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HNI > SEC Filings for HNI > Form 10-Q on 30-Oct-2012All Recent SEC Filings

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Form 10-Q for HNI CORP


30-Oct-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

The Corporation has two reportable segments: office furniture and hearth products. The Corporation is the second largest office furniture manufacturer in the world and the nation's leading manufacturer and marketer of gas- and wood-burning fireplaces. The Corporation utilizes its split and focus, decentralized business model to deliver value to its customers with its various brands and selling models. The Corporation is focused on growing its existing businesses while seeking out and developing new opportunities for growth.

Net sales for the third quarter of fiscal 2012 increased 9.2 percent to $550.9 million when compared to the third quarter of fiscal 2011. The increase was driven by new acquisitions in the office furniture segment and higher sales in the new construction channel of the hearth products segment. Gross margins for the quarter decreased from prior year levels due to unfavorable mix, seasonal ramp up inefficiencies and the impact of acquisitions offset partially by better price realization and lower material costs. Total selling and administrative expenses increased due to investments in growth initiatives and the impact of acquisitions. The Corporation completed the acquisition of BP Ergo, a leading manufacturer and marketer of office furniture in India, during the third quarter of 2012.

Results of Operations

The following table presents certain key highlights from the results of
operations for the periods indicated:

                                            Three Months Ended                                           Nine Months Ended
                                                                         Percent                                                      Percent
(In thousands)            September 29, 2012       October 1, 2011       Change        September 29, 2012       October 1, 2011       Change
Net sales               $            550,855     $         504,220          9.2  %   $          1,476,467     $       1,333,181         10.7  %
Cost of sales                        359,519               324,825         10.7  %                973,191               872,132         11.6  %
Gross profit                         191,336               179,395          6.7  %                503,276               461,049          9.2  %
Selling and
administrative expenses              149,421               138,671          7.8  %                444,610               407,281          9.2  %
Restructuring and
impairment charges                       172                   277        (37.9 )%                  1,361                 2,130        (36.1 )%
Operating income                      41,743                40,447          3.2  %                 57,305                51,638         11.0  %
Interest expense, net                  2,503                 2,345          6.7  %                  7,571                 8,724        (13.2 )%
Income before income
taxes                                 39,240                38,102          3.0  %                 49,734                42,914         15.9  %
Income taxes                          15,036                13,186         14.0  %                 18,785                15,192         23.7  %
Net income              $             24,204     $          24,916         (2.9 )%   $             30,949     $          27,722         11.6  %

Consolidated net sales for the third quarter of 2012 increased 9.2 percent or $46.6 million compared to the same quarter last year. The increase was driven by new acquisitions in the office furniture segment and higher sales in the new construction channel of the hearth products segment. Acquisitions contributed $42.6 million of sales, or 8.5 percent sales growth to the third quarter of 2012.

Gross margin for the third quarter of 2012 decreased to 34.7 percent compared to 35.6 percent for the same quarter last year. The decrease in gross margin was driven by unfavorable mix, seasonal ramp up inefficiencies and the impact of acquisitions offset partially by better price realization and lower material costs. Third quarter 2012 included $0.2 million of accelerated depreciation and transition costs related to the closure and consolidation of office furniture manufacturing facilities compared to $0.3 million in the same period in the prior year.

Total selling and administrative expenses, including restructuring charges, as a percentage of net sales decreased to 27.2 percent compared to 27.6 percent for the same quarter last year. Benefits from sales leverage were partially offset by investments in growth initiatives and acquisition related transaction expenses. Third quarter 2012 included $0.6 million of restructuring and transition charges associated with plant consolidations compared to $0.3 million in the same period in the prior year.


The provision for income taxes for continuing operations for the three months ended September 29, 2012 reflect an effective tax rate of 38.3 percent compared to 34.6 percent for the same period last year. The increase is due primarily to the research and development tax credit not being extended in 2012. The 2012 estimated annual effective tax rate is expected to be 38 percent.

Net income attributable to HNI Corporation was $24.5 million or $0.53 per diluted share in the third quarter of 2012 compared to $24.9 million or $0.55 per diluted share in the third quarter of 2011.

For the first nine months of 2012, consolidated net sales increased $143.3 million, or 10.7 percent, to $1.5 billion compared to $1.3 billion for the first nine months of 2011. Gross margins decreased to 34.1 percent compared to 34.6 percent for the same period last year. Net income attributable to HNI Corporation was $31.4 million for the first nine months of 2012 compared to $27.8 million for the first nine months of 2011. Earnings per share increased to $0.68 per diluted share compared to $0.61 per diluted share for the same period last year.

Office Furniture

Third quarter 2012 sales for the office furniture segment increased 10.9 percent or $45.9 million to $467.8 million from $421.9 million for the same quarter last year. Acquisitions contributed $42.6 million of sales, or 10.1 percent sales growth to the third quarter of 2012. Organic growth was effectively flat across all channels of the office furniture segment. Third quarter 2012 operating profit prior to unallocated corporate expenses decreased 7.4 percent or $3.1 million to $38.4 million as a result of unfavorable mix, seasonal ramp up inefficiencies, investments in growth initiatives and higher restructuring and transition costs. These were partially offset by better price realization and lower material costs. Third quarter 2012 included $0.8 million of restructuring and transition costs compared to $0.5 million of restructuring and transition costs in third quarter 2011.

Net sales for the first nine months of 2012 increased 12.4 percent or $139.3 million to $1.3 billion compared to $1.1 billion for the same period in 2011. Acquisitions contributed $83.0 million of sales, or 7.4 percent sales growth for the first nine months of 2012. Organic growth was across all channels of the office furniture segment. Operating profit for the first nine months of 2012 increased 1.3 percent or $0.9 million to $68.3 million compared to $67.5 million for the same period in 2011.

Hearth Products

Third quarter 2012 net sales for the hearth products segment increased 0.9 percent or $0.7 million to $83.1 million from $82.3 million for the same quarter last year. The increase was driven by an increase in the new construction channel partially offset by a decrease in the remodel-retrofit channel.
Operating profit prior to unallocated corporate expenses increased $2.2 million to $9.1 million compared to $6.9 million in the prior year quarter due to higher price realization and lower material costs offset partially by investments in selling and growth initiatives.

Net sales for the first nine months of 2012 increased 1.9 percent or $4.0 million to $211.5 million compared to $207.5 million for the same period in 2011. Operating profit for the first nine months of 2012 increased $5.7 million to $11.1 million compared to $5.3 million for the same period in 2011.

Liquidity and Capital Resources

Cash Flow - Operating Activities
Operating activities generated $80.8 million of cash in the first nine months of 2012 compared to $67.0 million in the first nine months of 2011. Working capital performance resulted in a $0.4 million use of cash in the first nine months of the current fiscal year compared to a $18.8 million use of cash in the same period of the prior year driven primarily by sell through of existing inventory at a newly acquired subsidiary and change in sales momentum.

Cash Flow - Investing Activities
Capital expenditures, including capitalized software, for the first nine months of fiscal 2012 were $44.7 million compared to $20.2 million in the same period of fiscal 2011 and were primarily for tooling and equipment for new products and the implementation of new integrated software systems to support business process transformation. For the full year 2012, capital expenditures are expected to be approximately $55 to $60 million, primarily focused on new product development and related tooling and the business systems transformation project referred to above.


The Corporation completed the acquisition of BP Ergo during the third quarter ended September 29, 2012 for a purchase price of approximately $25.5 million (including assumed indebtedness). The Corporation also completed the acquisition of the pellet stove business of Dansons, Inc. during the third quarter for a purchase price of approximately $1.5 million.

Cash Flow - Financing Activities
During the first nine months of fiscal 2012, net borrowings under the revolving credit facility peaked at $80 million. The net borrowings at the end of third quarter were $40 million and are classified as short-term as the Corporation expects to repay the borrowings within a year. The Corporation assumed $4.2 million of short-term bank debt with the acquisition of BP Ergo.

The Credit Agreement governing the Corporation's revolving credit facility contains a number of covenants, including covenants requiring maintenance of the following financial ratios as of the end of any fiscal quarter:

a consolidated interest coverage ratio of not less than 4.0 to 1.0, based upon the ratio of (a) consolidated EBITDA (as defined in the Credit Agreement) for the last four fiscal quarters to (b) the sum of consolidated interest charges; and

a consolidated leverage ratio of not greater than 3.0 to 1.0, based upon the ratio of (a) the quarter-end consolidated funded indebtedness (as defined in the Credit Agreement) to (b) consolidated EBITDA for the last four fiscal quarters; or

a consolidated leverage ratio of not greater than 3.5 to 1.0, based upon the ratio of (a) the quarter-end consolidated funded indebtedness to (b) consolidated EBITDA for the last four fiscal quarters following any qualifying debt financed acquisition.

The note purchase agreement pertaining to the Corporation's Senior Notes also contains a number of covenants, including a covenant requiring maintenance of consolidated debt to consolidated EBITDA (as defined in the note purchase agreement) of not greater than 3.5 to 1.0, based upon the ratio of (a) the quarter-end consolidated funded indebtedness (as defined in the note purchase agreement) to (b) consolidated EBITDA for the last four fiscal quarters.

The revolving credit facility is the primary source of committed funding from which the Corporation finances its planned capital expenditures and strategic initiatives, such as acquisitions, repurchases of common stock and certain working capital needs. Non-compliance with the various financial covenant ratios in the revolving credit facility or the Senior Notes could prevent the Corporation from being able to access further borrowings under the revolving credit facility, require immediate repayment of all amounts outstanding with respect to the revolving credit facility and Senior Notes and/or increase the cost of borrowing.

The most restrictive of the financial covenants is the consolidated leverage ratio requirement of 3.0 to 1.0 included in the Credit Agreement. Under the Credit Agreement, adjusted EBITDA is defined as consolidated net income before interest expense, income taxes and depreciation and amortization of intangibles, as well as non-cash, nonrecurring charges and all non-cash items increasing net income. At September 29, 2012, the Corporation was well below the maximum allowable ratio and was in compliance with all of the covenants and other restrictions in the Credit Agreement and the note purchase agreement. The Corporation currently expects to remain in compliance over the next twelve months.

The Corporation's Board of Directors (the "Board") declared a regular quarterly cash dividend of $0.24 per share on the Corporation's common stock on August 7, 2012, to shareholders of record at the close of business on August 17, 2012. The dividend was paid on August 31, 2012.

During the nine months ended September 29, 2012, the Corporation repurchased 528,000 shares of common stock at a cost of approximately $13.4 million, or an average price of $25.30 per share. As of September 29, 2012, approximately $122.4 million of the Board's current repurchase authorization remained unspent.

Cash, cash equivalents and short-term investments, coupled with cash from future operations, borrowing capacity under the existing facility and the ability to access capital markets, are expected to be adequate to fund operations and satisfy cash flow needs for at least the next twelve months.

Off-Balance Sheet Arrangements

The Corporation does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on the Corporation's financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.


Contractual Obligations

Contractual obligations associated with ongoing business and financing activities will result in cash payments in future periods. A table summarizing the amounts and estimated timing of these future cash payments was provided in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2011. During the first nine months of fiscal 2012, there were no material changes outside the ordinary course of business in the Corporation's contractual obligations or the estimated timing of the future cash payments.

Commitments and Contingencies

The Corporation is involved in various kinds of disputes and legal proceedings that have arisen in the ordinary course of business, including pending litigation, environmental remediation, taxes and other claims. It is the Corporation's opinion, after consultation with legal counsel, that additional liabilities, if any, resulting from these matters are not expected to have a material adverse effect on the Corporation's financial condition, cash flows or on the Corporation's quarterly or annual operating results when resolved in a future period.

Critical Accounting Policies

The preparation of the financial statements requires the Corporation to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Corporation continually evaluates its accounting policies and estimates. The Corporation bases its estimates on historical experience and on a variety of other assumptions believed by management to be reasonable in order to make judgments about the carrying value of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. A summary of the more significant accounting policies that require the use of estimates and judgments in preparing the financial statements is provided in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2011. During the first nine months of fiscal 2012, there were no material changes in the accounting policies and assumptions previously disclosed.

New Accounting Standards

For information pertaining to the Corporation's adoption of new accounting standards and any resulting impact to the Corporation's financial statements, please refer to Note O. New Accounting Standards of the Notes to the Condensed Consolidated Financial Statements, in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

Looking Ahead

Despite near-term economic and political uncertainties, management remains positive about the office furniture and hearth products markets and the prospects for long-term profitable growth. The Corporation continues its investments in selling, marketing and product initiatives to drive growth. Management believes the Corporation is well positioned for growth.

The Corporation continues to focus on creating long-term shareholder value by growing its businesses through investment in building brands, product solutions and selling models, enhancing its strong member-owner culture and remaining focused on its long-standing continuous improvement programs to build best total cost and a lean enterprise.

Forward-Looking Statements

Statements in this report that are not strictly historical, including statements as to plans, outlook, objectives and future financial performance, are "forward-looking" statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words, such as "anticipate," "believe," "could," "confident," "estimate," "expect," "forecast," "hope," "intend," "likely," "may," "plan," "possible," "potential," "predict," "project," "should," "will," "would" and variations of such words and similar expressions identify forward-looking statements. Forward-looking statements involve known and unknown risks, which may cause the Corporation's actual results in the future to differ materially from expected results. These risks include, without limitation: the Corporation's ability to realize financial benefits from its (a) price increases, (b) cost containment and business simplification initiatives, (c) investments in strategic acquisitions, new products and brand building, (d) investments in distribution and rapid continuous improvement, (e) ability to maintain its effective tax rate, (f) repurchases of common stock and (g) consolidation and logistical realignment initiatives; uncertainty related to the availability of cash and credit, and the terms and interest rates on which credit would be available, to fund operations and future growth; lower than expected demand for the Corporation's products due to uncertain political and economic conditions, slow or negative growth rates in global and domestic economies and the protracted decline in the housing market; lower industry growth than expected; major disruptions at our key facilities or in the supply of any key raw materials, components or finished goods; competitive pricing pressure from foreign and


domestic competitors; higher than expected costs and lower than expected supplies of materials; higher costs for energy and fuel; changes in the mix of products sold and of customers purchasing; relationships with distribution channel partners, including the financial viability of distributors and dealers; restrictions imposed by the terms of the Corporation's revolving credit facility and note purchase agreement; currency fluctuations and other factors described in the Corporation's annual and quarterly reports filed with the Securities and Exchange Commission on Forms 10-K and 10-Q. The Corporation undertakes no obligation to update, amend, or clarify forward-looking statements.

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