HNI Corporation — Form 10-Q Summary
Reporting period: The filing covers the three months ended April 2, 2016, compared with the three months ended April 4, 2015. This is a 2016 first-quarter filing, notwithstanding the request metadata identifying 2015 Q1. HNI operates office furniture and hearth products businesses.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $501.0 million | $523.5 million | Down 4.3% |
| Gross profit / gross margin | $185.7 million / 37.1% | $184.5 million / 35.2% | Profit up 0.7%; margin up 1.9 percentage points |
| Operating income | $19.5 million | $15.4 million | Up 26.6% |
| Net income attributable to HNI | $11.8 million | $8.5 million | Up 40.1% |
| Diluted EPS | $0.26 | $0.19 | Up $0.07 |
| Operating cash flow | $(20.2) million | $(49.3) million | Use of cash narrowed |
| Capital expenditures and capitalized software | $27.5 million | $28.2 million | Down $0.8 million |
Gross margin benefited from operational performance, lower material costs and price realization, partly offset by lower volume. Selling and administrative expense declined in dollars but rose to 33.0% of sales from 32.2%, reflecting incentive compensation and strategic investments, partly offset by cost reductions. The effective tax rate fell to 33.2% from 37.5%, primarily due to the timing of the R&D tax credit enactment and a change in the mix of foreign earnings.
Segments
- Office furniture: Sales were $387.3 million, down 4.9%; segment operating profit was $21.3 million, up 5.7%. Sales declined amid strong prior-year comparisons and a softer market; pricing, material costs, operating performance and cost reductions supported profit.
- Hearth products: Sales were $113.7 million, down 2.0%; segment operating profit was $12.6 million, up 0.5%. New-construction growth partly offset weaker retail pellet sales associated with warm weather and low oil prices.
Liquidity, debt and capital allocation
Cash and cash equivalents were $38.6 million at April 2, 2016, with $5.0 million of short-term investments. Operating activities used $20.2 million, including a $54.2 million working-capital cash use; management attributed the smaller use versus 2015 mainly to lower receivables from sales timing and lower sales. Cash flow from operations is expected to be positive for the full year.
Balance-sheet debt was $300 million at quarter-end: $150 million under the revolving facility and $150 million of senior notes due April 6, 2016. HNI subsequently repaid the notes at maturity with revolver borrowings. The amended revolver commitment is $400 million, with an option to increase capacity by a further $150 million, and matures in January 2021. HNI entered a swap on $150 million of variable-rate borrowings, paying a fixed 1.29% and receiving one-month LIBOR through January 2021. The company reported covenant compliance and expected to remain compliant over the next 12 months.
HNI used $60.9 million in investing activities, including $34.1 million for an acquisition. Financing activities provided $91.2 million. The company paid $11.8 million in dividends ($0.265 per share) and repurchased 49,400 shares for $1.7 million; $191.0 million remained under its repurchase authorization. Total assets were $1.31 billion and total equity was $488.6 million at quarter-end.
Material developments, outlook and risks
- On January 29, HNI acquired a small office furniture company with approximately $30 million in annual sales for about $34 million, net of cash acquired. Preliminary purchase accounting included about $17 million of goodwill and $13 million of other intangible assets; allocation remained subject to finalization.
- Restructuring charges were $1.1 million, versus $0.4 million in the prior-year quarter. Management also reported $1.8 million of transition and restructuring costs in cost of sales; total restructuring and transition costs for the quarter were $2.9 million.
- Management expects 2016 capital expenditures of approximately $115 million to $120 million and considers liquidity sources adequate for operations and cash needs for at least the next 12 months. It expressed optimism about long-term market prospects but provided no specific revenue or earnings guidance.
- Risks cited include weaker product demand and economic or housing conditions, competition and pricing pressure, material and energy costs, supply or facility disruptions, distribution-channel health, foreign currency movements, execution of cost, acquisition and business-transformation initiatives, and access to credit. Credit covenant compliance is important to continued revolver availability.
- Ordinary-course litigation, environmental, tax and other claims were not expected by management to materially affect financial condition, cash flows or results. No new material legal proceedings or material changes in reported risk factors were identified.
Important facts for investors to verify
- Confirm that comparisons and any performance analysis use the actual filing period ended April 2, 2016, rather than the 2015 period stated in the request metadata.
- Track whether sales weakness persists in office furniture and the retail pellet channel, and whether improved gross margin and segment profits can continue despite lower sales.
- Review post-quarter refinancing execution, interest expense, revolver availability and covenant headroom following repayment of the senior notes.
- Assess the acquired business’s final purchase-price allocation, integration and contribution to results, along with restructuring and transition costs.
- Monitor working-capital cash use, full-year operating cash generation, planned capital spending and the impact of the interest-rate swap.