-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MWzRGj+W/LCWWZYu9OO4hG6zL2LP8KqOAzo422MPfuB7UrHCBX3ycwQDDk7GncbX QupEwBcJQZHeKxJwd4KXag== 0000048287-99-000005.txt : 19990806 0000048287-99-000005.hdr.sgml : 19990806 ACCESSION NUMBER: 0000048287-99-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990703 FILED AS OF DATE: 19990805 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HON INDUSTRIES INC CENTRAL INDEX KEY: 0000048287 STANDARD INDUSTRIAL CLASSIFICATION: OFFICE FURNITURE (NO WOOD) [2522] IRS NUMBER: 420617510 STATE OF INCORPORATION: IA FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14225 FILM NUMBER: 99678484 BUSINESS ADDRESS: STREET 1: 414 EAST THIRD STREET - PO BOX 1109 CITY: MUSCATINE STATE: IA ZIP: 52761-7109 BUSINESS PHONE: 3192647400 MAIL ADDRESS: STREET 1: 414 EAST THIRD STREET STREET 2: P O BOX 1109 CITY: MUSCATINE STATE: IA ZIP: 52761 FORMER COMPANY: FORMER CONFORMED NAME: HOME O NIZE CO DATE OF NAME CHANGE: 19681001 10-Q 1 2Q10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (MARK ONE) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 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 common stock, as of the latest practical date. Class Outstanding at July 3, 1999 Common Shares, $1 Par Value 61,178,459 shares Exhibit Index is on page 17. HON INDUSTRIES Inc. and SUBSIDIARIES INDEX PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - July 3, 1999, and January 2, 1999 3-4 Condensed Consolidated Statements of Income - Three Months Ended July 3, 1999, and July 4, 1998 5 Condensed Consolidated Statements of Income - Six Months Ended July 3, 1999, and July 4, 1998 6 Condensed Consolidated Statements of Cash Flows - Six Months Ended July 3, 1999, and July 4, 1998 7 Notes to Condensed Consolidated Financial Statements 8-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-14 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURES 16 EXHIBIT INDEX 17 (27) Financial Data Schedule 18 PART I. FINANCIAL INFORMATION Item 1. Financial Statements HON INDUSTRIES Inc. and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS July 3, January 2, 1999 1999 (Unaudited) ASSETS (In thousands) CURRENT ASSETS Cash and cash equivalents $ 21,777 $17,500 Short-term investments - 169 Receivables 191,051 183,576 Inventories (Note B) 72,870 67,225 Deferred income taxes 16,093 12,477 Prepaid expenses and other current assets 12,259 9,382 Total Current Assets 314,050 290,329 PROPERTY, PLANT, AND EQUIPMENT, at cost Land and land improvements 16,249 12,156 Buildings 171,199 144,559 Machinery and equipment 454,078 411,238 Construction in progress 61,069 85,782 702,595 653,735 Less accumulated depreciation 237,621 209,558 Net Property, Plant, and Equipment 464,974 444,177 GOODWILL 108,509 108,586 OTHER ASSETS 20,807 21,377 Total Assets $908,340 $864,469 See accompanying notes to condensed consolidated financial statements. HON INDUSTRIES Inc. and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS July 3, January 2, 1999 1999 (Unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY (In thousands) CURRENT LIABILITIES Accounts payable and accrued expenses $194,311 $193,859 Income taxes 6,802 1,921 Note payable and current maturities of long-term debt 14,310 15,769 Current maturities of other long-term obligations 4,069 5,889 Total Current Liabilities 219,492 217,438 LONG-TERM DEBT 147,879 128,069 CAPITAL LEASE OBLIGATIONS 6,776 7,494 OTHER LONG-TERM LIABILITIES 17,845 18,067 DEFERRED INCOME TAXES 33,914 31,379 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 - 61,178 61,290 1999 - 61,178,459 shares; 1998 - 61,289,618 shares Paid-in capital 46,095 48,348 Retained earnings 374,280 351,786 Accumulated other comprehensive income 881 598 Total Shareholders' Equity 482,434 462,022 Total Liabilities and Shareholders' $908,340 $864,469 Equity See accompanying notes to condensed consolidated financial statements. HON INDUSTRIES Inc. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended July 3, July 4, 1999 1998 (In thousands, except per share data) Net sales $419,708 $401,417 Cost of products sold 292,077 278,107 Gross Profit 127,631 123,310 Selling and administrative expenses 89,785 83,213 Operating Income 37,846 40,097 Interest income 202 213 Interest expense 2,601 2,904 Income Before Income Taxes 35,447 37,406 Income taxes 12,938 14,027 Net Income $ 22,509 $ 23,379 Net income per common share $0.37 $0.38 Average number of common shares 61,169,059 61,663,050 outstanding Cash dividends per common share $0.095 $0.08 See accompanying notes to condensed consolidated financial statements. HON INDUSTRIES Inc. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Six Months Ended July 3, July 4, 1999 1998 (In thousands, except per share data) Net sales $844,167 $819,680 Cost of products sold 587,299 569,678 Gross Profit 256,868 250,002 Selling and administrative expenses 179,049 171,776 Provision for closing facilities (Note C) 19,679 - Operating Income 58,140 78,226 Interest income 386 648 Interest expense 4,830 5,511 Income Before Income Taxes 53,696 73,363 Income taxes 19,599 27,511 Net Income $ 34,097 $ 45,852 Net income per common share $0.56 $0.74 Average number of common shares 61,161,543 61,655,604 outstanding Cash dividends per common share $0.19 $0.16 See accompanying notes to condensed consolidated financial statements. HON INDUSTRIES Inc. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended July 3, July 4, 1999 1998 (In thousands) Net Cash Flows From (To) Operating Activities: Net income $ 34,097 $ 45,852 Noncash items included in net income: Depreciation and amortization 31,434 24,650 Other postretirement and postemployment benefits 997 49 Deferred income taxes (1,272) 3,090 Other - net (91) (24) Net increase (decrease) in noncash operating assets and liabilities (12,357) (13,530) Increase (decrease) in other liabilities (1,344) (751) Net cash flows from operating activities 51,464 59,336 Net Cash Flows From (To) Investing Activities: Capital expenditures - net (49,901) (80,016) Acquisition spending, net of cash acquired (1,637) (11,310) Short-term investments - net 169 (4) Long-term investments (519) (8) Other - net - 4 Net cash flows (to) investing activities (51,888) (91,334) Net Cash Flows From (To) Financing Activities: Purchase of HON INDUSTRIES common stock (7,630) (1,387) Proceeds from long-term debt 52,002 45,781 Payments of note and long-term debt (33,368) (21,064) Proceeds from sales of HON INDUSTRIES common stock to members and stock-based compensation 5,301 2,061 Dividends paid (11,604) (9,868) Net cash flows from (to) financing activities 4,701 15,523 Net increase (decrease) in cash and cash equivalents 4,277 (16,475) Cash and cash equivalents at beginning of period 17,500 46,080 Cash and cash equivalents at end of period $ 21,777 $ 29,605 See accompanying notes to condensed consolidated financial statements. HON INDUSTRIES Inc. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) July 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 six-month period ended July 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: July 3, 1999 January 2, ($000) (Unaudited) 1999 Finished products $ 28,736 $ 24,955 Materials and work in process 55,257 53,320 LIFO allowance (11,123) (11,050) $ 72,870 $ 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 quarters 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 manufacturing- related 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 six-month period ended July 3, 1999, $7.3 million of pretax exit costs were paid and charged against the liability. It included $4.7 million noncash write-off of plant and equipment, $1.8 million for severance for 326 positions, $.4 million for other employee-related expenses, and $.4 million for certain other expenses associated with the closing of the facilities. 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 six-month period ended July 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. 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 cost of the Company's corporate operations, interest income, and interest expense. Management views interest income and expense as corporate financing costs and not as a business segment cost. In addition, management applies one effective tax rate to its consolidated income before income taxes so income taxes are not reported or viewed internally on a segment basis. No geographic information for revenues from external customers or for long-lived assets is disclosed inasmuch as the Company's primary market and capital investments are concentrated in the United States. Reportable segment data reconciled to the consolidated financial statements for the three-month and six-month period ended July 3, 1999, and July 4, 1998, is a follows: Three Months Ended Six Months Ended July 3, July 4, July 3, July 4, 1999 1998 1999 1998 (In thousands) Net Sales: Office furniture $349,814 $343,493 $709,795 $710,329 Hearth products 69,894 57,924 134,372 109,351 $419,708 $401,417 $844,167 $819,680 Operation Profit: Office furniture Normal operations $ 32,792 $ 39,295 $ 69,086 $ 75,958 Facility closedown provision - - (19,679) - Office furniture - net 32,792 39,295 49,407 $ 75,958 Hearth products 10,239 6,725 16,023 9,656 Total operating profit 43,031 46,020 65,430 85,614 Unallocated corporate expense (7,584) (8,614) (11,734) (12,251) Income before income taxes $ 35,447 $ 37,406 $ 53,696 $ 73,363 Identifiable Assets: Office furniture $682,861 $606,765 Hearth products 165,531 150,645 General corporate 59,948 63,800 $908,340 $821,210 Depreciation & Amortization Expense Office furniture $ 12,815 $ 10,093 $ 25,273 $ 19,743 Hearth products 2,712 2,318 5,319 4,260 General corporate 511 328 842 647 $ 16,038 $ 12,739 $ 31,434 $ 24,650 Capital Expenditure, Net: Office furniture $ 14,187 $ 34,058 $ 34,478 $ 69,752 Hearth products 4,660 4,415 8,963 8,941 General corporate 910 1,476 6,460 1,323 $ 19,757 $ 39,949 $ 49,901 $ 80,016 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations A summary of the period-to-period changes in the principal items included in the Condensed Consolidated Statements of Income is shown below: Comparison of Increases (Decreases) Three Months Six Months Three Months Ended Ended Ended Dollars in Thousand July 3, 1999 & July 3, 1999 & July 3, 1999 & July 4, 1998 July 4, 1998 April 3, 1999 Net sales $18,291 4.6% $24,487 3.0% $(4,751) (1.1)% Cost of products sold 13,970 5.0 17,621 3.1 (3,145) (1.1) Selling & Administrative expenses 6,572 7.9 7,273 4.2 521 0.6 Provision for closing facilities - - 19,679 - 19,679 - Interest income (11) (5.2) (262) (40.4) 18 9.8 Interest expense (303)(10.4) (681) (12.4) 372 16.7 Income taxes (1,089) (7.8) (7,912) (28.8) 6,277 94.2 Net income (870) (3.7) (11,755) (25.6) 10,921 94.2 The Company reported its fourteenth consecutive quarterly record net sales. Consolidated net sales for the second quarter ended July 3, 1999, were $419.7 million, up 4.6%, compared to $401.4 million for the same quarter a year ago. Net income reached $22.5 million, compared to $23.4 million for second quarter 1998, a decrease of 3.7%. Net income per share for the quarter was $0.37 per diluted share, a decrease of 2.6% from $0.38 per diluted share earned in second quarter 1998. For the first six months of 1999, consolidated net sales rose 3.0% to $844.2 million from $819.7 million last year. The closing of three plants, a cost savings initiative to increase long-term profitability, was announced in first quarter. Accounting for a one-time charge of $19.7 million against pre-tax earnings, net income for the first six months was $34.1 million or $0.56 per share. Net income, before the charge, reached $46.6 million, an increase of 1.6% from $45.9 million in the first half of 1998. Prior to the one-time charge, net income per share was $0.76 per diluted share compared to $0.74 per share in 1998. Please refer to Note C for additional information regarding the one-time charge. For the second quarter of 1999, office furniture comprised 83% of consolidated net sales and hearth products comprised 17%. Net sales for office furniture were up 2% and hearth products sales increased 21% for the quarter compared to the same quarter a year ago. Office furniture contributed 76% of second quarter 1999 consolidated operating profit before unallocated corporate expenses and hearth products 24%. Consolidated gross profit margin for the second quarter of 1999 was 30.4% compared to 30.7% for the same period in 1998. As an investment for the future, the Company has increased capacity. However, modest revenue growth in office furniture during the second quarter did not allow the Company to adequately absorb the increased fixed costs, adversely impacting gross profit. Management continues to focus on improving gross margins by improving the net selling price of products and on reducing production costs. Selling and administrative expenses for the second quarter of 1999 were 21.4% compared to 20.7% in the comparable quarter of 1998. The Company has implemented a number of internal initiatives to better serve customers through shorter lead times, improved complete and on-time deliveries, and reduced transportation damage. These initiatives have resulted in increased freight costs and, in turn, increased selling and administrative expenses. Excluding freight, selling and administrative expenses for the second quarter of 1999 were 15.0% compared to 15.3% in second quarter 1998. The Company decreased its estimated annual effective tax rate to 36.5% for the first six months of 1999 from 37.5% a year earlier to reflect lower estimated state income taxes. Liquidity and Capital Resources As of July 3, 1999, cash and short-term investments increased to $21.8 million from $10.7 million at the end of first quarter 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 continued future growth. Net capital expenditures for the first six months of 1999 were $49.9 million compared to $80.0 million for the same six-month period in 1998. These expenditures primarily represent investment in new, more efficient machinery and equipment and completion of capacity expansion projects started in 1998. These investments were funded by a combination of cash reserves, cash from operations, and a revolving credit agreement. The Board of Directors declared a regular quarterly cash dividend of $0.095 per share on its common stock on May 10, 1999, to shareholders of record at the close of business on May 20. It was paid on June 1, 1999, and represented the 177th consecutive quarterly dividend paid by the Company. For the six months ended July 3, 1999, the Company repurchased 338,322 shares of its common stock at a cost of approximately $7.6 million or an average price of $22.55 per share. As of July 3, 1999, approximately $54.8 million of the Board's current repurchase authorization remained unspent. Year 2000 The Company is in the final stages of implementing its comprehensive Year 2000 ("Y2K") Readiness Plan, and has launched its Year 2000 Contingency Plan. The primary mission of these Plans is to maintain business continuity by giving priority remediation and resolution to any Year 2000 issue that could compromise normal business operations. The Year 2000 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. The Year 2000 Readiness Plan work is still on schedule to be completed during the third quarter of 1999, leaving fourth quarter of 1999 primarily for follow-up compliance testing and contingency planning as needed. The Company still estimates its total incremental out-of-pocket project costs will not exceed the $1.0 - $1.5 million range, including some costs that, because of their nature, will be capitalized. All Year 2000 costs associated with this project are being expensed in the period incurred. Through the fiscal quarter ended July 3, 1999, the Company has incurred and recorded project related costs of approximately $353,000. At this point, the Company assesses its internal Y2K issues to be fairly minor and routine in nature. Current efforts are being concentrated on internal readiness 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 by these providers. 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. In a worst-case scenario, the Company will utilize short-term solutions, as appropriate, until the problem is remedied. Looking Ahead Management expects to continue to exceed industry sales growth for the balance of the year in both segments in which it participates. Management is encouraged by positive economic indicators and customer reaction to the Company's new products and continued focus on service. 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 remediation and 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 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: August 5, 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 Page (27) Financial Data Schedule 18 EX-27 2 FINANCIAL DATA SCHEDULE
5 0000048287 HON INDUSTRIES INC. 1,000 6-MOS JAN-1-2000 JAN-3-1999 JUL-3-1999 21,777 0 194,291 (3,240) 72,870 314,050 702,595 237,621 908,340 219,492 147,879 0 0 61,178 421,256 908,340 844,167 844,167 587,299 587,299 198,728 0 4,830 53,696 19,599 34,097 0 0 0 34,097 0.56 0.56
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