10-K 1 a2042271z10-k.txt 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE ---------- SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 30, 2000 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE ---------- SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-2648 HON INDUSTRIES INC. An Iowa Corporation IRS Employer No. 42-0617510 414 East Third Street P. O. Box 1109 Muscatine, IA 52761-0071 319/264-7400 Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Common Stock, with par value of $1.00 per share. Preferred Share Purchase Rights to purchase shares of Series A Junior Participating Preferred Stock, with par value of $1.00 per share. Indicate by check mark whether the registrant (1) has filed all reports required 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ____ The aggregate market value of the voting stock held by nonaffiliates of the registrant, as of March 1, 2001, was: $1,099,041,437, assuming all 5% holders are affiliates. The number of shares outstanding of the registrant's common stock, as of March 1, 2001, was: 59,426,775. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Proxy Statement dated March 27, 2001, for the May 7, 2001, Annual Meeting of Shareholders are incorporated by reference into Part III. Index of Exhibits is located on Page 57. -1- ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS PART I
Page ---- Item 1. Business............................................................................. 3 Item 2. Properties........................................................................... 11 Item 3. Legal Proceedings.................................................................... 13 Item 4. Submission of Matters to a Vote of Security Holders.................................. 13 Table I - Executive Officers of the Registrant....................................... 14 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................ 16 Item 6. Selected Financial Data -- Eleven-Year Summary....................................... 18 Item 7. Management's Discussion and Analysis of Financial Condition And Results of Operations............................................................ 20 Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................... 25 Item 8. Financial Statements and Supplementary Data.......................................... 25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................. 25 PART III Item 10. Directors and Executive Officers of the Registrant................................... 26 Item 11. Executive Compensation............................................................... 26 Item 12. Securities Ownership of Certain Beneficial Owners and Management..................... 26 Item 13. Certain Relationships and Related Transactions....................................... 26 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................... 27 Signatures ..................................................................................... 30 Financial Statements............................................................................... 33 Financial Statement Schedules...................................................................... 56 Index of Exhibits.................................................................................. 57
-2- ANNUAL REPORT ON FORM 10-K PART I ITEM 1. BUSINESS GENERAL HON INDUSTRIES Inc. ("HON" or the "Company") is an Iowa corporation incorporated in 1944. The Company is a national manufacturer and marketer of office furniture and hearth products. Approximately 81% of fiscal year 2000 net sales were in office furniture and 19% in hearth products. A broad office furniture product offering is sold through a national system of dealers, wholesalers, warehouse clubs, retail superstores, and to end-user customers, and federal and state governments. Dealer, wholesaler, and retail superstores are the major channels based on sales. Hearth products include wood-, pellet-, and gas-burning factory-built fireplaces, fireplace inserts, stoves, and gas logs. These products are sold through a national system of dealers, wholesalers, large regional contractors, and Company-owned retail outlets. In fiscal 2000, the Company had net sales of $2.0 billion, of which approximately $1.6 billion was attributable to office furniture products and $.4 billion was attributable to hearth products. Please refer to Operating Segment Information in the Notes to Consolidated Financial Statements for further information about operating segments. The Company is organized into a corporate headquarters and operating units with offices, manufacturing plants, distribution centers, and sales showrooms in the United States, Canada, and Mexico. See Item 2. Properties for additional related discussion. Five operating units, marketing under various brand names, participate in the office furniture industry. These operating units include: The HON Company, Allsteel Inc., BPI Inc., The Gunlocke Company, and Holga Inc. Each of these operating units manufactures and markets products which are sold through various channels of distribution and segments of the industry. Hearth Technologies Inc. was created in October 1996 with the acquisition of Heat-N-Glo Fireplace Products, Inc. and its subsequent integration with the Company's Heatilator operation. On February 20, 1998, the Company acquired Aladdin Steel Products, Inc., a manufacturer of wood-, pellet-, and gas-burning stoves and inserts, for a purchase price of $10.2 million. This acquisition is also being operated by Hearth Technologies Inc. On February 29, 2000, the Company completed the acquisition of two leading hearth products distributors, American Fireplace Company (AFC) and the Allied Group (Allied) for a total purchase price of approximately $135 million. 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. HON International Inc. markets select products manufactured by the other various HON INDUSTRIES operating units outside the United States and Canada. Since its inception, the Company has been committed to improvement in manufacturing and in 1992 introduced its process improvement approach known as Rapid Continuous Improvement ("RCI") which focuses on streamlining design, manufacturing, and administrative processes. The Company's RCI program, in which most members participate, has contributed to increased productivity, lower manufacturing costs, and improved product quality and workplace safety. In addition, the Company's RCI efforts enable it to offer short average lead times, from receipt of order to shipment, for most of its products. The Company distributes its products through an extensive network of independent office furniture dealers, office products dealers, wholesalers and retailers. The Company is a supplier of office furniture to each of the largest nationwide chains of office products dealer, or "mega-dealers," which are Boise Cascade Corporation; U.S. Office Products Company; Corporate Express Inc., A Buhrmann Company; Office Depot Business Services Group; and Staples Commercial Advantage, and to the Office Depot, Staples, and Office Max superstores. -3- The Company's product development efforts are focused on reducing the cost to manufacture existing products, and on designing new products that provide additional features and top quality. Over 40% of the Company's 2000 net sales were from products introduced in the past three years. An important element of the Company's success has been its ability to attract, develop and retain skilled, experienced and efficient members. Each of the Company's eligible members owns stock in the Company through a number of stock-based plans, including a member stock purchase plan and a profit-sharing plan. In addition, most production members are eligible for incentive bonuses. For further financial-related information with respect to acquisitions, dispositions, and Company operations in general, refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, and the following captions included in the Notes to Consolidated Financial Statements, which are filed as part of this report: Nature of Operations, Business Combinations, and Operating Segment Information. 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, competition within the office furniture and fireplace industries; the relationship between supply and demand for value-priced office products, as well as direct vent gas- and wood-burning fireplaces; the effects of economic conditions; issues associated with the acquisition and integration of acquisitions; operating risks; the ability of the Company to realize cost savings and productivity improvements; the ability of the Company's distributors to successfully market and sell the Company's products; and the availability and cost of capital to finance planned growth; as well as the other risks, uncertainties, and factors described from time to time in the Company's filings with the Securities and Exchange Commission. INDUSTRY According to the Business and Institutional Furniture Manufacturer's Association ("BIFMA"), U.S. office furniture industry shipments are estimated to be approximately $13,285,000,000 in 2000, an increase of 8.5% over 1999. The Company believes that the increase was due in part to pent-up demand resulting from companies funneling capital resources into computer-related solutions during 1999 in fear of potential Year 2000 problems. The U.S. office furniture market consists of two primary segments--the project segment and the transactional segment. The project segment has traditionally been characterized by sales of large quantities of office furniture to large corporations, such as for new office facilities, relocations, or department or office redesigns, which are frequently customized to meet specific client and designer preferences. Project furniture is generally purchased through office furniture dealers who typically prepare a custom-designed office layout emphasizing image and design. The process is often lengthy and generally has several manufacturers competing for the same projects. Overhead and support associated with the sales and customization efforts in this segment are major reasons why the prices for project office furniture have traditionally been relatively high. The transactional segment of the market, in which the Company is a leader, primarily represents smaller orders of office furniture purchased by businesses and home office users on the basis of price, quality, selection and quick delivery. Office products dealers, wholesalers and retailers, such as office products superstores, are the primary distribution channels in this market segment. Office products dealers (many of whom also participate in the project segment of the market) publish periodic catalogs that display office furniture and products from various manufacturers. GROWTH STRATEGY The Company's strategy is to build on its position as a leading manufacturer of value-priced office furniture and hearth products in North America. The components of this growth strategy are to introduce new value-priced products, continually improve productivity, leverage the distribution network, and pursue complementary strategic acquisitions. -4- EMPLOYEES/MEMBERS As of December 30, 2000, the Company employed approximately 11,500 persons, 11,000 of whom were members and 500 of whom were temporary personnel. Of the approximately 11,500 persons employed by the Company, 6,400 were in the Company's manufacturing operations. The Company employed approximately 400 members who were members of unions. The Company believes that its labor relations are good. PRODUCTS OFFICE FURNITURE The Company designs, manufactures, and markets a broad range of office furniture in four basic categories: (i) filing, including vertical files, lateral files, pedestals, and high density filing; (ii) seating, including task chairs, executive desk chairs, and side chairs; (iii) office systems (typically modular and moveable workspaces with integrated work surfaces, space dividers, and lighting); and (iv) desks and related products, including tables, bookcases, and credenzas. The Company's products are sold through the Company's wholly owned subsidiaries - The HON Company, Allsteel Inc., BPI Inc., The Gunlocke Company, and Holga Inc. The Company's office furniture products are generally available in contemporary as well as traditional styles and are priced to sell in all channels of distribution. The Company's products are offered in many models, sizes, designs, and finishes and are constructed from both wood and nonwood materials. The following is a description of the Company's major product categories and product lines: FILING CABINETS The Company offers a variety of filing options designed either to be integrated into and support the Company's office systems products or to function as freestanding furniture in commercial and home offices. The Company believes it is the largest manufacturer and marketer of mid-priced steel filing cabinets in the United States. The Company sells most of its freestanding files through independent office products and office furniture dealers, nationwide chains of office products dealers, wholesalers, office products superstores, warehouse clubs, and mail order distributors. Higher priced files are sold through project-oriented office furniture dealers. SEATING The Company's seating line includes task chairs designed for different kinds of office work, such as secretarial, computer, clerical, laboratory and executive, guest chairs, conference and reception room seating, and stackable chairs. The chairs are available in a variety of frame colors, a multitude of fabrics, and a wide range of price points. Key customer criteria in seating includes superior ergonomics, aesthetics, comfort and quality. OFFICE SYSTEMS The Company offers a complete line of office panel systems products in order to meet the needs of a variety of organizations. Systems may be used for team worksettings, private offices and open floor plans, and are typically modular and movable workspaces composed of adjustable partitions, work surfaces, desk extensions, storage cabinets and electrical lighting systems which can be moved, reconfigured and reused within the office. Panel systems offer a cost-effective and flexible alternative to traditional drywall office construction. The Company has experienced increased demand for furniture systems able to accommodate new work arrangements such as team workspaces and workspaces shared by several employees who are frequently out of the office. A typical installation of office panels often includes associated sales of seating, casegoods, files, and accessories. -5- The Company offers whole office solutions, movable panels, storage units, and work surfaces that can be installed easily and reconfigured to accommodate growth and change in organizations. The Company also offers consultative selling and design services for certain of its office system products. The compelling value of the Company's systems lines is that these products are styled and featured similar to those of premium-priced contract systems manufacturers but are offered at competitive prices, with short lead times and superior service. DESKS AND RELATED PRODUCTS The Company's collection of desks and related products include stand-alone steel and wood furniture items, such as desks, bookshelves and credenzas, and are available in a range of designs and price points. The Company offers these products in both contemporary and traditional styles. The Company's desks and related products are sold to a wide variety of customers from those designing large office configurations to small retail and home office purchasers. The Company offers a variety of contemporary and traditional tables designed for use in conference rooms, private offices, training areas, team worksettings and open floor plans. Tables are produced in wood veneer and laminate and are available in numerous sizes, shapes and base styles. HEARTH PRODUCTS The Company is the largest U.S. manufacturer and marketer of metal prefabricated fireplace and related products, primarily for the home, which it sells under the widely recognized Heatilator, Heat-N-Glo, Dovre, and Quadra-Fire brand names. Products bearing these brands are marketed by the Company's three hearth products companies, Heatilator, Heat-N-Glo, and Aladdin. The Company's line of hearth products includes wood- and gas-burning fireplaces and stoves, fireplace inserts, chimney systems, and related accessories. Heatilator and Heat-N-Glo are leaders in the two largest segments of the home fireplace market: vented-gas and wood fireplaces. Heat-N-Glo is the leader in "direct vent" fireplaces, which replace the chimney-venting system used in traditional fireplaces with a less expensive vent through an outer wall. See Business - Intellectual Property. MANUFACTURING The HON Company manufactures office furniture in Alabama, California, Georgia, Iowa, Kentucky, North Carolina, Pennsylvania, Virginia, and Monterrey, Mexico. Allsteel Inc. manufactures office furniture in Iowa, Mississippi, Pennsylvania, and Tennessee. Holga Inc. manufactures office furniture in California. The Gunlocke Company manufactures office furniture in New York. BPI Inc. manufactures office furniture in California, North Carolina, and Washington. Hearth Technologies Inc. manufactures hearth products in Iowa, Maryland, Minnesota, Washington, and Calgary, Canada. The Company purchases raw materials and components from a variety of vendors, and generally most items are available from multiple sources. Major raw materials and components include coil steel, bar stock, castings, lumber, veneer, particle board, fabric, paint, lacquer, hardware, rubber products, plastic products, and shipping cartons. Since its inception, the Company has focused on making its manufacturing facilities and processes more flexible while at the same time reducing costs and improving product quality. In 1992, the Company adopted the principles of RCI, which focus on developing flexible and efficient design, manufacturing and administrative processes that remove excess cost. To achieve flexibility and attain efficiency goals, the Company has adopted a variety of production techniques including cell manufacturing, focused factories, just-in-time inventory management and value engineering. The application of the RCI process has increased productivity by reducing set-up and processing times, square footage, inventory levels, product costs and delivery times, while improving quality and enhancing member safety. The Company's RCI process involves production and administrative employees, management, customers and suppliers. The Company has facilitators, coaches and consultants dedicated to the RCI process and strives to involve all members in the RCI process. In addition, the Company has organized a group that designs, fabricates, tests and installs proprietary manufacturing equipment. Manufacturing also plays a key role in the Company's concurrent product development process that primarily seeks to design new products for ease of manufacturability. -6- PRODUCT DEVELOPMENT The Company's product development efforts are primarily focused on reducing the cost to manufacture existing products and designing new products that provide additional features and quality. The Company accomplishes this through improving existing products, extending product lines, applying ergonomic research, improving manufacturing processes, applying alternative materials and providing engineering support and training to its operating units. The Company conducts its product development efforts at both the corporate and operating unit level. At the corporate level, the staff at the Company's Stanley M. Howe Technical Center, working in conjunction with operating staff, seeks breakthrough developments in product design, manufacturability and materials usage. At the operating unit level, development efforts are focused on achieving incremental improvements in product features and manufacturing processes. The Company invested approximately $18.9 million, $17.1 million, and $15.7 million in product development during fiscal 2000, 1999, and 1998, respectively, and has budgeted in excess of $23 million for product development in fiscal 2001. INTELLECTUAL PROPERTY As of December 30, 2000, the Company owned 198 U.S. and 128 foreign patents and had applications pending for 41 U.S. and 83 foreign patents. In addition, the Company holds registrations for 113 U.S. and 179 foreign trademarks and has applications pending for 64 U.S. and 70 foreign trademarks. The Company's principal office furniture products do not require frequent technical changes. The majority of the Company's patents are design patents which expire at various times depending on the patent's date of issuance. The Company believes that neither any individual patent nor the Company's patents in the aggregate are material to the Company's business as a whole. When Hearth Technologies Inc. acquired Heat-N-Glo in October 1996, it also acquired its patent for the design of a zero-clearance direct vent gas fireplace (the "direct vent patent"). The Company currently offers numerous product designs that would not be possible without the direct vent technology. Although the Company believes that the protection afforded by the direct vent patent is not vital to sustaining Hearth Technologies' gross profit margins on its direct vent gas fireplaces, the technology that underlies the patent is a significant distinguishing feature for the Company's products. The Company applies for patent protection when it believes the expense of doing so is justified, and believes that the duration of its registered patents is adequate to protect these rights. The Company also pays royalties in certain instances for the use of patents on products and processes owned by others. The Company actively protects its trademarks that it believes have significant goodwill value. SALES AND DISTRIBUTION: CUSTOMERS Over the last ten years, the office products and office furniture industries have experienced substantial consolidation as larger dealers have acquired smaller local and regional dealers. Consolidation permits large dealers to benefit from economies of scale, increased purchasing power, and the elimination of redundant management and overhead expenses. Larger dealers have also been able to take advantage of more sophisticated management techniques designed to enhance customer service, lower costs and increase operating efficiency. At the same time, office products superstores have emerged and replaced local retail office supply stores. The Company believes that these trends may continue to result in fewer, larger dealers and retailers as customers for the Company's products. In 2000, the Company's ten largest customers represented approximately 38% of its consolidated net sales. The substantial purchasing power exercised by large customers may adversely affect the prices at which the Company can successfully offer its products. As a result of this consolidation, changes in the purchase patterns or the loss of a single customer may have a greater impact on the Company's financial results than such events would have had prior to such consolidation. In addition, there can be no assurance that the Company will be able to maintain its customer relationships as consolidation of its customers occur. -7- As a result of these trends, the Company today sells its products through five principal distribution channels. The first channel, independent, local office furniture and office products dealers, specialize in the sale of a broad range of office furniture and office furniture systems, mostly to small- and medium-sized businesses, branch offices of large corporations, and home office owners. The second distribution channel comprises nationwide chains of office products dealers, or "mega-dealers," including Boise Cascade Corporation; U.S. Office Products Company; Corporate Express Inc., A Buhrmann Company; Office Depot Business Services Group; and Staples Commercial Advantage. Many of the independent dealers and mega-dealer locations assist their customers with the evaluation of office space requirements, systems layout and product selection, and design and office solution services provided by professional designers. The third distribution channel, wholesalers, serve as distributors of the Company's products to independent dealers, mega-dealers and superstores. The Company sells to the nation's largest wholesalers, United Stationers and S.P. Richards, as well as to regional wholesalers. Wholesalers maintain stocks of standard product lines for resale to the various retailers. They also special order products from the Company in customer-selected models and colors. The Company's wholesalers maintain warehouse locations throughout the United States, which enable the Company to make its products available for rapid delivery to retailers anywhere in the country. One customer, United Stationers, accounted for approximately 14%, 13%, and 12% of the Company's consolidated net sales in 2000, 1999, and 1998, respectively. The fourth distribution channel is retail stores, which include office products superstores such as Office Depot, Office Max, and Staples and warehouse clubs like Costco. The fifth distribution channel consists of government-focused dealers that sell the Company's products to federal, state and local government offices. As of December 30, 2000, the Company's office furniture sales force consisted of 29 regional sales managers supervising 156 salespersons, plus approximately 39 firms of independent manufacturers' representatives who collectively provided national sales coverage. Sales managers and salespersons are compensated by a combination of salary and incentive bonus. Office products dealers, national wholesalers and retailers market their products over the world-wide web and through catalogs published periodically and distributed to existing and potential customers. The Company's marketing objective is to gain share in its distributors' media. The Company believes that the inclusion of the Company's product lines in customer catalogs offers strong potential for increased sales of the listed product items due to the exposure provided by these publications. The Company also makes export sales through HON International Inc. to approximately 150 office furniture dealers and wholesale distributors serving select foreign markets. Distributors are principally located in Latin America and the Caribbean. The Company has an international field sales organization consisting of a Vice President of Sales and Marketing and four regional managers. Sales outside of the United States and Canada represented approximately 1% of net sales in fiscal 2000. Limited quantities of select finished goods inventories are maintained at the Company's principal manufacturing plants and at its various distribution centers. Hearth Technologies Inc. sells its fireplace and stove products through approximately 3,000 dealers and 520 distributors. The Company has a field sales organization of 34 regional sales managers supervising 117 salespersons and 7 firms of independent manufacturers' representatives. As of December 30, 2000, the Company has an order backlog of approximately $111.2 million which will be filled in the ordinary course of business within the current fiscal year. This compares with $131.2 million as of January 1, 2000, and $97.8 million as of January 2, 1999. Backlog, in terms of percentage of net sales, was 5.4%, 7.3%, and 5.8% for fiscal years 2000, 1999, and 1998, respectively. The Company's products are manufactured and shipped within a few weeks following receipt of order. The dollar amount of the Company's order backlog is therefore not considered by management to be a leading indicator of the Company's expected sales in any particular fiscal period. For a discussion of the seasonal nature of the Company's sales, see Operating Segment Information in the Notes to Consolidated Financial Statements. -8- COMPETITION The office furniture industry is highly competitive, with a significant number of competitors offering similar products. The Company competes by emphasizing its ability to deliver compelling value products. In executing this strategy, the Company has two significant classes of competitors. First, the Company competes with numerous small- and medium-sized office furniture manufacturers that focus on more limited product lines and/or end-user segments and include Global Furniture Inc.; National Office Furniture, a division of Kimball Office Furniture Co.; Chromcraft; Paoli; and High Point Furniture Industries, Inc. Second, the Company competes with a small number of large office furniture manufacturers which control a substantial portion of the market share in the project-oriented office furniture market, such as Steelcase Inc.; Haworth, Inc.; Herman Miller, Inc.; and Knoll, Inc. Some of these large competitors have substantially greater assets, resources and capabilities in the traditional project market than the Company. Products and brands offered by these project-oriented office furniture market participants have strong acceptance in the market place and have developed, and may continue to develop, value-priced product designs to compete with the Company. The Company also faces significant price competition from its competitors and may encounter competition from new market entrants. There can be no assurance that the Company will be able to compete successfully in its markets in the future. Hearth products, consisting of prefabricated metal fireplaces and related products, are manufactured by a number of national and regional competitors. A limited number of manufacturers, however, are predominant in this industry. The Company competes primarily against the other large manufacturers which include CFM Majestic Inc. (a Canadian company), Lennox Industries Inc. (Superior and Marco brands), Martin Industries Inc., and Fireplace Manufacturers Inc. (FMI). Both office furniture and hearth products compete on the basis of price, product performance, product quality, complete and on-time delivery to the customer, and customer service and support. The Company believes that it competes principally by providing compelling value products designed to be among the best in their price range for product quality and performance, superior customer service, and short lead-times. This is made possible, in part, by the Company's significant on-going investment in product development, highly efficient and low cost manufacturing operations, and an extensive distribution network. The Company is one of the largest office furniture manufacturers in the United States, and believes that it is the largest manufacturer of value-priced furniture. The Company is also the largest manufacturer and marketer of fireplaces in the United States. For further discussion of the Company's competitive situation, refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. EFFECTS OF INFLATION Certain business costs may, from time to time, increase at a rate exceeding the general rate of inflation. The Company's objective is to offset the effect of inflation on its costs primarily through productivity increases in combination with certain adjustments to the selling price of its products as competitive market and general economic conditions permit. Investments are routinely made in modern plants, equipment, support systems, and for Rapid Continuous Improvement programs. These investments collectively focus on increasing productivity which helps to offset the effect of rising material and labor costs. Ongoing cost control disciplines are also routinely employed. In addition, the last-in, first-out (LIFO) valuation method is used for most of the Company's inventories, which ensures the changing material and labor costs are recognized in reported income; and more importantly, these costs are recognized in pricing decisions. -9- ENVIRONMENTAL The Company is subject to a variety of environmental laws and regulations governing discharges of air and water; the handling, storage, and disposal of hazardous or solid waste materials; and the remediation of contamination associated with releases of hazardous substances. Although the Company believes it is in material compliance with all of the various regulations applicable to its business, there can be no assurance that requirements will not change in the future or that the Company will not incur material costs to comply with such regulations. The Company has trained staff responsible for monitoring compliance with environmental, health, and safety requirements. The Company's environmental professionals work with responsible personnel at each manufacturing facility, the Company's environmental legal counsel, and consultants on the management of environmental, health and safety issues. The Company's ultimate goal is to reduce and, when practical, eliminate the creation of hazardous waste in its manufacturing processes. Compliance with federal, state, and local environmental regulations has not had a material effect on the capital expenditures, earnings, or competitive position of the Company to date. The Company does not anticipate that financially material capital expenditures will be required during fiscal year 2001 for environmental control facilities. It is management's judgment that compliance with current regulations should not have a material effect on the Company's financial condition or results of operations. However, the uncertainty of new environmental legislation and technology in this area makes it impossible to know with confidence. For additional information about the Company's environmental matters, refer to Item 3. Legal Proceedings and the Contingencies note in the Notes to Consolidated Financial Statements. BUSINESS DEVELOPMENT The development of the Company's business during the fiscal years ended December 30, 2000, January 1, 2000, and January 2, 1999, is discussed in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. -10- ITEM 2. PROPERTIES The Company maintains its corporate headquarters in Muscatine, Iowa, and conducts its operations at locations throughout the United States, Canada, and Mexico which house manufacturing, distribution, and retail operations and offices totaling an aggregate of approximately 9.2 million square feet. Of this total, approximately 2.3 million square feet are leased, including approximately 0.3 million square feet under a capital lease. Although the plants are of varying ages, the Company believes they are well maintained, are equipped with modern and efficient equipment, and are in good operating condition and suitable for the purposes for which they are being used. The Company has sufficient capacity to increase output at most locations by increasing the use of overtime and/or number of production shifts employed. The Company's principal manufacturing and distribution facilities (100,000 square feet in size or larger) are as follows:
Approximate Owned or Description Location Square Feet Leased of Use -------- ----------- ------ ------ Cedartown, Georgia 547,014 Owned Manufacturing wood/nonwood casegoods office furniture (1) Chester, Virginia 382,082 Owned/ Manufacturing nonwood casegoods Leased(2) office furniture (1) Colville, Washington 125,000 Owned Manufacturing stoves Florence, Alabama 308,763 Owned Manufacturing wood casegoods office furniture Jackson, Tennessee 155,000 Leased Manufacturing nonwood office seating Kent, Washington 189,062 Leased Manufacturing systems office furniture Lake City, Minnesota 235,000 Leased Manufacturing metal prefabricated fireplaces (1) Louisburg, North Carolina 176,354 Owned Manufacturing wood casegoods office furniture Milan, Tennessee 358,000 Leased Manufacturing systems office furniture Monterrey, Mexico 105,000 Owned Manufacturing nonwood office seating Mt. Pleasant, Iowa 288,006 Owned Manufacturing metal prefabricated fireplaces (1) Muscatine, Iowa 286,000 Owned Manufacturing nonwood casegoods office furniture Muscatine, Iowa 578,284 Owned Warehousing office furniture (1) Muscatine, Iowa 236,100 Owned Manufacturing wood casegoods office furniture Muscatine, Iowa 142,850 Owned Manufacturing systems office furniture Muscatine, Iowa 342,850 Owned Manufacturing systems office furniture Muscatine, Iowa 237,800 Owned Manufacturing nonwood office seating Muscatine, Iowa 210,000 Owned Warehousing office furniture Muscatine, Iowa 127,400 Owned Manufacturing wood casegoods office furniture Owensboro, Kentucky 311,575 Owned Manufacturing wood office seating Salisbury, North Carolina 129,000 Owned Manufacturing systems office furniture South Gate, California 520,270 Owned Manufacturing nonwood casegoods and seating office furniture (1) Wayland, New York 716,484 Owned Manufacturing wood casegoods and seating office furniture (1) West Hazleton, Pennsylvania 268,800 Owned Manufacturing nonwood casegoods office furniture Williamsport, Pennsylvania 147,265 Owned Manufacturing wood office seating and casegoods Verona, Mississippi 257,000 Owned Manufacturing systems office furniture ----
(1) Also includes a regional warehouse/distribution center (2) A capital lease Other Company facilities, under 100,000 square feet in size, are located in various communities throughout the United States and Canada. These facilities total approximately 1,758,000 square feet with approximately 850,000 square feet used for the manufacture and distribution of office furniture and approximately 908,000 square feet for hearth products. Of this total, approximately 994,000 square feet are leased. One of these facilities has been vacated and is in the process of being marketed for sale. The Company also leases sales showroom space in office furniture market centers in several major metropolitan areas. The Company has a 40,000 square foot leased plant in Savage, Minnesota, which is subleased. There are no major encumbrances on Company-owned properties other than outstanding mortgages on certain properties, the amount of which is disclosed in the Long-Term Debt note in the Notes to Consolidated Financial Statements, filed as a part of this report. Refer to the Property, Plant, and Equipment note in the Notes to Consolidated Financial Statements for related cost, accumulated depreciation, and net book value data. -12- ITEM 3. LEGAL PROCEEDINGS The Company is involved in certain continuing activities in Pennsylvania to clean-up environmental contamination at one site formerly owned by a subsidiary of the Company. The Pennsylvania environmental authorities are supervising this activity. The costs associated with this site are primarily related to the operation of a groundwater remediation system. These costs have not had a material effect on the financial condition or results of operations of the Company. Due to such factors as the wide discretion of regulatory authorities regarding clean-up levels and uncertain allocation of liability at multiple party sites, estimates made prior to the approval of a formal plan of action represent management's best judgment as to estimates of reasonably foreseeable expenses based upon average remediation costs at comparable sites. The Company, therefore, has accrued liabilities reflecting management's current, best estimate of the eventual future cost of the Company's anticipated share of remediation costs. For additional information on legal proceedings involving the Company, refer to the Contingencies note included in the Notes to Consolidated Financial Statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. -13- PART I, TABLE I EXECUTIVE OFFICERS OF THE REGISTRANT DECEMBER 30, 2000
Family Position Other Business Experience Name Age Relationship Position Held Since During Past Five Years ---- --- ------------ -------- ---------- ---------------------- Jack D. Michaels 63 None Chairman of the Board 1996 President 1990 Chief Executive Officer 1991 Director 1990 Jerald K. Dittmer 43 None Vice President, Finance 2000 Group Vice President, Seating and Wood (1999-00), Vice President, Strategic Planning (1999), Vice President and General Manager, Oak Steel and Mt. Pleasant Plants (1998-99), Vice President, Information Technology (1997-98), The HON Company; Vice President and Controller (1995-97), The Gunlocke Company Jeffrey D. Fick 39 None Vice President, 1997 Secretary and Acting General Counsel (1997); Member and Community Relations Senior Counsel (1994-97) Malcolm C. Fields 39 None Vice President and Chief 2000 Vice President, Information Technology Information Officer (1998-00), The HON Company; Manager, Technical Support Services (1997-98), Manager, Process Systems (1996-97), Manager, Engineering Systems (1995-96), HON INDUSTRIES Inc. Robert D. Hayes 57 None Vice President, Internal Audit 1999 Vice President and Controller (1997-99), and Controller (1991-97), The HON Company James I. Johnson 52 None Vice President, General Counsel 1997 General Counsel and Secretary, Norand and Secretary Corporation, a portable data computing company (1990-97) Gordon R. Marshall 56 None Vice President, Marketing 2000 Vice President, Marketing (1991-00), The HON Company Phillip M. Martineau 53 None Executive Vice President 2000 President and Chief Executive Officer (1996-99), Arcsmith, Inc. (Illinois Tool Works); President (1994-96), Ansell-Edmont Industrial Inc. (Pacific Dunlop Ltd.) John S. McGlinn 60 None Sr. Vice President, Operations 1997 Vice President and General Manager, LA-South Improvement Gate Plant (1981-97), The HON Company Melvin L. McMains 59 None Vice President and Controller 1998 Controller (1980-1998) Thomas K. Miller 62 None Vice President, International 2000 Vice President, Marketing and International + President, HON International Inc. 1996 (1996-00), Vice President, Marketing and Distribution (1996), Vice President, Strategic Development-Office Depot (1995-96), HON INDUSTRIES Inc.; President, Ring King Visibles, Inc. (1991-96) William F. Snydacker 55 None Treasurer 1980 David C. Stuebe 60 None Vice President and Chief Financial 1994 Officer
PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is listed for trading on the New York Stock Exchange (NYSE), trading symbol HNI. The Company moved to the NYSE, effective July 2, 1998, from the Nasdaq National Market System where the stock had traded under the symbol HONI. As of year-end 2000, the Company had 6,563 stockholders of record. Computershare Investor Services, L.L.C., Chicago, Illinois, serves as the Company's transfer agent and registrar of its common stock. Shareholders may report a change of address or make inquiries by writing or calling: Computershare Investor Services, L.L.C., P.O. Box 1689, Chicago, IL 60690-1689 or telephone 312/588-4991. Common Stock Market Prices and Dividends (Unaudited) and Common Stock Market Price and Price/Earnings Ratio (Unaudited) are presented in the Investor Information section which follows the Notes to Consolidated Financial Statements filed as part of this report. The Company expects to continue its policy of paying regular cash dividends on the first business day of March, June, September, and December. Dividends have been paid each quarter since the Company paid its first dividend in 1955. The average dividend payout percentage for the most recent three-year period has been 25% of prior year earnings. Future dividends are dependent on future earnings, capital requirements, and the Company's financial condition. -16- HON INDUSTRIES INC. AND SUBSIDIARIES ITEM 6. SELECTED FINANCIAL DATA -- ELEVEN-YEAR SUMMARY
2000(a) 1999(a) 1998(a) --------------------------------------------------------------------------------------------------------------------------- PER COMMON SHARE DATA Income before Cumulative Effect of Accounting Changes $ 1.77 $ 1.44 $ 1.72 Cumulative Effect of Accounting Changes - - - Net Income 1.77 1.44 1.72 Cash Dividends . 44 .38 .32 Book Value 9.59 8.33 7.54 Net Working Capital 1.09 1.52 1.19 --------------------------------------------------------------------------------------------------------------------------- OPERATING RESULTS (THOUSANDS OF DOLLARS) Net Sales $2,046,286 $1,800,931 $1,706,628 Cost of Products Sold 1,380,404 1,236,612 1,172,997 Gross Profit 665,882 564,319 533,631 Interest Expense 14,015 9,712 10,658 Income before Income Taxes 165,964 137,575 170,109 Income before Income Taxes as a % of Net Sales 8.11% 7.64% 9.97% Federal and State Income Taxes $ 59,747 $ 50,215 $ 63,796 Effective Tax Rate 36.0% 36.5% 37.50% Income before Cumulative Effect of Accounting Changes $ 106,217 $ 87,360 $ 106,313 Net Income 106,217 87,360 106,313 Net Income as a % of Net Sales 5.19% 4.85% 6.23% Cash Dividends and Share Purchase Rights Redeemed $ 26,455 $ 23,112 $ 19,730 Addition to (Reduction of) Retained Earnings 79,762 64,248 86,583 Net Income Applicable to Common Stock 106,217 87,360 106,313 % Return on Average Shareholders' Equity 19.77% 18.14% 25.20% Depreciation and Amortization $ 79,046 $ 65,453 $ 52,999 --------------------------------------------------------------------------------------------------------------------------- DISTRIBUTION OF NET INCOME % Paid to Shareholders 24.91% 26.46% 18.56% % Reinvested In Business 75.09% 73.54% 81.44% --------------------------------------------------------------------------------------------------------------------------- FINANCIAL POSITION (THOUSANDS OF DOLLARS) Current Assets $ 330,141 $ 316,556 $ 290,329 Current Liabilities 264,868 225,123 217,438 Working Capital 65,273 91,433 72,891 Net Property, Plant, and Equipment 454,312 455,591 444,177 Total Assets 1,022,470 906,723 864,469 % Return on Beginning Assets Employed 19.63% 16.94% 23.74% Long-Term Debt and Capital Lease Obligations $ 128,285 $ 124,173 $ 135,563 Shareholders' Equity 573,342 501,271 462,022 Retained Earnings 495,796 416,034 351,786 Current Ratio 1.25 1.41 1.34 --------------------------------------------------------------------------------------------------------------------------- CURRENT SHARE DATA Number of Shares Outstanding at Year-End 59,796,891 60,171,753 61,289,618 Weighted-Average Shares Outstanding During Year 60,140,302 60,854,579 61,649,531 Number of Shareholders of Record at Year-End 6,563 6,737 5,877 --------------------------------------------------------------------------------------------------------------------------- OTHER OPERATIONAL DATA Capital Expenditures-- Net (Thousands of Dollars) $ 59,840 $ 71,474 $ 149,717 Members (Employees) at Year-End 11,543(b) 10,095 9,824(b) --------------------------------------------------------------------------------------------------------------------------- -18- 1997 1996 1995 1994 PER COMMON SHARE DATA Income before Cumulative Effect of Accounting Changes $ 1.45 $ 1.13 $ .67 $ .87 Cumulative Effect of Accounting Changes - - - - Net Income 1.45 1.13 .67 .87 Cash Dividends .28 .25 .24 .22 Book Value 6.19 4.25 3.56 3.17 Net Working Capital 1.53 .89 1.07 1.27 --------------------------------------------------------------------------------------------------------------------------- OPERATING RESULTS (THOUSANDS OF DOLLARS) Net Sales $1,362,713 $998,135 $893,119 $845,998 Cost of Products Sold 933,157 679,496 624,700 573,392 Gross Profit 429,556 318,639 268,419 272,606 Interest Expense 8,179 4,173 3,569 3,248 Income before Income Taxes 139,128 105,267 65,517 86,338 Income before Income Taxes as a % of Net Sales 10.21% 10.55% 7.34% 10.21% Federal and State Income Taxes $ 52,173 $ 37,173 $ 24,419 $ 31,945 Effective Tax Rate 37.50% 35.31% 37.27% 37.00% Income before Cumulative Effect of Accounting Changes $ 86,955 $ 68,094 $ 41,098 $ 54,393 Net Income 86,955 68,094 41,098 54,156 Net Income as a % of Net Sales 6.38% 6.82% 4.60% 6.43% Cash Dividends and Share Purchase Rights Redeemed $ 16,736 $ 14,970 $ 14,536 $ 13,601 Addition to (Reduction of) Retained Earnings 37,838 33,860 18,863 13,563 Net Income Applicable to Common Stock 86,955 68,094 41,098 54,156 % Return on Average Shareholders' Equity 27.43% 29.06% 20.00% 28.95% Depreciation and Amortization $ 35,610 $ 25,252 $ 21,416 $ 19,042 --------------------------------------------------------------------------------------------------------------------------- DISTRIBUTION OF NET INCOME % Paid to Shareholders 19.25% 21.98% 35.37% 25.11% % Reinvested In Business 80.75% 78.02% 64.63% 74.89% --------------------------------------------------------------------------------------------------------------------------- FINANCIAL POSITION (THOUSANDS OF DOLLARS) Current Assets $ 295,150 $205,527 $194,183 $188,810 Current Liabilities 200,759 152,553 128,915 111,093 Working Capital 94,391 52,974 65,268 77,717 Net Property, Plant, and Equipment 341,030 234,616 210,033 177,844 Total Assets 754,673 513,514 409,518 372,568 % Return on Beginning Assets Employed 28.27% 25.93% 17.91% 24.72% Long-Term Debt and Capital Lease Obligations $ 134,511 $ 77,605 $ 42,581 $ 45,877 Shareholders' Equity 381,662 252,397 216,235 194,640 Retained Earnings 265,203 227,365 193,505 174,642 Current Ratio 1.47 1.35 1.51 1.70 --------------------------------------------------------------------------------------------------------------------------- CURRENT SHARE DATA Number of Shares Outstanding at Year-End 61,659,316 59,426,530 60,788,674 61,349,206 Weighted-Average Shares Outstanding During Year 59,779,508 60,228,590 60,991,284 62,435,450 Number of Shareholders of Record at Year-End 5,399 5,319 5,479 5,556 --------------------------------------------------------------------------------------------------------------------------- OTHER OPERATIONAL DATA Capital Expenditures-- Net (Thousands of Dollars) $ 85,491 $ 44,684 $ 53,879 $ 35,005 Members (Employees) at Year-End 9,390(b) 6,502(b) 5,933 6,131 --------------------------------------------------------------------------------------------------------------------------- 1993 1992 1991 1990 -------------------------------------------------------------------------------------------------------------------------- PER COMMON SHARE DATA Income before Cumulative Effect of Accounting Changes $ .69 $ .59 $ .51 $ .65 Cumulative Effect of Accounting Changes .01 - - - Net Income .70 .59 .51 .65 Cash Dividends .20 .19 .18 .15 Book Value 2.83 2.52 2.32 2.03 Net Working Capital 1.23 1.23 1.07 .82 --------------------------------------------------------------------------------------------------------------------------- OPERATING RESULTS (THOUSANDS OF DOLLARS) Net Sales $780,326 $706,550 $607,710 $663,896 Cost of Products Sold 537,828 479,179 411,168 458,522 Gross Profit 242,498 227,371 196,542 205,374 Interest Expense 3,120 3,441 3,533 3,611 Income before Income Taxes 70,854 61,893 52,653 69,085 Income before Income Taxes as a % of Net Sales 9.08% 8.76% 8.66% 10.41% Federal and State Income Taxes $ 26,216 $ 23,210 $ 19,745 $ 25,907 Effective Tax Rate 37.00% 37.50% 37.50% 37.50% Income before Cumulative Effect of Accounting Changes $ 44,638 $ 38,683 $ 32,908 $ 43,178 Net Income 45,127 38,683 32,908 43,178 Net Income as a % of Net Sales 5.78% 5.47% 5.42% 6.50% Cash Dividends and Share Purchase Rights Redeemed $ 12,587 $ 12,114 $ 11,656 $ 9,931 Addition to (Reduction of) Retained Earnings 17,338 26,569 18,182 (11,952) Net Income Applicable to Common Stock 45,127 38,683 32,908 43,178 % Return on Average Shareholders' Equity 26.35% 24.75% 23.41% 33.24% Depreciation and Amortization $ 16,631 $ 15,478 $ 14,084 $ 13,973 --------------------------------------------------------------------------------------------------------------------------- DISTRIBUTION OF NET INCOME % Paid to Shareholders 27.89% 31.32% 35.42% 23.00% % Reinvested In Business 72.11% 68.68% 64.58% 77.00% --------------------------------------------------------------------------------------------------------------------------- FINANCIAL POSITION (THOUSANDS OF DOLLARS) Current Assets $188,419 $171,309 $150,901 $146,591 Current Liabilities 110,759 91,780 82,275 93,465 Working Capital 77,660 79,529 68,626 53,126 Net Property, Plant, and Equipment 157,770 145,849 125,465 124,603 Total Assets 352,405 322,746 280,893 276,984 % Return on Beginning Assets Employed 22.14% 22.18% 19.66% 24.00% Long-Term Debt and Capital Lease Obligations $ 45,916 $ 50,961 $ 32,734 $ 37,250 Shareholders' Equity 179,553 163,009 149,575 131,612 Retained Earnings 161,079 143,741 117,172 98,990 Current Ratio 1.70 1.87 1.83 1.57 --------------------------------------------------------------------------------------------------------------------------- CURRENT SHARE DATA Number of Shares Outstanding at Year-End 63,351,692 64,737,912 64,417,370 64,769,794 Weighted-Average Shares Outstanding During Year 64,181,088 65,517,990 64,742,976 66,220,810 Number of Shareholders of Record at Year-End 4,653 4,534 4,466 4,331 --------------------------------------------------------------------------------------------------------------------------- OTHER OPERATIONAL DATA Capital Expenditures-- Net (Thousands of Dollars) $ 27,541 $ 26,626 $ 13,907 $ 20,709 Members (Employees) at Year-End 6,257 5,926 5,599 6,073 ---------------------------------------------------------------------------------------------------------------------------
(a) Data has been restated to include shipping and handling costs billed to customers as revenue per EITF Issue No. 00-10. Restatement of prior years are immaterial. (b) Includes acquisitions completed during year. -19- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the Company's historical results of operations and of its liquidity and capital resources should be read in conjunction with the Consolidated Financial Statements of the Company and related notes. RESULTS OF OPERATIONS The following table sets forth the percentage of consolidated net sales represented by certain items reflected in the Company's statements of income for the periods indicated.
Fiscal 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------- Net sales 100.0% 100.0% 100.0% Cost of products sold 67.5 68.7 68.7 ------------------------------------------------------------------------------------------------------------------- Gross profit 32.5 31.3 31.3 Selling and administrative expenses 23.8 22.1 20.8 Provision for closing facilities and reorganization expense - 1.1 - ------------------------------------------------------------------------------------------------------------------- Operating income 8.7 8.1 10.5 Interest expense (net) .6 .5 .5 ------------------------------------------------------------------------------------------------------------------- Income before income taxes 8.1 7.6 10.0 Income taxes 2.9 2.8 3.7 Net income 5.2% 4.9% 6.2% -------------------------------------------------------------------------------------------------------------------
The Company has two reportable core operating segments: office furniture and hearth products. The "Operating Segment Information" note included in the notes to consolidated financial statements provides more detailed financial data with respect to these two segments. FISCAL YEAR ENDED DECEMBER 30, 2000, COMPARED TO FISCAL YEAR ENDED JANUARY 1, 2000 NET SALES Net sales, on a consolidated basis, increased by 14% to $2.0 billion in 2000 from $1.8 billion in 1999. Office furniture net sales increased 9% in 2000 to $1.65 billion from $1.51 billion in 1999. Net sales of hearth products increased 39% to $396.3 million in 2000 from $285.9 million in 1999 due mainly to the Company's acquisition of two leading hearth products distributors, American Fireplace Company (AFC) and the Allied Group (Allied), which were joined to form Hearth Services Inc., a subsidiary of Hearth Technologies Inc. The office furniture industry reported an increase in shipments of 9% in 2000 compared to 1999. The Company's most recent five-year compounded annual growth rate in net sales is 18%. GROSS PROFIT Gross profit dollars increased 18% to $665.9 million in 2000 from $564.3 million in the prior year. Gross margin increased to 32.5% for 2000 from 31.3% in 1999. The improvement reflects the combination of improved price realization and productivity from rapid continuous improvement programs. SELLING AND ADMINISTRATIVE EXPENSES Selling and administrative expenses increased by 23% to $487.8 million in 2000 from $398.2 million in the prior year. Selling and administrative expenses, as a percent of net sales, increased to 23.8% in 2000 from 22.1% in 1999. The largest contributor to this increase was the acquisition of Hearth Services Inc.,which is a retail distributor. Retail distribution is a different business model that has proportionally higher selling and administrative costs than manufacturing. The Company is applying rapid continuous improvement philosophies to reduce these costs. -20- The Company also continued to experience increased investment in sales and marketing expenses associated with refocusing the Company and developing branding programs in the office furniture segment. The Company was able to reduce freight expense as a percent of net sales despite increased fuel and carrier costs. Selling and administrative expenses include freight expense to the customer, product development costs, and amortization expenses of intangible assets. The "Selling and Administrative Expenses" note included in the Notes to Consolidated Financial Statements provides further information regarding the comparative expense levels for these major expense items. OPERATING INCOME Operating income increased by 7% to $178.0 million in 2000 from $166.1 million (excluding a one-time pre-tax charge for closing facilities and reorganization expense of $19.7 million) in 1999. The increase is due mainly to increased sales and gross margins. NET INCOME Net income increased by 6% to $106.2 million in 2000 from $99.9 million, excluding the $12.5 million nonrecurring after-tax charge for the closing of facilities and reorganization expenses in the prior year. This increase is attributable primarily to increased sales and gross margins. Net income was favorably impacted by a decrease in the Company's effective tax rate from 36.5% in 1999 to 36.0% in 2000 resulting from favorable state income tax initiatives. Net income per common share increased by 8% to $1.77 in 2000 from $1.64 (excluding a nonrecurring after-tax charge of $0.20 per share) in 1999. The Company's net income per share performance for 2000 also benefited from the Company's common stock repurchase program. FISCAL YEAR ENDED JANUARY 1, 2000, COMPARED TO FISCAL YEAR ENDED JANUARY 2, 1999 NET SALES Net sales, on a consolidated basis, increased by 6% to $1.8 billion in 1999 from $1.7 billion in 1998. The Company increased sales in both core operating segments due to the continued focus on superior customer service and rapid introduction of new innovative and compelling value products. Office furniture net sales increased 4% in 1999 to $1.51 billion from $1.46 billion in 1998. Net sales of hearth products increased 16% to $285.9 million in 1999 from $246.0 million in 1998. The office furniture industry reported a decline in shipments of 1% in 1999 compared to 1998. The hearth products industry annual growth rate is estimated at 6% to 7%. The Company's most recent five-year compounded annual growth rate in net sales is 16%. GROSS PROFIT Gross profit dollars increased 6% to $564.3 million in 1999 from $533.6 million in the prior year. Gross margin held steady at 31.3% for 1999 and 1998. The Company is continuing to focus on improving gross margins. A tight labor market made it more difficult than anticipated to staff facilities, causing an increase in backlog and additional overtime, training, and expenses associated with moving production to alternate plant locations. The Company was able to fill positions in the fourth quarter and implemented plans to ensure workers are in place to meet order demands. Gross profit also included start-up costs associated with the Monterrey, Mexico, production facility. SELLING AND ADMINISTRATIVE EXPENSES Selling and administrative expenses increased by 12% to $398.2 million in 1999 from $354.5 million in the prior year. Selling and administrative expenses, as a percentage of net sales, increased to 22.1% in 1999 from 20.8% in 1998. The Company has implemented a number of internal initiatives to better serve customers through providing complete, on-time, and undamaged orders quickly. These initiatives have resulted in increased freight costs. The Company has contracted with distribution experts and is currently implementing a new logistical management system to lower freight costs while still providing excellent service execution to customers. -21- The Company also launched a strategic initiative during the fourth quarter to strengthen its office furniture market focus. Allsteel Inc, which was purchased in 1997, and The HON Company had been operating as one business unit. During the fourth quarter, the two operations were split into two separate business units. The HON Company serves the open-line, middle-market segment, and Allsteel Inc. serves the project-oriented contract market. The Company incurred additional costs related to this initiative in the near-term, but these investments will be leveraged as the companies increase sales and grow their market shares. Both business units continue to be reported under the Company's office furniture segment reported in the Operating Segment Information note included in the Notes to Consolidated Financial Statements. Selling and administrative expenses for 1999 were significantly influenced by increased freight expense to the customer, product development costs, and amortization expenses of intangible assets. The Selling and Administrative Expenses note, included in the Notes to the Consolidated Financial Statements, provides further information regarding the comparative expense levels for these major expense items. OPERATING INCOME Operating income decreased by 7.3% to $166.1 million (excluding a one-time pre-tax charge for closing facilities and reorganization expense of $19.7 million) in 1999 from $179.2 million in 1998. The decrease is due principally to increased selling and administrative expenses. NET INCOME Net income, excluding the $12.5 million nonrecurring after-tax charge for the closing of facilities and reorganization expenses, decreased by 6.1% to $99.9 million in 1999 from $106.3 million in the prior year. This decrease is attributable primarily to increased selling and administrative expenses. Net income was favorably impacted by a decrease in the Company's effective tax rate from 37.5% in 1998 to 36.5% in 1999 resulting from favorable state income tax initiatives. Net income per common share decreased by 4.7% to $1.64 (excluding a nonrecurring after-tax charge of $0.20 per share) in 1999 from $1.72 for 1998. The Company's net income per share performance for 1999 also benefited from the Company's common stock repurchase program. FISCAL YEAR ENDED JANUARY 2, 1999, COMPARED TO FISCAL YEAR ENDED JANUARY 3, 1998 NET SALES Net sales, on a consolidated basis, increased by 25% to $1.71 billion in 1998 from $1.36 billion in the prior year even though fiscal year 1998 was a normal 52-week year compared to 1997 being a 53-week year. The Company increased sales in both core operating segments due to the continued focus on superior customer service, rapid introduction of new innovative and compelling value products, and acquisitions. Office furniture net sales increased 26% in 1998 to $1.5 billion from $1.16 billion in 1997. Net sales of hearth products increased 20% to $246.0 million in 1998 from $204.5 million in 1997. Both core operating segments experienced another year of strong growth during 1998. The office products industry reported an annual growth rate of 7.8%, and hearth products an estimated 10%. The Company's most recent five-year compounded annual growth rate is 17% in net sales. GROSS PROFIT Gross profit increased 24% to $533.6 million in 1998 from $429.6 million in the prior year. Gross margin decreased to 31.3% for 1998 compared to 31.5% for 1997. This decrease was due to selling price reductions on select products to increase sales volume, which were only partially offset by productivity gains, and the adverse impact of the Allsteel acquisition not achieving the Company's margin standards as rapidly as projected. -22- SELLING AND ADMINISTRATIVE EXPENSES Selling and administrative expenses increased by 25% to $354.5 million from $284.4 million in the prior year. Selling and administrative expenses, as a percentage of net sales, decreased to 20.8% in 1998 from 20.9% in 1997. Management places major emphasis on controlling and reducing selling and administrative expenses. The Company expects to leverage these costs as sales grow; however, increased costs to meet competitive conditions offset a portion of the efficiency and leveraging gains. Selling and administrative expenses include freight expense to the customer, product development costs, and amortization expenses of intangible assets. The "Selling and Administrative Expenses" note included in the Notes to Consolidated Financial Statements provides further information regarding the comparative expense levels for these major expense items. OPERATING INCOME Operating income increased by 23% to $179.2 million in 1998 from $145.2 million in 1997. The increase is due to increased sales and lower selling and administrative expenses as a percent of sales. NET INCOME Net income increased by 22% to $106.3 million in 1998 from $87.0 million in 1997. This increase is a result of the higher operating income being partially offset by an increase in interest expense associated with acquisition and capital expenditures. Net income per common share increased by 19% to $1.72 in 1998 from $1.45 in 1997. Average shares outstanding increased to 61.6 million in 1998 from 59.8 million in 1997 as a result of the weighting of the October 1997 primary stock offering. LIQUIDITY AND CAPITAL RESOURCES During 2000, cash from operations was $204.9 million, which provided the funds necessary to meet working capital needs, help finance acquisitions, invest in capital improvements, repay long-term debt, repurchase common stock, and pay increased dividends. CASH MANAGEMENT Cash, cash equivalents, and short-term investments totaled $3.2 million compared to $22.2 million at the end of 1999 and $17.7 million at the end of 1998. These funds, coupled with cash from future operations and additional long-term debt, if needed, are expected to be adequate to finance operations, planned improvement, and internal growth. The Company places special emphasis on the management and reduction of its working capital with a particular focus on trade receivables and inventory levels. The success achieved in managing receivables is in large part a result of doing business with quality customers and maintaining close communications with them. Trade receivable days outstanding have averaged about 37 days over the past three years. Inventory levels and turns continue to improve as a function of reducing production cycle times. Inventory turns have been in the 17 to 18 range over the past three years. CAPITAL EXPENDITURE INVESTMENTS Capital expenditures, net of disposals, were $59.8 million in 2000, $71.5 million in 1999, and $149.7 million in 1998. Expenditures during 2000, 1999, and 1998 have been consistently focused on machinery and equipment and facility expansion needed to support new products, process improvements, cost-savings initiatives, and creating additional and more efficient production and warehousing capacity. ACQUISITIONS On February 29, 2000, the Company completed the acquisition of its Hearth Services Inc. division, which consists of two leading hearth products distributors, American Fireplace Company (AFC) and the Allied Group (Allied), establishing the Company as the leading manufacturer and distributor in the hearth products industry, for a purchase price of approximately $135 million. -23- In February 1998, the Company completed the acquisition of Aladdin Steel Products, Inc., a manufacturer of decorative gas- and wood-burning stoves, for a purchase price of approximately $10.2 million. This acquisition allowed the Company to strengthen its position in the hearth products market. LONG-TERM DEBT Long-term debt, including capital lease obligations, was 18% of total capitalization at December 30, 2000, 20% at January 1, 2000, and 23% at January 2, 1999. The Company does not expect future capital resources to be a constraint on planned growth. Significant additional borrowing capacity is available through a revolving bank credit agreement in the event cash generated from operations should be inadequate to meet future needs. CASH DIVIDENDS Cash dividends were $0.44 per common share for 2000, $0.38 for 1999, and $0.32 for 1998. Further, the Board of Directors announced a 9.1% increase in the quarterly dividend from $0.11 to $0.12 per common share effective with the March 1, 2001, dividend payment. The previous quarterly dividend increase was from $0.095 to $0.11, effective with the March 1, 2000, dividend payment. A cash dividend has been paid every quarter since April 15, 1955, and quarterly dividends are expected to continue. The average dividend payout percentage for the most recent three-year period has been 25% of prior year earnings. STOCK SPLIT On February 11, 1998, the Board of Directors announced a two-for-one stock split in the form of a 100 percent stock dividend that was paid on March 27, 1998, to shareholders of record on March 6, 1998. Shareholders received one share of common stock for each share held on record date. COMMON SHARE REPURCHASES During 2000, the Company repurchased 837,552 shares of its common stock at a cost of approximately $18.0 million, or an average price of $21.46. As of December 30, 2000, approximately $13.6 million of the $70.0 million authorized by the Board of Directors for repurchases remained unspent. On February 14, 2001, the Board authorized an additional $100 million for the Company's share repurchase program. During 1999, the Company repurchased 1,408,624 shares at a cost of approximately $30.9 million, or an average price of $21.91. During 1998, the Company repurchased 529,284 shares at a cost of approximately $12.2 million, or an average price of $23.04. LITIGATION AND UNCERTAINTIES The Company is involved in various legal actions arising in the course of business. These uncertainties are referenced in the Contingencies note included in the Notes to Consolidated Financial Statements. LOOKING AHEAD The Company believes the softness in the economy may have an adverse effect on net sales and operating income in the first half of 2001. However, the Company is cautiously optimistic about the results for the second half of the year based on economic improvement, new product introductions, and improved price realization. -24- ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has no material financial exposure to the various financial instrument market risks covered under this rule. Currently, the Company has no derivative financial instruments or off-balance sheet financing arrangements. For information related to the Company's long-term debt, refer to the Long-Term Debt disclosure in the Notes to Consolidated Financial Statements filed as part of this report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements listed under Item 14 (a)(1) and (2) are filed as part of this report. The Summary of Unaudited Quarterly Results of Operations follows the Notes to Consolidated Financial Statements filed as part of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -25- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information under the caption "Election of Directors" of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 7, 2001, is incorporated herein by reference. For information with respect to executive officers of the Company, see Part I, Table I "Executive Officers of the Registrant." The information under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 7, 2001, is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information under the captions "Election of Directors" and "Executive Compensation" of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 7, 2001, is incorporated herein by reference. ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information under the captions "Election of Directors" and "Beneficial Owners of Common Stock" of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 7, 2001, is incorporated herein by reference. The information under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 7, 2001, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information under the caption "Certain Relationships and Related Transactions" of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 7, 2001, is incorporated herein by reference. -26- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) FINANCIAL STATEMENTS The following consolidated financial statements of HON INDUSTRIES Inc. and Subsidiaries included in the Company's 2000 Annual Report to Shareholders are filed as a part of this report pursuant to Item 8:
Page ---- Report of Independent Public Accountants ........................................ 33 Consolidated Statements of Income for the Years Ended December 30, 2000; January 1, 2000; and January 2, 1999 ......................... 34 Consolidated Balance Sheets -- December 30, 2000; January 1, 2000; and January 2, 1999 ............................................................. 35 Consolidated Statements of Shareholders' Equity for the Years Ended December 30, 2000; January 1, 2000; and January 2, 1999 ......................... 36 Consolidated Statements of Cash Flows for the Years Ended December 30, 2000; January 1, 2000; and January 2, 1999 ......................... 37 Notes to Consolidated Financial Statements ...................................... 38 Investor Information ............................................................ 54 (2) FINANCIAL STATEMENT SCHEDULES The following consolidated financial statement schedule of the Company and subsidiaries is attached pursuant to Item 14(d): Schedule II Valuation and Qualifying Accounts for the Years Ended December 30, 2000; January 1, 2000; and January 2, 1999 ......... 56 All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. (b) REPORTS ON FORM 8-K There are no reports on Form 8-K filed during the last quarter of the period covered by this report.
-27- (c) EXHIBITS An exhibit index of all exhibits incorporated by reference into, or filed with, this Form 10-K appears on Page 57. The following exhibits are filed herewith: Exhibit ------- (3ii) By-Laws (10i) 1995 Stock-Based Compensation Plan (10xv) HON INDUSTRIES Inc. Long-Term Performance Plan (21) Subsidiaries of the Registrant (23) Consent of Independent Public Accountants (99B) Executive Deferred Compensation Plan (d) Financial Statement Schedules See Item 14(a)(2). -28- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. HON INDUSTRIES Inc. Date: March 27, 2001 By: /s/ Jack D. Michaels ----------------------------- Jack D. Michaels Chairman, President and CEO Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Each Director whose signature appears below authorizes and appoints Jack D. Michaels as his or her attorney-in-fact to sign and file on his or her behalf any and all amendments and post-effective amendments to this report.
Signature Title Date --------- ----- ---- /s/ Jack D. Michaels Chairman, President and CEO, 3/27/01 -------------------------------------------- Principal Executive Officer, Jack D. Michaels and Director /s/ Jerald K. Dittmer Vice President, Finance and 3/27/01 -------------------------------------------- Controller, and Principal Jerald K. Dittmer Accounting Officer /s/ David C. Stuebe Vice President and 3/27/01 -------------------------------------------- Chief Financial Officer David C. Stuebe /s/ Gary M. Christensen Director 3/27/01 -------------------------------------------- Gary M. Christensen /s/ Robert W. Cox Director 3/27/01 -------------------------------------------- Robert W. Cox /s/ Cheryl A. Francis Director 3/27/01 -------------------------------------------- Cheryl A. Francis /s/ W August Hillenbrand Director 3/27/01 -------------------------------------------- W August Hillenbrand /s/ Robert L. Katz Director 3/27/01 -------------------------------------------- Robert L. Katz /s/ Dennis J. Martin Director 3/27/01 -------------------------------------------- Dennis J. Martin /s/ Abbie J. Smith Director 3/27/01 -------------------------------------------- Abbie J. Smith /s/ Richard H. Stanley -------------------------------------------- Richard H. Stanley Director 3/27/01 /s/ Brian E. Stern Director 3/27/01 -------------------------------------------- Brian E. Stern /s/ Lorne R. Waxlax Director 3/27/01 -------------------------------------------- Lorne R. Waxlax
-31- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Board of Directors and Shareholders HON INDUSTRIES Inc. We have audited the accompanying consolidated balance sheets of HON Industries Inc. and subsidiaries as of December 30, 2000, January 1, 2000, and January 2, 1999, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the fiscal years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of HON INDUSTRIES Inc. and subsidiaries as of December 30, 2000, January 1, 2000, and January 2, 1999, and the results of its operations and its cash flows for each of the three fiscal years then ended, in conformity with accounting principles generally accepted in the United States. Arthur Andersen LLP Chicago, Illinois February 5, 2001 -33- HON INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except for per share data) FOR THE YEARS 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------- Net sales $2,046,286 $1,800,931 $1,706,628 Cost of products sold 1,380,404 1,236,612 1,172,997 ------------------------------------------------------------------------------------------------------------------- Gross Profit 665,882 564,319 533,631 Selling and administrative expenses 487,848 398,197 354,454 Provision for closing facilities and reorganization expenses - 19,679 - ------------------------------------------------------------------------------------------------------------------- Operating Income 178,034 146,443 179,177 ------------------------------------------------------------------------------------------------------------------- Interest income 1,945 844 1,590 Interest expense 14,015 9,712 10,658 ------------------------------------------------------------------------------------------------------------------- Income Before Income Taxes 165,964 137,575 170,109 Income taxes 59,747 50,215 63,796 ------------------------------------------------------------------------------------------------------------------- Net Income $ 106,217 $ 87,360 $ 106,313 ------------------------------------------------------------------------------------------------------------------- Net Income Per Common Share - Basic & Diluted $1.77 $1.44 $1.72 -------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. -34- HON INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(Amounts in thousands) AS OF YEAR-END 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------- ASSETS ------------------------------------------------------------------------------------------------------------------- CURRENT ASSETS Cash and cash equivalents $ 3,181 $ 22,168 $17,500 Short-term investments - - 169 Receivables 211,243 196,730 183,576 Inventories 84,360 74,937 67,225 Deferred income taxes 19,516 13,471 12,477 Prepaid expenses and other current assets 11,841 9,250 9,382 ------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 330,141 316,556 290,329 Property, Plant, and Equipment 454,312 455,591 444,177 Goodwill 216,371 113,116 108,586 Other Assets 21,646 21,460 21,377 ------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $1,022,470 $906,723 $864,469 ------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------------------------------------------------------------------------------------- CURRENT LIABILITIES Accounts payable and accrued expenses $ 240,540 $217,110 $198,520 Income taxes 12,067 - 1,921 Note payable and current maturities of long-term debt 10,408 6,106 15,769 Current maturities of other long-term obligations 1,853 1,907 1,228 ------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 264,868 225,123 217,438 LONG-TERM DEBT 126,093 119,860 128,069 CAPITAL LEASE OBLIGATIONS 2,192 4,313 7,494 OTHER LONG-TERM LIABILITIES 18,749 18,015 18,067 DEFERRED INCOME TAXES 37,226 38,141 31,379 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Common stock 59,797 60,172 61,290 Paid-in capital 17,339 24,981 48,348 Retained earnings 495,796 416,034 351,786 Accumulated other comprehensive income 410 84 598 ------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 573,342 501,271 462,022 ------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,022,470 $906,723 $864,469 -------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. -35- HON INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in thousands) ACCUMULATED ADDITIONAL RECEIVABLE OTHER TOTAL COMMON PAID-IN FROM CO. RETAINED COMPREHENSIVE SHAREHOLDERS' STOCK CAPITAL ESOP EARNINGS INCOME EQUITY ---------------------------------------------------------------------------------------------------------------------- Balance, January 3, 1998 $61,659 $55,906 $(1,099) $265,203 $(7) $381,662 Comprehensive Income: Net income 106,313 106,313 Other comprehensive income 605 605 Comprehensive income 106,918 Cash dividends (19,730) (19,730) Common shares -- treasury: Shares purchased (529) (11,672) (12,201) Shares issued under Members Stock Purchase Plan and stock awards 160 4,114 4,274 Principal repaid by HON Members Company Ownership 1,099 1,099 ---------------------------------------------------------------------------------------------------------------------- Balance, January 2, 1999 61,290 48,348 - 351,786 598 462,022 Comprehensive income: Net income 87,360 87,360 Other comprehensive income (514) (514) Comprehensive income 86,846 Cash dividends (23,112) (23,112) Common shares -- treasury: Shares purchased (1,409) (29,457) (30,866) Shares issued under Members Stock Purchase Plan and stock awards 291 6,090 6,381 ---------------------------------------------------------------------------------------------------------------------- Balance, January 1, 2000 60,172 24,981 - 416,034 84 501,271 Comprehensive income: Net income 106,217 106,217 Other comprehensive income 326 326 Comprehensive income 106,543 Cash dividends (26,455) (26,455) Common shares -- treasury: Shares purchased (838) (17,135) (17,973) Shares issued under Members Stock Purchase Plan and stock awards 463 9,493 9,956 ---------------------------------------------------------------------------------------------------------------------- Balance, December 30, 2000 $59,797 $17,339 - $495,796 $410 $573,342
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. -36- HON INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands) FOR THE YEARS 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------- NET CASH FLOWS FROM (TO) OPERATING ACTIVITIES: Net income $ 106,217 $ 87,360 $106,313 Noncash items included in net income: Depreciation and amortization 79,046 65,453 52,999 Other postretirement and postemployment benefits 1,572 2,329 1,529 Deferred income taxes (7,213) 6,033 13,816 Other -- net 90 (121) 8 Changes in working capital, excluding acquisition and disposition: Receivables 3,961 (13,154) (24,238) Inventories 6,410 (7,712) (4,286) Prepaid expenses and other current assets (1,616) 391 6,517 Accounts payable and accrued expenses 5,483 19,838 3,959 Income taxes 11,808 (2,178) (7,419) Increase in other liabilities (838) (2,054) (2,406) ------------------------------------------------------------------------------------------------------------------- Net cash flows from (to) operating activities 204,920 156,185 146,792 ------------------------------------------------------------------------------------------------------------------- NET CASH FLOWS FROM (TO) INVESTING ACTIVITIES: Capital expenditures -- net (59,840) (71,474) (149,717) Capitalized software (2,192) (3,530) - Acquisition spending, net of cash acquired (134,696) (8,932) (11,470) Principal repaid by HON Members Company Ownership Plan - - 1,099 Short-term investments -- net - 169 91 Other -- net (3) (290) 80 ------------------------------------------------------------------------------------------------------------------- Net cash flows from (to) investing activities (196,731) (84,057) (159,917) ------------------------------------------------------------------------------------------------------------------- NET CASH FLOWS FROM (TO) FINANCING ACTIVITIES: Purchase of HON INDUSTRIES common stock (17,973) (30,866) (12,206) Proceeds from long-term debt 155,181 147,055 73,237 Payments of note and long-term debt (147,458) (167,052) (60,079) Proceeds from sale of HON INDUSTRIES common stock to members 9,529 6,515 3,323 Dividends paid (26,455) (23,112) (19,730) ------------------------------------------------------------------------------------------------------------------- Net cash flows from (to) financing activities (27,176) (67,460) (15,455) ------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (18,987) 4,668 (28,580) ------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 22,168 17,500 46,080 ------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $3,181 $22,168 $17,500 ------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $13,395 $9,803 $10,867 Income taxes $54,634 $46,822 $56,787 -------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. -37- HON INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NATURE OF OPERATIONS HON INDUSTRIES Inc., with its subsidiaries (the Company), is a national manufacturer and marketer of office furniture and hearth products. Both industries are reportable segments; however, the Company's office furniture business is its principal line of business. Refer to the "Operating Segment Information" note for further information. Office furniture products are sold through a national system of dealers, wholesalers, warehouse clubs, retail superstores, and to end-user customers, and federal and state governments. Dealer, wholesaler, and retail superstores are the major channels based on sales. Hearth products include wood-, pellet-, and gas-burning factory-built fireplaces, fireplace inserts, stoves, and gas logs. These products are sold through a national system of dealers, wholesalers, large regional contractors, and Company-owned retail outlets. The Company's products are marketed predominantly in the United States and Canada. The Company exports select products to a limited number of markets outside North America, principally Latin America and the Caribbean, through its export subsidiary; however, based on sales, these activities are not significant. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND FISCAL YEAR-END The consolidated financial statements include the accounts and transactions of the Company and its subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. The Company's fiscal year ends on the Saturday nearest December 31. Fiscal year 2000 ended on December 30, 2000; 1999 ended on January 1, 2000; and 1998 ended on January 2, 1999. CASH AND CASH EQUIVALENTS Cash and cash equivalents generally consist of cash and commercial paper. These securities have original maturity dates not exceeding three months from date of purchase. SHORT-TERM INVESTMENTS Short-term investments are classified as available-for-sale and are highly liquid debt and equity securities. RECEIVABLES Accounts receivables are presented net of an allowance for doubtful accounts of $11,237,000, $3,568,000, and $2,816,000 for 2000, 1999, and 1998, respectively. INVENTORIES Inventories are valued at the lower of cost or market, determined principally by the last-in, first-out (LIFO) method. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are carried at cost. Depreciation has been computed by the straight-line method over estimated useful lives: land improvements, 10 - 20 years; buildings, 10 - 40 years; and machinery and equipment, 3 - 12 years. -38- GOODWILL AND PATENTS Goodwill represents the excess of cost over the fair value of net identifiable assets of acquired companies. Goodwill is being amortized on a straight-line basis over 20-40 years. Patents are being amortized on a straight-line basis over their estimated useful lives, which range from 7 to 16 years. Patents are reported by the Company as "Other Assets." The carrying value of goodwill and patents is reviewed by the Company whenever significant events or changes occur which might impair recovery of recorded costs. Based on its most recent analysis, the Company believes no material impairment of these intangible assets exists at December 30, 2000.
(In thousands) 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------- Goodwill $233,348 $121,846 $113,812 Patents 16,450 16,450 16,450 Less accumulated amortization 23,342 13,585 8,570 --------------------------------------------- $226,456 $124,711 $121,692 -------------------------------------------------------------------------------------------------------------------
REVENUE RECOGNITION Revenue is recognized upon shipment of goods to customers. PRODUCT DEVELOPMENT COSTS Product development costs relating to the development of new products and processes, including significant improvements and refinements to existing products, are expensed as incurred. The amounts charged against income were $18,911,000 in 2000, $17,117,000 in 1999, and $15,707,000 in 1998. STOCK-BASED COMPENSATION The Company accounts for its stock option plan using Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," which results in no charge to earnings when options are issued at fair market value. The Company has adopted the disclosure requirements of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The more significant areas requiring the use of management estimates relate to allowance for receivables, accruals for self-insured medical, workers compensation, and general liability insurance, and useful lives for depreciation and amortization. Actual results could differ from those estimates. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES In 2000, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs," that all amounts billed to a customer in a sale transaction related to shipping and handling, if any, represent revenues earned for the goods provided and should be classified as revenue. The Company implemented the above EITF consensus effective with the fourth quarter 2000 and has restated prior periods to reflect the change. The adoption of this consensus did not have a material impact on the Company's financial statements. In 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Company intends to adopt this Statement in January 2001 as required by the Statement. Adoption of this Statement is not expected to have a material impact on the Company's financial statements. -39- RECLASSIFICATIONS Certain prior year information has been reclassified to conform to the current year presentation. PROVISION FOR FACILITIES CLOSING AND REORGANIZATION EXPENSES 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 pre-tax charge of $19.7 million or $0.20 per diluted share was recorded during the first quarter of 1999. The charge includes $12.5 million for write-offs of plant and equipment, $2.6 million for severance arising from the elimination of approximately 360 positions, $2.1 million for other employee-related costs, and $2.4 million for certain other expenses associated with the closing of the facilities. The primary costs not yet incurred relate to costs associated with the closed buildings. Management believes the remaining reserve for facilities closing and reorganization expenses to be adequate to cover these obligations. 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), establishing the Company as the leading manufacturer and distributor in the hearth products industry. The Company acquired AFC and Allied for approximately $135 million in cash and debt including acquisition costs. 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 $23 million was recorded as goodwill and is being amortized on a straight-line basis over 20 years. As a result of the acquisition, the Company is in the process of finalizing its integration plan related to incremental exit costs and consolidation activities for acquired locations and activities. These costs which are not associated with the generation of future revenues and have no future economic benefits will be reflected as assumed liabilities in the allocation of purchase price to the net assets acquired. Management expects these amounts to be finalized in the first quarter of 2001. The Company acquired Aladdin Steel Products, Inc. on February 20, 1998, for approximately $10.2 million. Aladdin is a manufacturer of wood-, pellet-, and gas-burning stoves and inserts. Aladdin is being operated by Hearth Technologies Inc., the Company's hearth products subsidiary. The transaction was accounted for under the purchase method. Assuming the acquisition of American Fireplace Company, Allied Group, and Aladdin Steel Products, Inc. had occurred on January 4, 1998, the beginning of the Company's 1998 fiscal year, instead of the actual dates reported above, the Company's pro forma consolidated net sales would have been approximately $2.1 billion, $1.9 billion, and $1.8 billion for 2000, 1999, and 1998, respectively. Pro forma consolidated net income and net income per share for 2000, 1999, and 1998 would not have been materially different than the reported amounts. INVENTORIES
(In thousands) 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------- Finished products $48,990 $29,663 $24,955 Materials and work in process 46,497 55,737 53,320 LIFO allowance (11,127) (10,463) (11,050) ------------------------------------------- $84,360 $74,937 $67,225 -------------------------------------------------------------------------------------------------------------------
-40- PROPERTY, PLANT, AND EQUIPMENT
(In thousands) 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------- Land and land improvements $18,808 $17,114 $12,156 Buildings 202,189 181,080 144,559 Machinery and equipment 514,293 469,268 411,238 Construction and equipment installation in progress 27,547 37,819 85,782 ------------------------------------------- 762,837 705,281 653,735 Less allowances for depreciation 308,525 249,690 209,558 ------------------------------------------ $454,312 $455,591 $444,177 ------------------------------------------------------------------------------------------------------------------- ACCOUNTS PAYABLE AND ACCRUED EXPENSES (In thousands) 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------- Trade accounts payable $67,540 $77,907 $75,895 Compensation 15,781 10,820 11,450 Profit sharing and retirement expense 25,041 22,705 20,355 Vacation pay 14,560 12,093 11,751 Marketing expenses 65,931 58,832 45,833 Casualty self-insurance expense 12,216 7,428 6,271 Other accrued expenses 39,471 27,325 26,965 -------------------------------------------- $240,540 $217,110 $198,520 ------------------------------------------------------------------------------------------------------------------- LONG-TERM DEBT (In thousands) 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------- Industrial development revenue bonds, various issues, payable through 2018 with interest at 3.96-8.125% per annum $23,977 $24,608 $25,293 Note payable to bank, revolving credit agreement with interest at a variable rate (6.6875-6.9625% at year-end 2000)* 46,000 85,000 95,000 Convertible debenture payable to individuals, due in 2003 with interest at 5.5% per annum 53,000 5,074 -- Other notes and amounts 3,116 5,178 7,776 -------------------------------------------- $126,093 $119,860 $128,069 -------------------------------------------------------------------------------------------------------------------
* THE REVOLVING BANK CREDIT AGREEMENT IS PAYABLE IN THE YEAR 2002 WITH A MAXIMUM BORROWING LIMIT OF $200,000,000. -41- Aggregate maturities of long-term debt are as follows (in thousands): ------------------------------------------------------------------------------------------------------------------- 2001 $8,287 2002 46,773 2003 53,866 2004 553 2005 558 Thereafter 24,343 -------------------------------------------------------------------------------------------------------------------
The convertible debenture payable to individuals at the end of 2000 is payable to the former owners of businesses acquired by the Company in 2000. These individuals continue as employees of a subsidiary of the business following the merger. The convertible debenture is convertible into cash. Certain of the above borrowing arrangements include covenants which limit the assumption of additional debt and lease obligations. The Company has been and currently is in compliance with the covenants related to these debt agreements. The fair value of the Company's outstanding long-term debt obligations at year-end 2000 approximates the recorded aggregate amount. Property, plant, and equipment, with net carrying values of approximately $58,940,000 at the end of 2000, are mortgaged. SELLING AND ADMINISTRATIVE EXPENSES
(In thousands) 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------- Freight expense to customer* $137,197 $131,085 $106,453 Amortization of intangible assets 10,679 5,362 4,789 Product development costs 18,911 17,117 15,707 General selling and administrative expense 321,061 244,633 227,505 ------------------------------------------- $487,848 $398,197 $354,454 -------------------------------------------------------------------------------------------------------------------
* FREIGHT EXPENSE HAS BEEN RESTATED PER EITF ISSUE NO. 00-10. INCOME TAXES Significant components of the provision for income taxes are as follows:
(In thousands) 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------- Current: Federal $62,172 $40,744 $44,525 State 3,931 3,046 5,363 ------------------------------------------ 66,103 43,790 49,888 Deferred (6,356) 6,425 13,908 ------------------------------------------ $59,747 $50,215 $63,796 -------------------------------------------------------------------------------------------------------------------
-42- A reconciliation of the statutory federal income tax rate to the Company's effective income tax rate is as follows:
2000 1999 1998 ------------------------------------------------------------------------------------------------------------------- Federal statutory tax rate 35.0% 35.0% 35.0% State taxes, net of federal tax effect 1.5 1.7 2.6 Federal tax credits - - (.1) Other-- net (.5) (.2) - ------------------------------------------- Effective tax rate 36.0% 36.5% 37.5% -------------------------------------------------------------------------------------------------------------------
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets are as follows:
(In thousands) 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------- Net long-term deferred tax liabilities: Tax over book depreciation $(37,509) $(38,133) $(33,118) OPEB obligations 3,157 3,430 3,305 Goodwill (4,183) (2,959) (1,805) Other-- net 1,309 (479) (239) --------------------------------------------- Total net long-term deferred tax liabilities (37,226) (38,141) (31,379) ------------------------------------------------------------------------------------------------------------------- Net current deferred tax assets: Workers' compensation, general, and product liability accruals 4,183 2,984 2,315 Vacation accrual 4,632 3,492 2,531 Integration accruals (3,205) (3,263) (2,235) Inventory obsolescence reserve 2,404 1,287 1,026 Other-- net 11,502 8,971 8,840 ----------------------------------------- Total net current deferred tax assets 19,516 13,471 12,477 ------------------------------------------- Net deferred tax (liabilities) assets $(17,710) $(24,671) $(18,902) ------------------------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------- Common Stock, $1 Par Value Authorized 200,000,000 200,000,000 200,000,000 Issued and outstanding 59,796,891 60,171,753 61,289,618 Preferred Stock, $1 Par Value Authorized 1,000,000 1,000,000 1,000,000 Issued and outstanding - - - -------------------------------------------------------------------------------------------------------------------
-43- On February 11, 1998, the Company's Board of Directors declared a two-for-one stock split in the form of a 100% stock dividend paid on March 27, 1998, to shareholders of record on the close of business on March 6, 1998. In May 1998, shareholders authorized an increase of capital stock of the Company from 101,000,000 shares to 201,000,000 shares, consisting of 200,000,000 shares of common stock, $1.00 par value, and 1,000,000 shares of preferred stock, $1.00 par value. The Company purchased 837,552, 1,408,624, and 529,284 shares of its common stock during 2000, 1999, and 1998, respectively. The par value method of accounting is used for common stock repurchases. The excess of the cost of shares acquired over their par value is allocated to Paid-In Capital with the excess charged to Retained Earnings. 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 has changed the format of its consolidated statements of shareholders' equity to present comprehensive income. Components of other comprehensive income (loss) consist of the following:
(In thousands) 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------- Foreign currency translation adjustments - net of tax $118 $(79) $42 Change in unrealized gains on marketable securities - net of tax 208 (435) 563 Other comprehensive income (loss) $326 $(514) $605 -------------------------------------------------------------------------------------------------------------------
In May 1997, the Company registered 400,000 shares of its common stock under its 1997 Equity Plan for Non-Employee Directors, which was approved by shareholders at the May 1997 annual shareholders' meeting. This plan permits the Company to issue to its non-employee directors options to purchase shares of Company common stock, restricted stock of the Company, and awards of Company stock. The plan also permits non-employee directors to elect to receive all or a portion of their annual retainers and other compensation in the form of shares of Company common stock. During 2000, 1999, and 1998, 6,948, 12,758, and 10,664 shares of Company common stock were issued under the plan, respectively. Cash dividends declared and paid per share for each year are:
(In dollars) 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------- Common shares $.44 $.38 $.32 -------------------------------------------------------------------------------------------------------------------
Pursuant to the 1994 Members Stock Purchase Plan, 1,000,000 shares of the Company's common stock were registered for issuance to participating members. Members who have one year of employment eligibility and work a minimum of 20 hours per week have rights to purchase stock on a quarterly basis. The price of the stock purchased under the plan is 85% of the closing price on the applicable purchase date. No member may purchase stock under the plan in an amount which exceeds the lesser of 20% of his or her gross earnings or 4,000 shares, with a maximum fair market value of $25,000 in any calendar year. An additional 214,047 shares were available for issuance under the plan at December 30, 2000. The effect of the application of adopting Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation," was not material to the Company. Shares of common stock were issued in 2000, 1999, and 1998 pursuant to a members stock purchase plan as follows:
2000 1999 1998 ------------------------------------------------------------------------------------------------------------------- Shares issued 90,059 115,354 101,108 Average price per share $21.10 $19.16 $23.58 -------------------------------------------------------------------------------------------------------------------
-44- The Company has a shareholders rights plan which will expire August 20, 2008. The plan becomes operative if certain events occur involving the acquisition of 20% or more of the Company's common stock by any person or group in a transaction not approved by the Company's Board of Directors. Upon the occurrence of such an event, each right entitles its holder to purchase an amount of common stock of the Company with a market value of $400 for $200, unless the Board authorizes the rights be redeemed. The rights may be redeemed for $0.01 per right at any time before the rights become exercisable. In certain instances, the right to purchase applies to the capital stock of the acquirer instead of the common stock of the Company. The Company has reserved preferred shares necessary for issuance should the rights be exercised. The Company has entered into change in control employment agreements with corporate officers and certain other key employees. According to the agreements, a change in control occurs when a third person or entity becomes the beneficial owner of 20% or more of the Company's common stock or when more than one-third of the Company's Board of Directors is composed of persons not recommended by at least three-fourths of the incumbent Board of Directors. Upon a change in control, a key employee is deemed to have a two-year employment with the Company, and all his or her benefits are vested under Company plans. If, at any time within two years of the change in control, his or her position, salary, bonus, place of work, or Company-provided benefits are modified, or employment is terminated by the Company for any reason other than cause or by the key employee for good reason, as such terms are defined in the agreement, then the key employee is entitled to receive a severance payment equal to two times annual salary and the average of the prior two years' bonuses. STOCK OPTIONS Under the Company's 1995 Stock-Based Compensation Plan, as amended and restated effective November 10, 2000, the Company may award options to purchase shares of the Company's common stock and grant other stock awards to executives, managers, and key personnel. The Plan is administered by the Human Resources and Compensation Committee of the Board of Directors. Stock options awarded under the Plan must be at exercise prices equal to or exceeding the fair market value of the Company's common stock on the date of grant. Stock options are generally subject to four-year cliff vesting and must be exercised within 10 years from the date of grant. The Company accounts for executive stock options issued under this Plan using Accounting Principles Board Opinion No. 25, which results in no charge to earnings when options are issued at fair market value. The Company has elected the disclosure requirements of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." If compensation costs had been determined based on the fair value at the grant dates for awards under this Plan, consistent with SFAS No.123, the impact on net earnings and earnings per share would be less than one cent per share. The weighted-average fair value of options granted during 2000, 1999, and 1998 estimated on the date of grant using the Black-Scholes option-pricing model was $9.25, $10.01, and $15.51, respectively. The fair value of 2000, 1999, and 1998 options granted is estimated on the date of grant using the following assumptions: dividend yield of 0.90% to 1.97%, expected volatility of 31.04% to 35.89%, risk-free interest rate of 4.90% to 6.56%, and an expected life of 10 to 12 years depending on grant date. -45- The status of the Company's stock option plans is summarized below:
Number of Weighted-Average Shares Exercise Price ------------------------------------------------------------------------------------------------------------------- Outstanding at January 3, 1998 156,000 $24.74 Granted 20,000 32.50 Exercised - - Forfeited - - ------------------------------------------------------------------------------------------------------------------- Outstanding at January 2, 1999 176,000 $25.62 Granted 328,750 23.47 Exercised - - Forfeited (97,000) 23.86 ------------------------------------------------------------------------------------------------------------------- Outstanding at January 1, 2000 407,750 $24.30 Granted 532,500 20.13 Exercised (22,000) 23.80 Forfeited - - ------------------------------------------------------------------------------------------------------------------- Outstanding at December 30, 2000 918,250 $21.90 Options exercisable at: December 30, 2000 - - January 1, 2000 - - January 2, 1999 - - -------------------------------------------------------------------------------------------------------------------
The following table summarizes information about fixed stock options outstanding at December 30, 2000:
Options Options Outstanding Exercisable ------------------- ------------ Weighted- Number Average Weighted- Exercisable Range of Number Remaining Average at December 30, Exercise Prices Outstanding Contractual Life Exercise Price 2000 ------------------------------------------------------------------------------------------------------------------- $24.50-$28.25 112,000 6.5 years $24.83 0 $32.50 20,000 7.1 years $32.50 0 $23.31-$23.47 253,750 8.1 years $23.47 0 $18.31-$26.69 532,500 9.6 years $20.13 0 -------------------------------------------------------------------------------------------------------------------
RETIREMENT BENEFITS The Company has defined contribution profit-sharing plans covering substantially all employees who are not participants in certain defined benefit plans. The Company's annual contribution to the defined contribution plans is based on employee eligible earnings and results of operations and amounted to $24,400,000, $21,297,000, and $20,101,000 in 2000, 1999, and 1998, respectively. -46- The Company sponsors defined benefit plans which include a limited number of salaried and hourly employees at certain subsidiaries. The Company's funding policy is generally to contribute annually the minimum actuarially computed amount. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 132, "Employer's Disclosures about Pensions and Other Postretirement Benefits," as of January 4, 1998, the beginning of its 1998 fiscal year. Net pension costs relating to these plans were $-0-, $-0-, and $-0- for 2000, 1999, and 1998, respectively. The actuarial present value of obligations, less related plan assets at fair value, is not significant. The Company also participates in a multiemployer plan, which provides defined benefits to certain of the Company's union employees. Pension expense for this plan amounted to $308,500, $329,000, and $306,000 in 2000, 1999, and 1998, respectively. In 1992, the Company established a trust to administer a leveraged employee stock ownership plan (ESOP), the HON Members Company Ownership Plan. Company contributions based on employee eligible earnings and dividends on the shares are used to make loan interest and principal payments. As the loan is repaid, shares are distributed to the ESOP trust for allocation to participants. During 1998, the final shares in the Plan were allocated to participants, and the Plan was subsequently merged into the Company's defined contribution profit-sharing plan. Selected financial data pertaining to the ESOP is as follows:
(In thousands, except share data) 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------- Company contribution to ESOP - - $656 Dividend income of ESOP - - 533 Shares of common stock allocated to ESOP participant accounts - - 96,304 Closing market price of common stock as of year-end - - $23.94 -------------------------------------------------------------------------------------------------------------------
POSTRETIREMENT HEALTH CARE The Company adopted Statement of Financial Accounting Standards (SFAS) No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," as of January 4, 1998. The Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," as of January 3, 1993, and recorded the cumulative effect of the accounting change on the deferred recognition basis. -47- The following table sets forth the funded status of the plan, reconciled to the accrued postretirement benefits cost recognized in the Company's balance sheet at:
(In thousands) 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------- Reconciliation of benefit obligation Obligation at beginning of year $20,237 $17,341 $15,409 Service cost 182 529 419 Interest cost 882 1,137 1,045 Benefit payments (981) (1,013) (974) Actuarial (gains) losses (5,888) 2,243 1,442 Current year prior service cost (2,203) - - Obligation at end of year $12,229 $20,237 $17,341 ------------------------------------------------------------------------------------------------------------------- Funded status Funded status at end of year $12,229 $20,237 $17,341 Unrecognized transition obligation (7,103) (9,362) (10,075) Unrecognized prior-service cost (1,813) (2,338) (2,484) Unrecognized gain (loss) 5,457 862 4,031 Net amount recognized $8,770 $9,399 $8,813 ------------------------------------------------------------------------------------------------------------------- Net periodic postretirement benefit cost include: Service cost $182 $529 $419 Interest cost 882 1,137 1,045 Amortization of transition obligation over 20 years 581 713 713 Amortization of prior service cost - 146 146 Amortization of (gains) and losses (539) (629) (767) Net periodic postretirement benefit cost $1,106 $1,896 $1,556 -------------------------------------------------------------------------------------------------------------------
The discount rates at fiscal year-end 2000, 1999, and 1998 were 8.0%, 7.5%, and 6.75%, respectively. The pre-65 2001 gross trend rates begin at 8.0% for the medical and prescription drug coverages and grade down to 5.0% in six years and remain at this level for all future years. The post-64 gross trend rates begin at 7.25% for the medical coverage and decrease until the maximum Company subsidy (cap) is reached in 2006. For the prescription drug coverage, the 2001 gross trend rates begin at 8.0% and decrease until the cap is reached in 2006. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A 1% change in assumed health care cost trend rates would have the following effects:
(In thousands) 1% Increase 1% Decrease ------------------------------------------------------------------------------------------------------------------- Effect on total of service and interest cost components of net periodic postretirement health care benefit cost $54 $(22) Effect on the health care component of the accumulated postretirement benefit obligation $519 $(325) -------------------------------------------------------------------------------------------------------------------
-48- LEASES The Company leases certain warehouse, plant facilities and equipment. Commitments for minimum rentals under noncancelable leases at the end of 2000 are as follows:
Capitalized Operating (In thousands) Leases Leases ------------------------------------------------------------------------------------ 2001 $2,398 $13,318 2002 1,078 11,316 2003 211 9,509 2004 211 7,818 2005 211 4,893 Thereafter 1,224 10,584 ---------------------- Total minimum lease payments 5,333 $57,438 ======= Less amount representing interest 1,020 ----- Present value of net minimum lease payments, including current maturities of $2,121,000 $4,313 --------------------------------------------------------------------------------------
Property, plant, and equipment at year-end include the following amounts for capitalized leases:
(In thousands) 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------- Buildings $3,299 $3,299 $3,299 Machinery and equipment 15,805 15,805 15,805 ----------------------------------------- 19,104 19,104 19,104 Less allowances for depreciation 14,655 11,816 8,978 ----------------------------------------- $4,449 $7,288 $10,126 -------------------------------------------------------------------------------------------------------------------
Rent expense for the years 2000, 1999, and 1998 amounted to approximately $15,428,000, $10,403,000, and $10,150,000, respectively. The Company has operating leases for office and production facilities with annual rentals totaling $450,000 with the former owners of a business acquired in 1996. These individuals continue as officers of a subsidiary of the Company following the merger. Contingent rent expense under both capitalized and operating leases (generally based on mileage of transportation equipment) amounted to $941,000, $755,000, and $596,000 for the years 2000, 1999, and 1998, respectively. CONTINGENCIES The Company is involved in various legal actions which have arisen in the course of business. Management believes the outcome of these matters will not have a material effect on the financial condition or results of operations of the Company. OPERATING 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. This segment disclosure is essentially unchanged from the format used by the Company historically in complying with SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," and SFAS No. 30, "Disclosures of Information about Major Customers." That is, management views the Company as being in two operating segments: office furniture and hearth products, with the former being the principal segment. -49- 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 products segment manufactures and markets a broad line of manufactured gas-, pellet-, and wood-burning fireplaces and stoves, fireplace inserts, gas logs, and chimney systems principally for the home. The Company's two operating segments are somewhat seasonal with the third (July-September) and fourth (October-December) fiscal quarters historically having higher sales than the prior quarters. In fiscal 2000, 51% of the Company's consolidated net sales of office furniture were generated in the third and fourth quarters and 54% of consolidated net sales of hearth products were generated in the third and fourth quarters. 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 an operating segment cost. In addition, management applies an effective income tax rate to its consolidated income before income taxes so income taxes are not reported or viewed internally on a segment basis. Identifiable assets by segment are those assets applicable to the respective industry segments. Corporate assets consist principally of cash and cash equivalents, short-term investments, and corporate office real estate and related equipment. No geographic information for revenues from external customers or for long-lived assets is disclosed since 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 years ended 2000, 1999, and 1998 is as follows:
(In thousands) 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------- Net sales: Office furniture $1,649,937 $1,514,991 $1,460,668 Hearth products 396,349 285,940 245,960 ---------------------------------------------- $2,046,286 $1,800,931 $1,706,628 ------------------------------------------------------------------------------------------------------------------- Operating profit: Office furniture* $171,647 $131,607 $165,314 Hearth products 30,232 34,588 31,478 -------------------------------------------- Total operating profit 201,879 166,195 196,792 Unallocated corporate expenses (35,915) (28,620) (26,683) ------------------------------------------- Income before income taxes $165,964 $137,575 $170,109 ------------------------------------------------------------------------------------------------------------------- Identifiable assets: Office furniture $638,075 $678,503 $660,626 Hearth products 327,528 174,386 154,817 General corporate 56,867 53,834 49,026 ---------------------------------------------- $1,022,470 $906,723 $864,469 ------------------------------------------------------------------------------------------------------------------- Depreciation and amortization expense: Office furniture $58,926 $52,483 $42,562 Hearth products 18,109 11,065 9,120 General corporate 2,011 1,905 1,317 ------------------------------------------- $79,046 $65,453 $52,999 ------------------------------------------------------------------------------------------------------------------- -50- Capital expenditures -- net: Office furniture $39,361 $48,565 $128,482 Hearth products 17,643 16,489 18,162 General corporate 2,836 6,420 3,073 ------------------------------------------ $59,840 $71,474 $149,717 -------------------------------------------------------------------------------------------------------------------
*1999 INCLUDES A ONE-TIME PRE-TAX CHARGE OF $19.7 MILLION FOR THE CLOSING OF FACILITIES AND REORGANIZATION EXPENSES. One office furniture customer accounted for approximately 14%, 13%, and 12% of consolidated net sales in 2000, 1999, and 1998, respectively. -51- SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS The following table presents certain unaudited quarterly financial information for each of the past 12 quarters. In the opinion of the Company's management, this information has been prepared on the same basis as the consolidated financial statements appearing elsewhere in this report and includes all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial results set forth herein. Results of operations for any previous quarter are not necessarily indicative of results for any future period.
First Second Third Fourth (In thousands, except per share data) Quarter Quarter Quarter Quarter ------------------------------------------------------------------------------------------------------------------- YEAR-END 2000 (a)(b): Net sales $481,523 $509,649 $535,322 $519,792 Cost of products sold 329,416 343,842 354,367 352,779 --------------------------------------------------- Gross profit 152,107 165,807 180,955 167,013 Selling and administrative expenses 111,214 125,513 124,197 126,924 --------------------------------------------------- Operating income 40,893 40,294 56,758 40,089 Interest income (expense)-- net (2,550) (3,688) (3,303) (2,529) ---------------------------------------------------- Income before income taxes 38,343 36,606 53,455 37,560 Income taxes 13,803 13,188 19,234 13,522 --------------------------------------------------- Net income $24,540 $23,418 $34,221 $24,038 ================================================== Net income per common share $.41 $.39 $.57 $.40 Weighted-average common shares outstanding 60,186 60,145 60,162 60,069 AS A PERCENTAGE OF NET SALES Net sales 100.0% 100.0% 100.0% 100.0% Gross profit 31.6 32.5 33.8 32.1 Selling and administrative expenses 23.1 24.6 23.2 24.4 Operating income 8.5 7.9 10.6 7.7 Income taxes 2.9 2.6 3.6 2.6 Net income 5.1 4.6 6.4 4.6 YEAR-END 1999 (a): Net sales $427,660 $422,377 $478,609 $472,285 Cost of products sold 295,222 292,077 327,243 322,070 --------------------------------------------------- Gross profit 132,438 130,300 151,366 150,215 Selling and administrative expenses 92,465 92,454 104,105 109,173 Provision for closing facilities and reorganization expenses 19,679 - - - ---------------------------------------------------- Operating income 20,294 37,846 47,261 41,042 Interest income (expense)-- net (2,045) (2,399) (2,160) (2,264) --------------------------------------------------- Income before income taxes 18,249 35,447 45,101 38,778 Income taxes 6,661 12,938 16,462 14,154 --------------------------------------------------- Net income $11,588 $22,509 $28,639 $24,624 ================================================== Net income per common share $.19 $.37 $.47 $.41 Weighted-average common shares outstanding 61,154 61,169 60,921 60,159 AS A PERCENTAGE OF NET SALES Net sales 100.0% 100.0% 100.0% 100.0% Gross profit 31.0 30.8 31.6 31.8 Selling and administrative expenses 21.6 21.9 21.8 23.1 Provision for closing facilities and reorganization expenses 4.6 - - - Operating income 4.7 9.0 9.9 8.7 Income taxes 1.6 3.1 3.5 3.0 Net income 2.7 5.3 6.0 5.2
-52-
YEAR-END 1998 (a)(c): Net sales $420,791 $403,809 $451,320 $430,708 Cost of products sold 291,571 278,107 309,080 294,239 --------------------------------------------------- Gross profit 129,220 125,702 142,240 136,469 Selling and administrative expenses 91,091 85,605 90,803 86,955 ---------------------------------------------------- Operating income 38,129 40,097 51,437 49,514 Interest income (expense)-- net (2,172) (2,691) (2,025) (2,180) ---------------------------------------------------- Income before income taxes 35,957 37,406 49,412 47,334 Income taxes 13,484 14,027 18,530 17,755 --------------------------------------------------- Net income $22,473 $23,379 $30,882 $29,579 ================================================== Net income per common share $.36 $.38 $.50 $.48 Weighted-average common shares outstanding 61,648 61,663 61,691 61,596 AS A PERCENTAGE OF NET SALES Net sales 100.0% 100.0% 100.0% 100.0% Gross profit 30.7 31.1 31.5 31.7 Selling and administrative expenses 21.6 21.2 20.1 20.2 Operating income 9.1 9.9 11.4 11.5 Income taxes 3.2 3.5 4.1 4.1 Net income 5.4 5.8 6.8 6.9
(a) DATA HAS BEEN RESTATED TO INCLUDE SHIPPING AND HANDLING COSTS BILLED TO CUSTOMERS AS REVENUE PER EITF ISSUE NO. 00-10. (b) FIRST QUARTER 2000 INCLUDES PARTIAL QUARTERLY RESULTS OF OPERATION OF AMERICAN FIREPLACE COMPANY AND THE ALLIED GROUP ACQUISITIONS ACQUIRED FEBRUARY 29, 2000. (c) FIRST QUARTER 1998 INCLUDES PARTIAL QUARTERLY RESULTS OF OPERATION OF ALADDIN STEEL PRODUCTS, INC. ACQUISITION ACQUIRED FEBRUARY 20, 1998. -53- INVESTOR INFORMATION COMMON STOCK MARKET PRICES AND DIVIDENDS (UNAUDITED) QUARTERLY 2000 - 1999
2000 by Dividends Quarter High Low per Share ------------------------------------------------------------------------------------------------------------------- 1st $25 3/4 $15 9/16 $.11 2nd 27 7/8 23 .11 3rd 27 7/8 23 3/16 .11 4th 27 1/8 21 .11 --- Total Dividends Paid $.44 ===
1999 by Dividends Quarter High Low per Share ------------------------------------------------------------------------------------------------------------------- 1st $24 1/2 $19 3/4 $.095 2nd 29 7/8 21 5/8 .095 3rd 28 1/8 19 1/16 .095 4th 23 3/4 18 3/4 .095 ---- Total Dividends Paid $ .38 =====
COMMON STOCK MARKET PRICE AND PRICE/EARNINGS RATIO (UNAUDITED) FISCAL YEARS 2000 - 1990
Market Price* Price/earnings Ratio ------------------------- -------------------------- Earnings per Year High Low Share* High Low ---- ---- --- ------ ---- --- 2000 27 7/8 15 9/16 1.77 16 9 1999 29 7/8 18 3/4 1.44 21 13 1998 37 3/16 20 1.72 22 12 1997 32 1/8 15 7/8 1.45 22 11 1996 21 3/8 9 1/4 1.13 19 8 1995 15 5/8 11 1/2 .67 23 17 1994 17 12 .87 20 14 1993 14 5/8 10 3/4 .70 21 15 1992 11 3/4 8 1/4 .59 20 14 1991 10 1/4 6 5/8 .51 20 13 1990 11 1/2 6 3/4 .65 18 10 -- -- Eleven-Year Average 20 12 -------------------------------------------------------------------------------------------------------------------
*ADJUSTED FOR THE EFFECT OF STOCK SPLITS -54- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Board of Directors and Shareholders HON INDUSTRIES Inc. Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The valuation and qualifying accounts as of and for the three fiscal years ended December 30, 2000; January 1, 2000; and January 2, 1999, are presented for the purpose of additional analysis and are not a required part of the consolidated financial statements of HON INDUSTRIES Inc. Such information has been subjected to the auditing procedures applied in our audits of the consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the consolidated financial statements taken as a whole. Arthur Andersen LLP Chicago, Illinois February 5, 2001 -55- SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS HON INDUSTRIES INC. AND SUBSIDIARIES DECEMBER 30, 2000
---------------------------------------------------------------- -------------------------------------------- ---------------------- COL. A COL. B COL. C COL. D COL. E ---------------------------------------------------------------- -------------------------------------------- ---------------------- ADDITIONS ---------------------------------------------------------------- ---------------------- --------------------- ---------------------- DESCRIPTION BALANCE AT (1) (2) DEDUCTIONS BALANCE AT BEGINNING OF CHARGED TO CHARGED TO (DESCRIBE) END OF PERIOD PERIOD COSTS AND OTHER EXPENSES ACCOUNTS (DESCRIBE) ---------------------------------------------------------------- ---------------------- --------------------------------- -------- (In thousands) Reserves deducted in the consolidated balance sheet from the assets to which they apply: Year ended December 30, 2000: Allowance for doubtful accounts $3,568 $8,726 $1,057 (A) $11,237 ====== ====== ====== ======= Year ended January 1, 2000: Allowance for doubtful accounts $2,816 $2,114 $1,362 (A) $3,568 ====== ====== ====== ====== Year ended January 2, 1999: Allowance for doubtful accounts $3,277 $1,288 $1,749 (A) $2,816 ====== ====== ====== ======
Note A: Excess of accounts written off over recoveries ITEM 14(a)(3) - INDEX OF EXHIBITS EXHIBIT NUMBER DESCRIPTION OF DOCUMENT (3i) Articles of Incorporation of the Registrant, incorporated by reference to Exhibit 3(i) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 3, 1999 (3ii) By-Laws of the Registrant, incorporated by reference to Exhibit 3(ii) to the Registrant's Annual Report on Form 10-K for the year ended December 30, 2000 (4i) Rights Agreement dated as of August 13, 1998, by and between the Registrant and Harris Trust and Savings Bank, as Rights Agent, incorporated by reference to Exhibit 4.1 to Registration Statement on Form 8-A filed August 14, 1998, as amended by Form 8-A/A filed September 14, 1998, incorporated by reference to Exhibit 4.1 on Form 8-K filed August 10, 1998 (10i) 1995 Stock-Based Compensation Plan, as amended effective November 10, 2000, incorporated by reference to Exhibit 10(i) to the Registrant's Annual Report on Form 10-K for the year ended December 30, 2000 (10ii) 1997 Equity Plan for Non-Employee Directors, incorporated by reference to Exhibit B to the Registrant's proxy statement dated March 28, 1997, related to the Registrant's Annual Meeting of Shareholders held on May 13, 1997 (10iii) Form of Registrant's Change in Control Agreement, incorporated by reference to Exhibit 10 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 (10iv) Executive Long-Term Incentive Compensation Plan of the Registrant, incorporated by reference to Exhibit 99B to the Registrant's Annual Report on Form 10-K for the year ended December 30, 1995 (10v) ERISA Supplemental Retirement Plan of the Registrant, incorporated by reference to Exhibit 99C to the Registrant's Annual Report on Form 10-K for the year ended December 30, 1995 (10vi) 1994 Members Stock Purchase Plan of the Registrant, incorporated by reference to Exhibit 4.3 to the Registrant's Registration Statement No. 33-54163 on Form S-8 filed June 16, 1994 (10vii) Agreement as Consultant and Director, dated November 15, 1995, between the Registrant and Robert L. Katz, incorporated by reference to the same numbered exhibit filed with the Registrant's Annual Report on Form 10-K/A for the fiscal year ended December 28, 1996 (10viii) Form of Director and Officer Indemnification Agreement of the Registrant, incorporated by reference to the same numbered exhibit filed with the Registrant's Annual Report on Form 10-K/A for the fiscal year ended December 28, 1996 (10ix) Form of Common Stock Grant Agreement of the Registrant, incorporated by reference to the same numbered exhibit filed with the Registrant's Annual Report on Form 10-K/A for the fiscal year ended December 28, 1996 (10x) Form of HON INDUSTRIES Inc. Stock-Based Compensation Plan Stock Option Award Agreement of the Registrant, incorporated by reference to the same numbered exhibit filed with the Registrant's Annual Report on Form 10-K/A for the fiscal year ended December 28, 1996 (10xi) Stock Purchase Agreement of the Registrant, dated September 18, 1985, as amended by amendment dated February 11, 1991, between the Registrant and Stanley M. Howe, incorporated by reference to Exhibit 10(xi) to the Registrant's Annual Report on Form 10-K for the year ended January 3, 1998 (10xii) Real Estate Contract of the Registrant, dated November 15, 1997, between the Registrant and Terrence L. and Loretta B. Mealy, incorporated by reference to Exhibit 10(xii) to the Registrant's Annual Report on Form 10-K for the year ended January 3, 1998 (10xiii) $200,000,000 Credit Agreement, dated June 11, 1997; First Amendment to Credit Agreement and Waiver, dated October 20, 1997; and Second Amendment to Credit Agreement, dated January 18, 2000, by and between the Registrant and Bankers Trust Company, as Syndication Agent and Administrative Agent, and various lending institutions, incorporated by reference to Exhibit 10(xiii) to the Registrant's Annual Report on Form 10-K for the year ended January 1, 2000 (10xiv) HON INDUSTRIES Inc. Profit-Sharing Retirement Plan of the Registrant incorporated by reference to Exhibit 4.4 to the Registrant's Registration Statement No. 333-31366 on Form S-8 filed February 29, 2000 (10xv) HON INDUSTRIES Inc. Long-Term Performance Plan of the Registrant, incorporated by reference to the same numbered exhibit filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 2000 (16) Letter of Former Accountant, incorporated by reference to the Registrant's Report on Form 8-K dated May 14, 1996 (21) Subsidiaries of the Registrant (23) Consent of Independent Public Accountants (99A) Executive Bonus Plan of the Registrant as amended and restated on May 1, 2000, incorporated by reference to the same numbered exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 1, 2000 (99B) Executive Deferred Compensation Plan of the Registrant as amended and restated on November 10, 2000, incorporated by reference to the same numbered exhibit filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 2000 -58-