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2: EX-31.1 Certification -- §302 - SOA'02 -- ex311q22020 HTML 26K
3: EX-31.2 Certification -- §302 - SOA'02 -- ex312q22020 HTML 26K
4: EX-32.1 Certification -- §906 - SOA'02 -- ex321q22020 HTML 25K
11: R1 Cover Page HTML 75K
12: R2 Condensed Consolidated Statements of Comprehensive HTML 114K
Income
13: R3 Condensed Consolidated Balance Sheets HTML 138K
14: R4 Condensed Consolidated Balance Sheets HTML 34K
(Parenthetical)
15: R5 Condensed Consolidated Statements of Equity HTML 98K
16: R6 Condensed Consolidated Statements of Equity HTML 24K
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18: R8 Basis of Presentation HTML 25K
19: R9 Revenue from Contracts with Customers HTML 97K
20: R10 Acquisitions HTML 23K
21: R11 Inventories HTML 35K
22: R12 Goodwill and Other Intangible Assets HTML 125K
23: R13 Product Warranties HTML 44K
24: R14 Long-Term Debt HTML 47K
25: R15 Income Taxes HTML 42K
26: R16 Fair Value Measurements of Financial Instruments HTML 73K
27: R17 Accumulated Other Comprehensive Income (Loss) and HTML 121K
Shareholders' Equity
28: R18 Earnings Per Share HTML 61K
29: R19 Stock-Based Compensation HTML 48K
30: R20 Post-Retirement Health Care HTML 46K
31: R21 Recently Adopted Accounting Standards HTML 34K
32: R22 Guarantees, Commitments and Contingencies HTML 25K
33: R23 Reportable Segment Information HTML 115K
34: R24 Recently Adopted Accounting Standards (Policies) HTML 58K
35: R25 Business Combinations (Policies) HTML 27K
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Shareholders' Equity (Tables)
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47: R37 Reportable Segment Information (Tables) HTML 109K
48: R38 Revenue from Contracts with Customers - HTML 39K
Disaggregation of Revenue (Details)
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Assets and Liabilities (Details)
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Contract Assets and Liabilities (Details)
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(Details)
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53: R43 Inventories (Details) HTML 32K
54: R44 Goodwill and Other Intangible Assets Schedule of HTML 31K
Goodwill and Intangible Assets (Details)
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Intangible Assets (Details)
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58: R48 Goodwill and Other Intangible Assets - HTML 27K
Amortization Expense (Details)
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Amortization Expense (Details)
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Lived Intangible Assets (Details)
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Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon
Stock
iHNI
iNew York Stock Exchange
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
iYes
☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
iYes
☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer,""accelerated filer,""smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☒
Accelerated filer
☐
Smaller reporting company
i☐
Non-accelerated
filer
☐
Emerging growth company
i☐
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
Yes
i☐
No ☒
Indicate
the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date.
The accompanying unaudited, condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting
principles for complete financial statements. The December 28, 2019 consolidated balance sheet included in this Form 10-Q was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included. Operating results for the six-month period ended June 27, 2020 are not necessarily indicative of the results expected for the fiscal year ending January 2, 2021. For further information, refer to the consolidated financial statements and accompanying notes included in HNI Corporation's (the "Corporation") Annual Report on Form 10-K for the fiscal year ended December 28,
2019. Certain reclassifications have been made within the interim financial information to conform to the current presentation.
In the second quarter of 2020, the Corporation rebranded its segments to workplace furnishings (formerly office furniture) and residential building products (formerly hearth products). These changes clarify how and where the Corporation's products are used, and are intended to reduce confusion. These changes did not impact the Corporation's condensed consolidated financial statements.
Sales
by product category are subject to similar economic factors and market conditions. See “Note 16. Reportable Segment Information” in the Notes to Condensed Consolidated Financial Statements for further information about operating segments.
In addition to trade receivables, the Corporation has contract assets consisting of funds paid to certain workplace furnishings dealers in exchange for their multi-year commitment to market and sell the Corporation’s products. These contract
assets are amortized over the term of the contracts and recognized as a reduction of revenue. For contracts less than one year, the Corporation has elected the practical expedient to recognize incremental costs to obtain a contract as an expense when incurred. The Corporation has contract liabilities consisting of customer deposits and rebate and marketing program liabilities.
9
i
Contract
assets and contract liabilities were as follows (in thousands):
Cash received in advance and not recognized as revenue
—
(i33,520)
Reclassification
of cash received in advance to revenue as a result of performance obligations satisfied
—
i35,781
Net
change
$
i703
$
i4,266
/
Contract
liabilities for customer deposits paid to the Corporation prior to the satisfaction of performance obligations are recognized as revenue upon completion of the performance obligations. The amount of revenue recognized during the three and six months ended June 27, 2020 that was included in the December 28, 2019contract liabilities balance was $i0.0
million and $i8.6 million, respectively.
10
i
Performance
Obligations
The Corporation recognizes revenue for sales of workplace furnishings and residential building products at a point in time following the transfer of control of such products to the customer, which typically occurs upon shipment of the product. In certain circumstances, transfer of control to the customer does not occur until the goods are received by the customer or upon installation and/or customer acceptance, depending on the terms of the underlying contracts. iContracts
typically have a duration of less than one year and normally do not include a significant financing component. Generally, payment is due within i30 days of invoicing.
The Corporation's backlog orders are typically cancellable for a period of time and almost all contracts have an original duration of one year or less. As a result, the Corporation has elected the practical expedient permitted in the revenue accounting standard not to disclose the unsatisfied
performance obligation as of period end. The backlog is typically fulfilled within a few months.
Significant Judgments
The amount of consideration the Corporation receives and revenue recognized varies with changes in rebate and marketing program incentives, as well as early pay discounts, offered to customers. The Corporation uses significant judgment throughout the year in estimating the reduction in net sales driven by variable consideration for rebate and marketing programs. Judgments made include expected sales levels and utilization of funds. However, this judgment factor is significantly reduced at the end of each year when sales volumes and the impact to rebate and marketing programs are known and recorded as the programs typically end near the Corporation's fiscal year end.
/
Note
3. iAcquisitions
During the six months ended June 27, 2020, the Corporation acquired ithree
residential building products distributors, in January 2020, March 2020 and June 2020. All transactions were asset acquisitions and were consummated entirely in cash. The aggregate purchase price was approximately $i12 million, and the preliminary allocation includes $i10.5
million of goodwill, which is tax deductible. The remaining assets and liabilities acquired are not material. The Corporation will finalize the allocation of the purchase price during 2020 based on the final purchase price and any adjustments required over the remaining measurement period.
Note 4. iInventories
iThe
Corporation values its inventory at the lower of cost or net realizable value.iInventories included in the Condensed Consolidated Balance Sheets consisted of the following (in thousands):
In
the first quarter of 2020, the Corporation recorded goodwill impairment charges of $i14.1 million and $i7.5 million, respectively, related to two reporting units in the workplace
furnishings segment.
See "Note 3. Acquisitions" for additional information regarding goodwill acquired in the year-to-date period.
Definite-lived intangible assets
i
The table below summarizes amortizable definite-lived intangible assets, which are reflected in "Goodwill and Other Intangible Assets" in the Condensed Consolidated Balance Sheets (in thousands):
In
the first quarter of 2020, the Corporation recorded impairment charges of $i0.6 million and $i8.2 million,
related to definite-lived tradenames and customer lists, respectively, in the workplace furnishings segment.
i
Amortization expense is reflected in "Selling and administrative expenses" in the Condensed Consolidated Statements of Comprehensive Income and was as follows (in thousands):
The
occurrence of events such as acquisitions, dispositions, or impairments may impact future amortization expense. iBased on the current amount of intangible assets subject to amortization, the estimated amortization expense for each of the following five years is as follows (in millions):
2020
2021
2022
2023
2024
Amortization
expense
$
i24.0
$
i23.1
$
i20.1
$
i16.8
$
i15.1
Indefinite-lived
intangible assets
The Corporation also owns certain intangible assets, which are deemed to have indefinite useful lives because they are expected to generate cash flows indefinitely. iThese indefinite-lived intangible assets are reflected in "Goodwill and Other Intangible Assets" in the Condensed Consolidated Balance Sheets (in thousands):
In
the first quarter of 2020, the Corporation recorded an impairment charge of $i2.3 million, related to an indefinite-lived tradename in the workplace furnishings segment. The remaining immaterial change in the indefinite-lived intangible assets balances shown above is related to foreign currency translation impacts.
i
Impairment
Analysis
The Corporation evaluates its goodwill and indefinite-lived intangible assets for impairment on an annual basis during the fourth quarter, or whenever indicators of impairment exist. The Corporation also evaluates long-lived assets (which include definite-lived intangible assets) for impairment if indicators exist.
In the first quarter of 2020, the Corporation determined that a triggering event occurred, resulting in quantitative impairment tests performed over the goodwill, indefinite-lived intangible assets, and long-lived asset groups related to three reporting units in the workplace furnishings segment. This determination was made considering the reduced sales and profitability projections for these reporting units, driven by the COVID-19 pandemic and related economic disruption. The resulting impairment charges recorded
in the first quarter of 2020, as described in the preceding sections, are reflected in "Impairment and restructuring charges" in the Condensed Consolidated Statements of Comprehensive Income. For further information, refer to "Note 5. Goodwill and Other Intangible Assets" included in the Corporation's Quarterly Report on Form 10-Q for the fiscal quarter ended March 28, 2020.
No additional triggering events occurred and iiino//
impairment charges were recorded during the second quarter of 2020.
Note 6. iProduct Warranties
iThe
Corporation issues certain warranty policies on its workplace furnishings and residential building products that provide for repair or replacement of any covered product or component that fails during normal use because of a defect in design, materials, or workmanship. Allowances have been established for the anticipated future costs associated with the Corporation's warranty programs.
A warranty allowance is determined by recording a specific allowance for known warranty issues and an additional allowance for unknown claims expected to be incurred based on historical claims experience. Actual costs incurred could differ from the original estimates, requiring adjustments to the allowance. iActivity
associated with warranty obligations was as follows (in thousands):
The
current and long-term portions of the allowance for estimated settlements are included within "Accounts payable and accrued expenses" and "Other Long-Term Liabilities", respectively, in the Condensed Consolidated Balance Sheets. The following table summarizes when these estimated settlements are expected to be paid (in thousands):
Fixed
rate notes due in 2025 with an interest rate of 4.22%
i50,000
i50,000
Fixed
rate notes due in 2028 with an interest rate of 4.40%
i50,000
i50,000
Other
amounts
i—
i790
Deferred
debt issuance costs
(i519)
(i561)
Total
debt
i183,481
i175,229
Less:
Current maturities of long-term debt
i—
i790
Long-term
debt
$
i183,481
$
i174,439
/
The
carrying value of the Corporation's outstanding variable-rate, long-term debt obligations at June 27, 2020 was $i84 million, which approximated fair value. The fair value of the fixed rate notes was estimated based on a discounted cash flow method (Level 2) to be $i125
million at June 27, 2020.
As of June 27, 2020, the Corporation’s revolving credit facility borrowings were under the credit agreement entered into on April 20, 2018 with a scheduled maturity of April 20, 2023. The Corporation deferred the debt issuance costs related to the credit agreement, which are classified as assets, and is amortizing them over the term of the credit agreement. The current portion of debt issuance costs of $i0.4
million is the amount to be amortized over the next twelve months based on the current credit agreement and is reflected in "Prepaid expenses and other current assets" in the Condensed Consolidated Balance Sheets. The long-term portion of debt issuance costs of $i0.8 million is reflected in "Other Assets" in the Condensed Consolidated Balance Sheets.
As of June 27, 2020, there was $i84
million outstanding under the $i450 million revolving credit facility. The entire amount drawn under the revolving credit facility is considered long-term as the Corporation assumes no obligation to repay any of the amounts borrowed in the next twelve months. Based on current earnings before interest, taxes, depreciation and amortization, the Corporation can access the full remaining $i366
million of borrowing capacity available under the revolving credit facility and maintain compliance with applicable covenants.
In addition to cash flows from operations, the revolving credit facility under the credit agreement is the primary source of daily operating capital for the Corporation and provides additional financial capacity for capital expenditures, repurchases of common stock, and strategic initiatives, such as acquisitions.
In addition to the revolving credit facility, the Corporation also has $i100
million of borrowings outstanding under private placement note agreements entered into on May 31, 2018. Under the agreements, the Corporation issued $i50 million of seven-year fixed rate notes with an interest rate of i4.22
percent, due May 31, 2025, and $i50 million of ten-year fixed rate notes with an interest rate of i4.40
percent, due May 31, 2028. The Corporation deferred the debt issuance costs related to the private placement note agreements, which are classified as a reduction of long-term debt in accordance with ASU No. 2015-03, and is amortizing them over the terms of the private placement note agreements. The deferred debt issuance costs do not reduce the amount owed by the Corporation under the terms of the private placement note agreements. As of June 27, 2020, the debt
14
issuance costs balance of $i0.5
million related to the private placement note agreements is reflected in "Long-Term Debt" in the Condensed Consolidated Balance Sheets.
The credit agreement and private placement notes both contain financial and non-financial covenants. The covenants under both are substantially the same. Non-compliance with covenants under the agreements could prevent the Corporation from being able to access further borrowings, require immediate repayment of all amounts outstanding, and/or increase the cost of borrowing.
Covenants require maintenance of financial ratios as of the end of any fiscal quarter, including:
•a consolidated interest coverage ratio (as defined in the credit agreement) of not
less than i4.0 to 1.0, based upon the ratio of (a) consolidated EBITDA for the last four fiscal quarters to (b) the sum of consolidated interest charges; and
•a consolidated leverage ratio (as defined in the credit agreement) of not greater than i3.5
to 1.0, based upon the ratio of (a) the quarter-end consolidated funded indebtedness to (b) consolidated EBITDA for the last four fiscal quarters.
The most restrictive of the financial covenants is the consolidated leverage ratio requirement of i3.5 to 1.0. Under the credit agreement, consolidated EBITDA is defined as consolidated net income before interest expense, income taxes, and depreciation and amortization of intangibles,
as well as non-cash items that increase or decrease net income. As of June 27, 2020, the Corporation was below the maximum allowable ratio and was in compliance with all of the covenants and other restrictions in the credit agreement. The Corporation expects to remain in compliance with all of the covenants and other restrictions in the credit agreement over the next twelve months.
Note 8. iIncome
Taxes
The Corporation's tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items. iThe following table summarizes the Corporation's income tax provision (dollars in thousands):
The
Corporation's effective tax rate was lower in the three and six months ended June 27, 2020 compared to the same periods last year, primarily due to the mix of jurisdictional income, impairments recorded in the U.S. jurisdiction, and a change in the expected worldwide full year income tax rate due to the COVID-19 pandemic.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was enacted in response to the COVID-19 pandemic crisis. The CARES Act contains provisions relating to net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The Corporation is continuing to evaluate the impact of this
legislation on its consolidated financial position, results of operations, and cash flows, but at this time does not estimate a material impact.
Note 9. iFair Value Measurements of Financial Instruments
iFor
recognition purposes, on a recurring basis, the Corporation is required to measure at fair value its marketable securities, derivative financial instruments, and deferred stock-based compensation. The marketable securities are comprised of money market funds, government securities and corporate bonds. When available, the Corporation uses quoted market prices to determine fair value and classifies such measurements within Level 1. Where market prices are not available, the Corporation makes use of observable market-based inputs (prices or quotes from published exchanges and indexes) to calculate fair value using the market approach, in which case the measurements are classified within Level 2.
15
i
Financial
instruments measured at fair value were as follows (in thousands):
Fair value as of measurement date
Quoted prices in active markets for identical assets (Level 1)
(3) Current portion - "Prepaid expenses and other current assets"; Long-term portion - "Other Assets"
(4) "Other Long-Term Liabilities"
(5) Current portion - "Current maturities of other long-term obligations"; Long-term portion - "Other Long-Term Liabilities"
/
Note
10. iAccumulated Other Comprehensive Income (Loss) and Shareholders' Equity
i
The
following tables summarize the components of accumulated other comprehensive income (loss) and the changes in accumulated other comprehensive income (loss), net of tax, as applicable (in thousands):
Amounts
in parentheses indicate reductions to equity.
Interest Rate Swap
In August 2019, concurrent with the termination of a previous interest rate swap, the Corporation entered into a new interest rate swap transaction to hedge $i75 million of outstanding variable rate revolver borrowings against future interest rate volatility. Under the terms of this interest rate swap, the Corporation pays a fixed rate of i1.42
percent and receives one month LIBOR on a $i75 million notional value expiring August 2023. As of June 27, 2020, the fair value of the Corporation's interest rate swap liability was $i2.8
million. The unrecognized change in value of the interest rate swap, which includes the unamortized gain on the termination of the previous interest rate swap, is reported net of tax as $(i2.0) million in "Accumulated other comprehensive income (loss)" in the Condensed Consolidated Balance Sheets.
i
The
following table details the reclassifications from accumulated other comprehensive income (loss) (in thousands):
Three Months Ended
Six Months Ended
Details
about Accumulated Other Comprehensive Income (Loss) Components
Affected Line Item in the Statement Where Net Income is Presented
As
of June 27, 2020, approximately $i158.3 million of the Corporation's Board of Directors' ("Board") current repurchase authorization remained unspent. As announced in the April 6, 2020 COVID-19 response update, the Corporation temporarily suspended share repurchase activity to support free cash flow.
Note
11. iEarnings Per Share
i
The following table reconciles the numerators and denominators used in the calculation of
basic and diluted earnings per share ("EPS") (in thousands, except per share data):
Numerator for both basic and diluted EPS attributable to HNI Corporation net income (loss)
$
i12,556
$
i15,810
$
(i11,339)
$
i16,832
Denominators:
Denominator
for basic EPS weighted-average common shares outstanding
i42,640
i43,218
i42,634
i43,376
Potentially
dilutive shares from stock-based compensation plans
i289
i416
i—
i484
Denominator
for diluted EPS
i42,929
i43,634
i42,634
i43,860
Earnings
per share – basic
$
i0.29
$
i0.37
$
(i0.27)
$
i0.39
Earnings
per share – diluted
$
i0.29
$
i0.36
$
(i0.27)
$
i0.38
/
i
The
weighted-average common stock equivalents presented above do not include the effect of the common stock equivalents in the table below because their inclusion would be anti-dilutive (in thousands):
Common stock equivalents excluded because their inclusion would be anti-dilutive
i3,320
i2,232
i3,428
i2,084
/
Note
12. iStock-Based Compensation
iThe
Corporation measures stock-based compensation expense at grant date, based on the fair value of the award. Forms of awards issued under shareholder approved plans include stock options, restricted stock units based on a service condition ("restricted stock units"), restricted stock units based on both performance and service conditions ("performance stock units"), and shares issued under member stock purchase plans. Stock-based compensation expense related to stock options, restricted
18
stock units, and performance stock units is recognized over the employees' requisite service periods. Additionally, expense related to performance stock units is adjusted for the probability that the Corporation will perform
within an established target range of cumulative profitability over a multi-year period.
i
The following table summarizesexpense associated with these plans (in thousands):
The
following table summarizes unrecognized compensation expense and the weighted-average remaining service period for non-vested stock options and stock units as of June 27, 2020:
Unrecognized Compensation Expense (in thousands)
Weighted-Average Remaining Service Period (years)
Non-vested stock options
$
i1,835
i1.1
Non-vested
restricted stock units
$
i2,045
i0.9
Non-vested
performance stock units
$
i953
i1.4
/
Note
13. iPost-Retirement Health Care
i
The following table sets forth
the components of net periodic benefit costs included in the Condensed Consolidated Statements of Comprehensive Income (in thousands):
In
June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments and also issued subsequent amendments to the initial guidance: ASU 2018-19, ASU 2019-04, and ASU 2019-05 (collectively, Topic 326). Topic 326 replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses by requiring consideration of a broader range of reasonable and supportable information and is intended to provide financial statement users with more useful information about expected credit losses on financial instruments.
The Corporation adopted Topic 326 in the first quarter of fiscal 2020 using a modified retrospective transition approach. The adoption resulted in a cumulative effect decrease to retained earnings of $i0.1
million to reflect a change in the allowance for doubtful accounts. Additionally, Topic 326 requires the allowance for doubtful accounts balance (contra-asset) to be presented
/
19
separately in the Condensed Consolidated Balance Sheets. No other financial statement line items were materially impacted by the adoption.
The Corporation's allowance for doubtful accounts is developed based on several factors, including overall customer credit quality, historical write-off experience, and specific
account analyses projecting the ultimate collectability of the account. The adoption of Topic 326 did not significantly impact the Corporation's accounting policies or estimation methods related to the allowance for doubtful accounts. Furthermore, in the second quarter of 2020 the Corporation adjusted its method for determining the allowance for doubtful accounts in response to the COVID-19 pandemic. The impact of this adjustment was not material to the financial statements.
Topic 326 also introduced new accounting and reporting requirements related to available-for-sale debt securities, including consideration of whether an allowance for credit losses should be established. The Corporation has determined that such an allowance is not required with respect to its available-for-sale debt security portfolio. See "Note 9. Fair Value Measurements" for fair value information of
the Corporation's available-for-sale debt securities and where such are recorded in the Condensed Consolidated Balance Sheets. The amortized cost of this portfolio was $i13.1 million and $i12.5
million as of June 27, 2020 and December 28, 2019, respectively. Immaterial amounts of accrued interest receivable related to the Corporation's portfolio are recorded in "Prepaid expenses and other current assets" and "Other assets".
Note 15. iGuarantees,
Commitments, and Contingencies
The Corporation utilizes letters of credit and surety bonds in the amount of approximately $i22 million to back certain insurance policies and payment obligations. The Corporation utilizes trade letters of credit and banker's acceptances in the amount of approximately $i0.1
million to guarantee certain payments to overseas suppliers. The letters of credit, bonds, and banker's acceptances reflect fair value as a condition of their underlying purpose and are subject to competitively determined fees.
The Corporation has contingent liabilities which have arisen in the ordinary course of its business, including liabilities relating to pending litigation, environmental remediation, taxes, and other claims. It is the Corporation's opinion, after consultation with legal counsel, that liabilities, if any, resulting from these matters are not expected to have a material adverse effect on the Corporation's financial condition, cash flows, or on the Corporation's quarterly or annual operating results when resolved in a future period.
Note
16. iReportable Segment Information
As discussed in "Note 1. Basis of Presentation", in the second quarter of 2020, the Corporation rebranded its reportable segments. These changes did not impact the Corporation's condensed consolidated financial statements. iManagement
views the Corporation as being in itwo reportable segments based on industries: workplace furnishings (formerly office furniture) and residential building products (formerly hearth products), with the former being the principal segment./
The aggregated workplace furnishings segment manufactures and markets a broad line of commercial
and home office furniture which includes panel-based and freestanding furniture systems, seating, storage, tables, and architectural products. The residential building products segment manufactures and markets a full array of gas, wood, electric, and pellet fueled fireplaces, inserts, stoves, facings, and accessories.
For purposes of segment reporting, intercompany sales between segments are not material, and operating profit is income before income taxes exclusive of certain unallocated general corporate expenses. These unallocated general corporate expenses include the net costs of the Corporation's corporate operations. Management views interest income and expense as corporate financing costs and not as a reportable segment cost. In addition, management applies an effective income tax rate to its consolidated income before income taxes so income taxes are not reported or viewed
internally on a segment basis. Identifiable assets by segment are those assets applicable to the respective industry segments. Corporate assets consist principally of cash and cash equivalents, short-term investments, long-term investments, IT infrastructure, and corporate office real estate and related equipment.
No geographic information for revenues from external customers or for long-lived assets is disclosed since the Corporation's primary market and capital investments are concentrated in the United States.
20
i
Reportable
segment data reconciled to the Corporation's condensed consolidated financial statements was as follows (in thousands):
Item
2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of the Corporation's historical results of operations and of its liquidity and capital resources should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements of the Corporation and related notes. Statements that are not historical are forward-looking and involve risks and uncertainties. See "Forward-Looking Statements" at the end of this section for further information.
Overview
The Corporation has two reportable segments: workplace furnishings (formerly
office furniture) and residential building products (formerly hearth products). In the second quarter of 2020, the Corporation rebranded its reportable segments, with no impact on the Corporation's condensed consolidated financial statements. The Corporation is a leading global designer and provider of commercial furnishings, and a leading manufacturer and marketer of hearth products. The Corporation utilizes a decentralized business model to deliver value to customers via various brands and selling models. The Corporation is focused on growing its existing businesses while seeking out and developing new opportunities for growth.
Consolidated net sales for the second quarter of 2020 were $417.5 million, a decrease of 20.6 percent compared to net sales of $526.0 million in the prior-year quarter. The change was driven by a 24.8 percent decrease in the workplace furnishings segment,
along with a 6.1 percent decrease in the residential building products segment. The acquisition of residential building products distributors resulted in a $2.9 million increase compared to the second quarter of 2019.
Net income attributable to the Corporation in the second quarter of 2020 was $12.6 million compared to $15.8 million in the second quarter of 2019. The decrease was primarily due to lower volume as a result of the COVID-19 pandemic, partially offset by lower core SG&A spend, net productivity, and price realization.
Update on COVID-19 Pandemic
The Corporation's primary focus during the COVID-19 pandemic crisis continues to be the health and safety of its members. The Corporation implemented workplace
health and safety measures consistent with guidelines from the Centers for Disease Control and Prevention and has taken strong measures to create social distancing and keep members safe. A portion of the Corporation's members continue to work remotely.
The HNI strategy, including diverse revenue streams, price point breadth, channel reach, and a lean operating model, along with the dedication of members, allowed the Corporation to manage through challenging second quarter conditions. The Corporation aggressively managed costs and drove productivity, offsetting much of the impact from lower volumes resulting from the COVID-19 pandemic. The Corporation’s teams stayed focused on customers, generating and seizing market opportunities. As of June 27, 2020, the Corporation's major facilities continue to operate, and there are no material
disruptions to the Corporation's supply chain, manufacturing and distribution operations, or ability to serve customers.
As of the date of this filing, COVID-19 cases have begun to increase again, resulting in the resumption of restrictions in certain markets. As a result, there remains significant uncertainty concerning the magnitude of the impact and duration of the COVID-19 pandemic crisis. The Corporation continues to monitor the situation and may take further actions as may be required by federal, state, or local authorities or that the Corporation determines is in the best interest of its members.
22
Results
of Operations
The following table presents certain key highlights from the results of operations (in thousands):
Net income (loss) attributable to non-controlling interest
(2)
1
NM
(2)
(1)
NM
Net
income (loss) attributable to HNI Corporation
$
12,556
$
15,810
(20.6
%)
$
(11,339)
$
16,832
(167.4%)
As
a Percentage of Net Sales:
Net sales
100.0
%
100.0
%
100.0
%
100.0
%
Gross
profit
36.1
36.6
-50 bps
36.9
36.0
90 bps
Selling and administrative expenses
32.6
32.0
60 bps
34.2
33.3
90 bps
Impairment
and restructuring charges
—
0.2
-20 bps
3.7
0.1
360 bps
Operating income (loss)
3.6
4.4
-80 bps
(1.0)
2.7
-370 bps
Income
taxes
0.1
0.9
-80 bps
(0.1)
0.5
-60 bps
Net income (loss) attributable to HNI Corporation
3.0
3.0
0 bps
(1.3)
1.7
-300 bps
Results
of Operations - Three Months Ended
Net Sales
Consolidated net sales for the second quarter of 2020 decreased 20.6 percent compared to the same quarter last year. The change was driven by a decrease in both the workplace furnishings segment and residential building products segment. Included in the sales results for the current quarter was a $2.9 million impact from acquiring small residential building products distributors.
Gross Profit
Gross profit as a percentage of net sales decreased 50 basis points in the second quarter of 2020 compared to the same quarter last year primarily driven by lower volume, partially offset by price realization
and net productivity.
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Selling and Administrative Expenses
Selling and administrative expenses as a percentage of net sales increased 60 basis points in the second quarter of 2020 compared to the same quarter last year due to lower volume, partially offset by lower core SG&A spend and net productivity.
Operating Income
In
the second quarter of 2020, operating income was $14.8 million compared to operating income of $23.2 million in the same quarter last year. The change was primarily driven by lower volume, partially offset by lower core SG&A spend, net productivity, and price realization.
Interest Expense, Net
Interest expense, net for the second quarter of 2020 was $1.9 million, compared to $2.5 million in the same quarter last year. The decrease was driven by lower interest rates and reduced borrowings.
Income Taxes
The Corporation's income tax provision for the second quarter of 2020 was $0.3 million on income before taxes of $12.9 million,
or an effective tax rate of 2.7 percent. For the second quarter of 2019, the Corporation's income tax provision was an expense of $5.0 million on income before taxes of $20.8 million, or an effective tax rate of 23.9 percent. The decrease was primarily due to the mix of jurisdictional income, impairments recorded in the U.S. jurisdiction, and a change in the expected worldwide full year income tax rate due to the COVID-19 pandemic and related economic disruption. Refer to "Note 8. Income Taxes" for further information.
Net Income Attributable to HNI Corporation
Net income attributable to the Corporation was $12.6 million, or $0.29 per diluted share in the second quarter of 2020, compared to $15.8 million or $0.36 per diluted share in the second quarter of 2019.
Results
of Operations - Six Months Ended
Net Sales
Consolidated net sales for the first six months of 2020 decreased 11.9 percent compared to the same period last year. The change was driven by a 15.3 percent decrease in the workplace furnishings segment. The residential building products segment posted a modest 1.1 percent decrease from the prior year period. Included in the sales results for the first six months of 2020 was a $3.9 million impact from acquiring small residential building products distributors.
Gross Profit
Gross profit as a percentage of net sales increased 90 basis points in the first six months of 2020 compared to the
same period last year primarily driven by net productivity and price realization, partially offset by lower volume.
Selling and Administrative Expenses
Selling and administrative expenses as a percentage of net sales increased 90 basis points in the first six months of 2020 compared to the same period last year due to $5.0 million of one-time costs related to the COVID-19 pandemic and lower volume, partially offset by lower core SG&A spend.
Impairment and Restructuring Charges
During the first six months of 2020, the Corporation recorded $32.7 million of impairment charges related to goodwill and intangible assets as a result of
the COVID-19 pandemic and related economic disruption.
During the first six months of 2019, the Corporation recorded $0.9 million of restructuring costs in connection with a structural realignment in the workplace furnishings segment.
24
Operating Income (Loss)
In the first six months of 2020, operating loss was $8.9 million compared to operating income of $26.9 million in the same period last year. The change was primarily driven by $37.7 million of impairment charges and costs related
to the COVID-19 pandemic and related economic disruption. Aside from these charges, the business results improved compared to the same period last year primarily due to price realization, net productivity, and lower core SG&A spend, partially offset by lower volume.
Interest Expense, Net
Interest expense, net for the first six months of 2020 was $3.8 million, compared to $4.6 million in the same period last year. The decrease was due to lower interest rates and borrowings, partially offset by lower interest income.
Income Taxes
The Corporation's income tax provision for the first six months of 2020 was a benefit of $1.3 million
on loss before taxes of $12.6 million, or an effective tax rate of 10.3 percent. For the first six months of 2019, the Corporation's income tax provision was an expense of $5.5 million on income before taxes of $22.3 million, or an effective tax rate of 24.6 percent. The decrease was primarily due to the mix of jurisdictional income, impairments recorded in the U.S. jurisdiction, and a change in the expected worldwide full year income tax rate due to the COVID-19 pandemic and related economic disruption. Refer to "Note 8. Income Taxes" for further information.
Net Income (Loss) Attributable to HNI Corporation
Net loss attributable to the Corporation was $11.3 million, or $0.27 per diluted share in the first six months of 2020, compared to net income attributable to the Corporation of $16.8
million or $0.38 per diluted share in the first six months of 2019.
Workplace Furnishings
The following table presents certain key highlights from the results of operations in the workplace furnishing segment (in thousands):
Second quarter 2020 net
sales for the workplace furnishings segment decreased 24.8 percent compared to the same quarter last year.
Operating income as a percentage of net sales decreased 210 basis points in the second quarter of 2020 compared to the same quarter last year. The decrease was driven by lower volume, partially offset by net productivity, lower core SG&A spend, and price realization.
Six Months Ended
Net sales for the first six months of 2020 for the workplace furnishings segment decreased 15.3 percent compared to the same period last year.
Operating loss as a percentage of net sales decreased 610 basis points in the first six months of 2020 compared to the same period last year. The
workplace furnishings segment recorded charges of $32.7 million related to the impairment of goodwill and intangible assets and $3.4 million of other costs related to the COVID-19 pandemic and related economic disruption. Aside from these charges, the workplace furnishings segment results decreased compared to the prior-year quarter driven by lower volume and higher tariff expense, partially offset by price realization, net productivity, and lower core SG&A spend.
25
Residential Building Products
The
following table presents certain key highlights from the results of operations in the residential building products segment (in thousands):
Second quarter 2020 net sales for the
residential building products segment decreased 6.1 percent compared to the same quarter last year. Included in the sales results was a $2.9 million impact from acquiring small residential building products distributors.
Operating profit as a percentage of net sales increased 160 basis points in the second quarter of 2020 compared to the same quarter last year. The increase was primarily driven by price realization, lower variable compensation, lower core SG&A spend, and net productivity, partially offset by lower volume and unfavorable mix.
Six months ended
Net sales for the first six months of 2020 for the residential building products segment decreased 1.1 percent compared to the same period last year. Included in the sales results was a $3.9 million
impact from acquiring small residential building products distributors.
Operating profit as a percentage of net sales increased 180 basis points in the first six months of 2020 compared to the same period last year. The increase was primarily driven price realization, lower variable compensation, and net productivity, partially offset by lower volume.
Liquidity and Capital Resources
Cash, cash equivalents, and short-term investments, coupled with cash flow from future operations, borrowing capacity under the existing credit agreement, and the ability to access capital markets, are expected to be adequate
to fund operations and satisfy cash flow needs for at least the next twelve months. Additionally, based on current earnings before interest, taxes, depreciation and amortization generation, the Corporation can access the full remaining $366 million of borrowing capacity available under the revolving credit facility and maintain compliance with applicable covenants.
Cash Flow – Operating Activities
Operating activities were a source of $27.8 million of cash in the first six months of 2020 compared to a source of $12.8 million of cash in the first six months of 2019. The increase in operating cash flows was driven by seasonal timing differences in working capital and other liabilities.
Cash Flow – Investing Activities
Capital
expenditures, including capitalized software, for the first six months of 2020 were $20.8 million compared to $37.6 million in the same period last year. These expenditures are primarily focused on machinery, equipment, and tooling required to support new products, continuous improvements, and cost savings initiatives in manufacturing processes. For the full year 2020, capital expenditures are expected to be approximately $40 to $45 million.
Current year investing activities also include acquisition spending for small residential building products distributors.
Cash Flow – Financing Activities
Long-Term Debt - The Corporation maintains a revolving credit facility as the primary source of committed funding from which the Corporation
finances its planned capital expenditures, strategic initiatives, and seasonal working capital needs. Cash flows included in financing activities represent periodic borrowings and repayments under the revolving credit facility. See "Note 7. Long-Term Debt" in the Notes to Condensed Consolidated Financial Statements for further information.
26
Dividend - The Corporation is committed to maintaining or modestly growing the quarterly dividend. Cash dividends declared and paid per common share were as follows (in dollars):
During
the second quarter, the Board declared the regular quarterly cash dividend on May 5, 2020. The dividend was paid on June 1, 2020 to shareholders of record on May 15, 2020.
Stock Repurchase - The Corporation’s capital strategy related to stock repurchase is focused on offsetting the dilutive impact of issuances for various compensation related matters. The Corporation may elect to opportunistically purchase additional shares based on excess cash generation and/or share price considerations. The Board authorized $200 million on November 9, 2007 and an additional $200 million each on November 7, 2014 and February
13, 2019 for repurchases of the Corporation’s common stock. As announced in the April 6, 2020 COVID-19 response update, the Corporation temporarily suspended share repurchase activity to support free cash flow. See "Note 10. Accumulated Other Comprehensive Income (Loss) and Shareholders' Equity" in the Notes to Condensed Consolidated Financial Statements for further information.
Off-Balance Sheet Arrangements
The Corporation does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on the Corporation's financial condition, revenues or expenses, results
of operations, liquidity, capital expenditures, or capital resources.
Contractual Obligations
Contractual obligations associated with ongoing business and financing activities will result in cash payments in future periods. A table summarizing the amounts and estimated timing of these future cash payments was provided in the Corporation's Annual Report on Form 10-K for the fiscal year ended December 28, 2019. There were no material changes outside the ordinary course of business in the Corporation's contractual obligations or the estimated timing of the future cash payments during the first six months of 2020.
Commitments
and Contingencies
See "Note 15. Guarantees, Commitments, and Contingencies" in the Notes to Condensed Consolidated Financial Statements for further information.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon the Consolidated Financial Statements, prepared in accordance with Generally Accepted Accounting Principles ("GAAP"). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and
expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on a variety of other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Senior management has discussed the development, selection, and disclosure of these estimates with the Audit Committee of the Board. Actual results may differ from these estimates under different assumptions or conditions. A summary of the more significant accounting policies requiring the use of estimates and assumptions in preparing the financial statements is provided in the Corporation's Annual Report on Form 10-K for the fiscal year ended December 28, 2019.
Recently
Issued Accounting Standards Not Yet Adopted
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes. This update simplifies various aspects related to accounting for income taxes, removes certain exceptions to the general principles in ASC 740, and clarifies and amends existing guidance to improve consistent application. The new standard becomes effective for the
27
Corporation in fiscal 2021. The Corporation is currently evaluating the effect the standard will have on consolidated financial statements and related disclosures.
Looking
Ahead
Management continues to anticipate near-term challenges in both volume and profit levels as the Corporation navigates the COVID-19 pandemic and related economic disruption. However, management expects third quarter 2020 sales and profit to increase from second quarter 2020 levels, driven by seasonality. Cash flows are anticipated to remain healthy over the remainder of 2020, which has resulted in the acceleration of (1) certain investments in the second half of the year; and (2) the restoration of compensation for members and Board of Directors to levels existing prior to the reductions announced by the Corporation on April 22, 2020.
Management remains optimistic about the long-term prospects in the workplace furnishings and residential building
products markets. Management believes the Corporation continues to compete well and remains confident the investments made in the business will continue to generate strong returns for shareholders.
Forward-Looking Statements
Statements in this report to the extent they are not statements of historical or present fact, including statements as to plans, outlook, objectives, and future financial performance, are "forward-looking" statements, within the meaning of Section 21 of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Words such as "anticipate,""believe,""could,""confident,""estimate,""expect,""forecast,""hope,""intend,""likely,""may,""plan,""possible,""potential,""predict,""project,""should,""will,""would," and variations of such words and similar expressions identify forward-looking statements.
Forward-looking statements involve known and unknown risks and uncertainties, which may cause the Corporation's actual results in the future to differ materially from expected results. The most significant factors known to the Corporation that may adversely affect the Corporation’s business, operations, industries, financial position, or future financial performance are described within Item 1A of the Corporation's Annual Report on Form 10-K for the fiscal year ended December 28, 2019 and Part II, Item 1A of this
report. The Corporation cautions readers not to place undue reliance on any forward-looking statement, which speaks only as of the date made, and to recognize forward-looking statements are predictions of future results, which may not occur as anticipated. Actual results could differ materially from those anticipated in the forward-looking statements and from historical results due to the risks and uncertainties described elsewhere in this report, including but not limited to: the duration and scope of the COVID-19 pandemic and its effect on people and the economy; the levels of office furniture needs and housing starts; overall demand for the Corporation's products; general economic and market conditions in the United States and internationally; industry and competitive conditions; the consolidation and concentration of the Corporation's customers; the Corporation's reliance on its network of independent dealers; changes in trade policy; changes in raw material, component,
or commodity pricing; market acceptance and demand for the Corporation's new products; changing legal, regulatory, environmental, and healthcare conditions; the risks associated with international operations; the potential impact of product defects; the various restrictions on the Corporation's financing activities; an inability to protect the Corporation's intellectual property; impacts of tax legislation; force majeure events outside the Corporation's control; and other risks described in the Corporation's annual and quarterly reports filed with the Securities and Exchange Commission on Forms 10-K and 10-Q, as well as others the Corporation may consider not material or does not anticipate at this time. The risks and uncertainties described in this report, as well as those described within Item 1A of the Corporation's Annual Report on Form 10-K for the fiscal year ended December 28, 2019 and Part II, Item 1A of this
report, are not exclusive and further information concerning the Corporation, including factors that potentially could have a material effect on the Corporation's financial results or condition, may emerge from time to time.
The Corporation assumes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law. The Corporation advises you, however, to consult any further disclosures made on related subjects in future quarterly reports on Form 10-Q and current reports on Form 8-K filed with or furnished to the SEC.
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
As of June 27, 2020, there were no material changes to the financial market risks affecting the quantitative and qualitative disclosures presented in Item 7A of the Corporation's Annual Report on Form 10-K for the fiscal year ended December 28, 2019.
28
Item 4. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Corporation in the reports it files or submits under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures are also designed to ensure information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer of the Corporation, the Corporation's management carried out an evaluation
of the Corporation's disclosure controls and procedures pursuant to Exchange Act Rules 13a – 15(e) and 15d – 15(e). As of June 27, 2020, based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded these disclosure controls and procedures are effective.
Changes in Internal Controls
There have been no changes in the Corporation's internal controls over financial reporting during the fiscal quarter covered by this quarterly report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
29
PART
II. OTHER INFORMATION
Item 1. Legal Proceedings
For information regarding legal proceedings, see "Note 15. Guarantees, Commitments, and Contingencies" in the Notes to Condensed Consolidated Financial Statements, which information is incorporated herein by reference.
Item 1A. Risk Factors
There have been no additional material changes from the risk
factors disclosed in the "Risk Factors" section of the Corporation's Annual Report on Form 10-K for the fiscal year ended December 28, 2019, with the exception of:
•A new risk factor pertaining to the COVID-19 pandemic, as disclosed in Part II, Item 1A."Risk Factors" in the Corporation's Quarterly Report on Form 10-Q for the fiscal quarter ended March 28, 2020.
•As previously disclosed in the "Risk Factors" section of the Corporation's Annual Report on Form 10-K for the year ended December 28, 2019, the Corporation's international operations expose it to risks related to conducting business in multiple jurisdictions outside the U.S. These risks may be elevated given
the current uncertainties around the impact of the global pandemic; ongoing disputes and increased tensions related to global trade, particularly involving the U.S. and China; and complexities with foreign regulatory environments including the decreased ability of U.S. regulators to exercise oversight of subsidiaries of U.S. companies based in certain international jurisdictions.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities:
The following is a summary
of share repurchase activity during the quarter:
Period
Total Number of Shares (or Units) Purchased (1)
Average Price Paid per Share (or Unit)
Total
Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet be Purchased Under the Plans or Programs
03/29/20 – 04/25/20
27,500
$
23.63
27,500
$
158,287,093
04/26/20
– 05/23/20
—
$
—
—
$
158,287,093
05/24/20 – 06/27/20
—
$
—
—
$
158,287,093
Total
27,500
27,500
(1)
No shares were purchased outside of a publicly announced plan or program.
The Corporation repurchases shares under previously announced plans authorized by the Board as follows:
•Corporation's share purchase program ("Program") announced November 9, 2007, providing share repurchase authorization of $200,000,000 with no specific expiration date, with increases announced November 7, 2014 and February 13, 2019, providing additional share repurchase authorizations each of $200,000,000 with no specific expiration date.
•No repurchase plans expired or were terminated during the second quarter of 2020,
nor do any plans exist under which the Corporation does not intend to make further purchases. The Program does not obligate the Corporation to purchase any shares and the authorization for the Program may be terminated, increased, or decreased by the Board at any time. As announced in the April 6, 2020 COVID-19 response update, the Corporation temporarily suspended share repurchase activity to support free cash flow.
The
following materials from HNI Corporation's Quarterly Report on Form 10-Q for the fiscal quarter ended June 27, 2020 are formatted in Inline XBRL (eXtensible Business Reporting Language) and filed electronically herewith: (i) Condensed Consolidated Statements of Comprehensive Income; (ii) Condensed Consolidated Balance Sheets; (iii) Condensed Consolidated Statements of Equity; (iv) Condensed Consolidated Statements of Cash Flows; and (v) Notes to Condensed Consolidated Financial Statements
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
+ Filed or furnished herewith.
31
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
