UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 2002
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
For the transition period from ____________________ to ____________________
Commission File Number 0-2648
HON INDUSTRIES Inc.
(Exact name of Registrant as specified in its charter)
Iowa
42-0617510
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification Number)
P. O. Box 1109, 414 East Third Street, Muscatine, Iowa 52761-0071
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: 563/264-7400
Indicated by check mark whether the registrant (1) has filed all required reports to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES ____X_____ NO __________
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date.
Class
Outstanding at March 30, 2002
Common Shares, $1 Par Value
58,909,508
HON INDUSTRIES Inc. and SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
March 30, 2002, and December 29, 2001
3-4
Condensed Consolidated Statements of Income
Three Months Ended March 30, 2002, and March 31, 2001
5
Condensed Consolidated Statements of Cash Flows
6
Notes to Condensed Consolidated Financial Statements
7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
10-12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
13
SIGNATURES
14
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
March 30,
December 29,
2002
2001
(Unaudited)
ASSETS
(In thousands)
CURRENT ASSETS
Cash and cash equivalents
$ 69,589
$ 78,838
Receivables
159,582
161,390
Inventories (Note B)
53,293
50,140
Deferred income taxes
15,376
14,940
Prepaid expenses and other current assets
12,144
14,349
Total Current Assets
309,984
319,657
PROPERTY, PLANT, AND EQUIPMENT, at cost
Land and land improvements
21,540
21,678
Buildings
209,057
212,352
Machinery and equipment
498,220
494,458
Construction in progress
12,886
14,247
741,703
742,735
Less accumulated depreciation
351,669
337,764
Net Property, Plant, and Equipment
390,034
404,971
GOODWILL
214,518
214,337
OTHER ASSETS
20,773
22,926
Total Assets
$ 935,309
$ 961,891
See accompanying Notes to Condensed Consolidated Financial Statements.
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses
$ 170,618
$ 216,184
Income taxes
10,145
6,112
Note payable and current maturities
of long-term debt
59,716
6,715
Current maturities of other long-term
obligations
948
1,432
Total Current Liabilities
241,427
230,443
LONG-TERM DEBT
26,107
79,570
CAPITAL LEASE OBLIGATIONS
820
1,260
OTHER LONG-TERM LIABILITIES
19,310
18,306
DEFERRED INCOME TAXES
40,351
39,632
SHAREHOLDERS' EQUITY
Capital Stock:
Preferred, $1 par value; authorized
2,000,000 shares; no shares outstanding
-
Common, $1 par value; authorized
200,000,000 shares; outstanding -
58,910
58,673
2002 - 58,909,508 shares;
2001 - 58,672,933 shares
Paid-in capital
7,111
891
Retained earnings
541,090
532,555
Accumulated other comprehensive income
183
561
Total Shareholders' Equity
607,294
592,680
Total Liabilities and Shareholders' Equity
HON INDUSTRIES Inc. and SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF INCOME(Unaudited)
Three Months Ended
March 31,
(In thousands, except
per share data)
Net Sales
$ 399,139
$ 461,997
Cost of products sold
259,398
311,711
Gross Profit
139,741
150,286
Selling and administrative expenses
114,325
119,050
Operating Income
25,416
31,236
Interest income
635
222
Interest expense
1,215
2,922
Income Before Income Taxes
24,836
28,536
8,941
10,273
Net Income
$ 15,895
$ 18,263
Net income per common share
$0.27
$0.31
Average number of common shares outstanding
58,776,955
59,448,220
Cash dividends per common share
$0.125
$0.12
HON INDUSTRIES Inc. and SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)
Net Cash Flows From (To) Operating Activities:
Net income
Noncash items included in net income:
Depreciation and amortization
17,148
20,583
Other postretirement and postemployment
benefits
529
246
496
(1,734)
Asset impairment
1,300
Other - net
217
Net increase (decrease) in noncash operating
assets and liabilities
(40,437)
(18,321)
Increase (decrease) in other liabilities
476
626
Net cash flows from operating activities
(4,376)
19,663
Net Cash Flows From (To) Investing Activities:
Capital expenditures - net
(5,266)
(12,720)
Capitalized software
(22)
(12)
Acquisition spending
(6,332)
Long-term investments
1,910
311
(400)
Net cash flows (to) investing activities
(3,067)
(19,464)
Net Cash Flows From (To) Financing Activities:
Purchase of HON INDUSTRIES common stock
(19,825)
Proceeds from long-term debt
36,000
Payments of note and long-term debt
(903)
(1,294)
Proceeds from sales of HON INDUSTRIES common
stock to members and stock-based compensation
6,457
7,454
Dividends paid
(7,360)
(7,140)
Net cash flows from financing activities
(1,806)
15,195
Net increase (decrease) in cash and
cash equivalents
(9,249)
15,394
Cash and cash equivalents at beginning
of period
78,838
3,181
Cash and cash equivalents at end of period
$ 18,575
NOTES OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)March 30, 2002
Note A. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 30, 2002, are not necessarily indicative of the results that may be expected for the year ending December 28, 2002. For further information, refer to the consolidated financial statements and footnotes included in the Company's annual report on Form 10-K for the year ended December 29, 2001.
Note B. Inventories
Inventories of the Company and its subsidiaries are summarized as follows:
March 30, 2002
($000)
Finished products
$ 36,490
$ 33,280
Materials and work in process
26,464
26,469
LIFO allowance
(9,661)
(9,609)
$ 53,293
$ 50,140
Note C. Plant Shutdown
During the quarter ended March 30, 2002, the Company recorded costs of $3.9 million or $0.04 per diluted share for the shutdown of an office furniture facility in Jackson, Tennessee. Included in the costs were $1.3 million for asset impairments, $.7 million for severance payments, $.3 million for other employee related costs and $1.6 million for certain other expenses associated with the closing of the facility. The Company expects to realize savings during 2002 equal to the costs incurred in closing the facility.
Note D. Restructuring and Impairment Charge
During the quarter ended June 30, 2001, the Company recorded a pretax charge of $24.0 million or $0.26 per diluted share for a restructuring plan that involved consolidating physical facilities, discontinuing low volume product lines, and reductions of workforce. Included in this charge was the closedown of three of its office furniture facilities located in Williamsport, Pennsylvania, Tupelo, Mississippi, and Santa Ana, California. The charge included $16.2 million of asset impairments and $7.8 million of restructuring expenses.
Approximately $5.8 million of pretax exit costs have been paid and charged against the liability. This included $2.5 million for severance for 493 plant member positions, $0.5 million for other member related costs and $2.8 million for certain other expenses associated with the closing of facilities. The primary costs not yet incurred relate to costs associated with the closed buildings. Management believes the remaining reserve to be adequate to cover these obligations.
Note E. Comprehensive Income
The Company's comprehensive income in 2001 consisted of an unrealized holding gain or loss on equity securities available-for-sale under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and nominal foreign currency adjustments. The Company sold the equity securities in first quarter 2002; therefore, comprehensive income in 2002 consists totally of foreign currency adjustments.
Note F. Goodwill - Adoption of Statement 142
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets" on December 30, 2001, the beginning of its 2002 fiscal year. With the adoption of SFAS No. 142, goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill is assessed for impairment by applying a fair-value-based test. The Company is in the process of assessing the impairment and does not believe there is an impairment.
The following schedule reports the adjusted net income for the goodwill amortization impact:
For Period Ended
March 31, 2001
Reported net income
$15,895
$18,263
Add back: Goodwill amortization
1,577
Adjusted net income
$19,840
Basic and diluted earnings per share:
$0.307
Goodwill amortization
0.027
$0.334
Note G. New Accounting Standards
The Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," on December 30, 2001, the beginning of its 2002 fiscal year. The adoption did not have an impact on the Company's financial statements.
The Company will be required to adopt Statement No. 143, "Accounting for Asset Retirement Obligations," on December 29, 2002, the beginning of its 2003 fiscal year. The adoption of SFAS No. 143 is not expected to have a material impact on the Company's financial statements.
Note H. Business Segment Information
Management views the Company as being in two business segments: office furniture and hearth products with the former being the principal business segment.
The office furniture segment manufactures and markets a broad line of metal and wood commercial and home office furniture which includes file cabinets, desks, credenzas, chairs, storage cabinets, tables, bookcases, freestanding office partitions and panel systems, and other related products. The hearth product segment manufactures and markets a broad line of manufactured gas-, pellet- and wood-burning fireplaces and stoves, fireplace inserts, and chimney systems principally for the home.
For purposes of segment reporting, intercompany sales transfers between segments are not material and operating profit is income before income taxes exclusive of certain unallocated corporate expenses. These unallocated corporate expenses include the net cost of the Company's corporate operations, interest income, and interest expense. Management views interest income and expense as corporate financing costs and not as a business segment cost. In addition, management applies one effective tax rate to its consolidated income before income taxes so income taxes are not reported or viewed internally on a segment basis.
No geographic information for revenues from external customers or for long-lived assets is disclosed as the Company's primary market and capital investments are concentrated in the United States.
Reportable segment data reconciled to the consolidated financial statements for the three-month period ended March 30, 2002, and March 31, 2001, is as follows:
Net Sales:
Office furniture
$ 300,221
$ 366,509
Hearth products
98,918
95,488
Operating Profit:
$ 24,248
$ 32,524
6,505
3,238
Total operating profit
30,753
35,762
Unallocated corporate expense
(5,917)
(7,226)
Income before income taxes
$ 24,836
$ 28,536
Identifiable Assets:
$ 512,194
$ 590,319
308,734
340,380
General corporate
114,381
66,203
$ 996,902
Depreciation & Amortization Expense:
$ 12,291
$ 14,877
3,309
5,126
1,548
580
$ 17,148
$ 20,583
Capital Expenditure, Net:
$ 4,152
$ 9,716
920
194
82
$ 5,266
$ 12,720
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations
A summary of the period-to-period changes in the principal items included in the Condensed Consolidated Statements of Income is shown below:
Comparison of
Increases (Decreases)
Dollars in Thousands
March 30, 2002 &
December 29, 2001
$(62,858)
(13.6)
%
$(27,754)
(6.5)
(52,313)
(16.8)
(18,815)
(6.8)
Selling & administrative expenses
(4,725)
(4.0)
2,911
2.6
413
186.0
135
27.0
(1,707)
(58.4)
(209)
(14.7)
(1,332)
(13.0)
(4,142)
(31.7)
(2,368)
(7,364)
Consolidated net sales for the first quarter ending March 30, 2002, were $399.1 million, a 13.6% decrease from the $462.0 million in the first quarter of 2001 due to lower sales volume caused by the continued softness in the office furniture industry. Net income was $15.9 million, compared to $18.3 million for the same period a year ago. Net income per common share for first quarter 2002 was $0.27 per diluted share, a 12.9% decrease from $0.31 per share in first quarter 2001.
For the first quarter of 2002, office furniture comprised 75% of consolidated net sales and hearth products comprised 25%. Net sales for office furniture were down 18.1%. Sales were down in all three office furniture sectors - - retail, commercial and contract. The Business and Institutional Furniture Manufacturer's Association (BIFMA) reported shipments down 30 percent for the first two months of 2002. Hearth products sales increased 3.6% for the quarter, compared to the same quarter a year ago. Office furniture contributed 79% of first quarter 2002 consolidated operating profit before unallocated corporate expenses and hearth products contributed 21%.
The consolidated gross profit margin for the first quarter of 2002 was 35.0% compared to 32.5% for the same period in 2001. The improvement in gross profit margins is due to new product introductions and the Company's continued cost containment, rapid continuous improvement (RCI), and business simplification initiatives. Both segments experienced improved margins.
Selling and administrative expenses for the first quarter of 2002 were 28.6% of net sales, compared to 25.8% in the comparable quarter of 2001. Actual selling and administrative dollars for the quarter decreased 4.0 percent or $4.7 million compared to the same quarter last year. Included in selling and administrative expenses in 2002 were $3.9 million of costs due to the shutdown of an office furniture facility in Jackson, Tennessee. Included in the $3.9 million was $1.3 million for asset impairments, $.7 million for severance, $.3 million for other employee related costs, and $1.6 million for certain other expenses associated with the closing of the facility. The Company expects to realize savings during 2002 equal to the costs incurred in closing the facility. Selling and administrative expenses also included approximately $2 million of additional bad debt expense in first quarter 2002 due to the deterioration in the financial condition of a few customers. First quarter 2001 included approximately $2.5 million of goodwill amortization that is not included in 2002 due to the adoption of Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," on December 30, 2001, the beginning of the Company's 2002 fiscal year.
Liquidity and Capital Resources
As of March 30, 2002, cash and short-term investments decreased to $69.6 million, compared to a $78.8 million balance at year-end 2001. The annual payment of marketing programs and the annual funding of the Company's retirement plan were the main causes of the decrease in cash. Cash flow and working capital management are major focuses of management to ensure the Company is poised for growth.
Net capital expenditures for the first quarter of 2002 were $5.3 million and primarily represent investment in new, more efficient machinery and equipment. These investments were funded by cash from operations.
On February 13, 2002, the Board approved a 4.2% increase in the common stock quarterly cash dividend from $0.12 per share to $0.125 per share. The dividend was paid on March 1, 2002, to shareholders of record on February 22, 2002. This was the 188th consecutive quarterly dividend paid by the Company.
The Company did not repurchase any of its common stock during the first quarter of 2002. As of March 30, 2002, approximately $78.6 million of the Board's current repurchase authorization remained unspent.
Looking Ahead
The Company anticipates the second quarter to be challenging due to the continued slowdown in the office furniture industry. DRI-WEFA, BIFMA's forecasting consultant, is projecting the office furniture industry to be down over 15 percent in the second quarter of 2002 compared to the same quarter last year.
Statements in this report that are not strictly historical, including statements as to plans, objectives, and future financial performance, are "forward-looking" statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks, which may cause the Company's actual results in the future to differ materially from expected results. These risks include, among others: the Company's ability to realize financial benefits from its cost containment and business simplification initiatives, to realize the savings from its closing of the Jackson, Tennessee, facility, to achieve expected financial benefit from its contract sector strategy, to introduce and obtain sales at improved gross margins from new products, and other factors described in the Company's annual and quarterly reports filed with the Securities and Exchange Commission on Forms 10-K and 10-Q.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: May 1, 2002 HON INDUSTRIES Inc.
By: /s/ Jerald K. Dittmer Jerald K. Dittmer Vice President and CFO