HNI Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended December 29, 2018 (52 weeks), compared with fiscal 2017 ended December 30, 2017. The filing also reports fourth-quarter results. The request metadata says “2017 Q4,” but the supplied filing is for FY2018.
Business context and performance
HNI makes office furniture and hearth products. Office furniture generated 76% of FY2018 sales and hearth products 24%. North American office-furniture industry sales grew 5% in 2018, according to BIFMA.
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Net sales | $2,257.9 million | $2,175.9 million | +3.8% |
| Gross profit / margin | $835.0 million / 37.0% | $784.0 million / 36.0% | Margin +100 bps |
| Operating income / margin | $128.2 million / 5.7% | $76.7 million / 3.5% | Income +67.1% |
| Net income attributable to HNI | $93.4 million | $89.8 million | +4.0% |
| Diluted EPS | $2.11 | $2.00 | +5.5% |
| Operating cash flow | $186.4 million | $133.1 million | +$53.3 million |
| Capital expenditures, including capitalized software | $63.7 million | $127.4 million | Down $63.7 million |
FY2018 fourth-quarter sales were $598.1 million and attributable net income was $32.4 million, or $0.73 diluted EPS. Fourth-quarter operating income was $43.8 million and included $13.4 million of restructuring and impairment charges.
Segments and material changes
- Office furniture: Sales rose 2.7% to $1,706.1 million; operating profit increased 58.1% to $79.3 million, with a 4.6% margin versus 3.0%. Growth in supplies-driven and contract sales was partly offset by a $57.6 million negative net effect from closing and divesting small businesses.
- Hearth products: Sales rose 7.1% to $551.8 million; operating profit increased 9.2% to $91.4 million, with a 16.6% margin versus 16.2%. Both new-construction and retail sales increased.
- Consolidated gross margin improved on lower restructuring and transition costs, better pricing, productivity and cost savings; input-cost inflation was a partial offset. Results also benefited from lower restructuring, transition and impairment charges than in 2017.
- Office-furniture goodwill and long-lived-asset impairments totaled $14.9 million in 2018. Total restructuring and impairment charges were $15.7 million, down from $37.4 million in 2017. The company also recovered $1.8 million on a previously impaired long-term note receivable.
- The effective tax rate was 21.4% in 2018, compared with a 27.3% tax benefit rate in 2017. The prior-year result included a large deferred-tax benefit from the U.S. Tax Cuts and Jobs Act; excluding that Act’s effect, HNI says the 2017 rate would have been 36.2%.
Cash, debt, and liquidity
- Cash and cash equivalents were $76.8 million; short-term investments were $1.3 million. Management reported combined cash, cash equivalents and short-term investments of $78.1 million, versus $25.4 million at FY2017 year-end.
- Working capital was $97.6 million, compared with negative $0.8 million in FY2017. Current assets were $531.9 million and current liabilities $434.3 million.
- Total debt was approximately $250.0 million: $150 million drawn on a $450 million revolving facility and $100 million of private-placement notes. The notes carry fixed rates of 4.22% and 4.40%, due in 2025 and 2028. Long-term debt on the balance sheet was $249.4 million.
- The $150 million revolver borrowing was covered by an interest-rate swap. HNI reported covenant compliance and expected to remain compliant; it stated that $300 million of revolving capacity remained available.
- Dividends were $1.17 per share for FY2018, up from $1.13. The company repurchased 755,221 shares for $29.4 million. Approximately $48.6 million of repurchase authorization remained at year-end.
Outlook, risks, and unusual items
Management expressed optimism about long-term prospects in office furniture and hearth markets, but provided no specific sales or earnings guidance in the supplied filing text. HNI expects FY2019 capital expenditures of $65 million to $75 million, primarily for new products and operational improvements, and stated that available cash, operating cash flow and borrowing capacity should fund needs for at least the next twelve months.
- Key risks include economic and industry demand, housing starts and commercial activity; intense price competition; customer and dealer consolidation or loss; tariffs and raw-material inflation; freight and supply interruptions; and the ability to pass higher costs through pricing.
- Additional risks include product defects and warranty claims, environmental liabilities, healthcare costs, international and currency exposure, cybersecurity and IT disruption, and debt covenants or refinancing constraints.
- HNI completed a sale-leaseback of a manufacturing facility, receiving $16.9 million and leasing back part of the property for 10 years. The $5.1 million gain was deferred under the accounting rules then in effect.
- HNI adopted the revenue-recognition standard in 2018 using the modified-retrospective method and reported no material effect on results or financial position. It expected to adopt the lease-accounting standard in FY2019, increasing reported assets and liabilities; the exact impact was not clear in the filing text.
- Ordinary-course litigation, environmental, tax and other contingencies were not expected by management to have a material adverse effect. The filing reports no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the office-furniture segment can sustain its margin recovery while absorbing input-cost inflation and business-system transformation costs.
- Whether the office-furniture reporting unit with remaining net goodwill of $7.5 million faces further impairment; its 2018 impairment test was sensitive to discount-rate and growth assumptions.
- How tariffs, materials and freight costs affect margins, and whether pricing and productivity actions offset them.
- The company’s debt levels, revolver availability, covenant headroom, interest costs and cash conversion as capital spending and shareholder returns continue.
- The actual balance-sheet and earnings effects of FY2019 lease-accounting adoption, including treatment of the sale-leaseback gain.
- HNI reported that its financial statements were audited by KPMG and that internal control over financial reporting was effective as of December 29, 2018.