HNI Corporation — Q3 2011 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended October 1, 2011, compared with periods ended October 2, 2010. HNI operates office furniture and hearth products businesses; office furniture is its principal segment.
Key financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $504.2 million | $458.9 million | $1,333.2 million | $1,220.6 million |
| Gross profit | $179.4 million | $161.2 million | $461.0 million | $421.7 million |
| Operating income | $40.4 million | $31.0 million | $51.6 million | $37.5 million |
| Income from continuing operations | $24.9 million | $15.6 million | $27.7 million | $17.1 million |
| Diluted EPS from continuing operations | $0.55 | $0.34 | $0.61 | $0.37 |
- Q3 sales grew 9.9%; gross margin was 35.6%, versus 35.1%. Management attributed the improvement to higher volume, better price realization and lower restructuring and transition costs, partly offset by higher material costs.
- For the first nine months, sales increased 9.2%, operating income increased 37.5%, and continuing-operations income increased 62.1%. Gross margin was 34.6%, flat year over year.
- Q3 office furniture sales rose 8.9% to $421.9 million, with segment operating profit of $41.5 million versus $34.0 million. Hearth products sales rose 15.2% to $82.3 million, with segment operating profit of $6.9 million versus $3.0 million.
- Nine-month operating cash flow was $67.0 million, compared with $49.1 million. Investing used $25.8 million and financing used $38.8 million; cash and cash equivalents ended at $101.5 million. Capital expenditures plus capitalized software were $20.2 million.
- At October 1, current assets were $479.1 million and current liabilities $402.9 million. Cash plus short-term investments totaled $121.0 million. Debt and capital lease obligations included $50.4 million current and $150.2 million long-term debt, plus $0.4 million long-term capital leases.
- Cash dividends were $0.23 per share for Q3. The company repurchased 323,965 shares for approximately $10.0 million during the nine-month period; no shares were repurchased in Q3.
Material changes and unusual items
- Sales and profit improved across both segments. Q3 selling and administrative expenses were 27.6% of sales, down from 28.4%, reflecting volume leverage partly offset by higher fuel costs and incentive compensation.
- Continuing operations generated all reported 2011 earnings; discontinued operations were nil in the 2011 periods. The comparable 2010 nine-month period included a $2.6 million after-tax discontinued-operations loss.
- The effective tax rate on Q3 continuing operations was 34.6%, compared with 44.6% in Q3 2010; the prior-year rate was affected by a change in anticipated capital gain and capital-loss carry-forward utilization. Management estimated a 36.1% annual effective tax rate for 2011.
- HNI decided to exit a third-party-operated distribution center in Lithia Springs, Georgia, add distribution capacity at Cedartown, Georgia, and move some manufacturing to Muscatine, Iowa. The filing describes $0.5 million of Q3 restructuring and transition costs in MD&A; the restructuring note separately details $0.8 million of charges for the distribution-center closure and consolidation, including accelerated depreciation. The accrual for restructuring was $1.5 million at quarter end.
Outlook, financing, and risks
- Management expressed optimism about both markets and continued investment in sales, marketing, products, brands and distribution. It forecast approximately $30 million of capital expenditures for full-year 2011 and approximately $4.4 million of additional restructuring and transition charges over the remainder of 2011 and 2012. No specific revenue or earnings guidance was provided.
- A September 2011 amended revolving credit agreement raised borrowing capacity from $150 million to $250 million, with an option for a further $100 million, and extended the facility term to September 28, 2016, subject to stated maturity provisions. The company said it was in compliance with debt covenants and expected to remain compliant for the next 12 months.
- Key risks cited include uncertain economic and product demand, housing-market weakness, material and fuel costs, competitive pricing, supply or facility disruptions, distributor viability, execution of cost and growth initiatives, and access to credit. Management warned covenant breaches could restrict borrowing, accelerate repayment, or raise borrowing costs.
- Ordinary-course litigation, environmental remediation, tax matters and other claims were not expected to materially harm financial condition, though resolution could materially affect a future quarter’s or year’s results or cash flows. The company had $14 million of letters of credit supporting insurance and payment obligations.
Important facts for investors to verify
- Reconcile the restructuring disclosures: MD&A cites $0.5 million of Q3 costs, while the note details $0.8 million for the closure and consolidation; confirm the differing scope and classifications.
- Track whether the planned distribution and manufacturing realignment delivers the expected savings and whether the stated $4.4 million of further charges is realized.
- Review the $50 million revolving-facility borrowing classified as current, liquidity needs, and covenant headroom; the filing says compliance was strong but does not give a specific leverage ratio.
- Monitor inventory and working capital: inventory was $95.7 million at quarter end, up from $69.0 million at January 1, with management citing production leveling, increased volume and higher material costs.
- Assess the assumptions behind the 36.1% estimated annual tax rate, $30 million capital-spending plan and management’s market optimism; interim results are not necessarily indicative of full-year performance.