FINAL EGARIZED VERSION 08-06-2004 9:15 a.m. | ||
UNITED STATES SECURITIES AND EXCHANGE COMMISSION | ||
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(MARK ONE) | ||
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Class | Outstanding at |
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Six Months Ended |
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Condensed Consolidated Statements of Cash Flows |
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Notes to Condensed Consolidated Financial Statements |
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Item 4. Submission of Matters to a Vote of Security Holders | 25 |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
HNI Corporation and SUBSIDIARIES | HNI Corporation and SUBSIDIARIES | HNI Corporation and SUBSIDIARIES | ||
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| Jul. 3, | Jan. 3, | |
ASSETS | (In thousands) | (In thousands) | ||
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Cash and cash equivalents | $ 80,889 | $ 138,982 | $ 74,667 | $ 138,982 |
Total Current Assets | 362,676 | 462,122 | 412,124 | 462,122 |
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| PROPERTY, PLANT, AND EQUIPMENT, at cost | ||
Land and land improvements | 24,841 | 23,065 | 24,865 | 23,065 |
| 763,956 | 739,836 | 770,596 | 739,836 |
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| 320,960 | 312,368 |
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| 202,462 | 192,086 |
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| 83,880 | 55,250 |
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| $ 1,019,426 | $ 1,021,826 |
See accompanying Notes to Condensed Consolidated Financial Statements.
HNI Corporation and SUBSIDIARIES April 3, January 3, LIABILITIES AND SHAREHOLDERS' EQUITY (In thousands, except share and per share value data) CURRENT LIABILITIES Accounts payable and accrued expenses $ 172,940 491 $ 211,236 Total Current Liabilities 189,937 245,816 Capital Stock:
CONDENSED CONSOLIDATED BALANCE SHEETS
2004
(Unaudited)
2004
Income taxes
Note payable and current maturities of long-term
debt
Current maturities of other long-term obligations
12,366
4,140
5,958
26,658
1,964
LONG-TERM DEBT
2,591
2,690
CAPITAL LEASE OBLIGATIONS
1,344
1,436
OTHER LONG-TERM LIABILITIES
24,991
24,262
DEFERRED INCOME TAXES
38,724
37,733
SHAREHOLDERS' EQUITY
Preferred, $1 par value, authorized
2,000,000 shares, no shares outstanding
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Common, $1 par value, authorized
200,000,000 shares, outstanding -
2004 - 58,132,522 shares;
2003 - 58,238,519 shares
58,133
58,239
Paid-in capital
Retained earnings
Accumulated other comprehensive income
4,728
655,987
1
10,324
641,732
(406)
Total Shareholders' Equity
718,849
709,889
Total Liabilities and Shareholders' Equity
$ 976,436
$ 1,021,826
HNI Corporation and SUBSIDIARIES | ||
Jul. 3, | Jan. 3, | |
LIABILITIES AND SHAREHOLDERS' EQUITY | (In thousands, except share and per share value data) | |
CURRENT LIABILITIES | ||
Accounts payable and accrued expenses | $ 214,472 491 | $ 211,236 |
Total Current Liabilities | 238,666 | 245,816 |
LONG-TERM DEBT | 2,571 | 2,690 |
CAPITAL LEASE OBLIGATIONS | 1,252 | 1,436 |
OTHER LONG-TERM LIABILITIES | 27,380 | 24,262 |
DEFERRED INCOME TAXES | 38,842 | 37,733 |
SHAREHOLDERS' EQUITY | ||
Capital Stock: |
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Common, $1 par value, authorized |
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Paid-in capital | 617 | 10,324 |
Total Shareholders' Equity | 710,715 | 709,889 |
Total Liabilities and Shareholders' Equity | $ 1,019,426 | $ 1,021,826 |
See accompanying Notes to Condensed Consolidated Financial Statements.
HNI Corporation and SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF INCOME(Unaudited)April 3, 2004March 29,2003(In thousands, except shareand per share data)Net SalesCost of products sold Gross ProfitSelling and administrative expenses Restructuring and impairment charges Operating IncomeInterest incomeInterest expense Income Before Income TaxesIncome taxes Net Income$ 464,037 294,275169,762134,580 52034,662725 37035,017 12,606 $ 22,411$ 391,971 252,841139,130 114,426 -24,704821 1,08624,439 8,554 $ 15,885Net income per common share (basic and diluted) $0.38 $0.27Average number of common shares outstanding - basic 58,240,221 58,317,275Average number of common shares outstanding - diluted 58,690,281 58,581,531Cash dividends per common share $0.14 $0.13
HNI Corporation and SUBSIDIARIES | ||
Three Months Ended | ||
Jul. 3, | Jun. 28, | |
(In thousands, except share | ||
Net Sales Operating Income | $ 508,605 40,827 | $ 406,793 31,182 |
Net income per common share - basic | $0.45 | $0.35 |
Average number of common shares outstanding - basic | 57,943,191 | 58,142,937 |
Net income per common share - diluted | $0.44 | $0.35 |
Average number of common shares outstanding - diluted | 58,377,864 | 58,467,617 |
Cash dividends per common share | $0.14 | $0.13 |
See accompanying Notes to Condensed Consolidated Financial Statements.
HNI Corporation and SUBSIDIARIES
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(Unaudited)
Six Months Ended | ||
Jul. 3, | Jun. 28, | |
(In thousands, except share | ||
Net Sales | $ 972,642 | $ 798,764 |
Cost of products sold | 619,259 | 513,208 |
Gross Profit | 353,383 | 285,556 |
Selling and administrative expenses | 277,159 | 227,405 |
Restructuring and impairment charges | 735 | 2,265 |
Operating Income | 75,489 | 55,886 |
Interest income | 1,049 | 1,384 |
Interest expense | 574 | 1,798 |
Income Before Income Taxes | 75,964 | 55,472 |
Income taxes | 27,727 | 19,415 |
Net Income | $ 48,237 | $ 36,057 |
Net income per common share - basic | $0.83 | $0.62 |
Average number of common shares outstanding - basic | 58,091,706 | 58,230,106 |
Net income per common share - diluted | $0.82 | $0.62 |
Average number of common shares outstanding - diluted | 58,535,640 | 58,514,390 |
Cash dividends per common share | $0.28 | $0.26 |
See accompanying Notes to Condensed Consolidated Financial Statements.
HNI Corporation and SUBSIDIARIES | ||
Six Months Ended | ||
Jul. 3, | Jun. 28, | |
(In thousands) | ||
Net Cash Flows From (To) Operating Activities: |
939 550 (40,251) |
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Net Cash Flows From (To) Investing Activities: Additional purchase consideration |
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Net Cash Flows From (To) Financing Activities: |
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Net increase (decrease) in cash and | |
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Cash and cash equivalents at end of period | $ 74,667 | $ 128,292 |
See accompanying Notes to Condensed Consolidated Financial Statements.
HNI Corporation and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)AprilJuly 3, 2004
Note A. Basis of Presentation
The Company changed its name, with the approval of its shareholders, from HON INDUSTRIES Inc. to HNI Corporation effective May 5, 2004. The Company believes that changing its name will allow it to accomplish three important goals as it moves forward with its strategy of managing multiple distinct and independent brands: 1) create a corporate identity that clearly represents who it is today - the parent company for many of the leading brand name companies in the office furniture and hearth markets; 2) establish a corporate brand that better reflects the Corporation's strategic growth program - - product line extensions, market expansion, and strategic acquisitions; and 3) eliminate the confusion in the marketplace, resulting from the use of "HON" in both the corporate name and in the name of its largest operating company, and clarify the ownership of our other operating companies and their relationship with The HON Company.
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 footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-monthsix-month period ended AprilJuly 3, 2004 are not necessarily indicative of the results that may be expected for the year ending January 1, 2005. For further information, refer to the consolidated financial statements and footnotes included in the Company's annual report on Form 10-K for the year ended January 3, 2004.
Note B. Summary of Significant Accounting Policies
Stock based compensation - The Company accounts for its stock option plan using Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," which results in no charge to earnings when options are issued at fair market value. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," to stock-based employee compensation.
Three Months Ended | Three Months Ended | Six Months Ended | ||||
(In thousands) | Apr. 3, | Mar. 29, | Jul. 3, | Jun. 28, | Jul. 3, | Jun. 28, |
Net income, as reported | $ 22,411 | $ 15,885 | $ 25,826 | $ 20,172 | $ 48,237 | $ 36,057 |
Deduct: Total stock-based employee |
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Pro forma net income | $ 21,762 | $ 15,313 | $ 25,118 | $ 19,223 | $ 46,880 | $ 34,536 |
Earnings per share: |
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Note C. Inventories
The Company values approximately 85%89% of its inventory at the lower of cost or market by the last-in, first-out (LIFO) method.
(In thousands) | Apr. 3, 2004 |
| Jul. 3, 2004 | Jan. 3, 2004 |
Finished products | $ 37,940 | $ 31,407 | $ 47,357 | $ 31,407 |
Materials and work in process | 30,821 | 28,287 | 35,346 | 28,287 |
LIFO allowance | (9,926) | (9,864) | (12,292) | (9,864) |
$ 58,835 | $ 49,830 | $ 70,411 | $ 49,830 |
Note D. Comprehensive Income and Shareholders' Equity
The Company's comprehensive income infor the first six months of 2004 was $492,000 and consisted of changes in unrealized holding gains or losses on equity securities available-for-sale under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," additional pension liability and foreign currency adjustments.Securities".
For the three months ended April 3, 2004, the Company repurchased 441,200 shares of its common stock at a cost of approximately $16.5 million. As of April 3, 2004, $24.8 million of the Board's current repurchase authorization remained unspent. Subsequent to April 3, 2004, the Board of Directors authorized an additional $100 million for the Company's share repurchase program.
Note E. Earnings Per Share
The following table reconciles the numerators and denominators used in the calculation of basic and diluted earnings per share (EPS):
Three Months Ended | Three Months Ended | Six months Ended | |||||||
Apr. 3, 2004 | Mar. 29, 2003 | Jul. 3, 2004 | Jun. 28, 2003 | Jul. 3, 2004 | Jun. 28, 2003 | ||||
Numerators: | $ 22,411 | $ 15,885 | $ 25,826 | $ 20,172 |
| $36,057 | |||
Denominators: | Denominators: | 58,240,221 | 58,317,275 | Denominators: | 57,943,191 | 58,142,937 | 58,091,706 |
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Potentially dilutive shares | Potentially dilutive shares | 450,060 | 264,256 | Potentially dilutive shares | 434,673 | 324,680 | 443,934 |
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| 58,690,281 | 58,581,531 | Denominator for diluted EPS | 58,377,864 | 58,467,617 | 58,535,640 | 58,514,390 | |
Earnings per share - basic | Earnings per share - basic | $0.45 | $0.35 | $0.83 | $0.62 | ||||
Earnings per share - diluted | Earnings per share - diluted | $0.44 | $0.35 | $0.82 | $0.62 |
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Note F. Restructuring Reserve
During 2003 the Company closed two office furniture facilities located in Milan, Tennessee and Hazleton, Pennsylvania and consolidated production into other U.S. manufacturing locations. In connection with those shutdowns, the Company incurred $0.5 million of current period charges during the quarter ended AprilJuly 3, 2004. The Company reduced a previously recorded restructuring reserve for the shutdown of its Milan, Tennessee facility by approximately $0.3 million during the second quarter 2004. The reduction was due to the fact that the Company was able to exit a lease with the lessor at more favorable terms than previously estimated. The following is a summary of changes in restructuring accruals during the firstsecond quarter of 2004:
(In thousands) | Severance | Facility | Total | Severance | Facility | Total |
Accrual balance, | $ 334 | $1,100 | $1,434 | |||
Accrual balance, | $ 139 | $ 315 | $ 454 | |||
Restructuring charges | 520 | 42 | 445 | 487 | ||
Restructuring credit | - | (272) | (272) | |||
Cash payments | (195) | (1,305) | (1,500) | (88) | (488) | (576) |
Accrual balance, | $ 139 | $ 315 | $ 454 | |||
Accrual balance, | $ 93 | $ - | $ 93 |
Note G. Business Combinations
On January 5, 2004, the Company acquired certain assets of Paoli, Inc., a subsidiary of Klaussner Furniture Industries, Inc. The results of Paoli's operations have been included in the consolidated financial statements since that date. Paoli is a leading provider of wood case goods and seating with well-known brands, broad product offering, and strong independent representative sales and dealer networks.
The aggregate purchase price was $81.0 million and was paid in cash. The following table summarizes (in thousands) the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.
Current assets $27,304
Property, plant and equipment 26,455
Intangible assets 26,330
Goodwill 9,046
Total assets acquired 89,135
Current liabilities 8,147
Net assets acquired $80,988
Of the $26.3 million of acquired intangible assets, $18.3 million was assigned to registered trademarks that are not subject to amortization. The remaining $8.0 million of acquired intangible assets have a weighted-average useful life of approximately 15 years with amortization recorded based on the projected cash flow associated with the respective intangible assets existing relationships. The intangible assets that make up that amount include customer relationships of $5.4 million (19-year weighted-average useful life), patents and proprietary technology of $2.4 million (8-year weighted-average useful life), and other assets of $0.2 million (3-year weighted-average useful life).
The $9.0 million of goodwill was assigned to the office furniture segment and is all deductible for income tax purposes.
Assuming the acquisition of Paoli Inc. had occurred on December 29, 2002, the beginning of the Company's 2003 fiscal year, instead of the actual date reported above, the Company's pro forma consolidated net sales would have been $415$430 million for the firstsecond quarter of 2003 and $846 million for the six months ended June 28, 2003. Pro forma consolidated net income for firstsecond quarter 2003 and for the six months ended June 28, 2003 would have been $16.7$22.1 million or $0.29$0.38 per diluted share.share and $38.9 million or $0.66 per diluted share, respectively.
The Company also completed the acquisition of Hearth and Home Distributors of Delaware, Inc., a small hearth distributor, on January 5, 2004 for a purchase price of $4.5 million, which was paid in cash. The following table summarizes (in thousands) the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. The Company is in the process of finalizing the valuation of certain intangible assets; thus, the allocation of the purchase price is subject to refinement.
Current assets $ 526
Property, plant and equipment 91
Intangible assets 2,554
Goodwill 1,330
Total assets acquired 4,501
Current liabilities 1
Net assets acquired $4,500
The preliminary intangible assets primarily are customer relationships and have an estimated useful life of 10 years. The $1.3 million of goodwill was assigned to the hearth products segment and is all deductible for income tax purposes.
Note H. Goodwill and Other Intangible Assets
The table below summarizes amortizable definite-lived intangible assets as of AprilJuly 3, 2004 and January 3, 2004, which are reflected in Other Assets in the Company's condensed consolidated balance sheets:
(In thousands) | Apr. 3, 2004 | Jan. 3, 2004 | Jul. 3, 2004 | Jan. 3, 2004 |
Patents | $ 18,820 | $ 16,450 | $ 18,820 | $ 16,450 |
Customer relationships and other | 34,290 | 26,076 | 34,290 | 26,076 |
Less: accumulated amortization | (17,642) | (16,671) | (18,613) | (16,671) |
$ 35,468 | $ 25,855 | $ 34,497 | $ 25,855 |
Aggregate amortization expense for the three-monthsthree and six months ended AprilJuly 3, 2004 and March 29,June 28, 2003 was $971,000$1.0 million and $673,000,$1.9 million, and $0.7 million and $1.3 million, respectively. Amortization expense is estimated to decrease from $3.9 to $2.0 million per year over the next five years.
The Company also owns trademarks with a net carrying amount of $26.4 million.million and $8.1 million as of July 3, 2004 and January 3, 2004, respectively. The trademarks are deemed to have indefinite useful lives because they are expected to generate cash flows indefinitely.
The changes in the carrying amount of goodwill since January 3, 2004, are as follows by reporting segment:
Office | Hearth |
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Balance as of January 3, 2004 | $43,611 | $148,475 | $192,086 |
Goodwill increase during period | 9,046 | 1,330 | 10,376 |
Balance as of April 3, 2004 | $52,657 | $149,805 | $202,462 |
(In thousands) | Office | Hearth |
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Balance as of January 3, 2004 | $43,611 | $148,475 | $192,086 |
Goodwill acquired during period | 9,046 | 1,330 | 10,376 |
Balance as of July 3, 2004 | $ 52,657 | $ 149,805 | $ 202,462 |
In accordance with SFAS No. 142 "Goodwill and Other Intangible Assets", the Company evaluates its goodwill for impairment on an annual basis based on values at the end of third quarter or whenever indicators of impairment exist. The Company has previously evaluated its goodwill for impairment and has determined that the fair value of the reporting unit exceeds their carrying value so no impairment of goodwill was recognized. The increase in goodwill of $10.4 million relates to the acquisitions completed during the first quarter. See Business Combination footnote for further information.
Note I. Product Warranties
The companyCompany issues certain warranty policies on its furniture and hearth products that provide for repair or replacement of any covered product or component that fails during normal use because of a defect in design, or workmanship.
A warranty reserve is determined by recording a specific reserve for known warranty issues and an additional reserve for unknown claims that are expected to be incurred based on historical claims experience. Actual claims incurred could differ from the original estimates, requiring adjustments to the reserve. Activity associated with warranty obligations was as follows during the period:
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Six Months Ended
(In thousands) | Jul. 3, 2004 | Jun.28, 2003 |
Balance at beginning of period | $ 8,926 | $ 8,405 |
Balance at end of period | $ 10,224 | $ 8,362 |
Note J. Postretirement Health Care
In accordance with the interim disclosure requirements of revised SFAS No. 132, "Employers' Disclosures about Pensions and other Postretirement Benefits," the following table sets forth the components of net periodic benefit cost included in the Company's income statement for:
Three Months Ended | Six Months Ended | |||
(In thousands) | Apr. 3, | Mar. 29, | Jul. 3, | Jun. 28, |
Service cost | $ 71 | $ 62 | $ 142 | $ 125 |
Interest cost | 266 | 276 | 533 | 553 |
Expected return on plan assets | (72) | - | (145) | - |
Amortization of transition obligation | 145 | 290 | 290 | |
Amortization of prior service cost | 58 | 115 | 115 | |
Net periodic benefit cost | $468 | $541 | $ 935 | $ 1,083 |
Note K. Commitments and Contingencies
During the second quarter ended June 28, 2003, the Company entered into a one-year financial agreement for the benefit of one of its distributor chain partners.partners, which has been extended. The maximum financial exposure assumed by the Company as a result of this arrangement totals $3is currently $2.8 million of which over 75%79% is secured by collateral. In accordance with the provisions of FIN 45, the Company has recorded the fair value of this guarantee, which is estimated to be less than $0.1 million.
The Company utilizes letters of credit in the amount of $15 million to back certain financing instruments, insurance policies and payment obligations. The letters of credit reflect fair value as a condition of their underlying purpose and are subject to fees competitively determined.
The Company is contingently liable for future minimum payments totaling $8.5$7.3 million under a transportation service contract. The transportation agreement is for a three-year period and is automatically renewable for periods of one year unless either party gives sixty days written notice of its intent to terminate at the end of the original three-year term or any subsequent term. The minimum payments remaining are $3.6$2.4 million in 2004, and $4.9 million in 2005.
The Company has guaranteed a contractual lease obligation of an independent contract furniture dealership. The relatedlease term expires in the fourth quarter of 2004. As of April 3, 2004, the remaining unpaid lease payments subject to this guarantee totaled approximately $45,000.$28,000. In accordance with the provisions of FIN 45 no liability has been recorded, as the Company entered into this agreement prior to December 31, 2002.
The Company has contingent liabilities, which have arisen in the course of its business, including pending litigation, preferential payment claims in customer bankruptcies, environmental remediation, taxes, and other claims. The Company currently has a claim for approximately $7.6 million pending against it arising out of the bankruptcy of a customer filed in 2001. The Company was named a critical vendor by the bankruptcy court and, accordingly, was paid in full for all outstanding receivables. The claim alleges that the Company received preferential payments from the customer during the ninety days before the customer filed for bankruptcy protection. The claim was brought in February 2003. The Company has recorded an accrual with respect to this contingency, in an amount substantially less than the full amount of the claim, which represents the best estimate within the range of likely exposure and intends to vigorously defend against the claim. Given the nature of this claim, it is possible that the ultimate outcome could differ from the recorded amount.
Note L. New Accounting Standards
In December 2003, the Financial Accounting Standards Board issued Interpretation 46R (FIN 46R), a revision to Interpretation 46 (FIN 46), "Consolidation of Variable Interest Entities." FIN 46R clarifies some of the provisions of FIN 46 and exempts certain entities from its requirements. FIN 46R was effective at the end of the first interim period ending after March 15, 2004. The Company adopted FIN 46R on April 3, 2004, and it did not have an impact on the Company's financial statements.
In JanuaryMay 2004, the FASB issued FASB Staff Position No. 106-1,106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" ("FSP 106-1"106-2"). The Company has elected to defer accountingFSP 106-2 is effective for the economic effects of the Act, as permitted by FSP 106-1.first interim or annual period beginning after June 15, 2004. Therefore, in accordance with FSP 106-1,106-2, the accumulated postretirement benefit obligation or net period postretirement benefit cost included in the consolidated financial statements do not reflect any amount associated with the effectssubsidy because the Company is unable to conclude whether the benefits provided by the plan are actuarially equivalent to the Medicare Part D benefit under the Act. The Company is currently evaluating the impact of the Act. Specific authoritative guidance on accounting forAct and will adopt FSP 106-2 in the federal subsidy is pending. The final issued guidance could require a change to previously reported information.third quarter of 2004.
Note M. Business Segment Information
Management views the Company as being in two business segments: office furniture and hearth products with the former being the principal business segment.
The office furniture segment manufactures and markets a broad line of metal and wood commercial and home office furniture which includes file cabinets, desks, credenzas, chairs, storage cabinets, tables, bookcases, freestanding office partitions and panel systems, and other related products. The hearth product segment manufactures and markets a broad line of manufactured gas-, pellet- and wood-burning fireplaces and stoves, fireplace inserts, and chimney systems principally for the home.
For purposes of segment reporting, intercompany sales transfers between segments are not material and operating profit is income before income taxes exclusive of certain unallocated corporate expenses. These unallocated corporate expenses include the net cost of the Company's corporate operations, interest income, and interest expense. The increase in unallocated corporate expenses compared to prior year is due to costs and investment in corporate resources related to the Company's strategy and growth initiatives. Management views interest income and expense as corporate financing costs and not as a business segment cost. In addition, management applies one effective tax rate to its consolidated income before income taxes so income taxes are not reported or viewed internally on a segment basis.
No geographic information for revenues from external customers or for long-lived assets is disclosed as the Company's primary market and capital investments are concentrated in the United States.
Reportable segment data reconciled to the consolidated financial statements for the three-month periodthree and six month periods ended AprilJuly 3, 2004, and March 29,June 28, 2003, is as follows:
Three Months Ended Six Months Ended (In thousands) Jul. 3, Jun. 28, Jul. 3, Jun. 28, Net Sales: $ 508,605 $ 406,793 $ 972,642 $ 798,764 Operating Profit: $ 69,583 Depreciation & Amortization Expense: Capital Expenditures (including capitalized software): As of As of Identifiable Assets: Note N. Subsequent Events Subsequent to the end of second quarter, the Company finalized its acquisitions of Omni Remanufacturing, Inc., a panel systems remanufacturer and office services company; and Edward George Company, a Midwest hearth products distributor and its affiliate, Wisconsin Fireplace Systems, for a combined purchase price of $47 million in cash. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
The Company has two reportable core operating segments: office furniture and hearth products. The Company is the second largest office furniture manufacturer in the United States and the nation's leading manufacturer and marketer of gas- and wood-burning fireplaces.
The Company changed its name, with the approval of its shareholders, from HON INDUSTRIES Inc. to HNI Corporation effective May 5, 2004. The Company believes that changing its name will allow it to accomplish three important goals as it moves forward with its strategy of managing multiple distinct and independent brands: 1) create a corporate identity that clearly represents who it is today - the parent company for many of the leading brand name companies in the office furniture and hearth markets; 2) establish a corporate brand that better reflects the Corporation's strategic growth program - - product line extensions, market expansion, and strategic acquisitions; and 3) eliminate the confusion in the marketplace, resulting from the use of "HON" in both the corporate name and in the name of its largest operating company, and clarify the ownership of our other operating companies and their relationship with The HON Company.
During the firstsecond quarter, the Company experiencedcontinued to experience strong growth in both its office furniture and hearth products segments due to an improving economy and market share gain. On January 5, 2004, the Company completed the acquisition of Paoli Inc. a leading provider of wood case goods and seating. Sales from Paoli contributed a portionapproximately one-third of the growth in the office furniture segment. The Company also had an increase in sales due to customer purchases being made in advance of communicated price increases that will take effect later this year.
The Company's net income increased to $22.4$25.8 million for firstsecond quarter 2004 compared to $15.9$20.2 million for the same period last year. Net income per share was $0.38$0.44 per diluted share compared to $0.27$0.35 per diluted share in the firstsecond quarter of 2003, an increase of 40.725.7 percent. The Company'sCompany increased its annual effective tax rate infor 2004 is 36to 36.5 percent during the second quarter compared to 3536.0 percent in first quarter 2004 and 35.0 percent in 2003 due to increased state taxes and a reduced benefit from federal and state tax credits. This resulted in an effective tax rate for the second quarter 2004 of 36.9 percent.
The Company continues its aggressive investmentto invest in building its brands. During the firstsecond quarter the Company invested an incremental $3$5 million in its brand building and selling initiatives.
Since the beginning of the year theThe Company has experienced an increase inincreased steel costs of approximately 25 percent. While this increase did not have a significant impact on gross margins in$12 million and other material costs of approximately $3 million during the current quarter, the impact in second quarter is expectedwhen compared to be much greater. the same quarter last year, which offset productivity improvements and the effect of leveraging fixed costs over higher volumes.
Critical Accounting Policies
The preparation of the financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our accounting policies and estimates. We base our estimates on historical experience and on a variety of other assumptions believed to be reasonable in order to make judgments about the carrying value of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. A summary of the more significant accounting policies that require the use of estimates and judgments in preparing the financial statements is provided in the Company's 10-K report for the year ended January 3, 2004. During the first threesix months of fiscal 2004, there was no material change in the accounting estimates and assumptions previously disclosed.
Results of Operations
The following table presents certain key highlights fromchanges in the results of operations for the periods indicated.
Three Months Ended | |||
(In thousands) | Apr. 3 | Mar. 29 | Percent |
Net sales | $464,037 | $391,971 | 18.4% |
Cost of products sold | 294,275 | 252,841 | 16.4 |
Gross profit | 169,762 | 139,130 | 22.0 |
Selling & administrative expenses | 134,580 | 114,426 | 17.6 |
Restructuring & impairment charges | (520) | - | - |
Operating income | 34,662 | 24,704 | 40.3 |
Interest income | 725 | 821 | (11.7) |
Interest expense | 370 | 1,086 | (65.9) |
Income taxes | 12,606 | 8,554 | 47.4 |
Net income | 22,411 | 15,885 | 41.1 |
Three Months Ended | Six Months Ended | |||
(In thousands) | Jul. 3, 2004 & | Jul. 3, 2004 & | ||
Net Sales | $ 101,812 | 25.0% | $ 173,878 | 21.8% |
Cost of products sold | 64,617 | 24.8 | 106,051 | 20.7 |
Selling & administrative expenses | 29,600 | 26.2 | 49,754 | 21.9 |
Restructuring & impairment charges | (2,050) | -90.5 | (1,530) | -67.5 |
Interest Income | (239) | -42.5 | (335) | -24.2 |
Interest Expense | (508) | -71.3 | (1,224) | -68.1 |
Income Taxes | 4,260 | 39.2 | 8,312 | 42.8 |
Net Income | 5,654 | 28.0 | 12,180 | 33.8 |
Net sales for the firstsecond quarter increased 18.425.0 percent to $464.0$508.6 million, compared to $392.0$406.8 million for the same quarter last year. The Company experienced strong growth in both its office furniture and hearth products segments. On January 5, 2004, the Company completed the acquisition of Paoli Inc. a leading provider of wood case goods and seating. Sales from Paoli accounted for approximately one-third$26 million or one-fourth of the revenue increase for the quarter. The Company also had an increase in sales of approximately $21 million due to customer purchases being made in advance of communicated price increases that will take effect later this year.
Gross margins for the quarter increased to 36.636.1 percent from 35.536.0 percent for the same quarter last year. Included in gross margin for the second quarter of 2003 was $1.6 million of accelerated depreciation of machinery and equipment related to facility shutdowns reducing margins by 0.4 percentage points. The improvement was due to benefits from restructuring initiatives,Company experienced increases in steel costs of approximately $12 million, and other material costs of approximately $3 million that offset productivity improvements and the Company's rapid continuous improvement program, volume leverage and new products, partially offset by material cost increases.effect of leveraging fixed costs over higher volumes.
Total selling and administrative expenses, excluding restructuring charges, for the quarter were flat, as a28.0 percent of net sales compared to first27.8 percent for the same quarter 2003.last year. Included in firstsecond quarter 2004 were incremental investments of approximately $3$5 million in brand building and selling initiatives, increased freight and distribution costs of $6$8 million due to volume, rate increases and fuel surcharges, as well as the selling and administrative costs of new acquisitions of $8 million, and increased consulting and other costs associated with growth initiatives at the new acquisition.corporation level of $4 million.
During the second quarter of 2003, the Company closed two office furniture facilities and consolidated production into other U.S. manufacturing locations to increase efficiencies, streamline processes, and reduce overhead costs. The two facilities were located in Hazleton, Pennsylvania, and Milan, Tennessee. In connection with those shutdowns, the Company incurred $0.5$0.2 million of current periodnet restructuring charges during the second quarter ended April 3, 2004.of 2004 and $2.3 million of restructuring charges during the same quarter last year.
The Company's currentannual effective tax rate is 36for 2004 increased to 36.5 percent during the second quarter compared to 3536.0 percent in first quarter 2004 and 35.0 percent in 2003 due to increased state taxes and a reduced benefit from federal and state tax credits. This resulted in an effective tax rate for the second quarter of 2004 of 36.9 percent. The Company currently expects the effective tax rate to remain at this level36.5 percent in 2004.
Net income was $22.4$25.8 million compared to $15.9$20.2 million in the same period in 2003.2003, an increase of 28.0 percent. Net income per share was $0.38$0.44 per diluted share compared to $0.27$0.35 per diluted share in firstsecond quarter 2003, an increase of 40.725.7 percent.
Office Furniture
For the first quartersix months of 2004, consolidated net sales increased 21.8 percent to $972.6 million compared to $798.8 million in 2003. Paoli accounted for approximately $51 million or 6.4 percentage points of the increase. Gross margins year-to-date increased to 36.3 percent compared to 35.7 percent last year. Included in 2003 gross margins was $1.6 million of accelerated depreciation related to facility shutdowns, which reduced margins 0.2 percentage points. Increased steel and other material costs in 2004 partially offset productivity improvements and the effect of leveraging fixed costs over higher volumes. Net income was $48.2 million or $0.82 per diluted share compared to $36.1 million or $0.62 per diluted share in 2003, an increase of 33.8 percent.
Office Furniture
For the second quarter, net sales for the office furniture comprised 75 percent of consolidated net sales. Net sales for office furniture were up 18.6segment increased 26.6 percent to $349.7$384.7 million from $294.9$304.0 million for the same quarter last year. TheSecond quarter 2004 sales were positively impacted by approximately $21 million of customer purchases made in advance of price increases. In addition the Paoli acquisition accounted for approximately 8.5 percentage points of the increase in office furniture sales and has profitability similar to the Company's existing office furniture segment.sales. The remaining increase was driven by continued improvement in the economy and the marketindustry and market share gains by all of the Company's brands. Operating profit prior to unallocated corporate expenses increased to $31.7$37.2 million or 9.1compared to $27.3 million in 2003. Operating profit as a percent of net sales comparedincreased to $25.29.7 percent versus 9.0 percent in 2003. Included in second quarter 2004 results were $0.2 million or 8.5 percent of sales for the samenet restructuring charges and included in second quarter last year.2003 results were $1.6 million of accelerated depreciation and $2.3 million of restructuring charges related to plant shutdowns. The increase in operating marginsprofit is a result of gross profit improvements due to increased volumes, new products, and benefits received from restructuring initiatives and the rapid continuous improvement program, offset by additionalincreased freight expense and material costs including steel in addition to continued investments in brand building and selling initiatives andinitiatives. Net sales on a year-to-date basis increased freight expense and steel costs.22.6 percent to $734.3 million compared to $598.8 million. Operating profit as a percent of sales increased to 9.4 percent compared to 8.8 percent in 2003.
Hearth Products
For the second quarter, net sales for the hearth products segment increased 17.820.5 percent to $114.4$123.9 million from $97.1$102.8 million for the same quarter last year. This growth is attributable to strong housing starts, growth in market share in both the new construction and remodel/retrofitall channels, strengthening alliances with key distributors and dealers, innovative new proprietary product introductions, as well as a 1.8 percent price increase. Operating profit prior to unallocated corporate expenses was $10.6$15.6 million compared to $5.8$10.6 million in 2003.the same quarter last year. Operating profit as a percent of net sales increased to 9.312.6 percent versus 6.010.3 percent infor 2003. Improved profitability was the result of leveraging fixed costs over a higher sales volume, and a stronger mix of sales through owned distribution.distribution, and price increases partially offset by higher steel and freight costs. Net sales on a year-to-date basis increased 19.2 percent to $238.3 million compared to $199.9 million. Operating profit as a percent of sales increased to 11.0 percent compared to 8.2 percent in 2003.
Liquidity and Capital Resources
As of AprilJuly 3, 2004, cash and short-term investments were $84.9$78.0 million compared to $204.2 million at year-end 2003. Cash flow from operations for the first threesix months increased to $18.3$56.0 million compared to $7.9$54.5 million last year due to improved operating results. Consistent with prior years, cash was disbursed in the first quarter for the annual payment of marketing programs and the funding of the defined contribution retirement plan. Trade receivables and inventory levels have increased from year-end due to normal seasonality and the Paoli acquisition however days sales outstanding improved and inventory turns remained constant compared to the same quarter last year.increased volume. Cash flow and working capital management continue to be a major focus of management to ensure the Company is poised for growth.
Net capital expenditures, including capitalized software, for the first threesix months of 2004 were $6.1$15.8 million compared to $14.5versus $24.4 million in 2003 and were primarily for tooling and equipment for new products. First quarterThe first six months of 2003 included funding for the purchase of a previously leased hearth products plant. Cash from operations funded these investments.
The Company completed the acquisition of Paoli Inc. and a small hearth distributor for a total of $85.5 million. During the first quarter of 2004 theThe Company paid off $26.1 million of convertible debentures related to a previous hearth acquisition.acquisition during the first quarter of 2004. The Company has received approximately $4.5$5.3 million of proceeds from issuance of its stock due to the exercise of previously vested stock options.options and the Company's member stock ownership plan.
On February 11, 2004, theThe Board approvedof Directors declared a 7.7 percent increase in theregular quarterly cash divided of $0.14 per share on its common stock quarterly cash dividend from $0.13 per share to $0.14 per share. The dividend was paid on March 1,May 4, 2004, to shareholders of record at the close of business on February 20,May 14, 2004. ThisIt was the 196th consecutive quarterly dividend paid by the Company.on June 1, 2004.
For the threesix months ended AprilJuly 3, 2004, the Company repurchased 441,2001,124,300 shares of its common stock at a cost of approximately $16.5$43.7 million. As of April 3, 2004, $24.8 million of the Board's current repurchase authorization remained unspent. Subsequent to April 3,On May 4, 2004, the Board of Directors authorized an additional $100 million for the Company's share repurchase program. As of July 3, 2004, $97.6 million remained unspent.
On May 4,August 2, 2004, the Board of Directors declared a $0.14 per common share cash dividend to shareholders of record on May 14,August 12, 2004 to be paid on JuneSeptember 1, 2004.
Commitments and Contingencies
During the second quarter ended June 28, 2003, the Company entered into a one-year financial agreement for the benefit of one of its distributor chain partners.partners, which was extended. The maximum financial exposure assumed by the Company as a result of this arrangement totals $3$2.8 million of which over 75%79% is secured by collateral. In accordance with the provisions of FIN 45, the Company has recorded the fair value of this guarantee, which is estimated to be less than $0.1 million.
The Company utilizes letters of credit in the amount of $15 million to back certain financing instruments, insurance policies and payment obligations. The letters of credit reflect fair value as a condition of their underlying purpose and are subject to fees competitively determined.
The Company is contingently liable for future minimum payments totaling $8.5$7.3 million under a transportation service contract. The transportation agreement is for a three-year period and is automatically renewable for periods of one year unless either party gives sixty days written notice of its intent to terminate at the end of the original three-year term or any subsequent term. The minimum payments remaining are $3.6$2.4 million in 2004, and $4.9 million in 2005.
The Company has guaranteed a contractual lease obligation of an independent contract furniture dealership. The relatedlease term expires in the fourth quarter of 2004. As of April 3, 2004, the remaining unpaid lease payments subject to this guarantee totaled approximately $45,000.$28,000. In accordance with the provisions of FIN 45 no liability has been recorded, as the Company entered into this agreement prior to December 31, 2002.
The Company has contingent liabilities, which have arisen in the course of its business, including pending litigation, preferential payment claims in customer bankruptcies, environmental remediation, taxes, and other claims. The Company currently has a claim for approximately $7.6 million pending against it arising out of the bankruptcy of a customer filed in 2001. The Company was named a critical vendor by the bankruptcy court and, accordingly, was paid in full for all outstanding receivables. The claim alleges that the Company received preferential payments from the customer during the ninety days before the customer filed for bankruptcy protection. The claim was brought in February 2003. The Company has recorded an accrual with respect to this contingency, in an amount substantially less than the full amount of the claim, which represents the best estimate within the range of likely exposure and intends to vigorously defend against the claim. Given the nature of this claim, it is possible that the ultimate outcome could differ from the recorded amount.
Looking Ahead
Management believes that its volumes will remain strong for the remainder of the year. The Company is experiencing good momentum on orders and bid activity. However, material costs have increased since the beginning of the year due to pressure on all commodities. Management is working hard to manage costs and eliminate waste. The rate and magnitude of steel cost increases are at unprecedented levels. Since the beginning of the year the Company has experienced an increase of approximately 25 percent. Management also feels there is uncertainty about supply and the ability to get steel in an accelerated economy.
The Company has announcedimplemented selective price increases however, they do notthat will become effective untilduring the third quarter.
The Company's greatest challenge will be the impact of rising steel costs. The steel market is very volatile. Management believes that steel prices are trending up and continues to work aggressively to offset the rising costs through various initiatives including sourcing and material utilization.
Due to the Company's 52/53-week fiscal year, third quarter as2003 included an extra week than third quarter 2004.
Subsequent to the end of second quarter, the Company honors contracts withfinalized its customersacquisitions of Omni Remanufacturing, Inc., a panel systems remanufacturer and allows them timeoffice services company; and Edward George Company, a Midwest hearth products distributor and its affiliate, Wisconsin Fireplace Systems, for a combined purchase price of $47 million in cash. The two acquisitions account for combined annual sales of about $75 million and have comparable margins to prepare for the increases. The Company may experience an acceleration of sales in the second quarter that would normally occur in the third quarter due to the announced price increases.our existing operations.
The Company continues its focus on creating long-term shareholder value by growing its businesses through aggressive investment in building brands, enhancing its strong member-owner culture and remaining focused on its rapid continuous improvement programs to build best total cost.
Forward-Looking Statements
Statements in this report that are not strictly historical, including statements as to plans, objectives, and future financial performance, are "forward-looking" statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks, which may cause the Company's actual results in the future to differ materially from expected results. These risks include, among others: the Company's ability to realize financial benefits from (a) its price increases, (b) from its cost containment and business simplification initiatives, (c) from its investments in new products and brand building, and (d) from its investments in distribution and rapid continuous improvement; lower than expected demand for the Company's products due to uncertain political and economic conditions and lower industry growth than expected; competitive pricing pressure from foreign and domestic competitors; higher than expected material costs; and other factors described in the Company's annual and quarterly reports filed with the Securities and Exchange Commission on Forms 10-K and 10-Q.
Item 4. Controls and Procedures
Under the supervision and with the participation of management, the chief executive officer and chief financial officer of the Company have evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures as of AprilJuly 3, 2004, and, based on their evaluation, the chief executive officer and chief financial officer have concluded that these controls and procedures are effective. There were no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under 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 that 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.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(E) Issuer Purchases of Equity Securities
The following is a summary of share repurchase activity during the firstsecond quarter ended AprilJuly 3, 2004.
Period | (a) Total Number of Shares (or Units) Purchased (1) | (b) Average | (c) Total Number of | (d) Maximum Number (or |
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Period | (a) Total Number of Shares (or Units) Purchased (1) | (b) Average | (c) Total Number of | (d) Maximum Number (or |
4/4/04 - 5/1/04 |
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5/2/04 - 5/29/04 |
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5/30/04- |
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Total | 683,100 | $39.92 | 683,100 | $97,559,440.76 |
(1) No shares were purchased outside of a publicly announced plan or program.
The company repurchases shares under a previously announced plan authorized by the Board of Directors as follows:
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No repurchase plans expired or were terminated during the firstsecond quarter, nor do any plans exist under which the company does not intend to make further purchases.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of HNI Corporation was held on May 4, 2004, for purposes of electing four Directors to the Board of Directors, to change the Corporation's name to HNI Corporation by amending Section 1.01 of the Corporation's Articles of Incorporation, and to update anti-takeover provisions of the Corporation's Articles of Incorporation to be more consistent with current Iowa law. As of March 5, 2004, the record date for the meeting, there were 58,260,555 shares of common stock issued and outstanding and entitled to vote at the meeting. The first proposal voted upon was the election of four Directors for a term of three years and until their successors are elected and shall qualify. The four persons nominated by the Company's Board of Directors received the following votes and were elected: | |||
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Three-Year Term: |
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Other Directors whose term of office as a Director continued after the meeting are: Stan A. Askren, Gary M. Christensen, Cheryl A. Francis, Joseph Scalzo, Richard H. Stanley, Brian E. Stern, and Ronald V. Waters III. | |||
The second proposal voted upon was the amendment to Section 1.01of the Company's Articles of Incorporation to change the Corporation's name to HNI Corporation. The proposal was approved with 51,604,825 votes, or 88.58% voting for; 1,334,343 votes, or 2.29% voting against; and 433,804 votes, or 0.74% abstaining. The third proposal voted upon was to update the anti-takeover provisions of the Corporation's Articles of Incorporation to be more consistent with current Iowa law. The proposal was approved with 47,349,774 votes, or 81.27% voting for; 731,360 votes, or 1.26% voting against; and 357,271 votes or 0.61% abstaining. |
Item 6. Exhibits and Reports on Form 8-K
Exhibits. See Exhibit Index.
| Reports on Form The Company filed a periodic report on Form 8-K dated The Company filed a periodic report on Form 8-K dated May 4, 2004, to furnish the Company's press releases announcing Stan A. Askren as Chief Executive Officer, the change of the name of the Company to HNI Corporation effective May 5, 2004, the election of John A. Halbrook as a member of the Company's Board of Directors of an additional $100 million for the Company's share repurchase program and to provide the Company's Articles of Incorporation as amended at the Annual Shareholders' Meeting held on May 4, 2004. The Company filed a periodic report on Form 8-K dated July 1, 2004, to furnish the Company's press release relating to signing a purchase agreement to acquire certain assets of Omni Remanufacturing, Inc. |
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. | |
| HNI Corporation |
EXHIBIT INDEX | |
(31.1) | Certification of the CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
(31.2) | Certification of the CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
(32.1) | Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
Exhibit 31.1 | |
CERTIFICATION OF CHIEF EXECUTIVE OFFICER | |
I, Stan A. Askren, President and Chief Executive Officer of HNI Corporation, certify that:
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Date: | /s/ Stan A. Askren |
Name: Stan A. Askren Chief Executive Officer |
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CERTIFICATION OF CHIEF FINANCIAL OFFICER | |
I, Jerald K. Dittmer, Vice President and Chief Financial Officer of HNI Corporation, certify that:
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Date: | /s/ Jerald K. Dittmer |
Name: Jerald K. Dittmer |
(EXHIBIT 32.1)
Certification of CEO and CFO Pursuant to | |
In connection with the Quarterly Report on Form 10-Q of HNI Corporation (the "Company") for the quarterly period ended | |
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Name: Stan A. Askren Chief Executive Officer | |
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Name: Jerald K. Dittmer Chief Financial Officer | |
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