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HNI > SEC Filings for HNI > Form 10-Q on 1-Aug-2014All Recent SEC Filings

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Form 10-Q for HNI CORP


1-Aug-2014

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 a leading global office furniture manufacturer 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 2014 decreased 0.3 percent to $509.1 million when compared to the second quarter of fiscal 2013. The change was driven by the effect of divestitures and a decline in sales in the contract channel of the office furniture segment, partially offset by an increase in hearth product sales across both the new construction and remodel-retrofit channels as well as an increase in office furniture sales in the supplies-driven channel. Gross margin for the quarter increased from prior year levels due to increased price realization, strong operational performance and higher volume in the hearth products segment partially offset by lower volume and restructuring and transition charges in the office furniture segment. Total selling and administrative expenses increased due mainly to higher incentive based compensation.

During the second quarter of fiscal 2014, as part of continuing efforts to reduce structural costs, the Corporation made the decision to close two office furniture manufacturing facilities and consolidate production into existing manufacturing facilities. In connection with these consolidations the Corporation recorded $4.8 million of restructuring and transition costs of which $3.4 million were included in cost of sales. A triggering event occurred during the second quarter of 2014 for a reporting unit in the office furniture segment resulting in a $8.9 million goodwill impairment charge.

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 28, 2014      June 29, 2013      Change      June 28, 2014       June 29, 2013       Change
Net sales             $      509,143     $      510,698       (0.3 )%   $      961,344     $       952,995         0.9  %
Cost of sales                328,010            336,040       (2.4 )%          625,039             630,555        (0.9 )%
Gross profit                 181,133            174,658        3.7  %          336,305             322,440         4.3  %
Selling and
administrative
expenses                     155,288            152,078        2.1  %          300,498             296,634         1.3  %
(Gain) loss on sale
of assets                     (1,346 )            2,460         NM              (9,746 )             2,460          NM
Restructuring and
impairment charges            10,282                (35 )       NM              10,254                 121          NM
Operating income              16,909             20,155      (16.1 )%           35,299              23,225        52.0  %
Interest expense, net          2,041              2,567      (20.5 )%            4,173               5,083       (17.9 )%
Income before income
taxes                         14,868             17,588      (15.5 )%           31,126              18,142        71.6  %
Income taxes                   5,203              6,189      (15.9 )%           10,445               5,564        87.7  %
Net income            $        9,665     $       11,399      (15.2 )%   $       20,681     $        12,578        64.4  %

Consolidated net sales for the second quarter of 2014 decreased 0.3 percent or $1.6 million compared to the same quarter last year. The change was driven by the effect of divestitures and a decline in sales in the contract channel of the office furniture segment, partially offset by an increase in hearth product sales across both the new construction and remodel-retrofit channels as well as an increase in office furniture sales in the supplies-driven channel. Compared to prior year quarter, divestitures of several small businesses, including office furniture dealers, resulted in a $8.1 million sales decline.

Gross margin for the second quarter of 2014 increased to 35.6 percent compared to 34.2 percent for the same quarter last year. The increase in gross margin was driven by increased price realization, strong operational performance and higher hearth products


sales volume partially offset by lower volume and restructuring and transition charges in the office furniture segment. Second quarter 2014 included $3.4 million of accelerated depreciation and transition costs related to the closure and consolidation of office furniture manufacturing facilities.

As a result of the Corporation's ongoing business simplification and cost reduction strategies, the Corporation made the decision in the second quarter 2014 to close an office furniture manufacturing facility located in Florence, Alabama and consolidate production into existing office furniture manufacturing facilities. The Corporation also notified its members and the union representing the bargaining unit at its office furniture manufacturing facility located in Chicago, Illinois of its tentative decision, pending negotiations and consultation with the union, to close the facility and consolidate production into an existing facility. In connection with these decisions the Corporation recorded $4.8 million of pre-tax charges which included $2.6 million of accelerated depreciation on machinery and equipment and $0.8 million of transition costs recorded in cost of sales and $1.4 million of severance and facility exit costs which were recorded as restructuring charges during the quarter. The closure and consolidation of these facilities is expected to be substantially completed by the first quarter of 2015. The Corporation anticipates additional restructuring and transition costs of approximately $8.8 million related to these closures during the remainder of 2014.

The tentative decision to close a facility and exit a product line, as well as lower growth than projected at one of the Corporation's recently acquired reporting units in the office furniture segment, were identified as a triggering event for purposes of long-lived asset and goodwill impairment testing. As a result, the Corporation recognized pre-tax goodwill impairment expense of $8.9 million during the second quarter of 2014.

Total selling and administrative expenses as a percentage of net sales increased to 30.5 percent compared to 29.8 percent for the same quarter last year due mainly to increased incentive based compensation.

The Corporation realized a $1.3 million gain on the sale of California air emission credits in the second quarter of 2014. The Corporation realized a $2.5 million loss on the sale of a non-core office furniture business in the second quarter of 2013.

The provision for income taxes for continuing operations for the three months ended June 28, 2014 reflects an effective tax rate of 35.0 percent compared to 35.2 percent for the same period last year. The 2014 estimated annual effective tax rate is expected to be 35.0 percent.

Net income attributable to HNI Corporation was $9.7 million or $0.21 per diluted share in the second quarter of 2014 compared to $11.4 million or $0.25 per diluted share in the second quarter of 2013.

For the first six months of 2014, consolidated net sales increased $8.3 million, or 0.9 percent, to $961.3 million compared to $953.0 million for the first six months of 2013 driven by higher sales in the hearth products segment. Gross margins increased to 35.0 percent compared to 33.8 percent for the same period last year driven by better price realization, strong operational performance and higher volume in the hearth products segment partially offset by lower volume, unfavorable mix and restructuring and transition charges in the office furniture segment. Net income attributable to HNI Corporation was $20.8 million for the first six months of 2014 compared to $12.8 million for the first six months of 2013. Earnings per share increased to $0.45 per diluted share compared to $0.28 per diluted share for the same period last year.

Office Furniture

Second quarter 2014 sales for the office furniture segment decreased 2.9 percent or $12.7 million to $423.4 million from $436.2 million for the same quarter last year. Compared to the prior year quarter, divestitures resulted in a $8.1 million sales decline. Net sales in the contract channel decreased due to strong year over year comparisons and timing of large projects. This decrease was offset partially by an increase in the supplies-driven channel. Second quarter 2014 operating profit prior to unallocated corporate expenses decreased 17.6 percent or $3.9 million to $18.2 million as a result of lower volume, unfavorable mix and restructuring, transition and impairment charges. These were partially offset by increased price realization, strong operational performance and the loss on sale of a small non-core business in the prior year quarter. Second quarter 2014 included $13.7 million of restructuring, transition and impairment costs.

Net sales for the first six months of 2014 decreased 2.5 percent or $20.2 million to $781.8 million compared to $802.0 million for the same period in 2013. Compared to the prior year period, divestitures resulted in a $14.9 million sales decline. Net sales in the supplies-driven channel decreased due to harsh weather in the first quarter of 2014. This decrease was partially offset by an increase in the other office furniture channels. Operating profit for the first six months of 2014 increased 12.7 percent or $3.9 million to $34.7 million compared to $30.8 million for the same period in 2013 driven by the same drivers experienced in the current quarter plus an $8.4 million gain on the sale of a vacated facility during the first quarter of 2014.


Hearth Products

Second quarter 2014 net sales for the hearth products segment increased 15.0 percent or $11.2 million to $85.7 million from $74.5 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 and demand for alternative fuel products. Operating profit prior to unallocated corporate expenses increased $2.8 million to $8.5 million compared to $5.7 million in the prior year quarter due to increased volume and higher price realization offset partially by increased warranty expense and higher incentive-based compensation.

Net sales for the first six months of 2014 increased 18.9 percent or $28.6 million to $179.6 million compared to $151.0 million for the same period in 2013. Operating profit for the first six months of 2014 increased $10.9 million to $20.2 million compared to $9.3 million for the same period in 2013. The year-to-date increases 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 $7.0 million of cash in the first six months of 2014 compared to $18.2 million in the first six months of 2013. Working capital resulted in a $68.4 million use of cash in the first six months of the current fiscal year compared to a $76.8 million use of cash in the same period of the prior year. The change in working capital is due mainly to timing of accounts receivable collections. 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 2014 were $51.1 million compared to $33.6 million in the same period of fiscal 2013 and were primarily for tooling, equipment and capacity for new products, continuous improvements in manufacturing processes and the on-going implementation of new integrated information systems to support business process transformation. For the full year 2014, capital expenditures are expected to be approximately $90 to $95 million, primarily related to new products, operational process improvements and capabilities and the business process transformation project referred to above.

During the first quarter of 2014 the Corporation completed the sale of a facility located in South Gate, California. The proceeds from the sale of $12.0 million are reflected in the Condensed Consolidated Statement of Cash Flows as "Proceeds from property, plant and equipment".

Cash Flow - Financing Activities
The net borrowings under the revolving credit agreement at the end of second quarter were $35 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.

Additional borrowing capacity of $215 million is available through the revolving credit facility. 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 28, 2014, 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.

On May 6, 2014, the Corporation's Board of Directors (the "Board") approved a 4.2 percent increase in the common stock quarterly cash dividend from $0.24 per share to $0.25 per share. The dividend was paid on May 30, 2014, to shareholders of record at the close of business on May 16, 2014.

During the six months ended June 28, 2014, the Corporation repurchased 364,000 shares of common stock at a cost of approximately $13.1 million, or an average price of $35.85 per share. As of June 28, 2014, approximately $74.2 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 28, 2013. During the first six months of fiscal 2014, 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 28, 2013. During 2014 the Corporation changed its estimate regarding the quarterly accrual of annual incentive plan expense to more accurately match expense with earnings. During the first six months of fiscal 2014, 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 remains optimistic about the office furniture and hearth products markets. Management believes the Corporation is well positioned to drive sales and significantly increase profits in 2014.

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 continuing to execute its long-standing continuous improvement discipline 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 or in the domestic 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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