10-Q 1 r1q0210q3.htm UNITED STATES SECURITIES AND EXCHANGE COMMISSION

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

              SECURITIES EXCHANGE ACT OF 1934
   

For the transition period from ____________________ to ____________________
   

Commission File Number 0-2648
   

HON INDUSTRIES Inc.

(Exact name of Registrant as specified in its charter)
   

Iowa

42-0617510

          (State or other jurisdiction of

                    (I.R.S. Employer

            incorporation or organization)

               Identification Number)
   

P. O. Box 1109, 414 East Third Street, Muscatine, Iowa 52761-0071

(Address of principal executive offices)

                                   (Zip Code)
   

Registrant's telephone number, including area code: 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

  

Three Months Ended March 30, 2002, and March 31, 2001

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
   

 

PART I.     FINANCIAL INFORMATION

Item 1.     Financial Statements

HON INDUSTRIES Inc. and SUBSIDIARIES

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.

 

HON INDUSTRIES Inc. and SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

March 30,

December 29,

2002

2001

(Unaudited)

LIABILITIES AND SHAREHOLDERS' EQUITY

(In thousands)

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

$   935,309

$   961,891

See accompanying Notes to Condensed Consolidated Financial Statements.

 

HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

Three Months Ended

March 30,

March 31,

2002

2001

(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

Income taxes

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

See accompanying Notes to Condensed Consolidated Financial Statements.

 

HON INDUSTRIES Inc. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

Three Months Ended

March 30,

March 31,

2002

2001

(In thousands)

Net Cash Flows From (To) Operating Activities:

  Net income

$    15,895

$    18,263

  Noncash items included in net income:

    Depreciation and amortization

17,148

20,583

    Other postretirement and postemployment

      benefits

529

246

    Deferred income taxes

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

-

  Other - net

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

$    69,589

$    18,575

See accompanying Notes to Condensed Consolidated Financial Statements.

HON INDUSTRIES Inc. and SUBSIDIARIES

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

December 29,

($000)

(Unaudited)

2001

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 30, 2002

March 31, 2001
     

Reported net income

$15,895

$18,263

Add back: Goodwill amortization

  

1,577

Adjusted net income

$15,895

$19,840
     

Basic and diluted earnings per share:

    

  Reported net income

$0.27

$0.307

  Goodwill amortization

  

0.027

  Adjusted net income

$0.27

$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:

 

Three Months Ended

March 30,

March 31,

2002

2001

Net Sales:

   Office furniture

$  300,221

$  366,509

   Hearth products

98,918

95,488

$  399,139

$  461,997

Operating Profit:

   Office furniture

$    24,248

$    32,524

   Hearth products

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:

   Office furniture

$  512,194

$  590,319

   Hearth products

308,734

340,380

   General corporate

114,381

66,203

$  935,309

$  996,902

Depreciation & Amortization Expense:

   Office furniture

$    12,291

$    14,877

   Hearth products

3,309

5,126

   General corporate

1,548

580

$    17,148

$    20,583

Capital Expenditure, Net:

   Office furniture

$      4,152

$      9,716

   Hearth products

920

2,922

   General corporate

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)

Three Months Ended

    Three Months Ended

Dollars in Thousands

March 30, 2002 &

    March 30, 2002 &

March 31, 2001

    December 29, 2001

Net Sales

$(62,858)

(13.6)

%

$(27,754)

(6.5)

%

Cost of products sold

(52,313)

(16.8)

(18,815)

(6.8)

Selling & administrative expenses

(4,725)

(4.0)

2,911

2.6

Interest income

413

186.0

135

27.0

Interest expense

(1,707)

(58.4)

(209)

(14.7)

Income taxes

(1,332)

(13.0)

(4,142)

(31.7)

Net Income

(2,368)

(13.0)

(7,364)

(31.7)

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.

 

PART II.     OTHER INFORMATION

Item 6.     Exhibits and Reports on Form 8-K

    1. Exhibits. None
    2. Reports on Form 8-K. No reports on Form 8-K were filed during the
      quarter for which this report is filed.

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Dated: May 1, 2002                                                  HON INDUSTRIES Inc.

                                                                                By:    /s/ Jerald K. Dittmer
                                                                                        Jerald K. Dittmer
                                                                                        Vice President and CFO