2 0 0 0 A N N U A L R E P O R T We’ll be there. H O N I N D U S T R I E S Corporations invest almost $6.0 billion annually to expand and improve offices. HON INDUSTRIES Inc. 1 Small businesses create 60 percent of all new jobs. 2 HON INDUSTRIES Inc. More than 1,000,000 new homes install fireplaces each year. HON INDUSTRIES Inc. 5 Companies are starting up overnight, every day. Large companies are entering new markets, and small businesses are expanding at breakneck speeds. As the distinction between where we work and where we live blurs, making our homes into retreats has never been more important. Opportunity is everywhere we look; we’ll be there to seize it. 6 HON INDUSTRIES Inc. TA B L E O F C O N T E N T S 8 Financial Highlights 9 Letter to Shareholders 12 Editorial 18 At a Glance 20 Management’s Discussion and Analysis 24 Consolidated Financial Statements and Notes 38 Eleven-Year Summary 40 Auditors’ Report 41 Corporate Responsibility 42 Board of Directors 44 Officers 45 Investor Information Financial Highlights (Amounts in thousands, except for per share data) 2000 1999 Change Income Statement Data Net sales Gross profit Selling and administrative expenses Provision for closing facilities and reorganization expenses Operating income Net income Net income as a % of: Net sales Average shareholders’ equity Per common share: Net income Book value Cash dividends Balance Sheet Data Current assets Total assets Current liabilities Current ratio Long-term debt and capital lease obligations Debt/capitalization ratio Shareholders’ equity Average shareholders’ equity Working capital Other Data Capital expenditures – net Cash flow from operations Weighted-average shares outstanding during year Price/earnings ratio at year-end Number of shareholders at year-end Members (employees) at year-end *Includes acquisitions completed during year. $2,046,286 $1,800,931 665,882 487,848 – 178,034 106,217 5.2% 19.8% 564,319 398,197 19,679 146,443 87,360 4.9% 18.1% $«««««««««1.77 $÷÷÷÷«1.44 9.59 .44 8.33 .38 $«««330,141 $«««316,556 1,022,470 264,868 1.25 906,723 225,123 1.41 $«««128,285 $«««124,173 18.3% 19.9% $«««573,342 $«««501,271 537,307 65,273 481,647 91,433 13.6 % 18.0 % 22.5 % 21.6 % 21.6 % 22.9 % 15.1 % 15.8 % 4.3 % 12.8 % 17.7 % 3.3 % 14.4 % 11.6 % (28.6) % % $«««««59,840 $«««««71,474 (16.3) 204,920 156,185 60,140,302 60,854,579 14 6,563 11,543* 15 6,737 10,095 31.2 % (1.2) (2.6) % % 14.3 % 3 6 3 , 1 7 0 7 , 1 1 0 8 , 1 6 4 0 , 2 8 9 9 8 6 7 8 6 0 1 7 8 6 0 1 1 . 9 2 4 . 7 2 2 . 5 2 1 . 8 1 8 . 9 1 3 1 . 1 5 4 . 1 2 7 . 1 4 4 . 1 7 7 . 1 6 9 9 1 7 9 9 1 8 9 9 1 9 9 9 1 0 0 0 2 Net Sales Millions of Dollars 6 9 9 1 7 9 9 1 8 9 9 1 9 9 9 1 0 0 0 2 Net Income Millions of Dollars 6 9 9 1 7 9 9 1 8 9 9 1 9 9 9 1 0 0 0 2 Return On Average Shareholders’ Equity Percent 6 9 9 1 7 9 9 1 8 9 9 1 9 9 9 1 0 0 0 2 Earnings Per Share Dollars 8 HON INDUSTRIES Inc. and Subsidiaries To Our Fellow Shareholders It took HON INDUSTRIES nearly 50 years to reach our first billion dollars in sales. Only four years later, we have delivered the second billion dollars – and the third is clearly in our sights. We posted a record year in 2000. Sales climbed to $2.05 billion, a 13.6 percent gain over 1999; fourth quarter 2000 was our 20th consecutive quarter of growth. Net income increased 6.5 percent to $106.2 million, and earnings per share grew 7.9 percent to $1.77 per share, excluding the 1999 one-time restructuring charge. On February 14, 2001, our board of directors increased the annual dividend rate 9 percent to 12 cents per share, beginning our 46th consecutive year of dividends. We are positioning ourselves for growth. While we didn’t achieve the results we expected for 2000, we still enjoyed a great year. We can and will do better. Make no mistake: We are very encouraged by our performance in 2000. Splitting The HON Company and Allsteel Inc. into separate companies with JACK D. MICHAELS Chairman, President and CEO distinct markets was an uncommon idea and an unequivocal success in 2000. The HON Company focuses on the retail and commercial markets, and Allsteel Inc. focuses on the contract market. The strategy made solid contributions to the top and bottom lines and improved inventory turns even as retail and commercial sales slowed in the last quarter of the year. We also improved shipping performance and complete and on-time deliveries. These gains more than offset rising fuel prices. These improvement programs yielded many positive benefits in 2000, and we are still developing significant opportunities for growth within them. We will continue to reap the rewards this year and beyond. HON INDUSTRIES Inc. 9 In this uncertain economy, we face tough first and second quarters in 2001. But as one of the best, low-cost manufacturing companies in our industry, we are using these challenging times to grow and leverage our ability to realize the prof- itability and growth promises of our strategies. When opportunity reemerges with a reinvigorated economy – we’ll be ready. We see unparalleled opportunities ahead. Our growth strategy can be summarized as follows: Understand the potential. Simplify and focus. Take action on high-potential opportunities. For all its seeming simplicity, it is this powerful strategy that is putting us firmly in place to deliver strong results. The HON Company and Allsteel Inc. operated as a single unit a little more than a year ago. Today, each focuses on distinct, high-potential markets. The split freed them to refine and develop products responsive to their particular customer base instead of a universal market profile. Because of this, we are starting to attract customers we have never reached before. During 2000, we drove similar initiatives into other areas of our operation. There is a high demand for quality wood finishes in office furniture, and we zeroed in on the opportunity. We formed the Wood Products Group in third quarter 2000 to focus exclusively on wood opportunities. This group includes our premium Gunlocke® brand as well as the wood seating, veneer, and laminate products sold under Allsteel® and HON® brands. In less than a year, it has improved profitability and the manufacturing process, significantly reducing time-to-market. We are just beginning to unleash the potential of wood products that will fuel new growth across our brands. We are creating a future with unlimited possibilities. The HON Company, Allsteel Inc., and the Wood Products Group all dedicated significant resources to developing their markets and new products. These invest- ments are critical to developing the brand presence and product innovation that will be the seeds of their long-term success. 10 HON INDUSTRIES Inc. Hearth Technologies Inc. also embraced a bold strategy in 2000. It is focusing resources on geographical markets with tremendous growth potential, unrealized by competitors because of fragmented distribution channels. To address that, Hearth Technologies acquired a multistate retail operation that forms the core of our new hearth retail distribution. Hearth Technologies also will soon launch a cooperative, best-practices program that helps independent distributors grow their retail business and our related opportunities. In 2001, Hearth Technologies will concentrate on developing unique fireplace designs, new outdoor products, and innovative manufacturing processes. These new categories stretch the possibilities for hearth products and will ignite growth. We’ll be wherever we find opportunity. The process of focusing exclusively on high-potential opportunity permeates every operating company and every level of our organization and forms the nucleus of our growth strategies. In some ways, our growth strategy simply applies our award-winning Rapid Continuous Improvement model to our marketing and manufacturing operations. HON INDUSTRIES’ members have always energetically and successfully embraced change and excellence. Their performance won the Company recognition in Forbes, Fortune, CFO, and Industry Week magazines. I appreciate their dedication and have the deepest respect and gratitude for their efforts. Our directors have also been enthusiastic, engaged partners. Their generous feedback and ideas help us to continually fine-tune our forward-looking strategy. On behalf of all our shareholders, I thank them for their contributions. We see tremendous potential everywhere we look. That tells me HON INDUSTRIES is on the right road to deliver outstanding, long-term growth. You can be confident of this: Wherever great opportunities can be found, we’ll be there. Jack D. Michaels Chairman, President and CEO HON INDUSTRIES Inc. 11 Customers are the opportunity. We’ll be there. You may be sitting in an ergonomic Mobius® chair from The HON Company, using your laptop computer on Allsteel’s innovative Marbles™ table, enjoying the ambience of a Heat-N-Glo Everest™ fireplace in the corner of your office. You were introduced to these products by distributors, retailers, and designers. By structuring our companies to be more responsive to the people who sell our products, HON INDUSTRIES is getting closer to the people who use them. Today, each of our brands – Allsteel, HON, Gunlocke, BPI, Panel Concepts, and Holga in office furniture and Heatilator, Heat-N-Glo, and Aladdin in hearth products – is mastering the basics for its own distinct market. Each is tailoring its prod- ucts, service, and support to create a precise, customer- satisfying fit. In the process, we’re discovering a whole new world of opportunities for growth. 12 HON INDUSTRIES Inc. Companies require creative solutions, responsive service. We’ll be there. The desire for fast turnaround and ease of doing business drives a quickly growing, new sector of the contract furniture market. These purchases are made by flatter organizations where people are empowered to make decisions and teamwork flourishes. Their office furniture reflects this energetic, change-driven atmosphere. Allsteel Inc. is a leader in responding quickly to this emerging market with unmatched service. An innovative company, Allsteel focuses on creative office solutions. Allsteel spent last year refining its brand, developing new marketing materials, designing new showrooms, and ensuring its ability to deliver second-to-none customer service and support. It created a new organization that focuses on its market and on driving new growth. It also honed an aggressive network of dealer- partners and gave them the tools to succeed with the Allsteel brand. These dealer-partners are attending conferences at Allsteel’s new head- quarters, where they witness its brand promise at work: high-style intersecting with remarkable efficiency, unlimited potential, and great service. These dealer-partners return to their customers with imaginative ideas on how to approach the evolving workplace as well as with the ability to specify, deliver, and install Allsteel solutions at record-breaking rates. Allsteel is investing resources to develop new products that reflect the workplace philosophies of its forward-looking clientele. In 2000, Allsteel reinvented mobility furni- ture with Marbles™, a line of contemporary tables and storage units on stylish, go-anywhere wheels to facilitate teamwork. It captured the imagination with modernist Raptor™ seating and brought traditional seating into the 21st century with Virage™. The Allsteel brand is sparking the imaginations of people who design corporate offices and purchase furniture. Their confidence helped the company to grow at a rate that almost doubled the industry’s pace. HON INDUSTRIES Inc. 13 The retail and commercial markets are resilient. We’ll be there. In today’s competitive marketplace, small- and medium-sized businesses need office furnishings that deliver durability, comfort, and improved workplace performance. The HON Company leads this market by offering a full line of products through a vast network of wholesalers, independent dealers, and power retailers. In its 53-year history, HON has earned almost unparalleled brand penetration: We believe its products are in more U.S. businesses than any other office furniture brand. This market sector produces more than 60 percent of new American jobs on average, creating a continuous demand for new office furnishings. As the market leader, HON is well positioned to seize this growth opportunity. In 2000, the company introduced a formi- dable new dealer training program that speeds the HON brand message to its marketplace: a relentless pursuit of operational excellence to benefit the people who use its products. A new e-commerce initiative also links HON more closely to both its dealers and users and helped the company set a new standard in its quest for superb and responsive customer service. HON’s focus on its brand promise of unsurpassed customer satisfaction also improved complete and on-time deliveries by more than 50 percent last year and lowered warranty costs by 18 percent. Rapid Continuous Improvement programs helped its distributors improve operations, from managing inventories to reducing product damage. HON is also investing heavily in new products that respond to its users’ evolving workplace: In 2001, it will launch more products than at any other time in its history. The HON Company’s initiatives will translate directly into satisfied customers, stronger sales, and continued improvements in the brand’s bottom line. Everybody loves the look of fine wood. We’ll be there. There are tremendous wood furnishings opportunities for the Gunlocke, Allsteel, and HON brands. This wood sector represents a manufacturing and design challenge that we are only now managing effectively. We formed the Wood Products Group in third quarter 2000 to focus exclusively on wood opportunities. This group includes our premium Gunlocke brand produced in Wayland, New York, as well as the facilities that manufac- ture wood seating, veneer, and laminate products under our Allsteel and HON brand names. While the Wood Products Group is in its infancy, it is already delivering dramatic improvements in customer satisfaction, profitability, and return on assets. Gunlocke begins shipments of The ACS Collection™ (Advanced Customer Solution) product line this year, first seen in concept at last year’s NeoCon. The Wood Products Group’s improved performance is also creating new opportunities under the Allsteel and HON brands, where operational excellence is a critical factor in their brand promises. Niche opportunities are lucrative. We’ll be there. Three years ago, BPI Inc. reinvented itself to focus on panel systems for value- conscious companies that must hit the ground running, maximize space and flexibility, and protect narrow operating margins. Today it hits its target with remarkable precision and profitability, with 60 percent of its sales generated by new products introduced in the last three years. It turns around built-to-order, cost-effective solutions in only five days – the broadest quick-ship program in the industry. Two of BPI’s top five U.S. distributors recognized BPI as Vendor of the Year for growth in the new Parallel™ line, its versatile flagship system. HON INDUSTRIES Inc. 15 Panel Concepts, Inc. is recognized for industry-leading innovation. Its panel systems were the first to feature desk-height power, to incorporate patented flat-screen terminals into panel tiles, and to use its patented cam connection system. Panel Concepts’ new Empower™ system integrates the cam connection with tremendous wiring capacity and reconfiguration flexibility, innovations usually found only in more expensive systems. Holga Inc. is the leader in providing high-density shelving, storage, and movable filing systems. To fuel growth, Holga introduced three new products in 90 days: GNS, a cabinet that installs quickly and adapts to a variety of filing require- ments; a redesigned shelf file casing attractive enough for front office use; and Holga Sketch™, an innovative space-planning software that heralds other data-based products for the future. The company also added an electrical-assist option to Roll-X™, its award-winning mobile aisle system. HON International develops opportunities for Allsteel, BPI, Gunlocke, Holga, HON, and Panel Concepts brands through office furni- ture dealers in 53 countries in Latin America, Europe, Africa, and the Middle East and Asia Pacific. The company trains these dealers, helps develop their customers, and schedules, ships, and documents related exports. HON International also helps domestic dealers develop, ship, and install orders in international markets for U.S.-based multinational companies. 16 HON INDUSTRIES Inc. The market for fireplaces is unlimited. We’ll be there. In early 2000, Hearth Technologies Inc. purchased a multistate retail and distribu- tion operation that focuses on selling hearth products and services to consumers, dealers, and builders. Renamed Hearth Services, the division contributes revenues from fireplace installation services and finishing products that help Hearth Technologies optimize product delivery and provide top service to builders and consumers. Hearth Technologies also developed a new program that will roll out in 2001 to help loyal independent distributors strengthen and grow their businesses – and ours. By focusing closely on its markets, Hearth Technologies identified some stellar opportunities that required more integrated and automated practices. Other improvements in the pipeline will introduce revolutionary technologies throughout Hearth Technologies’ brands and create unlimited versatility in fireplace design and placement. Hearth Technologies is pursuing these emerging opportu- nities with new fireplace categories, some of which are already arriving on the market: Crescent™, an arched, kitchen fireplace, has a built in bun-warmer, and Twilight™, a see-through fireplace you can enjoy from your living room or patio, arrives this spring. To address rising energy costs, Hearth Technologies has developed furnace-rated fireplace products using a proprietary new technology that can circulate heat throughout homes with forced-air heating systems. Look around, anywhere. We’ll be there. Our passionate strategy for growth involves understanding the potential, simplifying our focus, and taking action on high-potential opportunities. It is a powerful strategy that is putting us firmly in place to deliver strong results. Opportunity is truly all around us, everywhere we look. We’ll be there! HON INDUSTRIES Inc. 17 HON INDUSTRIES At A Glance T E K R A M E R U T N R U F I T C A R T N O C I L A C R E M M O C / L I A T E R I E R U T N R U F I S E G O L O N H C E T H T R A E H Allsteel Inc. is one of the best-recognized brands in the office furniture industry. ® It is a leader in the design, manufacture, and marketing of office panel systems, desks, steel storage products, and office seating for the contract market. The Gunlocke Company hand crafts high-quality, natural wood office furniture ® that includes executive case goods, a wide range of seating, lounge furniture, conference tables, and custom office products built to designer specifications. Panel Concepts, Inc. is a leader in developing breakthrough technology solutions: It was the first in the industry to provide a powered desk height ® feature and to add flat-screen monitors in panel tiles. Holga, Inc. manufactures high-density shelving, storage, and mobile filing ® systems as well as traditional metal office furniture. Its products help compa- nies optimize their workplaces and improve employee efficiency. The HON Company is America’s leader in middle-market office furniture. ® The company offers a complete line of office furnishings including systems, seating, desks, tables, and files. BPI Inc. specializes in panel systems that are easy to specify, install, and ® reconfigure. It offers the industry’s broadest quick-ship program: Its entire product line is available in five days or less. HON International Inc. markets HON INDUSTRIES furniture products outside of the United States and Canada. Heatilator is the most recognized name in the fireplace industry. It is ® a state-of-the-art manufacturer of a full line of gas- and wood-burning fireplaces, inserts, and fireplace accessories. Heat-N-Glo invented today’s leading fireplace technology (direct-vent gas ® fireplaces) and is the industry’s leading manufacturer of gas fireplace products. It focuses on innovative technology that enhances the hearth experience and broadens the use of fireplaces. Aladdin Hearth Products manufactures and markets the most complete line of high-efficiency gas-, wood-, pellet-, and oil-burning hearth products available. It pursues the innovative “perfect fire” through its premium Quadra-Fire™ and Dovre® brands. Hearth Services Hearth Services is the largest distributor of fireplaces in the hearth industry that sells, installs, and services a broad range of gas- and wood-burning fireplaces and fireplace mantels, surrounds, facings, and other accessories. 18 HON INDUSTRIES Inc. Allsteel® New Products: In 2000 Raptor™ seating; Marbles™ mobility tables and storage cabinets; enhancements to Virage™ seating and Consensys® panel system. In 2001 enhancements to the Terrace® panel system; new wood veneer desking; and new seating solutions. Allsteel Inc. 2210 Second Avenue 800.553.8230 Muscatine, Iowa 52761 allsteeloffice.com Gunlocke® New Products: In 2000 Molti™ side seating; Molti™ stool; meet and greet lounge seating. In 2001 new case goods product line; Molti™ caster version seating; Molti™ lounge and new executive seating. The Gunlocke Company One Gunlocke Drive 800.828.6300 Wayland, New York 14572 gunlocke.com Panel Concepts® New Products: In 2000 Empower™ panel system line; new storage pedestals. Panel Concepts, Inc. 3001 South Yale Street 800.624.6118 Santa Ana, California 92704 panelconceptsinc.com Holga® New Products: In 2000 electrical assist feature for Roll-X™; GNS high-capacity storage cabinets; redesigned shelf file casing for front offices; Holga Sketch™ space-plan- ning software; enhanced Roll-X™ mobile aisle system and modular storage group families. Holga will also introduce its revolutionary 5-Day Ready-to-Ship Program in 2001. Holga Inc. 7901 Woodley Avenue 800.544.4623 Van Nuys, California 91406 holga.com HON® New Products: In 2000 Invitation™ guest seating; The Director Series™ for technology-heavy offices; Flagship™ lateral and pedestal files; Park Avenue Collection™. In 2001 Provisions™ Mobile The HON Company 200 Oak Street 800.833.3964 Tables; Instinct™ task seating series; Initiate™ panel system; expanded 10500 and 10700 series Muscatine, Iowa 52761 hon.com laminate case goods; Park Avenue wood case goods; Efficiencies™ track filing; Pagoda™ expansion. BPI® New Products: In 2000 added power desk-height feature to Parallel ®; expanded teaming and tasking product line. In 2001 new desking system solutions; additions to mobile table line; new fabric selections. BPI Inc. 21606-86th Place South 800.289.1274 Kent, Washington 98031 honi.com HON International Inc. New Products: In 2001 Allsteel’s enhanced Terrace® panel system; HON Company and Allsteel’s new case goods and seating products. HON International Inc. 414 East Third Street 319.262.7900 Muscatine, Iowa 52761 honi.com Heatilator New Products: In 2000 masonry Icon™ model with the look of a real masonry Heatilator fireplace; Novus™ 16-inch shallow-depth, gas-burning fireplace. In 2001 Novus™ upgrade 1915 West Saunders Street 800.843.2848 for improved flame appearance; new gas log sets. Mt. Pleasant, Iowa 52641 heatilator.com Heat-N-Glo New Products: In 2000 Crescent™ arched kitchen fireplaces; Intensity™ energy-efficient, large-flame fireplace; Everest™ vertical opening fireplace. In 2001 Twilight™ indoor-outdoor, see-through fireplace. Heat-N-Glo 20802 Kensington Boulevard 952.985.6000 Lakeville, Minnesota 55044 heatnglo.com Aladdin New Products: In 2000 Quadra-Fire™; Columbia Bay™ gas-burning stove with bay window; Contour™ contemporary designed pellet-burning stove; Dovre® Sapphire™ 25 T \ R gas-burning stove, top or rear vent; Isle Royale™ large wood-burning stove, top or front loading. Aladdin Hearth Products 1445 North Highway 509.684.3745 Colville, Washington 99114 aladdinhearth.com Hearth Services New Products: In 2000 masonry Icon™ model; Crescent™ kitchen fireplaces; Quadra-Fire™; Columbia Bay™. In 2001 Novus™ upgrade and Twilight™ indoor-outdoor, see-through fireplace. Hearth Services 2700 Fairview Avenue North 651.633.2561 Roseville, Minnesota 55113 honi.com HON INDUSTRIES Inc. 19 Management’s Discussion and Analysis of Financial Condition and Results of Operation THE FOLLOWING DISCUSSION OF THE COMPANY’S HISTORICAL RESULTS OF OPERATIONS AND OF ITS LIQUIDITY AND CAPITAL RESOURCES SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND RELATED NOTES. Results of Operations The following table sets forth the percentage of consolidated net Selling and Administrative Expenses Selling and administrative expenses increased by 23% to sales represented by certain items reflected in the Company’s state- $487.8 million in 2000 from $398.2 million in the prior year. ments of income for the periods indicated. Fiscal Net sales Cost of products sold Gross profit Selling and 2000 100.0% 67.5 32.5 1999 100.0% 68.7 31.3 administrative expenses 23.8 22.1 Provision for closing facilities and reorganization expense Operating income Interest expense (net) Income before income taxes Income taxes Net income – 8.7 .6 8.1 2.9 5.2% 1.1 8.1 .5 7.6 2.8 4.9% 1998 100.0% 68.7 31.3 20.8 – 10.5 .5 10.0 3.7 6.2% Selling and administrative expenses, as a percent of net sales, increased to 23.8% in 2000 from 22.1% in 1999. The largest contributor to this increase was the acquisition of Hearth Services Inc., which is a retail distributor. Retail distribution is a different business model that has proportionally higher selling and adminis- trative costs than manufacturing. The Company is applying rapid continuous improvement philosophies to reduce these costs. The Company also continued to experience increased investment in sales and marketing expenses associated with refocusing the Company and developing branding programs in the office furniture segment. The Company was able to reduce freight expense as a percent of net sales despite increased fuel and carrier costs. Selling and administrative expenses include freight expense to the customer, product development costs, and amortization expenses of intangible assets. The “Selling and Administrative Expenses” note included in the Notes to Consolidated Financial Statements provides The Company has two reportable core operating segments: office further information regarding the comparative expense levels for furniture and hearth products. The “Operating Segment Information” these major expense items. note included in the notes to consolidated financial statements pro- vides more detailed financial data with respect to these two segments. Fiscal Year Ended December 30, 2000, Compared to Fiscal Year Ended January 1, 2000 Net Sales Net sales, on a consolidated basis, increased by 14% to $2.0 billion in 2000 from $1.8 billion in 1999. Office furniture net sales Operating Income Operating income increased by 7% to $178.0 million in 2000 from $166.1 million (excluding a one-time pre-tax charge for closing facilities and reorganization expense of $19.7 million) in 1999. The increase is due mainly to increased sales and gross margins. Net Income Net income increased by 6% to $106.2 million in 2000 from increased 9% in 2000 to $1.65 billion from $1.51 billion in 1999. $99.9 million, excluding the $12.5 million nonrecurring after-tax Net sales of hearth products increased 39% to $396.3 million in charge for the closing of facilities and reorganization expenses in 2000 from $285.9 million in 1999 due mainly to the Company’s the prior year. This increase is attributable primarily to increased acquisition of two leading hearth products distributors, American sales and gross margins. Net income was favorably impacted by a Fireplace Company (AFC) and the Allied Group (Allied), which decrease in the Company’s effective tax rate from 36.5% in 1999 to were joined to form Hearth Services Inc., a subsidiary of Hearth 36.0% in 2000 resulting from favorable state income tax initiatives. Net income per common share increased by 8% to $1.77 in 2000 from $1.64 (excluding a nonrecurring after-tax charge of $0.20 per share) in 1999. The Company’s net income per share perform- ance for 2000 also benefited from the Company’s common stock repurchase program. Technologies Inc. The office furniture industry reported an increase in shipments of 9% in 2000 compared to 1999. The Company’s most recent five-year compounded annual growth rate in net sales is 18%. Gross Profit Gross profit dollars increased 18% to $665.9 million in 2000 from $564.3 million in the prior year. Gross margin increased to 32.5% for 2000 from 31.3% in 1999. The improvement reflects the combi- nation of improved price realization and productivity from rapid continuous improvement programs. 20 HON INDUSTRIES Inc. and Subsidiaries Fiscal Year Ended January 1, 2000, Compared to Fiscal Year Ended January 2, 1999 Net Sales Net sales, on a consolidated basis, increased by 6% to $1.8 billion operating as one business unit. During the fourth quarter, the two operations were split into two separate business units. The HON Company serves the open-line, middle-market segment, and Allsteel Inc. serves the project-oriented contract market. The in 1999 from $1.7 billion in 1998. The Company increased sales Company incurred additional costs related to this initiative in the in both core operating segments due to the continued focus on near-term, but these investments will be leveraged as the compa- superior customer service and rapid introduction of new innovative nies increase sales and grow their market shares. Both business and compelling value products. Office furniture net sales increased units continue to be reported under the Company’s office furniture 4% in 1999 to $1.51 billion from $1.46 billion in 1998. Net sales segment reported in the Operating Segment Information note of hearth products increased 16% to $285.9 million in 1999 from included in the Notes to Consolidated Financial Statements. $246.0 million in 1998. The office furniture industry reported a decline in shipments of 1% in 1999 compared to 1998. The hearth products industry annual growth rate is estimated at 6% to 7%. The Company’s most recent five-year compounded annual growth rate in net sales is 16%. Gross Profit Gross profit dollars increased 6% to $564.3 million in 1999 from $533.6 million in the prior year. Gross margin held steady at 31.3% for 1999 and 1998. The Company is continuing to focus on improv- ing gross margins. A tight labor market made it more difficult than anticipated to staff facilities, causing an increase in backlog and additional overtime, training, and expenses associated with moving production to alternate plant locations. The Company was able to fill positions in the fourth quarter and implemented plans to ensure workers are in place to meet order demands. Gross profit also included start-up costs associated with the Monterrey, Mexico, production facility. Selling and Administrative Expenses Selling and administrative expenses increased by 12% to $398.2 mil- lion in 1999 from $354.5 million in the prior year. Selling and administrative expenses, as a percentage of net sales, increased to 22.1% in 1999 from 20.8% in 1998. The Company has imple- mented a number of internal initiatives to better serve customers through providing complete, on-time, and undamaged orders quickly. These initiatives have resulted in increased freight costs. The Company has contracted with distribution experts and is currently implementing a new logistical management system to Selling and administrative expenses for 1999 were significantly influenced by increased freight expense to the customer, product development costs, and amortization expenses of intangible assets. The Selling and Administrative Expenses note, included in the Notes to the Consolidated Financial Statements, provides further infor- mation regarding the comparative expense levels for these major expense items. Operating Income Operating income decreased by 7.3% to $166.1 million (excluding a one-time pre-tax charge for closing facilities and reorganization expense of $19.7 million) in 1999 from $179.2 million in 1998. The decrease is due principally to increased selling and adminis- trative expenses. Net Income Net income, excluding the $12.5 million nonrecurring after-tax charge for the closing of facilities and reorganization expenses, decreased by 6.1% to $99.9 million in 1999 from $106.3 million in the prior year. This decrease is attributable primarily to increased selling and administrative expenses. Net income was favorably impacted by a decrease in the Company’s effective tax rate from 37.5% in 1998 to 36.5% in 1999 resulting from favorable state income tax initiatives. Net income per common share decreased by 4.7% to $1.64 (excluding a nonrecurring after-tax charge of $0.20 per share) in 1999 from $1.72 for 1998. The Company’s net income per share performance for 1999 also benefited from the Company’s common lower freight costs while still providing excellent service execution stock repurchase program. to customers. The Company also launched a strategic initiative during the fourth quarter to strengthen its office furniture market focus. Allsteel Inc, which was purchased in 1997, and The HON Company had been HON INDUSTRIES Inc. and Subsidiaries 21 Fiscal Year Ended January 2, 1999, Compared to Fiscal Year Ended January 3, 1998 Net Income Net income increased by 22% to $106.3 million in 1998 from Net Sales Net sales, on a consolidated basis, increased by 25% to $1.71 bil- $87.0 million in 1997. This increase is a result of the higher operat- ing income being partially offset by an increase in interest expense lion in 1998 from $1.36 billion in the prior year even though fiscal associated with acquisition and capital expenditures. year 1998 was a normal 52-week year compared to 1997 being a 53-week year. The Company increased sales in both core operating segments due to the continued focus on superior customer service, rapid introduction of new innovative and compelling value products, and acquisitions. Office furniture net sales increased 26% in 1998 to $1.5 billion from $1.16 billion in 1997. Net sales of hearth products increased 20% to $246.0 million in 1998 from $204.5 million in Net income per common share increased by 19% to $1.72 in 1998 from $1.45 in 1997. Average shares outstanding increased to 61.6 million in 1998 from 59.8 million in 1997 as a result of the weighting of the October 1997 primary stock offering. Liquidity and Capital Resources During 2000, cash from operations was $204.9 million, which 1997. Both core operating segments experienced another year of provided the funds necessary to meet working capital needs, help strong growth during 1998. The office products industry reported finance acquisitions, invest in capital improvements, repay long- an annual growth rate of 7.8%, and hearth products an estimated term debt, repurchase common stock, and pay increased dividends. 10%. The Company’s most recent five-year compounded annual growth rate is 17% in net sales. Cash Management Cash, cash equivalents, and short-term investments totaled Gross Profit Gross profit increased 24% to $533.6 million in 1998 from $429.6 $3.2 million compared to $22.2 million at the end of 1999 and $17.7 million at the end of 1998. These funds, coupled with cash million in the prior year. Gross margin decreased to 31.3% for 1998 from future operations and additional long-term debt, if needed, compared to 31.5% for 1997. This decrease was due to selling price are expected to be adequate to finance operations, planned improve- reductions on select products to increase sales volume, which were ment, and internal growth. only partially offset by productivity gains, and the adverse impact of the Allsteel acquisition not achieving the Company’s margin stan- dards as rapidly as projected. Selling and Administrative Expenses Selling and administrative expenses increased by 25% to $354.5 mil- The Company places special emphasis on the management and reduction of its working capital with a particular focus on trade receivables and inventory levels. The success achieved in managing receivables is in large part a result of doing business with quality customers and maintaining close communications with them. Trade lion from $284.4 million in the prior year. Selling and administrative receivable days outstanding have averaged about 37 days over the expenses, as a percentage of net sales, decreased to 20.8% in 1998 past three years. Inventory levels and turns continue to improve as from 20.9% in 1997. Management places major emphasis on con- a function of reducing production cycle times. Inventory turns have trolling and reducing selling and administrative expenses. The been in the 17 to 18 range over the past three years. Company expects to leverage these costs as sales grow; however, increased costs to meet competitive conditions offset a portion of the efficiency and leveraging gains. Capital Expenditure Investments Capital expenditures, net of disposals, were $59.8 million in 2000, $71.5 million in 1999, and $149.7 million in 1998. Selling and administrative expenses include freight expense to the Expenditures during 2000, 1999, and 1998 have been consistently customer, product development costs, and amortization expenses of focused on machinery and equipment and facility expansion needed intangible assets. The “Selling and Administrative Expenses” note to support new products, process improvements, cost-savings initia- included in the Notes to Consolidated Financial Statements provides tives, and creating additional and more efficient production and further information regarding the comparative expense levels for warehousing capacity. these major expense items. Operating Income Operating income increased by 23% to $179.2 million in 1998 Acquisitions On February 29, 2000, the Company completed the acquisition of its Hearth Services Inc. division, which consists of two leading from $145.2 million in 1997. The increase is due to increased hearth products distributors, American Fireplace Company (AFC) sales and lower selling and administrative expenses as a percent and the Allied Group (Allied), establishing the Company as the lead- of sales. ing manufacturer and distributor in the hearth products industry, for a purchase price of approximately $135 million. 22 HON INDUSTRIES Inc. and Subsidiaries In February 1998, the Company completed the acquisition of Aladdin Steel Products, Inc., a manufacturer of decorative gas- and Common Share Repurchases During 2000, the Company repurchased 837,552 shares of its wood-burning stoves, for a purchase price of approximately $10.2 common stock at a cost of approximately $18.0 million, or an million. This acquisition allowed the Company to strengthen its average price of $21.46. As of December 30, 2000, approximately position in the hearth products market. $13.6 million of the $70.0 million authorized by the Board of Long-Term Debt Long-term debt, including capital lease obligations, was 18% of total capitalization at December 30, 2000, 20% at January 1, 2000, and 23% at January 2, 1999. The Company does not expect future capital resources to be a constraint on planned growth. Significant additional borrowing capacity is available through a revolving bank credit agreement in the event cash generated from operations should be inadequate to meet future needs. Cash Dividends Cash dividends were $0.44 per common share for 2000, $0.38 for 1999, and $0.32 for 1998. Further, the Board of Directors announced a 9.1% increase in the quarterly dividend from $0.11 to $0.12 per Directors for repurchases remained unspent. On February 14, 2001, the Board authorized an additional $100 million for the Company’s share repurchase program. During 1999, the Company repurchased 1,408,624 shares at a cost of approximately $30.9 million, or an average price of $21.91. During 1998, the Company repurchased 529,284 shares at a cost of approximately $12.2 million, or an average price of $23.04. Litigation and Uncertainties The Company is involved in various legal actions arising in the course of business. These uncertainties are referenced in the Contingencies note included in the Notes to Consolidated Financial Statements. common share effective with the March 1, 2001, dividend payment. Looking Ahead The previous quarterly dividend increase was from $0.095 to $0.11, The Company believes the softness in the economy may have effective with the March 1, 2000, dividend payment. A cash divi- an adverse effect on net sales and operating income in the first half dend has been paid every quarter since April 15, 1955, and quarterly of 2001. However, the Company is cautiously optimistic about the dividends are expected to continue. The average dividend payout results for the second half of the year based on economic improve- percentage for the most recent three-year period has been 25% of ment, new product introductions, and improved price realization. prior year earnings. Stock Split On February 11, 1998, the Board of Directors announced a two-for- one stock split in the form of a 100 percent stock dividend that was paid on March 27, 1998, to shareholders of record on March 6, 1998. Shareholders received one share of common stock for each share held on record date. HON INDUSTRIES Inc. and Subsidiaries 23 Consolidated Statements of Income (Amounts in thousands, except for per share data) For the Years Net sales Cost of products sold Gross Profit Selling and administrative expenses Provision for closing facilities and reorganization expenses Operating Income Interest income Interest expense Income Before Income Taxes Income taxes Net Income Net Income Per Common Share – Basic and Diluted The accompanying notes are an integral part of the consolidated financial statements. 2000 1999 1998 $2,046,286 1,380,404 $1,800,931 1,236,612 $1,706,628 1,172,997 665,882 487,848 – 178,034 1,945 14,015 165,964 59,747 564,319 398,197 19,679 146,443 844 9,712 137,575 50,215 533,631 354,454 – 179,177 1,590 10,658 170,109 63,796 $«««106,217 $«««««««««1.77 $«««««87,360 $«««««««««1.44 $«««106,313 $«««««««««1.72 24 HON INDUSTRIES Inc. and Subsidiaries Consolidated Balance Sheets (Amounts in thousands) As of Year-End Assets Current Assets Cash and cash equivalents Short-term investments Receivables Inventories Deferred income taxes Prepaid expenses and other current assets Total Current Assets Property, Plant, and Equipment Goodwill Other Assets Total Assets Liabilities and Shareholders’ Equity Current Liabilities Accounts payable and accrued expenses Income taxes Note payable and current maturities of long-term debt Current maturities of other long-term obligations Total Current Liabilities Long-Term Debt Capital Lease Obligations Other Long-Term Liabilities Deferred Income Taxes Commitments and Contingencies Shareholders’ Equity Common stock Paid-in capital Retained earnings Accumulated other comprehensive income Total Shareholders’ Equity Total Liabilities and Shareholders’ Equity The accompanying notes are an integral part of the consolidated financial statements. 2000 1999 1998 $«««««««3,181 $««22,168 – 211,243 84,360 19,516 11,841 330,141 454,312 216,371 21,646 – 196,730 74,937 13,471 9,250 316,556 455,591 113,116 21,460 $««17,500 169 183,576 67,225 12,477 9,382 290,329 444,177 108,586 21,377 $1,022,470 $906,723 $864,469 $«««240,540 $217,110 $198,520 12,067 10,408 1,853 $«««264,868 126,093 2,192 18,749 37,226 59,797 17,339 495,796 410 573,342 – 6,106 1,907 $225,123 119,860 4,313 18,015 38,141 60,172 24,981 416,034 84 501,271 1,921 15,769 1,228 $217,438 128,069 7,494 18,067 31,379 61,290 48,348 351,786 598 462,022 $1,022,470 $906,723 $864,469 HON INDUSTRIES Inc. and Subsidiaries 25 Consolidated Statements of Shareholders’ Equity (Amounts in thousands) Balance, January 3, 1998 Comprehensive income: Net income Other comprehensive income Comprehensive income Cash dividends Common shares – treasury: Shares purchased Shares issued under Members Stock Purchase Plan and stock awards Principal repaid by HON Members Company Ownership Balance, January 2, 1999 Comprehensive income: Net income Other comprehensive income Comprehensive income Cash dividends Common shares – treasury: Shares purchased Shares issued under Members Stock Purchase Plan and stock awards Balance, January 1, 2000 Comprehensive income: Net income Other comprehensive income Comprehensive income Cash dividends Common shares – treasury: Shares purchased Shares issued under Members Stock Purchase Plan and stock awards Balance, December 30, 2000 Common Stock Additional Paid-in Capital Receivable from Co. ESOP Accumulated Other Comprehensive Income Total Shareholders’ Equity Retained Earnings $«61,659 $««55,906 $«(1,099) $«265,203 $««««(7) $«381,662 106,313 (19,730) 605 106,313 605 106,918 (19,730) (12,201) 4,274 1,099 (529) (11,672) 160 4,114 1,099 61,290 48,348 – 351,786 598 462,022 87,360 (23,112) (514) 87,360 (514) 86,846 (23,112) (30,866) 6,381 – 416,034 84 501,271 106,217 (26,455) 326 106,217 326 106,543 (26,455) (17,973) 9,956 (1,409) (29,457) 291 60,172 6,090 24,981 (838) (17,135) 463 9,493 $59,797 $«17,339 $««««««««– $495,796 $410 $573,342 The accompanying notes are an integral part of the consolidated financial statements. 26 HON INDUSTRIES Inc. and Subsidiaries Consolidated Statements of Cash Flows (Amounts in thousands) For the Years Net Cash Flows From (To) Operating Activities: Net income Noncash items included in net income: Depreciation and amortization Other postretirement and postemployment benefits Deferred income taxes Other – net Changes in working capital, excluding acquisition and disposition: Receivables Inventories Prepaid expenses and other current assets Accounts payable and accrued expenses Income taxes Increase in other liabilities Net cash flows from (to) operating activities Net Cash Flows From (To) Investing Activities: Capital expenditures – net Capitalized software Acquisition spending, net of cash acquired Principal repaid by HON Members Company Ownership Plan Short-term investments – net Other – net Net cash flows from (to) investing activities Net Cash Flows From (To) Financing Activities: Purchase of HON INDUSTRIES common stock Proceeds from long-term debt Payments of note and long-term debt Proceeds from sale of HON INDUSTRIES common stock to members Dividends paid Net cash flows from (to) financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental Disclosures of Cash Flow Information: Cash paid during the year for: Interest Income taxes The accompanying notes are an integral part of the consolidated financial statements. 2000 1999 1998 $«106,217 $÷87,360 $106,313 79,046 1,572 (7,213) 90 3,961 6,410 (1,616) 5,483 11,808 (838) 65,453 2,329 6,033 (121) (13,154) (7,712) 391 19,838 (2,178) (2,054) 52,999 1,529 13,816 8 (24,238) (4,286) 6,517 3,959 (7,419) (2,406) 204,920 156,185 146,792 (59,840) (2,192) (134,696) – – (3) (71,474) (3,530) (8,932) – 169 (290) (149,717) – (11,470) 1,099 91 80 (196,731) (84,057) (159,917) (17,973) 155,181 (147,458) 9,529 (26,455) (27,176) (18,987) 22,168 (30,866) 147,055 (167,052) 6,515 (23,112) (67,460) 4,668 17,500 (12,206) 73,237 (60,079) 3,323 (19,730) (15,455) (28,580) 46,080 $«««««3,181 $««22,168 $««17,500 $«««13,395 $«««54,634 $÷÷9,803 $÷46,822 $««10,867 $««56,787 HON INDUSTRIES Inc. and Subsidiaries 27 Notes to Consolidated Financial Statements Nature of Operations HON INDUSTRIES Inc., with its subsidiaries (the Company), is a Goodwill and Patents Goodwill represents the excess of cost over the fair value of net national manufacturer and marketer of office furniture and hearth identifiable assets of acquired companies. Goodwill is being amor- products. Both industries are reportable segments; however, the tized on a straight-line basis over 20-40 years. Patents are being Company’s office furniture business is its principal line of business. amortized on a straight-line basis over their estimated useful lives, Refer to the “Operating Segment Information” note for further which range from 7 to 16 years. Patents are reported by the information. Office furniture products are sold through a national Company as “Other Assets.” system of dealers, wholesalers, warehouse clubs, retail superstores, and to end-user customers, and federal and state governments. Dealer, wholesaler, and retail superstores are the major channels based on sales. Hearth products include wood-, pellet-, and gas- burning factory-built fireplaces, fireplace inserts, stoves, and gas logs. These products are sold through a national system of dealers, The carrying value of goodwill and patents is reviewed by the Company whenever significant events or changes occur which might impair recovery of recorded costs. Based on its most recent analysis, the Company believes no material impairment of these intangible assets exists at December 30, 2000. wholesalers, large regional contractors, and Company owned retail (In thousands) outlets. The Company’s products are marketed predominantly in the Goodwill United States and Canada. The Company exports select products Patents to a limited number of markets outside North America, principally Latin America and the Caribbean, through its export subsidiary; Less accumulated amortization however, based on sales, these activities are not significant. 2000 1999 1998 $233,348 $121,846 $113,812 16,450 16,450 16,450 23,342 13,585 8,570 $226,456 $124,711 $121,692 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. Revenue Recognition Revenue is recognized upon shipment of goods to customers. Product Development Costs Product development costs relating to the development of new The Company’s fiscal year ends on the Saturday nearest December products and processes, including significant improvements and 31. Fiscal year 2000 ended on December 30, 2000; 1999 ended on refinements to existing products, are expensed as incurred. The January 1, 2000; and 1998 ended on January 2, 1999. amounts charged against income were $18,911,000 in 2000, Cash and Cash Equivalents Cash and cash equivalents generally consist of cash and commercial paper. These securities have original maturity dates not exceeding three months from date of purchase. Short-Term Investments Short-term investments are classified as available-for-sale and are highly liquid debt and equity securities. Receivables Accounts receivables are presented net of an allowance for doubtful accounts of $11,237,000, $3,568,000, and $2,816,000 for 2000, 1999, and 1998, 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 $17,117,000 in 1999, and $15,707,000 in 1998. Stock-Based Compensation The Company accounts for its stock option plan using Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” which results in no charge to earnings when options are issued at fair market value. The Company has adopted the disclosure requirements of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation.” Use of Estimates The preparation of financial statements in conformity with gener- ally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The more signifi- cant areas requiring the use of management estimates relate to allowance for receivables, accruals for self-insured medical, work- ers compensation, and general liability insurance, and useful lives for depreciation and amortization. Actual results could differ from been computed by the straight-line method over estimated useful those estimates. lives: land improvements, 10–20 years; buildings, 10–40 years; and machinery and equipment, 3–12 years. Generally Accepted Accounting Principles In 2000, the Emerging Issues Task Force (EITF) reached a consen- sus on Issue No. 00-10, “Accounting for Shipping and Handling Fees and Costs,” that all amounts billed to a customer in a sale 28 HON INDUSTRIES Inc. and Subsidiaries transaction related to shipping and handling, if any, represent rev- The Company acquired Aladdin Steel Products, Inc. on February enues earned for the goods provided and should be classified as 20, 1998, for approximately $10.2 million. Aladdin is a manufac- revenue. The Company implemented the above EITF consensus turer of wood-, pellet-, and gas-burning stoves and inserts. Aladdin effective with the fourth quarter 2000 and has restated prior peri- is being operated by Hearth Technologies Inc., the Company’s ods to reflect the change. The adoption of this consensus did not hearth products subsidiary. The transaction was accounted for have a material impact on the Company’s financial statements. In under the purchase method. 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The Company intends to adopt this Statement in January 2001 as required by the Statement. Adoption of this Statement is not expected to have a material impact on the Company’s financial statements. Assuming the acquisition of American Fireplace Company, Allied Group, and Aladdin Steel Products, Inc. had occurred on January 4, 1998, the beginning of the Company’s 1998 fiscal year, instead of the actual dates reported above, the Company’s pro forma consoli- dated net sales would have been approximately $2.1 billion, $1.9 billion, and $1.8 billion for 2000, 1999, and 1998, respec- Reclassifications Certain prior year information has been reclassified to conform to tively. Pro forma consolidated net income and net income per share for 2000, 1999, and 1998 would not have been materially different the current year presentation. than the reported amounts. Provision for Facilities Closing and Reorganization Expenses On February 11, 1999, the Company adopted a plan to close three Inventories (In thousands) 2000 1999 1998 of its office furniture facilities located in Winnsboro, South Carolina; Sulphur Springs, Texas; and Mt. Pleasant, Iowa. A pre-tax charge of $19.7 million or $0.20 per diluted share was recorded during the first quarter of 1999. The charge includes $12.5 million for write- offs of plant and equipment, $2.6 million for severance arising from the elimination of approximately 360 positions, $2.1 million for Finished products $««48,990 $÷29,663 $÷24,955 Materials and work in process 46,497 55,737 53,320 LIFO allowance (11,127) (10,463) (11,050) $««84,360 $÷74,937 $÷67,225 other employee-related costs, and $2.4 million for certain other Property, Plant, and Equipment expenses associated with the closing of the facilities. (In thousands) 2000 1999 1998 The primary costs not yet incurred relate to costs associated with Land and land improvements $««18,808 $÷17,114 $÷12,156 the closed buildings. Management believes the remaining reserve for Buildings 202,189 181,080 144,559 facilities closing and reorganization expenses to be adequate to Machinery and equipment 514,293 469,268 411,238 cover these obligations. Business Combinations On February 29, 2000, the Company completed the acquisition of its Hearth Services division, which consists of two leading hearth products distributors, American Fireplace Company (AFC) and the Allied Group (Allied), establishing the Company as the leading manufacturer and distributor in the hearth products industry. The Construction and equipment installation in progress Less allowances for depreciation 27,547 37,819 85,782 762,837 705,281 653,735 308,525 249,690 209,558 $454,312 $455,591 $444,177 Company acquired AFC and Allied for approximately $135 million Accounts Payable and Accrued Expenses in cash and debt including acquisition costs. The acquisition has (In thousands) 2000 1999 1998 been accounted for using the purchase method, and the results of Trade accounts payable $««67,540 $÷77,907 $÷75,895 AFC and Allied have been included in the Company’s financial statements since the date of acquisition. The excess of the considera- tion paid over the fair value of the business of $23 million was recorded as goodwill and is being amortized on a straight-line basis over 20 years. As a result of the acquisition, the Company is in the process of Compensation Profit sharing and retirement expense Vacation pay Marketing expenses Casualty self-insurance finalizing its integration plan related to incremental exit costs and expense consolidation activities. These costs which are not associated with Other accrued expenses the generation of future revenues and have no future economic benefits will be reflected as assumed liabilities in the allocation of purchase price to the net assets acquired. Management expects these amounts to be finalized in the first quarter of 2001. 15,781 10,820 11,450 25,041 14,560 65,931 12,216 39,471 22,705 12,093 58,832 7,428 27,325 20,355 11,751 45,833 6,271 26,965 $240,540 $217,110 $198,520 HON INDUSTRIES Inc. and Subsidiaries 29 Long-Term Debt (In thousands) 2000 1999 1998 (In thousands) 2000 1999 1998 Selling and Administrative Expenses 46,000 85,000 95,000 *Freight expense has been restated per EITF issue no. 00-10. Freight expense to customer* $137,197 $131,085 $106,453 Amortization of intangible assets Product development costs General selling and administrative expense 10,679 18,911 5,362 17,117 4,789 15,707 321,061 244,633 227,505 $487,848 $398,197 $354,454 Income Taxes Significant components of the provision for income taxes are as follows: (In thousands) Current: Federal State Deferred 2000 1999 1998 $62,172 $÷40,744 $÷44,525 3,931 66,103 (6,356) 3,046 43,790 6,425 5,363 49,888 13,908 $59,747 $÷50,215 $÷63,796 A reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate is as follows: Federal statutory tax rate State taxes, net of federal tax effect Federal and state tax credits Other – net Effective tax rate 2000 35.0% 1.5 – (.5) 36.0% 1999 35.0% 1.7 – (.2) 36.5% 1998 35.0% 2.6 (.1) – 37.5% Industrial development revenue bonds, various issues, payable through 2018 with interest at 3.96-8.125% per annum $««23,977 $««24,608 $««25,293 Note payable to bank, revolving credit agreement with interest at a variable rate (6.6875-6.9625% at year-end 2000)* Convertible debenture payable to individuals, due in 2003 with interest at 5.5% per annum Other notes and amounts 53,000 3,116 5,074 5,178 – 7,776 $126,093 $119,860 $128,069 *The revolving bank credit agreement is payable in the year 2002 with a maximum borrowing limit of $200,000,000. Aggregate maturities of long-term debt are as follows (in thousands): 2001 2002 2003 2004 2005 Thereafter $÷8,287 46,773 53,866 553 558 24,343 The convertible debenture payable to individuals at the end of 2000 is payable to the former owners of businesses acquired by the Company in 2000. These individuals continue as employees of a subsidiary of the business following the merger. The convertible debenture is convertible into cash. Certain of the above borrowing arrangements include covenants which limit the assumption of additional debt and lease obligations. The Company has been and currently is in compliance with the covenants related to these debt agreements. The fair value of the Company’s outstanding long-term debt obligations at year-end 2000 approximates the recorded aggregate amount. Property, plant, and equipment, with net carrying values of approxi- mately $58,940,000 at the end of 2000, are mortgaged. 30 HON INDUSTRIES Inc. and Subsidiaries Deferred income taxes reflect the net tax effects of temporary The Company purchased 837,552, 1,408,624, and 529,284 shares differences between the carrying amounts of assets and liabilities of its common stock during 2000, 1999, and 1998, respectively. for financial reporting purposes and the amounts used for income The par value method of accounting is used for common stock tax purposes. Significant components of the Company’s deferred repurchases. The excess of the cost of shares acquired over their par tax liabilities and assets are as follows: value is allocated to Paid-In Capital with the excess charged to 2000 1999 1998 Retained Earnings. (In thousands) Net long-term deferred tax liabilities: Tax over book depreciation OPEB obligations Goodwill Other – net Total net long-term deferred tax liabilities Net current deferred tax assets: Workers’ compensation, general, and product liability accruals Vacation accrual Integration accruals Inventory obsolescence reserve Other – net Total net current deferred tax assets Net deferred tax (liabilities) assets $(37,509) $(38,133) $(33,118)) 3,157 (4,183) 1,309 3,430 (2,959) (479) 3,305 (1,805) (239) $(37,226) $(38,141) $(31,379)) 4,183 4,632 (3,205) 2,404 11,502 2,984 3,492 (3,263) 1,287 8,971 2,315 2,531 (2,235) 1,026 8,840 19,516 13,471 12,477 $(17,710) $(24,671) $(18,902)) The Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, “Reporting Comprehensive Income,” as of January 4, 1998, the beginning of its 1998 fiscal year. The Company has changed the format of its consolidated statements of shareholders’ equity to present comprehensive income. Components of other comprehensive income (loss) consist of the following: (In thousands) Foreign currency translation adjustments – net of tax Change in unrealized gains on marketable securities – net of tax Other comprehensive income (loss) 2000 1999 1998 $118 $««(79) $««42 208 (435) 563 $326 $(514) $605 In May 1997, the Company registered 400,000 shares of its com- mon stock under its 1997 Equity Plan for Non-Employee Directors, which was approved by shareholders at the May 1997 annual shareholders’ meeting. This plan permits the Company to issue to its non-employee directors options to purchase shares of Company common stock, restricted stock of the Company, and awards of Company stock. The plan also permits non-employee directors to elect to receive all or a portion of their annual retainers and other Shareholders’ Equity and Earnings Per Share Common Stock, $1 Par Value Authorized 2000 1999 1998 compensation in the form of shares of Company common stock. During 2000, 1999, and 1998, 6,948, 12,758, and 10,664 shares of Company common stock were issued under the plan, respectively. 200,000,000 200,000,000 200,000,000 Cash dividends declared and paid per share for each year are: Issued and outstanding 59,796,891 60,171,753 61,289,618 Preferred Stock, $1 Par Value Authorized 1,000,000 1,000,000 1,000,000 (In thousands) Common shares 2000 1999 1998 $÷÷.44 $÷÷.38 $÷÷.32 Issued and outstanding – – – Pursuant to the 1994 Members Stock Purchase Plan, 1,000,000 shares of the Company’s common stock were registered for issuance On February 11, 1998, the Company’s Board of Directors declared to participating members. Members who have one year of employ- a two-for-one stock split in the form of a 100% stock dividend paid ment eligibility and work a minimum of 20 hours per week have on March 27, 1998, to shareholders of record on the close of busi- rights to purchase stock on a quarterly basis. The price of the stock ness on March 6, 1998. In May 1998, shareholders authorized an purchased under the plan is 85% of the closing price on the applica- increase of capital stock of the Company from 101,000,000 shares ble purchase date. No member may purchase stock under the plan to 201,000,000 shares, consisting of 200,000,000 shares of com- in an amount which exceeds the lesser of 20% of his or her gross mon stock, $1.00 par value, and 1,000,000 shares of preferred earnings or 4,000 shares, with a maximum fair market value of stock, $1.00 par value. $25,000 in any calendar year. An additional 214,047 shares were HON INDUSTRIES Inc. and Subsidiaries 31 available for issuance under the plan at December 30, 2000. awarded under the Plan must be at exercise prices equal to or exceed- The effect of the application of adopting Financial Accounting ing the fair market value of the Company’s common stock on the Standards Board Statement No. 123, “Accounting for Stock-Based date of grant. Stock options are generally subject to four-year cliff Compensation,” was not material to the Company. Shares of com- vesting and must be exercised within 10 years from the date of grant. mon stock were issued in 2000, 1999, and 1998 pursuant to a members stock purchase plan as follows: 2000 1999 1998 Shares issued 90,059 115,354 101,108 Average price per share $««21.10 $«««19.16 $«««23.58 The Company has a shareholders’ rights plan which will expire August 20, 2008. The plan becomes operative if certain events occur involving the acquisition of 20% or more of the Company’s common stock by any person or group in a transaction not approved by the Company’s Board of Directors. Upon the occur- rence of such an event, each right entitles its holder to purchase an amount of common stock of the Company with a market value of $400 for $200, unless the Board authorizes the rights be redeemed. The rights may be redeemed for $0.01 per right at any time before the rights become exercisable. In certain instances, the right to pur- chase applies to the capital stock of the acquirer instead of the common stock of the Company. The Company has reserved pre- The Company accounts for executive stock options issued under this Plan using Accounting Principles Board Opinion No. 25, which results in no charge to earnings when options are issued at fair mar- ket value. The Company has elected the disclosure requirements of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation.” If compensation costs had been determined based on the fair value at the grant dates for awards under this Plan, consistent with SFAS No.123, the impact on net earnings and earnings per share would be less than one cent per share. The weighted-average fair value of options granted during 2000, 1999, and 1998 esti- mated on the date of grant using the Black-Scholes option-pricing model was $9.25, $10.01, and $15.51, respectively. The fair value of 2000, 1999, and 1998 options granted is estimated on the date of grant using the following assumptions: dividend yield of 0.90% to 1.97%, expected volatility of 31.04% to 35.89%, risk-free inter- est rate of 4.90% to 6.56%, and an expected life of 10 to 12 years depending on grant date. ferred shares necessary for issuance should the rights be exercised. The status of the Company’s stock option plans is summarized 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 below: Outstanding at January 3, 1998 of the Company’s common stock or when more than one-third of the Company’s Board of Directors is composed of persons not rec- ommended by at least three-fourths of the incumbent Board of Directors. Upon a change in control, a key employee is deemed to Granted Exercised Forfeited have a two-year employment with the Company, and all his or her Outstanding at benefits are vested under Company plans. If, at any time within two January 2, 1999 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 annual salary and the average of the prior two years’ bonuses. Stock Options Under the Company’s 1995 Stock-Based Compensation Plan, as amended and restated effective November 10, 2000, the Company may award options to purchase shares of the Company’s common stock and grant other stock awards to executives, managers, and key personnel. The Plan is administered by the Human Resources and Compensation Committee of the Board of Directors. Stock options Granted Exercised Forfeited Outstanding at January 1, 2000 Granted Exercised Forfeited Outstanding at December 30, 2000 Options exercisable at: December 30, 2000 January 1, 2000 January 2, 1999 Number of Shares 156,000 20,000 – – 176,000 328,750 – (97,000) 407,750 532,500 (22,000) – Weighted-Average Exercise Price $24.74 $32.50 – – $25.62 $23.47 – $23.86 $24.30 $20.13 $23.80 – 918,250 $21.90 – – – – – – 32 HON INDUSTRIES Inc. and Subsidiaries The following table summarizes information about fixed stock In 1992, the Company established a trust to administer a lever- options outstanding at December 30, 2000: aged 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 partici- pants. During 1998, the final shares in the Plan were allocated to participants, and the Plan was subsequently merged into the Company’s defined contribution profit-sharing plan. Selected financial data pertaining to the ESOP is as follows: (In thousands, except share data) 2000 1999 Company contribution to ESOP Dividend income of ESOP Shares of common stock allocated to ESOP participant accounts Closing market price of common stock as of year-end – – – – – – – – 1998 $÷«656 533 96,304 $23.94 Options Outstanding Weighted- Average Remaining Contractual Life Weighted- Average Exercise Price Options Exercisable Number Exercisable at December 30, 2000 Range of Exercise Prices Number Outstanding $24.50-$28.25 112,000 6.5 years $32.50 20,000 7.1 years $23.31-$23.47 253,750 $18.31-$26.69 532,500 8.1 years 9.6 years $24.83 $32.50 $23.47 $20.13 0 0 0 0 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 $24,400,000, $21,297,000, and $20,101,000 in 2000, 1999, and 1998, 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. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 132, “Employer’s Disclosures about Pensions and Other Postretirement Benefits,” as of January 4, 1998, the beginning of its 1998 fiscal year. Net pension costs relating to these plans were $-0-, $-0-, and $-0- for 2000, 1999, and 1998, respectively. The actuarial present value of obligations, less related plan assets at fair value, is not significant. The Company also participates in a multiemployer plan, which pro- vides defined benefits to certain of the Company’s union employees. Pension expense for this plan amounted to $308,500, $329,000, and $306,000 in 2000, 1999, and 1998, respectively. HON INDUSTRIES Inc. and Subsidiaries 33 Postretirement Health Care medical coverage and decrease until the maximum Company subsidy The Company adopted Statement of Financial Accounting (cap) is reached in 2006. For the prescription drug coverage, the 2001 Standards (SFAS) No. 132, “Employers’ Disclosures about Pensions gross trend rates begin at 8.0% and decrease until the cap is reached and Other Postretirement Benefits,” as of January 4, 1998. The in 2006. Assumed health care cost trend rates have a significant effect Company adopted SFAS No. 106, “Employers’ Accounting for on the amounts reported for the health care plans. A 1% change in Postretirement Benefits Other Than Pensions,” as of January 3, assumed health care cost trend rates would have the following effects: 1993, and recorded the cumulative effect of the accounting change on the deferred recognition basis. (In thousands) 1% Increase 1% Decrease The following table sets forth the funded status of the plan, recon- ciled to the accrued postretirement benefits cost recognized in the Company’s balance sheet at: (In thousands) Reconciliation of benefit obligation: Obligation at beginning of year Service cost Interest cost Benefit payments Actuarial (gains) losses Current year prior service cost 2000 1999 1998 $20,237 $17,341 $15,409 182 882 (981) (5,888) (2,203) 529 1,137 (1,013) 2,243 – 419 1,045 (974)) (1,442) – Obligation at end of year $12,229 $20,237 $17,341 Funded status: Funded status at end of year Unrecognized transition obligation Unrecognized prior-service cost Unrecognized gain (loss) Net amount recognized Net periodic postretirement benefit cost include: Service cost Interest cost Amortization of transition obligation over 20 years Amortization of prior service cost Amortization of (gains) and losses Net periodic postretirement benefit cost $12,229 $20,237 $17,341 (7,103) (9,362) (10,075) (1,813) 5,457 (2,338) 862 (2,484)) 4,031 $««8,770 $÷9,399 $÷8,813 882 581 – 1,137 1,045 713 146 713 146 (539) (629) (767)) $««1,106 $÷1,896 $÷1,556 The discount rates at fiscal year-end 2000, 1999, and 1998 were 8.0%, 7.5%, and 6.75%, respectively. The pre-65 2001 gross trend rates begin at 8.0% for the medical and prescription drug coverages and grade down to 5.0% in six years and remain at this level for all future years. The post-64 gross trend rates begin at 7.25% for the 34 HON INDUSTRIES Inc. and Subsidiaries Effect on total of service and interest cost components of net periodic postretirement health care benefit cost Effect on the health care component of the accumulated postretirement benefit obligation $«««««««54 $««««««(22)))))) $«««««519 $««««(325) Leases The Company leases certain warehouse and plant facilities and equipment. Commitments for minimum rentals under noncancelable leases at the end of 2000 are as follows: (In thousands) 2001 2002 2003 2004 2005 Thereafter Total minimum lease payments Less amount representing interest Present value of net minimum lease payments, including current maturities of $2,121,000 Capitalized Leases Operating Leases $««2,398 $13,318 1,078 11,316 9,509 7,818 4,893 10,584 $57,438 211 211 211 1,224 5,333 1,020 $««4,313 (In thousands) Buildings 2000 1999 1998 $««3,299 $÷3,299 $÷3,299 Machinery and equipment 15,805 15,805 15,805 Less allowances for depreciation 14,655 11,816 19,104 19,104 19,104 8,978 $««4,449 $««7,288 $10,126 Rent expense for the years 2000, 1999, and 1998 amounted to approximately $15,428,000, $10,403,000, and $10,150,000, respectively. The Company has operating leases for office and pro- duction facilities with annual rentals totaling $450,000 with the former owners of a business acquired in 1996. These individuals continue as officers of a subsidiary of the Company following $«««««182 $«««««529 $÷«««419 amounts for capitalized leases: Property, plant, and equipment at year-end include the following the merger. Contingent rent expense under both capitalized and by segment are those assets applicable to the respective industry operating leases (generally based on mileage of transportation segments. Corporate assets consist principally of cash and cash equipment) amounted to $941,000, $755,000, and $596,000 for equivalents, short-term investments, and corporate office real estate the years 2000, 1999, and 1998, respectively. and related equipment. Contingencies No geographic information for revenues from external customers or The Company is involved in various legal actions which have arisen for long-lived assets is disclosed since the Company’s primary mar- in the course of business. Management believes the outcome of ket and capital investments are concentrated in the United States. these matters will not have a material effect on the financial condi- tion or results of operations of the Company. Reportable segment data reconciled to the consolidated financial statements for the years ended 2000, 1999, and 1998 is as follows: Operating Segment Information The Company adopted Statement of Financial Accounting Standards (SFAS) No. 131, “Disclosures about Segments of an (In thousands) Net sales: 2000 1999 1998 Enterprise and Related Information,” effective with its 1998 fiscal Office furniture $1,649,937 $1,514,991 $1,460,668 year beginning January 4, 1998. This segment disclosure is essen- Hearth products 396,349 285,940 245,960 tially unchanged from the format used by the Company historically in complying with SFAS No. 14, “Financial Reporting for Segments of a Business Enterprise,” and SFAS No. 30, “Disclosures of Information about Major Customers.” That is, management views the Company as being in two operating segments: office furniture and hearth products, with the former being the principal 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 products segment manufac- tures and markets a broad line of manufactured gas-, pellet-, and wood-burning fireplaces and stoves, fireplace inserts, gas logs, and chimney systems principally for the home. The Company’s two operating segments are somewhat seasonal with the third (July-September) and fourth (October-December) fiscal quarters historically having higher sales than the prior quar- ters. In fiscal 2000, 51% of the Company’s consolidated net sales of office furniture were generated in the third and fourth quarters and 54% of consolidated net sales of hearth products were gener- ated in the third and fourth quarters. Operating profit: Office furniture* Hearth products Total operating profit Unallocated corporate expenses Income before income taxes Identifiable assets: Office furniture Hearth products General corporate Depreciation and amortization expense: Office furniture Hearth products General corporate 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 Capital expenditures – net: Office furniture Hearth products expenses. These unallocated corporate expenses include the net General corporate costs of the Company’s corporate operations, interest income, and interest expense. Management views interest income and expense as corporate financing costs and not as an operating segment cost. In addition, management applies an effective income tax rate to its $2,046,286 $1,800,931 $1,706,628 $«««171,647 $«««131,607 $«««165,314 30,232 34,588 31,478 201,879 166,195 196,792 (35,915) (28,620) (26,683)) $«««165,964 $«««137,575 $«««170,109 $«««638,075 $«««678,503 $«««660,626 327,528 174,386 154,817 56,867 53,834 49,026 $1,022,470 $«««906,723 $«««864,469 $«««««58,926 $«««««52,483 $«««««42,562 18,109 2,011 11,065 1,905 9,120 1,317 $«««««79,046 $«««««65,453 $«««««52,999 $«««««39,361 $«««««48,565 $«««128,482 17,643 2,836 16,489 6,420 18,162 3,073 $«««««59,840 $«««««71,474 $«««149,717 *1999 includes a one-time pre-tax charge of $19.7 million for the closing of facilities and reorganization expenses. consolidated income before income taxes so income taxes are not One office furniture customer accounted for approximately 14%, reported or viewed internally on a segment basis. Identifiable assets 13%, and 12% of consolidated net sales in 2000, 1999, and 1998, respectively. HON INDUSTRIES Inc. and Subsidiaries 35 Summary of Unaudited Quarterly Results of Operations The following table presents certain unaudited quarterly financial information for each of the past 12 quarters. In the opinion of the Company’s management, this information has been prepared on the same basis as the consolidated financial statements appearing elsewhere in this report and includes all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial results set forth herein. Results of operations for any previous quarter are not necessarily indicative of results for any future period. (In thousands, except per share data) Year-End 2000 (a)(b): Net sales Cost of products sold Gross profit Selling and administrative expenses Operating income Interest income (expense) – net Income before income taxes Income taxes Net income Net income per common share Weighted-average common shares outstanding As a Percentage of Net Sales Net sales Gross profit Selling and administrative expenses Operating income Income taxes Net income Year-End 1999 (a): Net sales Cost of products sold Gross profit Selling and administrative expenses Provision for closing facilities and reorganization expenses Operating income Interest income (expense) – net Income before income taxes Income taxes Net income Net income per common share Weighted-average common shares outstanding As a Percentage of Net Sales Net sales Gross profit Selling and administrative expenses Provision for closing facilities and reorganization expenses Operating income Income taxes Net income 36 HON INDUSTRIES Inc. and Subsidiaries First Quarter Second Quarter Third Quarter Fourth Quarter $481,523 $509,649 $535,322 $519,792 329,416 152,107 111,214 40,893 (2,550) 38,343 13,803 $÷24,540 $÷÷÷÷.41 60,186 100.0% 31.6 23.1 8.5 2.9 5.1 343,842 165,807 125,513 40,294 (3,688) 36,606 13,188 $÷23,418 $÷÷÷÷.39 60,145 100.0% 32.5 24.6 7.9 2.6 4.6 354,367 180,955 124,197 56,758 (3,303) 53,455 19,234 $÷34,221 $÷÷÷÷.57 60,162 100.0% 33.8 23.2 10.6 3.6 6.4 352,779 167,013 126,924 40,089 (2,529) 37,560 13,522 $÷24,038 $««««««««.40 60,069 100.0% 32.1 24.4 7.7 2.6 4.6 $427,660 $422,377 $478,609 $472,285 295,222 132,438 92,465 19,679 20,294 (2,045) 18,249 6,661 $««11,588 $÷÷÷÷.19 61,154 100.0% 31.0 21.6 4.6 4.7 1.6 292,077 130,300 92,454 – 37,846 (2,399) 35,447 12,938 $««22,509 $÷÷÷÷.37 61,169 100.0% 30.8 21.9 – 9.0 3.1 327,243 151,366 104,105 – 47,261 (2,160) 45,101 16,462 $««28,639 $÷÷÷÷.47 60,921 100.0% 31.6 21.8 – 9.9 3.5 322,070 150,215 109,173 – 41,042 (2,264) 38,778 14,154 $««24,624 $÷÷÷÷.41 60,159 100.0% 31.8 23.1 – 8.7 3.0 ÷÷÷÷2.7 ÷÷÷÷5.3 ÷÷÷÷6.0 ÷÷÷÷5.2 (In thousands, except per share data) Year-End 1998 (a)(c): Net sales Cost of products sold Gross profit Selling and administrative expenses Operating income Interest income (expense) – net Income before income taxes Income taxes Net income Net income per common share Weighted-average common shares outstanding As a Percentage of Net Sales Net sales Gross profit Selling and administrative expenses Operating income Income taxes Net income First Quarter Second Quarter Third Quarter Fourth Quarter $420,791 $403,809 $451,320 $430,708 291,571 129,220 91,091 38,129 (2,172) 35,957 13,484 $««22,473 $÷÷÷÷.36 61,648 100.0% 30.7 21.6 9.1 3.2 5.4 278,107 125,702 85,605 40,097 (2,691) 37,406 14,027 $««23,379 $÷÷÷÷.38 61,663 100.0% 31.1 21.2 9.9 3.5 5.8 309,080 142,240 90,803 51,437 (2,025) 49,412 18,530 294,239 136,469 86,955 49,514 (2,180) 47,334 17,755 $««30,882 $««29,579 $.50 61,691 $.48 61,596 100.0% 100.0% 31.5 20.1 11.4 4.1 6.8 31.7 20.2 11.5 4.1 6.9 (a) Data has been restated to include shipping and handling costs billed to customers as revenue per EITF Issue No. 00-10. (b) First quarter 2000 includes partial quarterly results of operation of American Fireplace Company and the Allied Group acquisitions acquired February 29, 2000. (c) First quarter 1998 includes partial quarterly results of operation of Aladdin Steel Products, Inc. acquisition acquired February 20, 1998. Common Stock Market Prices and Dividends (Unaudited) Common Stock Market Price and Price/Earnings Ratio Quarterly 2000–1999 (Unaudited) Fiscal Years 2000–1990 2000 by Quarter 1st 2nd 3rd 4th Total Dividends Paid 1999 by Quarter 1st 2nd 3rd 4th Total Dividends Paid High $25ef 27uk 27uk 27qk High $24qs 29uk 28qk 23ef Low $15oah 23 23eah 21 Low $19ef 21tk 19qah 18ef Dividends per Share $.11 .11 .11 .11 $÷.44 Dividends per Share $.095 .095 .095 .095 $÷.38 Market Price* High 27uk 29uk 37eah 32qk 21ek 15tk 17 14tk 11ef 10qf 11qs Low 15oah 18ef 20 15uk 9qf 11qs 12 10ef 8qf 6tk 6ef Earnings per Share* 1.77 1.44 1.72 1.45 1.13 .67 .87 .70 .59 .51 .65 Year 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 Eleven-Year Average *Adjusted for the effect of stock splits Price/Earnings Ratio High 16 21 22 22 19 23 20 21 20 20 18 20 Low 9 13 12 11 8 17 14 15 14 13 10 12 HON INDUSTRIES Inc. and Subsidiaries 37 Selected Financial Data – Eleven-Year Summary Per Common Share Data Income before Cumulative Effect of Accounting Changes Cumulative Effect of Accounting Changes Net Income Cash Dividends Book Value Net Working Capital Operating Results (Thousands of Dollars) Net Sales Cost of Products Sold Gross Profit Interest Expense Income before Income Taxes Income before Income Taxes as a % of Net Sales Federal and State Income Taxes Effective Tax Rate Income before Cumulative Effect of Accounting Changes Net Income Net Income as a % of Net Sales Cash Dividends and Share Purchase Rights Redeemed Addition to (Reduction of) Retained Earnings Net Income Applicable to Common Stock % Return on Average Shareholders’ Equity Depreciation and Amortization Distribution of Net Income % Paid to Shareholders % Reinvested in Business Financial Position (Thousands of Dollars) Current Assets Current Liabilities Working Capital Net Property, Plant, and Equipment Total Assets % Return on Beginning Assets Employed Long-Term Debt and Capital Lease Obligations Shareholders’ Equity Retained Earnings Current Ratio Current Share Data Number of Shares Outstanding at Year-End Weighted-Average Shares Outstanding During Year Number of Shareholders of Record at Year-End Other Operational Data 2000(a) 1999(a) 1998(a) 1997 $«««««««««1.77 $«««««««««1.44 $«««««««««1.72 $«««««««««1.45 – 1.77 .44 9.59 1.09 $2,046,286 1,380,404 665,882 14,015 165,964 – 1.44 .38 8.33 1.52 $1,800,931 1,236,612 564,319 9,712 137,575 – 1.72 .32 7.54 1.19 $1,706,628 1,172,997 533,631 10,658 170,109 – 1.45 .28 6.19 1.53 $1,362,713 933,157 429,556 8,179 139,128 8.11% 7.64% 9.97% 10.21% $«««««59,747 $«««««50,215 $«««««63,796 $«««««52,173 36.0% 36.5% 37.50% 37.50% $«««106,217 $«««««87,360 $«««106,313 $«««««86,955 106,217 5.19% 87,360 4.85% 106,313 6.23% 86,955 6.38% $«««««26,455 $«««««23,112 $«««««19,730 $«««««16,736 79,762 106,217 19.77% 64,248 87,360 18.14% 86,583 106,313 25.20% 37,838 86,955 27.43% $«««««79,046 $«««««65,453 $«««««52,999 $«««««35,610 24.91% 75.09% 26.46% 73.54% 18.56% 81.44% 19.25% 80.75% $«««330,141 $«««316,556 $«««290,329 $«««295,150 264,868 65,273 454,312 1,022,470 19.63% $«««128,285 573,342 495,796 1.25 225,123 91,433 455,591 906,723 16.94% 217,438 72,891 444,177 864,469 23.74% 200,759 94,391 341,030 754,673 28.27% $«««124,173 $«««135,563 $«««134,511 501,271 416,034 1.41 462,022 351,786 1.34 381,662 265,203 1.47 59,796,891 60,171,753 61,289,618 61,659,316 60,140,302 60,854,579 61,649,531 59,779,508 6,563 6,737 5,877 5,399 Capital Expenditures – Net (Thousands of Dollars) Members (Employees) at Year-End $«««««59,840 11,543(b) $«««««71,474 10,095 $«««149,717 9,824(b) $«««««85,491 9,390(b) (a) Data has been restated to include shipping and handling costs billed to customers as revenue per EITF Issue No. 00-10. Restatement of prior years deemed immaterial. (b) Includes acquisitions completed during year. 38 HON INDUSTRIES Inc. and Subsidiaries 1996 1995 1994 1993 1992 1991 1990 $««««««1.13 $««««««««.67 $««««««««.87 $««««««««.69 $««««««««.59 $««««««««.51 $««««««««.65 – 1.13 .25 4.25 .89 $998,135 679,496 318,639 4,173 105,267 10.55% $««37,173 35.31% $««68,094 68,094 6.82% – .67 .24 3.56 1.07 $893,119 624,700 268,419 3,569 65,517 7.34% $««24,419 37.27% $««41,098 41,098 4.60% – .87 .22 3.17 1.27 $845,998 573,392 272,606 3,248 86,338 10.21% $««31,945 37.00% $««54,393 54,156 6.43% .01 .70 .20 2.83 1.23 $780,326 537,828 242,498 3,120 70,854 9.08% $««26,216 37.00% $««44,638 45,127 5.78% – .59 .19 2.52 1.23 $706,550 479,179 227,371 3,441 61,893 8.76% $««23,210 37.50% $««38,683 38,683 5.47% – .51 .18 2.32 1.07 – .65 .15 2.03 .82 $607,710 $663,896 411,168 196,542 3,533 52,653 8.66% $««19,745 37.50% $««32,908 32,908 5.42% 458,522 205,374 3,611 69,085 10.41% $««25,907 37.50% $««43,178 43,178 6.50% $««14,970 $««14,536 $««13,601 $««12,587 $««12,114 $««11,656 $««««9,931 33,860 68,094 29.06% 18,863 41,098 20.00% 13,563 54,156 28.95% 17,338 45,127 26.35% 26,569 38,683 24.75% 18,182 32,908 23.41% (11,952) 43,178 33.24% $««25,252 $««21,416 $««19,042 $««16,631 $««15,478 $««14,084 $««13,973 21.98% 78.02% 35.37% 64.63% 25.11% 74.89% 27.89% 72.11% 31.32% 68.68% 35.42% 64.58% 23.00% 77.00% $205,527 $194,183 $188,810 $188,419 $171,309 $150,901 $146,591 152,553 52,974 234,616 513,514 25.93% $««77,605 252,397 227,365 1.35 128,915 65,268 210,033 409,518 17.91% $««42,581 216,235 193,505 1.51 111,093 77,717 177,844 372,568 24.72% $««45,877 194,640 174,642 1.70 110,759 77,660 157,770 352,405 22.14% $««45,916 179,553 161,079 1.70 91,780 79,529 145,849 322,746 22.18% $««50,961 163,009 143,741 1.87 82,275 68,626 125,465 280,893 19.66% $««32,734 149,575 117,172 1.83 93,465 53,126 124,603 276,984 24.00% $««37,250 131,612 98,990 1.57 59,426,530 60,788,674 61,349,206 63,351,692 64,737,912 64,417,370 64,769,794 60,228,590 60,991,284 62,435,450 64,181,088 65,517,990 64,742,976 66,220,810 5,319 5,479 5,556 4,653 4,534 4,466 4,331 $««44,684 6,502(b) $««53,879 5,933 $««35,005 6,131 $««27,541 6,257 $««26,626 5,926 $««13,907 5,599 $««20,709 6,073 HON INDUSTRIES Inc. and Subsidiaries 39 Report of Independent Public Accountants Management’s Responsibility for Financial Statements To the Board of Directors of HON INDUSTRIES Inc. Management is responsible for the preparation, integrity, and We have audited the accompanying consolidated balance objectivity of the consolidated financial statements and other financial sheets of HON INDUSTRIES Inc. and subsidiaries as of December information presented in this report. The accompanying consolidated 30, 2000, January 1, 2000, and January 2, 1999, and the related financial statements and related notes were prepared in accordance consolidated statements of income, shareholders’ equity, and cash with generally accepted accounting principles, applying certain flows for each of the fiscal years then ended. These financial state- estimates and judgments as required. ments are the responsibility of the Company’s management. Our HON INDUSTRIES’ internal controls are designed to provide responsibility is to express an opinion on these consolidated reasonable assurance as to the integrity and reliability of the finan- financial statements based on our audit. cial statements and to adequately safeguard, verify, and maintain We conducted our audits in accordance with auditing accountability of assets. Such controls are based on established standards generally accepted in the United States. Those standards written policies and procedures, are implemented by trained, skilled require that we plan and perform the audit to obtain reasonable personnel with an appropriate segregation of duties, and are moni- assurance about whether the consolidated financial statements are tored through a comprehensive internal audit program. These policies free of material misstatement. An audit includes examining, on a and procedures prescribe that the Company and all its members are test basis, evidence supporting the amounts and disclosures in the to maintain the highest ethical standards and that its business practices consolidated financial statements. An audit also includes assessing are to be conducted in a manner which is above reproach. the accounting principles used and significant estimates made by Arthur Andersen LLP, independent public accountants, is management, as well as evaluating the overall consolidated financial retained to audit HON INDUSTRIES’ financial statements. Their statement presentation. We believe that our audits provide a accompanying report is based on audits conducted in accordance reasonable basis for our opinion. with generally accepted auditing standards, which includes the con- In our opinion, the consolidated financial statements referred sideration of the Company’s internal controls to establish a basis to above present fairly, in all material respects, the financial posi- for reliance thereon in determining the nature, timing, and extent tion of HON INDUSTRIES Inc. and subsidiaries as of December of audit tests to be applied. 30, 2000, January 1, 2000, and January 2, 1999, and the results The Board of Directors exercises its responsibility for these of its operations and its cash flows for each of the three fiscal years financial statements through its Audit Committee, which consists then ended, in conformity with accounting principles generally entirely of nonmanagement board members. The Audit Committee accepted in the United States. Chicago, Illinois February 5, 2001 meets periodically with the independent public accountants and with the Company’s internal auditors, both privately and with man- agement present, to review accounting, auditing, internal controls, and financial reporting matters. JACK D. MICHAELS Chairman, President and DAVID C. STUEBE Vice President and Chief Executive Officer Chief Financial Officer 40 HON INDUSTRIES Inc. and Subsidiaries Corporate Responsibility Supporting our communities: We’ll be there. HON INDUSTRIES is dedicated to improving the quality of life in communities where our members live, work, and raise their families. Nothing is more important than the active participation of our members in community affairs. Whether coaching youth sports activities, leading a scout troop, or reading to elementary school students, our members make a difference. Through their volunteer efforts, they give back to our communities. The HON INDUSTRIES Charitable Foundation devotes its efforts to benefit and enhance our communities, education, and families and children. The Foundation recently helped expand day care in one commu- nity to serve more than 100 children. Through awards to educational institutions and scholarships for members’ children, the Foundation improves educational opportunities. It also helps museums, cultural institutions, and other nonprofit organizations create programs that benefit personal growth for families and children. Now and in the future, HON INDUSTRIES and its members will be there to invest in our communities, our education system, and families and children to ensure a prosperous future. HON INDUSTRIES Inc. 41 Board of Directors Gary M. Christensen President and Chief Executive Officer, Pella Corporation Robert W. Cox Chairman Emeritus, Baker & McKenzie Cheryl A. Francis Former Executive Vice President and CFO, RR Donnelly & Sons Company Gus Hillenbrand Retired President and Chief Executive Officer, Hillenbrand Industries, Inc. Robert L. Katz President, Robert L. Katz and Associates Dennis J. Martin Executive Vice President, Illinois Tool Works, Inc. President, ITW Hobart President, The Miller Group, ITW HON INDUSTRIES directors are seated in the Mirati® chair from Allsteel. The chair’s hourglass silhouette reflects European trends while its substance is decidedly American. The influences are skillfully blended to create a striking transatlantic design. 42 HON INDUSTRIES Inc. Jack D. Michaels Chairman, President and CEO, HON INDUSTRIES Inc. Abbie J. Smith Chaired Professor, The University of Chicago, Graduate School of Business Richard H. Stanley Vice Chairman of the Board of Directors, HON INDUSTRIES Inc. Brian E. Stern President, Xerox Technology Enterprises Xerox Corporation Lorne R. Waxlax Retired Executive Vice President, The Gillette Company Chairman, SC Companies, Inc. Chairman, Stanley Consultants, Inc. Committees of the Board Audit Cheryl A. Francis, Chairperson Gus Hillenbrand Dennis J. Martin Abbie J. Smith Human Resources and Compensation Lorne R. Waxlax, Chairperson Gary M. Christensen Robert L. Katz Public Policy and Corporate Governance Richard H. Stanley, Chairperson Robert W. Cox Brian E. Stern HON INDUSTRIES Inc. 43 Officers Subsidiaries JACK D. MICHAELS Chairman, President and CEO GORDON R. MARSHALL Vice President, Marketing JERALD K. DITTMER Vice President, Finance JEFFREY D. FICK Vice President, Member and Community Relations MALCOLM C. FIELDS Vice President and Chief Information Officer ROBERT D. HAYES Vice President, Internal Audit JAMES I. JOHNSON Vice President, General Counsel and Secretary JOHN S. MCGLINN Senior Vice President, Operations Improvement PHILLIP M. MARTINEAU Executive Vice President, Wood MELVIN L. MCMAINS Vice President and Controller THOMAS K. MILLER Vice President, International WILLIAM F. SNYDACKER Treasurer DAVID C. STUEBE Vice President and Chief Financial Officer ALLSTEEL INC. STANLEY A. ASKREN President BPI INC. JEAN M. REYNOLDS President HEARTH TECHNOLOGIES INC. DANIEL C. SHIMEK President HOLGA INC. BRIAN R. OKEN President THE HON COMPANY DAVID C. BURDAKIN President 44 HON INDUSTRIES Inc. and Subsidiaries Investor Information Schedule of Quarterly Results The Company operates on a fiscal Independent Public Accountants Arthur Andersen LLP Safe Harbor Statement Statements in this annual report that year ending on the Saturday nearest 33 West Monroe Street are not strictly historical, including December 31. Quarterly results are Chicago, IL 60603-5385 statements as to plans, objectives, typically announced within 20 days after the end of each quarter, and audited results are typically announced Financial Information and Inquiries Shareholders or other interested “forward-looking” statements that are made pursuant to the safe harbor and future financial performance, are within 40 days after year-end. investors are welcome to call or write provisions of the Private Securities Fiscal 2001 Quarter-End Dates 1st Quarter >Saturday, March 31 2nd Quarter >Saturday, June 30 3rd Quarter >Saturday, September 29 DAVID C. STUEBE, with questions or requests for Litigation Reform Act of 1995. additional information. Inquiries Forward-looking statements involve should be directed to: known and unknown risks, which may cause the Company’s actual results in the future to differ materially from 4th Quarter >Saturday, December 29 Vice President and CFO expected results. These risks include, Annual Meeting The Company’s annual shareholders’ or JAMES P. MCKEONE, among others, competition within the Investor Relations Manager office furniture and fireplace industries; the relationship between supply and meeting will be held at 10:30 a.m. on HON INDUSTRIES Inc. demand for value-priced office prod- Monday, May 7, 2001, at the Holiday P.O. Box 1109 ucts, as well as direct vent gas and Inn, Highways 61 & 38 North, Muscatine, IA 52761-0071 wood fireplaces; the effects of economic Muscatine, Iowa. Shareholders and Telephone: 319-264-7400 conditions; issues associated with the other interested investors are encour- Fax: 319-264-7655 aged to attend the meeting. www.honi.com acquisition and integration of acquisi- tions; operating risks; the ability of the Company to realize cost savings and 10-K Report A copy of the Company’s annual report Common Stock HON INDUSTRIES common stock productivity improvements; the ability of the Company’s distributors to suc- filed with the Securities and Exchange trades on the New York Stock cessfully market and sell the Company’s Commission on Form 10-K is available, Exchange under the symbol: HNI. products; and the availability of capital without charge, upon written request to Stock price quotations can be found to finance planned growth, as well as David C. Stuebe, Vice President and in major daily newspapers and The the risks, uncertainties, and other fac- tors described from time to time in the Company’s filings with the Securities and Exchange Commission. CFO, at the Company’s corporate Wall Street Journal. headquarters address. Corporate Headquarters HON INDUSTRIES Inc. 414 East Third Street P.O. Box 1109 Muscatine, IA 52761-0071 Telephone: 319-264-7400 Fax: 319-264-7217 Website: www.honi.com Transfer Agent Shareholders may report a change of address or make inquiries by writing or calling: Computershare Investor Services, LLC 2 North LaSalle Street Chicago, IL 60602 Telephone: 312-588-4991 HON INDUSTRIES Inc. and Subsidiaries 45 s c i h p a r G e v i t c A : g n i t n i r P g n i s s e l B h c i r d e H : y h p a r g o t o h P r o i r e t n I n i w d o o G w e r d n A : y h p a r g o t o h P e v i t u c e x E o r d n a S : y h p a r g o t o h P l a p i c n i r P m o c . n d n a c b . w w w / u e N & s e t a o C r e l l o B : n g i s e D