HNI Corporation — FY2014 Form 10-K
Business context and reporting period. HNI designs and manufactures office furniture and hearth products. Its fiscal year ended January 3, 2015, covered 53 weeks; FY2013 covered 52 weeks. FY2014 revenue was approximately 78% office furniture and 22% hearth products. The filing also reports quarterly results, including Q4.
Financial performance
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $2,222.7 million | $2,060.0 million |
| Gross profit / margin | $784.2 million / 35.3% | $715.3 million / 34.7% |
| Operating income / margin | $112.8 million / 5.1% | $106.0 million / 5.1% |
| Net income attributable to HNI | $61.5 million | $63.7 million |
| Diluted EPS | $1.35 | $1.39 |
| Cash from operations | $167.8 million | $165.0 million |
- Sales rose 7.9%, reflecting increased volume and better price realization in both segments. Management said the additional fiscal week had minimal impact on sales and operating income.
- Office furniture sales increased 3.2% to $1,739.0 million; segment operating margin declined to 5.0% from 5.8%. Hearth sales grew 29.1% to $483.6 million; segment operating margin increased to 15.9% from 12.5%.
- Q4 sales were $646.7 million versus $541.3 million a year earlier. Net income attributable to HNI was $7.1 million versus $22.8 million; diluted EPS was $0.16 versus $0.50. Q4 included $21.8 million of restructuring and impairment charges.
- FY2014 income tax expense was $43.8 million, with a 41.7% effective tax rate versus 34.5% in FY2013; the increase was primarily attributed to non-deductible goodwill impairment. A tax-law extension generated a $2.6 million benefit.
Cash, liquidity and capital
- Cash and cash equivalents were $34.1 million and short-term investments were $3.1 million at year-end, down from combined cash and short-term investments of $72.3 million a year earlier. Current assets were $455.6 million versus current liabilities of $457.3 million; the current ratio was 1.00 and working capital was negative $1.8 million.
- Long-term debt was $197.7 million, including $47.7 million drawn on the revolving facility and $150.0 million of senior notes due in 2016. Long-term debt and capital leases were 32% of total capitalization. HNI reported compliance with covenants and a leverage ratio of 1.14 against a maximum of 3.0.
- Investing cash outflow was $154.2 million, including $61.8 million for the Vermont Castings Group acquisition. Capital expenditures were $74.3 million; capitalized software was a further $38.4 million, making combined capital spending $112.7 million. FY2015 capital expenditures were forecast at $110–$115 million.
- HNI repurchased 1.67 million shares for approximately $67.9 million in FY2014 and paid $44.3 million in dividends ($0.99 per share). Approximately $219.4 million remained authorized for repurchases at year-end.
Material changes, outlook and risks
- HNI acquired Vermont Castings Group on October 1, 2014 for approximately $62.2 million in cash. The acquisition added $25 million of FY2014 hearth sales. Purchase-price allocation was preliminary.
- HNI recorded $29.4 million of goodwill and intangible impairment charges related to office-furniture reporting units, as well as $8.8 million of pre-tax charges associated with closing three office-furniture plants and consolidating production. The closures were expected to be substantially complete by Q1 2015, with about $1 million of additional restructuring costs anticipated in 2015.
- HNI realized $10.7 million in gains from sales of two facilities and California air-emission credits. Despite higher sales and operating income, net income fell 3.5%, reflecting impairment and restructuring costs and the higher tax rate.
- Management was optimistic about office-furniture and hearth markets and long-term prospects, and planned continued investment in brands, products, selling and operations. No specific earnings or revenue guidance was provided.
- Principal risks include economic and housing-market weakness, intense price competition and customer/channel consolidation, rising material and freight costs, dealer and supplier disruption, acquisition integration, and possible further goodwill impairment. HNI also cited risks from its multi-year business-software implementation, international operations, environmental and product-liability exposures, and concentration of facilities in eastern Iowa.
- Management and the auditor reported effective internal control over financial reporting; the auditor gave an unqualified opinion on the financial statements. Vermont Castings was excluded from the internal-control assessment because it was acquired during the year. HNI said ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether recent office-furniture acquisitions and the remaining near-break-even impairment-sensitive reporting unit meet management’s forecasts; a 100-basis-point increase in its discount rate or decrease in long-term growth would have caused that unit to fail the impairment test.
- Whether the hearth segment can sustain its rapid sales and margin growth, including the contribution and integration of Vermont Castings.
- How plant closures, higher freight and material costs, and planned investment affect margins and cash conversion; inventory turns declined to 12 from 15.
- Funding and refinancing plans for the $150 million senior notes due in 2016, alongside planned capital spending, dividends and repurchases.
- Whether the business-system implementation remains on schedule and within cost expectations, and whether stated liquidity and covenant headroom remain adequate.