are offered in many models, sizes, designs, and finishes and are constructed
from both wood and nonwood materials.
The following is a description of the Company's major product categories
and product lines:
FILING CABINETS
The Company offers a variety of filing options designed either to be
integrated into and support the Company's office systems products or to function
as free-standing furniture in commercial and home offices. The Company believes
it is the largest manufacturer and marketer of mid-priced steel filing cabinets
in the United States.
The Company sells most of its free-standing files through independent
office products and office furniture dealers, nationwide chains of office
products dealers, wholesalers, office products superstores, warehouse clubs, and
mail order distributors. Higher priced files are sold through project-oriented
office furniture dealers.
SEATING
The Company's seating line includes task chairs designed for different
kinds of office work, such as secretarial, computer, clerical, laboratory and
executive, guest chairs, conference and reception room seating, and stackable
chairs. The chairs are available in a variety of frame colors, a multitude of
fabrics, and a wide range of price points. Key customer criteria in seating
includes superior ergonomics, aesthetics, comfort and quality.
Gunlocke is one of the few remaining companies that continues to make
curved wood legs, arms and backs through the steambending process, which
produces strong and attractive seating components.
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OFFICE SYSTEMS
The Company offers a complete line of office panel systems products in
order to meet the needs of a variety of organizations. Systems may be used for
team worksettings, private offices and open floor plans, and are typically
modular and movable workspaces composed of adjustable partitions, work surfaces,
desk extensions, storage cabinets and electrical lighting systems which can be
moved, reconfigured and reused within the office. Panel systems offer a
cost-effective and flexible alternative to traditional drywall office
construction. The Company has experienced increased demand for furniture systems
able to accommodate new work arrangements such as team workspaces and workspaces
shared by several employees who are frequently out of the office. A typical
installation of office panels often includes associated sales of seating,
casegoods, files and accessories.
The Company offers whole office solutions, movable panels, storage units
and work surfaces that can be installed easily and reconfigured to accommodate
growth and change in organizations. The Company also offers consultative selling
and design services for certain of its office system products. The compelling
value of the Company's systems lines is that these products are styled and
featured similar to those of premium-priced contract systems manufacturers but
are offered at substantially lower prices.
DESKS AND RELATED PRODUCTS
The Company's collection of desks and related products include stand-alone
steel and wood furniture items, such as desks, bookshelves and credenzas, and
are available in a range of designs and price points. The Company offers these
products in both contemporary and traditional styles. The Company's desks and
related products are sold to a wide variety of customers from those designing
large office configurations to small retail and home office purchasers.
The Company offers a variety of contemporary and traditional tables
designed for use in conference rooms, private offices, training areas, team
worksettings and open floor plans. Tables are produced in wood veneer and
laminate and are available in numerous sizes, shapes and base styles.
HEARTH PRODUCTS
The Company is the largest U.S. manufacturer and marketer of metal
prefabricated fireplace and related products, primarily for the home, which
it sells under the widely recognized Heatilator, Heat-N- Glo, Arrow-Dover,
and Aladdin brand names. Products bearing these brands are marketed by the
Company's three hearth products companies, Heatilator, Heat-N-Glo, and
Aladdin. Each manufactures and markets its products separately and is part of
the Company's Hearth Technologies Inc. subsidiary.
The Company's line of hearth products includes wood- and gas-burning fireplaces
and stoves, fireplace inserts, chimney systems, and related accessories.
Heatilator and Heat-N-Glo are leaders in the two largest segments of the home
fireplace market: vented-gas and wood fireplaces. Heat-N-Glo is the leader in
"direct vent" fireplaces, which replace the chimney-venting system used in
traditional fireplaces with a less expensive clothes-dryer-type vent through an
outer wall. See Business - Intellectual Property.
MANUFACTURING
The HON Company manufactures office furniture in California, Georgia, Iowa,
Kentucky, Mississippi, North Carolina, Pennsylvania, South Carolina, Tennessee,
Texas, and Virginia. BPI Inc. manufactures office furniture in California, North
Carolina, and Washington. Holga Inc. manufactures office furniture in
California. The Gunlocke Company manufactures office furniture in New York.
Hearth Technologies Inc. manufactures hearth products in Iowa, Minnesota,
Washington, and Alberta, Canada.
The Company purchases raw materials and components from a variety of
vendors, and generally most items are available from multiple sources. Major raw
materials and components include coil steel, bar stock, castings, lumber,
veneer, particle board, fabric, paint, lacquer, hardware, rubber products,
plastic products, and shipping cartons.
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Since its inception, the Company has focused on making its manufacturing
facilities and processes more flexible while at the same time reducing costs and
improving product quality. In 1992, the Company adopted the principles of RCI,
which focus on developing flexible and efficient design, manufacturing and
administrative processes that remove excess cost. To achieve flexibility and
attain efficiency goals, the Company has adopted a variety of production
techniques including cell manufacturing, focused factories, just-in-time
inventory management and value engineering. The application of the RCI process
has increased productivity by reducing set-up and processing times, square
footage, inventory levels, product costs and delivery times, while improving
quality and enhancing member safety. The Company's RCI process involves
production and administrative employees, management, customers and suppliers.
The Company has facilitators, coaches and consultants dedicated to the RCI
process and strives to involve all members in the RCI process. In addition, the
Company has organized a group that designs, fabricates, tests and installs
proprietary manufacturing equipment. Manufacturing also plays a key role in the
Company's concurrent product development process that primarily seeks to design
new products for ease of manufacturability.
PRODUCT DEVELOPMENT
The Company's product development efforts are primarily focused on
reducing the cost to manufacture existing products and designing new products
that provide additional features and quality. The Company accomplishes this
through improving existing products, extending product lines, applying
ergonomic research, improving manufacturing processes, applying alternative
materials and providing engineering support and training to its operating
units. The Company conducts its product development efforts at both the
corporate and operating unit level. At the corporate level, the staff at the
Company's Stanley M. Howe Technical Center, working in conjunction with
operating staff, seeks breakthrough developments in product design,
manufacturability and materials usage. At the operating unit level,
development efforts are focused on achieving incremental improvements in
product features and manufacturing processes. The Company invested
approximately $15.7 million, $15.4 million, and $10.4 million in product
development during fiscal 1998, 1997 and 1996, respectively, and has budgeted
in excess of $18 million for product development in fiscal 1999.
INTELLECTUAL PROPERTY
As of January 2, 1999, the Company owned 165 U.S. and 102 foreign patents
and had applications pending for 32 U.S. and 78 foreign patents. In addition,
the Company holds registrations for 83 U.S. and 143 foreign trademarks and has
applications pending for 55 U.S. and 37 foreign trademarks.
The Company's principal office furniture products do not require frequent
technical changes. The majority of the Company's patents are design patents
which expire at various times depending on the patent's date of issuance. The
Company believes that neither any individual patent nor the Company's patents in
the aggregate are material to the Company's business as a whole.
When Hearth Technologies Inc. acquired Heat-N-Glo in October 1996, it also
acquired its patent for the design of a zero-clearance direct vent gas fireplace
(the "direct vent patent"). The direct vent design replaces the traditional
top-venting chimney system by permitting the exhaust pipe to traverse a
structure's exterior wall. The sealed combustion chamber of the direct vent gas
fireplace increases indoor air quality by using outside rather than inside air
for combustion, and the direct vent design achieves 70% heating efficiency,
which means that the patented direct vent gas fireplaces are an efficient
alternative heat source in individual rooms. The direct vent gas fireplaces are
highly versatile for use in home design because the direct vent design
eliminates the need for a traditional chimney system with top venting, thus
opening up the space above the fireplace for use. The Company currently offers
numerous product designs that would not be possible without the direct vent
technology. Additionally, since a chimney is not employed in the direct vent
design, the cost of adding a new fireplace to a home is greatly reduced.
The direct vent patent has been successfully enforced against numerous
infringers. Hearth Technologies Inc. presently is engaged as a plaintiff in two
patent infringement cases involving this patent. Final disposition of these
cases is not likely for several years. Although the Company believes that the
protection afforded by the direct vent patent is not vital to sustaining Hearth
Technologies' gross profit margins on its direct vent gas fireplaces due to
other technological innovations that support the direct vent design, the
technology that underlies the patent is a significant distinguishing feature for
the Company's products.
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The Company applies for patent protection when it believes the expense of
doing so is justified, and believes that the duration of its registered patents
is adequate to protect these rights. The Company also pays royalties in certain
instances for the use of patents on products and processes owned by others.
The Company actively protects its trademarks which it believes have
significant goodwill value.
SALES AND DISTRIBUTION: CUSTOMERS
Over the last ten years, the office products and office furniture
industries have experienced substantial consolidation as larger dealers have
acquired smaller local and regional dealers. Consolidation permits large dealers
to benefit from economies of scale, increased purchasing power, and the
elimination of redundant management and overhead expenses. Larger dealers have
also been able to take advantage of more sophisticated management techniques
designed to enhance customer service, lower costs and increase operating
efficiency. At the same time, office products superstores have emerged and
replaced local retail office supply stores. The Company believes that these
trends may continue to result in fewer, larger dealers and retailers as
customers for the Company's products.
In 1998, the Company's ten largest customers represented approximately 37%
of its consolidated net sales. The substantial purchasing power exercised by
large customers may adversely affect the prices at which the Company can
successfully offer its products. As a result of this consolidation, changes in
the purchase patterns or the loss of a single customer may have a greater impact
on the Company's financial results than such events would have had prior to such
consolidation. In addition, there can be no assurance that the Company will be
able to maintain its customer relationships as consolidation of its customers
occur.
As a result of these trends, the Company today sells its products through
five principal distribution channels. The first channel, independent, local
office furniture and office products dealers, specialize in the sale of a broad
range of office furniture and office furniture systems, mostly to small- and
medium-sized businesses, branch offices of large corporations, and home office
owners. The second distribution channel comprises nationwide chains of office
products dealers, or "mega-dealers," including Boise Cascade Corporation; BT
Office Products International, Inc.; U.S. Office Products Company; Corporate
Express Inc.; Office Depot Inc.--Business Services Division; and Staples
Commercial Advantage. Many of the independent dealers and mega-dealer locations
assist their customers with the evaluation of office space requirements, systems
layout and product selection, and design and office solution services provided
by professional designers.
The third distribution channel, wholesalers, serve as distributors of the
Company's products to independent dealers, mega-dealers and superstores. The
Company sells to the nation's largest wholesalers, United Stationers and S.P.
Richards, as well as to smaller regional wholesalers. Wholesalers maintain
stocks of standard product lines for resale to dealers. They also special order
products from the Company in customer-selected models and colors. The Company's
wholesalers maintain warehouse locations throughout the United States, which
enable the Company to make its products available for rapid delivery to dealers
anywhere in the country. One customer, United Stationers, accounted for
approximately 12% of the Company's consolidated net sales in 1998, 1997, and
1996.
The fourth distribution channel is retail stores, which include office
products superstores such as Office Depot, Office Max, and Staples and warehouse
clubs like Sam's Club and Costco.
The fifth distribution channel consists of government-focused dealers that
sell the Company's products to federal, state and local government offices in
accordance with contract terms to which the Company has agreed.
As of January 2, 1999, the Company's office furniture sales force consisted
of 19 regional sales managers supervising 121 salespersons, plus approximately
40 firms of independent manufacturers' representatives who collectively provided
national sales coverage. Sales managers and salespersons are compensated by a
combination of salary and incentive bonus.
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Office products dealers, national wholesalers and retailers market their
products through catalogs published periodically and distributed to existing and
potential customers. The Company's marketing objective is to gain share in its
customers' catalogs. The Company believes that the inclusion of the Company's
product lines in customer catalogs offers strong potential for increased sales
of the listed product items due to the exposure provided by these publications.
The Company also makes export sales through HON Export Limited to
approximately 150 office furniture dealers and wholesale distributors serving
select foreign markets. Distributors are principally located in Latin America
and the Caribbean. The Company has an international field sales organization
consisting of a Vice President of Sales and Marketing and four regional
managers. Sales outside of the United States and Canada represented
approximately 1% of net sales in fiscal 1998.
Limited quantities of select finished goods inventories are maintained at
the Company's principal manufacturing plants and at its various distribution
centers.
Hearth Technologies Inc. sells its fireplace and stove products through
approximately 3,000 dealers and 520 distributors. The company has a field sales
organization of 14 regional sales managers supervising 36 salespersons and 7
firms of independent manufacturers' representatives.
As of January 2, 1999, the Company has an order backlog of approximately
$97.8 million which will be filled in the ordinary course of business within the
current fiscal year. This compares with $106.4 million as of January 3, 1998,
and $59.1 million as of December 28, 1996. Backlog, in terms of percentage of
net sales, was 5.8%, 7.8%, and 5.9% for fiscal years 1998, 1997, and 1996,
respectively. The Company's products are manufactured and shipped within a few
weeks following receipt of order. The dollar amount of the Company's order
backlog is therefore not considered by management to be a leading indicator of
the Company's expected sales in any particular fiscal period.
For a discussion of the seasonal nature of the Company's sales, see
Operating Segment Information in the Notes to the Consolidated Financial
Statements.
COMPETITION
The office furniture industry is highly competitive, with a significant
number of competitors offering similar products. The Company competes by
emphasizing its ability to deliver compelling value products. In executing this
strategy, the Company has two significant classes of competitors. First, the
Company competes with numerous small- and medium-sized office furniture
manufacturers that focus on more limited product lines and/or end-user segments
and include Global Furniture Inc.; Anderson-Hickey Co., Globe Business Furniture
and United Chair, Inc., divisions of Haworth, Inc.; National Office Furniture, a
division of Kimball Office Furniture Co.; and High Point Furniture Industries,
Inc. Second, the Company competes with a small number of large office furniture
manufacturers which control a substantial portion of the market share in the
project-oriented office furniture market, such as Steelcase Inc.; Haworth, Inc.;
Herman Miller, Inc.; and Knoll, Inc. Some of these large competitors have
substantially greater assets, resources and capabilities in the traditional
project market than the Company. Products and brands offered by these
project-oriented office furniture market participants have strong acceptance in
the market place and have developed, and may continue to develop, value-priced
product designs to compete with the Company. The Company also faces significant
price competition from its competitors and may encounter competition from new
market entrants. There can be no assurance that the Company will be able to
compete successfully in its markets in the future.
Hearth products, consisting of prefabricated metal fireplaces and related
products, are manufactured by a number of national and regional competitors. A
limited number of manufacturers, however, are predominant in this relatively
small industry. The Company competes primarily against the larger manufacturers
which include CFM/Majestic Inc. (a Canadian company), Lennox Industries Inc.
(Superior and Marco brands), Martin Industries Inc., and Fireplace Manufacturers
Inc. (FMI).
Both office furniture and hearth products compete on the basis of price,
product performance, product quality, complete and on-time delivery to the
customer, and customer service and support. The Company believes that it
competes principally by providing compelling value products designed to be among
the best in their price range for product quality and performance, superior
customer service,
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and short lead-times. This is made possible, in part, by the Company's
significant on-going investment in product development, highly efficient and low
cost manufacturing operations, and an extensive distribution network.
The Company is one of the largest office furniture manufacturers in the
United States, and believes that it is the largest manufacturer of value-priced
furniture. The Company is also the largest manufacturer and marketer of
fireplaces in the United States.
For further discussion of the Company's competitive situation, refer to
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
EFFECTS OF INFLATION
Certain business costs may, from time to time, increase at a rate exceeding
the general rate of inflation. The Company's objective is to offset the effect
of inflation on its costs primarily through productivity increases in
combination with certain adjustments to the selling price of its products as
competitive market and general economic conditions permit.
Investments are routinely made in modern plants, equipment, support
systems, and for Rapid Continuous Improvement programs. These investments
collectively focus on increasing productivity which helps to offset the effect
of rising material and labor costs. Ongoing cost control disciplines are also
routinely employed. In addition, the last-in, first-out (LIFO) valuation method
is used for most of the Company's inventories, which ensures the changing
material and labor costs are recognized in reported income; and more
importantly, these costs are recognized in pricing decisions.
ENVIRONMENTAL
The Company is subject to a variety of environmental laws and regulations
governing discharges of air and water; the handling, storage, and disposal of
hazardous or solid waste materials; and the remediation of contamination
associated with releases of hazardous substances. Although the Company believes
it is in material compliance with all of the various regulations applicable to
its business, there can be no assurance that requirements will not change in the
future or that the Company will not incur material costs to comply with such
regulations. The Company has trained staff responsible for monitoring compliance
with environmental, health, and safety requirements. The Company's environmental
professionals work with responsible personnel at each manufacturing facility,
the Company's environmental legal counsel, and consultants on the management of
environmental, health and safety issues. The Company's ultimate goal is to
reduce and, when practical, eliminate the creation of hazardous waste in its
manufacturing processes.
Compliance with federal, state, and local environmental regulations has
not had a material effect on the capital expenditures, earnings, or competitive
position of the Company to date. The Company does not anticipate that
financially material capital expenditures will be required during fiscal year
1999 for environmental control facilities. It is management's judgment that
compliance with current regulations should not have a material effect on the
Company's financial condition or results of operations. However, the uncertainty
of new environmental legislation and technology in this area makes it impossible
to know with confidence.
For additional information about the Company's environmental matters,
refer to Item 3. Legal Proceedings and the Contingencies note in the Notes to
the Consolidated Financial Statements.
BUSINESS DEVELOPMENT
The development of the Company's business during the fiscal years ended
January 2, 1999, January 3, 1998, and December 28, 1996, is discussed in Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
-10-
<PAGE>
ITEM 2. PROPERTIES
The Company maintains its corporate headquarters in Muscatine, Iowa,
and conducts its operations at locations throughout the United States and Canada
which house manufacturing and distribution operations and offices totaling an
aggregate of approximately 8.2 million square feet. Of this total, approximately
1.9 million square feet are leased, including approximately 0.3 million square
feet under a capital lease.
Although the plants are of varying ages, the Company believes they are
well maintained, are equipped with modern and efficient equipment, and are in
good operating condition and suitable for the purposes for which they are being
used. The Company has sufficient capacity to increase output at most locations
by increasing the use of overtime and/or number of production shifts employed.
The Company's principal manufacturing and distribution facilities
(100,000 square feet in size or larger) are as follows:
<TABLE>
<CAPTION>
APPROXIMATE OWNED OR DESCRIPTION
LOCATION SQUARE FEET LEASED OF USE
-------- ----------- -------- -----------
<S> <C> <C> <C>
Cedartown, Georgia 547,014 Owned Manufacturing non-wood
casegoods office
furniture(1)
Chester, Virginia 382,082 Owned / Manufacturing non-wood
Leased (2) casegoods office
furniture(1)
Florence, Alabama 308,763 Owned Manufacturing non-wood
casegoods office furniture
Jackson, Tennessee 301,000 Leased Manufacturing parts for
office furniture(1)
Jackson, Tennessee 155,000 Leased Manufacturing non-wood
office seating
Lake City, Minnesota 235,000 Leased Manufacturing metal
prefabricated fireplaces(1)
Louisburg, North Carolina 176,354 Owned Manufacturing wood
casegoods office furniture
Milan, Tennessee 358,000 Leased Manufacturing systems
office furniture
Mt. Joy, Iowa 182,653 Leased Warehousing office
furniture
Mt. Pleasant, Iowa 288,006 Owned Manufacturing metal
prefabricated fireplaces(1)
Muscatine, Iowa 286,000 Owned Manufacturing non-wood
casegoods office
furniture(1)
Muscatine, Iowa 397,284 Owned Warehousing office
furniture(1)
Muscatine, Iowa 236,100 Owned Manufacturing wood
casegoods office furniture
Muscatine, Iowa 142,850 Owned Manufacturing systems
office furniture
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Muscatine, Iowa 342,850 Owned Manufacturing systems
office furniture
Muscatine, Iowa 237,800 Owned Manufacturing non-wood
office seating
Owensboro, Kentucky 311,575 Owned Manufacturing wood office
seating
South Gate, California 520,270 Owned Manufacturing non-wood
casegoods and seating
office furniture(1)
Sulphur Springs, Texas 155,690 Owned Manufacturing non-wood
casegoods office furniture
Wayland, New York 692,226 Owned Manufacturing wood
casegoods and seating
office furniture(1)
West Hazleton, Pennsylvania 268,800 Owned Manufacturing non-wood
casegoods office furniture
Williamsport, Pennsylvania 147,265 Owned Manufacturing wood office
seating and casegoods
Winnsboro, South Carolina 181,523 Owned Manufacturing non-wood
office seating
Verona, Mississippi 257,000 Owned Manufacturing systems
office furniture
</TABLE>
- ------------------
(1) Also includes a regional warehouse/distribution center.
(2) A capital lease.
Other Company manufacturing and distribution facilities, under 100,000
square feet in size, are located in Muscatine and Mt. Pleasant, Iowa; Van Nuys
and Santa Ana, California; Kent, Washington; Salisbury, North Carolina;
Richmond, Virginia; Savage, Minnesota; Colville, Washington; and Calgary,
Alberta, Canada. These facilities total approximately 986,000 square feet with
approximately 856,000 square feet used for the manufacture and distribution of
office furniture and approximately 130,000 square feet for hearth products. Of
this total, approximately 560,600 square feet are leased. The Company also
leases sales showroom space in office furniture market centers in several major
metropolitan areas.
The Company has a 104,000 square foot leased plant in Savage, Minnesota,
which is in the process of being subleased.
There are no major encumbrances on Company-owned properties other than
outstanding mortgages on certain properties, the amount of which is disclosed in
the Long-Term Debt note in the Notes to Consolidated Financial Statements, filed
as a part of this report. Refer to the Property, Plant, and Equipment note in
the Notes to Consolidated Financial Statements for related cost, accumulated
depreciation, and net book value data.
As of January 2, 1999, the Company has approximately 371,000 additional
square feet of office, production and warehousing space in various stages of
construction at four existing plant sites which are scheduled for completion
during 1999.
-12-
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in certain continuing activities in Pennsylvania to
clean-up environmental contamination at one site formerly owned by a subsidiary
of the Company. The Pennsylvania environmental authorities are supervising this
activity. The costs associated with this site are primarily related to the
operation of a groundwater remediation system. These costs have not had a
material effect on the financial condition or results of operations of the
Company.
The Company was a party, along with three other potentially responsible
parties, to an Imminent or Substantial Endangerment Order and Remedial Action
Order dated April 29, 1994 (the "Order") by the California Department of Toxic
Substances Control ("DTSC") in connection with the former Firestone Tire &
Rubber Company facility in South Gate, California (the "Firestone Site"). The
Order expired by operation of law at the end of 1998. The DTSC has indicated
that it may issue another order relating to the Firestone Site, naming the
Company and the other parties to Order. However, to date it has not done so. The
Company has denied liability, asserting that any contamination on the property
relates to operations conducted by others before the Company purchased the
property. Investigation and clean-up work at the Firestone Site is being
conducted by Bridgestone/Firestone, Inc. pursuant to a work plan approved by
DTSC in 1995, and the Company believes they will continue to do so at their own
expense. Expenditures by the Company to date have not had a material effect on
the Company's financial condition or results of operations.
Due to such factors as the wide discretion of regulatory authorities
regarding clean-up levels and uncertain allocation of liability at multiple
party sites, estimates made prior to the approval of a formal plan of action
represent management's best judgment as to estimates of reasonably foreseeable
expenses based upon average remediation costs at comparable sites. The Company,
therefore, has accrued liabilities reflecting management's current, best
estimate of the eventual future cost of the Company's anticipated share of
remediation costs. That estimate is based upon estimated ranges of remediation
costs, the existence of other potentially responsible parties to share in such
costs who are financially viable, the Company's experience to date in relation
to the determination of its allocable share, the knowledge of the Company that
it did not contribute contamination to the sites, and the anticipated periods of
time over which such costs may be paid. Recovery of these costs from insurance
is not expected. Management believes that the ultimate outcome of these matters
will not have a material effect on the Company's financial position or results
of operations.
For additional information on legal proceedings involving the Company,
refer to the Contingencies note included in the Notes to the Consolidated
Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-13-
<PAGE>
<TABLE>
<CAPTION>
PART I, TABLE I
EXECUTIVE OFFICERS OF THE REGISTRANT. (Information as of January 2, 1999)
-------------------------------------
FAMILY POSITION OTHER BUSINESS EXPERIENCE
NAME AGE RELATIONSHIP POSITION HELD SINCE DURING PAST FIVE YEARS
---- --- ------------ -------- ---------- -------------------------
<S> <C> <C> <C> <C> <C>
Jack D. Michaels 61 None Chairman of the Board 1996 Chairman, President and Chief
President 1990 Executive Officer.
Chief Executive Officer 1991
Director 1990
Jeffrey D. Fick 37 None Vice President, 1997 Secretary and Acting General
Member and Community Counsel (1997); Senior Counsel,
Relations (1994-97), HON INDUSTRIES Inc.;
Attorney, Gray, Plant, Mooty, Mooty
& Bennett, a law firm (1986-94).
James I. Johnson 50 None Vice President, 1997 General Counsel and Secretary,
General Counsel Norand Corporation, a portable data
computing company (1990-97).
and Secretary
George J. Koenigsaecker III 53 None President, The HON 1995 Executive Vice President,
Company Operations, The HON Company
(1992-95); Senior Vice President,
HON INDUSTRIES Inc. (1995).
Melvin L. McMains 57 None Vice President and 1998 Controller (1980-present),
Controller 1980 HON INDUSTRIES Inc.
Thomas K. Miller 60 None Vice President, 1996 Vice President, Marketing and
Marketing and Distribution, (1996); Vice
International President, Strategic Development-
President, Office Depot (1995-96),
HON Export Limited 1996 HON INDUSTRIES Inc.; President,
Ring King Visibles, Inc. (1991-96).
David W. Strohl 55 None Vice President, 1993 Vice President, Technical
Technical Development Development
David C. Stuebe 58 None Vice President and 1994 President, CEO, and Director,
Chief Financial Officer Diversified Industries, Inc., a
recycler of precious metals and
electronic system components
(1990-94).
</TABLE>
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is listed for trading on the New York Stock
Exchange (NYSE), trading symbol HNI. The Company moved to the NYSE, effective
July 2, 1998, from the Nasdaq National Market System where the stock had traded
under the symbol HONI. As of year-end 1998, the Company had 5,877 stockholders
of record.
Effective June 26, 1998, Harris Trust and Savings Bank, Chicago, Illinois,
began service as the Company's transfer agent and registrar of its common stock.
Previously, the Company had served as its own stock transfer agent. Shareholders
may report a change of address or make inquiries by writing or calling: Harris
Trust and Savings Bank, P. O. Box A3504, Chicago, IL 60690-3504 or telephone
312/360-5346.
Common Stock Market Prices and Dividends (Unaudited) and Common Stock
Market Price and Price/Earnings Ratio (Unaudited) are presented in the Investor
Information section which follows the Notes to the Consolidated Financial
Statements filed as part of this report.
The Company expects to continue its policy of paying regular cash dividends
on the first business day of March, June, September, and December. Dividends
have been paid each quarter since the Company paid its first dividend in 1955.
The average dividend payout percentage for the most recent three-year period has
been 26% of prior year earnings. Future dividends are dependent on future
earnings, capital requirements, and the Company's financial condition.
-15-
<PAGE>
<TABLE>
<CAPTION>
HON INDUSTRIES Inc. and Subsidiaries
ITEM 6. SELECTED FINANCIAL DATA -- ELEVEN-YEAR SUMMARY
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER COMMON SHARE DATA
Income from Continuing Operations.............................. $1.72 $1.45 $ 1.13
Income from Discontinued Operations............................ - - -
Cumulative Effect of Accounting Changes........................ - - -
Gain on Sale of Discontinued Operations........................ - - -
Net Income..................................................... 1.72 1.45 1.13
Cash Dividends................................................. .32 .28 .25
Book Value..................................................... 7.54 6.19 4.25
Net Working Capital............................................ 1.19 1.53 .89
OPERATING RESULTS (Thousands of Dollars)
Net Sales...................................................... $1,696,433 $1,362,713 $ 998,135
Cost of Products Sold.......................................... 1,172,997 933,157 679,496
Gross Profit................................................... 523,436 429,556 318,639
Interest Expense............................................... 10,658 8,179 4,173
Income from Continuing Operations before Income Taxes.......... 170,109 139,128 105,267
Income before Income Taxes as a % of Net Sales................. 10.03% 10.21% 10.55%
Federal and State Income Taxes................................. $ 63,796 $ 52,173 $ 37,173
Effective Tax Rate for Continuing Operations................... 37.50% 37.50% 35.31%
Income from Continuing Operations.............................. $ 106,313 $ 86,955 $ 68,094
Income from Continuing Operations as a % of Net Sales.......... 6.27% 6.38% 6.82%
Income before Cumulative Effect of Accounting Changes.......... $ 106,313 $ 86,955 $ 68,094
Income from Discontinued Operations............................ - - -
Net Income..................................................... 106,313 86,955 68,094
Cash Dividends and Share Purchase Rights Redeemed.............. 19,730 16,736 14,970
Addition to (Reduction of) Retained Earnings................... 86,583 37,838 33,860
Net Income Applicable to Common Stock.......................... 106,313 86,955 68,094
% Return on Average Shareholders' Equity....................... 25.20% 27.43% 29.06%
Depreciation and Amortization.................................. $ 52,999 $ 35,610 $ 25,252
DISTRIBUTION OF NET INCOME
% Paid to Shareholders......................................... 18.56% 19.25% 21.98%
% Reinvested in Business....................................... 81.44% 80.75% 78.02%
FINANCIAL POSITION (Thousands of Dollars)
Current Assets................................................. $ 290,329 $ 295,150 $ 205,527
Current Liabilities............................................ 217,438 200,759 152,553
Working Capital................................................ 72,891 94,391 52,974
Net Property, Plant, and Equipment............................. 444,177 341,030 234,616
Total Assets of Continuing Operations.......................... 864,469 754,673 513,514
Total Assets of Discontinued Operations - Net.................. - - -
Total Assets................................................... 864,469 754,673 513,514
% Return on Beginning Assets Employed.......................... 23.74% 28.27% 25.93%
Long-Term Debt and Capital Lease Obligations................... $ 135,563 $ 134,511 $ 77,605
Shareholders' Equity........................................... 462,022 381,662 252,397
Retained Earnings.............................................. 351,786 265,203 227,365
Current Ratio.................................................. 1.34 1.47 1.35
CURRENT SHARE DATA
Number of Shares Outstanding at Year-End....................... 61,289,618 61,659,316 59,426,530
Weighted-Average Shares Outstanding During Year................ 61,649,531 59,779,508 60,228,590
Number of Shareholders of Record at Year-End................... 5,877 5,399 5,319
OTHER OPERATIONAL DATA
Capital Expenditures - Net (Thousands of Dollars).............. $ 149,717 $ 85,491 $ 44,684
Members (Employees) at Year-End.................................... 9,824* 9,390* 6,502*
</TABLE>
*INCLUDES ACQUISITIONS COMPLETED DURING YEAR.
-16-
<PAGE>
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989 1988
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ .67 $ .87 $ .69 $ .59 $ .51 $ .65 $ .39 $ .34
- - - - - - - .02
- - .01 - - - - -
- - - - - - - .11
.67 .87 .70 .59 .51 .65 .39 .47
.24 .22 .20 .19 .18 .15 .12 .10
3.56 3.17 2.83 2.52 2.32 2.03 1.88 1.98
1.07 1.27 1.23 1.23 1.07 .82 .83 1.29
$893,119 $845,998 $780,326 $706,550 $607,710 $663,896 $602,009 $532,456
624,700 573,392 537,828 479,179 411,168 458,522 409,942 366,599
268,419 272,606 242,498 227,371 196,542 205,374 192,067 165,857
3,569 3,248 3,120 3,441 3,533 3,611 3,944 4,188
65,517 86,338 70,854 61,893 52,653 69,085 44,656 41,919
7.34% 10.21% 9.08% 8.76% 8.66% 10.41% 7.42% 7.87%
$ 24,419 $ 31,945 $ 26,216 $ 23,210 $ 19,745 $ 25,907 $ 17,193 $ 16,139
37.27% 37.00% 37.00% 37.50% 37.50% 37.50% 38.50% 38.50%
$ 41,098 $ 54,393 $ 44,638 $ 38,683 $ 32,908 $ 43,178 $ 27,463 $ 25,780
4.60% 6.43% 5.72% 5.47% 5.42% 6.50% 4.56% 4.84%
$ 41,098 $ 54,393 $ 44,638 $ 38,683 $ 32,908 $ 43,178 $ 27,463 $ 25,780
- - - - - - - 9,515
41,098 54,156 45,127 38,683 32,908 43,178 27,463 35,295
14,536 13,601 12,587 12,114 11,656 9,931 8,298 7,956
18,863 13,563 17,338 26,569 18,182 (11,952) (17,444) 20,986
41,098 54,156 45,127 38,683 32,908 43,178 27,463 35,295
20.00% 28.95% 26.35% 24.75% 23.41% 33.24% 19.92% 25.77%
$ 21,416 $ 19,042 $ 16,631 $ 15,478 $ 14,084 $ 13,973 $ 12,866 $ 11,860
35.37% 25.11% 27.89% 31.32% 35.42% 23.00% 30.22% 22.54%
64.63% 74.89% 72.11% 68.68% 64.58% 77.00% 69.78% 77.46%
$194,183 $188,810 $188,419 $171,309 $150,901 $146,591 $162,576 $175,367
128,915 111,093 110,759 91,780 82,275 93,465 106,104 78,787
65,268 77,717 77,660 79,529 68,626 53,126 56,472 96,580
210,033 177,844 157,770 145,849 125,465 124,603 114,116 94,339
409,518 372,568 352,405 322,746 280,893 276,984 284,322 275,928
- - - - - - - -
409,518 372,568 352,405 322,746 280,893 276,984 284,322 275,928
17.91% 24.72% 22.14% 22.18% 19.66% 24.00% 16.32% 18.46%
$ 42,581 $ 45,877 $ 45,916 $ 50,961 $ 32,734 $ 37,250 $ 36,996 $ 37,863
216,235 194,640 179,553 163,009 149,575 131,612 128,203 147,549
193,505 174,642 161,079 143,741 117,172 98,990 110,942 128,386
1.51 1.70 1.70 1.87 1.83 1.57 1.53 2.23
60,788,674 61,349,206 63,351,692 64,737,912 64,417,370 64,769,794 68,194,176 74,647,164
60,991,284 62,435,450 64,181,088 65,517,990 64,742,976 66,220,810 69,632,100 74,853,672
5,479 5,556 4,653 4,534 4,466 4,331 4,124 4,134
$ 53,879 $ 35,005 $ 27,541 $ 26,626 $ 13,907 $ 20,709 $ 12,807 $ 10,299
5,933 6,131 6,257 5,926 5,599 6,073 6,385 5,423
</TABLE>
-17-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the Company's historical results of operations and
of its liquidity and capital resources should be read in conjunction with the
consolidated financial statements of the Company and related notes.
RESULTS OF OPERATIONS
The following table sets forth the percentage of consolidated net sales
represented by certain items reflected in the Company's statements of income for
the periods indicated.
<TABLE>
<CAPTION>
Fiscal
-------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales................................... 100.0% 100.0% 100.0%
Cost of products sold....................... 69.1 68.5 68.1
------ ------ ------
Gross profit................................ 30.9 31.5 31.9
Selling and administrative expenses......... 20.3 20.9 21.6
Gain on sale of subsidiary.................. - - 0.3
--------- --------- -------
Operating income............................ 10.6 10.6 10.6
Interest expense (net)...................... .5 .4 .1
-------- -------- --------
Income before income taxes.................. 10.1 10.2 10.5
Income taxes................................ 3.8 3.8 3.7
------- ------- -------
Net income.................................. 6.3% 6.4% 6.8%
</TABLE>
The Company has two reportable core operating segments: office furniture and
hearth products. The Operating Segment Information note, included in the Notes
to Consolidated Financial Statements, provides more detailed financial data with
respect to these two segments.
FISCAL YEAR ENDED JANUARY 2, 1999, COMPARED TO FISCAL YEAR ENDED JANUARY 3, 1998
NET SALES
Net sales, on a consolidated basis, increased by 24% to $1.7 billion in 1998
from $1.36 billion in the prior year even though fiscal year 1998 was a normal
52-week year compared to 1997 being a 53-week year. The Company increased sales
in both core operating segments due to the continued focus on superior customer
service, rapid introduction of new innovative and compelling value products, and
acquisitions. Office furniture net sales increased 25% in 1998 to $1.5 billion
from $1.16 billion in 1997. Net sales of hearth products increased 20% to $245.1
million in 1998 from $204.5 million in 1997. Both core operating segments
experienced another year of strong growth during 1998. The office products
industry reported an annual growth rate of 8% and hearth products an estimated
10%. The Company's most recent five-year compounded annual growth rate is 17% in
net sales.
GROSS PROFIT
Gross profit increased 22% to $523.4 million in 1998 from $429.6 million in the
prior year. Gross margin decreased to 30.9% for 1998 compared to 31.5% for 1997.
This decrease was due to selling price reductions on select products to increase
sales volume, which were only partially offset by productivity gains, and the
adverse impact of the Allsteel acquisition not achieving the Company's margin
standards as rapidly as projected.
-18-
<PAGE>
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses increased by 21% to $344.3 million from
$284.4 million in the prior year. Selling and administrative expenses, as a
percentage of net sales, decreased to 20.3% in 1998 from 20.9% in 1997.
Management places major emphasis on controlling and reducing selling and
administrative expenses. The Company expects to leverage these costs as sales
grow, however, increased costs to meet competitive conditions offset a portion
of the efficiency and leveraging gains.
Selling and administrative expenses include freight expense to the customer,
product development costs and amortization expenses of intangible assets. The
Selling and Administrative Expenses note, included in the Notes to Consolidated
Financial Statements, provides further information regarding the comparative
expense levels for these major expense items.
OPERATING INCOME
Operating income increased by 23% to $179.2 million in 1998 from $145.2 million
in 1997. The increase is due to increased sales and lower selling and
administrative expenses as a percent of sales.
NET INCOME
Net income increased by 22% to $106.3 million in 1998 from $87.0 million in
1997. This increase is a result of the higher operating income being partially
offset by an increase in interest expense associated with acquisition and
capital expenditures.
Net income per common share increased by 19% to $1.72 in 1998 from $1.45 in
1997. Average shares outstanding increased to 61.6 million in 1998 from 59.8
million in 1997 as a result of the weighting of the October 1997 primary stock
offering.
FISCAL YEAR ENDED JANUARY 3, 1998, COMPARED TO FISCAL YEAR ENDED DECEMBER 28,
1996
NET SALES
Net sales, on a consolidated basis, increased by 37% to $1.36 billion in 1997
from $998.1 million in the prior year. The Company increased net sales in both
core segments by offering compelling value products through a combination of
broad selection, features, quality, price and service. Office furniture products
net sales increased 31% in 1997 to $1.16 billion from $887.3 million in 1996 due
in part from the Company's acquisitions of Allsteel Inc.; Bevis Custom
Furniture, Inc.; and Panel Concepts, Inc. Hearth products net sales increased
84% in 1997 to $204.5 million from $110.8 million in 1996 due in part to the
Company's October 1996 acquisition of Heat-N-Glo Fireplace Products, Inc. Both
core industry segments experienced strong growth during 1997. The office
products industry reported an annual growth rate of 15% and hearth products an
estimated 10%. The Company's compounded annual growth rate for the five-year
period of 1993 to 1997 was 14% in net sales while the overall office furniture
industry's sales growth rate was 8%. No comparable industry growth data is
available for the hearth products industry.
GROSS PROFIT
Gross profit increased by 35% to $429.6 million in 1997 from $318.6 million in
the prior year. Gross margin decreased to 31.5% for 1997 compared to 31.9% for
1996. This lower margin is due to the combination of productivity gains and cost
control initiatives being more than offset by strategic selling price reductions
on select products to increase market share and the impact of lower operating
margins for certain 1997 acquisitions.
-19-
<PAGE>
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses increased by 32% to $284.4 million from
$215.6 million in the prior year. Selling and administrative expenses, as a
percentage of net sales, decreased to 20.9% in 1997 from 21.6% in 1996. This
decrease was a result of continued commitment to develop more efficient business
processes which have improved member productivity, stringent control of
expenses, and increased efficiencies associated with higher net sales. However,
these results were partially offset by increased freight costs due to growth of
unit volume, increased distribution costs for new warehouse capacity and product
handling technologies that facilitate providing a higher level of service to
customers, and the ongoing commitment to developing and marketing new products.
This expense category, in addition to freight expense to the customer, also
includes major costs related to product development and amortization expense of
intangible assets. The Selling and Administrative Expenses note included in the
Notes to Consolidated Financial Statements provides further information
regarding the comparative expense levels for these major expense items.
OPERATING INCOME
Operating income increased by 41% to $145.2 million in 1997 from $103.0 million,
excluding a nonrecurring pre-tax gain on the sale of a subsidiary of $3.2
million in 1996. The increase is due to controlling operating costs and
leveraging incremental sales.
NET INCOME
Net income increased by 32% to $87.0 million in 1997 from $66.1 million in 1996,
excluding the $2.0 million nonrecurring after-tax gain on the sale of a
subsidiary. This increase is a result of the higher operating income being
partially offset by an increase in interest expense associated with acquisitions
and the resumption of a more normal effective income tax rate. The effective tax
rate was 37.5% for 1997 compared to 35.3% for 1996. The rate for 1996 was
favorably impacted by nonrecurring income tax credits of $2.1 million, or $0.04
per share, recorded in the third quarter of 1996.
Net income per common share increased by 32% to $1.45 in 1997 from $1.10,
excluding a nonrecurring after-tax gain of $0.03 per share in 1996. Average
common shares outstanding decreased to 59.8 million in 1997 from 60.2 million in
1996.
FISCAL YEAR ENDED DECEMBER 28, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 30,
1995
NET SALES
Net sales, on a consolidated basis, increased by 12% to $998.1 million in 1996
from $893.1 million in the prior year. The increase in net sales for both core
business segments was due to the Company's offering of an ongoing stream of
innovative and quality new products and a commitment to manufacturing
excellence. Office furniture products net sales increased 8% in 1996 to $887.3
million from $818.9 million in 1995. Hearth products net sales increased 49% in
1996 to $110.8 million from $74.2 million in 1995 due in part to the Company's
October 1996 acquisition of Heat-N-Glo Fireplace Products, Inc.
GROSS PROFIT
Gross profit increased by 19% to $318.6 million in 1996 from $268.4 million in
the prior year. The increase in gross profit is primarily attributable to the
Company's sales growth in both operating segments, which has been driven by unit
sales growth as opposed to pricing growth. Gross profit margin increased to
31.9% for 1996 compared to 30.1% for 1995. This increase was a result of the
elimination of production inefficiencies associated with two operations closed
during 1995 and increased production unit volume, productivity improvements, and
effective cost control efforts, partially offset by continued price reductions
on many of the Company's products.
-20-
<PAGE>
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses increased by 7% to $215.6 million in 1996
from $201.7 million in the prior year. Selling and administrative expenses as a
percentage of net sales decreased to 21.6% in 1996 from 22.6% in 1995. This
decrease was a result of continued implementation of the Company's Rapid
Continuous Improvement process, which led to more efficient business processes
and increased efficiencies associated with higher net sales. These decreases
were partially offset by increases in marketing programs, greater use of
cooperative advertising programs, freight costs escalating at a more rapid rate
than product price increases, and additional costs of pursuing a proactive
acquisition strategy.
OPERATING INCOME
Operating income increased by 54% to $103.0 million (excluding a nonrecurring
pre-tax gain on the sale of a subsidiary of $3.2 million) in 1996 from $66.7
million in 1995. The increase is a result of the increase in gross profit and
lower selling and administrative expenses as a percentage of net sales.
NET INCOME
Net income, excluding the $2.0 million nonrecurring after-tax gain on the sale
of a subsidiary, increased by 61% to $66.1 million in 1996 from $41.1 million in
the prior year. This increase is primarily attributable to increased operating
income, lower net interest expense and a lower effective income tax rate. The
effective tax rate was 35.3% for 1996 compared to 37.3% for 1995. The rate for
1996 was favorably impacted by non-recurring income tax credits of $2.1 million,
or $0.04 per share, recorded in the third quarter of 1996.
Net income per common share increased by 64% to $1.10 (excluding a nonrecurring
after-tax gain of $0.03 per share) in 1996 from $0.67 for 1995. The Company's
net income per share performance for 1996 benefited from the Company's common
stock repurchase program.
During 1995 and 1996, the Company closed, consolidated, and sold several
operations in an effort to concentrate further on its core strengths. In
addition, the Company resolved several litigation uncertainties, reduced its
work force, addressed several asset realization concerns, and benefited from
special tax credits. The net effect of these nonrecurring business events was to
reduce annual net income by $3.3 million, or $0.05 per share, in 1996, and $4.8
million, or $0.08 per share, in 1995.
LIQUIDITY AND CAPITAL RESOURCES
During 1998, cash from operations was $146.8 million which provided the funds
necessary to meet working capital needs, help finance acquisitions, invest in
capital improvements, repay long-term debt, and pay increased dividends.
CASH MANAGEMENT
Cash, cash equivalents, and short-term investments totaled $17.7 million
compared to $46.3 million at the end of 1997 and $32.7 million at the end of
1996. These funds, coupled with cash from future operations and additional
long-term debt, if needed, are expected to be adequate to finance operations,
planned improvement, and internal growth.
The Company places special emphasis on the management and reduction of its
working capital with a particular focus on trade receivables and inventory
levels. The success achieved in managing receivables is in large part a result
of doing business with quality customers and maintaining close communications
with them. Trade receivable days outstanding have averaged about 36 days over
the past three years. Inventory levels and turns continue to improve as a
function of reducing production cycle times. Inventory turns have been in the 17
to 18 range over the past three years with 1998 reaching 18.4 turns.
-21-
<PAGE>
The Company had a cash infusion during the fourth quarter of 1997 from its
primary offering of 2,300,000 shares of common stock at an offering price of $26
per share. This transaction netted the Company approximately $56.8 million which
was used to finance acquisitions and to repay a portion of debt associated with
acquisitions.
CAPITAL EXPENDITURE INVESTMENTS
Capital expenditures, net of disposals, were $149.7 million in 1998, $85.5
million in 1997, and $44.7 million in 1996. Expenditures during 1998, 1997, and
1996 have been consistently focused on machinery and equipment and facility
expansion needed to support new products, process improvements, cost- saving
initiatives, and creating additional production and warehousing capacity.
ACQUISITIONS
In February 1998, the Company completed the acquisition of Aladdin Steel
Products, Inc. for a purchase price of approximately $10.2 million. This
acquisition allowed the Company to strengthen its position in the hearth
products market. During 1997, the Company completed three office furniture
acquisitions: Allsteel Inc. in June; Bevis Custom Furniture, Inc. in November;
and Panel Concepts, Inc. in December for a combined purchase price of
approximately $119.5 million. In October 1996, the Company acquired Heat-N-Glo
Fireplace Products, Inc., a leading hearth products manufacturer, for a purchase
price of approximately $79 million. These acquisitions were accounted for under
the purchase method of accounting and financed by a combination of cash and
long-term debt.
LONG-TERM DEBT
Long-term debt, including capital lease obligations, was 23% of total
capitalization at January 2, 1999, 26% at January 3, 1998, and 24% at December
28, 1996. The Company does not expect future capital resources to be a
constraint on planned growth. Significant additional borrowing capacity is
available through a revolving bank credit agreement in the event cash generated
from operations should be inadequate to meet future capital needs.
CASH DIVIDENDS
Cash dividends were $0.32 per common share for 1998, $0.28 for 1997, and $0.25
for 1996. Further, the Board of Directors announced an 18.8% increase in the
quarterly dividend from $0.08 to $0.095 per common share effective with the
March 1, 1999, dividend payment. The previous quarterly dividend increase was
from $0.07 to $0.08, effective with the February 28, 1998, dividend payment. A
cash dividend has been paid every quarter since April 15, 1955, and quarterly
dividends are expected to continue. The average dividend payout percentage for
the most recent three-year period has been 26% of prior year earnings.
STOCK SPLIT
On February 11, 1998, the Board of Directors announced a two-for-one stock split
in the form of a 100 percent stock dividend that was 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.
COMMON SHARE REPURCHASES
During 1998, the Company repurchased 529,284 shares of its common stock at a
cost of approximately $12.2 million, or an average price of $23.04. As of
January 2, 1999, approximately $62.5 million of the $70.0 million authorized for
repurchases remained unspent. During 1997, the Company repurchased 183,154
shares at a cost of approximately $4.1 million, or an average price of $22.30.
During 1996, the Company repurchased 1,507,600 shares at a cost of approximately
$21.9 million, or an average price of $14.54.
-22-
<PAGE>
LITIGATION AND UNCERTAINTIES
The Company is involved in various legal actions arising in the course of
business. These uncertainties are referenced in the Contingencies note included
in the Notes to Consolidated Financial Statements.
YEAR 2000 ISSUE
The Company is actively working a comprehensive Year 2000 (Y2K) readiness plan.
The primary mission of the plan is to maintain business continuity by giving
priority remediation and resolution to any Year 2000 issue, whether internally
or externally based, that may disrupt or compromise normal business operations.
The project is focused on three business fronts: (1) information technology
(IT), which encompasses traditional computer hardware, software and related
networks; (2) operations, which encompass material suppliers and embedded chips
used by facility, production, and distribution machinery, equipment, and support
processes; and (3) customers and other nonoperational service providers.
Remediation progress achieved to date has been primarily in the information
technology area, which has benefited from having the earliest start. The other
two focus areas are in various stages of identifying potential remediation
targets, solutions, and confirmation procedures.
The IT issues addressed to date have been minor. Potential operational issues
have been identified and are being aggressively pursued. None appear at this
time to constitute a serious threat to the Company's Y2K business continuity
mission. Customers and other nonoperational service providers represent a unique
challenge inasmuch as the Company must rely primarily on individual Year 2000
readiness disclosures. In most instances, the Company is unable to independently
confirm readiness. However, no customer or service provider has been identified
as constituting a serious threat to the business continuity mission. Total
incremental out-of-pocket project remediation-related costs incurred through
January 2, 1999, were less than $100,000. Internal project costs were
negligible.
All three project focus areas are on schedule to be completed during the second
and third quarter of 1999, leaving the fourth quarter of 1999 primarily for
follow-up compliance testing and contingency planning as needed. The Company is
estimating 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 costs associated with this project are being expensed or
capitalized in the period incurred.
While the Company at this time does not expect any material business
interruptions due to Year 2000 issues, even with the best of plans and the best
follow-through efforts, there may be a variety of potential business risks.
Management believes these business risks include, but are 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.
-23-
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no material financial exposure to the various financial
instrument market risks covered under this rule. Currently, the Company has no
derivative financial instruments or off-balance sheet financing arrangements.
For information related to the Company's long-term debt, refer to the Long- Term
Debt disclosure in the Notes to Consolidated Financial Statements filed as part
of this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements listed under Item 14 (a)(1) and (2) are filed as
part of this report.
The Summary of Unaudited Quarterly Results of Operations follows the Notes
to the Consolidated Financial Statements filed as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
-24-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information under the caption "Election of Directors" of the Company's
Proxy Statement for the Annual Meeting of Shareholders to be held on May 11,
1999, is incorporated herein by reference. For information with respect to
executive officers of the Company, see Part I, Table I "Executive Officers of
the Registrant."
The information under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 11, 1999, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information under the captions "Election of Directors" and "Executive
Compensation" of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 11, 1999, is incorporated herein by reference.
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information under the captions "Election of Directors" and "Beneficial
Owners of Common Stock" of the Company's Proxy Statement for the Annual Meeting
of Shareholders to be held on May 11, 1999, is incorporated herein by reference.
The information under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 11, 1999, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Certain Relationships and Related
Transactions" of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 11, 1999, is incorporated herein by reference.
-25-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) (1) FINANCIAL STATEMENTS
The following consolidated financial statements of HON
INDUSTRIES Inc. and Subsidiaries included in the Company's 1998
Annual Report to Shareholders are filed as a part of this report
pursuant to Item 8:
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Public Accountants.................................. 31
Consolidated Statements of Income for the Years Ended
January 2, 1999; January 3, 1998; and December 28, 1996................... 32
Consolidated Balance Sheets -- January 2, 1999; January 3, 1998;
and December 28, 1996 .................................................... 33
Consolidated Statements of Shareholders' Equity for the Years
Ended January 2, 1999; January 3, 1998; and December 28, 1996............ 34
Consolidated Statements of Cash Flows for the Years Ended
January 2, 1999; January 3, 1998; and December 28, 1996................... 35
Notes to Consolidated Financial Statements................................ 36
Investor Information...................................................... 52
</TABLE>
(2) FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedule of
the Company and subsidiaries is attached pursuant to Item 14(d):
<TABLE>
<CAPTION>
<S> <C> <C>
Schedule II Valuation and Qualifying Accounts for the
Years Ended January 2, 1999; January 3, 1998; and
December 28, 1996......................................... 54
</TABLE>
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange
Commission are not required under the related instructions or are
inapplicable and, therefore, have been omitted.
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the last quarter of
the period covered by this report.
-26-
<PAGE>
(c) EXHIBITS
An exhibit index of all exhibits incorporated by reference into,
or filed with, this Form 10-K appears on Page 55. The following
exhibits are filed herewith:
<TABLE>
<CAPTION>
Page(s) in
EXHIBIT FORM 10-K
<S> <C> <C>
(21) Subsidiaries of the Registrant.................................. 58
(23) Consent of Independent Public Accountants....................... 59
(27) Financial Data Schedule......................................... 60
</TABLE>
(d) FINANCIAL STATEMENT SCHEDULES
See Item 14(a)(2).
-27-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this annual report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
HON INDUSTRIES Inc.
Date: March 29, 1999 By /s/ JACK D. MICHAELS
--------------------------------
Jack D. Michaels
Chairman, President and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated. Each Director whose signature
appears below authorizes and appoints Jack D. Michaels as his or her
attorney-in-fact to sign and file on his or her behalf any and all amendments
and post-effective amendments to this report.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JACK D. MICHAELS Chairman, President and CEO, 3/29/99
- -------------------- Principal Executive Officer,
Jack D. Michaels and Director
/s/ MELVIN L. MCMAINS Vice President and Controller and 3/29/99
- --------------------- Principal Accounting Officer
Melvin L. McMains
/s/ DAVID C. STUEBE Vice President and 3/29/99
- --------------------- Chief Financial Officer
David C. Stuebe
</TABLE>
-28-
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ROBERT W. COX Director 3/29/99
- --------------------------
Robert W. Cox
/s/ W AUGUST HILLENBRAND Director 3/29/99
- --------------------------
W August Hillenbrand
/s/ STANLEY M. HOWE Director 3/29/99
- --------------------------
Stanley M. Howe
/s/ ROBERT L. KATZ Director 3/29/99
- --------------------------
Robert L. Katz
/s/ CELESTE C. MICHALSKI Director 3/29/99
- --------------------------
Celeste C. Michalski
/s/ MOE S. NOZARI Director 3/29/99
- --------------------------
Moe S. Nozari
/s/ FRANK S. PTAK Director 3/29/99
- --------------------------
Frank S. Ptak
/s/ RICHARD H. STANLEY Director 3/29/99
- --------------------------
Richard H. Stanley
/s/ BRIAN E. STERN Director 3/29/99
- --------------------------
Brian E. Stern
/s/ LORNE R. WAXLAX Director 3/29/99
- --------------------------
Lorne R. Waxlax
</TABLE>
-29-
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
-30-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
HON INDUSTRIES Inc.
We have audited the accompanying consolidated balance sheets of HON INDUSTRIES
Inc. and subsidiaries as of January 2, 1999, January 3, 1998, and December 28,
1996, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three fiscal years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of HON INDUSTRIES Inc.
and subsidiaries as of January 2, 1999, January 3, 1998, and December 28, 1996,
and the results of its operations and its cash flows for each of the three
fiscal years then ended, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Chicago, Illinois
February 1, 1999
-31-
<PAGE>
<TABLE>
<CAPTION>
HON INDUSTRIES Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales......................................... $1,696,433,000 $1,362,713,000 $998,135,000
Cost of products sold............................. 1,172,997,000 933,157,000 679,496,000
- ---------------------------------------------------------------------------------------------------------------
GROSS PROFIT................................. 523,436,000 429,556,000 318,639,000
Selling and administrative expenses............... 344,259,000 284,397,000 215,646,000
Gain on sale of subsidiary........................ - - 3,200,000
- ---------------------------------------------------------------------------------------------------------------
OPERATING INCOME............................. 179,177,000 145,159,000 106,193,000
- ---------------------------------------------------------------------------------------------------------------
Interest income................................... 1,590,000 2,148,000 3,247,000
Interest expense.................................. 10,658,000 8,179,000 4,173,000
- ---------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES................... 170,109,000 139,128,000 105,267,000
Income taxes...................................... 63,796,000 52,173,000 37,173,000
- ---------------------------------------------------------------------------------------------------------------
NET INCOME................................... $ 106,313,000 $ 86,955,000 $ 68,094,000
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE.................. $1.72 $1.45 $1.13
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
-32-
<PAGE>
HON INDUSTRIES Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF YEAR-END 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
- ----------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents........................................... $ 17,500,000 $ 46,080,000 $ 31,196,000
Short-term investments.............................................. 169,000 260,000 1,502,000
Receivables......................................................... 183,576,000 158,408,000 109,095,000
Inventories......................................................... 67,225,000 60,182,000 43,550,000
Deferred income taxes............................................... 12,477,000 14,391,000 9,046,000
Prepaid expenses and other current assets........................... 9,382,000 15,829,000 11,138,000
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS.............................................. 290,329,000 295,150,000 205,527,000
Property, Plant, and Equipment......................................... 444,177,000 341,030,000 234,616,000
Goodwill............................................................... 108,586,000 98,720,000 51,213,000
Other Assets........................................................... 21,377,000 19,773,000 22,158,000
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS...................................................... $864,469,000 $754,673,000 $513,514,000
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued expenses............................... $193,859,000 $183,738,000 $127,910,000
Income taxes........................................................ 1,921,000 8,133,000 2,574,000
Note payable and current maturities of long-term debt............... 15,769,000 2,545,000 16,244,000
Current maturities of other long-term obligations................... 5,889,000 6,343,000 5,825,000
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES......................................... $217,438,000 $200,759,000 $152,553,000
LONG-TERM DEBT......................................................... 128,069,000 123,487,000 71,285,000
CAPITAL LEASE OBLIGATIONS.............................................. 7,494,000 11,024,000 6,320,000
OTHER LONG-TERM LIABILITIES............................................ 18,067,000 18,601,000 20,183,000
DEFERRED INCOME TAXES.................................................. 31,379,000 19,140,000 10,726,000
MINORITY INTEREST IN SUBSIDIARY........................................ - - 50,000
COMMITMENTS AND CONTINGENCIES..........................................
SHAREHOLDERS' EQUITY
Common stock........................................................ 61,290,000 61,659,000 29,713,000
Paid-in capital..................................................... 48,348,000 55,906,000 360,000
Retained earnings................................................... 351,786,000 265,203,000 227,365,000
Receivable from HON Members Company Ownership Plan.................. - (1,099,000) (5,041,000)
Accumulated other comprehensive income.............................. 598,000 (7,000) -
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY........................................ 462,022,000 381,662,000 252,397,000
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................ $864,469,000 $754,673,000 $513,514,000
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
-33-
<PAGE>
HON INDUSTRIES Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Receivable Accumulated Total
Common Paid-in from Co. Retained Other Compre- Shareholders'
Stock Capital ESOP Earnings hensive Income Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 30, 1995.................. $ 30,394,000 $ 550,000 $ (8,214,000) $193,505,000 $ -$216,235,000
Comprehensive income:
Net income............................... 68,094,000 68,094,000
Other comprehensive income............... -
Comprehensive income........................ 68,094,000
Cash dividends.............................. (14,970,000) (14,970,000)
Common shares - treasury:
Shares purchased......................... (754,000) (1,896,000) (19,264,000) (21,914,000)
Shares issued under Members Stock
Purchase Plan and stock awards......... 73,000 1,706,000 1,779,000
Principal repaid by HON Members
Company Ownership Plan................. 3,173,000 3,173,000
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 28, 1996.................. 29,713,000 360,000 (5,041,000) 227,365,000 - 252,397,00
Comprehensive income:
Net income............................... 86,955,000 86,955,000
Other comprehensive income............... (7,000) (7,000)
Comprehensive income........................ 86,948,000
Cash dividends.............................. (16,736,000) (16,736,000)
Stock split effected in the form of a
100% stock dividend.................. 30,830,000 (30,830,000) -
Common shares - treasury:
Shares purchased......................... (92,000) (2,441,000) (1,551,000) (4,084,000)
Shares issued through public
stock offering....................... 1,150,000 55,616,000 56,766,000
Shares issued under Members Stock
Purchase Plan and stock awards....... 58,000 2,371,000 2,429,000
Principal repaid by HON Members
Company Ownership Plan............... 3,942,000 3,942,000
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, January 3, 1998.................... 61,659,000 55,906,000 (1,099,000) 265,203,000 (7,000) 381,662,000
Comprehensive Income:
Net income............................... 106,313,000 106,313,000
Other comprehensive income............... 605,000 605,000
Comprehensive income........................ 106,918,000
Cash dividends.............................. (19,730,000) (19,730,000)
Common shares - treasury:
Share purchased.......................... (529,000) (11,672,000) (12,201,000)
Share issued under Members Stock
Purchase Plan and stock awards....... 160,000 4,114,000 4,274,000
Principal repaid by HON Members
Company Ownership.................... 1,099,000 1,099,000
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, January 2, 1999.................... $ 61,290,000 $ 48,348,000 - $351,786,000 $598,000 $462,022,000
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
-34-
<PAGE>
<TABLE>
<CAPTION>
HON INDUSTRIES Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET CASH FLOWS FROM (TO) OPERATING ACTIVITIES:
Net income..................................................... $106,313,000 $ 86,955,000 $ 68,094,000
Noncash items included in net income:
Depreciation and amortization............................... 52,999,000 35,610,000 25,252,000
Gain on sale of subsidiary, net of tax...................... - - (2,016,000)
Other postretirement and postemployment benefits............ 1,529,000 1,397,000 1,398,000
Deferred income taxes....................................... 13,816,000 7,128,000 5,103,000
Other - net................................................. 8,000 (35,000) 252,000
Changes in working capital, excluding acquisition and disposition:
Receivables................................................. (24,238,000) (15,169,000) (5,085,000)
Inventories................................................. (4,286,000) 3,134,000 184,000
Prepaid expenses and other current assets................... 6,517,000 (1,574,000) (2,613,000)
Accounts payable and accrued expenses....................... 3,895,000 16,789,000 998,000
Accrued facilities closing and reorganization expenses...... 64,000 (256,000) (1,147,000)
Income taxes................................................ (7,419,000) 6,881,000 (3,971,000)
Increase in other liabilities.................................. (2,406,000) 525,000 6,860,000
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash flows from (to) operating activities.......... 146,792,000 141,385,000 93,309,000
- ---------------------------------------------------------------------------------------------------------------------------------
NET CASH FLOWS FROM (TO) INVESTING ACTIVITIES:
Capital expenditures - net..................................... (149,717,000) (85,491,000) (44,684,000)
Acquisition spending, net of cash acquired..................... (11,470,000) (121,424,000) (79,136,000)
Net proceeds from sale of subsidiary........................... - - 7,336,000
Principal repaid by HON Members Company
Ownership Plan............................................... 1,099,000 3,942,000 3,173,000
Short-term investments - net................................... 91,000 442,000 12,392,000
Other - net.................................................... 80,000 1,792,000 (976,000)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash flows from (to) investing activities.......... (159,917,000) (200,739,000) (101,895,000)
- ---------------------------------------------------------------------------------------------------------------------------------
NET CASH FLOWS FROM (TO) FINANCING ACTIVITIES:
Purchase of HON INDUSTRIES common stock........................ (12,206,000) (4,085,000) (21,912,000)
Proceeds from public offering of
HON INDUSTRIES common stock.................................. - 56,766,000 -
Proceeds from long-term debt................................... 73,237,000 100,238,000 51,072,000
Payments of note and long-term debt............................ (60,079,000) (64,374,000) (8,416,000)
Proceeds from sale of HON INDUSTRIES
common stock to members...................................... 3,323,000 2,429,000 1,777,000
Dividends paid................................................. (19,730,000) (16,736,000) (14,970,000)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash flows from (to) financing activities............... (15,455,000) 74,238,000 7,551,000
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................. (28,580,000) 14,884,000 (1,035,000)
- ---------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR....................... 46,080,000 31,196,000 32,231,000
- ---------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR............................. $ 17,500,000 $ 46,080,000 $ 31,196,000
- ---------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.................................................... $ 10,867,000 $ 8,404,000 $ 3,334,000
Income taxes................................................ $ 56,787,000 $ 38,246,000 $ 36,318,000
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
-35-
<PAGE>
HON INDUSTRIES Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NATURE OF OPERATIONS
HON INDUSTRIES Inc., with its subsidiaries (the Company), is a national
manufacturer and marketer of office furniture and hearth products. Both
industries are reportable segments; however, the Company's office furniture
business is its principal line of business. Refer to the Operating Segment
Information note for further information. Office furniture products are sold
through a national system of dealers, wholesalers, mass merchandisers, warehouse
clubs, retail superstores, end-user customers, and to federal and state
governments. Dealer, wholesaler, and retail superstores are the major channels
based on sales. Hearth products include wood-, pellet-, and gas-burning factory-
built fireplaces, fireplace inserts, stoves, and gas logs. These products are
sold through a national system of dealers, wholesalers, and large regional
contractors. The Company's products are marketed predominantly in the United
States and Canada. The Company exports select products to a limited number of
markets outside North America, principally Latin America and the Caribbean,
through its export subsidiary; however, based on sales, it is not significant.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND FISCAL YEAR-END
The consolidated financial statements include the accounts and transactions of
the Company and its subsidiaries. Intercompany accounts and transactions have
been eliminated in consolidation.
The Company follows a 52/53-week fiscal year which ends on the Saturday nearest
December 31. Fiscal year 1998 ended on January 2, 1999; 1997 ended on January 3,
1998; and 1996 ended on December 28, 1996. The financial statements for fiscal
year 1997 are based on a 53-week period, fiscal years 1998 and 1996 are on a
52-week basis.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents generally consist of cash and commercial paper. These
securities have original maturity dates not exceeding three months from date of
purchase.
SHORT-TERM INVESTMENTS
Short-term investments are classified as available-for-sale and are highly
liquid debt and equity securities. These investments are stated at cost which
approximates market value.
RECEIVABLES
Accounts receivable are presented net of an allowance for doubtful accounts of
$2,816,000, $3,277,000, and $1,830,000 for 1998, 1997, and 1996, respectively.
INVENTORIES
Inventories are valued at the lower of cost or market, determined principally by
the last-in, first-out (LIFO) method.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are carried at cost. Depreciation has been
computed by the straight-line method over estimated useful lives: land
improvements, 10-20 years; buildings, 10-40 years; and machinery and equipment,
3-12 years. The Company capitalized interest costs of $22,000 and $95,000 in
1997 and 1996, respectively.
-36-
<PAGE>
GOODWILL AND PATENTS
Goodwill represents the excess of cost over the fair value of net identifiable
assets of acquired companies. Goodwill is being amortized on a straight-line
basis predominantly over 30 years. Patents are being amortized on a
straight-line basis over their estimated useful lives, which range from 7 to 16
years. Patents are reported by the Company as "Other Assets."
The carrying value of goodwill and patents is reviewed by the Company whenever
significant events or changes occur which might impair recovery of recorded
costs. Based on its most recent analysis, the Company believes no material
impairment of these intangible assets exists at January 2, 1999.
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------
(In thousands)
<S> <C> <C> <C>
Goodwill............................................. $113,812 $100,667 $52,051
Patents.............................................. 16,450 16,450 16,060
Less accumulated amortization ....................... 8,570 3,781 838
---------------------------------------
$121,692 $113,336 $67,273
---------------------------------------
---------------------------------------
</TABLE>
PRODUCT DEVELOPMENT COSTS
Product development costs relating to the development of new products and
processes, including significant improvements and refinements to existing
products, are expensed as incurred. The amounts charged against income were
$15,707,000 in 1998, $15,371,000 in 1997, and $10,423,000 in 1996.
STOCK-BASED COMPENSATION
The Company accounts for its stock option plan using Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," which results in no
charge to earnings when options are issued at fair market value. The Company has
adopted the disclosure requirements of Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation."
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
NEW ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income," SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," and SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," as of January 4,
1998, the beginning of its 1998 fiscal year, and SFAS No. 128, "Earnings Per
Share," and SFAS No. 129, "Disclosure of Information about Capital Structure,"
as of January 3, 1998, year-end 1997, and SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets to be Disposed Of," in the first quarter of
1996. Their adoption had no material effect on financial condition or results of
operations.
EARNINGS PER SHARE
Net income per common share is based on the weighted-average number of shares of
common stock outstanding during each year including allocated and unallocated
ESOP shares. The Company adopted Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings Per Share," and SFAS No. 129, "Disclosure of
Information about Capital Structure," as of January 3, 1998, which is the end of
its 1997 fiscal year. The effect of adoption was immaterial.
-37-
<PAGE>
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. SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or shareholders'
equity. The Company's comprehensive income consists of an unrealized holding
gain on equity securities available-for-sale under SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," and nominal foreign currency
adjustments. Prior years' financial statements have been reclassified to conform
to these requirements.
RECLASSIFICATIONS
Certain prior year information has been reclassified to conform to the current
year presentation.
BUSINESS COMBINATIONS
The Company acquired Aladdin Steel Products, Inc. on February 20, 1998. Aladdin
is a manufacturer of wood-, pellet-, and gas-burning stoves and inserts. Aladdin
is being operated by Hearth Technologies Inc., the Company's hearth products
subsidiary. The transaction was accounted for under the purchase method. The
cash purchase price and preliminary allocation is shown below:
<TABLE>
<CAPTION>
(In millions)
<S> <C> <C>
Purchase Price $10.2
Preliminary Allocation of Purchase Price:
Working capital, other than cash .2
Property, plant, and equipment 1.8
Goodwill 8.2
</TABLE>
The Company completed three office furniture business acquisitions during fiscal
year 1997. Allsteel Inc. was a stock purchase acquired on June 17, 1997, from
ACI America Holdings Inc., a subsidiary of BTR plc, for approximately $66
million. It manufactures and markets a line of quality, mid-priced office
furniture with manufacturing and distribution facilities in Jackson and Milan,
Tennessee; Verona, Mississippi; and West Hazleton, Pennsylvania. Bevis Custom
Furniture, Inc. was an asset purchase acquired on November 13, 1997, from Hunt
Manufacturing Co. for approximately $45.1 million. It manufactures and markets a
line of affordably priced office furniture with a manufacturing operation
located in Florence, Alabama. Allsteel and Bevis operate as part of the
Company's division, The HON Company. Panel Concepts, Inc. was a stock purchase
acquired December 1, 1997, from Standard Pacific Corp. for approximately $8.4
million. It manufactures and markets innovative panel- based office systems with
a manufacturing plant located in Santa Ana, California. Panel Concepts operates
as part of the Company's subsidiary, BPI Inc. Each of the transactions was
accounted for under the purchase method of accounting and all were financed by a
combination of cash and long-term debt. Assuming the acquisition of Heat-N-Glo
Fireplace Products, Inc., Allsteel Inc., Bevis Custom Furniture, Inc., and Panel
Concepts, Inc. had occurred on December 31, 1995, the beginning of the Company's
1996 fiscal year, instead of the actual dates, the Company's pro forma
consolidated net sales would have been approximately $1.5 billion and $1.3
billion for 1997 and 1996, respectively. Pro forma consolidated net income and
net income per share for 1997 and 1996 would not have been materially different
than the reported amounts.
In October 1996, the Company acquired Heat-N-Glo Fireplace Products Inc.,
located in Savage, Minnesota, for a combination of cash and debt totaling
approximately $79 million. The transaction was accounted for under the purchase
method. The Company merged Heat-N-Glo into Heatilator Inc., which changed its
name to Hearth Technologies Inc. Both Heatilator and Heat-N-Glo are engaged in
the manufacturing and marketing of quality hearth products and operate as
divisions of Hearth Technologies Inc. Assuming this transaction had occurred as
of the beginning of fiscal year 1995, the Company's pro forma consolidated net
sales would have been approximately $1.07 billion and $971.6 million in 1996 and
1995, respectively.
-38-
<PAGE>
Assuming the acquisition of Heat-N-Glo Fireplace Products, Inc., 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 the actual dates reported above, the Company's pro forma
consolidated net sales would have been approximately $1.7 billion and $1.5
billion for 1998 and 1997, respectively. Pro forma consolidated net income and
net income per share for 1998 and 1997 would not have been materially different
than the reported amounts.
BUSINESS DISPOSITION
On January 24, 1996, the Company sold the outstanding stock of Ring King
Visibles, Inc., a wholly owned subsidiary, for $8.0 million in cash and the
forgiveness of intercompany receivables of approximately $2.0 million. The sale
resulted in an approximate $3.2 million pre-tax gain for the Company (an
after-tax gain of $2.0 million, or $0.03 per share) which was recorded in the
first quarter of fiscal year 1996.
<TABLE>
<CAPTION>
INVENTORIES
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Finished products....................... $24,955 $26,352 $20,303
Materials and work in process........... 53,320 48,186 36,184
------------------------------------------
LIFO allowance.......................... (11,050) (14,356) (12,937)
------------------------------------------
$67,225 $60,182 $43,550
------------------------------------------
------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PROPERTY, PLANT, AND EQUIPMENT
1998 1997 1996
---------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Land and land improvements........................... $ 12,156 $ 10,059 $ 9,114
Buildings............................................ 144,559 111,387 92,509
Machinery and equipment.............................. 411,238 333,216 231,780
Construction and equipment
installation in progress........................... 85,782 60,832 42,507
---------------------------------------------------
653,735 515,494 375,910
Less allowances for depreciation..................... 209,558 174,464 141,294
---------------------------------------------------
$444,177 $341,030 $234,616
---------------------------------------------------
---------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
1998 1997 1996
---------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Trade accounts payable............................... $75,895 $ 76,623 $ 44,762
Compensation......................................... 6,789 6,339 6,331
Profit sharing and retirement expense................ 20,355 15,013 11,736
Vacation pay......................................... 11,751 10,879 8,064
Marketing expenses................................... 45,833 38,096 36,550
Casualty self-insurance expense...................... 6,271 5,201 3,787
Other accrued expenses............................... 26,965 31,587 16,680
------------------------------------------------
$193,859 $183,738 $127,910
------------------------------------------------
------------------------------------------------
</TABLE>
-39-
<PAGE>
<TABLE>
<CAPTION>
LONG-TERM DEBT
1998 1997 1996
-----------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Industrial development revenue
bonds, various issues, payable
through 2018 with interest
at 3.44-8.125% per annum.......................... $ 25,293 $ 23,549 $ 24,063
Note payable to bank, term loan
payable in 2001 with interest
at 7.11% per annum................................ - - 27,200
Note payable to bank, revolving
credit agreement with interest
at a variable rate (5.25-5.8125% at
year-end 1998)*................................... 95,000 80,000 -
Convertible debenture payable to
individuals, due in 1999 with
interest at 7.0% per annum........................ - 12,000 12,000
Other notes and amounts.............................. 7,776 7,938 8,022
--------------------------------------------------
$128,069 $123,487 $ 71,285
--------------------------------------------------
--------------------------------------------------
</TABLE>
* THE REVOLVING BANK CREDIT AGREEMENT IS PAYABLE IN THE YEAR 2002 WITH A
MAXIMUM BORROWING LIMIT OF $200,000,000.
Aggregate maturities of long-term debt are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1999............................... $12,574
2000............................... 3,282
2001............................... 3,207
2002............................... 95,710
2003............................... 833
Thereafter......................... 25,037
</TABLE>
The note and convertible debenture payable to individuals are payable to the
former owners of a business acquired by the Company in 1996. These individuals
continue as officers of a subsidiary of the Company following the merger. The
convertible debenture is convertible into shares of common stock of Hearth
Technologies Inc., a subsidiary of the Company, representing 10% of the current
issued and outstanding stock of Hearth Technologies Inc.
Certain of the above borrowing arrangements include covenants which limit the
assumption of additional debt and lease obligations. The fair value of the
Company's outstanding long-term debt obligations at year-end 1998 approximates
the recorded aggregate amount.
Property, plant, and equipment, with net carrying values of approximately
$54,227,000 at the end of 1998, are mortgaged.
<TABLE>
<CAPTION>
SELLING AND ADMINISTRATIVE EXPENSES
1998 1997 1996
-------------------------------------------
(In thousands)
<S> <C> <C> <C>
Freight expense to customer.......................... $ 96,258 $ 73,261 $ 51,662
Amortization of intangible assets.................... 4,789 2,943 838
Product development costs............................ 15,707 15,371 10,423
General selling and administrative expense........... 227,505 192,822 152,723
--------------------------------------------
$344,259 $284,397 $215,646
--------------------------------------------
--------------------------------------------
</TABLE>
-40-
<PAGE>
INCOME TAXES
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------
(In thousands)
<S> <C> <C> <C>
Current:
Federal........................................... $44,525 $38,989 $27,958
State............................................. 5,363 4,695 3,932
------------------------------------------
49,888 43,684 31,890
Deferred............................................ 13,908 8,489 5,283
------------------------------------------
$63,796 $52,173 $37,173
------------------------------------------
------------------------------------------
</TABLE>
A reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
Federal statutory tax rate........................... 35.0% 35.0% 35.0%
State taxes, net of federal
tax effect........................................ 2.6 2.6 2.7
Federal and state tax credits........................ (.1) (.2) (2.2)
Other - net.......................................... - .1 (.2)
-----------------------------------------
Effective tax rate................................... 37.5% 37.5% 35.3%
-----------------------------------------
-----------------------------------------
</TABLE>
The Company recognized one-time federal and state research and development and
new jobs tax credits totaling $2.1 million, or $0.04 per share, in 1996 related
to prior tax years.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------
(In thousands)
<S> <C> <C> <C>
Net long-term deferred tax liabilities:
Tax over book depreciation........................ $(33,118) $(25,743) $(17,584)
OPEB obligations.................................. 3,305 3,920 2,947
Other - net....................................... (1,566) 2,683 3,911
-------------------------------------------
Total net long-term deferred
tax liabilities.................... (31,379) (19,140) (10,726)
--------------------------------------------
--------------------------------------------
Net current deferred tax assets:
Workers' compensation, general,
and product liability accruals.................. 2,315 2,054 1,548
Vacation accrual.................................. 2,531 892 1,855
Inventory obsolescence reserve.................... 1,026 2,631 580
Other - net....................................... 6,605 8,814 5,063
-------------------------------------------
Total net current deferred tax
assets...................................... 12,477 14,391 9,046
-------------------------------------------
Net deferred tax (liabilities)
assets...................................... $(18,902) $ (4,749) $ (1,680)
-------------------------------------------
-------------------------------------------
</TABLE>
-41-
<PAGE>
SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------------
<S> <C> <C> <C>
Common Stock, $1 Par Value
Authorized........................................ 200,000,000 100,000,000 100,000,000
Issued and outstanding............................ 61,289,618 61,659,316 59,426,530
Preferred Stock, $1 Par Value
Authorized........................................ 1,000,000 1,000,000 1,000,000
Issued and outstanding............................ - - -
</TABLE>
On February 11, 1998, the Company's Board of Directors declared a two-for-one
stock split in the form of a 100% stock dividend paid on March 27, 1998, to
shareholders of record on the close of business on March 6, 1998. In May 1998,
shareholders authorized an increase of capital stock of the Company from
101,000,000 shares to 201,000,000 shares, consisting of 200,000,000 shares of
common stock, $1.00 par value, and 1,000,000 shares of preferred stock, $1.00
par value.
The Company purchased 529,284; 183,154; and 1,507,600 shares of its common stock
during 1998, 1997, and 1996, respectively. The par value method of accounting is
used for common stock repurchases. The excess of the cost of shares acquired
over their par value is allocated to Paid-In Capital with the excess charged to
Retained Earnings.
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 has changed the format of its consolidated
statements of shareholders' equity to present comprehensive income.
Components of other comprehensive income (loss) consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------
(In thousands)
<S> <C> <C> <C>
Foreign currency translation adjustments -
net of tax.................................... $ 42 $(7) $ -
Change in unrealized gains on marketable
securities - net of tax....................... 563 - -
-------------------------------------
Other comprehensive income (loss)................ $605 $(7) $ -
-------------------------------------
-------------------------------------
</TABLE>
The Company filed a Registration Statement with the Securities and Exchange
Commission in September 1997 for a primary offering of 2,000,000 shares of its
common stock which was combined with a secondary offering of 4,790,000 shares of
Company stock by Bandag, Incorporated, a major shareholder. The combined public
offering was priced at $26.00 per share on October 23, 1997, and closed on
October 29, 1997. The Company granted the underwriters an option to purchase
1,018,500 additional shares at the same price to cover over-allotments, if any,
of which 300,000 shares were subsequently purchased. The Company's net proceeds
from the sale of its 2,300,000 shares were used to finance acquisitions and to
repay debt associated with acquisitions.
In May 1997, the Company registered 400,000 shares of its common stock under its
1997 Equity Plan for Non-Employee Directors which was approved by shareholders
at the May 1997 Annual Shareholders Meeting. This plan permits the Company to
issue to its non-employee directors options to purchase shares of Company common
stock, restricted stock of the Company, and awards of Company stock. The plan
also permits non-employee directors to elect to receive all or a portion of
their annual retainers and other compensation in the form of shares of Company
common stock. During 1998 and 1997, 4,250 and 5,400 shares of Company common
stock were issued under the plan, respectively.
Cash dividends declared and paid per share for each year are:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------
(In dollars)
<S> <C> <C> <C>
Common shares........................... $.32 $.28 $.25
</TABLE>
-42-
<PAGE>
Pursuant to the 1994 Members Stock Purchase Plan, 1,000,000 shares of the
Company's common stock were registered for issuance to participating members.
Members, who have one year of employment eligibility and work a minimum of 20
hours per week, have rights to purchase stock on a quarterly basis. The price of
the stock purchased under the plan is 85% of the closing price on the applicable
purchase date. No member may purchase stock under the plan in an amount which
exceeds the lesser of 20% of his or her gross earnings or 4,000 shares, with a
maximum fair market value of $25,000 in any calendar year. An additional 419,460
shares were available for issuance under the plan at January 2, 1999. The effect
of the application of adopting Financial Accounting Standards Board Statement
No. 123, "Accounting for Stock-Based Compensation," was not material to the
Company. Shares of common stock were issued in 1998, 1997, and 1996 pursuant to
a members stock purchase plan as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
Shares issued........................... 101,108 84,552 122,740
Average price per share................. $23.58 $20.77 $12.45
</TABLE>
The Company has a shareholders rights plan which will expire August 20, 2008.
The plan becomes operative if certain events occur involving the acquisition of
20% or more of the Company's common stock by any person or group in a
transaction not approved by the Company's Board of Directors. Upon the
occurrence of such an event, each right entitles its holder to purchase an
amount of common stock of the Company with a market value of $400 for $200,
unless the Board authorizes the rights be redeemed. The rights may be redeemed
for $0.01 per right at any time before the rights become exercisable. In certain
instances, the right to purchase applies to the capital stock of the acquirer
instead of the common stock of the Company. The Company has reserved preferred
shares necessary for issuance should the rights be exercised.
The Company has entered into change in control employment agreements with
corporate officers and certain other key employees. According to the agreements,
a change in control occurs when a third person or entity becomes the beneficial
owner of 20% or more of the Company's common stock or when more than one-third
of the Company's Board of Directors is composed of persons not recommended by at
least three-fourths of the incumbent Board of Directors. Upon a change in
control, a key employee is deemed to have a two-year employment with the
Company, and all his or her benefits are vested under Company plans. If, at any
time within two years of the change in control, his or her position, salary,
bonus, place of work, or Company-provided benefits are modified, or employment
is terminated by the Company for any reason other than cause or by the key
employee for good reason, as such terms are defined in the agreement, then the
key employee is entitled to receive a severance payment equal to two times
salary and the average of the prior two years' bonuses.
STOCK OPTIONS
Under the Company's 1995 Stock-Based Compensation Plan, as amended and restated
effective May 13, 1997, the Company may award options to purchase shares of the
Company's common stock and grant other stock awards to executives, managers, and
key personnel. The Plan is administered by the Human Resources and Compensation
Committee of the Board of Directors. Stock options awarded under the Plan must
be at exercise prices equal to or exceeding the fair market value of the
Company's common stock on the date of grant. Stock options are generally subject
to four-year cliff vesting and must be exercised within ten years from the date
of grant.
The Company accounts for executive stock options issued under this Plan using
Accounting Principles Board Opinion No. 25, which results in no charge to
earnings when options are issued at fair market value. The Company has elected
the disclosure requirements of Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation."
If compensation costs had been determined based on the fair value at the grant
dates for awards under this Plan, consistent with SFAS No.123, the impact on net
earnings and earnings per share would be less than one-cent per share. The
weighted average fair value of options granted during 1998 and 1997 estimated on
the date of grant using the Black-Scholes option-pricing model was $15.51 and
$11.85, respectively. The fair value of 1998 and 1997 options granted is
estimated on the date of grant using the following assumptions: dividend yield
of 0.90% to 1.31%, expected volatility of 30.90% to 31.40%, risk-free interest
rate of 5.53% to 6.71%, and an expected life of 10 years depending on grant
date.
-43-
<PAGE>
The status of the Company's stock option plans is summarized below:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
----------- ----------------
<S> <C> <C>
Outstanding at December 28, 1996............ - -
Granted..................................... 156,000 $24.74
Exercised................................... - -
Forfeited................................... - -
------------ -----------
Outstanding at January 3, 1998.............. 156,000 24.74
Granted..................................... 20,000 32.50
Exercised................................... - -
Forfeited................................... - -
------------ -----------
Outstanding at January 2, 1999.............. 176,000 25.62
Options exercisable at:
January 2, 1999.................... -
January 3, 1998.................... -
</TABLE>
The following table summarizes information about fixed stock options outstanding
at January 2, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------------------- -------------------
WEIGHTED-AVERAGE NUMBER EXERCISABLE
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE AT
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE JANUARY 2, 1999
- -------------------- ----------- -------------------- --------------------- --------------------
<S> <C> <C> <C> <C>
$24.50 - $28.25 156,000 8.5 $24.74 0
$32.50 20,000 9.1 $32.50 0
</TABLE>
RETIREMENT BENEFITS
The Company has defined contribution profit-sharing plans covering substantially
all employees who are not participants in certain defined benefit plans. The
Company's annual contribution to the defined contribution plans is based on
employee eligible earnings and results of operations and amounted to
$20,101,000, $14,558,000, and $11,118,000 in 1998, 1997, and 1996, respectively.
The Company sponsors defined benefit plans which include a limited number of
salaried and hourly employees at certain subsidiaries. The Company's funding
policy is generally to contribute annually the minimum actuarially computed
amount. The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 132, "Employer's Disclosures about Pensions and Other Postretirement
Benefits," as of January 4, 1998, the beginning of its 1998 fiscal year. Net
pension costs relating to these plans were $-0-, $93,000, and $146,000 for 1998,
1997, and 1996, respectively. The actuarial present value of obligations, less
related plan assets at fair value, is not significant.
The Company also participates in a multiemployer plan, which provides defined
benefits to certain of the Company's union employees. Pension expense for this
plan amounted to $306,000, $327,000, and $275,000 in 1998, 1997, and 1996,
respectively.
In 1992, the Company established a trust to administer a leveraged employee
stock ownership plan (ESOP), the HON Members Company Ownership Plan. Company
contributions based on employee eligible earnings and dividends on the shares
are used to make loan interest and principal payments. As the loan is repaid,
shares are distributed to the ESOP trust for allocation to participants. During
1998, the final shares in the Plan were allocated to participants, and the Plan
was subsequently merged into the Company's defined contribution profit-sharing
plan. Selected financial data pertaining to the ESOP is as follows:
-44-
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------
(In thousands, except share data)
<S> <C> <C> <C>
Company contribution to ESOP................... $656 $3,735 $3,348
Dividend income of ESOP........................ 533 487 446
Company interest expense on ESOP
loan........................................ - - 555
Shares of common stock allocated to
ESOP participant accounts................... 96,304 351,574 305,466
Shares held in suspense (unallocated)
by ESOP as of year-end...................... - 96,304 447,878
Fair value of shares held in suspense
by ESOP as of year-end...................... - $2,757 $7,264
Closing market price of common stock
as of year-end.............................. $23.94 $28.63 $16.22
</TABLE>
POSTRETIREMENT HEALTH CARE
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits," as of
January 4, 1998. The Company adopted SFAS No. 106, "Employers' Accounting for
Postretirement benefits Other Than Pensions," as of January 3, 1993, and
recorded the cumulative effect of the accounting change on the deferred
recognition basis.
The following table sets forth the funded status of the plan, reconciled to the
accrued postretirement benefits cost recognized in the Company's balance sheet
at:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------
(In thousands)
<S> <C> <C> <C>
Reconciliation of benefit obligation
Obligation at beginning of year...................... $ 15,409 $ 15,259 $ 21,559
Service cost......................................... 419 480 810
Interest cost........................................ 1,045 1,115 1,629
Benefit payments..................................... (974) (796) (865)
Actuarial (gains) losses............................. 1,442 (649) (7,874)
---------------------------------------------
Obligation at end of year............................ $ 17,341 $ 15,409 $ 15,259
---------------------------------------------
---------------------------------------------
Funded status
Funded status at end of year......................... $ 17,341 $ 15,409 $ 15,259
Unrecognized transition obligation................... (10,075) (10,788) (11,501)
Unrecognized prior-service cost...................... (2,484) (2,630) (2,776)
Unrecognized gain (loss)............................. 4,031 6,586 6,919
---------------------------------------------
Net amount recognized................................ $ 8,813 $8,577 $7,901
---------------------------------------------
---------------------------------------------
Net periodic postretirement benefit cost include:
Service cost......................................... $ 419 $ 480 $ 810
Interest cost........................................ 1,045 1,115 1,629
Amortization of transition
obligation over 20 years......................... 713 713 713
Amortization of prior service cost................... 146 146 146
Amortization of (gains) and losses................... (767) (922) -
---------------------------------------------
Net periodic postretirement benefit cost............. $ 1,556 $ 1,532 $ 3,298
---------------------------------------------
---------------------------------------------
</TABLE>
-45-
<PAGE>
The discount rates at fiscal year-end 1998, 1997, and 1996 were 6.75%, 7.0%, and
7.5%, respectively. The pre-65 1999 gross trend rates begin at 10% for the
medical and prescription drug coverages and grade down to 5% in eight years and
remain at this level for all future years. The post-64 gross trend rates begin
at 8% for the medical coverage and decrease until the maximum Company subsidy
(cap) is reached in 2003. For the prescription drug coverage, the 1999 gross
trend rates begin at 10% and decrease until the cap is reached in 2003. Assumed
health care cost trend rates have a significant effect on the amounts reported
for the health care plans. A 1% change in assumed health care cost trend rates
would have the following effects:
<TABLE>
<CAPTION>
1% INCREASE 1% DECREASE
------------------------------
(In thousands)
<S> <C> <C>
Effect on total of service and interest cost
components of net periodic postretirement
health care benefit cost......................... $ 136 $(109)
Effect on the health care component of the
accumulated postretirement benefit
obligation....................................... $1,954 $(414)
</TABLE>
LEASES
The Company leases certain warehouse and plant facilities and equipment.
Commitments for minimum rentals under noncancellable leases at the end of 1998
are as follows:
<TABLE>
<CAPTION>
Capitalized Operating
Leases Leases
----------------------------
(In thousands)
<S> <C> <C>
1999........................................ $4,210 $9,915
2000........................................ 3,757 8,048
2001........................................ 2,398 6,569
2002........................................ 1,078 5,269
2003........................................ 211 3,896
Thereafter.................................. 1,646 4,036
------ ------
Total minimum lease payments................ 13,300 37,733
------
------
Less amount representing interest........... 2,611
------
Present value of net minimum
lease payments, including current........
maturities of $3,195,000................. $10,689
-------
-------
</TABLE>
Property, plant, and equipment at year-end include the following amounts for
capitalized leases:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Buildings............................... $ 3,299 $ 3,299 $ 3,299
Machinery and equipment................. 15,805 15,805 8,419
-------------------------------------------------
19,104 19,104 11,718
Less allowances for
depreciation......................... 8,978 6,139 4,854
-------------------------------------------------
$10,126 $12,965 $ 6,864
-------------------------------------------------
-------------------------------------------------
</TABLE>
-46-
<PAGE>
Rent expense for the years 1998, 1997, and 1996 amounted to approximately
$10,150,000, $7,555,000, and $6,788,000, respectively. The Company has operating
leases for office and production facilities with annual rentals totaling
$578,000 with the former owners of a business acquired in 1996. These
individuals continue as officers of a subsidiary of the Company following the
merger. Contingent rent expense under both capitalized and operating leases
(generally based on mileage of transportation equipment) amounted to $596,000,
$581,000, and $353,000 for the years 1998, 1997, and 1996, respectively.
CONTINGENCIES
The Company is involved in various legal actions which have arisen in the course
of business. Management believes the outcome of these matters will not have a
material effect on the financial condition or results of operations of the
Company.
OPERATING 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. This segment disclosure is
essentially unchanged from the format used by the Company historically in
complying with SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," and SFAS No. 30, "Disclosures of Information about Major
Customers." That is, management views the Company as being in two operating
segments: office furniture and hearth products, with the former being the
principal 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 wood-, pellet-,
and gas- burning fireplaces and stoves, fireplace inserts, gas logs, and chimney
systems principally for the home.
The Company's October 2, 1996, acquisition of Heat-N-Glo Fireplace Products,
Inc., resulted in hearth products becoming a reportable segment. Prior to this
acquisition, the Company had only one reportable segment, office furniture.
Refer to the "Business Combinations" note for additional information regarding
this acquisition.
The Company's two operating segments are somewhat seasonal with the third
(July-September) and fourth (October-December) fiscal quarters historically
having higher sales than the prior quarters. In fiscal 1998, 51% of the
Company's consolidated net sales of office furniture were generated in the third
and fourth quarters and 55% of consolidated net sales of hearth products were
generated in the third and fourth quarters.
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 an operating segment cost. In addition, management
applies an effective income tax rate to its consolidated income before income
taxes so income taxes are not reported or viewed internally on a segment basis.
Identifiable assets by segment are those assets applicable to the respective
industry segments. Corporate assets consist principally of cash and cash
equivalents, short-term investments, and corporate office real estate and
related equipment.
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.
-47-
<PAGE>
Reportable segment data reconciled to the consolidated financial statements for
the years ended 1998, 1997, and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------
(In thousands)
<S> <C> <C> <C>
Net sales:
Office furniture..................................... $1,451,328 $1,158,228 $887,299
Hearth products...................................... 245,105 204,485 110,836
---------------------------------------------
$1,696,433 $1,362,713 $998,135
---------------------------------------------
---------------------------------------------
Operating profit:
Office furniture..................................... $ 165,314 $ 139,710 $106,824
Hearth products...................................... 31,478 24,817 14,155
---------------------------------------------
Total operating profit............................... 196,792 164,527 120,979
Unallocated corporate expenses....................... (26,683) (25,399) (15,712)
---------------------------------------------
Income before income taxes........................... $ 170,109 $ 139,128 $105,267
---------------------------------------------
---------------------------------------------
Identifiable assets:
Office furniture..................................... $ 660,626 $ 551,120 $330,575
Hearth products...................................... 154,817 128,361 122,037
General corporate.................................... 49,026 75,192 60,902
---------------------------------------------
$ 864,469 $ 754,673 $513,514
---------------------------------------------
---------------------------------------------
Depreciation and amortization expense:
Office furniture..................................... $ 42,562 $ 27,633 $ 21,140
Hearth products...................................... 9,120 6,590 2,813
General corporate.................................... 1,317 1,387 1,299
---------------------------------------------
$ 52,999 $ 35,610 $ 25,252
---------------------------------------------
---------------------------------------------
Capital expenditures - net:
Office furniture..................................... $ 128,482 $ 73,659 $ 41,186
Hearth products...................................... 18,162 13,055 4,060
General corporate.................................... 3,073 (1,223) (562)
---------------------------------------------
$ 149,717 $ 85,491 $ 44,684
---------------------------------------------
---------------------------------------------
</TABLE>
One office furniture customer accounted for approximately 12% of consolidated
net sales in 1998, 1997, and 1996.
-48-
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
-49-
<PAGE>
SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited quarterly financial information
for each of the past twelve quarters. In the opinion of the Company's
management, this information has been prepared on the same basis as the
consolidated financial statements appearing elsewhere in this report and
includes all adjustments (consisting only of normal recurring accruals)
necessary to present fairly the financial results set forth herein. Results of
operations for any previous quarter are not necessarily indicative of results
for any future period.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
YEAR-END 1998: (a)
Net sales................................ $418,263 $401,417 $448,679 $428,074
Cost of products sold.................... 291,571 278,107 309,080 294,239
----------- ----------- ----------- -----------
Gross profit............................. 126,692 123,310 139,599 133,835
Selling and administrative expenses...... 88,563 83,213 88,162 84,321
----------- ----------- ----------- -----------
Operating income......................... 38,129 40,097 51,437 49,514
Interest income (expense) - net.......... (2,172) (2,691) (2,025) (2,180)
----------- ----------- ----------- -----------
Income before income taxes............... 35,957 37,406 49,412 47,334
Income taxes............................. 13,484 14,027 18,530 17,755
----------- ----------- ----------- -----------
Net income............................... $ 22,473 $ 23,379 $ 30,882 $ 29,579
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income per common share ............. $ .36 $ .38 $ .50 $ .48
Weighted-average common
shares outstanding.................... 61,648 61,663 61,691 61,596
AS A PERCENTAGE OF NET SALES
Net sales................................ 100.0% 100.0% 100.0% 100.0%
Gross profit............................. 30.3 30.7 31.1 31.3
Selling and administrative expenses...... 21.2 20.7 19.6 19.7
Operating income......................... 9.1 10.0 11.5 11.6
Income taxes............................. 3.2 3.5 4.1 4.1
Net income............................... 5.4 5.8 6.9 6.9
YEAR-END 1997: (b)
Net sales................................ $282,859 $296,567 $391,348 $391,939
Cost of products sold.................... 194,194 200,969 268,147 269,847
----------- ----------- ----------- -----------
Gross profit............................. 88,665 95,598 123,201 122,092
Selling and administrative expenses...... 60,453 64,303 80,641 79,000
----------- ----------- ----------- -----------
Operating income......................... 28,212 31,295 42,560 43,092
Interest income (expense) - net.......... (1,142) (1,141) (2,209) (1,539)
----------- ----------- ----------- -----------
Income before income taxes............... 27,070 30,154 40,351 41,553
Income taxes............................. 10,152 11,307 15,132 15,582
----------- ----------- ----------- -----------
Net income............................... $ 16,918 $ 18,847 $ 25,219 $ 25,971
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income per common share ............. $ .28 $ .32 $ .43 $ .42
Weighted-average common
shares outstanding.................... 59,400 59,384 59,356 61,011
AS A PERCENTAGE OF NET SALES
Net sales................................ 100.0% 100.0% 100.0% 100.0%
Gross profit............................. 31.3 32.2 31.5 31.2
Selling and administrative expenses...... 21.4 21.7 20.6 20.2
Operating income......................... 10.0 10.6 10.9 11.0
Income taxes............................. 3.6 3.8 3.9 4.0
Net income............................... 6.0 6.4 6.4 6.6
</TABLE>
-50-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEAR-END 1996: (c)
Net sales................................ $233,477 $219,260 $255,254 $290,144
Cost of products sold.................... 160,006 150,227 176,403 192,860
------------ -------------- ------------- ------------
Gross profit............................. 73,471 69,033 78,851 97,284
Selling and administrative expenses...... 49,846 49,507 53,605 62,688
Gain on sale of subsidiary............... 3,200 - - -
------------ -------------- ------------- ------------
Operating income......................... 26,825 19,526 25,246 34,596
Interest income (expense) - net.......... (119) (8) 91 (890)
------------ -------------- ------------- ------------
Income before income taxes............... 26,706 19,518 25,337 33,706
Income taxes............................. 9,881 7,222 7,430 12,640
------------ -------------- ------------- ------------
Net income............................... $ 16,825 $ 12,296 $ 17,907 $ 21,066
------------ -------------- ------------- ------------
------------ -------------- ------------- ------------
Net income per common share ............. $ .28 $ .20 $ .30 $ .35
Weighted-average common
shares outstanding.................... 60,690 60,340 60,126 59,758
AS A PERCENTAGE OF NET SALES
Net sales................................ 100.0% 100.0% 100.0% 100.0%
Gross profit............................. 31.5 31.5 30.9 33.5
Selling and administrative expenses...... 21.3 22.6 21.0 21.6
Operating income......................... 11.5 8.9 9.9 11.9
Income taxes............................. 4.2 3.3 2.9 4.4
Net income............................... 7.2 5.6 7.0 7.3
</TABLE>
(A) FIRST QUARTER 1998 INCLUDES PARTIAL QUARTERLY RESULTS OF OPERATION OF
ALADDIN STEEL PRODUCTS, INC. ACQUISITION ACQUIRED FEBRUARY 20, 1998.
(B) THIRD QUARTER 1997 REPRESENTS 14 WEEKS OF BUSINESS ACTIVITY COMPARED TO 13
WEEKS FOR THE SAME QUARTER IN 1996 AND 1995. IN ADDITION, THE QUARTER
INCLUDES THE FIRST QUARTERLY RESULTS OF THE ALLSTEEL INC. ACQUISITION
ACQUIRED JUNE 17, 1997. FISCAL YEAR 1997 SIMILARLY REPRESENTS 53 WEEKS
COMPARED TO 52 WEEKS IN 1998 AND 1996. FOURTH QUARTER INCLUDES PARTIAL
QUARTERLY RESULTS OF OPERATION OF TWO ACQUISITIONS: BEVIS CUSTOM
FURNITURE, INC., ACQUIRED NOVEMBER 13, 1997, AND PANEL CONCEPTS, INC.,
ACQUIRED DECEMBER 1, 1997.
(C) FIRST QUARTER 1996 INCLUDES $3,200,000 PRE-TAX GAIN ON THE SALE OF RING
KING VISIBLES, INC. (AFTER-TAX GAIN OF $2,000,000, OR $0.03 PER SHARE).
THIRD QUARTER INCLUDES ONE-TIME FEDERAL AND STATE INCOME TAX CREDITS OF
$2,100,000, OR $0.04 PER SHARE. FOURTH QUARTER INCLUDES THE RESULTS OF
OPERATION OF HEAT-N-GLO FIREPLACE PRODUCTS, INC., ACQUIRED OCTOBER 2,
1996.
SUBSEQUENT EVENTS
On February 11, 1999, the Company announced a cost savings initiative to
increase long-term profitability. It will close three office furniture
manufacturing operations and consolidate substantially all production into other
U.S. manufacturing operations that have created capacity primarily through
ongoing rapid continuous improvement initiatives. 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. A charge
to pre-tax earnings of approximately $19.7 million, or $0.20 per diluted share,
will be taken in the first quarter of 1999 in connection with this
consolidation.
-51-
<PAGE>
HON INDUSTRIES Inc. and Subsidiaries
INVESTOR INFORMATION
COMMON STOCK MARKET PRICES AND DIVIDENDS
(UNAUDITED)
QUARTERLY 1998 - 1997
<TABLE>
<CAPTION>
1998 by Dividends
Quarter High Low per Share
<S> <C> <C> <C>
1st $37 3/16 $ 27 3/4 $.08
2nd 36 1/2 26 1/4 .08
3rd 32 7/8 21 1/2 .08
4th 28 1/4 20 .08
----
Total Dividends Paid $.32
----
----
</TABLE>
<TABLE>
<CAPTION>
1997 by Dividends
Quarter High Low per Share
<S> <C> <C> <C>
1st $21 1/2 $15 7/8 $.07
2nd 27 1/8 17 1/2 .07
3rd 32 1/8 22 1/8 .07
4th 31 23 13/16 .07
----
Total Dividends Paid $.28
----
----
</TABLE>
COMMON STOCK MARKET PRICE AND PRICE/
EARNINGS RATIO (UNAUDITED)
FISCAL YEARS 1998 - 1988
<TABLE>
<CAPTION>
Price/
Market Earnings
Price* Earnings Ratio
-------------------- per -------------
Year High Low Share* High Low
<S> <C> <C> <C> <C> <C>
1998 37 3/16 20 1.72 22 12
1997 32 1/8 15 7/8 1.45 22 11
1996 21 3/8 9 1/4 1.13 19 8
1995 15 5/8 11 1/2 .67 23 17
1994 17 12 .87 20 14
1993 14 5/8 10 3/4 .70 21 15
1992 11 3/4 8 1/4 .59 20 14
1991 10 1/4 6 5/8 .51 20 13
1990 11 1/2 6 3/4 .65 18 10
1989 9 5/16 4 3/8 .39 25 11
1988 5 1/8 3 15/16 .47 11 8
------------
Eleven-Year Average 20 12
------------
------------
</TABLE>
*Adjusted for the effect of stock splits
-52-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors and Shareholders HON INDUSTRIES Inc.
Our audit was conducted for the purpose of forming an opinion on the
consolidated financial statements taken as a whole. The valuation and qualifying
accounts as of and for the three fiscal years ended January 2, 1999, January 3,
1998, and December 28, 1996, are presented for the purpose of additional
analysis and are not a required part of the consolidated financial statements of
HON INDUSTRIES Inc. Such information has been subjected to the auditing
procedures applied in our audits of the consolidated financial statements and,
in our opinion, is fairly stated in all material respects in relation to the
consolidated financial statements taken as a whole.
Arthur Andersen LLP
Chicago, Illinois
February 1, 1999
-53-
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
HON INDUSTRIES INC. AND SUBSIDIARIES
JANUARY 2, 1999
- -----------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- -----------------------------------------------------------------------------------------------------------------
ADDITIONS
DESCRIPTION BALANCE AT BEGINNING (1) (2) DEDUCTIONS-- BALANCE AT END
OF PERIOD CHARGED TO COSTS CHARGED TO OTHER DESCRIBE OF PERIOD
AND EXPENSES ACCOUNTS--DESCRIBE
- -----------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Reserves deducted
in the consolidated
balance sheet from
the assets to which
they apply:
Year ended January 2,
1999: Allowance for
doubtful accounts $3,277 $1,288 $1,749 (A) $2,816
------ ------ ---------- -------
------ ------ ---------- -------
Year ended January 3,
1998: Allowance for
doubtful accounts $1,830 $2,162 $ 715 (A) $3,277
------ ------ ---------- -------
------ ------ ---------- -------
Year ended December 28,
1996: Allowance for
doubtful accounts $1,867 $1,222 $1,259 (A) $1,830
------ ------ ---------- -------
------ ------ ---------- -------
</TABLE>
Note A--Excess of accounts written off over recoveries.
-54-
<PAGE>
ITEM 14(A)(3) - INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION OF DOCUMENT NUMBER
<S> <C> <C>
(3i) Articles of Incorporation of the Registrant,
incorporated by reference to Exhibit 3(i) to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended October 3, 1998..................................... -
(3ii) By-Laws of the Registrant, incorporated by reference
to Exhibit 3ii to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended October 3, 1998................ -
(4i) Rights Agreement dated as of August 13, 1998, by and
between the Registrant and Harris Trust and Savings
Bank, as Rights Agent, incorporated by reference to
Exhibit 4.1 to Registration Statement on Form 8-A filed
August 14, 1998, as amended by Form 8-A/A filed
September 14, 1998, incorporated by reference
to Exhibit 4.1 on Form 8-K filed August 10, 1998.................. -
(10i) 1995 Stock Based Compensation Plan, as amended and
restated effective May 13, 1997, incorporated by
reference to Exhibit A to the Registrants' proxy
statement dated March 28, 1997, related to the
Registrant's annual meeting of shareholders held
on May 13, 1997................................................... -
(10ii) 1997 Equity Plan for Non-Employee Directors,
incorporated by reference to Exhibit B to the
Registrant's proxy statement dated March 28, 1997,
related to the Registrant's annual meeting of
shareholders held on May 13, 1997................................. -
(10iii) Form of Registrant's Change in Control Agreement,
incorporated by reference to Exhibit 10 to the
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1994.................................. -
(10iv) Executive Long-Term Incentive Compensation Plan of the
Registrant, incorporated by reference to Exhibit 99B to
the Registrant's Annual Report
on Form 10-K for the year ended December 30, 1995................. -
</TABLE>
-55-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
(10v) ERISA Supplemental Retirement Plan of the Registrant,
incorporated by reference to Exhibit 99C to the
Registrant's Annual Report on Form 10-K for
the year ended December 30, 1995.................................. -
(10vi) 1994 Members Stock Purchase Plan of the Registrant,
incorporated by reference to Exhibit 4.3 to the
Registrant's Registration Statement
No. 33-54163 on Form S-8 filed June 16, 1994...................... -
(10vii) Agreement as Consultant and Director, dated November 15,
1995, between the Registrant and Robert L. Katz,
incorporated by reference to the same numbered exhibit
filed with the Registrant's Annual Report on Form 10-K/A
for the fiscal year ended December 28, 1996....................... -
(10viii) Form of Director and Officer Indemnification Agreement
of the Registrant, incorporated by reference to the same
numbered exhibit filed with the Registrant's Annual
Report on Form 10-K/A
for the fiscal year ended December 28, 1996....................... -
(10ix) Form of Common Stock Grant Agreement of the Registrant,
incorporated by reference to the same numbered exhibit
filed with the Registrant's Annual Report on Form 10-K/A
for the fiscal year ended December 28, 1996....................... -
(10x) Form of HON INDUSTRIES Inc. Stock-Based Compensation
Plan Stock Option Award Agreement of the Registrant,
incorporated by reference to the same numbered exhibit
filed with the Registrant's Annual Report on Form 10-K/A
for the fiscal year ended December 28, 1996....................... -
(10xi) Stock Purchase Agreement of the Registrant, dated
September 18, 1985, as amended by amendment dated
February 11, 1991, between the
Registrant and Stanley M. Howe.................................... -
(10xii) Real Estate Contract of the Registrant, dated
November 15, 1997, between the Registrant
and Terrence L. and Loretta B. Mealy.............................. -
</TABLE>
-56-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
(16) Letter of Former Accountant, incorporated
by reference to the Registrant's Report on Form 8-K
dated May 14, 1996................................................ -
(21) Subsidiaries of the Registrant ................................... 58
(23) Consent of Independent Public Accountants ........................ 59
(27) Financial Data Schedule .......................................... 60
(99A) Executive Bonus Plan of the Registrant, incorporated by
reference to the same numbered exhibit filed with the
Registrant's Annual Report on Form 10-K for
the fiscal year ended December 28, 1996 .......................... -
(99B) Executive Deferred Compensation Plan of the Registrant,
incorporated by reference to the same numbered exhibit
filed with the Registrant's Annual Report on Form 10-K
for the fiscal year
ended December 28, 1996........................................... -
</TABLE>
Long-term debt of the Registrant or various of its subsidiaries is outstanding
under numerous instruments. No such instrument authorizes an amount of
securities thereunder in excess of 10% of the total assets of Registrant and its
subsidiaries on a consolidated basis. The Registrant agrees that it will furnish
a copy of any such instrument to the Securities and Exchange Commission upon its
request.
-57-
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
COUNTRY/STATE
SUBSIDIARY OF INCORPORATION DOING BUSINESS AS
- ---------- ---------------- -----------------
<S> <C> <C>
AHC Inc. Alabama AHC Inc.
Allsteel Inc. Illinois Allsteel Inc.
BPI Inc. Iowa BPI Inc.
The Gunlocke Company Iowa The Gunlocke Company
Gas Fire Development, Inc Minnesota Gas Fire Development, Inc.
Hearth Technologies Inc. Iowa Hearth Technologies Inc.
HFM Partners Iowa HFM Partners
Hiebert East, Inc. Iowa Hiebert East, Inc.
Holga Inc. Iowa Holga Inc.
HON Export Limited Iowa HON Export Limited
HON Financial Corporation III Iowa HON Financial Corporation III
HON Financial Services Inc. Iowa HON Financial Services Inc.
HON INDUSTRIES (Canada) Inc. Canada HON INDUSTRIES (Canada) Inc.
HON (Mexico) L.L.C. Iowa HON (Mexico) L.L.C.
HON Technology Inc. Iowa HON Technology Inc.
Murphy-Miller Co. Iowa Murphy-Miller Co.
Panel Concepts, Inc. Delaware Panel Concepts, Inc.
T. M. Export Inc. Barbados T. M. Export Inc.
Hearth Technologies (Canada) Inc. Canada Hearth Technologies (Canada) Inc.
Precision Gas Technology of Canada, Inc. Canada Precision Gas Technology of Canada,
Inc.
1640-7041 Quebec Inc. Canada 1640-7041 Quebec Inc.
HON INDUSTRIAS Sde R.L.de C.V. Mexico HON INDUSTRIAS Sde R.L.de C.V.
HON INDUSTRIAS II Sde R.L.de C.V. Mexico HON INDUSTRIAS II Sde R.L.de
C.V.
Chandler Attwood Limited Iowa Inactive
CorryHiebert Corporation Iowa Inactive
</TABLE>
-58-
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report, included in this Form 10-K, into HON INDUSTRIES Inc.'s previously filed
Registration Statement Files Nos. 33-20759, 33-61305, and 33-27121 on Form S-8
and No. 333-36433 on Form S-3.
Arthur Andersen LLP
Chicago, Illinois
March 25, 1999
59
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<PAGE>
<ARTICLE> 5
<CIK> 0000048287
<NAME> HON INDUSTRIES INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> JAN-02-1999
<CASH> 17,500
<SECURITIES> 169
<RECEIVABLES> 186,392
<ALLOWANCES> 2,816
<INVENTORY> 67,225
<CURRENT-ASSETS> 290,329
<PP&E> 653,735
<DEPRECIATION> 209,558
<TOTAL-ASSETS> 864,469
<CURRENT-LIABILITIES> 217,438
<BONDS> 128,069
0
0
<COMMON> 61,290
<OTHER-SE> 400,732
<TOTAL-LIABILITY-AND-EQUITY> 864,469
<SALES> 1,696,433
<TOTAL-REVENUES> 1,696,433
<CGS> 1,172,997
<TOTAL-COSTS> 1,172,997
<OTHER-EXPENSES> 344,259
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,068
<INCOME-PRETAX> 170,109
<INCOME-TAX> 63,796
<INCOME-CONTINUING> 106,313
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 106,313
<EPS-PRIMARY> 1.72
<EPS-DILUTED> 1.72
</TABLE>
