HNI Corporation — Form 10-Q Summary
Reporting period: Three months ended April 1, 2017, compared with the three months ended April 2, 2016. Although the request metadata says 2016 Q1, the filing itself reports 2017 Q1.
Financial results
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $477.7 million | $501.0 million | Down 4.7% |
| Gross profit | $173.7 million | $185.7 million | Down 6.5% |
| Gross margin | 36.4% | 37.1% | Down 0.7 percentage point |
| Operating income | $7.9 million | $19.5 million | Down 59.4% |
| Net income attributable to HNI | $4.8 million | $11.8 million | Down 59.6% |
| Diluted EPS | $0.11 | $0.26 | Lower |
| Operating cash flow | $(32.0) million | $(20.2) million | Greater cash use |
Net interest expense was $1.0 million, down from $1.8 million. The effective tax rate was 31.0%, versus 33.2%; the 2017 rate included a $0.6 million benefit from newly adopted stock-compensation tax guidance. Restructuring charges in operating expenses were $2.1 million; the filing also reports $6.3 million of restructuring costs and $3.8 million of transition costs, including amounts recorded in cost of sales.
Cash and cash equivalents were $29.1 million at April 1, down from $36.3 million at year-end. Capital expenditures including capitalized software were $32.8 million. The company paid $12.1 million in dividends and repurchased $11.7 million of shares during the quarter.
Segments and changes versus prior year
- Office furniture: Sales fell 7.1% to $360.0 million; operating profit fell 69.7% to $6.4 million. Management cited lower project activity, acquisitions and divestitures, restructuring and transition costs, and strategic growth investments. Acquisitions and divestitures of smaller office-furniture businesses reduced year-over-year sales by $9.3 million.
- Hearth products: Sales rose 3.5% to $117.7 million, supported by modest single-family housing growth and remodel activity. Operating profit declined 6.0% to $11.8 million, primarily reflecting restructuring and transition costs.
- Consolidated sales and margins declined; management attributed margin pressure to lower volume and restructuring and transition costs, partly offset by productivity, divestitures, and net price realization. Selling and administrative expense declined in dollars but rose to 34.3% of sales from 33.0%.
Liquidity, debt, outlook, and risks
Borrowings under the $400 million revolving credit facility totaled $290 million at quarter-end, including $115 million classified as current and $175 million long-term. The facility matures January 6, 2021. HNI reported compliance with its financial covenants and expected continued compliance over the next 12 months. Management said cash, future operating cash flow, available borrowing capacity, and capital-market access should be adequate for at least the next 12 months.
Management expected operating cash flow to be positive for fiscal 2017 and capital expenditures of approximately $100–$110 million. It remained optimistic about the long-term prospects of both businesses but provided no specific revenue or earnings forecast in this filing. Key stated risks include weak demand or housing conditions, competitive pricing, raw-material and energy costs, execution of transformation and facility-consolidation initiatives, credit availability and terms, supply disruptions, and currency and regulatory changes.
A multi-employer pension fund trustee asserted a withdrawal-liability claim relating to a business HNI sold in 2013. HNI recorded no liability, stating that an unfavorable outcome was neither probable nor remote, and said it intended to defend the claim. The filing also discusses ordinary-course legal, environmental, tax, and other claims, which management did not expect to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether weaker office-furniture demand and the steep segment profit decline continued after Q1, and how much reflects temporary restructuring and transition costs.
- Progress and realized savings from the facility closures, production moves, and business transformation; the filing records substantial related costs.
- Operating cash flow, working-capital trends, and debt repayment, given negative Q1 operating cash flow and $290 million of revolver borrowings.
- The amount and potential outcome of the multi-employer pension withdrawal-liability claim; no liability was recorded and the filing does not provide a clear estimate of exposure.
- Delivery against the stated full-year operating-cash-flow and capital-expenditure expectations, and compliance with credit-facility covenants.