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 March 31, 2001 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: 563/264-7400 ------------------- 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 MARCH 31, 2001 - ----------------------------- ----------------------------- Common Shares, $1 Par Value 59,249,927 shares -1-
HON INDUSTRIES Inc. and SUBSIDIARIES INDEX PART I. FINANCIAL INFORMATION PAGE ---- ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) - ----------------------------------------- Condensed Consolidated Balance Sheets - March 31, 2001, and December 30, 2000 3-4 Condensed Consolidated Statements of Income - Three Months Ended March 31, 2001, and April 1, 2000 5 Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2001, and April 1, 2000 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 -2-
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS - ----------------------------- HON INDUSTRIES Inc. and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> March 31, Dec. 30, 2001 2000 (Unaudited) ------------------------------------ ASSETS (In thousands) <S> <C> <C> CURRENT ASSETS Cash and cash equivalents $ 18,575 $ 3,181 Receivables 177,592 211,243 Inventories (Note B) 79,515 84,360 Deferred income taxes 19,892 19,516 Prepaid expenses and other current assets 11,825 11,841 ---------- ---------- Total Current Assets 307,399 330,141 PROPERTY, PLANT, AND EQUIPMENT, at cost Land and land improvements 20,045 18,808 Buildings 205,699 202,189 Machinery and equipment 517,897 514,293 Construction in progress 29,590 27,547 ---------- ---------- 773,231 762,837 Less accumulated depreciation 324,725 308,525 ---------- ---------- Net Property, Plant, and Equipment 448,506 454,312 GOODWILL 221,420 216,371 OTHER ASSETS 19,577 21,646 ---------- ---------- Total Assets $ 996,902 $1,022,470 ========== ========== </TABLE> See accompanying notes to condensed consolidated financial statements. -3-
HON INDUSTRIES Inc. and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> March 31, Dec. 30, 2001 2000 (Unaudited) -------------------------------- (In thousands) <S> <C> <C> LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses $ 179,470 $ 240,540 Income taxes 17,501 12,067 Note payable and current maturities of long-term debt 10,408 10,408 Current maturities of other long-term obligations 496 1,853 ---------- ---------- Total Current Liabilities 207,875 264,868 LONG-TERM DEBT 161,648 126,093 CAPITAL LEASE OBLIGATIONS 1,343 2,192 OTHER LONG-TERM LIABILITIES 19,620 18,749 DEFERRED INCOME TAXES 35,755 37,226 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 - 59,250 59,797 2001 - 59,249,927 shares; 2000 - 59,796,891 shares Paid-in capital 4,278 17,339 Retained earnings 506,920 495,796 Accumulated other comprehensive income 213 410 ---------- ---------- Total Shareholders' Equity 570,661 573,342 Total Liabilities and Shareholders' Equity $ 996,902 $1,022,470 ========== ========== </TABLE> See accompanying notes to condensed consolidated financial statements. -4-
HON INDUSTRIES Inc. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) <TABLE> <CAPTION> Three Months Ended ------------------ March 31, April 1, 2001 2000 ------------------------------------- (In thousands, except per share data) <S> <C> <C> Net Sales $ 461,997 $ 481,523 Cost of products sold 311,711 329,416 ----------- ----------- Gross Profit 150,286 152,107 Selling and administrative expenses 119,050 111,214 ----------- ----------- Operating Income 31,236 40,893 Interest income 222 289 Interest expense 2,922 2,839 ----------- ----------- Income Before Income Taxes 28,536 38,343 Income taxes 10,273 13,803 ----------- ----------- Net Income $ 18,263 $ 24,540 =========== =========== Net income per common share $ 0.31 $ 0.41 =========== =========== Average number of common shares outstanding 59,448,220 60,185,851 =========== =========== Cash dividends per common share $ 0.12 $ 0.11 =========== =========== </TABLE> See accompanying notes to condensed consolidated financial statements. -5-
HON INDUSTRIES Inc. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> Three Months Ended ------------------ March 31, April 1, 2001 2000 -------------------------- (In thousands) <S> <C> <C> Net Cash Flows From (To) Operating Activities: Net income $ 18,263 $ 24,540 Noncash items included in net income: Depreciation and amortization 20,583 18,499 Other postretirement and postemployment benefits 246 519 Deferred income taxes (1,734) (1,002) Other - net - (34) Net increase (decrease) in noncash operating assets and liabilities (18,321) (13,209) Increase (decrease) in other liabilities 626 (492) --------- --------- Net cash flows from operating activities 19,663 28,821 --------- --------- Net Cash Flows From (To) Investing Activities: Capital expenditures - net (12,720) (16,023) Capitalized software (12) (72) Acquisition spending (6,332) (134,473) Short-term investments - net - - Long-term investments - - Other - net (400) (115) --------- --------- Net cash flows (to) investing activities (19,464) (150,683) --------- --------- Net Cash Flows From (To) Financing Activities: Purchase of HON INDUSTRIES common stock (19,825) (6,897) Proceeds from long-term debt 36,000 149,999 Payments of note and long-term debt (1,294) (20,772) Proceeds from sales of HON INDUSTRIES common stock to members and stock-based compensation 7,454 7,412 Dividends paid (7,140) (6,615) --------- --------- Net cash flows from financing activities 15,195 123,127 --------- --------- Net increase (decrease) in cash and cash equivalents 15,394 1,265 Cash and cash equivalents at beginning of period 3,181 22,168 --------- --------- Cash and cash equivalents at end of period $ 18,575 $ 23,433 ========= ========= </TABLE> See accompanying notes to condensed consolidated financial statements. -6-
HON INDUSTRIES Inc. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) March 31, 2001 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 March 31, 2001, are not necessarily indicative of the results that may be expected for the year ending December 29, 2001. 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 December 30, 2000. Note B. Inventories Inventories of the Company and its subsidiaries are summarized as follows: <TABLE> <CAPTION> March 31, 2001 December 30, ($000) (Unaudited) 2000 --------------------------------------- <S> <C> <C> Finished products $ 52,166 $ 48,990 Materials and work in process 38,195 46,497 LIFO allowance (10,846) (11,127) --------------- --------------- $ 79,515 $ 84,360 =============== =============== </TABLE> Note C. Business Combinations The Company completed the acquisitions of two small hearth product distributors during the first quarter of 2001. On January 12, 2001, the Company purchased the assets of M. H. Seifert Construction Inc. for a purchase price of approximately $1.9 million. On February 9, 2001, the Company purchased the stock of Heating Alternatives, Ltd. for approximately $3.4 million. The excess of the consideration paid over the fair value of the businesses, or approximately $4 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. -7-
During the quarter, management finalized its integration plan related to the acquisition of its Hearth Services division. Costs related to severance and consolidation of facilities of approximately $2.4 million have been recorded and reflected as an adjustment to goodwill. Of this amount, $0.8 million has been utilized as of March 31, 2001. Management expects these activities to be completed within the year. Final estimates did not have a material effect on the original liabilities established in connection with the purchase. Note D. 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 E. 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 period ended March 31, 2001, and April 1, 2000, is as follows: -8-
<TABLE> <CAPTION> Three Months Ended ------------------ March 31, April 1, 2001 2000 ---------------------------- <S> <C> <C> Net Sales: Office furniture $ 366,509 $ 398,288 Hearth products 95,488 83,235 ----------- ----------- $ 461,997 $ 481,523 =========== =========== Operating Profit: Office furniture $ 32,524 $ 38,572 Hearth products 3,238 4,770 ----------- ----------- Total operating profit 35,762 43,342 Unallocated corporate expense (7,226) (4,999) ----------- ----------- Income before income taxes $ 28,536 $ 38,343 =========== =========== Identifiable Assets: Office furniture $ 590,319 $ 671,284 Hearth products 340,380 336,274 General corporate 66,203 56,745 ----------- ----------- $ 996,902 $ 1,064,303 =========== =========== Depreciation & Amortization Expense: Office furniture $ 14,877 $ 14,374 Hearth products 5,126 3,599 General corporate 580 526 ----------- ----------- $ 20,583 $ 18,499 =========== =========== Capital Expenditure - Net: Office furniture $ 9,716 $ 10,478 Hearth products 2,922 4,554 General corporate 82 991 ----------- ----------- $ 12,720 $ 16,023 =========== =========== </TABLE> Note F. Subsequent Event On April 30, 2001, the Company announced that it will consolidate the wood office furniture production from its Williamsport, Pennsylvania, facility into other manufacturing locations. The Williamsport operation will close following an orderly transition of production to other facilities. Plans are in place to complete these moves in the second and third quarters of 2001. The one-time charge to pre-tax earnings is estimated to be approximately $2.5 million. This charge will include fixed asset write-offs, severance and other expenses associated with the closedown of the facility. -9-
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: <TABLE> <CAPTION> Comparison of --------------------------------------------------------------------- Increases (Decreases) Three Months Ended Three Months Ended Dollars in Thousands March 31, 2001 & March 31, 2001 & April 1, 2000 December 30, 2000 --------------------------------------------------------------------- <S> <C> <C> <C> <C> Net Sales $(19,526) (4.1) % $(57,795) (11.1) % Cost of products sold (17,705) (5.4) (41,068) (11.6) Selling & administrative expenses 7,836 7.0 (7,874) (6.2) Provision for closing facilities Interest income (67) (23.2) (507) (69.5) Interest expense 83 2.9 (336) (10.3) Income taxes (3,530) (25.6) (3,249) (24.0) Net Income (6,277) (25.6) (5,775) (24.0) </TABLE> Consolidated net sales for the first quarter ending March 31, 2001, were $462.0 million, a 4.1% decrease from the $481.5 million in the first quarter of 2000 due to lower sales volume caused by the slowdown in the economy. Net income was $18.3 million, compared to $24.5 million for the same period a year ago. Net income per common share for first quarter 2001 was $0.31 per diluted share, a 24.4% decrease from $0.41 per share in first quarter 2000. For the first quarter of 2001, office furniture comprised 79% of consolidated net sales and hearth products comprised 21%. Net sales for office furniture were down 8.0%. Hearth products sales increased 14.7% for the quarter compared to the same quarter a year ago due to the February 29, 2000, acquisition of American Fireplace Company and the Allied Group. Proforma first quarter 2001 hearth products sales, excluding the acquisition from both years, decreased 5.3% for the quarter. Office furniture contributed 91% of first quarter 2001 consolidated operating profit before unallocated corporate expenses and hearth products contributed 9%. The consolidated gross profit margin for the first quarter of 2001 was 32.5% compared to 31.6% for the same period in 2000. This increase in margin was due to the acquisition of Hearth Services which generate higher returns at the gross profit level. Excluding the Hearth Services acquisition, the consolidated gross profit margin was 31.4% for both 2001 and 2000. The Company continues to focus on improving -10-
gross margins by improving the net selling price of products and reducing production costs. Selling and administrative expenses for the first quarter of 2001 were 25.8% of net sales compared to 23.1% in the comparable quarter of 2000. The largest contributor to this increase was the acquisition of Hearth Services which is a retail distributor with proportionately higher selling and administrative expenses than manufacturing. Excluding the Hearth Services acquisition, selling and administrative expenses for the first quarter of 2001 were 24.0% of net sales compared to 22.6% the previous year. This increase was due to continued investment in sales and marketing expenses associated with the Company's simplify, focus and branding strategy and lower overall sales volume. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2001, cash and short-term investments increased to $18.6 million compared to a $3.2 million balance at year-end 2000. Net cash flows from operations contributed to the improvement. Receivables decreased from $211.2 million at year-end 2000 to $177.6 million due to the lower sales volume. 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 2001 were $12.7 million and primarily represent investment in new, more efficient machinery and equipment. These investments were funded by a combination of cash from operations and a revolving credit agreement. During the first quarter of 2001, the Company completed the acquisition of two small hearth products distributors for a total purchase price of approximately $5.3 million. It is normal for long-term debt to increase in the first quarter due to cash requirements for marketing program payments and the annual funding of the Company's profit-sharing retirement plan. In addition to the normal cash requirements, the Company also completed two small acquisitions and funded a captive insurance company during the first quarter of 2001. On February 14, 2001, the Board approved a 9.1% increase in the common stock quarterly cash dividend from $0.11 per share to $0.12 per share. The dividend was paid on March 1, 2001, to shareholders of record on February 21, 2001. This was the 184th consecutive quarterly dividend paid by the Company. In the first quarter, the Company repurchased 807,285 shares of its common stock at a cost of approximately $19.8 million or an average price of $24.56 per share. As of March 31, 2001, approximately $93.8 million of the Board's current repurchase authorization remained unspent. -11-
On May 7, 2001, the Board of Directors declared an $0.12 per common share cash dividend to shareholders of record on May 17, 2001, to be paid on June 1, 2001. SUBSEQUENT EVENTS On April 30, 2001, the Company announced that it will consolidate the wood office furniture production from its Williamsport, Pennsylvania, facility into other manufacturing locations. The Williamsport operation will close following an orderly transition of production to other facilities. Plans are in place to complete these moves in the second and third quarters of 2001. The one-time charge to pre-tax earnings is estimated to be approximately $2.5 million. This charge will include fixed asset write-offs, severance and other expenses associated with the closedown of the facility. LOOKING AHEAD The Company anticipates that the second quarter of 2001 will be challenging in both sales and profits due to the current economic environment. The Company is focused on optimizing 2001 performance, while continuing to follow its long-term value creation strategies. Statements in this report that are not strictly historical, including statements as to plans, objectives, and future financial performance, are "forward-looking" statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks, which may cause the Company's actual results in the future to differ materially from expected results. These risks include, among others: the Company's ability to realize financial benefits from reducing its cost structure, to achieve expected financial benefit from its contract sector strategy, to introduce and obtain sales from new products; and other factors described in the Company's annual and quarterly reports filed with the Securities and Exchange Commission on Forms 10-K and 10-Q. -12-
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 7, 2001, for purposes of electing three Directors to the Board of Directors. As of March 1, 2001, the record date for the meeting, there were 59,426,775 shares of common stock issued and outstanding and entitled to vote at the meeting. The single proposal submitted to shareholders for a vote 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: <TABLE> <CAPTION> For Withheld Against <S> <C> <C> <C> Dennis J. Martin 52,616,956 342,133 -0- or 88.5% or 0.6% or 0.0% Jack D. Michaels 52,588,098 370,911 -0- or 88.5% or 0.6% or 0.0% Abbie J. Smith 52,607,752 351,337 -0- or 88.5% or 0.6% or 0.0% </TABLE> Other Directors whose term of office as a Director continued after the meeting are: Gary M. Christensen, Robert W. Cox, Cheryl A. Francis, Robert L. Katz, Richard H. Stanley, Brian E. Stern, and Lorne R. Waxlax. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. None (b) Reports on Form 8-K. The Company filed a periodic report on Form 8-K dated March 14, 2001, to report the transfer of David C. Stuebe from HON INDUSTRIES Inc. to Hearth Technologies Inc. -13-
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, 2001 HON INDUSTRIES Inc. By /s/ Jerald K. Dittmer -------------------------- Jerald K. Dittmer Vice President, Finance and Controller -14-