HNI Corporation Reports Earnings for Third Quarter Fiscal Year 2020

Rhea-AI Summary

HNI Corporation reported third-quarter 2020 sales of $507.1 million, down 18.9% year-over-year, with net income of $30.7 million and diluted EPS of $0.71, a 33.6% decline compared to last year. The Residential Building Products segment saw net sales growth of 9.3%, while Workplace Furnishings faced a 27.1% decline. Despite challenges, operating cash flow increased 12% year-over-year, totaling $143 million for the year-to-date. The company anticipates continued moderate declines in Workplace Furnishings for Q4 but expects growth in Residential Building Products.

Positive

• Residential Building Products segment showed a 9.3% net sales increase.
• Operating cash flow rose by 12%, totaling $143 million year-to-date.
• Company maintained a strong balance sheet with $109 million in cash.

Negative

• Total consolidated net sales decreased by 18.9% year-over-year.
• Workplace Furnishings experienced a 27.1% decline in net sales.
• GAAP net income per diluted share fell by 33.6% compared to the prior year.

MUSCATINE, Iowa--(BUSINESS WIRE)--HNI Corporation (NYSE: HNI) today announced sales for the third quarter ended September 26, 2020 of $507.1 million and net income of $30.7 million. GAAP net income per diluted share was $0.71, compared to $1.07 in the prior year. Non-GAAP net income per diluted share was $0.71, compared to $1.08 in the prior year. GAAP to non-GAAP reconciliations follow the financial statements in this release.

Third Quarter Highlights

• Strong results in Residential Building Products: Third quarter operating profit increased 27 percent; operating margin expanded 270 basis points; and net sales grew 9.3 percent on a year-over-year basis.
• Solid profits in Workplace Furnishings: Third quarter 2020 operating profit was nearly $17 million, despite a 27 percent year-over-year contraction on the segment’s top line.
• Continued strong cash flow: Third quarter operating cash flow increased $12.7 million or 12 percent versus the prior year quarter despite continued pandemic related top-line pressures. Operating cash flow for the first three quarters of 2020 totaled $143 million, which represents a 24 percent increase compared to the prior year period.
• High-quality balance sheet: Quarter-ending debt levels were $175 million with a gross leverage ratio of approximately 0.9x. Cash totaled $109 million as of the end of the third quarter, representing an increase of $83 million from the second quarter balance.

“Our members delivered another solid quarter in an environment that remains uniquely challenging. And, again in the third quarter, our results demonstrate much of what is unique about HNI. Our diversified revenue streams, our ability and willingness to invest despite ongoing uncertainty, and our cost and expense management efforts combined to deliver strong free cash flow in the third quarter, positioning us well for the future,” stated Jeff Lorenger, Chairman, President, and Chief Executive Officer.

HNI Corporation – Financial Performance
(Dollars in millions, except per share data)
		Three Months Ended
		September 26, 2020			September 28, 2019			Change
GAAP
Net Sales		$507.1			$625.4			(18.9	%)
Gross Profit %		36.6	%		38.0	%		-140 bps
SG&A %		28.9	%		28.3	%		60 bps
Operating Income		$38.8			$60.7			(36.1	%)
Operating Income %		7.6	%		9.7	%		-210 bps
Effective Tax Rate		17.6	%		21.2	%
Net Income %		6.1	%		7.4	%		-130 bps
EPS – diluted		$0.71			$1.07			(33.6	%)
Non-GAAP
Gross Profit %		36.6	%		38.0	%		-140 bps
Operating Income		$38.8			$61.1			(36.6	%)
Operating Income %		7.6	%		9.8	%		-220 bps
EPS – diluted		$0.71			$1.08			(34.3	%)

Third Quarter Summary Comments

• Consolidated net sales decreased 18.9 percent from the prior-year quarter to $507.1 million. On an organic basis, sales decreased 19.3 percent. The impact of residential building products distributors acquired in 2020 increased sales $2.4 million compared to the prior-year quarter. A reconciliation of organic sales, a non-GAAP measure, follows the financial statements in this release.
• Gross profit margin decreased 140 basis points compared to the prior-year quarter. This decrease was primarily driven by lower Workplace Furnishings volume, partially offset by volume growth in Residential Building Products and net productivity.
• Selling and administrative expenses as a percent of sales increased 60 basis points compared to prior-year quarter due to lower volume, partially offset by lower core SG&A spend, and freight & distribution productivity.
• Consolidated operating income declined $21.9 million or 36.1 percent versus the prior year quarter. On a non-GAAP basis, the decline was $22.4 million, which equates to a decremental margin of 19 percent.
• Non-GAAP net income per diluted share was $0.71 compared to $1.08 in the prior-year quarter. The $0.37 decrease was due to lower Workplace Furnishings volume, partially offset by year-over-year SG&A expense management, net productivity benefits, and volume growth in Residential Building Products.

Third Quarter Balance Sheet and Cash Flow

• The Corporation’s cash balance totaled $109 million—representing an increase of $83 million from the second quarter’s total of $26 million.
• Quarter-ending debt levels were $175 million, consisting of $100 million in private placement notes and $75 million drawn on the Corporation’s $450 million revolving line of credit. The gross leverage ratio was approximately 0.9x and well below the Corporation’s debt covenant of 3.5x.
• Compared to the prior year period, cash flow from operating activities on a year-to-date basis increased 24 percent to $143 million. Improved working capital efficiency primarily drove the increase.
• Capital expenditures on a year-to-date basis declined $21 million or 46 percent year-over-year. The decrease reflects the Corporation’s response to pandemic-related pressures. Investment in capitalized software increased $3.2 million or 77 percent year-over-year on a year-to-date basis, reflecting the Corporation’s emphasis on digital initiatives.

Third Quarter Orders

• Orders in the Workplace Furnishings segment excluding eCommerce declined 25 percent year-over-year. This compares favorably to the 35 percent order decline in the second quarter of 2020. Monthly year-over-year order declines moderated through the third quarter; however, market conditions remain uncertain and volatile.
• Orders in eCommerce increased 35 percent year-over-year. Much of the moderation from the second quarter’s triple-digit order increase was a result of tougher comparables and supply constraints. September eCommerce orders re-accelerated and are indicative of continued strong demand and improving inventory positions.
• Orders in the Residential Building Products segment increased 13 percent compared to the prior year quarter. Remodel-retrofit activity was strong throughout the third quarter, and orders related to new home construction gained momentum over the period.

Workplace Furnishings – Financial Performance
(Dollars in millions)
		Three Months Ended
		September 26, 2020			September 28, 2019			Change
GAAP
Net Sales		$353.4			$484.8			(27.1	%)
Operating Profit		$16.8			$51.2			(67.1	%)
Operating Profit %		4.8	%		10.6	%		-580 bps
Non-GAAP
Operating Profit		$16.8			$51.7			(67.4	%)
Operating Profit %		4.8	%		10.7	%		-590 bps

• Workplace Furnishings net sales decreased 27.1 percent from the prior-year quarter to $353.4 million.
• Workplace Furnishings GAAP operating profit margin decreased 580 basis points versus the prior-year quarter. On a non-GAAP basis, segment operating margin decreased 590 basis points year-over-year driven by lower volume, partially offset by net productivity and lower core SG&A spend.

Residential Building Products – Financial Performance
(Dollars in millions)
		Three Months Ended
		September 26, 2020			September 28, 2019			Change
GAAP
Net Sales		$153.7			$140.6			9.3	%
Operating Profit		$30.2			$23.8			27.0	%
Operating Profit %		19.6	%		16.9	%		270 bps
Non-GAAP
Operating Profit		$30.2			$23.8			27.0	%
Operating Profit %		19.6	%		16.9	%		270 bps

• Residential Building Products net sales increased 9.3 percent from the prior-year quarter to $153.7 million. On an organic basis, sales increased 7.6 percent. The impact of building products distributors acquired in 2020 increased sales $2.4 million compared to the prior-year quarter.
• Residential Building Products operating profit margin expanded 270 basis points, primarily driven by higher volume, favorable price-cost, lower core SG&A spend, and net productivity.

Concluding Remarks

“As we look ahead, we are prepared to confront the continued near-term macro challenges. However, we see longer-term opportunity and signs our strategies are gaining momentum. I am extremely proud of all our HNI members and of the company’s collective perseverance and ability to adapt.

As we emerge from this period, we will do so as a stronger company— well positioned to grow revenue, expand margins, and generate cash flow,” Mr. Lorenger concluded.

Fourth Quarter 2020 Outlook

• Limited visibility and volatile conditions: Pandemic-related uncertainty remains and limits the Corporation’s visibility.
• Workplace Furnishings revenue: Recent order trends suggest year-over-year revenue declines will moderate slightly in the fourth quarter. Additionally, the fourth quarter 2020 benefits from an extra week in the fiscal calendar. Assuming the recent trends continue, the combination of these factors point to fourth quarter revenue declines in the mid-teens on a year-over-year rate basis.
• Residential Building Products revenue: The Corporation believes cyclical strength, secular support, company-specific initiatives, and its strong competitive position support revenue growth acceleration. Recent order trends, housing construction activity, and the fourth quarter’s extra week suggest fourth quarter growth rates in the mid to high teens compared to the prior year quarter.
• HNI decremental margins: The Corporation expects decremental margins for the full year to be less than 20 percent on a consolidated basis. This implies higher decremental margins in the fourth quarter, primarily driven by unfavorable business mix and accelerating investment levels.
• Balance sheet: The Corporation continues to expect strong cash generation and estimates the year-ending debt to be approximately $175 million, consistent with the third quarter balance and the level reported at the end of 2019.

Conference Call

HNI Corporation will host a conference call on Monday, October 19, 2020 at 10:00 a.m. (Central) to discuss third quarter fiscal year 2020 results. To participate, call 1-877-512-9166 – conference ID number 6673387. A live webcast of the call will be available on HNI Corporation’s website at http://www.hnicorp.com (under Investors – News Releases & Events). A replay of the webcast will also be made available at that website address. An audio replay of the call will be available until Monday, October 26, 2020, 10:59 p.m. (Central) by dialing 1-855-859-2056 or 1-404-537-3406 – Conference ID number 6673387.

About HNI Corporation

HNI Corporation (NYSE: HNI) is a manufacturer of workplace furnishings and residential building products, operating under two segments. The Workplace Furnishings segment is a leading global designer and provider of commercial furnishings, going to market under multiple unique brands. The Residential Building Products segment is the nation’s leading manufacturer and marketer of hearth products, which include a full array of gas, electric, wood, and pellet-burning fireplaces, inserts, stoves, facings, and accessories. More information can be found on the Corporation’s website at www.hnicorp.com.

Forward-Looking Statements

This release contains "forward-looking" statements based on current expectations regarding future plans, events, outlook, objectives, financial performance, expectations for sales growth, and earnings per diluted share (GAAP and non-GAAP), including statements regarding the expected effects on our business, financial condition and results of operations from the COVID-19 pandemic. Forward-looking statements can be identified by words including “expect,” “believe,” “anticipate,” “estimate,” “may,” “will,” “would,” “could,” “confident”, or other similar words, phrases, or expressions. Forward-looking statements involve known and unknown risks and uncertainties, which may cause the Corporation’s actual future results and performance to differ materially from expected results. These risks include but are 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; change 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; and force majeure events outside the Corporation’s control. A description of these risks and additional risks can be found in the Corporation’s annual and quarterly reports filed with the Securities and Exchange Commission on Forms 10-K and 10-Q. The Corporation assumes no obligation to update, amend, or clarify forward-looking statements, except as required by applicable law.

HNI Corporation and Subsidiaries Condensed Consolidated Statements of Comprehensive Income (In thousands, except per share data) (Unaudited)
		Three Months Ended										Nine Months Ended
		September 26, 2020					September 28, 2019					September 26, 2020					September 28, 2019
Net sales		$	507,063				$	625,386				$	1,393,224				$	1,630,868
Cost of sales		321,516					387,715					880,754					1,030,993
Gross profit		185,547					237,671					512,470					599,875
Selling and administrative expenses		146,785					176,731					449,933					511,080
Impairment and restructuring charges		—					284					32,661					1,214
Operating income		38,762					60,656					29,876					87,581
Interest expense, net		1,517					2,205					5,271					6,795
Income before income taxes		37,245					58,451					24,605					80,786
Income taxes		6,558					12,375					5,259					17,878
Net income		30,687					46,076					19,346					62,908
Less: Net loss attributable to non-controlling interest		(1		)			(2		)			(3		)			(2		)
Net income attributable to HNI Corporation		$	30,688				$	46,078				$	19,349				$	62,910
Average number of common shares outstanding – basic		42,684					42,899					42,651					43,217
Net income attributable to HNI Corporation per common share – basic		$	0.72				$	1.07				$	0.45				$	1.46
Average number of common shares outstanding – diluted		43,010					43,186					42,905					43,620
Net income attributable to HNI Corporation per common share – diluted		$	0.71				$	1.07				$	0.45				$	1.44
Foreign currency translation adjustments		$	923				$	(1,035	)			$	368				$	(406	)
Change in unrealized gains (losses) on marketable securities, net of tax		(33		)			36					269					252
Change in pension and post-retirement liability, net of tax		—					—					—					(1,185		)
Change in derivative financial instruments, net of tax		106					(477		)			(2,393		)			(2,112		)
Other comprehensive income (loss), net of tax		996					(1,476		)			(1,756		)			(3,451		)
Comprehensive income		31,683					44,600					17,590					59,457
Less: Comprehensive loss attributable to non-controlling interest		(1		)			(2		)			(3		)			(2		)
Comprehensive income attributable to HNI Corporation		$	31,684				$	44,602				$	17,593				$	59,459

HNI Corporation and Subsidiaries Condensed Consolidated Balance Sheets (In thousands) (Unaudited)
		September 26, 2020					December 28, 2019
Assets
Current Assets:
Cash and cash equivalents		$	109,385				$	52,073
Short-term investments		1,495					1,096
Receivables		209,921					278,124
Allowance for doubtful accounts		(5,991		)			(3,559		)
Inventories		144,135					163,465
Prepaid expenses and other current assets		41,490					37,635
Total Current Assets		500,435					528,834
Property, Plant, and Equipment:
Land and land improvements		29,782					29,394
Buildings		295,998					295,517
Machinery and equipment		577,442					581,225
Construction in progress		12,142					20,881
		915,364					927,017
Less accumulated depreciation		551,031					545,510
Net Property, Plant, and Equipment		364,333					381,507
Right-of-use Finance Leases		2,193					2,129
Right-of-use Operating Leases		73,896					72,883
Goodwill and Other Intangible Assets		412,287					445,709
Other Assets		21,581					21,450
Total Assets		$	1,374,725				$	1,452,512
Liabilities and Equity
Current Liabilities:
Accounts payable and accrued expenses		$	390,535				$	453,202
Current maturities of long-term debt		—					790
Current maturities of other long-term obligations		2,890					1,931
Current lease obligations - Finance		691					564
Current lease obligations - Operating		23,124					22,218
Total Current Liabilities		417,240					478,705
Long-Term Debt		174,502					174,439
Long-Term Lease Obligations - Finance		1,522					1,581
Long-Term Lease Obligations - Operating		57,948					58,233
Other Long-Term Liabilities		67,187					67,990
Deferred Income Taxes		82,736					87,196
Equity:
HNI Corporation shareholders' equity		573,269					584,044
Non-controlling interest		321					324
Total Equity		573,590					584,368
Total Liabilities and Equity		$	1,374,725				$	1,452,512

HNI Corporation and Subsidiaries Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited)
		Nine Months Ended
		September 26, 2020					September 28, 2019
Net Cash Flows From (To) Operating Activities:
Net income		$	19,346				$	62,908
Non-cash items included in net income:
Depreciation and amortization		57,917					57,838
Other post-retirement and post-employment benefits		1,104					1,106
Stock-based compensation		6,746					5,408
Reduction in carrying amount of right-of-use assets		16,965					17,252
Deferred income taxes		(3,730		)			4,798
Impairment of goodwill and intangible assets		32,661					—
Other – net		815					4,473
Net increase (decrease) in operating assets and liabilities, net of divestitures		13,316					(28,359		)
Increase (decrease) in other liabilities		(1,779		)			(9,802		)
Net cash flows from (to) operating activities		143,361					115,622
Net Cash Flows From (To) Investing Activities:
Capital expenditures		(24,751		)			(46,093		)
Proceeds from sale of property, plant, and equipment		81					247
Acquisition spending, net of cash acquired		(10,857		)			—
Capitalized software		(7,250		)			(4,098		)
Purchase of investments		(3,922		)			(6,140		)
Sales or maturities of investments		3,246					3,889
Other – net		—					2,327
Net cash flows from (to) investing activities		(43,453		)			(49,868		)
Net Cash Flows From (To) Financing Activities:
Payments of long-term debt		(82,828		)			(125,039		)
Proceeds from long-term debt		82,119					115,775
Dividends paid		(39,060		)			(39,164		)
Purchase of HNI Corporation common stock		(6,764		)			(65,106		)
Proceeds from sales of HNI Corporation common stock		2,210					22,338
Other – net		1,727					1,636
Net cash flows from (to) financing activities		(42,596		)			(89,560		)
Net increase (decrease) in cash and cash equivalents		57,312					(23,806		)
Cash and cash equivalents at beginning of period		52,073					76,819
Cash and cash equivalents at end of period		$	109,385				$	53,013

HNI Corporation and Subsidiaries Reportable Segment Data (In thousands) (Unaudited)
		Three Months Ended										Nine Months Ended
		September 26, 2020					September 28, 2019					September 26, 2020					September 28, 2019
Net Sales:
Workplace furnishings		$	353,361				$	484,755				$	999,827				$	1,247,778
Residential building products		153,702					140,631					393,397					383,090
Total		$	507,063				$	625,386				$	1,393,224				$	1,630,868
Income (Loss) Before Income Taxes:
Workplace furnishings		$	16,826				$	51,162				$	(8,619	)			$	68,180
Residential building products		30,197					23,772					65,232					54,743
General corporate		(8,261		)			(14,278		)			(26,737		)			(35,342		)
Operating Income		38,762					60,656					29,876					87,581
Interest expense, net		1,517					2,205					5,271					6,795
Total		$	37,245				$	58,451				$	24,605				$	80,786
Depreciation and Amortization Expense:
Workplace furnishings		$	11,065				$	11,232				$	33,177				$	33,540
Residential building products		2,351					2,291					6,976					6,521
General corporate		5,896					5,863					17,764					17,777
Total		$	19,312				$	19,386				$	57,917				$	57,838
Capital Expenditures (including capitalized software):
Workplace furnishings		$	6,946				$	6,524				$	18,340				$	29,190
Residential building products		2,695					3,204					5,874					10,779
General corporate		1,584					2,856					7,787					10,222
Total		$	11,225				$	12,584				$	32,001				$	50,191
												As of September 26, 2020					As of December 28, 2019
Identifiable Assets:
Workplace furnishings												$	714,896				$	874,913
Residential building products												393,941					364,653
General corporate												265,888					212,946
Total												$	1,374,725				$	1,452,512

Non-GAAP Financial Measures

This earnings release includes certain non-GAAP financial information as defined by Securities and Exchange Commission Regulation G. Pursuant to the requirements of this regulation, reconciliations of this non-GAAP financial information to HNI’s financial statements as prepared in accordance with GAAP are included below and throughout this earnings release. This information gives investors additional insights into HNI’s financial performance and operations. While HNI’s management believes the non-GAAP financial measures are useful in evaluating HNI’s operations, this information should be considered supplemental and not in isolation or as a substitute for, or superior to, financial information prepared and presented in accordance with GAAP. In addition, these measures may be different from non-GAAP financial measures used by other companies, limiting their usefulness for comparison purposes.

To supplement condensed consolidated financial statements, which are prepared and presented in accordance with GAAP, this earnings release uses the following non-GAAP financial measures: organic sales, gross profit, operating income, operating profit, income taxes, net income, and net income per diluted share (i.e., EPS). These measures are adjusted from the comparable GAAP measures to exclude the impacts of the selected items as summarized in the table below. Generally, non-GAAP EPS is calculated using HNI’s overall effective tax rate for the year, as this rate is reflective of the tax applicable to most non-GAAP adjustments.

The sales adjustments to arrive at the non-GAAP organic sales information included in this earnings release excludes the impact of acquiring residential building products distributors. Restructuring charges incurred in the prior year period are primarily comprised of severance costs related to a structural realignment in the Workplace Furnishings segment. Transition items incurred in connection with this realignment include member relocation costs.

HNI Corporation Reconciliation
(Dollars in millions)
		Three Months Ended
		September 26, 2020													September 28, 2019
		Workplace Furnishings				Residential Building Products				Total					Workplace Furnishings				Residential Building Products				Total
Sales as reported (GAAP)		$	353.4			$	153.7			$	507.1				$	484.8			$	140.6			$	625.4
% change from PY		(27.1		%)		9.3		%		(18.9		%)
Less: Acquisitions		—				2.4				2.4					—				—				—
Organic Sales (non-GAAP)		$	353.4			$	151.3			$	504.6				$	484.8			$	140.6			$	625.4
% change from PY		(27.1		%)		7.6		%		(19.3		%)

HNI Corporation Reconciliation
(Dollars in millions, except per share data)
		Three Months Ended September 28, 2019
		Gross Profit				Operating Income				Tax				Net Income				EPS
As reported (GAAP)		$	237.7			$	60.7			$	12.4			$	46.1			$	1.07
% of net sales		38.0		%		9.7		%						7.4		%
Tax %										21.2		%
Restructuring charges		—				0.3				0.1				0.2				0.01
Transition costs		—				0.2				0.0				0.2				0.00
Results (non-GAAP)		$	237.7			$	61.1			$	12.5			$	46.5			$	1.08
% of net sales		38.0		%		9.8		%						7.4		%
Tax %										21.2		%

Workplace Furnishings Reconciliation
(Dollars in millions)
		Three Months Ended
		September 26, 2020				September 28, 2019				Percent Change
Operating profit as reported (GAAP)		$	16.8			$	51.2			(67.1	%)
% of net sales		4.8		%		10.6		%
Restructuring charges		—				0.3
Transition costs		—				0.2
Operating profit (non-GAAP)		$	16.8			$	51.7			(67.4	%)
% of net sales		4.8		%		10.7		%