Annual Report (Form 10-K), fiscal year 1994

ITEM 1. BUSINESS. ------------------
GENERAL.
HON INDUSTRIES Inc. is principally a manufacturer and marketer of office furniture. It also manufactures and markets a limited line of office workspace productivity accessories. In addition, it is a major manufacturer and marketer of metal prefabricated fireplaces and related products for the home buildings products industry.
The Company is organized into a corporate headquarters and eight operating units with offices, manufacturing plants, distribution centers, and sales showrooms nationwide. See Item 2.



ITEM 2. PROPERTIES. --------------------
The Company maintains its corporate headquarters in Muscatine, Iowa, and conducts its operations in 21 cities throughout the United States which house manufacturing and distribution operations and offices. These total an aggregate 5,269,718 square feet. Of this total, 595,710 square feet are leased, including 336,297 square feet under capital leases. For further information regarding the Company's lease obligations, refer to the "Leases" note included in the "Notes to Consolidated Financial Statements."
While the plants are of varying ages, the Company considers that 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 facilities (100,000 square feet in size or larger) are as follows:
The Company also owns a 224,764 square foot manufacturing facility located in Muscatine, Iowa, which it leases to another company; and it owns a 468,788 square foot office and manufacturing facility located in Corry, Pennsylvania, which is listed for sale.
Other manufacturing facilities are located in Atlanta, GA; Dallas and Houston, TX; Denver, CO; Kent, WA; Mt. Pleasant and Muscatine, IA; Salisbury, NC; San Jose and Van Nuys, CA. These facilities total an aggregate of 822,746 square feet. Of this total, 319,693 square feet are leased, including 60,280 square feet under a capital lease.
The Company also leases sales showroom space in office furniture market centers in several major metropolitan areas.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS. ---------------------------
The Company has been named along with various other "potentially responsible parties" as a party to an Imminent or Substantial Endangerment Order and Remedial Action Order dated April 28, 1994, by the California Department of Toxic Substances Control (DTSC) in connection with the former Firestone Tire and Rubber Company Facility in South Gate, California. The Company acquired part of the Facility in 1981. The Company is cooperating in the preparation of a Remedial Investigation/Feasibility Study Workplan which will be submitted to the DTSC in 1995.
The Company is a guarantor of certain leases for showroom space at the International Design Center (IDC) in Long Island City, New York. On June 26, 1992, the Company filed an action in the New York Supreme Court claiming wrongful eviction and breach of representations and warranties that the IDC would be maintained as a showroom facility. The IDC has counterclaimed for back rent and other damages. The parties are conducting pre-trial discovery.
For additional information on this item, refer to the "Contingencies" note included in the "Notes to Consolidated Financial Statements."
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. -------------------------------------------------------------
None.
PART I, TABLE I ---------------
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. ------------------------------------------------------------------------------
The Company's common stock trades on The Nasdaq Stock Market under the symbol: HONI. As of year-end 1994, the Company had 5,556 stockholders of record.
Common Stock Market Price and Price/Earnings Ratio and Quarterly Common Stock Market Prices and Dividends are presented in the "Investor Information" section which follows the "Notes to the Consolidated Financial Statements" material filed as part of this report. The market price quotations were published by the National Association of Securities Dealers, Inc. The quotations represent prices between dealers; do not include retail markup, markdown, or commissions; and do not necessarily represent actual transactions.
The Company expects to continue its policy of paying regular cash dividends on the first business day of March, June, September, and December. Historically, the dividend payout percentage has ranged from approximately 25% to 33% of the previous year's earnings. Future dividends are dependent on future earnings, capital requirements, and the Company's financial condition. In addition, the payment of dividends is subject to the restrictions described in the "Long-Term Debt and Other Liabilities" note included in the "Notes to Consolidated Financial Statements."
APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
Approximate Number of Equity Title of Class Security Holders of Record as of December 31, 1994 -------------- ---------------------------------------------------
Common Stock, $1.00 Par Value 5,556
Preferred Stock, $1.00 Par Value -0-
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HON INDUSTRIES Inc. and Subsidiaries
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA -- ELEVEN-YEAR SUMMARY
HON INDUSTRIES Inc. and Subsidiaries
Item 7.

Item 7. Management's Discussion and Analysis
FINANCIAL OVERVIEW
The 1994 U.S. business economy stimulated a year of solid growth for HON INDUSTRIES and its operating companies. It represents the second consecutive year of record performance by the Company.
For 1994, net sales, operating income, net income, and net income per share were each the "best-ever" in the Company's history. This was the case for 1993 results as well.
The Company leveraged its increased sales by either reducing or holding the line on costs and expenses which added to bottom line performance.
These represent the Company's key financial goals. Actual performance may exceed the goals in some years and fall short in others, but over the longer-term, management is committed to achieving or exceeding these goals on the average.
Readers are encouraged to carefully review the Company's consolidated financial statements and related notes found elsewhere in the report for more comprehensive explanations of many of the issues discussed in this section.
RESULTS OF OPERATIONS
Industry sources estimate total sales for the 1994 U.S. office furniture industry to be in the range of $8.7 billion. Industry shipments are reported to be up 7.7% for the year. These results, however, were significantly influenced by a few large office furniture manufacturers that compete in the higher-end contract segment of the market. This segment rebounded in 1994 after several years of pent-up demand. The Company primarily participates in this industry segment through its operating company, The Gunlocke Company.
The Company's 1994 sales growth of 8.4% (9.9% year-over-year for continuing operations) exceeds the overall industry growth rate indicating market share gains. Management estimates approximately 5% of the sales growth resulted from unit growth and 3% from pricing increases. Heatilator Inc., the Company's gas and wood-burning prefabricated metal fireplace and stove company, also turned in a record performance year. While there is no reliable industry data to reference, management believes Heatilator Inc. has regained its industry leadership position which it had lost prior to being acquired by the Company in 1981.
The Company's 1994 financial results were driven principally by three business factors:
1) Increases in market share in core markets;
2) Productivity improvements achieved through the Company's rapid continuous improvement program; and
3) Stringent cost containment and reduction actions.
INCREASES IN MARKET SHARE
A key business strategy has been and continues to be profitable sales growth, especially in core office furniture and prefabricated fireplace markets. Office furniture sales growth is being led by the growth of the retail superstores. This channel represents a key growth market for the Company's products. Accordingly, new products and branding strategies are being targeted to serve this channel better. The Company is simultaneously maintaining its high standards of support and service to its long-standing traditional channels of distribution which include dealers, wholesalers, and governmental accounts.
Product development is a major strategic focus for the Company. Investments for new products, product line extensions, and improvements to existing products continue to increase. Consolidated expenses for product development for fiscal years 1994, 1993, and 1992 increased 31.4%, 31.0%, and 74.3%, respectively. Approximately 30% of the Company's 1994 net sales were from products introduced in the past three years. The product development emphasis for office furniture has been with seating, systems, desks, and lateral file products. For the fireplace business, the emphasis has been on applying new gas technologies to both fireplace and stove products.
The demand for the Company's office furniture products is most influenced by the state of the general economy and the rate of growth of small- and medium-sized businesses. Management sees no clear correlation between demand for office furniture products in the U.S., as distinguished from home furnishings, and the rise and fall of the prime rate charged by leading banks. This seems to be a major point of difference between the two industries.
Increased market share for prefabricated metal fireplaces and related products has been gained principally through the introduction of innovative new gas fireplace and stove products. These products have helped position Heatilator at the top of its industry. Demand for Heatilator's fireplace products is more closely tied to the growth rate of residential construction and remodeling that, in turn, are somewhat dependent on home mortgage interest rates.
As noted previously, fiscal year 1993 also represented record operating results even though it included a $4.0 million pretax charge for discontinuing the operations of one of the Company's office furniture operating companies. The introduction of new products and product line extensions, responsive sales and marketing programs, reliable customer service and support, and reducing customer lead times stimulated 1993 sales growth by 10.4%. This performance was achieved against a backdrop of 5% reported sales growth for the broader U.S. office furniture industry.
Fiscal year 1992 also represented a solid year of growth for the Company. Financial performance for the year reflected a gradually improving customer demand for the Company's products. Industry sales growth for 1992 was 6% while the Company's sales growth exceeded 16%.
PRODUCTIVITY IMPROVEMENTS
Management has successfully leveraged its increased sales to achieve bottom line growth. Cost of products sold and operating expenses, as a percent of net sales, have been reduced or stabilized by employing a diligent companywide rapid continuous improvement program (RCI). The program focuses on all aspects of the business ranging from product design, manufacturing processes, distribution activities, and administrative support processes. The program objective is to eliminate nonvalue-added activities and to simplify and streamline processes to make them more responsive and less costly. RCI results to date represent a wide range of successes.
. Products have been redesigned to enhance their quality and make them easier to manufacture.
- 15 -
HON INDUSTRIES Inc. and Subsidiaries
Item 7. Management's Discussion and Analysis
. Production setup times have been reduced by 50% to 90%.
. Production processes are being reengineered to be more efficient, reduce cost, and improve product quality.
. Personnel are freed up to work full time on supporting RCI, which keeps the improvement momentum growing.
. Factory space is being freed up as work-in-process inventories are reduced, allowing for increased production capacity.
. Inventory turns are steadily improving as work-in-process inventories are eliminated from the processes.
. Customer lead time is continuing to improve and is setting a new industry standard.
. Administrative support processes are being challenged, streamlined, and simplified to be more responsive without adding personnel.
Management expects productivity gains from the ongoing RCI program to largely offset 1995 material and member cost increases. These gains, coupled with cost reduction program savings and material substitution efforts, should minimize product price increases to the customer and preserve profit margins.
STRINGENT COST CONTAINMENT AND REDUCTION
Selling and administrative costs are also a major cost containment and reduction target. These expenses, as a percent of net sales, have been reduced or held stable over the past three years. This is especially noteworthy considering the intense competitive sales environment during the period. RCI also plays an important role in managing these costs.
BUSINESS CONSOLIDATION
During 1994, the Company consolidated the operations of its XLM Company with The HON Company. Using The HON Company's broader-based distribution channels for XLM products has increased market share and profitability in the rapidly growing retail and commercial dealer office furniture channels.
Chandler Attwood Limited, the Company's "experimental laboratory" with local distributed manufacturing, has been a financial disappointment. The business was launched in 1993. To improve financial performance, the Company will close four of its sites, reposition its products and service at the remaining two sites, and concentrate resources on new product development. The knowledge gained from this experiment has been successfully implemented in other operating companies.
In late 1993, HON INDUSTRIES closed its CorryHiebert Corporation office furniture plant located in Corry, Pennsylvania. The closure decision resulted in a charge of $4.0 million to 1993 earnings (after-tax effect of $2.5 million or $.08 per share). As of December 31, 1994, $0.9 million of the reserve remained unspent.
In 1993, the Company acquired the DOVRE brand of cast iron fireplaces and woodstoves for North and South America from Dovre Industries, NV, a Belgian company, for approximately $1.2 million. These products are manufactured and marketed through Heatilator. Heatilator reengineered the product and added gas burning products to the line. This product is quite popular with domestic consumers because of its high-gloss enamel finish that gives it a unique appearance and its advanced flame technology.
TAXES
Management actively takes steps to manage its tax burden. The Company's effective tax rate was 37.0% for fiscal years 1994 and 1993, and 37.5% for 1992.
COMPARATIVE FINANCIAL PERFORMANCE
The Company's financial performance compares favorably to all U.S. industry. The Company was first recognized in Fortune magazine's list of the 500 Largest Industrial Corporations based on its 1985 results. Companies are included on the basis of annual net sales, but management suggests it is bottom line performance that really distinguishes HON INDUSTRIES Inc. For example, the Company ranked #414 in sales and #246 in profits based on its 1993 results. Below is a table showing the annual ranking of the Company for the past three years for various performance measures reported by Fortune:
These rankings demonstrate the relative financial performance of the Company and its ability to sustain profitability and return to investors while increasing sales.
- 16 -
During 1994, cash from operations of $64.6 million provided most of the funds necessary to meet working capital needs; acquire property, plant, and equipment; repay long-term debt; pay dividends; and repurchase Company stock.
Inventory turnover demonstrates the Company's success in reducing its investment in inventories. Had the Company experienced the same inventory turns in 1994 as it had in 1991 (11.67), inventories would have been $8.2 million higher in 1994 than they actually were.
Net capital expenditures (net of disposals) for all three years were principally for the acquisition of more efficient and productive machinery and equipment. Management anticipates 1995 fiscal year expenditures will be similar to the 1994 level. The largest capital expenditures planned for 1995 are for additional facility expansion for The HON Company at its Muscatine, Iowa, and Richmond, Virginia, operations.
Future capital required to finance operations, improvements, and growth is expected to be met from cash generated by operations and additional long-term debt as circumstances dictate.
Dividends - ---------
The Company's dividend payout was $0.44, $0.40, and $0.37 per common share for years 1994, 1993, and 1992, respectively.
- ------------------------------------------------------- INCREASED QUARTERLY DIVIDENDS
Historically, the Company's dividend payout percentage has ranged from approximately 25% to 33% of prior year earnings. The Company expects to continue its policy of paying quarterly cash dividends. Through the March 1, 1995, dividend payment, the Company has paid 160 consecutive quarterly common stock dividends (40 years).
COMMON STOCK TRANSACTIONS
The HON INDUSTRIES Inc. 1994 Members' Stock Purchase Plan was approved at the May 1994 Annual Shareholders Meeting. Under the new plan, 500,000 shares of common stock were made available for issuance to members. The introduction of the new plan resulted in a 56% increase in member participation which contributed to the 19% increase in the number of Company shareholders during 1994.
The Board of Directors first authorized the Company to repurchase its common stock in 1985 and has periodically renewed the authorization. At the February 1994 Board of Directors meeting, the Board authorized the Company to repurchase up to $20.0 million of its own shares. Over a ten-year time period, 14,806,397 shares of HON INDUSTRIES common stock have been purchased at a cost of $197.1 million or an average cost of $13.31 per share.
COMMON STOCK REPURCHASED UNDER BOARD AUTHORIZATIONS
By virtue of these repurchases, there has been a significant reduction in the number of shares outstanding, and earnings per share are higher. The Company will continue to acquire its stock in the open market and from members whenever management, acting under Board authority, believes such action is in the best interest of the shareholders and Company.
During 1992, the Company established the HON Members Company Ownership Plan, an employee stock ownership plan (ESOP). A trust was established to administer the plan as a long-term retirement benefit for members.
HON INDUSTRIES Inc. and Subsidiaries
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
================================================================================
OTHER MATTERS
David C. Stuebe was named Vice President and Chief Financial Officer of the Company, effective October 4, 1994. He replaced John W. Axel, Senior Vice President, Finance and Development, who had resigned in January 1994. Mr. Stuebe is a Certified Public Accountant and has a diverse financial and operations background in various manufacturing businesses.
The Company is in EDGAR phase-in Group CF-4, which required the Company to begin submitting SEC filings electronically as of December 6, 1993. All subsequent SEC filings, except the 1993 Annual Report on Form 10-K which was exempt, have been filed through EDGAR.
Although the U.S. rate of inflation is not currently an issue, the possibility of it becoming a factor in the future has not been eliminated. The Company adjusts the selling prices of its products to maintain profit margins whenever possible. In addition, it employs a variety of other inflation defenses. For example, the LIFO method is used for valuing inventories; investments are routinely made to upgrade plants and equipment to increase worker productivity; RCI projects are continually being pursued to improve productivity; and ongoing cost control disciplines are routinely employed. In 1995, some select raw material prices are projected to increase more rapidly than the rate of general inflation, but this situation is not expected to have a significant impact on the level of profitability.
The Company is a party to a few matters arising in connection with laws and regulations pertaining to the protection of the environment. It has been named along with various other "potentially responsible parties" as a party to an Imminent or Substantial Endangerment Order and Remedial Action Order dated April 28, 1994, by the California Department of Toxic Substances Control (DTSC) in connection with the former Firestone Tire and Rubber Company facility in South Gate, California. Firestone owned and operated the facility from 1927 until 1981. The Company acquired part of the facility in 1981. The Company is cooperating with Firestone in the preparation of a Remedial Investigation/Feasibility Study Workplan which will be submitted to the DTSC in 1995. Since the facility investigation has not begun, the Company is not able to reasonably estimate the cost of site investigation, the cost of potential remedial actions, or its final allocation share of those costs, if any. The Company periodically reviews these costs and will disclose each of the costs, if material, when they can be reasonably estimated. Nevertheless, management does not believe that the Company's potential liability for any of the environmental matters, including the former Firestone Tire and Rubber Company facility, will have a material effect on the Company's liquidity, financial position, or results of operations taken as a whole. Please refer to the "Contingencies" note in the "Notes to Consolidated Financial Statements" for additional discussion of the Company's environmental risks.
Management has launched a program to improve the Company's investor relations effort. The ultimate improvements will take many forms. Early evidence of this effort is this Annual Report to Shareholders. There has been a focus on ease of readability and on report content believed to be most relevant to shareholders and potential new investors.
ITEM 8.


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 is presented in the "Investor Information" section which follows the "Notes to the Consolidated Financial Statements" material filed as part of this report.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND ------------------------------------------------------------------------ FINANCIAL DISCLOSURE. - ---------------------
None.
PART III
ITEM 10.



ITEM 10. DIRECTORS 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 9, 1995, is incorporated herein by reference.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION. ---------------------------------
The information under the caption "Executive Compensation" of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 9, 1995, is incorporated herein by reference.
ITEM 12.

ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND --------------------------------------------------------------- MANAGEMENT. - -----------
The information under the caption "Beneficial Owners of Common Stock" of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 9, 1995, is incorporated herein by reference.
The information under the caption "Compliance with Section 16(a) of the Securities Exchange Act of 1934" of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 9, 1995, is incorporated herein by reference.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. ---------------------------------------------------------
None.
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PART IV
ITEM 14.

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 1994 Annual Report to Shareholders are filed as a part of this report pursuant to Item 8:
Page ----
Report of Independent Auditors............................. 27
Consolidated Statements of Income for the Years Ended December 31, 1994; January 1, 1994; and January 2, 1993.... 28
Consolidated Balance Sheets -- December 31, 1994; January 1, 1994; and January 2, 1993....................... 29
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1994; January 1, 1994; and January 2, 1993............................................ 30
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994; January 1, 1994; and January 2, 1993.... 31
Notes to Consolidated Financial Statements................. 32
Investor Information (including Summary of Unaudited Quarterly Results of Operations)........................... 36
(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 31, 1994; January 1, 1994; and January 2, 1993........................ 38
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 were no reports on Form 8-K filed during the last quarter of the period covered by this report.
(c) Exhibits. ---------
The following exhibits are filed pursuant to Item 601 of Regulation S-K:
Page(s) in Exhibit Form 10-K ------- ----------
(10) Change in Control Agreement of the Registrant...... 40
(22) Subsidiaries of the Registrant..................... 52
(24) Consent of Independent Auditors.................... 53
(27) Financial Data Schedule............................ 54
(28A) Executive Bonus Plan of the Registrant............. 55
(28B) Executive Long-Term Incentive Compensation Plan of the Registrant.................................. 60
(d) Financial Statement Schedules. ------------------------------
See Item 14(a)(2).
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: February 13, 1995 By /s/ Stanley M. Howe ----------------- ------------------------------ Stanley M. Howe Chairman of the Board
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 Stanley M. Howe 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/ Stanley M. Howe Chairman of the Board and 2/13/95 - ------------------------- Director Stanley M. Howe
/s/ Jack D. Michaels President and CEO, 2/13/95 - ------------------------- Principal Executive Officer, Jack D. Michaels and Director
/s/ Melvin L. McMains Controller and 2/13/95 - ------------------------- Principal Accounting Officer Melvin L. McMains
/s/ David C. Stuebe Vice President and 2/13/95 - ------------------------- Chief Financial Officer David C. Stuebe
Signature Title Date --------- ----- ----
/s/ Robert W. Cox Director 2/13/95 - ------------------------- Robert W. Cox
/s/ W. James Farrell Director 2/13/95 - ------------------------- W. James Farrell
/s/ Lee Liu Director 2/13/95 - ------------------------- Lee Liu
/s/ Celeste C. Michalski Director 2/13/95 - ------------------------- Celeste C. Michalski
/s/ Michael S. Plunkett Director 2/13/95 - ------------------------- Michael S. Plunkett
/s/ Herman J. Schmidt Director 2/13/95 - ------------------------- Herman J. Schmidt
/s/ Richard H. Stanley Director 2/13/95 - ------------------------- Richard H. Stanley
/s/ Jan K. Ver Hagen Director 2/13/95 - ------------------------- Jan K. Ver Hagen
/s/ Lorne R. Waxlax Director 2/13/95 - ------------------------- Lorne R. Waxlax
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REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders HON INDUSTRIES Inc.
We have audited the accompanying balance sheets of HON INDUSTRIES Inc. and subsidiaries as of December 31, 1994, January 1, 1994, and January 2, 1993, and the related consolidated statements of income, shareholders' equity, and cash flows for the years then ended. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall 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 consolidated financial position of HON INDUSTRIES Inc. and subsidiaries as of December 31, 1994, January 1, 1994, and January 2, 1993, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in the Notes to Consolidated Financial Statements, the Company changed its method of accounting for postemployment benefits in 1994 and its method of accounting for income taxes and postretirement benefits other than pensions in 1993.
Ernst & Young LLP
February 1, 1995
HON INDUSTRIES Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
HON INDUSTRIES Inc. and Subsidiaries
HON INDUSTRIES Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
The accompanying notes are an integral part of the consolidated financial statements.
HON INDUSTRIES Inc. and Subsidiaries
HON INDUSTRIES Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PRINCIPAL BUSINESS AND SIGNIFICANT CUSTOMER INFORMATION
The Company operates in one principal business segment, the manufacture of office furniture and accessories, including file cabinets, desks, chairs, credenzas, and panel systems. The Company also manufactures factory-built fireplaces, fireplace inserts, and stoves; however, this business is not of sufficient size to be a reportable segment.
One customer accounted for approximately 10%, 13%, and 12% of consolidated net sales in 1994, 1993, and 1992, respectively.
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 1994 ended on December 31, 1994; 1993 ended on January 1, 1994; and 1992 ended on January 2, 1993.
Cash and Cash Equivalents - ------------------------- The Company considers all investments with a maturity of three months or less when purchased to be cash equivalents.
Short-Term Investments - ---------------------- Short-term investments are stated at cost, which approximates market value.
Receivables - ----------- Accounts receivable are presented net of an allowance for doubtful accounts of $1,654,000; $1,917,000; and $1,964,000 for 1994, 1993, and 1992, 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, 4-12 years.
CHANGES IN BUSINESS
On October 8, 1993, the Company announced the closing of its CorryHiebert Corporation furniture plant located in Corry, Pennsylvania, which closed on December 17, 1993. The closure resulted in a pretax charge of $3,980,000 (after- tax effect of $2,507,000, or $.08 per share) recorded in the fiscal quarter ended October 2, 1993.
The Company incurred capital lease obligations of $8,561,000 in 1992 in connection with lease agreements to acquire information technology equipment.
Current replacement cost exceeded the amount stated for inventories valued by the LIFO method by approximately $12,983,000; $11,705,000; and $12,666,000 as of year-end 1994, 1993, and 1992, respectively.
LONG-TERM DEBT AND OTHER LIABILITIES
Aggregate maturities of long-term debt and other liabilities are as follows (in thousands):
1995 $ 5,468 1996 12,150 1997 1,391 1998 1,541 1999 976 Thereafter 30,022
Certain of the above borrowing arrangements include covenants which require the maintenance of a minimum level of working capital, place restrictions on the payment of cash dividends, and limit the assumption of additional debt and lease obligations. Approximately $146,489,000 of retained earnings were unrestricted at the end of 1994.
The fair value of the Company's outstanding long-term debt obligations at year- end 1994 approximates the recorded aggregate amount.
Property, plant and equipment, with net carrying values of approximately $28,406,000 at the end of 1994, are mortgaged.
INCOME TAXES
Effective January 3, 1993, the Company changed its method of accounting for income taxes as required by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS No. 109). Financial statements for years prior to 1993 were not restated. The cumulative effect of adopting FAS No. 109 at January 3, 1993, was to increase net income by $489,000, or $.02 a share.
Significant components of the provision for income taxes are as follows:
The components of the provision for deferred income taxes for the year ended January 2, 1993, are as follows:
A reconciliation of the statutory federal income tax rate to the Company's effective income tax rate is as follows:
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:
HON INDUSTRIES Inc. and Subsidiaries
Notes to Consolidated Financial Statements
SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE
The Company purchased 1,078,835; 751,399; and 819,687 shares of its common stock during 1994, 1993, and 1992, respectively.
Cash dividends declared and paid per share for each year are:
1994 1993 1992 ----------------------- Common shares................... $.44 $.40 $.37
Net income per common share is based on the weighted average number of shares of common stock outstanding during each year including allocated and unallocated ESOP shares.
Shares of common stock were issued in 1994, 1993, and 1992 pursuant to a members' stock purchase plan as follows:
1994 1993 1992 ------------------------ Shares issued................ 77,302 49,816 54,207 Average price per share...... $23.25 $22.96 $17.42
During 1994, shareholders approved the 1994 Members' Stock Purchase Plan. Under the new plan, 500,000 shares of common stock were registered for issuance to participating members. Beginning on July 3, 1994, rights to purchase stock are granted on a quarterly basis to all members who have one year of employment eligibility and work a minimum of 20 hours per week. 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 2,000 shares, with a maximum fair market value of $25,000 in any calendar year. During 1994, 77,302 shares of common stock were issued under the plan at an average price of $23.25. An additional 422,698 shares were available for issuance under the plan at December 31, 1994.
The Company has granted restricted stock awards aggregating 75,500 shares of common stock to officers. Vesting of such shares, which is generally dependent on continued employment, occurs in 25% increments annually. The officers are entitled to dividends and have voting rights on all shares awarded. Unearned compensation expense, representing the fair market value of the shares at the date of grant, is charged to income over the vesting period. Approximately $37,000; $223,000; and $356,000 were charged to income as a result of the awards for the years 1994, 1993, and 1992, respectively. At year-end 1994, 1,875 of the awarded shares were not vested.
Pursuant to the Company's Shareholder Rights Plan, each share of common stock carries with it one Right. Each Right entitles a shareholder to buy one two- hundredth of a share of a new series of preferred stock at an exercise price of $75.00. Each one two-hundredth of a share of the new preferred stock has terms designed to make it the economic equivalent of one share of common stock. Rights will be exercisable only if a person or group acquires 20% or more of the Company's common stock or announces a tender offer, the consummation of which would result in ownership by a person or group of 20% or more of the common stock. If the Company is acquired in a merger or other business combination transaction, each Right will entitle its holder to purchase, at the then current exercise price of the Right, a number of the acquiring company's common shares having a market value at that time of twice the exercise price of the Right.
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 salary and the average of the prior two years' bonuses.
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 $10,849,000; $10,092,000; and $9,472,000 in 1994, 1993, and 1992, respectively.
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. Net pension costs relating to these plans were $228,000; $172,000; and $151,000 for 1994, 1993, and 1992, respectively. The actuarial present value of benefit obligations, less related plan assets at fair value, is not significant.
In 1992, the Company established a trust to administer a newly adopted 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. Selected financial data pertaining to the ESOP is as follows:
In 1994, the Company adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits," which required accrual accounting for nonaccumulating postemployment benefits. The cumulative effect of adoption was to reduce net income by $237,000, after tax, or $.01 a share.
POSTRETIREMENT HEALTH CARE
The Company adopted Statement of Financial Accounting Standards 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. The cost of providing these benefits was previously recognized in the period in which the benefits were paid.
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:
The discount rates at December 31, 1994, and January 1, 1994, were 8.0% and 7.5%, respectively. The 1995 trend rates begin at 8.6% for the post-65 medical coverage and 12.2% for the prescription drug coverage. These rates decrease until their respective caps are reached in the year 2002 for post-65 medical coverage and 2001 for prescription drug coverage. Thereafter, the medical trend rates applicable to the Company subsidy are assumed to be zero percent. Since the pre-65 benefit is currently capped, medical trend rates are assumed to be zero percent for all years. If the medical trend rates were increased by 1.0% for each year, the APBO as of December 31, 1994, would increase by $98,000, and the sum of the service and interest cost components of the net periodic postretirement benefit cost for fiscal year 1994 would increase by $8,000. The 1992 cost for these postretirement benefits on a pay-as-you-go basis was $1,023,000.
LEASES
The Company leases certain warehouse and plant facilities and equipment. Commitments for minimum rentals under noncancellable leases at the end of 1994 are as follows:
Property, plant, and equipment at year-end include the following amounts for capitalized leases:
Rent expense for the years 1994, 1993, and 1992 amounted to approximately $6,572,000; $4,854,000; and $5,031,000, respectively. Contingent rent expense under both operating and capitalized leases (generally based on mileage of transportation equipment) amounted to $525,000; $490,000; and $674,000 for the years 1994, 1993, and 1992, respectively.
CONTINGENCIES
In connection with laws and regulations pertaining to the protection of the environment, the Company is a party to a few remediation investigations and clean-ups and, along with other companies, has been named a "potentially responsible party" for certain waste disposal sites. Because each of these matters is subject to various uncertainties (such as the extent of contamination, the type of remediation, or other action that may be required), the Company cannot predict the actual costs it will ultimately incur with respect to these matters. However, based on the existence of other "potentially responsible parties" to share in such costs, the volume and type of waste the Company is believed to have contributed to each site and the period of time over which environmental costs may be paid, the Company does not believe that potential liability at these sites will have a material effect on the Company's liquidity, financial position, or results of operations taken as a whole.
HON INDUSTRIES Inc. and Subsidiaries
Investor Information
CORPORATE HEADQUARTERS
HON INDUSTRIES Inc. P O Box 1109 414 East Third Street Muscatine IA 52761-7109 Telephone: 319-264-7400
INDEPENDENT AUDITORS
Ernst & Young LLP Sears Tower 233 South Wacker Drive Chicago IL 60606-6301
FINANCIAL INFORMATION AND INQUIRIES
Shareholders and other interested investors are welcome to call or write with questions or requests for additional information.
Inquiries should be directed to:
David C. Stuebe, Vice President and CFO HON INDUSTRIES Inc. P O Box 1109 Muscatine IA 52761-7109 Telephone: 319-264-7400
COMMON STOCK
HON INDUSTRIES common stock trades on The Nasdaq Stock market under the symbol: HONI. Stock price quotations can be found in major daily newspapers and The Wall Street Journal.
TRANSFER AGENT
The Company serves as its own transfer agent. Share- holders may report a change of address or make inquiries by writing or calling:
Stock Transfer Department HON INDUSTRIES Inc. P O Box 1109 Muscatine IA 52761-7109 Telephone: 319-264-7223
COMMON STOCK DIVIDENDS
The Company has paid a cash dividend every quarter since April 15, 1955 -- for 40 years. The 1994 annual dividend was $0.44 per share, up 10% from the 1993 dividend and marked the sixth consecutive year of increases. The quarterly dividend increased another 9.1% from $0.11 to $0.12 per share for the March 1, 1995, payment. Dividends are expected to be paid on March 1, June 1, September 1, and December 1 in fiscal 1995.
QUARTERLY CALENDAR
The Company operates on a fiscal year ending on the Saturday nearest December 31. Quarterly results are typically announced within 20 days after the end of each quarter, and audited results are typically announced within 40 days after year-end.
ANNUAL MEETING
The Company's annual shareholders' meeting will be held at 10:30 a.m. on Tuesday, May 9, 1995, at the Holiday Inn, Highways 61 & 38 North, Muscatine, Iowa. For overnight lodging reservations, please call 319-264-5550.
Shareholders and other interested investors are encouraged to attend the meeting.
10-K REPORT
A copy of the Company's annual report filed with the Securities and Exchange Commission on Form 10-K is available, without charge, upon written request to David C. Stuebe, Vice President and CFO, at the address noted above.
*In 1993, includes a pretax charge of $3,980,000 (after-tax effect of $2,507,000, or $.08 per share) for discontinuing the operations of a subsidiary.
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SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
HON INDUSTRIES Inc. AND SUBSIDIARIES
December 31, 1994
Note A--Excess of accounts written off over recoveries.
ITEM 14(a)(3) - INDEX OF EXHIBITS. ----------------------------------
Page ---- Exhibits --------
(10) Change in Control Agreement of the Registrant......... 40
(22) Subsidiaries of the Registrant........................ 52
(24) Consent of Independent Auditors....................... 53
(27) Financial Data Schedule............................... 54
(28A) Executive Bonus Plan of the Registrant................ 55
(28B) Executive Long-Term Incentive Compensation Plan of the Registrant................................ 60