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HNI > SEC Filings for HNI > Form 10-K on 21-Feb-2014All Recent SEC Filings

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Form 10-K for HNI CORP


21-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the Corporation's historical results of operations and of its liquidity and capital resources should be read in conjunction with the Consolidated Financial Statements of the Corporation and related notes. Statements that are not historical are forward-looking and involve risks and uncertainties, including those discussed under "Item 1A. Risk Factors" and elsewhere in this report.

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 various brands and selling models. The Corporation is focused on growing its existing businesses while seeking out and developing new opportunities for growth.

The Corporation delivered strong profit improvement in 2013 despite challenging market conditions and a slow economy. Growth in the supplies-driven channel of the office furniture segment was solid despite the heavy weight of economic and political uncertainty on small business confidence. Growth in the contract channel of the office furniture segment was a result of strong project activity and market demand for new products. Both channels were impacted by a steep decline in sales to the federal government. The Corporation's hearth products segment leveraged its leading market position to increase sales and drive significant profit improvement as the housing market continued to recover. The Corporation remained committed to long-term profitable growth across its core businesses and increased the amount of focused investments in selling, marketing, manufacturing and product initiatives.

Net sales during 2013 were $2.1 billion, an increase of 2.8 percent, compared to net sales of $2.0 billion in 2012. The sales increase was driven by growth in the new construction and remodel/retrofit channels of the hearth products segment. The growth in the supplies-driven and contract channels of the office furniture segment was offset by a large decline in federal government sales and the impact of divestitures of several small businesses.

Management is positive about the office furniture and hearth markets. The Corporation will continue to invest in selling, marketing and product initiatives and remain focused on improving operations and reducing cost.

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Results of Operations

The following table sets forth the percentage of consolidated net sales represented by certain items reflected in the Corporation's Consolidated Statements of Income for the periods indicated.

Fiscal                                            2013           2012           2011
Net Sales                                         100.0  %       100.0  %       100.0  %
Cost of products sold                              65.3           65.6           65.1
Gross profit                                       34.7           34.4           34.9
Selling and administrative expenses                29.6           29.9           30.2
Restructuring related charges                         -            0.1            0.2
Operating income                                    5.1            4.4            4.4
Interest income (expense) net                      (0.5 )         (0.5 )         (0.6 )
Income (loss) from continuing operations
before income taxes                                 4.7            3.9            3.8
Income taxes                                        1.6            1.5            1.3
Net income attributable to the noncontrolling
interest                                              -              -              -
Income (loss) from continuing operations
attributable to HNI Corporation                     3.1  %         2.4  %         2.5  %

Net Sales

Net sales during 2013 were $2.1 billion, an increase of 2.8 percent, compared to net sales of $2.0 billion in 2012. The office furniture segment experienced better price realization and increased volume in commercial markets offset by a 28 percent decline in sales to the federal government. The hearth products segment experienced increased volume and better price realization in both the new construction and remodel/retrofit channels. Compared to prior year, divestitures of several small businesses, including office furniture dealers, partially offset by the acquisition of BP Ergo, reduced sales $27.5 million. Net sales during 2012 were $2.0 billion, an increase of 9.3 percent, compared to net sales of $1.8 billion in 2011. Both the office furniture segment and the hearth products segment experienced increased volume and better price realization. Acquisitions contributed $93.0 million or 5.1 percent sales growth in 2012.

Gross Profit

Gross profit as a percent of net sales increased 0.3 percentage points in 2013 as compared to 2012 due to higher volume, better price realization and lower material costs offset partially by unfavorable mix, new product ramp-up and operation reconfiguration costs to meet changing market demand. Gross profit as a percent of net sales decreased 0.5 percentage points in 2012 as compared to 2011 due to unfavorable mix, investments to improve operations, new product ramp-up and impact of acquisitions offset partially by higher volume, better price realization and lower material costs.

Selling and Administrative Expenses

Selling and administrative expenses increased 1.6 percent in 2013 and 8.2 percent in 2012. The increase in 2013 was due to volume related expenses, investments in selling and growth initiatives, higher incentive-based compensation and a loss on sale of a small non-core office furniture business of $2.5 million. The increase in 2012 was due to volume related expenses, investments in selling and growth initiatives, higher incentive-based compensation and costs associated with acquisitions.

Selling and administrative expenses include freight expense for shipments to customers, product development costs and amortization expense of intangible assets. Refer to Summary of Significant Accounting Policies and Goodwill and Other Intangible Assets in the Notes to Consolidated Financial Statements for further information regarding the comparative expense levels for these items.

Restructuring and Impairment Charges

During 2011, the Corporation made the decision to transition out of its Lithia Springs, Georgia office furniture distribution center and the transition was completed in the fourth quarter of 2012. The distribution center was operated by a third-party logistics provider. The Corporation added distribution capacity to its Cedartown, Georgia office furniture manufacturing facility and

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distribution center to make up for the loss of the Lithia Springs distribution center. To make room for the additional distribution capacity, the Corporation consolidated some office furniture manufacturing production from the Cedartown facility into exisiting office furniture manufacturing facilities in Muscatine, Iowa. In addition, during 2011, the Corporation made the decision to consolidate some office furniture manufacturing production from its Hickory, North Carolina facility into its Wayland, New York facility. In connection with the closure, consolidations and realignment, the Corporation recorded $2.0 million of pre-tax charges which included $0.2 million of accelerated depreciation of machinery and equipment recorded in cost of sales and $1.8 million of severance and facility exit costs recorded as restructuring costs in 2011. During 2012, the Corporation recorded current period charges which included $0.3 million of accelerated depreciation of machinery and equipment recorded in cost of sales and $1.5 million of severance and facility exit costs recorded as restructuring costs. These included impairment of leasehold improvements of $0.2 million which was a non-cash transaction.

The Corporation made the decision to close certain hearth products retail and distribution locations during the first quarter of 2011. A pre-tax charge of $0.4 million was recorded for severance and facility exit costs.

During 2010, the Corporation made the decision to close an office furniture facility in Salisbury, North Carolina and consolidate production into existing office furniture manufacturing facilities. During 2011, the Corporation incurred $0.6 million of current period charges recorded as restructuring costs.

During 2010, the Corporation completed the shutdown of an office furniture facility in South Gate, California and consolidated production into existing office furniture manufacturing facilities. During 2011, 2012 and 2013, the Corporation incurred $0.5 million, $0.4 million and $0.3 million of current period charges due to ongoing costs related to a vacant building recorded as restructuring costs, respectively.

Operating Income

Operating income increased $18.4 million to $106.0 million in 2013, compared to $87.6 million in 2012. The increase was due to higher volume, better price realization, lower material costs and distribution network realignment savings and lower restructuring costs. These were offset partially by new product ramp-up, facility reconfiguration to meet changing market demands, selling, marketing and product initiatives, higher incentive-based compensation and a loss on the sale of a small non-core business. Operating income increased $6.1 million to $87.6 million in 2012, compared to $81.5 million in 2011. The increase was due to higher volume, better price realization and lower material costs. These were offset partially by investments in operations, selling, marketing and product initiatives, and higher incentive-based compensation.

Income Taxes

The provision for income taxes for continuing operations reflect an effective tax rate of 34.5 percent, 37.7 percent and 34.8 percent for 2013, 2012 and 2011, respectively. The current year decrease in the effective tax rate was primarily driven by the federal research and development credit extension which was effective from January 2, 2013, resulting in both the 2012 and 2013 related credits of $1.3 million each being recognized in fiscal 2013.

Net Income Attributable to HNI Corporation

Net income attributable to HNI Corporation increased 30.1 percent to $63.7 million in 2013 compared to $49.0 million in 2012 and $46.0 million in 2011. Net income per diluted share increased 29.9 percent to $1.39 in 2013 compared to $1.07 in 2012 and $1.01 in 2010.

Office Furniture

Office furniture comprised 82 percent, 84 percent and 83 percent of consolidated net sales for 2013, 2012 and 2011, respectively. Net sales for office furniture decreased $2.1 million or 0.1 percent in 2013 to $1.685 billion compared to $1.687 billion in 2012 including increased price realization of $30 million. Compared to prior year, divestitures of several small businesses, including office furniture dealers, partially offset by the acquisition of BP Ergo, reduced sales by $27.5 million. The Corporation experienced growth in both the supplies-driven and contract channels which was more than offset by a large decline in sales to the federal government. Net sales for office furniture increased 10.4 percent in 2012 to $1.687 billion compared to $1.528 billion in 2011 including increased price realization of $41 million. Acquisitions contributed $93 million of sales in 2012. The Corporation experienced growth in both the supplies-driven and contract channels partially offset by a large decline in sales to the federal government. BIFMA reported 2013 shipments up 1 percent from 2012 levels which were down 1 percent from 2011 levels.

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Operating profit as a percent of net sales was 5.8 percent in 2013, 5.4 percent in 2012 and 6.5 percent in 2011. The increase in operating margins in 2013 was due to better price realization, lower material costs, distribution network realignment savings and lower restructuring costs. These were partially offset by unfavorable mix, new product ramp-up, facility reconfiguration costs to meet changing market demands and loss on the sale of a small non-core business. The decrease in operating margins in 2012 was due to unfavorable mix, investments to improve operations, new product ramp-up, investments in growth initiatives and impact of acquisitions. These were partially offset by increased volume, better price realization and lower restructuring costs.

Hearth Products

Hearth products sales increased $58.1 million or 18.3 percent in 2013 to $375 million compared to $317 million in 2012 including increased price realization of $5 million. The sales increase was also due to an increase in both the new construction channel due to housing market recovery and the remodel/retrofit channel due to strong remodeling activity. Hearth products sales increased 3.7 percent in 2012 to $317 million compared to $305 million in 2011 including increased price realization of $5 million. The sales increase was also due to an increase in the new construction channel offset partially by a decrease in the remodel/retrofit channel.

Operating profit as a percent of sales in 2013 was 12.5 percent compared to 8.4 percent in 2012 and 4.8 percent in 2011. The increase in operating margins in 2013 was due to higher volume, better price realization and lower material costs. These were partially offset by investments in growth initiatives and higher incentive-based compensation. The increase in operating margins in 2012 was due to higher volume and better price realization. These were partially offset by investments in selling and marketing initiatives.

Liquidity and Capital Resources

Cash Flow - Operating Activities

Cash generated from operating activities in 2013 totaled $165.0 million compared to $144.8 million generated in 2012 due to increased net income and certain non-cash items. Changes in working capital balances resulted in a $11.5 million source of cash in 2013 compared to $32.9 million in the prior year. Cash generated from operating activities in 2011 totaled $134.3 million and changes in working capital balances resulted in a $12.9 million source of cash.

The source of cash related to working capital balances in 2013 was primarily driven from lower inventory of $1.6 million and increased current liabilities of $30.4 million. The increase in current liabilities is comprised of a $14.6 million increase in trade accounts payable, a $11.3 million increase in other accruals, namely compensation, marketing and freight expense accruals and a $4.5 million increase in tax-related accruals. These sources of cash were offset partially by a $21.0 million increase in trade receivables due to increased sales during the fourth quarter.

The source of cash related to working capital balances in 2012 was primarily driven from lower inventory of $9.5 million and increased current liabilities of $32.2 million. The increase in current liabilities is comprised of a $25.4 million increase in trade accounts payable, a $2.1 million increase in other accruals, namely compensation and marketing expense accruals and a $4.7 million increase in tax-related accruals. These sources of cash were offset partially by a $7.0 million increase in trade receivables due to increased sales during the fourth quarter.

The source of cash related to working capital balances in 2011 was primarily driven from increased current liabilities of $35.4 million. The increase in current liabilities is comprised of a $29.5 million increase in trade accounts payable, a $10.3 million increase in other accruals, namely compensation and marketing expense accruals, offset by a $4.4 million decrease in tax-related accruals. These sources of cash were offset partially by a $6.9 million increase in trade receivables and higher inventory of $11.3 million due to increased sales during the fourth quarter.

The Corporation places special emphasis on management and control of 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 communication with them. Management believes recorded trade receivable valuation allowances at the end of 2013 are adequate to cover the risk of potential bad debts. Allowances for non-collectible trade receivables, as a percent of gross trade receivables, totaled 2.6 percent, 2.4 percent and 2.3 percent at the end of fiscal years 2013, 2012 and 2011, respectively. The Corporation's inventory turns were 15, 14 and 16, for 2013, 2012 and 2011, respectively.

Cash Flow - Investing Activities

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Capital expenditures, including capitalized software, were $78.9 million in 2013, $60.3 million in 2012 and $31.1 million in 2011. These expenditures continue to focus on machinery and equipment and tooling required to support new products, continuous improvements in our manufacturing processes and cost savings initiatives as well as the implementation of new integrated information systems to support business process transformation. The Corporation anticipates capital expenditures for 2014 to total $90 to $95 million, primarily related to new products, operational process improvements and capabilities and the business process transformation project referred to above.

In 2012, the investing activities reflected a net cash outflow of $25.5 million related to the acquisition of BP Ergo and $1.5 million related to the acquisition of a pellet stove business. The addition of BP Ergo provides the Corporation a presence in the India office furniture market. In 2011, investing activities reflected a net cash outflow of $55 million related to the acquisition of Artcobell. The addition of Artcobell increased the Corporation's presence in the educational furniture market. Refer to the Business Combination note in the Notes to Consolidated Financial Statements for additional information.

In 2011, the Corporation completed the sale of a facility located in Owensboro, Kentucky, a facility located in Salisbury, North Carolina and excess land located in Meadville, Pennsylvania. The proceeds from these sales of $3 million are reflected in the Consolidated Statement of Cash Flows as "Proceeds from sale of property, plant and equipment" for 2011.

Cash Flow - Financing Activities

On September 28, 2011, the Corporation amended and restated its existing revolving credit facility dated June 11, 2010. The Corporation increased its borrowing capacity from $150 million to $250 million and has the option to increase its borrowing capacity by an additional $100 million. The Corporation also extended the term to the earlier of (i) September 28, 2016 or (ii) the date 90 days prior to the maturity date of the Corporation's senior notes (April 6, 2016), subject to certain exceptions. The Corporation effectively decreased interest costs. Amounts borrowed under the credit agreement may be borrowed, repaid and reborrowed from time to time. The Corporation paid approximately $1.2 million of debt issuance costs that are being amortized straight-line over the term of the credit agreement. During 2013 net borrowings under the revolving credit facility peaked at $69 million. As of December 28, 2013, there were no amounts outstanding under the revolving credit facility.

In 2006, the Corporation refinanced $150 million of borrowings outstanding under its prior revolving credit facility with 5.54 percent, ten-year unsecured Senior Notes due in 2016 issued through the private placement debt market. Interest payments are due semi-annually on April 1 and October 1 of each year and the principal is due in a lump sum in 2016.

Additional borrowing capacity of $250 million is available through the revolving credit facility in the event cash generated from operations should be inadequate to meet future needs. The Corporation does not currently expect access to future capital to be a constraint on planned growth. Long-term debt, including capital lease obligations, was 26% of total capitalization as of December 28, 2013, December 29, 2012 and December 31, 2011.

The credit agreement governing the revolving credit facility and the note purchase agreement pertaining to the Senior Notes contain covenants that, among other things, restrict, subject to certain exceptions, our ability to:
incur additional indebtedness and lease obligations and make guarantees;

create liens on assets;

engage in any material line of business substantially different from existing lines of business;

sell assets;

make investments, loans and advances, including acquisitions;

engage in sale-leaseback transactions in excess of $50 million in the aggregate;

repay the Senior Notes or enter into certain amendments thereof; and

engage in certain transactions with affiliates.

The credit agreement governing the 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

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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 governing the 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 and Senior Notes are the primary sources of committed funding from which the Corporation finances its planned capital expenditures, strategic initiatives such as repurchases of common stock and certain working capital needs. Non-compliance with the various financial covenant ratios 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 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 governing the revolving credit facility. 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 December 28, 2013, the Corporation was well below this ratio at 1.0 and was in compliance with all of the covenants and other restrictions in the credit agreement and note purchase agreement. The Corporation currently expects to remain in compliance over the next twelve months.

During 2013, the Corporation repurchased 740,000 shares of its common stock at a cost of approximately $27.5 million, or an average price of $37.15. The Board authorized $200 million on August 8, 2006, and an additional $200 million on November 9, 2007, for repurchases of the Corporation's common stock. As of December 28, 2013 approximately $87.3 million of this authorized amount remained unspent. During 2012, the Corporation repurchased 800,000 shares of its common stock at a cost of approximately $21.0 million, or an average price of $26.28. During 2011, the Corporation repurchased 323,965 shares of its common stock at a cost of approximately $10.0 million, or an average price of $30.87.

A cash dividend has been paid every quarter since April 15, 1955, and quarterly dividends are expected to continue. Cash dividends were $0.96 per common share for 2013, $0.95 for 2012 and $0.92 for 2011. The last quarterly dividend increase was from $0.23 to $0.24 per common share effective with the June 1, 2012 dividend payment for shareholders of record at the close of business on May 18, 2012. The average dividend payout percentage for the most recent three-year period has been 105 percent of prior year earnings or 34 percent of prior year cash flow from operating activities.

Cash, cash equivalents and short-term investments totaled $72.3 million at the end of 2013 compared to $49.0 million at the end of 2012 and $82.0 million at the end of 2011. These funds, 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. As of the end of 2013, $15.2 million of cash was held overseas and considered permanently reinvested. If such amounts were repatriated it could result in additional tax expense to the Corporation. The Corporation does not believe asserting this cash as permanently reinvested will have any impact on its liquidity.

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Contractual Obligations
The following table discloses the Corporation's obligations and commitments to
make future payments under contracts:
                                                      Payments Due by Period
                                             Less than          1 - 3          3 - 5       More than
(In thousands)                   Total          1 Year          Years          Years         5 Years
Long-term debt obligations,
including estimated
interest (1)                $  169,157     $     8,678     $  160,479                    $         -
Capital lease obligations          237             129            108              -               -
Operating lease obligations    102,059          28,753         44,852         14,387          14,067
Purchase obligations (2)        67,406          67,406              -              -               -
Other long-term obligations
(3)                             37,899           4,285         10,374          3,692          19,548
Total                       $  376,758     $   109,251     $  215,813     $   18,079     $    33,615

(1) Interest has been included for all debt at the fixed rate in effect as of December 28, 2013, as applicable.

(2) Purchase obligations include agreements to purchase goods or services that are enforceable, legally binding and specify all significant terms, including the quantity to be purchased, the price to be paid and the timing of the purchase.

(3) Other long-term obligations represent payments due to members who are participants in the Corporation's deferred and long-term incentive . . .

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