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 29, 1997 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________________ to ______________________ Commission File Number 0-2648 HON INDUSTRIES Inc. (Exact name of Registrant as specified in its charter) Iowa 42-0617510 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) P.O. Box 1109, 414 East Third Street, Muscatine, Iowa 52761-7109 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code 319-264-7400 Indicate by check mark whether the registrant (1) has filed all required reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Class Outstanding at March 29, 1997 Common Shares, $1 Par Value 29,705,828 shares Exhibit Index is on page 13. Page 1 of 14
HON INDUSTRIES Inc. and SUBSIDIARIES INDEX PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets -- March 29, 1997, and December 28, 1996 3-4 Condensed Consolidated Statements of Income -- Three Months Ended March 29, 1997, and March 30, 1996 5 Condensed Consolidated Statements of Cash Flows -- Three Months Ended March 29, 1997, and March 30, 1996 6 Notes to Condensed Consolidated Financial Statements 7-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-11 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 12 SIGNATURES 12 EXHIBIT INDEX 13 (27) Financial Data Schedule 14 Page 2 of 14
PART I. FINANCIAL INFORMATION Item 1. Financial Statements HON INDUSTRIES Inc. and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS March 29, 1997 December 28, (Unaudited) 1996 ASSETS (In thousands) CURRENT ASSETS Cash and cash equivalents $ 13,902 $ 31,196 Short-term investments 1,504 1,502 Receivables 110,341 109,095 Inventories (Note B) 40,216 43,550 Deferred income taxes 9,216 9,046 Prepaid expenses and other current assets 12,894 11,138 ------- ------- 188,073 205,527 Total Current Assets PROPERTY, PLANT, AND EQUIPMENT, at cost Land and land improvements 9,191 9,114 Buildings 96,078 92,509 Machinery and equipment 244,224 231,780 Construction in progress 43,054 42,507 ------- ------- 392,547 375,910 Less accumulated depreciation 146,121 141,294 ------- ------- Net Property, Plant, and Equipment 246,426 234,616 GOODWILL 50,634 51,213 OTHER ASSETS 22,354 22,158 ------- ------- Total Assets $507,487 $513,514 ======= ======= See accompanying notes to condensed consolidated financial statements. Page 3 of 14
HON INDUSTRIES Inc. and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS March 29, 1997 December 28, (Unaudited) 1996 LIABILITIES AND SHAREHOLDERS' EQUITY (In thousands) CURRENT LIABILITIES Accounts payable and accrued expenses $115,787 $127,910 Income taxes 11,732 2,574 Note payable and current maturities of long-term obligations 10,762 22,069 ------- ------- Total Current Liabilities 138,281 152,553 LONG-TERM DEBT AND OTHER LIABILITIES 86,710 91,468 CAPITAL LEASE OBLIGATIONS 6,050 6,320 DEFERRED INCOME TAXES 11,513 10,726 MINORITY INTEREST IN SUBSIDIARY 38 50 SHAREHOLDERS' EQUITY Capital Stock: Preferred, $1 par value; authorized 1,000,000 shares; no shares outstanding - - Common, $1 par value; authorized 100,000,000 shares; outstanding -- 29,706 29,713 1997 - 29,705,828 shares; 1996 - 29,713,265 shares Paid-in capital 456 360 Retained earnings 239,774 227,365 Receivable from HON Members Company Ownership Plan (5,041) (5,041) ------- ------- Total Shareholders' Equity 264,895 252,397 Total Liabilities and Shareholders' Equity $507,487 $513,514 ======= ======= See accompanying notes to condensed consolidated financial statements. Page 4 of 14
HON INDUSTRIES Inc. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended March 29, March 30, 1997 1996 (In thousands, except per share data) Net sales (Note E) $282,859 $233,477 Cost of products sold 194,194 160,006 Gross Profit 88,665 73,471 Selling and administrative expenses 60,453 49,846 Gain on sale of subsidiary (Note C) - 3,200 ------- ------- Operating Income 28,212 26,825 Interest income 411 741 Interest expense 1,553 860 ------- ------- Income Before Income Taxes 27,070 26,706 Income taxes 10,152 9,881 ------- ------- Net Income 16,918 16,825 ======= ======= Net income per common share (Note D) $.57 $.55 ======= ======= Average number of common shares outstanding 29,699,911 30,345,172 ========== ========== Cash dividends per common share $.14 $.12 ======= ======= See accompanying notes to condensed consolidated financial statements. Page 5 of 14
HON INDUSTRIES Inc. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended March 29, March 30, 1997 1996 (In thousands) Net Cash Flows From (To) Operating Activities: Net income $ 16,918 $ 16,825 Noncash items included in net income: Depreciation and amortization 7,439 5,586 Gain on sale of subsidiary, net of tax (Note C) - (2,016) Other postretirement and postemployment benefits 799 618 Deferred income taxes 617 - Other - net 256 - Net increase (decrease) in noncash operating assets and liabilities (6,605) (2,006) Increase (decrease) in other liabilities (3,307) (1,520) ------- ------- Net cash flows from operating activities 16,117 17,487 ------- ------- Net Cash Flows From (To) Investing Activities: Capital expenditures - net (18,412) (8,190) Acquisition spending, net of cash acquired (262) - Net proceeds from sale of subsidiary (Note C) - 7,336 Short-term investments - net (802) 1,498 Long-term investments 800 (64) Other - net (455) - ------- ------- Net cash flows (to) investing activities (19,131) 580 ------- ------- Net Cash Flows (To) Financing Activities: Purchase of HON INDUSTRIES common stock (1,171) (3,416) Payments of note and long-term debt (9,859) (1,348) Proceeds from sales of HON INDUSTRIES common stock to members and stock-based compensation 908 576 Dividends paid (4,158) (3,642) ------- ------- Net cash flows (to) financing activities (14,280) (7,830) ------- ------- Net increase (decrease) in cash and cash equivalents (17,294) 10,237 Cash and cash equivalents at beginning of period 31,196 32,231 ------- ------- Cash and cash equivalents at end of period $ 13,902 $ 42,468 ======= ======= See accompanying notes to condensed consolidated financial statements. Page 6 of 14
HON INDUSTRIES Inc. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) March 29, 1997 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 29, 1997, are not necessarily indicative of the results that may be expected for the year ending January 3, 1998. 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 28, 1996. Note B. Inventories Inventories of the Company and its subsidiaries are summarized as follows: March 29, 1997 ($000) (Unaudited) December 28, 1996 Finished products $13,926 $15,793 Materials and work in process 26,290 27,757 ------ ------ $40,216 $43,550 ====== ====== Note C. Gain on Sale of Subsidiary During the first quarter of 1996, the Company sold all outstanding shares of its subsidiary, Ring King Visibles, Inc., for a sale price of $8,000,000 in cash and the forgiveness of intercompany receivables of approximately $2,000,000. The sale resulted in an approximate $3,200,000 pretax gain. Note D. Net Income per Common Share In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (FAS) No. 128, "Earnings per Share." The Statement requires the current primary earnings per share calculation to be replaced with a new basic earnings per share calculation. This Statement will become effective for public companies for financial statements issued after December 15, 1997, and early adoption is not permitted. Management estimates the impact of adopting FAS 128 will have no effect on the calculation of the Company's reported year-end 1997 earnings per share given its current capital structure of common stock and no potentially dilutive securities. Page 7 of 14
Note E. Business Combinations Assuming the acquisition of Heat-N-Glo Fireplace Products, Inc., had occurred on December 31, 1995, the beginning of the Company's 1996 fiscal year, instead of on October 2, 1996, when it actually occurred, the Company's pro forma consolidated net sales for the first quarter ended March 30, 1996, would have been approximately $253.1 million instead of the reported $233.5 million. Pro forma consolidated net income and net income per share for the first quarter of 1996 would not have been materially different from the reported amounts. Page 8 of 14
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations A summary of the period-to-period changes in the principal items included in the Condensed Consolidated Statements of Income is shown below: Comparison of Increases (Decreases) Three Months Ended Three Months Ended Dollars in Thousands March 29, 1997 & March 29, 1997 & March 30, 1996 December 28, 1996 Net sales $49,382 21.2% $(7,286) (2.5)% Cost of products sold 34,187 21.4 1,333 0.7 Selling & Administrative expenses 10,608 21.3 (2,235) (3.6) Gain on sale of subsidiary (3,200) (100.0) - - Interest income (329) (44.4) (530) (56.3) Interest expense 693 80.6 (278) (15.2) Income taxes 271 2.7 (2,488) (19.7) Net income 93 0.6 (4,148) (19.7) The Company reported record first quarter sales and earnings for its first fiscal quarter of 1997. This is the fifth consecutive quarter of record results from the operations. For the quarter ended March 29, 1997, consolidated net sales were $282.9 million compared to $233.5 million in 1996, an increase of 21.2%. Net income for the first quarter of 1997 was $16.9 million, a 14.2% increase over net income generated in the same quarter in 1996, excluding a nonrecurring gain. Net income per share for the quarter increased to $0.57 per share, an increase of 18.8% when measured against $0.48 earned from ongoing operations last year. The reported results for the first quarter of 1996 included a $2 million after-tax, nonrecurring gain on the sale of a subsidiary, Ring King Visibles, Inc., which contributed an additional $0.07 per share to 1996 first quarter net income which, accordingly, totaled $16.8 million, or $0.55 per share. As a result of the October 1996 acquisition of Heat-N-Glo Fireplace Products, Inc., the Company now has two reportable core business segments: office furniture and hearth products. Hearth products include a broad line of manufactured gas- and wood-burning fireplaces and stoves, fireplace inserts, and chimney systems principally for the home. For the first quarter of 1997, office furniture comprised 85% of consolidated net sales and hearth products 15%. Net sales for office furniture were up 11% for the quarter compared to the same quarter a year ago, which basically mirrors the reported growth of the overall office furniture industry. Hearth products sales increased 155%, due primarily to contributions from the Heat-N- Glo division of Hearth Technologies Inc. Management is pleased with the Page 9 of 14
integration progress being shown by Hearth Technologies which is the new subsidiary formed by the merger of Heatilator and Heat-N-Glo. This new subsidiary has a stream of new products under development, and its overall growth prospects continue to look promising. Office furniture contributed 93% of consolidated operating profit before unallocated corporate expenses and hearth products 7% as defined by the prevailing Financial Accounting Standards Board Statements for segment reporting. The first quarter of the fiscal year is historically the weakest sales and earnings quarter for the hearth products segment. The consolidated gross profit margin for the first quarter of 1997 was 31.3% compared to 31.5% for the same period in 1996. Consolidated selling and administrative expenses for the first quarter of 1996 were 21.4% of net sales compared to 21.3% in the comparable quarter of 1996. Selling and administrative expenses for 1997 include goodwill amortization associated with the Company's acquisition of Heat-N-Glo, which amounted to a $0.02 per share charge to earnings in the first quarter. Interest expense increased from $.9 million in the first quarter of 1996 to $1.6 million for the first quarter of 1997 as the result of new debt incurred to finance the acquisition of Heat-N-Glo. The Company increased its estimated annual effective tax rate to 37.5% for the 1997 quarter from 37.0% a year earlier to reflect higher estimated state income taxes. Liquidity and Capital Resources As of March 29, 1997, cash and short-term investments decreased to $15.4 million compared to a $32.7 million balance at year-end 1996. The decrease is due to marketing program payments, note payable payment, and capital expenditures. Net capital expenditures for the first quarter of 1997 quarter were $18.4 million and primarily represent investment in new, more-efficient machinery and equipment. These investments were funded by cash reserves and cash from operations. A $0.14 per share quarterly dividend on common stock was paid on February 28, 1997, to shareholders of record on February 24, 1997. This was the 168th consecutive quarterly dividend paid by the Company. In the first quarter, the Company repurchased 32,573 shares of its common stock at a cost of approximately $1.2 million or an average price of $35.94 per share. As of March 29, 1997, approximately $7.6 million of the Board's current repurchase authorization remained unspent. 10 of 14
Looking Ahead Management's goal is to achieve double-digit growth in sales and earnings for 1997. New products in existing and new category offerings through multiple channels of distribution will continue to be a major contributor to results. The Company will also continue to focus on cost control by aggressive purchasing policies, efficient use of resources, and reducing distribution costs. Except for the historical information contained herein, the matters discussed in this Form 10-Q are forward-looking statements. Such forward-looking statements involve risks and uncertainties which could cause actual results or outcomes to differ materially from those discussed in the forward-looking statements. The following are some of the important factors that could cause actual results or outcomes to differ materially from those discussed in the forward-looking statements: competitive conditions, pricing trends in the office furniture and hearth products markets, acceptance of the Company's new product introductions, the overall growth rate of the office furniture and hearth products industries, the achievement of cost reductions and productivity improvements in the Company's operations, impact of future acquisitions, as well as the risks, uncertainties, and other factors described from time to time in the Company's SEC filings and reports. Page 11 of 14
PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. See Exhibit Index. (b) Reports on Form 8-K. No reports on Form 8-K have been filed during the quarter for which this report is filed. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HON INDUSTRIES Inc. Dated: May 9, 1997 By /s/ David C. Stuebe David C. Stuebe Vice President and Chief Financial Officer By /s/ Melvin L. McMains Melvin L. McMains Controller Page 12 of 14
PART II. EXHIBITS EXHIBIT INDEX Page (27) Financial Data Schedule 14 Page 13 of 14