HNI Corporation — Form 10-Q Summary
Reporting period: The filing is for the quarter ended June 28, 2014, and was filed August 1, 2014. This conflicts with the request metadata identifying “2013 Q2”; the filing itself reports 2014 Q2, compared with the quarter ended June 29, 2013.
HNI reports two segments: office furniture and hearth products. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where indicated.
Financial performance and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $509.1m | $510.7m | $961.3m | $953.0m |
| Gross profit / margin | $181.1m / 35.6% | $174.7m / 34.2% | $336.3m / 35.0% | $322.4m / 33.8% |
| Operating income | $16.9m | $20.2m | $35.3m | $23.2m |
| Net income attributable to HNI | $9.7m | $11.4m | $20.8m | $12.8m |
| Diluted EPS | $0.21 | $0.25 | $0.45 | $0.28 |
| Operating cash flow | Not separately presented for the quarter | $(7.0)m | $(18.2)m |
- Q2 sales declined 0.3%; first-half sales increased 0.9%. First-half operating income rose 52.0% and HNI-attributable net income rose 62.1% year over year, benefiting in part from a $5.7m gain on the first-quarter sale of a facility and improved gross margin.
- Q2 operating income and net income declined 16.1% and 15.2%, respectively. Q2 diluted EPS was $0.21, versus $0.25 a year earlier.
- At June 28, 2014, cash and cash equivalents were $29.3m and short-term investments were $2.9m. Current assets were $439.5m and current liabilities were $435.0m.
- Debt and capital leases included $35.7m of current maturities/notes payable, $150.1m of long-term debt and $0.05m of capital lease obligations. The company reported approximately $215m of additional revolving-credit capacity and was in compliance with its debt covenants.
- First-half capital expenditures, including capitalized software, were $51.1m. HNI paid $22.0m in dividends and repurchased $13.1m of stock in the first half. The quarterly dividend was raised 4.2%, to $0.25 per share.
Material changes and business drivers
- Office furniture Q2 sales fell 2.9% to $423.4m, reflecting divestitures and weaker contract-channel sales, partly offset by supplies-driven-channel growth. First-half segment sales declined 2.5% to $781.8m.
- Hearth products Q2 sales rose 15.0% to $85.7m; first-half sales increased 18.9% to $179.6m. Management cited housing-market recovery, remodeling activity and demand for alternative-fuel products.
- Gross margin improved in both periods, supported by price realization and operational performance, as well as higher hearth-product volume. Office furniture lower volume, unfavorable mix and restructuring/transition costs partly offset those gains.
- Q2 selling and administrative expense increased 2.1% to $155.3m, with incentive-based compensation cited as a key factor.
Outlook, unusual items and risks
- Management said it remained optimistic about both markets and believed HNI was positioned to grow sales and significantly increase profits in 2014. No specific full-year revenue or earnings forecast was provided.
- Management expected positive operating cash flow for full-year 2014 and capital expenditures of approximately $90m–$95m.
- HNI decided to close its Florence, Alabama office-furniture facility and announced a tentative, union-consultation-dependent decision to close its Chicago facility. The closures were expected to be substantially complete by Q1 2015. Q2 included $4.8m of related pre-tax charges, including $3.4m in cost of sales; approximately $8.8m of additional restructuring and transition costs was anticipated for the remainder of 2014.
- Slower-than-projected order growth and facility/product-line decisions triggered an $8.9m goodwill impairment in the office-furniture segment.
- A first-half change to the quarterly accrual estimate for annual incentive-plan expense reduced expense by $2.4m and increased diluted EPS by $0.04; management said it would not affect full-year financial statements.
- Management identified risks including demand and housing-market uncertainty, competitive pricing, material and fuel costs, execution of cost-reduction and business-system initiatives, credit availability and covenant restrictions. Ordinary-course litigation, environmental, tax and other claims were not expected by management to have a material adverse effect.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is for Q2 2014, not Q2 2013.
- Assess whether office-furniture demand, especially contract-channel orders, improves and whether the announced facility consolidations deliver expected savings.
- Track the $8.9m goodwill impairment and the expected additional $8.8m restructuring/transition costs, including actual timing and cash impact.
- Monitor working-capital requirements and cash conversion: first-half operating cash flow remained negative despite improving year over year.
- Verify progress against full-year capital-spending expectations, positive operating-cash-flow expectations and debt-covenant headroom.
- Consider that first-half earnings benefited from a facility-sale gain and the incentive-accrual estimate change; determine how much of earnings improvement is recurring.