HNI Corporation — Form 10-Q Summary
Reporting period: Quarter ended March 31, 2018. The request metadata says “2017 Q1,” but the filing covers 2018 Q1 and compares results with the quarter ended April 1, 2017. The financial statements are unaudited. HNI reports office furniture and hearth products segments.
Financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $505.1 million | $477.7 million |
| Gross profit / margin | $176.9 million / 35.0% | $173.7 million / 36.4% |
| Operating income / margin | $3.7 million / 0.7% | $7.9 million / 1.7% |
| Net income attributable to HNI | $2.5 million | $4.8 million |
| Diluted EPS | $0.06 | $0.11 |
| Operating cash flow | $(30.8) million | $(32.0) million |
| Capital expenditures, including capitalized software | $16.3 million | $32.8 million |
Sales rose 5.7%; gross profit increased 1.8%, while operating income fell 53.5% and HNI-attributable net income fell 48.1%. Gross margin declined about 140 basis points. Management attributed lower profitability mainly to Business Systems Transformation (BST) amortization and implementation costs, unfavorable business and product mix, and input-cost inflation, partly offset by higher volume and lower restructuring and transition costs.
Office furniture sales increased 5.8% to $380.9 million, but segment operating results moved to a $0.4 million loss from $6.4 million of profit. Hearth sales rose 5.5% to $124.2 million, and segment operating profit increased 44.9% to $17.1 million. Office furniture sales growth included gains in North American contract, supplies-driven, and international businesses; closures and divestitures of small dealers reduced sales by $12.4 million year over year. Hearth growth reflected single-family housing and pellet appliance demand.
Liquidity, debt, and capital
At March 31, cash and cash equivalents were $28.8 million, short-term investments $1.8 million, and total current assets $460.1 million versus current liabilities of $427.9 million. Total debt was $329.0 million, including $79.0 million classified as current and $250.0 million long-term. Revolver borrowings were $328.0 million under a $400 million facility; the variable rate was 3.0%. HNI reported compliance with its credit covenants and expected continued compliance over the next 12 months.
Operating activities used $30.8 million of cash, which management said reflected normal seasonal working-capital needs. Cash increased by $5.5 million to $28.8 million, supported by financing cash flow and $18.4 million of proceeds from property sales, including a sale-leaseback. The company paid a quarterly dividend of $0.285 per share and repurchased 152,822 shares for approximately $6.0 million; about $72.0 million remained under the repurchase authorization.
Outlook, developments, and risks
- Management expects operating cash flow to be positive for fiscal 2018 and capital expenditures of approximately $75–$85 million. It said cash, future operating cash flow, borrowing capacity, and access to capital markets should be adequate for operations and cash needs for at least 12 months. No specific earnings or revenue guidance is provided.
- On April 20, 2018, HNI amended its credit agreement, extending maturity to April 20, 2023, with two possible one-year extensions, and increasing capacity to $450 million.
- A manufacturing facility sale-leaseback generated $16.9 million in net proceeds. HNI deferred the $5.1 million gain and will amortize it as a rent-expense reduction over the 10-year lease term; the transaction had no material income-statement impact in the quarter.
- The income-tax benefit was $1.0 million on $1.5 million of pretax income, a negative 66.1% effective rate. HNI cited the Tax Cuts and Jobs Act and the release of a valuation allowance for certain foreign jurisdictions; this materially affected the period’s reported tax result.
- Restructuring charges were $1.3 million, primarily related to the Orleans, Indiana office-furniture facility closure. BST implementation in most domestic office-furniture operations involved changes to order management, production scheduling, pricing, shipping, purchasing, and accounting; management identified implementation costs and execution as relevant factors.
- CEO and Chairman Stan Askren announced plans to retire no later than December 31, 2018. Jeffrey Lorenger became President, and the Board anticipated he would assume the CEO role by that date.
- Risks cited include demand and housing conditions, raw-material and commodity costs, dealer and customer concentration, competition, execution of BST and cost-reduction efforts, international operations, product defects, and financing restrictions. HNI reported pending Artcobell-related litigation but said it believed the matters would not materially affect its financial condition or results.
Key facts for investors to verify
- Confirm the intended reporting period: the supplied metadata says 2017 Q1, while this filing is for Q1 2018.
- Assess whether BST costs, product mix, and input-cost inflation continue to pressure office-furniture margins and consolidated profitability.
- Review debt levels, seasonal working-capital needs, covenant headroom, and the effect of the amended $450 million credit facility.
- Distinguish recurring operating performance from the unusual tax benefit and sale-leaseback proceeds.
- Monitor the stated capital-spending outlook, positive full-year operating-cash-flow expectation, restructuring, and CEO succession.