HNI CORPORATION 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 or disclosures. 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 third quarter of 2020 were$507.1 million , a decrease of 18.9 percent compared to net sales of$625.4 million in the prior-year quarter. The change was due to a 27.1 percent decrease in the workplace furnishings segment, partially offset by a 9.3 percent increase in the residential building products segment. The acquisition of residential building products distributors resulted in a$2.4 million increase compared to the third quarter of 2019.
Net income attributable to the Corporation in the third quarter of 2020 was
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 theCenters 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 continue to manage through challenging 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 ofSeptember 26, 2020 , the Corporation's major facilities continue to operate, and there are no material disruptions to the Corporation's supply chain, dealer network, manufacturing and distribution operations, or ability to serve customers. As of the date of this filing, COVID-19 cases continue to show volatility in various regions of theU.S. and abroad, resulting in continuing 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):
Three Months Ended Nine Months Ended
September 26, September 28, September 26, September 28,
2020 2019 Change 2020 2019 Change
Net sales $ 507,063 $ 625,386 (18.9 %) $ 1,393,224 $ 1,630,868 (14.6 %)
Cost of sales 321,516 387,715 (17.1 %) 880,754 1,030,993 (14.6 %)
Gross profit 185,547 237,671 (21.9 %) 512,470 599,875 (14.6 %)
Selling and administrative
expenses 146,785 176,731 (16.9 %) 449,933 511,080 (12.0 %)
Impairment and restructuring
charges - 284 NM 32,661 1,214 NM
Operating income 38,762 60,656 (36.1 %) 29,876 87,581 (65.9 %)
Interest expense, net 1,517 2,205 (31.2 %) 5,271 6,795 (22.4 %)
Income before income taxes 37,245 58,451 (36.3 %) 24,605 80,786 (69.5 %)
Income taxes 6,558 12,375 (47.0 %) 5,259 17,878 (70.6 %)
Net income (loss) attributable to
non-controlling interest (1) (2) NM (3) (2) NM
Net income attributable to HNI
Corporation $ 30,688 $ 46,078 (33.4 %) $ 19,349 $ 62,910 (69.2 %)
As a Percentage ofNet Sales : Net sales 100.0 % 100.0 % 100.0 % 100.0 % Gross profit 36.6 38.0 -140 bps 36.8 36.8 0 bps Selling and administrative expenses 28.9 28.3 60 bps 32.3 31.3 100 bps Impairment and restructuring charges - 0.0 0 bps 2.3 0.1 220 bps Operating income 7.6 9.7 -210 bps 2.1 5.4 -330 bps Income taxes 1.3 2.0 -70 bps 0.4 1.1 -70 bps Net income attributable to HNI Corporation 6.1 7.4 -130 bps 1.4 3.9 -250 bps
Results of Operations - Three Months Ended
Consolidated net sales for the third quarter of 2020 decreased 18.9 percent compared to the same quarter last year. The change was driven by a decrease in the workplace furnishings segment, partially offset by an increase in the residential building products segment. Included in the sales results for the current quarter was a$2.4 million impact from acquiring residential building products distributors. Gross Profit
Gross profit as a percentage of net sales decreased 140 basis points in the third quarter of 2020 compared to the same quarter last year primarily driven by lower workplace furnishings volume, partially offset by volume growth in residential building products 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 third quarter of 2020 compared to the same quarter last year due to lower volume, partially offset by lower core SG&A spend and freight and distribution productivity. Operating Income In the third quarter of 2020, operating income was$38.8 million , compared to$60.7 million in the same quarter last year. The decrease was primarily driven by lower workplace furnishings volume, partially offset by year-over-year SG&A expense management, net productivity benefits, and volume growth in residential building products. Interest Expense, Net Interest expense, net for the third quarter of 2020 was$1.5 million , compared to$2.2 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 third quarter of 2020 was$6.6 million on income before taxes of$37.2 million , or an effective tax rate of 17.6 percent. For the third quarter of 2019, the Corporation's income tax provision was an expense of$12.4 million on income before taxes of$58.5 million , or an effective tax rate of 21.2 percent. The decreased rate was primarily due to the effect of tax credits on lower projected worldwide full year income. Refer to "Note 8. Income Taxes" for further information.
Net Income Attributable to
Net income attributable to the Corporation was
Results of Operations - Nine Months Ended
Consolidated net sales for the first nine months of 2020 decreased 14.6 percent compared to the same period last year. The change was driven by a 19.9 percent decrease in the workplace furnishings segment, partially offet by a 2.7 percent increase in the residential building products segment. Included in the sales results for the first nine months of 2020 was a$6.4 million impact from acquiring residential building products distributors.
Gross Profit
Gross profit as a percentage of net sales remained flat in the first nine months of 2020 compared to the same period last year as lower volume was offset by net productivity and favorable price-cost.
Selling and Administrative Expenses
Selling and administrative expenses as a percentage of net sales increased 100 basis points in the first nine 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 nine 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 nine months of 2019, the Corporation recorded$1.2 million of restructuring costs in connection with a structural realignment in the workplace furnishings segment. 24
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Operating Income
In the first nine months of 2020, operating income was$29.9 million compared to operating income of$87.6 million in the same period last year. The decrease was driven by lower volume and$37.7 million of impairment charges and costs related to the COVID-19 pandemic and resulting economic disruption, partially offset by lower core SG&A spend, net productivity, and favorable price-cost.
Interest Expense, Net
Interest expense, net for the first nine months of 2020 was
Income Taxes
The Corporation's income tax provision for the first nine months of 2020 was an expense of$5.3 million on income before taxes of$24.6 million , or an effective tax rate of 21.4 percent. For the first nine months of 2019, the Corporation's income tax provision was an expense of$17.9 million on income before taxes of$80.8 million , or an effective tax rate of 22.1 percent. The decrease was primarily due to the effect of tax credits on lower projected worldwide full year income. Refer to "Note 8. Income Taxes" for further information.
Net Income Attributable to
Net income attributable to the Corporation was
Workplace Furnishings
The following table presents certain key highlights from the results of operations in the workplace furnishings segment (in thousands):
Three Months Ended Nine Months Ended
September 26, September 28, September 26, September 28,
2020 2019 Change 2020 2019 Change
Net sales $ 353,361 $ 484,755 (27.1 %) $ 999,827 $ 1,247,778 (19.9 %)
Operating profit (loss) $ 16,826 $ 51,162 (67.1 %) $ (8,619) $ 68,180 (112.6 %)
Operating profit (loss) % 4.8 % 10.6 % -580 bps (0.9 %) 5.5 % -640 bps
Three Months Ended
Third quarter 2020 net sales for the workplace furnishings segment decreased
27.1 percent compared to the same quarter last year.
Operating profit as a percentage of net sales decreased 580 basis points in the
third quarter of 2020 compared to the same quarter last year. The decrease was
driven by lower volume, partially offset by net productivity and lower core SG&A
spend.
Nine Months Ended Net sales for the first nine months of 2020 for the workplace furnishings segment decreased 19.9 percent compared to the same period last year.
Operating profit (loss) as a percentage of net sales decreased 640 basis points in the first nine months of 2020 compared to the same period last year. In the current year period, 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. Additionally, segment results decreased compared to the same period last year due to by lower volume, partially offset by lower core SG&A spend, net productivity, and favorable price-cost. 25 --------------------------------------------------------------------------------
Residential Building Products
The following table presents certain key highlights from the results of operations in the residential building products segment (in thousands):
Three Months Ended Nine Months Ended
September 26, September 28, September 26, September 28,
2020 2019 Change 2020 2019 Change
Net sales $ 153,702 $ 140,631 9.3 % $ 393,397 $ 383,090 2.7 %
Operating profit $ 30,197 $ 23,772 27.0 % $ 65,232 $ 54,743 19.2 %
Operating profit % 19.6 % 16.9 % 270 bps 16.6 % 14.3 % 230 bps
Three months ended
Third quarter 2020 net sales for the residential building products segment
increased 9.3 percent compared to the same quarter last year. Included in the
sales results was a $2.4 million impact from acquiring residential building
products distributors.
Operating profit as a percentage of net sales increased 270 basis points in the
third quarter of 2020 compared to the same quarter last year. The increase was
primarily driven by higher volume, favorable price-cost, lower core SG&A spend,
and net productivity.
Nine months ended
Net sales for the first nine months of 2020 for the residential building
products segment increased 2.7 percent compared to the same period last year.
Included in the sales results was a $6.4 million impact from acquiring
residential building products distributors.
Operating profit as a percentage of net sales increased 230 basis points in the
first nine months of 2020 compared to the same period last year. The increase
was primarily driven by favorable price-cost, net productivity, and lower core
SG&A spend.
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$375 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$143.4 million of cash in the first nine months of 2020 compared to a source of$115.6 million of cash in the first nine months of 2019. The increase in operating cash flows was driven by favorable working capital activity. Cash Flow - Investing Activities Capital expenditures, including capitalized software, for the first nine months of 2020 were$32.0 million compared to$50.2 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 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.
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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):
Three Months Ended Nine Months Ended
September 26, September 28, September 26, September 28,
2020 2019 2020 2019
Dividends per common share $ 0.305 $
0.305
During the third quarter, the Board declared the regular quarterly cash dividend onAugust 3, 2020 . The dividend was paid onSeptember 1, 2020 to shareholders of record onAugust 14, 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 onNovember 9, 2007 and an additional$200 million each onNovember 7, 2014 andFebruary 13, 2019 for repurchases of the Corporation's common stock. As announced in theApril 6, 2020 COVID-19 response update, the Corporation temporarily suspended share repurchase activity to support available cash flow; this initiative continues to be evaluated and there is currently no timeframe planned regarding resumption of share repurchases. 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 endedDecember 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 nine 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
InDecember 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 fourth quarter 2020 sales to increase from third quarter 2020 levels, driven by improving recent order trends in both segments, strong housing construction activity which supports Residential Building Products sales growth, and an extra week in the fourth quarter fiscal calendar. Cash flows are anticipated to remain healthy, with net debt levels expected to be stable through fiscal year-end. 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 endedDecember 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 inthe 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 theSecurities 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 endedDecember 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
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