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 June 30, 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 June 30, 2001 Common Shares, $1 Par Value 59,160,247 shares
HON INDUSTRIES Inc. and SUBSIDIARIES INDEX PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - June 30, 2001, and December 30, 2000 3-4 Condensed Consolidated Statements of Income - Three Months Ended June 30, 2001, and July 1, 2000 5 Condensed Consolidated Statements of Income - Six Months Ended June 30, 2001, and July 1, 2000 6 Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2001, and July 1, 2000 7 Notes to Condensed Consolidated Financial Statements 7-10 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
PART I. FINANCIAL INFORMATION Item 1. Financial Statements HON INDUSTRIES Inc. and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30, December 30, 2001 2000 (Unaudited) ASSETS (In thousands) CURRENT ASSETS Cash and cash equivalents $ 35,101 $ 3,181 Receivables 181,664 211,243 Inventories (Note B) 71,088 84,360 Deferred income taxes 18,538 19,516 Prepaid expenses and other current assets 11,063 11,841 Total Current Assets 317,454 330,141 PROPERTY, PLANT, AND EQUIPMENT, at cost Land and land improvements 21,833 18,808 Buildings 208,950 202,189 Machinery and equipment 510,972 514,293 Construction in progress 24,506 27,547 766,261 762,837 Less accumulated depreciation 340,396 308,525 Net Property, Plant, and Equipment 425,865 454,312 GOODWILL 219,048 216,371 OTHER ASSETS 21,904 21,646 Total Assets $984,271 $1,022,470 See accompanying notes to condensed consolidated financial statements.
HON INDUSTRIES Inc. and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30, December 30, 2001 2000 (Unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY (In thousands) CURRENT LIABILITIES Accounts payable and accrued expenses $200,490 $ 240,418 Accrued facilities closing and reorganization expense 7,498 122 Income taxes 8,396 12,067 Note payable and current maturities of long-term debt 61,211 10,408 Current maturities of other long-term obligations 615 1,853 Total Current Liabilities 278,210 264,868 LONG-TERM DEBT 79,621 126,093 CAPITAL LEASE OBLIGATIONS 2,124 2,192 OTHER LONG-TERM LIABILITIES 20,103 18,749 DEFERRED INCOME TAXES 38,750 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 - 59,160 59,797 2001 - 59,160,247 shares; 2000 - 59,796,891 shares Paid-in capital 2,013 17,339 Retained earnings 504,030 495,796 Accumulated other comprehensive income 260 410 Total Shareholders' Equity 565,463 573,342 Total Liabilities and Shareholders' Equity $984,271 $1,022,470 See accompanying notes to condensed consolidated financial statements.
HON INDUSTRIES Inc. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended June 30, July 1, 2001 2000 (In thousands, except per share data) Net Sales $444,196 $509,649 Cost of products sold 292,789 343,842 Gross Profit 151,407 165,807 Selling and administrative expenses 118,983 125,513 Restructuring and impairment charges 24,000 - Operating Income 8,424 40,294 Interest income 486 434 Interest expense 2,318 4,122 Income Before Income Taxes 6,592 36,606 Income taxes 2,373 13,188 Net Income $ 4,219 $ 23,418 Net income per common share $0.07 $0.39 Average number of common shares outstanding 59,204,849 60,144,502 Cash dividends per common share $0.12 $0.11 See accompanying notes to condensed consolidated financial statements.
HON INDUSTRIES Inc. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Six Months Ended June 30, July 1, 2001 2000 (In thousands, except per share data) Net Sales $906,193 $991,172 Cost of products sold 604,500 673,258 Gross Profit 301,693 317,914 Selling and administrative expenses 238,033 236,727 Restructuring and impairment charges 24,000 - Operating Income 39,660 81,187 Interest income 708 723 Interest expense 5,240 6,961 Income Before Income Taxes 35,128 74,949 Income taxes 12,646 26,991 Net Income $ 22,482 $ 47,958 Net income per common share $0.38 $0.80 Average number of common shares outstanding 59,326,535 60,165,177 Cash dividends per common share $0.24 $0.22 See accompanying notes to condensed consolidated financial statements.
HON INDUSTRIES Inc. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, July 1, 2001 2000 (In thousands) Net Cash Flows From (To) Operating Activities: Net income $ 22,482 $ 47,958 Noncash items included in net income: Depreciation and amortization 41,199 38,832 Other postretirement and postemployment benefits 742 914 Deferred income taxes 2,626 300 Asset impairment 16,200 - Other - net 64 (3) Net increase (decrease) in noncash operating assets and liabilities 3,758 (20,739) Increase (decrease) in other liabilities 613 (915) Net cash flows from operating activities 87,684 66,347 Net Cash Flows From (To) Investing Activities: Capital expenditures - net (23,921) (29,651) Capitalized software (89) (230) Acquisition spending (6,332) (134,648) Other - net (711) - Net cash flows (to) investing activities (31,053) (164,529) Net Cash Flows From (To) Financing Activities: Purchase of HON INDUSTRIES common stock (22,730) (7,239) Proceeds from long-term debt 36,000 150,059 Payments of note and long-term debt (31,736) (42,487) Proceeds from sales of HON INDUSTRIES common stock to members and stock-based compensation 8,004 8,009 Dividends paid (14,249) (13,233) Net cash flows from financing activities (24,711) 95,109 Net increase (decrease) in cash and cash equivalents 31,920 (3,073) Cash and cash equivalents at beginning of period 3,181 22,168 Cash and cash equivalents at end of period $ 35,101 $ 19,095 See accompanying notes to condensed consolidated financial statements.
HON INDUSTRIES Inc. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) June 30, 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 six-month period ended June 30, 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: June 30, December 30, 2001 2000 ($000) (Unaudited) Finished products $ 49,985 $ 48,990 Materials and work in process 32,011 46,497 LIFO allowance (10,908) (11,127) $ 71,088 $ 84,360 Note C. Restructuring and Impairment Charge During the quarter ended June 30, 2001, the Company recorded a pretax charge of $24.0 million or $0.26 per diluted share for a restructuring plan that involves consolidating physical facilities, discontinuing low volume product lines, and reductions of workforce. Costs related to the closedown of three office furniture facilities, including Williamsport, Pennsylvania and Tupelo, Mississippi, are included in this charge. The charge includes $16.2 million for write-offs of machinery and equipment, $3.1 million for severance arising from the elimination of approximately 600 positions, $0.8 million for other employee related costs, $2.2 million for idle facility costs, and $1.7 million for certain other expenses associated with the closing of facilities. During the quarter ended June 30, 2001, $0.4 million of pretax exit costs were paid and charged against the liability.
Note D. 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. During the first quarter of 2001, 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, $1.1 million has been utilized as of June 30, 2001. Management expects these activities to be completed within the year. 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 June 30, 2001, and July 1, 2000, is as follows: <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, July 1, June 30, July 1, 2001 2000 2001 2000 (In thousands) <S> <C> <C> <C> <C> Net Sales: Office furniture $ 338,578 $ 408,681 $ 705,087 $ 806,969 Hearth products 105,618 100,968 201,106 184,203 $ 444,196 $ 509,649 $ 906,193 $ 991,172 Operating Profit: Office furniture Normal operations $ 32,366 $ 40,840 $ 64,890 $ 79,412 Restructuring and impairment charges (22,500) - (22,500) - Office Furniture - net 9,866 40,840 42,390 79,412 Hearth products Normal operations 9,519 5,473 12,757 10,243 Restructuring and impairment charges (1,500) (1,500) Hearth products - net 8,019 5,473 11,257 10,243 Total operating profit 17,885 46,313 53,647 89,655 Unallocated corporate expense (11,293) (9,707) (18,519) (14,706) Income before income taxes $ 6,592 $ 36,606 $ 35,128 $ 74,949 Identifiable Assets: Office furniture $ 575,470 $ 660,339 Hearth products 339,483 336,887 General corporate 69,318 67,034 $ 984,271 $1,064,260 Depreciation & Amortization Expense: Office furniture $ 14,877 $ 14,880 $ 29,754 $ 29,254 Hearth products 5,160 4,962 10,286 8,561 General corporate 579 491 1,159 1,017 $ 20,616 $ 20,333 $ 41,199 $ 38,832 Capital Expenditure, Net: Office furniture $ 9,260 $ 6,768 $ 18,976 $ 17,246 Hearth products 1,600 5,704 4,522 10,258 General corporate 341 1,156 423 2,147 $ 11,201 $ 13,628 $ 23,921 $ 29,651 </TABLE>
Note G. New Accounting Standards The Financial Accounting Standards Board finalized Statement of Financial Accounting Standards (SFAS) No. 141 "Business Combinations" and No. 142 "Goodwill and Other Intangible Assets" on June 30, 2001. The Company will be required to adopt both statements on December 30, 2001, the beginning of its 2002 fiscal year. SFAS No. 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method of accounting. With the adoption of SFAS No. 142, goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill will be assessed for impairment by applying a fair-value-based test. The Company does not anticipate recognizing any impairment of goodwill upon adoption. The Company will stop recording, on an annual basis, approximately $9 million of goodwill amortization upon adoption. 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 Six Months Ended Three Months Ended Dollars in Thousands June 30, 2001 & June 30, 2001 & June 30, 2001 & July 1, 2000 July 1, 2000 March 31, 2001 <S> <C> <C> <C> <C> <C> <C> Net Sales $(65,453) (12.8)% $(84,979) (8.6)% $(17,801) (3.9)% Cost of products sold (51,053) (14.8) (68,758) (10.2) (18,922) (6.1) Selling & administrative expenses (6,530) (5.2) 1,306 0.6 (67) (0.1) Restructuring and impairment charges 24,000 24,000 24,000 Interest income 52 12.0 (15) (2.1) 264 118.9 Interest expense (1,804) (43.8) (1,721) (24.7) (604) (20.7) Income taxes (10,815) (82.0) (14,345) (53.1) (7,900) (76.9) Net Income (19,199) (82.0) (25,476) (53.1) (14,044) (76.9) </TABLE> Consolidated net sales for the second quarter ending June 30, 2001, were $444.2 million, a 12.8% decrease from the $509.6 million in the second quarter of 2000. The Company recorded a restructuring and impairment charge in the second quarter. Accounting for the one-time charge of $24.0 million against pretax earnings, net income for the quarter was $4.2 million or $0.07 per share. Net income, before the charge, was $19.6 million, a decrease of 16.4% from $23.4 million for the same period a year ago. Prior to the one-time charge, net income per share was $0.33 per diluted share compared to $0.39 per share in second quarter 2000. For the first six months of 2001, consolidated net sales decreased 8.6% to $906.2 million from $991.2 million last year. Net income was $37.8 million or $0.64 per share, excluding the after-tax restructuring charge of $15.4 million or $0.26 per share. Earnings per share before the one-time charge were down 20.0% from $0.80 for the same period a year ago. Net income after the restructuring reserve was $22.5 million or $0.38 per share.
For the second quarter of 2001, office furniture comprised 76% of consolidated net sales and hearth products comprised 24%. Net sales for office furniture were down 17.2%. Hearth products sales increased 4.6% for the quarter compared to the same quarter a year ago. Office furniture contributed 77% of second quarter 2001 consolidated operating profit before unallocated corporate expenses and the one-time charge and hearth products contributed 23%. The consolidated gross profit margin for the second quarter of 2001 increased to a new second quarter record of 34.1% compared to 32.5% for the same period in 2000. This increase in margin was due to improved price realization, cost containment, and business simplification. Selling and administrative expenses for the second quarter of 2001, excluding the one-time charge, were 26.8% of net sales compared to 24.6% in the comparable quarter of 2000. This increase was due to lower overall sales volume. Actual selling and administrative dollars for the quarter, prior to the one-time charge, decreased 5.2% or $6.5 million from the same quarter a year ago. During the quarter ended June 30, 2001, the Company recorded a pretax restructuring charge of $24.0 million or $0.26 per diluted share. The plan involves consolidating physical facilities, discontinuing low volume product lines and reductions of workforce. Costs related to the closedown of three office furniture facilities, including Williamsport, Pennsylvania and Tupelo, Mississippi, are included in this charge. The charge includes $16.2 million of asset impairments per Financial Accounting Standards Board Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The remaining $7.8 million of the charge is classified as restructuring expenses in accordance with EITF 94-3 of the Financial Accounting Standards Board and Staff Accounting Bulletin (SAB 100) of the Securities and Exchange Commission. The charge includes $3.1 million for severance arising from the elimination of approximately 600 positions, $0.8 million for other employee related costs, $2.2 million for idle facility costs, and $1.7 for certain other expenses associated with the closing of facilities. During the quarter ended June 30, 2001, $0.4 million of pretax exit costs were paid and charged against the liability. The restructuring is expected to save approximately $12 million annually.
Liquidity and Capital Resources As of June 30, 2001, cash and short-term investments increased to $35.1 million compared to a $3.2 million balance at year-end 2000. Net cash flows from operations contributed to the improvement. Net capital expenditures for the first six months of 2001 were $23.9 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. 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. The Board of Directors declared a regular quarterly cash dividend of $0.12 per share on its common stock on May 7, 2001, to shareholders of record at the close of business on May 17, 2001. It was paid on June 1, 2001, and represented the 185th consecutive quarterly dividend paid by the Company. For the first six months ended June 30, 2001, the Company repurchased 922,837 shares of its common stock at a cost of approximately $22.7 million or an average price of $24.63 per share. As of June 30, 2001, approximately $90.9 million of the Board's current repurchase authorization remained unspent. On August 6, 2001, the Board of Directors declared a $0.12 per common share cash dividend to shareholders of record on August 16, 2001, to be paid on August 31, 2001. Looking Ahead The Company anticipates that the remainder of 2001 will be challenging in both sales and profits due to the current economic environment. The Company is focused on optimizing their 2001 performance, while continuing to follow their 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 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.
PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. None (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: August 9, 2001 HON INDUSTRIES Inc. By /s/ Jerald K. Dittmer Jerald K. Dittmer Vice President, Finance and Controller