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HNI > SEC Filings for HNI > Form 10-Q on 30-Jul-2013All Recent SEC Filings

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Form 10-Q for HNI CORP


30-Jul-2013

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 second quarter of fiscal 2013 increased 6.3 percent to $510.7 million when compared to the second quarter of fiscal 2012. The increase was driven by both the office furniture and hearth products segments. Gross margins for the quarter decreased from prior year levels due to new product ramp up and facility reconfiguration costs to meet changing market demands and product category shifts partially offset by higher volume and increased price realization. Total selling and administrative expenses increased due to selling initiatives and a loss on the sale of a small non-core office furniture business.

Results of Operations

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

                                       Three Months Ended                                    Six Months Ended
                                                                Percent                                               Percent
(In thousands)          June 29, 2013       June 30, 2012       Change        June 29, 2013       June 30, 2012       Change
Net sales              $      510,698     $       480,400          6.3  %   $       952,995     $       925,612          3.0  %
Cost of sales                 336,040             315,287          6.6  %           630,555             613,672          2.8  %
Gross profit                  174,658             165,113          5.8  %           322,440             311,940          3.4  %
Selling and
administrative
expenses                      154,538             151,455          2.0  %           299,094             295,189          1.3  %
Restructuring and
impairment charges                (35 )               292       (112.0 )%               121               1,189        (89.8 )%
Operating income               20,155              13,366         50.8  %            23,225              15,562         49.2  %
Interest expense, net           2,567               2,633         (2.5 )%             5,083               5,068          0.3  %
Income before income
taxes                          17,588              10,733         63.9  %            18,142              10,494         72.9  %
Income taxes                    6,189               3,835         61.4  %             5,564               3,749         48.4  %
Net income             $       11,399     $         6,898         65.3  %   $        12,578     $         6,745         86.5  %

Consolidated net sales for the second quarter of 2013 increased 6.3 percent or $30.3 million compared to the same quarter last year. The increase was driven by both the office furniture segment and the hearth products segment. Compared to prior year quarter, divestitures of several small businesses, including office furniture dealers, partially offset by the acquisition of BP Ergo, resulted in a $4.9 million sales decline.

Gross margin for the second quarter of 2013 decreased to 34.2 percent compared to 34.4 percent for the same quarter last year. The decrease in gross margin was driven by new product ramp up and facility reconfiguration to meet changing market demand and product category shifts partially offset by higher volume and better price realization. Second quarter 2012 included $0.3 million of accelerated depreciation and transition costs related to the closure and consolidation of office furniture manufacturing facilities.

During the second quarter of 2013 the Corporation sold a small non-core office furniture business resulting in a loss on sale of $2.4 million. The business sold and the loss on sale are not material to the Corporation's quarterly or annual results and therefore has not been presented as discontinued operations on the Condensed Consolidated Statements of Comprehensive Income.

Total selling and administrative expenses, including restructuring charges, as a percentage of net sales improved to 30.3 percent compared to 31.6 percent for the same quarter last year due to higher volume, network distribution realignment savings and lower restructuring charges partially offset by investment in growth initiatives and a loss on the sale of a small non-core office furniture business. Second quarter 2012 included $0.8 million of restructuring and transition charges associated with plant consolidations.


The provision for income taxes for continuing operations for the three months ended June 29, 2013, reflects an effective tax rate of 35.2 percent compared to 35.7 percent for the same period last year. The 2013 estimated annual effective tax rate is expected to be 34.0 percent.

Net income attributable to HNI Corporation was $11.4 million or $0.25 per diluted share in the second quarter of 2013 compared to $7.0 million or $0.15 per diluted share in the second quarter of 2012.

For the first six months of 2013, consolidated net sales increased $27.4 million, or 3.0 percent, to $953.0 million compared to $925.6 million for the first six months of 2012 driven by an increase in the supplies-driven channel of the office furniture segment and higher sales in the hearth products segment. Gross margins increased to 33.8 percent compared to 33.7 percent for the same
period last year driven by higher volume and better price realization partially offset by unfavorable mix, new product ramp up and facility reconfiguration to meeting changing market demand and product category shifts. Net income attributable to HNI Corporation was $12.8 million for the first six months of 2013 compared to $6.9 million for the first six months of 2012. Earnings per share increased to $0.28 per diluted share compared to $0.15 per diluted share for the same period last year.

Office Furniture

Second quarter 2013 sales for the office furniture segment increased 4.2 percent or $17.6 million to $436.2 million from $418.6 million for the same quarter last year. The change was driven by increases in both the supplies-driven and contract channels due to strong project activity and increasing demand for new products. Compared to the prior year quarter, divestitures, partially offset by the acquisition of BP Ergo, resulted in a $4.9 million sales decline. Second quarter 2013 operating profit prior to unallocated corporate expenses increased 0.3 percent or $0.1 million to $22.1 million as a result of higher volume, increased price realization, distribution network realignment savings and lower restructuring charges. These were partially offset by new product ramp up, facility reconfigurations to meet changing market demands and product category shifts and a loss on the sale of a small non-core business. Second quarter 2012 included $1.1 million of restructuring and transition costs.

Net sales for the first six months of 2013 increased 0.6 percent or $4.8 million to $802.0 million compared to $797.2 million for the same period in 2012. The change was driven by an increase in the supplies-driven channel partially offset by a decrease in the other office furniture channels and the impact of small divestitures. Compared to the first six months of the prior year, divestitures, partially offset by the acquisition of BP Ergo, resulted in a $6.9 million sales decline. Operating profit for the first six months of 2013 increased 3.1 percent or $0.9 million to $30.8 million compared to $29.9 million for the same period in 2012 driven by the same drivers experienced in the current quarter.

Hearth Products

Second quarter 2013 net sales for the hearth products segment increased 20.5 percent or $12.7 million to $74.5 million from $61.8 million for the same quarter last year. The increase was driven by an increase in both the new construction channel due to housing market recovery and the remodel-retrofit channel due to strong remodeling activity. Operating profit prior to unallocated corporate expenses increased $4.8 million to $5.7 million compared to $0.9 million in the prior year quarter due to increased volume, higher price realization and lower input costs offset partially by investments in selling initiatives and higher incentive-based compensation.

Net sales for the first six months of 2013 increased 17.6 percent or $22.5 million to $151.0 million compared to $128.4 million for the same period in 2012. Operating profit for the first six months of 2013 increased $7.3 million to $9.3 million compared to $2.0 million for the same period in 2012. The year-to-date increase in sales and operating profit were driven by the same drivers experienced in the current quarter.

Liquidity and Capital Resources

Cash Flow - Operating Activities
Operating activities used $12.5 million of cash in the first six months of 2013 compared to generating $5.7 million in the first six months of 2012. Working capital was a $71.1 million use of cash in the first six months of the current fiscal year compared to a $35.2 million use of cash in the same period of the prior year. Trade receivables and inventory increased from the same period in the prior year due to timing and increased sales. Cash flow from operating activities is expected to be positive for the year.

Cash Flow - Investing Activities


Capital expenditures, including capitalized software, for the first six months of fiscal 2013 were $39.3 million compared to $25.1 million in the same period of fiscal 2012 and were primarily for tooling and equipment for new products, manufacturing investments for laminate capabilities and the on-going implementation of new integrated software systems to support business process transformation. For the full year 2013, capital expenditures are expected to be approximately $80 to $85 million, primarily focused on new product development and related tooling, accelerated manufacturing investments for laminate capabilities and the business systems transformation project referred to above.

Cash Flow - Financing Activities
The net borrowings under the revolving credit facility at the end of second quarter were $69 million and are classified as short-term as the Corporation expects to repay the borrowings within a year.

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, consolidated 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 June 29, 2013, 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 May 7, 2013, to shareholders of record at the close of business on May 17, 2013. The dividend was paid on May 31, 2013.

During the six months ended June 29, 2013, the Corporation repurchased 223,100 shares of common stock at a cost of approximately $7.7 million, or an average price of $34.56 per share. As of June 29, 2013, approximately $107.1 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 29, 2012. During the first six months of fiscal 2013, 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 29, 2012. During the first six months of fiscal 2013, 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 N. 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

Management is encouraged by the improvement in the office furniture and hearth products markets. The Corporation continues its investments in selling, marketing and product initiatives to drive profitable growth. Management believes the Corporation is well positioned to drive sales and solidly increase profits in 2013.

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, including its business system transformation (c) investments in strategic acquisitions, production capacity, 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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