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 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 commons tock, as of the latest practical date. Class Outstanding at April 1, 2000 Common Shares, $1 Par Value 60,149,888 shares Exhibit Index is on Page 15.
HON INDUSTRIES Inc. and SUBSIDIARIES INDEX PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - April 1, 2000, and January 1, 2000 3-4 Condensed Consolidated Statements of Income - Three Months Ended April 1, 2000, and April 3, 1999 5 Condensed Consolidated Statements of Cash Flows - Three Months Ended April 1, 2000, and April 3, 1999 6 Notes to Condensed Consolidated Financial Statements 7-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-12 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 13 Item 6. Exhibits and Reports on Form 8-K 13 SIGNATURES 14 EXHIBIT INDEX 15 (27) Financial Data Schedule (99A) Executive Bonus Plan of Registrant, as amended and restated on May 1, 2000, effective as of January 1, 2000
PART I. FINANCIAL INFORMATION Item 1. Financial Statements HON INDUSTRIES Inc. and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS April 1, January 1, 2000 2000 (Unaudited) (In thousands) ASSETS CURRENT ASSETS Cash and cash equivalents $ 23,433 $ 22,168 Short-term investments - - Receivables 213,396 196,730 Inventories (Note B) 93,381 74,937 Deferred income taxes 13,805 13,471 Prepaid expenses and other current assets 11,213 9,250 Total Current Assets 355,228 316,556 PROPERTY, PLANT, AND EQUIPMENT, at cost Land and land improvements 17,515 17,114 Buildings 187,153 181,080 Machinery and equipment 484,206 469,268 Construction in progress 37,802 37,819 726,676 705,281 Less accumulated depreciation 263,885 249,690 Net Property, Plant, and Equipment 462,791 455,591 GOODWILL 225,650 113,116 OTHER ASSETS 20,634 21,460 Total Assets $1,064,303 $906,723 See accompanying notes to condensed consolidated financial statements.
HON INDUSTRIES Inc. and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS April 1, January 1, 2000 2000 (Unaudited) (In thousands) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses $211,069 $213,072 Income taxes 15,525 - Note payable and current maturities of long-term debt 6,316 6,106 Current maturities of other long-term obligations 2,402 5,945 Total Current Liabilities 235,312 225,123 LONG-TERM DEBT 250,011 119,860 CAPITAL LEASE OBLIGATIONS 3,931 4,313 OTHER LONG-TERM LIABILITIES 17,760 18,015 DEFERRED INCOME TAXES 37,605 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 - 60,150 60,172 2000 - 60,149,888 shares; 1999 - 60,171,753 shares Paid-in capital 25,518 24,981 Retained earnings 433,959 416,034 Accumulated other comprehensive income 57 84 Total Shareholders' Equity 519,684 501,271 Total Liabilities and Shareholders' Equity $1,064,303 $906,723 See accompanying notes to condensed consolidated financial statements.
HON INDUSTRIES Inc. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended April 1, April 3, 2000 1999 (In thousands, except per share data) Net sales $478,601 $424,459 Cost of products sold 329,416 295,222 Gross Profit 149,185 129,237 Selling and administrative expenses 108,292 89,264 Provision for closing facilities (Note C) - 19,679 Operating Income 40,893 20,294 Interest income 289 184 Interest expense 2,839 2,229 Income Before Income Taxes 38,343 18,249 Income taxes 13,803 6,661 Net Income 24,540 11,588 Net income per common share $.41 $.19 Average number of common shares 60,185,851 61,154,027 outstanding Cash dividends per common share $.11 $.095 See accompanying notes to condensed consolidated financial statements.
HON INDUSTRIES Inc. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended April 1, April 3, 2000 1999 (In thousands) Net Cash Flows From (To) Operating Activities: Net income $ 24,540 $ 11,588 Noncash items included in net income: Depreciation and amortization 18,499 15,396 Other postretirement and postemployment benefits 519 494 Deferred income taxes (1,002) (636) Other - net (34) (44) Net increase (decrease) in noncash operating assets and liabilities (13,209) (13,425) Increase (decrease) in other liabilities (492) (1,264) Net cash flows from operating activities 28,821 12,109 Net Cash Flows From (To) Investing Activities: Capital expenditures - net (16,023) (30,006) Capitalized software (72) (138) Acquisition spending (134,473) (1,637) Short-term investments - net - 169 Long-term investments - (9) Other - net (115) - Net cash flows (to) investing activities (150,683) (31,621) Net Cash Flows From (To) Financing Activities: Purchase of HON INDUSTRIES common stock (6,897) (5,126) Proceeds from long-term debt 149,999 41,651 Payments of note and long-term debt (20,772) (22,593) Proceeds from sales of HON INDUSTRIES common stock to members and stock-based compensation 7,412 4,598 Dividends paid (6,615) (5,796) Net cash flows from financing activities 123,127 12,734 Net increase (decrease) in cash and cash equivalents 1,265 (6,778) Cash and cash equivalents at beginning of period 22,168 17,500 Cash and cash equivalents at end of period $ 23,433 $ 10,722 See accompanying notes to condensed consolidated financial statements.
HON INDUSTRIES Inc. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) April 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 three-month period ended April 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: April 1, 2000 January 1, ($000) (Unaudited) 2000 Finished products $ 55,240 $ 29,663 Materials and work in process 48,672 55,737 LIFO Allowance (10,531) (10,463) $ 93,381 $ 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 April 1, 2000, the primary costs not yet incurred relate to costs associated with the closed buildings and worker's compensation claims. Management believes the remaining reserve of $3.8 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). The Company acquired AFC and Allied for approximately $134 million in cash and debt. 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 fair values of the acquired net assets. 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 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 1, 2000, and April 3, 1999, is as follows: Three Months Ended April 1, April 3, 2000 1999 Net Sales: Office furniture $ 395,637 $359,981 Hearth products 82,964 64,478 $ 478,601 $424,459 Operation Profit: Office furniture Normal operations $ 38,572 $ 36,294 Facility closedown provision - (19,679) Office furniture - net 38,572 16,615 Hearth products 4,770 5,784 Total operating profit 43,342 22,399 Unallocated corporate expense (4,999) (4,150) Income before income taxes $ 38,343 $ 18,249 Identifiable Assets: Office furniture $ 671,284 $666,632 Hearth products 336,274 159,143 General corporate 56,745 46,763 $1,064,303 $872,538 Depreciation & Amortization Expense: Office furniture $ 14,374 $ 12,458 Hearth products 3,599 2,607 General corporate 526 331 $ 18,499 $ 15,396 Capital Expenditure, Net: Office furniture $ 10,478 $ 20,291 Hearth products 4,554 4,165 General corporate 991 5,550 $ 16,023 $ 30,006
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 Three Months Ended Ended Dollars in Thousands April 1, 2000 & April 1, 2000 & April 3, 1999 January 1, 2000 Net sales $54,142 12.8% $9,225 2.0% Cost of products sold 34,194 11.6 7,346 2.3 Selling & administrative expenses 19,028 21.3 2,028 1.9 Provision for closing facilities (19,679) N/M - - Interest income 105 57.1 64 28.4 Interest expense 610 27.4 350 14.1 Income taxes 7,142 107.2 (351) (2.5) Net income 12,952 111.8 (84) (0.3) The Company reported record first quarter sales and earnings for its fiscal quarter ended April 1, 2000. This sales increase marks the 17th consecutive quarter of record sales growth. Consolidated net sales for the first quarter ending April 1, 2000, were $478.6 million, a 12.8% increase from the $424.5 million in the first quarter of 1999. Net income was $24.5 million, compared to $24.1 million for the same period a year ago prior to a $12.5 million after-tax charge for plant closings. Net income per common share for first quarter 2000 was $0.41 per diluted share, a 5.1% increase from $0.39 per share from ongoing operations in first quarter 1999. Results for first quarter 1999 included a $0.20 per share provision for the closing of three plants. After the charge, first quarter 1999 net income was $11.6 million or $0.19 per share. For the first quarter of 2000, office furniture comprised 83% of consolidated net sales and hearth products comprised 17%. Net sales for office furniture were up 9.9%. Hearth products sales increased 28.7% for the quarter compared to the same quarter a year ago. Proforma first quarter 2000 hearth products sales, excluding the February 29, 2000, acquisition of American Fireplace Company and the Allied Group, increased 7.3% for the quarter. Office furniture contributed 89% of first quarter 2000 consolidated operating profit before unallocated corporate expenses and hearth products contributed 11%. The consolidated gross profit margin for the first quarter of 2000 was 31.2% compared to 30.4% for the same period in 1999. The Company is continuing to focus on improving gross margins by improving the net selling price of products and reducing production costs. Selling and administrative expenses for the first quarter of 2000 were 22.6% of net sales compared to 21.0% in the comparable quarter of 1999, excluding the one-time charge. The Company experienced increased costs to establish and promote the HON and Allsteel brands in their respective market segments including increased sales and administrative support and new literature. Rising fuel and carrier costs during the first quarter of 2000 offset efforts to reduce freight expense. These factors combined with the amortization expense associated with the acquisition of Hearth Services led to increased selling and administrative expenses. Management continues to focus on controlling and reducing selling and administrative expenses as a percent of net sales. The Company decreased its estimated annual effective tax rate to 36% for the first quarter of 2000 from 36.5% a year earlier to reflect lower estimated state income taxes. Liquidity and Capital Resources As of April 1, 2000, cash and short-term investments increased to $23.4 million compared to a $22.2 million balance at year-end 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 growth. Net capital expenditures for the first quarter of 2000 were $16.0 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. 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 nearly $200 million, will be joined to form Hearth Services Inc., a subsidiary of Hearth Technologies Inc. On February 16, 2000, the Board approved a 15.8% increase in the common stock quarterly cash dividend from $0.095 per share to $0.11 per share. The dividend was paid on March 1, 2000, to shareholders of record on February 23, 2000. This was the 180th consecutive quarterly dividend paid by the Company. In the first quarter, the Company repurchased 374,255 of its common stock at a cost of approximately $6.9 million or an average price of $18.43 per share. As of April 1, 2000, approximately $24.7 million of the Board's current repurchase authorization remained unspent. On February 29, 2000, the Company filed a Form S-8 Registration Statement. This filing registered 3,000,000 shares of HON INDUSTRIES common stock to be issued over time under the HON INDUSTRIES Inc. Profit-Sharing Retirement Plan. On May 2, 2000, the Board of Directors declared an $0.11 per common share cash dividend to shareholders of record on May 12, 2000, to be paid on June 1, 2000. 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 optimistic about its business outlook for fiscal year 2000. Management's goal is to achieve improved profitability and record results for 2000. This will be achieved by continually improving the cost structure, providing the best customer service in the two industries, and introducing new products. 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.
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 1, 2000, for purposes of electing three Directors to the Board of Directors, and to adopt the First Amendment to the HON INDUSTRIES Inc. Executive Bonus Plan to permit certain awards granted under the Plan to be exempt from the $1 million deduction limit set forth in Section 162(m) of the Internal Revenue Code. As of March 1, 2000, the record date for the meeting, there were 60,164,262 shares of common stock issued and outstanding and entitled to vote at the meeting. The first proposal voted upon was the election of three Directors for a term of three years and until their successors are elected and shall qualify. The three persons nominated by the Company's Board of Directors received the following votes and were elected: For Withheld Against Gary M. Christensen 49,929,006 483,794 -0- or 83.0% or 0.8% or 0.0% Robert W. Cox 49,947,821 465,038 -0- or 83.0% or 0.8% or 0.0% Lorne R. Waxlax 49,935,773 477,087 -0- or 83.0% or 0.8% or 0.0% The second proposal voted upon was the adoption of the First Amendment to the HON INDUSTRIES Inc. Executive Bonus Plan. The proposal was approved with 46,142,431 votes, or 76.7% voting for; 3,049,997 votes, or 5.1% voting against; and 1,220,428 votes, or 2.0% voting withheld. As to the second proposal, there were 3 or 0% broker non-votes. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. See Exhibit Index. (b) Reports on Form 8-K. The Company filed a periodic report on Form 8-K dated February 2, 2000, to report the Company had signed a purchase agreement to acquire American Fireplace Company and the Allied group on January 31, 2000. The Company filed a periodic report on Form 8-K dated March 15, 2000, to report the acquisition of American Fireplace Company and the Allied Group on February 29, 2000.
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 11, 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
PART II. EXHIBITS EXHIBIT INDEX (27) Financial Data Schedule (99A) Executive Bonus Plan of the Registrant, as amended and restated on May 1, 2000, effective as of January 1, 2000.