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 1, 2000
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 1, 2000
Common Shares, $1 Par Value 60,164,436 shares
Exhibit Index is on Page 16.
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HON INDUSTRIES Inc. and SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
July 1, 2000, and January 1, 2000 3-4
Condensed Consolidated Statements of Income -
Three Months Ended July 1, 2000, and July 3, 1999 5
Condensed Consolidated Statements of Income -
Six Months Ended July 1, 2000, and July 3, 1999 6
Condensed Consolidated Statements of Cash Flows -
Six Months Ended July 1, 2000, and July 3, 1999 7
Notes to Condensed Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
EXHIBIT INDEX 16
(27) Financial Data Schedule 17
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 1, January 1,
(Unaudited) 2000
ASSETS (In thousands)
CURRENT ASSETS
Cash and cash equivalents $ 19,095 $ 22,168
Receivables 222,009 196,730
Inventories (Note B) 97,382 74,937
Deferred income taxes 13,787 13,471
Prepaid expenses and other current assets 10,486 9,250
Total Current Assets 362,759 316,556
PROPERTY, PLANT, AND EQUIPMENT, at cost
Land and land improvements 19,113 17,114
Buildings 186,369 181,080
Machinery and equipment 495,698 469,268
Construction in progress 33,087 37,819
734,267 705,281
Less accumulated depreciation 276,719 249,690
Net Property, Plant, and Equipment 457,548 455,591
GOODWILL 222,954 113,116
OTHER ASSETS 20,999 21,460
Total Assets $1,064,260 $906,723
See accompanying notes to condensed consolidated financial statements.
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HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 1, January 1,
2000 2000
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY (In thousands)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 216,967 $213,072
Income taxes 10,401 -
Note payable and current maturities
of long-term debt 6,014 6,106
Current maturities of other long-term
obligations 3,654 5,945
Total Current Liabilities 237,036 225,123
LONG-TERM DEBT 229,380 119,860
CAPITAL LEASE OBLIGATIONS 3,146 4,313
OTHER LONG-TERM LIABILITIES 18,152 18,015
DEFERRED INCOME TAXES 39,209 38,141
SHAREHOLDERS' EQUITY
Capital Stock:
Preferred, $1 par value; authorized
2,000,000 shares; no shares outstanding - -
Common, $1 par value; authorized
200,000,000 shares; outstanding - 60,164 60,172
2000 - 60,164,436 shares;
1999 - 60,171,753 shares
Paid-in capital 25,759 24,981
Retained earnings 450,760 416,034
Accumulated other comprehensive income 654 84
Total Shareholders' Equity 537,337 501,271
Total Liabilities and Shareholders'
Equity $1,064,260 $906,723
See accompanying notes to condensed consolidated financial statements.
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HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
July 1, July 3,
2000 1999
(In thousands, except
per share data)
Net sales $506,552 $419,708
Cost of products sold 343,842 292,077
Gross Profit 162,710 127,631
Selling and administrative expenses 122,416 89,785
Operating Income 40,294 37,846
Interest income 434 202
Interest expense 4,122 2,601
Income Before Income Taxes 36,606 35,447
Income taxes 13,188 12,938
Net Income 23,418 22,509
Net income per common share $.39 $.37
Average number of common shares
outstanding 60,144,502 61,169,059
Cash dividends per common share $.11 $.095
See accompanying notes to condensed consolidated financial statements.
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HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Six Months Ended
July 1, July 3,
2000 1999
(In thousands, except
per share data)
Net sales $985,153 $844,167
Cost of products sold 673,258 587,299
Gross Profit 311,895 256,868
Selling and administrative expenses 230,708 179,049
Provision for closing facilities (Note C) - 19,679
Operating Income 81,187 58,140
Interest income 723 386
Interest expense 6,961 4,830
Income Before Income Taxes 74,949 53,696
Income taxes 26,991 19,599
Net Income 47,958 34,097
Net income per common share $.80 $.56
Average number of common shares
outstanding 60,165,177 61,161,543
Cash dividends per common share $.22 $.19
See accompanying notes to condensed consolidated financial statements.
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HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
July 1, July 3,
2000 1999
(In thousands)
Net Cash Flows From (To) Operating
Activities:
Net income $ 47,958 $ 34,097
Noncash items included in net income:
Depreciation and amortization 38,832 31,434
Other postretirement and postemployment
benefits 914 997
Deferred income taxes 300 (1,272)
Other - net (3) (91)
Net increase (decrease) in noncash
operating assets and liabilities (20,739) (12,357)
Increase (decrease) in other liabilities (915) (1,344)
Net cash flows from operating activities 66,347 51,464
Net Cash Flows From (To) Investing
Activities:
Capital expenditures - net (29,651) (49,722)
Capitalized software (230) (179)
Acquisition spending, net of cash acquired (134,648) (1,637)
Short-term investments - net - 169
Long-term investments - (519)
Net cash flows (to) investing activities (164,529) (51,888)
Net Cash Flows From (To) Financing
Activities:
Purchase of HON INDUSTRIES common stock (7,239) (7,630)
Proceeds from long-term debt 150,059 52,002
Payments of note and long-term debt (42,487) (33,368)
Proceeds from sales of HON INDUSTRIES
common stock to members and stock-based
compensation 8,009 5,301
Dividends paid (13,233) (11,604)
Net cash flows from (to) financing
activities 95,109 4,701
Net increase (decrease) in cash and
cash equivalents (3,073) 4,277
Cash and cash equivalents at beginning
of period 22,168 17,500
Cash and cash equivalents at end of period $ 19,095 $ 21,777
See accompanying notes to condensed consolidated financial statements.
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HON INDUSTRIES Inc. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
July 1, 2000
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 1, 2000, are not necessarily indicative of the results
that may be expected for the year ending December 30, 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 1, 2000.
Note B. Inventories
Inventories of the Company and its subsidiaries are summarized as
follows:
July 1, 2000 January 1,
($000) (Unaudited) 2000
Finished products $ 57,456 $ 29,663
Materials and work in process 50,419 55,737
LIFO allowance (10,493) (10,463)
$ 97,382 $ 74,937
Note C. Provision for Closing Facilities
On February 11, 1999, the Company adopted a plan to close three
of its office furniture facilities located in Winnsboro, South
Carolina; Sulphur Springs, Texas; and Mt. Pleasant, Iowa. A
pretax charge of $19.7 million or $0.20 per diluted share was
recorded during the quarter ended April 3, 1999. As of July 1,
2000, the primary costs not yet incurred relate to costs
associated with the closed buildings and workers' compensation
claims. Management believes the remaining reserve of
approximately $4 million to be adequate to cover these
obligations.
Note D. Business Combinations
On February 29, 2000, the Company completed the acquisition of
its Hearth Services division which consists of two leading hearth
products distributors, American Fireplace Company (AFC) and the
Allied Group (Allied), establishing the Company as the leading
manufacturer and distributor in the hearth products industry.
The Company acquired AFC and Allied for approximately $135
million in cash and debt including acquisition costs. The
acquisition has been accounted for using the purchase method and
the results of AFC and Allied have been included in the Company's
financial statements since the date of acquisition. The excess
of the consideration paid over the fair value of the business of
$21 million was recorded as goodwill and is being amortized on a
straight-line basis over 20 years. This allocation of purchase
price is preliminary and subject to change as additional
information is obtained related to the resolution of the fair
value of contracts acquired.
Note E. Comprehensive Income
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
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 1,
2000, and July 3, 1999, is a follows:
Three Months Ended Six Months Ended
July 1, July 3, July 1, July 3
2000 1999 2000 1999
(In thousands)
Net Sales:
Office furniture $405,838 $349,814 $ 801,475 $709,795
Hearth products 100,714 69,894 183,678 134,372
$506,552 $419,708 $ 985,153 $844,167
Operation Profit:
Office furniture
Normal operations $ 40,840 $ 32,792 $ 79,412 $ 69,086
Facility closedown provision - - - (19,679)
Office furniture - net 40,840 32,792 79,412 49,407
Hearth products 5,473 10,239 10,243 16,023
Total operating profit 46,313 43,031 89,655 65,430
Unallocated corporate expense (9,707) (7,584) (14,706) (11,734)
Income before income taxes $ 36,606 $ 35,447 $ 74,949 $ 53,696
Identifiable Assets:
Office furniture $ 660,339 $682,861
Hearth products 336,887 165,531
General corporate 67,034 59,948
$1,064,260 $908,340
Depreciation & Amortization
Expense
Office furniture $ 14,880 $ 12,815 $ 29,254 $ 25,273
Hearth products 4,962 2,712 8,561 5,319
General corporate 491 511 1,017 842
$ 20,333 $ 16,038 $ 38,832 $ 31,434
Capital Expenditure, Net:
Office furniture $ 6,768 $ 14,184 $ 17,246 $ 34,475
Hearth products 5,704 4,622 10,258 8,787
General corporate 1,156 910 2,147 6,460
$ 13,628 $ 19,716 $ 29,651 $ 49,722
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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 1, 2000 & July 1, 2000 & July 1, 2000 &
July 3, 1999 July 3, 1999 April 1, 2000
Net sales $ 86,844 20.7% $140,986 16.7% $ 27,951 5.8%
Cost of products sold 51,765 17.7 85,959 14.6 14,426 4.4
Selling &
Administrative expenses 32,631 36.3 51,659 28.9 14,124 13.0
Provision for closing
facilities - - (19,679) N/M - -
Interest income 232 114.9 337 87.3 145 50.2
Interest expense 1,521 58.5 2,131 44.1 1,283 45.2
Income taxes 250 1.9 7,392 37.7 (615) (4.5)
Net income 909 4.0 13,861 40.7 (1,122) (4.6)
The Company reported its eighteenth consecutive quarterly record
net sales. Consolidated net sales for the second quarter ending
July 1, 2000, were $506.6 million, up 20.7%, compared to $419.7
million for the same quarter a year ago. Net income reached
$23.4 million, compared to $22.5 million for second quarter 1999,
an increase of 4.0%. Net income per common share for the quarter
was $0.39 per diluted share, an increase of 5.4% from $0.37 per
diluted share earned in second quarter 1999.
For the first six months of 2000, consolidated net sales rose
16.7% to $985.2 million from $844.2 million last year. Net
income was $48.0 million, compared to $46.6 million for the same
period a year ago prior to a $12.5 million after-tax charge for
plant closings in 1999. Net income per common share for the
first six months of 2000 was $0.80 per diluted share, a 5.3%
increase from $0.76 per share from ongoing operations for the
same period in 1999. Results for 1999 included a $0.20 per share
provision for the closing of three plants. After the charge,
1999 net income for the first six months was $34.1 million or
$0.56 per share.
For the second quarter of 2000, office furniture comprised 80.0%
of consolidated net sales and hearth products comprised 20.0%.
Net sales for office furniture were up 16.0%. Hearth products
sales increased 44.1% for the quarter compared to the same
quarter a year ago. Proforma second quarter 2000 hearth product
sales, excluding the February 29, 2000, acquisition of American
Fireplace Company and the Allied Group, decreased 0.3% for the
quarter. Office furniture contributed 88.0% of second quarter
2000 consolidated operating profit before unallocated corporate
expenses and hearth products contributed 12.0%.
The consolidated gross profit margin for the second quarter of
2000 was 32.1% compared to 30.4% for the same period in 1999.
The gross profit improvement reflects the combination of improved
price realization and productivity from rapid continuous
improvement programs.
Selling and administrative expenses for the second quarter of
2000 were 24.2% of net sales compared to 22.6% in the comparable
quarter of 1999. The Company continued to experience increased
costs to establish and promote the HON and Allsteel brands in
their respective market segments including increased sales and
administrative support and new sales literature. The acquisition
of Hearth Services and new strategic growth initiatives in Hearth
Technologies' outdoor and international businesses also
contributed to the increase in selling and administrative
expenses. Freight expenses, which is included in selling and
administrative expenses, remained relatively unchanged from
second quarter 1999 at 6.2% of net sales in spite of increased
fuel costs.
The Company decreased its estimated annual effective tax rate to
36.0% for fiscal year 2000 from 36.5% in 1999 to reflect lower
estimated state income taxes.
Liquidity and Capital Resources
As of July 1, 2000, cash and short-term investments decreased to
$19.1 million from $22.2 million balance at year-end 1999. The
decrease is principally due to capital expenditures and payments
made on the revolving credit agreement. Net cash flows from
operation were strong at $66.3 million for the first six months,
an improvement of 28.9% for the same period a year ago. 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 2000 were
$29.7 million compared to $49.9 million for the same six-month
period in 1999. These expenditures primarily represent
investment in new, more efficient machinery and equipment. These
investments were funded by a combination of cash reserves, cash
from operations and a revolving credit agreement.
As referenced earlier, on February 29, 2000, the Company
completed the acquisition of two leading hearth products
distributors, American Fireplace Company (AFC) and the Allied
Group (Allied). AFC and Allied sell, install, and service a
broad range of gas- and wood-burning fireplaces as well as
fireplace mantels, surrounds, facings and other accessories. AFC
and Allied, with combined 1999 sales of approximately $200
million, have been joined to form Hearth Services Inc., a
subsidiary of Hearth Technologies Inc.
The Board of Directors declared a regular quarterly cash dividend
of $0.11 per share on its common stock on May 2, 2000, to
shareholders of record at the close of business on May 12, 2000.
It was paid on June 1, 2000, and represented the 181st
consecutive quarterly dividend paid by the Company.
For the six months ended July 1, 2000, the Company repurchased
388,381 shares of its common stock at a cost of approximately
$7.2 million or an average price of $18.64 per share. As of July
1, 2000, approximately $24.3 million of the Board's current
repurchase authorization remained unspent.
Based on operations since January 1, 2000, the Company has not
experienced any adverse operational impact to its ongoing
business as a result of the "Year 2000" issue.
Looking Ahead
The Company is encouraged by customer reaction to the Company's
new products and continued focus on service. Management's goal
is to achieve improved profitability and record results for 2000.
Except for the historical 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 products, the overall
growth rate of the office furniture and hearth products
industries, the achievement of cost reductions and productivity
in the Company's operations, the Company's ability to realize
financial benefits of operating The HON Company and Allsteel Inc.
as separate businesses, the Company's ability to obtain expected
profits from acquired businesses, 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.
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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 3, 2000 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
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PART II. EXHIBITS
EXHIBIT INDEX Page
(27) Financial Data Schedule 17
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