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 April 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 commons tock, as of the latest practical date. Class Outstanding at April 3,1999 Common Shares, $1 Par Value 61,256,914 shares Exhibit Index is on Page 18.
HON INDUSTRIES Inc. and SUBSIDIARIES INDEX PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - April 3, 1999, and January 2, 1999 3-4 Condensed Consolidated Statements of Income - Three Months Ended April 3, 1999, and April 4, 1998 5 Condensed Consolidated Statements of Cash Flows - Three Months Ended April 3, 1999, and April 4, 1998 6 Notes to Condensed Consolidated Financial Statements 7-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-15 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 16 SIGNATURES 17 EXHIBIT INDEX 18 (3i) Articles of Incorporation, as amended and restated, on May 11, 1999 (10i) 1995 Stock-Based Compensation Plan, as amended and restated, on February 10, 1999 (27) Financial Data Schedule
PART I. FINANCIAL INFORMATION Item 1. Financial Statements HON INDUSTRIES Inc. and SUBSIDIARIES CONDENSED CONSOLITATED BALANCE SHEETS April 3, January 2, 1999 1999 (Unaudited) ASSETS (In thousands) CURRENT ASSETS Cash and cash equivalents $10,722 $ 17,500 Short-term investments - 169 Receivables 178,625 183,576 Inventories (Note B) 66,587 67,225 Deferred income taxes 14,285 12,477 Prepaid expenses and other current assets 12,685 9,382 Total Current Assets 282,904 290,329 PROPERTY, PLANT, AND EQUIPMENT, at cost Land and land improvements 14,724 12,156 Buildings 157,908 144,559 Machinery and equipment 438,314 411,238 Construction in progress 72,453 85,782 683,399 653,735 Less accumulated depreciation 223,359 209,558 Net Property, Plant, and Equipment 460,040 444,177 GOODWILL 109,368 108,586 OTHER ASSETS 20,226 21,377 Total Assets $872,538 $864,469 See accompanying notes to condensed consolidated financial statements.
HON INDUSTRIES Inc. and SUBSIDIARIES CONDENSED CONSOLITATED BALANCE SHEETS April 3, January 2, 1999 1999 (Unaudited) (In thousands) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses $173,491 $193,859 Income taxes 8,803 1,921 Note payable and current maturities of long-term debt 14,310 15,769 Current maturities of other long-term obligations 3,373 5,889 Total Current Liabilities 199,977 217,438 LONG-TERM DEBT 147,952 128,069 CAPITAL LEASE OBLIGATIONS 7,478 7,494 OTHER LONG-TERM LIABILITIES 17,585 18,067 DEFERRED INCOME TAXES 32,462 31,379 SHAREHOLDERS' EQUITY Capital Stock: Preferred, $1 par value; authorized 1,000,000 shares; no shares outstanding - - Common, $1 par value; authorized 200,000,000 shares; outstanding - 61,257 61,290 1999 - 61,256,914 shares; 1998 - 61,289,618 shares Paid-in capital 47,817 48,348 Retained earnings 357,579 351,786 Accumulated other comprehensive income 431 598 Total Shareholders' Equity 467,084 462,022 Total Liabilities and Shareholders' Equity $872,538 $864,469 See accompanying notes to condensed consolidated financial statements.
HON INDUSTRIES Inc. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended April 3, April 4, 1999 1998 (In thousands, except per share data) Net sales $424,459 $418,263 Cost of products sold 295,222 291,571 Gross Profit 129,237 126,692 Selling and administrative expenses 89,264 88,563 Provision for closing facilities (Note C) 19,679 - Operating Income 20,294 38,129 Interest income 184 435 Interest expense 2,229 2,607 Income Before Income Taxes 18,249 35,957 Income taxes 6,661 13,484 Net Income 11,588 22,473 Net income per common share $.19 $.36 Average number of common shares outstanding 61,154,027 61,647,784 Cash dividends per common share $.095 $.08 See accompanying notes to condensed consolidated financial statements.
HON INDUSTRIES Inc. and SUBSIDIARIES CONDENSED CONSOLITATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended April 3, April 4, 1999 1998 (In thousands) Net Cash Flows From (To) Operating Activities: Net income $ 11,588 $ 22,473 Noncash items included in net income: Depreciation and amortization 15,396 11,911 Other postretirement and postemployment benefits 494 354 Deferred income taxes (636) 1,125 Other - net (44) (12) Net increase (decrease) in noncash operating assets and liabilities (13,425) (32,712) Increase (decrease) in other liabilities (1,264) (1,326) Net cash flows from operating activities 12,109 1,813 Net Cash Flows From (To) Investing Activities: Capital expenditures - net (30,144) (40,067) Acquisition spending, net of cash acquired (1,637) (11,523) Short-term investments - net 169 (2) Long-term investments (9) (1) Other - net - 1 Net cash flows (to) investing activities (31,621) (51,592) Net Cash Flows From (To) Financing Activities: Purchase of HON INDUSTRIES common stock (5,126) (940) Proceeds from long-term debt 41,651 35,050 Payments of note and long-term debt (22,593) (15,952) Proceeds from issuance of stock 4,598 1,226 Dividends paid (5,796) (4,933) Net cash flows from financing activities 12,734 14,451 Net increase (decrease) in cash and cash equivalents (6,778) (35,328) Cash and cash equivalents at beginning of period 17,500 46,080 Cash and cash equivalents at end of period $ 10,722 $ 10,752 See accompanying notes to condensed consolidated financial statements.
HON INDUSTRIES Inc. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) April 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 three-month period ended April 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: April 3, 1999 January 2, ($000) (Unaudited) 1999 Finished products $ 23,882 $ 24,955 Materials and work in process 53,766 53,320 LIFO Allowance (11,061) (11,050) $ 66,587 $ 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 quarter 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 positions, $2.1 million for other employee related costs, and $2.4 million for certain other expenses associated with the closing of the facility. During the first quarter ended April 3, 1999, $2.9 million of pretax exit costs were paid and charged against the liability. It included $1.6 million for write-off of plant and equipment, $1.1 million for severance for 210 positions, $.1 million for other employee related expenses and $.1 million for certain other expenses associated with the closing of the facility. 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 quarter ended April 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. For the three- month periods ended April 3, 1999 and April 4, 1998, the change in comprehensive income is approximately ($167,000) and $1,000, respectively. The Company's comprehensive income consists of an unrealized holding gain or loss on equity securities available-for-sale under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities", and nominal foreign currency adjustments. Note F. Business Segment Information The Company adopted Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information," effective with its 1998 fiscal year beginning January 4, 1998. Management views the Company as being in two business segments: office furniture and hearth products with the former being the principal business segment. The office furniture segment manufactures and markets a broad line of metal and wood commercial and home office furniture which includes file cabinets, desks, credenzas, chairs, storage cabinets, tables, bookcases, freestanding office partitions and panel systems, and other related products. The hearth product segment manufactures and markets a broad line of manufactured gas- , pellet- and wood-burning fireplaces and stoves, fireplace inserts, and chimney systems principally for the home. For purposes of segment reporting, intercompany sales transfers between segments are not material and operating profit is income before income taxes exclusive of certain unallocated corporate expenses. These unallocated corporate expenses include the net costs of the Company's corporate operations, interest income, and interest expense. Management views interest income and expense as corporate financing costs and not as a business segment cost. In addition, management applies one effective tax rate to its consolidated income before income taxes so income taxes are not reported or viewed internally on a segment basis. No geographic information for revenues from external customers or for long-lived assets is disclosed inasmuch as the Company's primary market and capital investments are concentrated in the United States. Reportable segment data reconciled to the consolidated financial statements for the three month period ended April 3, 1999, and April 4, 1998, is as follows: Three Months Ended April 3, April 4, 1999 1998 Net Sales: Office furniture $359,981 $366,836 Hearth products 64,478 51,427 $424,459 $418,263 Operation Profit: Office furniture Normal operations $ 36,294 $ 36,663 Facility closedown provision (19,679) - Office furniture - net 16,615 36,663 Hearth products 5,784 2,931 Total operating profit 22,399 39,594 Unallocated corporate expense (4,150) (3,637) Income before income taxes $ 18,249 $ 35,957 Identifiable Assets: Office furniture $666,632 $591,118 Hearth products 159,143 145,917 General corporate 46,763 41,374 $872,538 $778,409 Depreciation & Amortization Expense: Office furniture $ 12,458 $ 9,650 Hearth products 2,607 1,942 General corporate 331 319 $ 15,396 $ 11,911 Capital Expenditure, Net: Office furniture $ 20,291 $ 35,694 Hearth products 4,303 4,526 General corporate 5,550 (153) $ 30,144 $ 40,067 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 Consolidate Statements of Income is shown below: Comparison of Increases (Decreases) Three Months Three Months Ended Ended Dollars in Thousands April 3, 1999 & April 3, 1999 & April 4, 1998 January 2, 1999 Net sales $ 6,196 1.5% $(3,615) (0.8)% Cost of products sold 3,651 1.3 983 0.3 Selling & Administrative expenses 701 0.8 4,943 5.9 Provision for closing facilities 19,679 N/M 19,679 N/M Interest income (251) (57.7) (173) (48.5) Interest expense (378) (14.5) (308) (12.1) Income taxes (6,823) (50.6) (11,094) (62.5) Net income (10,885) (48.4) (17,991 (60.8) The Company reported record first quarter sales and earnings for its fiscal quarter ended April 3, 1999, prior to a one-time charge for a cost savings initiative. This is the 13th consecutive quarter of record results from operations. Consolidated net sales for the first quarter ending April 3, 1999, were $424.5 million, a 1.5% increase from the $418.3 million in the first quarter of 1998. The closing of three plants, a cost savings initiative to increase long-term profitability, was announced in first quarter with an anticipated annualized savings of $11.6 million upon completion of the closings. Accounting for a one-time charge of $19.7 million against pre-tax earnings, net income for the quarter was $11.6 million or $0.19 per share. Net income, before the charge, reached $24.1 million, an increase of 7.2% from $22.5 million for the same period a year ago. Prior to the one-time charge, net income per share was $0.39 per diluted share compared to $0.36 per share in first quarter 1998. For the first quarter of 1999, office furniture comprised 85% of consolidated net sales and hearth products comprised 15%. Net sales for office furniture were down 2% for the quarter compared to the same quarter a year ago. Due to the unusually strong office furniture industry growth rate in 1997 of 15%, the Company ended fiscal year 1997 with a higher than normal order backlog which further strengthened first quarter 1998 net sales. While backlog is normally not a consideration because of the Company's short delivery times, it is a factor when comparing first quarter 1998 and 1999 shipments. Hearth products sales increased 25% for the quarter compared to the same quarter a year ago. Office furniture contributed 86% of first quarter 1999 consolidated operating profit before unallocated corporate expenses and the one-time charge and hearth products 14%. The consolidated gross profit margin for the first quarter of 1999 was 30.4% compared to 30.3% for the same period in 1998. The Company is continuing to focus on improving gross margins. The focus is on improving the net selling price of products and on reducing production costs. Selling and administrative expenses for the first quarter of 1999, excluding the one-time charge, were 21.0% of net sales compared to 21.2% in the comparable quarter of 1998. Management places emphasis on controlling and reducing selling and administrative expenses as a percent of net sales. Selling and administrative expenses also include freight and distribution expenses incurred to get the product to the customer. 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 on February 11, 1999. 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. Upon completion of the closedowns, the Company is anticipating annualized savings of $11.6 million mainly from reduced salaries and benefits, depreciation, and other costs related to operating the three facilities. A pretax charge of $19.7 million or $0.20 per diluted share was recorded during the quarter ended April 3, 1999. The charge includes $12.5 million for write-offs of plant and equipment, $2.6 million for severance arising from the elimination of approximately 360 positions, $2.1 million for other employee related costs, and $2.4 million for certain other expenses associated with the closing of the facilities. During the first quarter ended April 3, 1999, $2.9 million of pretax exit costs were paid and charged against the liability. It included $1.6 million for write-off of plant and equipment, $1.1 million for severance for 210 positions, $.1 million for other employee related expenses and $.1 million for certain other expenses associated with the closing of the facility. The Company decreased its estimated annual effective tax rate to 36.5% for the first quarter of 1999 from 37.5% a year earlier to reflect lower estimated state income taxes. Liquidity and Capital Resources As of April 3, 1999, cash and short-term investments decreased to $10.7 million compared to a $17.7 million balance at year-end 1998. The decrease is due to marketing program payments typically made in the first quarter and capital expenditures. Net capital expenditures for the first quarter of 1999 were $30.1 million and 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. The Board of Directors approved an 18.8% increase in the common stock quarterly dividend from $.08 per share to $.095 per share. The dividend was paid on March 1, 1999 to shareholders of record on February 19, 1999. This was the 176th consecutive quarterly dividend paid by the Company. In the first quarter, the Company repurchased 231,405 of its common stock at a cost of approximately $5.1 million or an average price of $22.15 per share. As of April 3, 1999, approximately $57.3 million of the Board's current repurchase authorization remained unspent. On May 10, 1999, the Board of Directors declared an $.095 per common share cash dividend to shareholders of record on May 20, 1999, to be paid on June 1, 1999. Year 2000 The Company is continuing to work on its comprehensive Year 2000 ("Y2K") Compliance Plan. The primary mission of the Plan is to maintain business continuity by giving priority remediation and resolution to any Year 2000 issue that could compromise normal business operations. The 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. All three project focus initiatives are on schedule to be completed during the second and third quarters of 1999, leaving fourth quarter of 1999 primarily for follow-up compliance testing and contingency planning as needed. The Company plans to engage an independent review of its Y2K compliance plan and follow- through effort during June-September to further assess its quality and comprehensiveness. The Company still estimates 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 internal and external costs associated with this project are being expensed or capitalized in the period incurred. Through the fiscal quarter ended April 3, 1999, the Company has incurred and recorded costs of approximately $125,000. At this point, the Company assesses its Y2K issues to be comparatively modest and routine in nature. Current efforts are being concentrated on internal compliance 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. The Company maintains an electronic copy of its latest Year 2000 Readiness Disclosure at its website location at www.honi.com. So, 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. Looking Ahead The Company is optimistic about its business outlook for fiscal year 1999. If the U.S. economy remains healthy, 1999 is expected to be another record year in terms of earnings. This optimism is based on the Company's ability to continue improving its cost structure, increase sales through the introduction of new value- priced products, and provide outstanding customer service and support. 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 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.
PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Shareholders of HON INDUSTRIES Inc. was held on May 11, 1999, for purposes of electing four Directors to the Board of Directors, and to amend the Articles of Incorporation to increase the authorized shares of the Company's preferred stock from 1,000,000 to 2,000,000. As of March 12, 1999, the record date for the meeting, there were 61,083,054 shares of common stock issued and outstanding and entitled to vote at the meeting. The first proposal voted upon was the election of four Directors for a term of three years and until their successors are elected and shall qualify. The four persons nominated by the Company's Board of Directors received the following votes and were elected: For Withheld Against Cheryl A. Francis 54,725,131 123,263 -0- or 89.6% or .2% or 0% Robert L. Katz 54,732,710 115,684 -0- or 89.6% or .2% or 0% Richard H. Stanley 54,673,402 174,992 -0- or 89.5% or .3% or 0% Brian E. Stern 54,764,243 84,151 -0- or 89.7% or .1% or 0% The second proposal voted upon was the approval of the Amendment of the Articles of Incorporation. The proposal was approved with 33,770,694 votes, or 55.3% voting for; 11,223,189 votes, or 18.4% voting against; and 207,145 votes, or .3% voting withheld. As to the second proposal, there were 9,647,365 or 15.8% broker non-votes. 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.
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: May 14, 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
PART II. EXHIBITS EXHIBIT INDEX (3i) Articles of Incorporation, as amended and restated, on May 11, 1999 (10i) 1995 Stock-Based Compensation Plan, as amended and restated, on February 10, 1999 (27) Financial Data Schedule