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 September 29, 2001
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 September 29, 2001
Common Shares, $1 Par Value
58,636,933
HON INDUSTRIES Inc. and SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
September 29, 2001, and December 30, 2000
3-4
Condensed Consolidated Statements of Income
Three Months Ended September 29, 2001, and September 30, 2000
5
Nine Months Ended September 29, 2001, and September 30, 2000
6
Condensed Consolidated Statements of Cash Flows
7
Notes to Condensed Consolidated Financial Statements
8-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
11-13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
14
SIGNATURES
15
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
September 29,
December 30,
2001
2000
(Unaudited)
ASSETS
(In thousands)
CURRENT ASSETS
Cash and cash equivalents
$ 40,918
$ 3,181
Receivables
198,262
211,243
Inventories (Note B)
71,185
84,360
Deferred income taxes
18,481
19,516
Prepaid expenses and other current assets
11,893
11,841
Total Current Assets
340,739
330,141
PROPERTY, PLANT, AND EQUIPMENT, at cost
Land and land improvements
21,790
18,808
Buildings
212,658
202,189
Machinery and equipment
497,703
514,293
Construction in progress
20,484
27,547
752,635
762,837
Less accumulated depreciation
335,978
308,525
Net Property, Plant, and Equipment
416,657
454,312
GOODWILL
216,666
216,371
OTHER ASSETS
22,357
21,646
Total Assets
$ 996,419
$ 1,022,470
See accompanying Notes to Condensed Consolidated Financial Statements.
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses
$ 216,288
$ 240,418
Accrued facilities closing and reorganization expense
4,751
122
Income taxes
21,283
12,067
Note payable and current maturities
of long-term debt
39,211
10,408
Current maturities of other long-term
obligations
745
1,853
Total Current Liabilities
282,278
264,868
LONG-TERM DEBT
79,611
126,093
CAPITAL LEASE OBLIGATIONS
1,699
2,192
OTHER LONG-TERM LIABILITIES
17,099
18,749
DEFERRED INCOME TAXES
40,430
37,226
SHAREHOLDERS' EQUITY
Capital Stock:
Preferred, $1 par value; authorized
2,000,000 shares; no shares outstanding
-
Common, $1 par value; authorized
200,000,000 shares; outstanding -
58,637
59,797
2001 - 58,636,933 shares;
2000 - 59,796,891 shares
Paid-in capital
17,339
Retained earnings
516,336
495,796
Accumulated other comprehensive income
329
410
Total Shareholders' Equity
575,302
573,342
Total Liabilities and Shareholders' Equity
HON INDUSTRIES Inc. and SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF INCOME(Unaudited)
Three Months Ended
September 30,
(In thousands, except
per share data)
Net Sales
$ 459,352
$ 535,322
Cost of products sold
298,427
354,367
Gross Profit
160,925
180,955
Selling and administrative expenses
114,759
124,197
Operating Income
46,166
56,758
Interest income
509
493
Interest expense
1,884
3,796
Income Before Income Taxes
44,791
53,455
16,125
19,234
Net Income
$ 28,666
$ 34,221
Net income per common share
$0.48
$0.57
Average number of common shares outstanding
59,047,587
60,162,183
Cash dividends per common share
$0.12
$0.11
Nine Months Ended
$ 1,365,545
$ 1,526,494
902,927
1,027,625
462,618
498,869
352,792
360,924
Restructuring and impairment charges
24,000
85,826
137,945
1,217
1,216
7,124
10,757
79,919
128,404
28,771
46,225
$ 51,148
$ 82,179
$0.86
$1.37
59,233,573
60,164,179
$0.36
$0.33
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
61,777
58,953
Other postretirement and postemployment
benefits
1,249
1,109
4,322
1,091
Asset impairment
16,200
Other - net
64
28
Net increase (decrease) in noncash operating
assets and liabilities
12,483
(25,866)
Increase (decrease) in other liabilities
(2,898)
(1,266)
Net cash flows from operating activities
144,345
116,228
Net Cash Flows From (To) Investing Activities:
Capital expenditures - net
(32,170)
(46,871)
Capitalized software
(109)
(261)
Acquisition spending
(8,632)
(134,688)
Long-term investments
(3)
344
Net cash flows (to) investing activities
(40,567)
(181,823)
Net Cash Flows From (To) Financing Activities:
Purchase of HON INDUSTRIES common stock
(35,059)
(7,807)
Proceeds from long-term debt
36,218
155,059
Payments of note and long-term debt
(54,389)
(74,491)
Proceeds from sales of HON INDUSTRIES common
stock to members and stock-based compensation
8,525
9,068
Dividends paid
(21,336)
(19,851)
Net cash flows from financing activities
(66,041)
61,978
Net increase (decrease) in cash and
cash equivalents
37,737
(3,617)
Cash and cash equivalents at beginning
of period
3,181
22,168
Cash and cash equivalents at end of period
$ 18,551
NOTES OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)September 29, 2001
Note A. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended September 29, 2001, are not necessarily indicative of the results that may be expected for the year ending December 29, 2001. For further information, refer to the consolidated financial statements and footnotes included in the Company's annual report on Form 10-K for the year ended December 30, 2000.
Note B. Inventories
Inventories of the Company and its subsidiaries are summarized as follows:
September 29, 2001
($000)
Finished products
$ 51,781
$ 48,990
Materials and work in process
30,306
46,497
LIFO allowance
(10,902)
(11,127)
$ 71,185
$ 84,360
Note C. Restructuring and Impairment Charge
During the quarter ended June 30, 2001, the Company recorded a pretax charge of $24.0 million or $0.26 per diluted share for a restructuring plan that involves consolidating physical facilities, discontinuing low volume product lines, and reductions of workforce. Included in this charge is the closedown of three of its office furniture facilities located in Williamsport, Pennsylvania, Tupelo, Mississippi, and Santa Ana, California. The charge includes $16.2 million of asset impairments per Financial Accounting Standards Board Statement 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The remaining $7.8 million of the charge is classified as restructuring expenses in accordance with EITF 94-3 of the Financial Accounting Standards Board and Staff Accounting Bulleting (SAB 100) of the Securities and Exchange Commission. Included in the $7.8 million is $3.1 million for severance arising from the elimination of approximately 600 positions, $.8 million for other employee related costs, and $3.9 million for certain other expenses associated with the closing of facilities.
During the nine month period ended September 29, 2001, $3.2 million of pretax exit costs were paid and charged against the liability. It included $1.8 million for severance for 324 positions, $.2 million for other employee related costs and $1.2 million for certain other expenses associated with the closing of facilities.
Note D. Business Combinations
The Company completed the acquisitions of three small hearth product distributors during the nine-month period ending September 29, 2001, for a total purchase price of approximately $7.6 million.
During the first quarter of 2001, management finalized its integration plan related to the acquisition of its Hearth Services division. Costs related to severance and consolidation of facilities of approximately $2.4 million have been recorded and reflected as an adjustment to goodwill. Of this amount, $1.3 million has been utilized as of September 29, 2001. Management expects these activities to be completed within the year. Final estimates did not have a material effect on the original liabilities established in connection with the purchase.
Note E. Comprehensive Income
The Company's comprehensive income consists of an unrealized holding gain or loss on equity securities available-for-sale under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and nominal foreign currency adjustments.
Note F. Business Segment Information
Management views the Company as being in two business segments: office furniture and hearth products with the former being the principal business segment.
The office furniture segment manufactures and markets a broad line of metal and wood commercial and home office furniture which includes file cabinets, desks, credenzas, chairs, storage cabinets, tables, bookcases, freestanding office partitions and panel systems, and other related products. The hearth product segment manufactures and markets a broad line of manufactured gas-, pellet- and wood-burning fireplaces and stoves, fireplace inserts, and chimney systems principally for the home.
For purposes of segment reporting, intercompany sales transfers between segments are not material and operating profit is income before income taxes exclusive of certain unallocated corporate expenses. These unallocated corporate expenses include the net cost of the Company's corporate operations, interest income, and interest expense. Management views interest income and expense as corporate financing costs and not as a business segment cost. In addition, management applies one effective tax rate to its consolidated income before income taxes so income taxes are not reported or viewed internally on a segment basis.
No geographic information for revenues from external customers or for long-lived assets is disclosed inasmuch as the Company's primary market and capital investments are concentrated in the United States.
Reportable segment data reconciled to the consolidated financial statements for the three-month and nine-month period ended September 29, 2001, and September 30, 2000, is as follows:
Net Sales:
Office furniture
$ 353,138
$ 434,006
$ 1,058,225
$ 1,240,975
Hearth products
106,214
101,316
307,320
285,519
Operating Profit:
Normal operations
$ 41,223
$ 54,458
$ 106,113
$ 133,870
(22,500)
Office Furniture - net
41,223
54,458
83,613
133,870
12,277
9,128
25,034
19,371
(1,500)
Hearth products - net
23,534
Total operating profit
53,500
63,586
107,147
153,241
Unallocated corporate expense
(8,709)
(10,131)
(27,228)
(24,837)
Income before income taxes
$ 44,791
$ 53,455
$ 79,919
$ 128,404
Identifiable Assets:
$ 574,858
$ 661,477
340,921
341,008
General corporate
80,640
72,380
$ 1,074,865
Depreciation & Amortization Expense:
$ 14,957
$ 14,960
$ 44,711
$ 44,214
5,028
4,665
15,314
13,226
593
496
1,752
1,513
$ 20,578
$ 20,121
$ 61,777
$ 58,953
Capital Expenditure, Net:
$ 6,477
$ 11,565
$ 25,453
$ 28,811
1,161
4,236
5,683
14,494
611
1,419
1,034
3,566
$ 8,249
$ 17,220
$ 32,170
$ 46,871
Note G. New Accounting Standards
The Financial Accounting Standards Board finalized Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets," on June 30, 2001. The Company will be required to adopt both statements on December 30, 2001, the beginning of its 2002 fiscal year.
SFAS No. 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method of accounting. With the adoption of SFAS No. 142, goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill will be assessed for impairment by applying a fair-value-based test. The Company does not anticipate recognizing any impairment of goodwill upon adoption. The Company will stop recording, on an annual basis, approximately $9 million of goodwill amortization upon adoption.
The Financial Accounting Standards Board finalized SFAS No. 143, "Accounting for Asset Retirement Obligations," on August 15, 2001, and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," on October 3, 2001. The Company will be required to adopt Statement No. 143 on December 29, 2002, the beginning of its 2003 fiscal year and Statement No. 144 on December 30, 2001, the beginning of its 2002 fiscal year. The adoption of SFAS No. 143 and SFAS No. 144 is not expected to have a material impact on the Company's financial statements.
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
September 29, 2001 &
&
September 30, 2000
June 30, 2001
$ (75,970)
(14.2)
%
$(160,949)
(10.5)
$ 15,156
3.4
(55,940)
(15.8)
(124,698)
(12.1)
5,638
1.9
Selling & administrative
expenses
(9,438)
(7.6)
(8,132)
(2.3)
(4,224)
(3.6)
(24,000)
16
3.2
1
0.1
23
4.7
(1,912)
(50.4)
(3,633)
(33.8)
(434)
(18.7)
(3,109)
(16.2)
(17,454)
(37.8)
13,752
579.5
(5,555)
(31,031)
24,447
Consolidated net sales for the third quarter ending September 29, 2001, were $459.4 million, a 14.2% decrease from the $535.3 million in the third quarter of 2000. Net income was $28.7 million, a decrease of 16.2% from $34.2 million over the same period in 2000. Net income per share for the quarter was $0.48 per diluted share, a decrease of 15.8% from $0.57 per diluted share earned in third quarter 2000.
For the first nine months of 2001, consolidated net sales decreased 10.5% to $1.4 billion from $1.5 billion last year. Net income was $66.5 million or $1.12 per share, excluding an after-tax restructuring charge of $15.4 million or $0.26 per share, taken in second quarter 2001 to better align the Company's permanent cost structure. Earnings per share before the one-time charge were down 18.2% from $1.37 for the same period a year ago. Net income after the restructuring charge was $51.1 million or $0.86 per share.
For the third quarter of 2001, office furniture comprised 77% of consolidated net sales and hearth products comprised 23%. Net sales for office furniture were down 18.6%. Hearth products sales increased 4.8% for the quarter compared to the same quarter a year ago. Office furniture contributed 77% of third quarter 2001 consolidated operating profit before unallocated corporate expenses and hearth products contributed 23%.
The consolidated gross profit margin for the third quarter of 2001 increased to a new quarterly record of 35.0% compared to 33.8% for the same period in 2000. This increase in margin was due to improved cost containment, and business simplification.
Selling and administrative expenses for the third quarter of 2001 were 25.0% of net sales compared to 23.2% in the comparable quarter of 2000. This increase was due to lower overall sales volume. Actual selling and administrative dollars for the quarter decreased 7.6% or $9.4 million.
During the quarter ended June 30, 2001, the Company recorded a pretax charge of $24.0 million or $0.26 per diluted share for a restructuring plan that involves consolidating physical facilities, discontinuing low volume product lines, and reductions of workforce. Included in this charge is 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 related to asset impairments and $7.8 million was provided to cover restructuring expenses. Restructuring spending during the nine-month period included $1.8 million for severance for 324 positions, $.2 million for other employee related costs and $1.2 million for certain other expenses associated with the closing of facilities.
Liquidity and Capital Resources
As of September 29, 2001, cash and short-term investments increased to $40.9 million compared to a $3.2 million balance at year-end 2000. Net cash flows from operations contributed to the improvement. Cash flow and working capital management are major focuses of management to ensure the Company is poised for growth.
Net capital expenditures for the first nine months of 2001 were $32.2 million and primarily represent investment in new, more efficient machinery and equipment. These investments were funded by a combination of cash reserves, cash from operations and a revolving credit agreement.
During the first quarter of 2001, the Company completed the acquisition of three small hearth products distributors for a total purchase price of approximately $7.6 million.
The Board of Directors declared a regular quarterly cash dividend of $0.12 per share on its common stock on August 6, 2001, to shareholders of record at the close of business on August 16, 2001. It was paid on August 31, 2001, and represented the 186th consecutive quarterly dividend paid by the Company.
For the first nine months ended September 29, 2001, the Company repurchased 1,472,937 shares of its common stock at a cost of approximately $35.1 million or an average price of $23.80 per share. As of September 29, 2001, approximately $78.6 million of the Board's current repurchase authorization remained unspent.
Looking Ahead
The Company anticipates that the remainder of 2001 will be challenging in both sales and profits due to the current economic and political environment. The Company is focused on optimizing their 2001 performance, while continuing to follow their long-term value creation strategies.
Statements in this report that are not strictly historical, including statements as to plans, objectives, and future financial performance, are "forward-looking" statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks, which may cause the Company's actual results in the future to differ materially from expected results. These risks include, among others: the Company's ability to realize financial benefits from simplifying its business and reducing its cost structure, to introduce and obtain sales from new products; and other factors described in the Company's annual and quarterly reports filed with the Securities and Exchange Commission on Forms 10-K and 10-Q.
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: November 8, 2001 HON INDUSTRIES Inc.
By: /s/ Jerald K. Dittmer
Jerald K. Dittmer Vice President and CFO