UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 3, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number 0-2648
HON INDUSTRIES Inc.
(Exact name of Registrant as specified in its charter)
Iowa 42-0617510
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
P.O. Box 1109, 414 East Third Street, Muscatine, Iowa 52761-0071
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 319/264-7400
Indicate by check mark whether the registrant (1) has filed all
required reports to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
Indicate the number of share outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Class Outstanding at July 3, 1999
Common Shares, $1 Par Value 61,178,459 shares
Exhibit Index is on page 17.
<PAGE>
HON INDUSTRIES Inc. and SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
July 3, 1999, and January 2, 1999 3-4
Condensed Consolidated Statements of Income -
Three Months Ended July 3, 1999, and July 4, 1998 5
Condensed Consolidated Statements of Income -
Six Months Ended July 3, 1999, and July 4, 1998 6
Condensed Consolidated Statements of Cash Flows -
Six Months Ended July 3, 1999, and July 4, 1998 7
Notes to Condensed Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
EXHIBIT INDEX 17
(27) Financial Data Schedule 18
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 3, January 2,
1999 1999
(Unaudited)
ASSETS (In thousands)
CURRENT ASSETS
Cash and cash equivalents $ 21,777 $17,500
Short-term investments - 169
Receivables 191,051 183,576
Inventories (Note B) 72,870 67,225
Deferred income taxes 16,093 12,477
Prepaid expenses and other current assets 12,259 9,382
Total Current Assets 314,050 290,329
PROPERTY, PLANT, AND EQUIPMENT, at cost
Land and land improvements 16,249 12,156
Buildings 171,199 144,559
Machinery and equipment 454,078 411,238
Construction in progress 61,069 85,782
702,595 653,735
Less accumulated depreciation 237,621 209,558
Net Property, Plant, and Equipment 464,974 444,177
GOODWILL 108,509 108,586
OTHER ASSETS 20,807 21,377
Total Assets $908,340 $864,469
See accompanying notes to condensed consolidated financial
statements.
<PAGE>
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 3, January 2,
1999 1999
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY (In thousands)
CURRENT LIABILITIES
Accounts payable and accrued expenses $194,311 $193,859
Income taxes 6,802 1,921
Note payable and current maturities
of long-term debt 14,310 15,769
Current maturities of other long-term
obligations 4,069 5,889
Total Current Liabilities 219,492 217,438
LONG-TERM DEBT 147,879 128,069
CAPITAL LEASE OBLIGATIONS 6,776 7,494
OTHER LONG-TERM LIABILITIES 17,845 18,067
DEFERRED INCOME TAXES 33,914 31,379
SHAREHOLDERS' EQUITY
Capital Stock:
Preferred, $1 par value; authorized
2,000,000 shares; no shares outstanding - -
Common, $1 par value; authorized
200,000,000 shares; outstanding - 61,178 61,290
1999 - 61,178,459 shares;
1998 - 61,289,618 shares
Paid-in capital 46,095 48,348
Retained earnings 374,280 351,786
Accumulated other comprehensive income 881 598
Total Shareholders' Equity 482,434 462,022
Total Liabilities and Shareholders' $908,340 $864,469
Equity
See accompanying notes to condensed consolidated financial
statements.
<PAGE>
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
July 3, July 4,
1999 1998
(In thousands, except
per share data)
Net sales $419,708 $401,417
Cost of products sold 292,077 278,107
Gross Profit 127,631 123,310
Selling and administrative expenses 89,785 83,213
Operating Income 37,846 40,097
Interest income 202 213
Interest expense 2,601 2,904
Income Before Income Taxes 35,447 37,406
Income taxes 12,938 14,027
Net Income $ 22,509 $ 23,379
Net income per common share $0.37 $0.38
Average number of common shares 61,169,059 61,663,050
outstanding
Cash dividends per common share $0.095 $0.08
See accompanying notes to condensed consolidated financial
statements.
<PAGE>
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Six Months Ended
July 3, July 4,
1999 1998
(In thousands, except
per share data)
Net sales $844,167 $819,680
Cost of products sold 587,299 569,678
Gross Profit 256,868 250,002
Selling and administrative expenses 179,049 171,776
Provision for closing facilities (Note C) 19,679 -
Operating Income 58,140 78,226
Interest income 386 648
Interest expense 4,830 5,511
Income Before Income Taxes 53,696 73,363
Income taxes 19,599 27,511
Net Income $ 34,097 $ 45,852
Net income per common share $0.56 $0.74
Average number of common shares 61,161,543 61,655,604
outstanding
Cash dividends per common share $0.19 $0.16
See accompanying notes to condensed consolidated financial
statements.
<PAGE>
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
July 3, July 4,
1999 1998
(In thousands)
Net Cash Flows From (To) Operating
Activities:
Net income $ 34,097 $ 45,852
Noncash items included in net income:
Depreciation and amortization 31,434 24,650
Other postretirement and postemployment
benefits 997 49
Deferred income taxes (1,272) 3,090
Other - net (91) (24)
Net increase (decrease) in noncash
operating assets and liabilities (12,357) (13,530)
Increase (decrease) in other liabilities (1,344) (751)
Net cash flows from operating activities 51,464 59,336
Net Cash Flows From (To) Investing
Activities:
Capital expenditures - net (49,901) (80,016)
Acquisition spending, net of cash acquired (1,637) (11,310)
Short-term investments - net 169 (4)
Long-term investments (519) (8)
Other - net - 4
Net cash flows (to) investing activities (51,888) (91,334)
Net Cash Flows From (To) Financing
Activities:
Purchase of HON INDUSTRIES common stock (7,630) (1,387)
Proceeds from long-term debt 52,002 45,781
Payments of note and long-term debt (33,368) (21,064)
Proceeds from sales of HON INDUSTRIES
common stock to members and stock-based
compensation 5,301 2,061
Dividends paid (11,604) (9,868)
Net cash flows from (to) financing
activities 4,701 15,523
Net increase (decrease) in cash and
cash equivalents 4,277 (16,475)
Cash and cash equivalents at beginning
of period 17,500 46,080
Cash and cash equivalents at end of period $ 21,777 $ 29,605
See accompanying notes to condensed consolidated financial
statements.
<PAGE>
HON INDUSTRIES Inc. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
July 3, 1999
Note A. Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the six-month period
ended July 3, 1999, are not necessarily indicative of the results
that may be expected for the year ending January 1, 2000. For
further information, refer to the consolidated financial
statements and footnotes included in the Company's annual report
on Form 10-K for the year ended January 2, 1999.
Note B. Inventories
Inventories of the Company and its subsidiaries are summarized as
follows:
July 3, 1999 January 2,
($000) (Unaudited) 1999
Finished products $ 28,736 $ 24,955
Materials and work in process 55,257 53,320
LIFO allowance (11,123) (11,050)
$ 72,870 $ 67,225
Note C. Provision for Closing Facilities
On February 11, 1999, the Company adopted a plan to close three
of its office furniture facilities located in Winnsboro, South
Carolina; Sulphur Springs, Texas; and Mt. Pleasant, Iowa. The
operations will close following an orderly transition of
production to other facilities which is expected to be completed
during the second and third quarters of 1999. A pretax charge of
$19.7 million or $0.20 per diluted share was recorded during the
quarter ended April 3, 1999. The charge includes $12.5 million
for write-offs of plant and equipment, $2.6 million for severance
arising from the elimination of approximately 360 manufacturing-
related positions, $2.1 million for other employee-related costs,
and $2.4 million for certain other expenses associated with the
closing of the facilities.
During the six-month period ended July 3, 1999, $7.3 million of
pretax exit costs were paid and charged against the liability.
It included $4.7 million noncash write-off of plant and
equipment, $1.8 million for severance for 326 positions, $.4
million for other employee-related expenses, and $.4 million for
certain other expenses associated with the closing of the
facilities.
Note D. New Accounting Standards
In March 1998, the Accounting Standards Executive Committee of
the AICPA issued Statement of Position (SOP) 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for
Internal Use." The SOP, which was adopted as of January 3, 1999,
the beginning of the Company's 1999 fiscal year, requires the
capitalization of certain costs incurred in connection with
developing or obtaining internal use software. Prior to the
adoption of SOP 98-1, the Company expensed all internal use
software-related costs as incurred. The effect of adopting the
SOP was immaterial on the Company's financial condition or
results of operation during the six-month period ended July 3,
1999.
Note E. Comprehensive Income
The Company adopted Statement of Financial Accounting Standards
(SFAS) No. 130, "Reporting Comprehensive Income," as of January
4, 1998, the beginning of its 1998 fiscal year. The Company's
comprehensive income consists of an unrealized holding gain or
loss on equity securities available-for-sale under SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities," and nominal foreign currency adjustments.
Note F: Business Segment Information
The Company adopted Statement of Financial Accounting Standards
(SFAS) No. 131, "Disclosures about Segments of an Enterprise and
Related Information," effective with its 1998 fiscal year
beginning January 4, 1998. Management views the Company as being
in two business segments: office furniture and hearth products
with the former being the principal business segment.
The office furniture segment manufactures and markets a broad
line of metal and wood commercial and home office furniture which
includes file cabinets, desks, credenzas, chairs, storage
cabinets, tables, bookcases, freestanding office partitions and
panel systems, and other related products. The hearth product
segment manufactures and markets a broad line of manufactured gas-
, pellet- and wood-burning fireplaces and stoves, fireplace
inserts, and chimney systems principally for the home.
For purposes of segment reporting, intercompany sales transfers
between segments are not material and operating profit is income
before income taxes exclusive of certain unallocated corporate
expenses. These unallocated corporate expenses include the net
cost of the Company's corporate operations, interest income, and
interest expense. Management views interest income and expense
as corporate financing costs and not as a business segment cost.
In addition, management applies one effective tax rate to its
consolidated income before income taxes so income taxes are not
reported or viewed internally on a segment basis.
No geographic information for revenues from external customers or
for long-lived assets is disclosed inasmuch as the Company's
primary market and capital investments are concentrated in the
United States.
Reportable segment data reconciled to the consolidated financial
statements for the three-month and six-month period ended July 3,
1999, and July 4, 1998, is a follows:
Three Months Ended Six Months Ended
July 3, July 4, July 3, July 4,
1999 1998 1999 1998
(In thousands)
Net Sales:
Office furniture $349,814 $343,493 $709,795 $710,329
Hearth products 69,894 57,924 134,372 109,351
$419,708 $401,417 $844,167 $819,680
Operation Profit:
Office furniture
Normal operations $ 32,792 $ 39,295 $ 69,086 $ 75,958
Facility closedown provision - - (19,679) -
Office furniture - net 32,792 39,295 49,407 $ 75,958
Hearth products 10,239 6,725 16,023 9,656
Total operating profit 43,031 46,020 65,430 85,614
Unallocated corporate expense (7,584) (8,614) (11,734) (12,251)
Income before income taxes $ 35,447 $ 37,406 $ 53,696 $ 73,363
Identifiable Assets:
Office furniture $682,861 $606,765
Hearth products 165,531 150,645
General corporate 59,948 63,800
$908,340 $821,210
Depreciation & Amortization
Expense
Office furniture $ 12,815 $ 10,093 $ 25,273 $ 19,743
Hearth products 2,712 2,318 5,319 4,260
General corporate 511 328 842 647
$ 16,038 $ 12,739 $ 31,434 $ 24,650
Capital Expenditure, Net:
Office furniture $ 14,187 $ 34,058 $ 34,478 $ 69,752
Hearth products 4,660 4,415 8,963 8,941
General corporate 910 1,476 6,460 1,323
$ 19,757 $ 39,949 $ 49,901 $ 80,016
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
A summary of the period-to-period changes in the principal items
included in the Condensed Consolidated Statements of Income is
shown below:
Comparison of
Increases (Decreases) Three Months Six Months Three Months
Ended Ended Ended
Dollars in Thousand July 3, 1999 & July 3, 1999 & July 3, 1999 &
July 4, 1998 July 4, 1998 April 3, 1999
Net sales $18,291 4.6% $24,487 3.0% $(4,751) (1.1)%
Cost of products sold 13,970 5.0 17,621 3.1 (3,145) (1.1)
Selling &
Administrative
expenses 6,572 7.9 7,273 4.2 521 0.6
Provision for closing
facilities - - 19,679 - 19,679 -
Interest income (11) (5.2) (262) (40.4) 18 9.8
Interest expense (303)(10.4) (681) (12.4) 372 16.7
Income taxes (1,089) (7.8) (7,912) (28.8) 6,277 94.2
Net income (870) (3.7) (11,755) (25.6) 10,921 94.2
The Company reported its fourteenth consecutive quarterly record
net sales. Consolidated net sales for the second quarter ended
July 3, 1999, were $419.7 million, up 4.6%, compared to $401.4
million for the same quarter a year ago. Net income reached
$22.5 million, compared to $23.4 million for second quarter 1998,
a decrease of 3.7%. Net income per share for the quarter was
$0.37 per diluted share, a decrease of 2.6% from $0.38 per
diluted share earned in second quarter 1998.
For the first six months of 1999, consolidated net sales rose
3.0% to $844.2 million from $819.7 million last year. The
closing of three plants, a cost savings initiative to increase
long-term profitability, was announced in first quarter.
Accounting for a one-time charge of $19.7 million against pre-tax
earnings, net income for the first six months was $34.1 million
or $0.56 per share. Net income, before the charge, reached $46.6
million, an increase of 1.6% from $45.9 million in the first half
of 1998. Prior to the one-time charge, net income per share was
$0.76 per diluted share compared to $0.74 per share in 1998.
Please refer to Note C for additional information regarding the
one-time charge.
For the second quarter of 1999, office furniture comprised 83% of
consolidated net sales and hearth products comprised 17%. Net
sales for office furniture were up 2% and hearth products sales
increased 21% for the quarter compared to the same quarter a year
ago. Office furniture contributed 76% of second quarter 1999
consolidated operating profit before unallocated corporate
expenses and hearth products 24%.
Consolidated gross profit margin for the second quarter of 1999
was 30.4% compared to 30.7% for the same period in 1998. As an
investment for the future, the Company has increased capacity.
However, modest revenue growth in office furniture during the
second quarter did not allow the Company to adequately absorb the
increased fixed costs, adversely impacting gross profit.
Management continues to focus on improving gross margins by
improving the net selling price of products and on reducing
production costs.
Selling and administrative expenses for the second quarter of
1999 were 21.4% compared to 20.7% in the comparable quarter of
1998. The Company has implemented a number of internal
initiatives to better serve customers through shorter lead times,
improved complete and on-time deliveries, and reduced
transportation damage. These initiatives have resulted in
increased freight costs and, in turn, increased selling and
administrative expenses. Excluding freight, selling and
administrative expenses for the second quarter of 1999 were 15.0%
compared to 15.3% in second quarter 1998.
The Company decreased its estimated annual effective tax rate to
36.5% for the first six months of 1999 from 37.5% a year earlier
to reflect lower estimated state income taxes.
Liquidity and Capital Resources
As of July 3, 1999, cash and short-term investments increased to
$21.8 million from $10.7 million at the end of first quarter
1999. Net cash flows from operations contributed to the
improvement. Cash flow and working capital management are major
focuses of management to ensure the Company is poised for
continued future growth.
Net capital expenditures for the first six months of 1999 were
$49.9 million compared to $80.0 million for the same six-month
period in 1998. These expenditures primarily represent
investment in new, more efficient machinery and equipment and
completion of capacity expansion projects started in 1998. These
investments were funded by a combination of cash reserves, cash
from operations, and a revolving credit agreement.
The Board of Directors declared a regular quarterly cash dividend
of $0.095 per share on its common stock on May 10, 1999, to
shareholders of record at the close of business on May 20. It
was paid on June 1, 1999, and represented the 177th consecutive
quarterly dividend paid by the Company.
For the six months ended July 3, 1999, the Company repurchased
338,322 shares of its common stock at a cost of approximately
$7.6 million or an average price of $22.55 per share. As of July
3, 1999, approximately $54.8 million of the Board's current
repurchase authorization remained unspent.
Year 2000
The Company is in the final stages of implementing its
comprehensive Year 2000 ("Y2K") Readiness Plan, and has launched
its Year 2000 Contingency Plan. The primary mission of these
Plans is to maintain business continuity by giving priority
remediation and resolution to any Year 2000 issue that could
compromise normal business operations.
The Year 2000 project is focused on three business fronts: (1)
information technology, which encompasses traditional computer
hardware, software, and related networks; (2) operations, which
encompasses material suppliers, equipment vendors, and embedded
chips used by facility, production, and distribution machinery,
equipment, and support processes; and (3) customers and other
nonoperational service providers.
The Year 2000 Readiness Plan work is still on schedule to be
completed during the third quarter of 1999, leaving fourth
quarter of 1999 primarily for follow-up compliance testing and
contingency planning as needed. The Company still estimates its
total incremental out-of-pocket project costs will not exceed the
$1.0 - $1.5 million range, including some costs that, because of
their nature, will be capitalized. All Year 2000 costs
associated with this project are being expensed in the period
incurred. Through the fiscal quarter ended July 3, 1999, the
Company has incurred and recorded project related costs of
approximately $353,000.
At this point, the Company assesses its internal Y2K issues to be
fairly minor and routine in nature. Current efforts are being
concentrated on internal readiness testing of equipment and
processes. While the Company does not anticipate any material
business interruptions due to Year 2000 issues that are within
its control, this outcome is also dependent on many other
business and service partners having their Year 2000 house in
order. These partners include among others: utility service
providers; key suppliers, including a few foreign suppliers; key
customers; banking system; equipment vendors; and software and
other related system and service providers. In these cases, the
Company is relying principally on individual Y2K readiness
statements by these providers.
Given the unusual nature of the Y2K challenge, even with a
comprehensive and responsive due diligence effort, business risk
can not be totally avoided. Management views the Company's
business risks to include, but not necessarily limited to, the
following: higher than expected remediation costs, exclusion of
coverage by insurers for losses/damages attributable to Year 2000
issues, loss of production, loss of sales, and litigation risk.
In a worst-case scenario, the Company will utilize short-term
solutions, as appropriate, until the problem is remedied.
Looking Ahead
Management expects to continue to exceed industry sales growth
for the balance of the year in both segments in which it
participates. Management is encouraged by positive economic
indicators and customer reaction to the Company's new products
and continued focus on service.
Except for the historic information contained herein, the matters
discussed in this Form 10-Q are forward-looking statements. Such
forward-looking statements involve risks and uncertainties which
could cause actual results or outcomes to differ materially from
those discussed in the forward-looking statements including but
not limited to: competitive conditions, pricing trends in the
office furniture and hearth products markets, acceptance of the
Company's new product introductions, the overall growth rate of
the office furniture and hearth product industries, the
achievement of cost reductions and productivity in the Company's
operations, the impact of future acquisitions, the Company's
ability to identify and correct or implement remediation and
contingency plans to deal with the Y2K issues, as well as the
risks, uncertainties, and other factors described from time to
time in the Company's SEC filings and reports.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. See Exhibit Index.
(b) Reports on Form 8-K. No reports on Form 8-K were filed
during the quarter for which this report is filed.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Dated: August 5, 1999 HON INDUSTRIES Inc.
By /s/ David C. Stuebe
David C. Stuebe
Vice President and
Chief Financial Officer
By /s/ Melvin L. McMains
Melvin L. McMains
Vice President
and Controller
<PAGE>
PART II. EXHIBITS
EXHIBIT INDEX Page
(27) Financial Data Schedule 18
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<NAME> HON INDUSTRIES INC.
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<PERIOD-START> JAN-3-1999
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