UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 |
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FORM 10-Q |
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(MARK ONE) | |
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/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended OctoberApril 3, 2009.2010. |
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OR |
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from ____________________ to ____________________ |
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Commission File Number: 1-14225 |
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HNI Corporation (Exact name of registrant as specified in its charter) |
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Iowa (State or other jurisdiction of incorporation or organization) | 42-0617510 (I.R.S. Employer Identification Number) |
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P. O. Box 1109, 408 East Second Street Muscatine, Iowa 52761-0071 (Address of principal executive offices) | 52761-0071 (Zip Code) |
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Registrant's telephone number, including area code: 563/272-7400 |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d)15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO |
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405(232.405 of this chapter) during the preceding 12 months (or for such shorter periodprior that the registrant was required to submit and post such files). YES NONO____ |
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer X Accelerated filer Non-accelerated filer (Do not check if a smaller reporting company) Smaller reporting company |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES NO X |
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Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. |
Class Common Shares, $1 Par Value | Outstanding at OctoberApril 3, 20092010 45,037,28745,217,413
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HNI Corporation and SUBSIDIARIES |
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INDEX |
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PART I. FINANCIAL INFORMATION |
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Item 1. Financial Statements (Unaudited). | |
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Condensed Consolidated Balance Sheets OctoberApril 3, 2009,2010, and January 3, 20092, 2010 | 3 |
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Condensed Consolidated Statements of Income Three Months Ended OctoberApril 3, 2009,2010, and September 27, 2008April 4, 2009 | 5 |
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Condensed Consolidated Statements of Income Nine Months Ended October 3, 2009, and September 27, 2008 | 6 |
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Condensed Consolidated Statements of Cash Flows NineThree Months Ended OctoberApril 3, 2009,2010, and September 27, 2008April 4, 2009 | 76 |
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Notes to Condensed Consolidated Financial Statements | 87 |
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.Operations | 1917 |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.Risk | 2522 |
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Item 4. Controls and Procedures.Procedures | 2523 |
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PART II. OTHER INFORMATION |
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Item 1. Legal Proceedings.Proceedings | 2624 |
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Item 1A. Risk Factors.Factors | 2624 |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.Proceeds | 2624 |
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Item 3. Defaults Upon Senior Securities – None. | - |
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Item 4. Submission of Matters to a Vote of Security Holders – None. None | - |
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Item 5. Other Information – None.None | - |
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Item 6. Exhibits.Exhibits | 2625 |
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SIGNATURES | 2726 |
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EXHIBIT INDEX | 2827 |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
HNI Corporation and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS | HNI Corporation and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS | | HNI Corporation and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS | |
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| | Oct. 3, 2009 (Unaudited) | | | Jan. 3, 2009 | | | Apr. 3, 2010 (Unaudited) | | | Jan. 2, 2010 | |
ASSETS | | (In thousands) | | | (In thousands) | |
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CURRENT ASSETS | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 45,968 | | | $ | 39,538 | | | $ | 43,041 | | | $ | 87,374 | |
Short-term investments | | | 8,151 | | | | 9,750 | | | | 7,972 | | | | 5,994 | |
Receivables | | | 187,916 | | | | 238,327 | | | | 157,467 | | | | 163,732 | |
Inventories (Note C) | | | 67,011 | | | | 84,290 | | | | 64,925 | | | | 65,144 | |
Deferred income taxes | | | 20,022 | | | | 16,313 | | | | 18,508 | | | | 20,299 | |
Prepaid expenses and other current assets | | | 19,128 | | | | 29,623 | | | | 23,040 | | | | 17,728 | |
Total Current Assets | | | 348,196 | | | | 417,841 | | | | 314,953 | | | | 360,271 | |
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PROPERTY, PLANT, AND EQUIPMENT, at cost | PROPERTY, PLANT, AND EQUIPMENT, at cost | | | | | | PROPERTY, PLANT, AND EQUIPMENT, at cost | | | | | |
Land and land improvements | | | 23,757 | | | | 23,753 | | | | 21,710 | | | | 21,815 | |
Buildings | | | 279,020 | | | | 277,898 | | | | 264,955 | | | | 267,596 | |
Machinery and equipment | | | 499,608 | | | | 525,996 | | | | 486,887 | | | | 490,287 | |
Construction in progress | | | 5,804 | | | | 21,738 | | | | 7,624 | | | | 8,377 | |
| | | 808,189 | | | | 849,385 | | | | 781,176 | | | | 788,075 | |
Less accumulated depreciation | | | 535,999 | | | | 533,779 | | | | 530,286 | | | | 527,973 | |
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Net Property, Plant, and Equipment | | | 272,190 | | | | 315,606 | | | | 250,890 | | | | 260,102 | |
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GOODWILL | | | 267,865 | | | | 268,392 | | | | 260,628 | | | | 261,114 | |
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OTHER ASSETS | | | 136,133 | | | | 163,790 | | | | 109,224 | | | | 112,839 | |
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Total Assets | | $ | 1,024,384 | | | $ | 1,165,629 | | | $ | 935,695 | | | $ | 994,326 | |
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See accompanying Notes to Condensed Consolidated Financial Statements.
HNI Corporation and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS | HNI Corporation and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS | | HNI Corporation and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS | |
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| | Oct. 3, 2009 (Unaudited) | | | Jan. 3, 2009 (As Adjusted) | | | Apr. 3, 2010 (Unaudited) | | | Jan. 2, 2010 | |
LIABILITIES AND EQUITY | | (In thousands, except share and per share value data) | | | (In thousands, except share and per share value data) | |
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CURRENT LIABILITIES | | | | | | | | | | | | |
Accounts payable and accrued expenses | | $ | 300,301 | | | $ | 313,431 | | | $ | 255,614 | | | $ | 299,718 | |
Note payable and current maturities of long-term debt and capital lease obligations | | | 2,374 | | | | 54,494 | | | | 50,009 | | | | 39 | |
Current maturities of other long-term obligations | | | 478 | | | | 5,700 | | | | 321 | | | | 385 | |
Total Current Liabilities | | | 303,153 | | | | 373,625 | | | | 305,944 | | | | 300,142 | |
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LONG-TERM DEBT | | | 200,000 | | | | 267,300 | | | | 150,000 | | | | 200,000 | |
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CAPITAL LEASE OBLIGATIONS | | | 1 | | | | 43 | | | | - | | | | - | |
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OTHER LONG-TERM LIABILITIES | | | 50,557 | | | | 50,399 | | | | 48,607 | | | | 50,332 | |
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DEFERRED INCOME TAXES | | | 33,565 | | | | 25,271 | | | | 22,521 | | | | 24,227 | |
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EQUITY | | | | | | | | | | | | | | | | |
Parent Company shareholders' equity: | | | | | | | | | |
HNI Corporation shareholders' equity: | | | | | | | | | |
Capital Stock: | | | | | | | | | | | | | | | | |
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 - | | | 45,037 | | | | 44,324 | | | | | | | | | |
October 3, 2009 – 45,037,287 shares; | | | | | | | | | |
January 3, 2009 – 44,324,409 shares | | | | | | | | | |
April 3, 2010 – 45,217,413 shares; | | | | | | | | | |
January 2, 2010 – 45,093,504 shares | | | | 45,217 | | | | 45,093 | |
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Additional paid-in capital | | | 17,471 | | | | 6,037 | | | | 23,918 | | | | 19,695 | |
Retained earnings | | | 375,733 | | | | 400,379 | | | | 339,539 | | | | 355,270 | |
Accumulated other comprehensive income | | | (1,471 | ) | | | (1,907 | ) | | | (526 | ) | | | (774 | ) |
Total Parent Company shareholders' equity | | | 436,770 | | | | 448,833 | | |
Total HNI Corporation shareholders' equity | | | | 408,148 | | | | 419,284 | |
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Noncontrolling interest | | | 338 | | | | 158 | | | | 475 | | | | 341 | |
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Total Equity | | | 437,108 | | | | 448,991 | | | | 408,623 | | | | 419,625 | |
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Total Liabilities and Equity | | $ | 1,024,384 | | | $ | 1,165,629 | | | $ | 935,695 | | | $ | 994,326 | |
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See accompanying Notes to Condensed Consolidated Financial Statements.
HNI Corporation and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) |
| | Three Months Ended |
| | Apr. 3, 2010 | | | Apr. 4, 2009 (As Adjusted) |
| | (In thousands, except share and per share data) |
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Net sales | | $ | 363,506 | | | $ | 396,829 | |
Cost of sales | | | 244,326 | | | | 274,183 | |
Gross profit | | | 119,180 | | | | 122,646 | |
Selling and administrative expenses | | | 122,800 | | | | 133,938 | |
Restructuring and impairment | | | 1,834 | | | | 5,085 | |
Operating income (loss) | | | (5,454 | ) | | | (16,377 | ) |
Interest income | | | 88 | | | | 135 | |
Interest expense | | | 2,723 | | | | 3,198 | |
Earnings (loss) before income taxes | | | (8,089 | ) | | | (19,440 | ) |
Income taxes | | | (3,947 | ) | | | (7,742 | ) |
Income (loss) from continuing operations, less applicable income taxes | | | (4,142 | ) | | | (11,698 | ) |
Discontinued operations, less applicable income taxes | | | (1,711 | ) | | | (161 | ) |
Net income (loss) | | | (5,853 | ) | | | (11,859 | ) |
Less: Net income attributable to the noncontrolling interest | | | (133 | ) | | | (27 | ) |
Net income (loss) attributable to HNI Corporation | | $ | (5,986 | ) | | $ | (11,886 | ) |
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Income (loss) from continuing operations attributable to HNI Corporation per common share – basic | | $ | (0.09 | ) | | $ | (0.26 | ) |
Discontinued operations attributable to HNI Corporation per common share – basic | | $ | (0.04 | ) | | $ | (0.01 | ) |
Net income (loss) attributable to HNI Corporation per common share – basic | | $ | (0.13 | ) | | $ | (0.27 | ) |
Average number of common shares outstanding – basic | | | 45,166,450 | | | | 44,612,079 | |
Income (loss) from continuing operations attributable to HNI Corporation per common share – diluted | | $ | (0.09 | ) | | $ | (0.26 | ) |
Discontinued operations attributable to HNI Corporation per common share – diluted | | $ | (0.04 | ) | | $ | (0.01 | ) |
Net income (loss) attributable to HNI Corporation per common share – diluted | | $ | (0.13 | ) | | $ | (0.27 | ) |
Average number of common shares outstanding – diluted | | | 45,166,450 | | | | 44,612,079 | |
Cash dividends per common share | | $ | 0.215 | | | $ | 0.215 | |
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See accompanying Notes to Condensed Consolidated Financial Statements.
HNI Corporation and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) |
| | Three Months Ended |
| | Oct. 3, 2009 | | | Sep. 27, 2008 (As Adjusted) |
| | (In thousands, except share and per share data) |
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Net sales | | $ | 453,956 | | | $ | 663,141 | |
Cost of sales | | | 287,352 | | | | 438,423 | |
Gross profit | | | 166,604 | | | | 224,718 | |
Selling and administrative expenses | | | 129,897 | | | | 189,577 | |
Restructuring and impairment | | | 4,440 | | | | 1,497 | |
Operating income | | | 32,267 | | | | 33,644 | |
Interest income | | | 51 | | | | 208 | |
Interest expense | | | 3,167 | | | | 4,245 | |
Earnings before income taxes | | | 29,151 | | | | 29,607 | |
Income taxes | | | 11,441 | | | | 10,107 | |
Net income | | | 17,710 | | | | 19,500 | |
Less: Net income attributable to the noncontrolling interest | | | 96 | | | | 11 | |
Net income attributable to Parent Company | | $ | 17,614 | | | $ | 19,489 | |
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Net income attributable to Parent Company per common share – basic | | $ | 0.39 | | | $ | 0.44 | |
Average number of common shares outstanding – basic | | | 44,994,399 | | | | 44,213,017 | |
Net income attributable to Parent Company per common share – diluted | | $ | 0.39 | | | $ | 0.44 | |
Average number of common shares outstanding – diluted | | | 45,598,155 | | | | 44,340,220 | |
Cash dividends per common share | | $ | 0.215 | | | $ | 0.215 | |
See accompanying Notes to Condensed Consolidated Financial Statements. |
5
HNI Corporation and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) |
| | Nine Months Ended |
| | Oct. 3, 2009 | | | Sep. 27, 2008 (As Adjusted) |
| | (In thousands, except share and per share data) |
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Net sales | | $ | 1,242,612 | | | $ | 1,839,638 | |
Cost of sales | | | 821,792 | | | | 1,221,439 | |
Gross profit | | | 420,820 | | | | 618,199 | |
Selling and administrative expenses | | | 390,920 | | | | 544,805 | |
Restructuring and impairment | | | 13,403 | | | | 4,344 | |
Operating income | | | 16,497 | | | | 69,050 | |
Interest income | | | 311 | | | | 846 | |
Interest expense | | | 9,414 | | | | 12,481 | |
Earnings before income taxes | | | 7,394 | | | | 57,415 | |
Income taxes | | | 2,944 | | | | 20,382 | |
Net income | | | 4,450 | | | | 37,033 | |
Less: Net income attributable to the noncontrolling interest | | | 119 | | | | 98 | |
Net income attributable to Parent Company | | $ | 4,331 | | | $ | 36,935 | |
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Net income attributable to Parent Company per common share – basic | | $ | 0.10 | | | $ | 0.83 | |
Average number of common shares outstanding – basic | | | 44,833,711 | | | | 44,327,939 | |
Net income attributable to Parent Company per common share – diluted | | $ | 0.10 | | | $ | 0.83 | |
Average number of common shares outstanding – diluted | | | 45,272,912 | | | | 44,453,445 | |
Cash dividends per common share | | $ | 0.645 | | | $ | 0.645 | |
See accompanying Notes to Condensed Consolidated Financial Statements. |
HNI Corporation and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) | |
| | Nine Months Ended | |
| | Oct. 3, 2009 | | | Sep. 27, 2008 | |
| | (In thousands) | |
Net Cash Flows From (To) Operating Activities: | | | | | | |
Net income | | $ | 4,450 | | | $ | 37,033 | |
Noncash items included in net income: | | | | | | | | |
Depreciation and amortization | | | 55,715 | | | | 52,407 | |
Other postretirement and post employment benefits | | | 1,386 | | | | 1,132 | |
Stock-based compensation | | | 2,869 | | | | 1,373 | |
Excess tax benefits from stock compensation | | | - | | | | (11 | ) |
Deferred income taxes | | | 4,197 | | | | 1,196 | |
(Gain)/Loss on sale, retirement and impairment of long-lived assets and intangibles | | | 81 | | | | 1,346 | |
Stock issued to retirement plan | | | 6,565 | | | | 6,592 | |
Other – net | | | 891 | | | | 1,801 | |
Net increase (decrease) in operating assets and liabilities | | | 66,615 | | | | 4,266 | |
Increase (decrease) in other liabilities | | | (6,848 | ) | | | (2,537 | ) |
Net cash flows from (to) operating activities | | | 135,921 | | | | 104,598 | |
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Net Cash Flows From (To) Investing Activities: | | | | | | | | |
Capital expenditures | | | (9,715 | ) | | | (53,664 | ) |
Proceeds from sale of property, plant and equipment | | | 6,569 | | | | 1,009 | |
Acquisition spending, net of cash acquired | | | (500 | ) | | | (75,479 | ) |
Capitalized software | | | (1,159 | ) | | | (926 | ) |
Short-term investments – net | | | - | | | | (250 | ) |
Purchase of long-term investments | | | (9,710 | ) | | | (10,531 | ) |
Sales or maturities of long-term investments | | | 31,672 | | | | 12,758 | |
Other – net | | | 400 | | | | - | |
Net cash flows from (to) investing activities | | | 17,557 | | | | (127,083 | ) |
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Net Cash Flows From (To) Financing Activities: | | | | | | | | |
Proceeds from sales of HNI Corporation common stock | | | 2,191 | | | | 3,251 | |
Purchase of HNI Corporation common stock | | | - | | | | (28,553 | ) |
Excess tax benefits from stock compensation | | | - | | | | 11 | |
Proceeds from long-term debt | | | 97,000 | | | | 306,000 | |
Payments of note and long-term debt and other financing | | | (217,261 | ) | | | (236,298 | ) |
Dividends paid | | | (28,978 | ) | | | (28,579 | ) |
Net cash flows from (to) financing activities | | | (147,048 | ) | | | 15,832 | |
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Net increase (decrease) in cash and cash equivalents | | | 6,430 | | | | (6,653 | ) |
Cash and cash equivalents at beginning of period | | | 39,538 | | | | 33,881 | |
Cash and cash equivalents at end of period | | $ | 45,968 | | | $ | 27,228 | |
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See accompanying Notes to Condensed Consolidated Financial Statements. | |
HNI Corporation and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) | |
| | Three Months Ended | |
| | Apr. 3, 2010 | | | Apr. 4, 2009 | |
| | (In thousands) | |
Net Cash Flows From (To) Operating Activities: | | | | | | |
Net income (loss) | | $ | (5,853 | ) | | $ | (11,859 | ) |
Noncash items included in net income: | | | | | | | | |
Depreciation and amortization | | | 16,060 | | | | 19,240 | |
Other postretirement and post employment benefits | | | 423 | | | | 462 | |
Stock-based compensation | | | 1,509 | | | | 709 | |
Deferred income taxes | | | (68 | ) | | | 1,712 | |
(Gain)/Loss on sale, retirement and impairment of long-lived assets and intangibles | | | 818 | | | | 132 | |
Stock issued to retirement plan | | | 5,400 | | | | 6,565 | |
Other – net | | | (128 | ) | | | (528 | ) |
Net increase (decrease) in operating assets and liabilities | | | (43,121 | ) | | | (6,085 | ) |
Increase (decrease) in other liabilities | | | (442 | ) | | | (4,719 | ) |
Net cash flows from (to) operating activities | | | (25,402 | ) | | | 5,629 | |
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Net Cash Flows From (To) Investing Activities: | | | | | | | | |
Capital expenditures | | | (4,706 | ) | | | (4,026 | ) |
Proceeds from sale of property, plant and equipment | | | 1,327 | | | | 299 | |
Capitalized software | | | (93 | ) | | | (590 | ) |
Purchase of long-term investments | | | (2,805 | ) | | | (285 | ) |
Sales or maturities of long-term investments | | | 900 | | | | 3,550 | |
Other – net | | | 603 | | | | - | |
Net cash flows from (to) investing activities | | | (4,774 | ) | | | (1,052 | ) |
| | | | | | | | |
Net Cash Flows From (To) Financing Activities: | | | | | | | | |
Proceeds from sales of HNI Corporation common stock | | | 608 | | | | - | |
Purchase of HNI Corporation common stock | | | (3,291 | ) | | | - | |
Proceeds from long-term debt | | | - | | | | 60,000 | |
Payments of note and long-term debt and other financing | | | (1,729 | ) | | | (72,336 | ) |
Dividends paid | | | (9,745 | ) | | | (9,649 | ) |
Net cash flows from (to) financing activities | | | (14,157 | ) | | | (21,985 | ) |
| | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | (44,333 | ) | | | (17,408 | ) |
Cash and cash equivalents at beginning of period | | | 87,374 | | | | 39,538 | |
Cash and cash equivalents at end of period | | $ | 43,041 | | | $ | 22,130 | |
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See accompanying Notes to Condensed Consolidated Financial Statements. | |
HNI Corporation and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
OctoberApril 3, 20092010
Note A. Basis of Presentation
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. The January 3, 20092, 2010 consolidated balance sheet included in this Form 10-Q was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for theth e three-month and nine-month periodsperiod ended OctoberApril 3, 20092010 are not necessarily indicative of the results that may be expected for the fiscal year ending January 2, 2010.1, 2011. For further information, refer to the consolidated financial statements and footnotesaccompanying notes included in HNI Corporation's (the "Corporation") Annual Report on Form 10-K for the fiscal year ended January 3, 2009.2, 2010.
Note B. Stock-Based Compensation
The Corporation measures stock-based compensation expense at grant date, based on the fair value of the award and recognizes expense over the employee requisite service period. For the three and nine months ended OctoberApril 3, 2009,2010, and September 27, 2008,April 4, 2009, the Corporation recognized $1.0$1.5 million and $2.9 million, and $0.4 million and $1.4$0.7 million, respectively, of stock-based compensation expense for the cost of stock options and time-based restricted stock units issued under the HNI Corporation 2007 Stock-Based Compensation Plan and shares issued under the HNI Corporation 2002 Members' Stock Purchase Plan.
At OctoberApril 3, 2009,2010, there was $7.2$13.8 million of unrecognized compensation cost related to nonvested stock-based compensation awards, which the Corporation expects to recognize over a weighted-average remaining requisite service period of 1.31.5 years.
Note C. Inventories
The Corporation values its inventory at the lower of cost or market with approximately 85%80% valued by the last-in, first-out ("LIFO") method.
(In thousands) | | Oct. 3, 2009 (Unaudited) | | | Jan. 3, 2009 | | | Apr. 3, 2010 (Unaudited) | | | Jan. 2, 2010 | |
Finished products | | $ | 54,717 | | | $ | 51,807 | | | $ | 46,549 | | | $ | 48,198 | |
Materials and work in process | | | 39,966 | | | | 60,155 | | | | 41,752 | | | | 40,322 | |
LIFO allowance | | | (27,672 | ) | | | (27,672 | ) | | | (23,376 | ) | | | (23,376 | ) |
| | $ | 67,011 | | | $ | 84,290 | | | $ | 64,925 | | | $ | 65,144 | |
Note D. Comprehensive Income and Shareholders' Equity
The following table reconciles net income to comprehensive income attributable to HNI Corporation:
| | Three Months Ended | | | Nine Months Ended | | | Three Months Ended | |
(In thousands) | | Oct. 3, 2009 | | | Sep. 27, 2008 | | | Oct. 3, 2009 | | | Sep. 27, 2008 | | | Apr. 3, 2010 | | | Apr. 4, 2009 | |
Net income | | $ | 17,710 | | | $ | 19,500 | | | $ | 4,450 | | | $ | 37,033 | | |
Net income (loss) | | | $ | (5,853 | ) | | $ | (11,859 | ) |
| | | | | | | | | |
Other comprehensive income, net of income tax as applicable: | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustments | | | 15 | | | | 72 | | | | (86 | ) | | | 1,287 | | | | (4 | ) | | | (91 | ) |
Change in unrealized gains (losses) on marketable securities | | | - | | | | 107 | | | | 134 | | | | (96 | ) | | | - | | | | (133 | ) |
Change in pension and postretirement liability | | | 79 | | | | 79 | | | | 237 | | | | 237 | | | | 79 | | | | 79 | |
Change in derivative financial instruments | | | 49 | | | | (224 | ) | | | 151 | | | | (356 | ) | | | 173 | | | | (12 | ) |
Comprehensive income | | | 17,853 | | | | 19,534 | | | | 4,886 | | | | 38,105 | | |
Comprehensive income attributable to noncontrolling interest | | | 96 | | | | 11 | | | | 119 | | | | 98 | | |
Comprehensive income attributable to HNI Corporation | | $ | 17,757 | | | $ | 19,523 | | | $ | 4,767 | | | $ | 38,007 | | |
Comprehensive income (loss) | | | $ | (5,605 | ) | | $ | (12,016 | ) |
Comprehensive (income) attributable to noncontrolling interest | | | | (133 | ) | | | (27 | ) |
Comprehensive income (loss) attributable to HNI Corporation | | | $ | (5,738 | ) | | $ | (12,043 | ) |
The following table summarizes the components of accumulated other comprehensive loss and the changes in accumulated other comprehensive loss, net of tax as applicable for the ninethree months ended OctoberApril 3, 2009:2010:
(in thousands) | | Foreign Currency Translation Adjustment | | | Unrealized Gains (Losses) on Marketable Securities | | | Pension Postretirement Liability | | | Derivative Financial Instruments | | | Accumulated Other Comprehensive Loss | | | Foreign Currency Translation Adjustment | | | Pension Postretirement Liability | | | Derivative Financial Instruments | | | Accumulated Other Comprehensive Loss | |
Balance at January 3, 2009 | | $ | 3,620 | | | $ | (134 | ) | | $ | (3,455 | ) | | $ | (1,938 | ) | | $ | (1,907 | ) | |
Balance at January 2, 2010 | | | $ | 3,526 | | | $ | (2,710 | ) | | $ | (1,590 | ) | | $ | (774 | ) |
Year-to date change | | | (86 | ) | | | 134 | | | | 237 | | | | 151 | | | | 436 | | | | (4 | ) | | | 79 | | | | 173 | | | | 248 | |
Balance at October 3, 2009 | | $ | 3,534 | | | $ | - | | | $ | (3,218 | ) | | $ | (1,787 | ) | | $ | (1,471 | ) | |
Balance at April 3, 2010 | | | $ | 3,522 | | | $ | (2,631 | ) | | $ | (1,417 | ) | | $ | (526 | ) |
ForDuring the ninethree months ended OctoberApril 3, 2009,2010, the Corporation did not repurchase anyrepurchased 135,000 shares of its common stock.stock at a cost of approximately $3.3 million. As of OctoberApril 3, 2009, $163.62010, $160.3 million of the Corporation's Board of Directors' current repurchase authorization remained unspent.
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 | | | Nine Months Ended | | | Three Months Ended | |
(In thousands, except per share data) | | Oct. 3, 2009 | | | Sep. 27, 2008 | | | Oct. 3, 2009 | | | Sep.27, 2008 | | | Apr. 3, 2010 | | | Apr. 4, 2009 | |
Numerators: | | | | | | | | | | | | | | | | | | |
Numerator for both basic and diluted EPS attributable to Parent Company net income (loss) | | $ | 17,614 | | | $ | 19,489 | | | $ | 4,331 | | | $ | 36,935 | | | $ | (5,986 | ) | | $ | (11,886 | ) |
Denominators: | | | | | | | | | | | | | | | | | | | | | | | | |
Denominator for basic EPS weighted-average common shares outstanding | | | 44,994 | | | | 44,213 | | | | 44,834 | | | | 44,328 | | | | 45,166 | | | | 44,612 | |
Potentially dilutive shares from stock-based compensation plans | | | 604 | | | | 127 | | | | 439 | | | | 125 | | | | - | | | | - | |
Denominator for diluted EPS | | | 45,598 | | | | 44,340 | | | | 45,273 | | | | 44,453 | | | | 45,166 | | | | 44,612 | |
Earnings per share – basic | | $ | 0.39 | | | $ | 0.44 | | | $ | 0.10 | | | $ | 0.83 | | | $ | (0.13 | ) | | $ | (0.27 | ) |
Earnings per share – diluted | | $ | 0.39 | | | $ | 0.44 | | | $ | 0.10 | | | $ | 0.83 | | | $ | (0.13 | ) | | $ | (0.27 | ) |
Certain exercisable and non-exercisableNone of the outstanding stock options or restricted stock units were not included in the computation of diluted EPS at OctoberApril 3, 2010 and April 4, 2009, and September 27, 2008, because their inclusionas all would have been anti-dilutive. The number of stock options outstanding which met thisbe anti-dilutive criterion fordue to the three and nine months ended October 3, 2009 was 1,325,023 and 1,394,946, respectively. The number of stock options outstanding which met this anti-dilutive criterion for the three and nine months ended September 27, 2008 was 1,403,584 and 1,352,258, respectively.current period loss.
Note F. Restructuring Reserve and Plant Closures
As a result of challenging market conditions and the Corporation's ongoing business simplification and cost reduction strategies, management made the decision to close an additional office furniture manufacturing facility located in Owensboro, KentuckySalisbury, North Carolina and consolidate production into existing office furniture manufacturing facilities. During the quarter ended October 3, 2009, in connection with the closure of the Owensboro facility the Corporation recorded $0.5 million of severance costs for approximately 28 non-bargaining unit members and $1.7 million of costs to withdraw from the multi-employer pension plan. The Corporation anticipates the closure and consolidation of this facility will be substantially complete by the end of the second quarter of 2010. In connection with the closure of the South Gate, California and Louisburg, North Carolina office furniture manufacturing facilities announced earlier this year,Salisbury location, the Corporation recorded $1.6 million of charges during the third quarter ended April 3, 2010 which included $0.8 million of accelerated depreciation of machinery and equipment recorded in cost of sales and $0.8 million of other costs which were recorded as restructuring costs. The Corporation had previously recorded $3.8$1.3 million of severance costs for approximately 340125 members during the first halfand $0.3 million of the yearaccelerated depreciation recorded in connection with the closurecost of the South Gate and Louisburg facilities.sales. The Corporation anticipates the closure and consolidation of these two facilities will be substantially completecompleted by the end of 2009.
The Corporation made the decision to consolidate significant production from its hearth product Mount Pleasant, Iowa2010. In connection with other office furniture plant to other existing hearth products manufacturing facilities. Additionally,closures announced in 2009, the Corporation will close hearth products distribution centers in Alsip, Illinois and Lake City, Minnesota and transfer operations to its Mount Pleasant facility. The Corporation recorded $2.1$0.7 million of charges during the third quarter ended April 3, 2010 which included $0.6$0.3 million of accelerated depreciation recorded in cost of sales and $1.3 million of severance costs for approximately 160 members and $0.2$0.4 million of other costs which were recorded as restructuring costs.
The Corporation anticipates these structural changes will be substantially complete duringCorporation's hearth products segment recorded $0.1 million of restructuring costs in the first quarter related to the consolidation of 2010.production and shutdown of distribution centers announced in 2009.
FollowingThe following is a summary of changes in restructuring accruals during the ninethree months ended OctoberApril 3, 2009.2010. This summary does not include accelerated depreciation of $1.4 million as this item was not accounted for through the restructuring accrual on the Corporation's Condensed Consolidated Balance Sheets but is included in theas a component of "Restructuring and impairment" line itemImpairment" in the Corporation's Condensed Consolidated Statements of Income.
(In thousands) | | Severance and Member Related Costs | | | Facility Exit Costs & Other | | | Total | |
Balance as of January 3, 2009 | | $ | 155 | | | $ | 224 | | | $ | 379 | |
Restructuring charges | | | 7,731 | | | | 3,707 | | | | 11,438 | |
Cash payments | | | (2,724 | ) | | | (3,057 | ) | | | (5,781 | ) |
Balance as of October 3, 2009 | | $ | 5,162 | | | $ | 874 | | | $ | 6,036 | |
The Corporation completed the sale of a hearth distribution location and recorded $0.6 million of goodwill impairment charges, included in the "Restructuring and impairment" line item in the Corporation's Condensed Consolidated Statements of Income, to reduce the assets being held for sale to fair market value.9
(In thousands) | | Severance | | | Facility Exit Costs & Other | | | Total | |
Balance as of January 2, 2010 | | $ | 4,389 | | | $ | 1,569 | | | $ | 5,958 | |
Restructuring charges | | | 1,286 | | | | 548 | | | | 1,834 | |
Cash payments | | | (1,699 | ) | | | (877 | ) | | | (2,576 | ) |
Balance as of April 3, 2010 | | $ | 3,976 | | | $ | 1,240 | | | $ | 5,216 | |
Note G. Discontinued Operations
During the quarter ended April 3, 2010, the Corporation committed to a plan to sell a small non-core business of its office furniture segment. The Corporation also sold a small non-core component of its hearth product segment during the first quarter. Revenues and expenses associated with these business operations are presented as discontinued operations for all periods presented.
During the quarter ended April 3, 2010, the Corporation recorded a pre-tax charge of approximately $1.0 million to reduce the assets of the office furniture business to fair market value. The charge was principally due to the write-down of intangibles not deductible for tax purposes. A pre-tax loss of $0.4 million was recorded at the time of sale of the hearth products component referred to above.
Summarized financial information for discounted operations is as follows:
| | Three Months Ended | |
(in thousands) | | Apr. 3, 2010 | | | Apr. 4, 2009 | |
Discontinued operations: | | | | | | |
Operating loss before tax | | $ | (1,291 | ) | | $ | (230 | ) |
Benefit for income tax | | | (471 | ) | | | (69 | ) |
Net loss from discontinued operations, net of income tax | | | (820 | ) | | | (161 | ) |
Impairment loss and loss on sale of discontinued operations: | | | | | | | | |
Impairment loss and loss on sale of discontinued operations before tax | | | (1,403 | ) | | | - | |
Benefit for income tax | | �� | (512 | ) | | | - | |
Net impairment loss and loss on sale of discontinued operations | | | (891 | ) | | | - | |
Loss from discontinued operations, net of income tax benefit | | $ | (1,711 | ) | | $ | (161 | ) |
Assets to be disposed of as of April 3, 2010 are recorded as follows:
(in thousands) | | Apr. 3, 2010 | |
Prepaid Expenses and Other Current Assets | | | |
Receivables | | $ | 3,062 | |
Prepaid expenses | | | 105 | |
| | | 3,167 | |
Other Assets | | | | |
Property and equipment | | | 389 | |
Intangible assets | | | 1,595 | |
| | | 1,983 | |
Accounts Payable and Accrued Expenses | | | | |
Accounts Payable | | | 514 | |
Accrued Expenses | | | 492 | |
| | | 1,006 | |
Total net assets held for sale | | $ | 4,144 | |
Note H. Goodwill and Other Intangible Assets
The table below summarizes amortizable definite-lived intangible assets as of OctoberApril 3, 20092010 and January 3, 2009,2, 2010, which are reflected in the "Other Assets" line item in the Corporation's Condensed Consolidated Balance Sheets:
(In thousands) | | Oct. 3, 2009 | | | Jan. 3, 2009 | | | Apr. 3, 2010 | | | Jan. 2, 2010 | |
Patents | | $ | 19,325 | | | $ | 19,325 | | | $ | 19,325 | | | $ | 19,325 | |
Customer relationships and other | | | 115,664 | | | | 115,664 | | | | 108,463 | | | | 115,451 | |
Less: accumulated amortization | | | 63,615 | | | | 56,098 | | | | 65,742 | | | | 68,004 | |
| | $ | 71,374 | | | $ | 78,891 | | | $ | 62,046 | | | $ | 66,772 | |
Aggregate amortization expense for the three and nine months ended OctoberApril 3, 2010 and April 4, 2009 and September 27, 2008 was $2.6$3.0 million and $7.5 million, and $3.1 million and $8.0$2.3 million, respectively. Based on the current amount of intangible assets subject to amortization, the estimated amortization expense for each of the following five fiscal years is as follows:
(In millions) | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | |
Amortization Expense | | $ | 10.0 | | | $ | 8.6 | | | $ | 7.2 | | | $ | 6.2 | | | $ | 5.8 | | | $ | 8.3 | | | $ | 6.4 | | | $ | 5.8 | | | $ | 5.3 | | | $ | 4.7 | |
As events such as potential acquisitions, dispositions or impairments occur in the future, these amounts may change.
The Corporation also owns trademarks and trade names with a net carrying amount of $60.6$41.0 million. The trademarks are deemed to have indefinite useful lives because they are expected to generate cash flows indefinitely. The Corporation determines the fair value of indefinite lived trade names on an annual basis during the fourth quarter or whenever indication of impairment exists. The Corporation concluded that there was not a need for an interim assessment as performance is in line with management’s expectations.
The changes in the carrying amount of goodwill since January 3, 2009,2, 2010, are as follows by reporting segment:
(In thousands) | | Office Furniture | | | Hearth Products | | | Total | |
Balance as of January 3, 2009 | | $ | 101,339 | | | $ | 167,053 | | | $ | 268,392 | |
Goodwill increase during period | | | - | | | | 500 | | | | 500 | |
Goodwill decrease during period | | | - | | | | (1,027 | ) | | | (1,027 | ) |
Balance as of October 3, 2009 | | $ | 101,339 | | | $ | 166,526 | | | $ | 267,865 | |
(In thousands) | | Office Furniture | | | Hearth Products | | | Total | |
Balance as of January 2, 2010 | | | | | | | | | |
Goodwill | | $ | 123,948 | | | $ | 166,525 | | | $ | 290,473 | |
Accumulated impairment losses | | | (29,359 | ) | | | - | | | | (29,359 | ) |
| | | 94,589 | | | | 166,525 | | | | 261,114 | |
Goodwill acquired during the quarter | | | - | | | | - | | | | - | |
Impairment losses | | | - | | | | - | | | | - | |
Goodwill related to the sale of business units | | | - | | | | (486 | ) | | | (486 | ) |
Balance as of April 3, 2010 | | | | | | | | | | | | |
Goodwill | | | 123,948 | | | | 166,039 | | | | 289,987 | |
Accumulated impairment losses | | | (29,359 | ) | | | - | | | | (29,359 | ) |
| | $ | 94,589 | | | $ | 166,039 | | | $ | 260,628 | |
The Corporation evaluates its goodwill for impairment on an annual basis during the fourth quarter, or whenever indicators of impairment exist. The Corporation estimates the fair value of its reporting units using various valuation techniques, with the primary technique being a discounted cash flow method. This method employs assumptions that are market participant based. The increasedecrease in the hearth products segment goodwill is for contingent consideration payments related to a previous acquisition.
The Corporation completed the sale of a hearth distribution location, included in the Hearth & Home Technologies reporting unitnon-core component during the third quarter. The Corporation determined the fair value of goodwill associated with this location to be $1.0 million during the second quarter and recorded an impairment charge of $0.6 million, included in the "Restructuring and impairment" line item in the Corporation's Condensed Consolidated Statements of Income during the second quarter.
As a result, management reviewed the valuation of the remaining Hearth & Home Technologies reporting unit during the second quarter, excluding the cash flows association with the location discussed above. The Corporation's analysis of this reporting unit concluded the fair value exceeded the carrying value by approximately 15% and as such, no impairment charges during second quarter were necessary. For the quarter ended October 3, 2009, all reporting units continue to perform in line with management’s expectations since the last assessment therefore the Corporation concluded there was not a need for an interim assessment.
Note H.I. Product Warranties
The Corporation issues certain warranty policies on its office 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:periods noted:
| | Nine Months Ended | | | Three Months Ended | |
(In thousands) | | Oct. 3, 2009 | | | Sep. 27, 2008 | | | Apr. 3, 2010 | | | Apr. 4, 2009 | |
Balance at beginning of period | | $ | 13,948 | | | $ | 12,123 | | | $ | 12,684 | | | $ | 13,948 | |
Accrual assumed from acquisition | | | - | | | | 250 | | |
Accruals for warranties issued during period | | | 9,715 | | | | 14,449 | | | | 4,107 | | | | 4,039 | |
Adjustments related to pre-existing warranties | | | (78 | ) | | | 1,190 | | | | 749 | | | | (180 | ) |
Settlements made during the period | | | (10,772 | ) | | | (14,690 | ) | | | (4,644 | ) | | | (4,092 | ) |
Balance at end of period | | $ | 12,813 | | | $ | 13,322 | | | $ | 12,896 | | | $ | 13,715 | |
Note I.J. Postretirement Health Care
The following table sets forth the components of net periodic benefit cost included in the Corporation's income statement for:
| | Nine Months Ended | | | Three Months Ended | |
(In thousands) | | Oct. 3, 2009 | | | Sep. 27, 2008 | | | Apr. 3, 2010 | | | Apr. 4, 2009 | |
Service cost | | $ | 293 | | | $ | 297 | | | $ | 90 | | | $ | 97 | |
Interest cost | | | 719 | | | | 722 | | | | 210 | | | | 240 | |
Expected return on plan assets | | | - | | | | (268 | ) | |
Amortization of transition obligation | | | 381 | | | | 381 | | | | 127 | | | | 127 | |
Amortization of (gain)/loss | | | (7 | ) | | | - | | | | (4 | ) | | | (2 | ) |
Net periodic benefit cost | | $ | 1,386 | | | $ | 1,132 | | | $ | 423 | | | $ | 462 | |
Note J.K. Income Taxes
The provision for income taxes in the thirdfirst quarter of fiscal 20092010 reflects an actual effective tax rate of 39.245.2 percent, compared to an estimated annuala discrete period effective tax rate of 34.139.7 percent for the thirdfirst quarter of fiscal 2008 and actual2009. The first quarter 2010 effective tax rate forwas impacted by a discrete benefit associated with an adjustment of deferred tax assets. The 2010 estimated annual effective tax rate including discontinued operations is expected to be 36 percent, slightly higher than the full year 2008U.S. tax rate of 34.2 percent.35 percent, primarily due to increased profitability and the lack of U.S. research and development tax credits which have not been extended past 2009. A discrete calculation was used to report the 2009 thirdfirst quarter tax provision rather than an estimated annual tax rate as uncertainty in the full year outlook produces significantproduced sign ificant variability inand made it difficult to reasonably estimate the estimated2009 annual effective tax rate.
Note K.L. Derivative Financial Instruments
The Corporation uses derivative financial instruments to reduce its exposure to adverse fluctuations in interest rates. On the date a derivative is entered into, the Corporation designates the derivative as (i) a fair value hedge, (ii) a cash flow hedge, (iii) a hedge of a net investment in a foreign operation, or (iv) a risk management instrument not eligible for hedge accounting. The Corporation recognizes all derivatives on its consolidated balance sheet at fair value.
In June 2008, the Corporation entered into an interest rate swap agreement, designated as a cash flow hedge, for purposes of managing its benchmark interest rate fluctuation risk. Under the interest rate swap agreement, the Corporation pays a fixed rate of interest and receives a variable rate of interest equal to the one-month London Interbank Offered Rate (LIBOR) as determined on the last day of each monthly settlement period on an aggregated notional principal amount of $50 million. The net amount paid or received upon monthly settlements is recorded as an adjustment to interest expense, while the change in fair value is recorded as a component of accumulated other comprehensive income in the equity section of the Corporation’sCorporation's consolidated balance sheet. The interest rate swap agreement matures on MayM ay 27, 2011.
The aggregate fair market value of the interest rate swap as of OctoberApril 3, 20092010 was a liability of $2.9$2.3 million, of which $1.9$2.0 million is included in current liabilities and $1.0$0.3 million is included in long-term liabilities in the Corporation's Condensed Consolidated Balance Sheetcondensed consolidated balance sheet as of OctoberApril 3, 2009.2010. For the nine-monththree month period ended OctoberApril 3, 2009,2010, the Corporation recorded a
deferred net loss of $987,000$249,000 in other comprehensive income and reclassified $1,228,000$527,000 from other comprehensive income to current period earnings as interest expense in its Condensed Consolidated Statementsthe consolidated statement of Income.income. As of OctoberApril 3, 2009, $1.2 million2010, $1,246,500 of deferred net losses, net of tax, included in equity ("Accumulated other comprehensive income (loss)" in the Corporation's Condensed Consolidated Balance Sheets)Sheet) related to this interest rate swap, are expected to be reclassified to current earnings ("Interest expense" in the Corporation's Condensed Consolidated StatementStatements of Income) over the next twelve months.
Note L.M. Fair Value Measurements
The Financial Accounting Standards Board ("FASB") provided enhanced guidance for using fair value to measure assets and liabilities for financial assets and liabilities. The guidance also expanded the amount of required disclosure regarding the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value and the effect of fair value measurements on earnings. The guidance applies whenever other guidance requires (or permits) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. The Corporation adopted the guidance with regard to its financial assets and liabilities on December 30, 2008 and with regard to its nonfinancial assets and liabilities on January 4, 2009. The adoption did not have a material impact on the Corporation’s financial statements.
For recognition purposes, on a recurring basis the Corporation is required to measure at fair value its marketable securities, which are classified as available-for-sale, and its investment in target funds. The marketable securities were comprised of investments in money market funds. They are reported as noncurrent assets as they are not anticipated to be used for current operations. The target funds are reported as both current and noncurrent assets based on the portion that is anticipated to be used for current operations. When available the Corporation uses quoted market prices to determine fair value and classify such measurements within Level 1. In some cases where market prices are not available, the Corporation makes use of observable market-based inputs to calculate fair value, in which case the measurements are classified within Level 2.
Assets measured at fair value during the ninethree months ended OctoberApril 3, 20092010 were as follows:
(in thousands) | | Fair value as of measurement date | | | Quoted prices in active markets for identical assets (Level 1) | | | Significant other observable inputs (Level 2) | | | Significant unobservable inputs (Level 3) | | | Fair value as of measurement date | | | Quoted prices in active markets for identical assets (Level 1) | | | Significant other observable inputs (Level 2) | | | Significant unobservable inputs (Level 3) | |
Investment in target funds | | $ | 7,901 | | | $ | - | | | $ | 7,901 | | | $ | - | | | $ | 7,717 | | | $ | - | | | $ | 7,717 | | | $ | - | |
Derivative financial instrument | | $ | (2,864 | ) | | $ | - | | | $ | (2,864 | ) | | $ | - | | | $ | (2,270 | ) | | $ | - | | | $ | (2,270 | ) | | $ | - | |
Assets measured at fair value for the Corporation's fiscal year ended January 3, 20092, 2010 were as follows:
(in thousands) | | Fair value as of measurement date | | | Quoted prices in active markets for identical assets (Level 1) | | | Significant other observable inputs (Level 2) | | | Significant unobservable inputs (Level 3) | |
Investment in target funds | | $ | 5,744 | | | $ | - | | | $ | 5,744 | | | $ | - | |
Derivative financial instrument | | $ | (2,548 | ) | | $ | - | | | $ | (2,548 | ) | | $ | - | |
(in thousands) | | Fair value as of measurement date | | | Quoted prices in active markets for identical assets (Level 1) | | | Significant other observable inputs (Level 2) | | | Significant unobservable inputs (Level 3) | |
Marketable securities | | $ | 3,696 | | | $ | 3,696 | | | $ | - | | | $ | - | |
Investment in target funds | | $ | 25,047 | | | $ | - | | | $ | 25,047 | | | $ | - | |
Derivative financial instrument | | $ | ( 3,106 | ) | | $ | - | | | $ | ( 3,106 | ) | | $ | - | |
In addition to the methods and assumptions the Corporation uses to record the fair value of financial instruments as discussed in the section above, it uses the following methods and assumptions to estimate the fair value of its financial instruments. Effective April 5, 2009, the Corporation adopted the guidance on interim disclosures about fair value of financial instruments. See Note N. New Accounting Standards for additional information.
Cash and cash equivalents
CarryingThe carrying amount approximated fair value.
Available-for-sale securitiesFair value for available-for-sale securities was estimated based on quoted market prices.14
Long-term debt (including current portion)
The faircarrying value of the Corporation’sCorporation's outstanding variable ratevariable-rate, long-term debt obligations at OctoberApril 3, 20092010 and January 3, 2009,2, 2010, the end of the Corporation's 2009 fiscal year, approximates the carryingfair value. The fair value of the Corporation's outstanding fixed ratefixed-rate, long-term debt obligations is estimated to be $137$150 million at OctoberApril 3, 20092010 and $151 million at January 3, 2009, below2, 2010, compared to the carrying value of $150 million.
Note M.N. Commitments and Contingencies
The Corporation utilizes letters of credit in the amount of $20.9$18.4 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 competitively determined fees.
The Corporation has contingent liabilities which have arisen in the ordinary course of its business, including pending litigation, environmental remediation, taxes, and other claims. It is the Corporation's opinion, after consultation with legal counsel, that liabilities, if any, resulting from these matters are not expected to have a material adverse effect on the Corporation's financial condition, although such matters could have a material effect on the Corporation's quarterly or annual operating results and cash flows when resolved in a future period.
Note N.O. New Accounting Standards
In December 2007,There were no new accounting standards issued during the FASB issued amended guidance regarding accounting for business combinations. The amended guidance applies the acquisition method to all transactions and other events in which one entity obtains control over one or more other businesses, and requires, among other things,quarter that assets acquired and liabilities assumed be measured at fair value as of the acquisition date, that liabilities related to contingent considerations be recognized at the acquisition date and remeasured at fair value in each subsequent reporting period, that acquisition-related costs be expensed as incurred, and that income be recognized if the fair value of the net assets acquired exceeds the fair value of the consideration transferred. The Corporation will apply the guidance as amended prospectively to business combinations for which the acquisition date is on or after January 3, 2009 and can only assess the impact of the amended guidance once an acquisition is consummated.
In December 2007, the FASB issued new guidance which requires a noncontrolling interest in a subsidiary be reported as equity and the amount of consolidated net income specifically attributable to the noncontrolling interest be identified in the consolidated financial statements. It also requires consistency in the manner of reporting changes in the parent’s ownership interest and requires fair value measurement of any noncontrolling equity investment retained in a deconsolidation. The Corporation adopted the guidance in the first quarter of 2009. As a result of the adoption, the Corporation has reported noncontrolling interests as a component of equity in its Condensed Consolidated Balance Sheets and the net income or loss attributableexpects to noncontrolling interests has been separately identified in its Condensed Consolidated Statements of Income. The prior periods presented have also been reclassified to conform to the current classification requirements.
In March 2008, the FASB expanded the disclosure requirements for derivative instruments and hedging activities with the intent to provide users of financial statements with an enhanced understanding of an entity’s derivative activity. The Corporation adopted the new guidance as of January 4, 2009 and has included related disclosures in Note K. Derivative Financial Instruments.
In April 2009, the FASB issued guidance requiring the disclosures about fair value of financial instruments to be included for interim reporting periods. The Corporation adopted the new guidance effective April 5, 2009 and has included related disclosures in Note L. Fair Value Measurements.
In April 2009, the FASB issued guidance on determining when the trading volume and activity for an asset or liability has significantly decreased, which may indicate an inactive market, and on measuring the fair value of an asset or liability in inactive markets. The Corporation adopted the guidance effective April 5, 2009. The adoption did not have a material impact on the financial statements.
In May 2009, the FASB established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The Corporation adopted the guidelines as of July 4, 2009. The Corporation has performed an evaluation of subsequent events through November 5, 2009, the date the financial statements were issued.
Note O.P. Business Segment Information
Management views the Corporation as operating 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 storage products, desks, credenzas, chairs, tables, bookcases, freestanding office partitions and panel systems and other related products. The hearth products segment manufactures and markets a broad line of manufactured gas, electric, wood and biomass burning fireplaces, inserts, stoves, facings and accessories, 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 Corporation's corporate operations, interest income and interest expense. The decreaseincrease in unallocated corporate expenses during the quarter ended April 3, 2010, compared to the same quarter in the prior year is due primarily to decreased interest expense and cost control initiatives.increased group medical costs. Management views interest income and expense as corporate financing costs rather than 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 segmentsegme nt basis.
The Corporation's primary market and capital investments are concentrated in the United States.
Reportable segment data reconciled to the consolidated financial statements for the three- and nine-monthsthree month periods ended OctoberApril 3, 2009,2010, and September 27, 2008,April 4, 2009, is as follows:
| | Three Months Ended | | | Nine Months Ended | |
(In thousands) | | Oct. 3, 2009 | | | Sep. 27, 2008 | | | Oct. 3, 2009 | | | Sep. 27, 2008 | |
Net Sales: | | | | | | | | | | | | |
Office Furniture | | $ | 379,913 | | | $ | 560,661 | | | $ | 1,041,747 | | | $ | 1,541,207 | |
Hearth Products | | | 74,043 | | | | 102,480 | | | | 200,865 | | | �� | 298,431 | |
| | $ | 453,956 | | | $ | 663,141 | | | $ | 1,242,612 | | | $ | 1,839,638 | |
| | | | | | | | | | | | | | | | |
Operating Profit (Loss): | | | | | | | | | | | | | | | | |
Office furniture (1) | | | | | | | | | | | | | | | | |
Operations before restructuring charges | | $ | 41,048 | | | $ | 40,583 | | | $ | 64,001 | | | $ | 92,327 | |
Restructuring and impairment charges | | | (2,954 | ) | | | (1,072 | ) | | | (8,451 | ) | | | (3,943 | ) |
Office furniture – net | | | 38,094 | | | | 39,511 | | | | 55,550 | | | | 88,384 | |
Hearth products | | | | | | | | | | | | | | | | |
Operations before restructuring charges | | | 3,305 | | | | 4,148 | | | | (13,731 | ) | | | 2,843 | |
Restructuring and impairment charges | | | (1,486 | ) | | | (425 | ) | | | (4,952 | ) | | | (401 | ) |
Hearth products – net | | | 1,819 | | | | 3,723 | | | | (18,683 | ) | | | 2,442 | |
Total operating profit | | | 39,913 | | | | 43,234 | | | | 36,867 | | | | 90,826 | |
Unallocated corporate expense | | | (10,908 | ) | | | (13,644 | ) | | | (29,653 | ) | | | (33,562 | ) |
Income (loss) before income taxes | | $ | 29,005 | | | $ | 29,590 | | | $ | 7,214 | | | $ | 57,264 | |
| | | | | | | | | | | | | | | | |
Depreciation & Amortization Expense: | | | | | | | | | | | | | | | | |
Office furniture | | $ | 12,958 | | | $ | 12,936 | | | $ | 39,857 | | | $ | 37,583 | |
Hearth products | | | 4,237 | | | | 3,785 | | | | 13,117 | | | | 11,479 | |
General corporate | | | 738 | | | | 1,121 | | | | 2,741 | | | | 3,345 | |
| | $ | 17,933 | | | $ | 17,842 | | | $ | 55,715 | | | $ | 52,407 | |
| | | | | | | | | | | | | | | | |
Capital Expenditures: | | | | | | | | | | | | | | | | |
Office furniture | | $ | 2,498 | | | $ | 15,125 | | | $ | 8,227 | | | $ | 44,973 | |
Hearth products | | | 537 | | | | 3,163 | | | | 2,237 | | | | 8,350 | |
General corporate | | | 86 | | | | 363 | | | | 410 | | | | 1,267 | |
| | $ | 3,121 | | | $ | 18,651 | | | $ | 10,874 | | | $ | 54,590 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | As of Oct. 3, 2009 | | | As of Sep. 27, 2008 | |
Identifiable Assets: | | | | | | | | | | | | | | | | |
Office furniture | | | | | | | | | | $ | 631,369 | | | $ | 828,095 | |
Hearth products | | | | | | | | | | | 309,219 | | | | 340,467 | |
General corporate | | | | | | | | | | | 83,796 | | | | 107,638 | |
| | | | | | | | | | $ | 1,024,384 | | | $ | 1,276,200 | |
(1) Includes noncontrolling interest. | | Three Months Ended | |
(In thousands) | | Apr. 3, 2010 | | | Apr. 4, 2009 | |
Net Sales: | | | | | | |
Office Furniture | | $ | 300,032 | | | $ | 330,800 | |
Hearth Products | | | 63,474 | | | | 66,029 | |
| | $ | 363,506 | | | $ | 396,829 | |
| | | | | | | | |
Operating Profit (Loss): | | | | | | | | |
Office furniture | | | | | | | | |
Operations before restructuring charges | | $ | 7,980 | | | $ | 3,652 | |
Restructuring and impairment charges | | | (1,733 | ) | | | (2,989 | ) |
Office furniture – net | | | 6,247 | | | | 663 | |
Hearth products | | | | | | | | |
Operations before restructuring charges | | | (2,805 | ) | | | (9,237 | ) |
Restructuring and impairment charges | | | (101 | ) | | | (2,096 | ) |
Hearth products – net | | | (2,906 | ) | | | (11,333 | ) |
Total operating profit | | | 3,341 | | | | (10,670 | ) |
Unallocated corporate expense | | | (11,430 | ) | | | (8,770 | ) |
Income (loss) before income taxes | | $ | (8,089 | ) | | $ | (19,440 | ) |
| | | | | | | | |
Depreciation & Amortization Expense: | | | | | | | | |
Office furniture | | $ | 11,641 | | | $ | 13,165 | |
Hearth products | | | 3,779 | | | | 5,014 | |
General corporate | | | 640 | | | | 1,061 | |
| | $ | 16,060 | | | $ | 19,240 | |
| | | | | | | | |
Capital Expenditures: | | | | | | | | |
Office furniture | | $ | 3,561 | | | $ | 2,910 | |
Hearth products | | | 442 | | | | 1,469 | |
General corporate | | | 796 | | | | 237 | |
| | $ | 4,799 | | | $ | 4,616 | |
| | | | | | | | |
| | As of Apr. 3, 2010 | | | As of Apr. 4, 2009 | |
Identifiable Assets: | | | | | | | | |
Office furniture | | $ | 565,226 | | | $ | 659,776 | |
Hearth products | | | 284,881 | | | | 321,115 | |
General corporate | | | 85,588 | | | | 97,043 | |
| | $ | 935,695 | | | $ | 1,077,934 | |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.Operations
Overview
The Corporation has two reportable segments: office furniture and hearth products. The Corporation is the second largest office furniture manufacturer in the world and the nation's leading manufacturer and marketer of gas- and wood-burning fireplaces. The Corporation utilizes its split and focus, decentralized business model to deliver value to its customers with its various brands and selling models. The Corporation is focused on growing its existing businesses while seeking out and developing new opportunities for growth.
Net sales for the thirdfirst quarter of fiscal 20092010 decreased 31.58.4 percent to $454.0$363.5 million aswhen compared to the thirdfirst quarter of the prior year.fiscal 2009. The decrease was driven by large declines in both segments due to adverse market conditions.segments. Gross margins for the quarter increased from prior year levels due primarily to increased price realization, lower material costs and cost reduction initiatives partially offset partially by lower volume and decreased volume.price realization. Selling and administrative expenses decreased due to cost control initiatives, lower volume related costs, and improved distribution efficiencies offset partially by increasedand lower restructuring and transition costs.
The Corporation continues to take actions to reset its cost structure due to challenging market conditions and pursuant to its ongoing business simplification and cost reduction strategies. The Corporation announced the decision to shutdownclose an office furniture manufacturing facility and recorded $4.1$2.8 million of restructuring and transition costs in the thirdfirst quarter in connection with this shutdownclosure as well as previouslyoffice furniture plant closures announced shutdowns.in 2009 net of a non-operating gain on the sale of one of the facilities. In addition $1.8the Corporation recorded $0.2 million of chargesrestructuring and transition costs in its hearth products segment related to the restructuringconsolidation of production and closure of distribution centers announced in 2009.
The Corporation made a decision to sell a non-core business of the office furniture segment and sold a non-core component of the hearth operations were recordedproducts segment during the third quarter.first quarter of 2010. Revenues and expenses associated with these business operations are presented as discontinued operations for all periods presented in the condensed consolidated financial statements.
Critical Accounting Policies
The preparation of the financial statements requires the Corporation to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Corporation continually evaluates its accounting policies and estimates. The Corporation bases its estimates on historical experience and on a variety of other assumptions believed by management 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 Corporation's AnnualAnnu al Report on Form 10-K for the year ended January 3, 2009.2, 2010. During the first ninethree months of fiscal 2009,2010, there were no material changes in the accounting policies and assumptions previously disclosed.
New Accounting Standards
For information pertaining to the Corporation's adoption ofThere were no new accounting standards and any resultingissued during the quarter that the Corporation expects to have a material impact toon the Corporation's financial statements, please refer to the first paragraph of Note L. Fair Value Measurements and the entirety of Note N. New Accounting Standards of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
statements.
Results of Operations
The following table presents certain key highlights from the results of operations for the periods indicated:
| | Three Months Ended | | | Nine Months Ended | | | Three Months Ended | |
(In thousands) | | Oct. 3, 2009 | | | Sep. 27, 2008 | | | Percent Change | | | Oct. 3, 2009 | | | Sep. 27, 2008 | | | Percent Change | | | Apr. 3, 2010 | | | Apr. 4, 2009 | | | Percent Change | |
Net sales | | $ | 453,956 | | | $ | 663,141 | | | | -31.5 | | | $ | 1,242,612 | | | $ | 1,839,638 | | | | -32.5 | | | $ | 363,506 | | | $ | 396,829 | | | | -8.4 | % |
Cost of sales | | | 287,352 | | | | 438,423 | | | | -34.5 | | | | 821,792 | | | | 1,221,439 | | | | -32.7 | | | | 244,326 | | | | 274,183 | | | | -10.9 | |
Gross profit | | | 166,604 | | | | 224,718 | | | | -25.9 | | | | 420,820 | | | | 618,199 | | | | -31.9 | | | | 119,180 | | | | 122,646 | | | | -2.8 | |
Selling & administrative expenses | | | 129,897 | | | | 189,577 | | | | -31.5 | | | | 390,920 | | | | 544,805 | | | | -28.2 | | | | 122,800 | | | | 133,938 | | | | -8.3 | |
Restructuring & impairment charges | | | 4,440 | | | | 1,497 | | | | 196.6 | | | | 13,403 | | | | 4,344 | | | | 208.5 | | | | 1,834 | | | | 5,085 | | | | -63.9 | |
Operating income (loss) | | | 32,267 | | | | 33,644 | | | | -4.1 | | | | 16,497 | | | | 69,050 | | | | -76.1 | | | | (5,454 | ) | | | (16,377 | ) | | | 66.7 | |
Interest expense, net | | | 3,116 | | | | 4,037 | | | | -22.8 | | | | 9,103 | | | | 11,635 | | | | -21.8 | | | | 2,635 | | | | 3,063 | | | | -14.0 | |
Earnings (loss) before income taxes | | | 29,151 | | | | 29,607 | | | | -1.5 | | | | 7,394 | | | | 57,415 | | | | -87.1 | | | | (8,089 | ) | | | (19,440 | ) | | | 58.4 | |
Income taxes | | | 11,441 | | | | 10,107 | | | | 13.2 | | | | 2,944 | | | | 20,382 | | | | -85.6 | | | | (3,947 | ) | | | (7,742 | ) | | | -49.0 | |
Less: Net income attributable to the noncontrolling interest | | | 96 | | | | 11 | | | | 772.7 | | | | 119 | | | | 98 | | | | 21.4 | | |
Net income (loss) attributable to Parent Company | | $ | 17,614 | | | $ | 19,489 | | | | -9.6 | | | $ | 4,331 | | | $ | 36,935 | | | | -88.3 | | |
Income (loss) from continuing operations | | | | (4,142 | ) | | | (11,698 | ) | | | 64.6 | |
Consolidated net sales for the thirdfirst quarter of 2009 decreased 31.58.4 percent or $209.2$33.3 million compared to the same quarter last year due to challenging market conditionsyear. The decrease occurred in both the office furniture and hearth products segments.
Gross marginsmargin for the thirdfirst quarter of 2009 increased to 36.732.8 percent compared to 33.930.9 percent for the same quarter last year. The improvement in gross margin was due to increased price realization,driven by cost reduction initiatives and lower material costs and cost reduction initiatives offset partially by decreased volume. Thirdvolume and price realization and higher restructuring and transition costs. First quarter 20092010 included $1.6$1.5 million of accelerated depreciation and transition costs related to the shutdownclosure and consolidation of office furniture manufacturing facilities and hearth restructuring.consolidation.
As a result of challenging market conditions and the Corporation's ongoing business simplification and cost reduction strategies, management made the decision to close an office furniture manufacturing facility located in Owensboro, KentuckySalisbury, North Carolina and consolidate production into existing office furniture manufacturing facilities. In connection with the closure of the Owensboro facilitySalisbury location the Corporation recorded $0.5$1.6 million of charges during the quarter ended April 3, 2010 which included $1.3 million of severance costs for approximately 30 non-bargaining unit125 members and $1.7$0.3 million of costs to withdraw from the multi-employer pension plan during the quarter ended October 3, 2009.accelerated depreciation recorded in cost of sales. The Corporation anticipates the closure and consolidation of this facility will be substantially completecompleted by the end of the second quarter of 2010. In connection with the closure of twoother office furniture facilitiesplant closures announced earlier this year,in 2009, the Corporation recorded $2.0$1.5 million of restructuring and transition charges during the thirdfirst quarter which included $0.8$0.3 million of accelerated depreciation and $0.2$0.8 million of other transition costs recorded in cost of sales $0.8 million of costs recorded as restructuring costs and $0.2 million of other transition costs recorded in selling and administrative expense. The Corporation anticipates the closure and consolidation of these two facilities will be substantially complete by the end of 2009. The Corporation made the decision to consolidate significant production from its hearth product Mount Pleasant, Iowa plant to other
existing hearth products manufacturing facilities. Additionally, the Corporation will close hearth products distribution centers in Alsip, Illinois and Lake City, Minnesota and transfer operations to its Mount Pleasant facility. In connection with the hearth restructuring the Corporation recorded $2.1 million of charges during the third quarter which included $0.6 million of accelerated depreciation recorded in cost of sales and $1.3 million of severance costs for approximately 160 members and $0.2$0.4 million of other costs which were recorded as restructuring costs. The Corporation expects these changes will be substantially completerecorded a gain of $0.5 million on the sale of one of the closed office furniture manufacturing facilities during the first quarter. The Corporation's hearth products segment recorded $0.2 million of charges during the first quarter related to the consolidation of 2010.production and shutdown of distribution centers announced in 2009. These charges included
$0.1 million of transition costs recorded in cost of sales and $0.1 million of other costs which were recorded as restructuring costs. The Corporation anticipates additional restructuring and transition chargescosts of approximately $9.2$5.9 million related to the various closures of which $4.2 million will impactover the remainder of 2009 and $5.0 million will impact the first two quarters of 2010. The Corporation is currently in negotiations with the union representing the bargaining unit at the Owensboro facility and therefore is not able to estimate all of the charges associated with that closure until the negotiations conclude.
Total selling and administrative expenses, including restructuring charges, as a percent of sales increaseddecreased to 29.634.3 percent compared to 28.835.0 percent for the same quarter last year due to lower volume.year. Actual selling and administrative expenses decreased $56.7$14.4 million as a result of cost control initiatives, lower volume related expenses, improved distribution efficiencies and a gain of $0.3 million on the sale of a building. Thirdlower restructuring and transition costs. First quarter 2009 included $4.4$5.1 million of restructuring charges compared to $1.5 million in 2008.associated with a plant consolidation.
Net income attributable to parent company for the third quarterThe Corporation experienced a net loss from continuing operations of 2009 was $17.6($4.1) million or $0.39 per diluted share compared to net income of $19.5 million or $0.44($0.09) per diluted share in thirdthe first quarter 2008.of 2010 compared to a net loss of ($11.7) million or ($0.26) per diluted share in the first quarter of 2009. Net interest expense decreased $0.9$0.4 million during the quarter as compared to third quarter 2008 due to reducedlower borrowing.
The provision for income taxes in the thirdfirst quarter of fiscal 20092010 reflects an actual effective tax rate of 39.245.2 percent, compared to an estimated annuala discrete period effective tax rate of 34.139.7 percent for the thirdfirst quarter of fiscal 2008 and actual2009. The first quarter 2010 effective tax rate forwas impacted by a discrete benefit associated with an adjustment of deferred tax assets. The 2010 estimated annual effective tax rate including discontinued operations is expected to be 36 percent, slightly higher than the full year 2008U.S. tax rate of 34.2 percent.35 percent, primarily due to increased profitability and the lack of U.S. research and development tax credits which have not been extended past 2009. A discrete calculation was used to report the third2009 first quarter tax provision rather than an estimated annual tax rate as uncertainty in the full year outlook produces significantproduced signif icant variability inand made it difficult to reasonably estimate the estimated2009 annual effective tax rate.
ForThe Corporation made a decision to sell a small, non-core business of the office furniture segment during the first nine monthsquarter of 2009, consolidated net sales decreased $0.6 billion, or 32.5 percent,2010. A pre-tax charge of $1.0 million was recorded to $1.2 billion comparedreduce the assets held for sale to $1.8 billionfair market value. In addition, the Corporation sold a small non-core component of its hearth products segment during the quarter. A pre-tax charge of $0.4 million was recorded at the time of the sale. Revenues and expenses associated with these business operations are presented as discontinued operations for the same periodall periods presented in the prior year. Acquisitions added $10.2 million or 0.6 percentage points of sales. Gross margins increased to 33.9 percent compared to 33.6 percent for the same period last year. Operating income was $16.5 million for the first nine months of 2009 compared to $69.1 million for the first nine months of 2008. Earnings per share decreased to $0.10 per diluted share compared to $0.83 per diluted share for the same period last year.financial statements.
Office Furniture
ThirdFirst quarter 2010 sales for the office furniture segment decreased 32.29.3 percent or $180.7$30.8 million to $379.9$300.0 million from $560.7$330.8 million for the same quarter last year driven by substantial weaknessdeclines in both the supplies-driven and contractall channels of the office furniture industry. Operating profit prior to unallocated corporate expenses for the quarter decreased $1.4increased $5.6 million to $38.1$6.2 million when compared to the same period last year as a result of lower volumematerial costs, improved distribution efficiencies, cost reduction initiatives and increased restructuring and transition costsa $0.5 million gain on the sale of a facility. These were partially offset by lower volume and decreased price realization, lower input costs, distribution efficiencies and cost control initiatives. Thirdrealization. First quarter 20092010 included $4.1$3.1 million of restructuring and transition costs including accelerated depreciation compared to $1.1$3.0 million of restructuring costs in thirdfirst quarter 2008.2009.
Net sales for the first nine months of 2009 decreased 32.4 percent or $0.5 billion to $1.0 billion compared to $1.5 billion for the same period in 2008. Acquisitions added $10.2 million or 0.7 percentage points of sales. Operating profit decreased 37.1 percent or $32.8 million to $55.6 million over the first nine months of 2009 when compared to the same period in 2008.
Hearth Products
ThirdFirst quarter 2010 net sales for the hearth products segment decreased 27.73.9 percent or $28.4$2.6 million to $74.0$63.5 million from $102.5$66.0 million for the same quarter last year driven by significant declinesa decline in boththe remodel-retrofit channel partially offset by an increase in the new construction and remodel-retrofit channels.channel. Operating profit prior to unallocated corporate expenses for the quarter decreased $1.9increased $8.4 million to $1.8a $2.9 million when comparedloss due to third quarter 2008 due tocost reduction initiatives and lower material and restructuring costs partially offset by lower volume and higherdecreased price realization. First quarter 2010 included $0.2 million of restructuring expenses partially offset by cost reduction initiatives, lower incentive based compensationand transition costs and a non-operating gain related to the sale of a building.
Net sales for the first nine months of 2009 decreased 32.7 percent or $97.6 million to $200.9 million compared to $298.4$2.1 million for the same periodof restructuring costs in 2008. Operating profit decreased $21.1 million to a $18.7 million loss over the first nine months ofquarter 2009.
Liquidity and Capital Resources
Cash Flow – Operating Activities
Cash generated from operatingOperating activities for the first nine monthsused $25.4 million of 2009 totaled $135.9 million compared to $104.6 million generatedcash in the first nine monthsquarter 2010 compared to generating $5.6 million of 2008. Improved workingcash in the first quarter 2009. Working capital performance resulted in a $66.6$43.1 million sourceuse of cash in the current fiscal year compared to $4.2$6.1 million use of cash in the prior year. Working capital performance in the first quarter of 2009 was positively impacted by reductions in accounts receivable due to a significant decrease in revenue. The Corporation's first quarter is historically the lowest quarter for operating cash flow due to seasonal business patterns and funding requirements. Cash flow from operating activities is expected to be positive for the year.
Cash Flow – Investing Activities
Capital expenditures including capitalized software for the first ninethree months of fiscal 20092010 were $10.9$4.8 million compared to $54.6$4.6 million in the same period of fiscal 20082009 and were primarily for tooling and equipment for new products. For the full year 2009,2010, capital expenditures are expected to be approximately $20$25 to $30 million primarily forfocused on new product development and related tooling. The Corporation sold $21 million of long-term investments during the first nine months and used the proceeds to repay debt.
Cash Flow – Financing Activities
During the first ninethree months of fiscal 2009,2010, net borrowings under the Corporation's revolving credit facility decreased $57.5remained at $50 million. As of OctoberApril 3, 2009, $50 million2010, it is classified as short-term as the revolver expires in January of 2011. The Corporation is currently exploring its financing options and plans to have a new credit facility in place by the end of the revolving credit facility was outstanding and all classified as long-term. The Corporation paid off its $47.5 million term loan during the first nine months of 2009. Included in current liabilities is $2.3 million outstanding under the Corporation’s industrial revenue bonds as of October 3, 2009. The Corporation expects to repay that portion of the bonds within the next twelve months.Corporation's second fiscal quarter.
The credit agreement governing the Corporation's revolving credit facility contains a number of covenants, including covenants requiring maintenance of the following financial ratios as of the end of any fiscal quarter:
· | a consolidated interest coverage ratio of not less than 4.0 to 1.0, based upon the ratio of (a) consolidated EBITDA (as defined in the respective credit agreement) for the last four fiscal quarters to (b) the sum of consolidated interest charges; and |
· | a consolidated leverage ratio of not greater than 3.0 to 1.0, based upon the ratio of (a) the quarter-end consolidated funded indebtedness (as defined in the respective credit agreement) to (b) consolidated EBITDA for the last four fiscal quarters. |
The note purchase agreement pertaining to the Corporation's Senior Notes also contains a number of covenants, including a covenant requiring maintenance of consolidated debt to consolidated EBITDA (as defined in the note purchase agreement) of not greater than 3.5 to 1.0, based upon the ratio of (a) the quarter-end consolidated funded indebtedness (as defined in the note purchase agreement) to (b) consolidated EBITDA for the last four fiscal quarters.
The revolving credit facility and Senior Notes are the primary sources of committed funding from which the Corporation finances its planned capital expenditures, strategic initiatives, such as repurchases of common stock and certain working capital needs. Non-compliance with the various financial covenant ratios could prevent the Corporation from being able to access further borrowings under the revolving credit facility, require immediate repayment of all amounts outstanding with respect to the revolving credit facility and Senior Notes andand/or increase the cost of borrowing.
The most restrictive of the financial covenants is the consolidated leverage ratio requirement of 3.0 to 1.0 included in the credit agreement governing the revolving credit facility. Under that credit agreement, adjusted EBITDA is defined as consolidated net income before interest expense, income taxes and depreciation and amortization of intangibles, as well as non-cash, nonrecurring charges and all non-cash items increasing net income. At OctoberApril 3, 2009,2010, the Corporation was well below this ratio and was in compliance with all of the covenants and other restrictions in the credit agreements and note purchase agreement. The Corporation currently expects to remain in compliance over the next twelve months. If the Corporation’s actual results over the next twelve months are lower than current projections, the margin by which the Corporation is below the consolidated leverage ratio will decrease. However, even if a 20 percent decline in expected results over the next twelve months were to occur, the Corporation would remain in compliance with the covenant.
The Corporation's Board of Directors (the "Board") declared a regular quarterly cash dividend of $0.215 per share on the Corporation's common stock on August 19, 2009,February 17, 2010, to shareholders of record at the close of business on August 31, 2009.March 1, 2010. It was paid on SeptemberMarch 8, 2009.2010.
TheDuring the three months ended April 3, 2010, the Corporation repurchased 135,000 shares of common stock at a cost of approximately $3.3 million, or an average price of $24.38 per share. For the three months ended April 4, 2009, the Corporation did not repurchase any shares of common stock during the third quarter of 2009. For the nine months ended September 27, 2008, the Corporation repurchased 1,004,700 shares of its common stock at a cost of approximately $28.6 million, or an average price of $28.42 per share.stock. As of OctoberApril 3, 2009,2010, approximately $163.6$160.3 million of the Board's current repurchase authorization remained unspent.
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 year ended January 3, 2009.2, 2010. During the first ninethree months of fiscal 2009,2010 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.
Commitments and Contingencies
The Corporation is involved in various kinds of disputes and legal proceedings that have arisen in the ordinary course of its business, including pending litigation, environmental remediation, taxes and other claims. It is the Corporation's opinion, after consultation with legal counsel, that liabilities, if any, resulting from these matters are not expected to have a material adverse effect on the Corporation's financial condition, although such matters could have a material effect on the Corporation's quarterly or annual operating results and cash
flows when resolved in a future period.
Looking Ahead
Although management sees signs of stabilizationManagement is encouraged by recent trends in many ofboth the Corporation's markets, management expects weak demand to continue across its businesseshearth and office furniture markets. Management believes the actions it has taken during the remainder of 2009. The Corporation continuesrecent downturn to reset its cost structure and invest in selling and growth initiatives has positioned the Corporation to market conditions while investing in new products, selling initiatives and operational improvements.benefit as its markets improve.
The Corporation continues to focus on creating long-term shareholder value by growing its businesses through investment in building brands, product solutions and selling models, enhancing its strong member-owner culture and remaining focused on its long-standing continuous improvement programs to build best total cost and a lean enterprise.
Forward-Looking Statements
Statements in this report that are not strictly historical, including statements as to plans, outlook, objectives and future financial performance, are "forward-looking" statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are made pursuant to the safe harbor provisions of 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, which may cause the Corporation's actual results in the future to differ materially from expected results. These risks include, without limitation: the Corporation's ability to realize financial benefits from its (a) price increases, (b) cost containment and business simplification initiatives for the entire Corporation,
(c) investments in strategic acquisitions, new products and brand building, (d) investments in distribution and rapid continuous improvement, (e) ability to maintain its effective tax rate, (f) repurchases of common stock, and (f)(g) consolidation and logistical realignment initiatives; uncertainty related to the availability of cash and credit, and the terms and interest rates on which credit would be available, to fund operations and future growth; lower than expected demand for the Corporation's products due to uncertain political and economic conditions, including the recent credit crisis, slow or negative growth rates in global and domestic economies and the protracted decline in the housing market; lower industry growthgrow th than expected; major disruptions at our key facilities or in the supply of any key raw materials, components or finished goods; uncertainty related to disruptions of business by terrorism, military action, epidemic, acts of God or other Force Majeure events; competitive pricing pressure from foreign and domestic competitors; higher than expected costs and lower than expected supplies of materials (including steel and petroleum based materials); higher than expected costs for energy and fuel; changes in the mix of products sold and of customers purchasing; relationships with distribution channel partners, including the financial viability of distributors and dealers; restrictions imposed by the terms of the Corporation's revolving credit facility term loan creditand note purchase agreement; currency fluctuations and other factors described in the Corporation's annual and quarterly reports filed with the Securities and Exchange Commission on Forms 10-K and 10-Q. The Corporation undertakes 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.Risk
As of OctoberApril 3, 2009,2010, there were no material changes to the financial market risks that affect the quantitative and qualitative disclosures presented in Item 7A of the Corporation's Annual Report on Form 10-K for the year ended January 3, 2009.2, 2010.
Item 4. Controls and Procedures.Procedures
Disclosure controls and procedures are designed to ensure information required to be disclosed by the Corporation in the reports it files or submits under the Securities Exchange Act of 1934 (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures are also designed to ensure 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.
Under the supervision and with the participation of management, the chief executive officer and chief financial officer of the Corporation carried out an evaluation of the Corporation's disclosure controls and procedures pursuant to Exchange Act Rules 13a – 15(e) and 15d – 15(e). As of OctoberApril 3, 2009,2010, and, based on this evaluation, the chief executive officer and chief financial officer have concluded these disclosure controls and procedures are effective.
Furthermore, there have been no changes in the Corporation's internal control over financial reporting during the fiscal quarter covered by this Quarterly Reportquarterly report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.Proceedings
There are no new legal proceedings or material developments to report other than ordinary routine litigation incidental to the business.
Item 1A. Risk Factors.Factors
There have been no material changes from the risk factors disclosed in the "Risk Factors" section of the Corporation's Annual Report on Form 10-K for the year ended January 3, 2009.2, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.Proceeds
Directors and members (i.e., employees) of the Corporation receive common stock equivalents pursuant to the HNI Corporation Executive Deferred Compensation Plan and the HNI Corporation Directors Deferred Compensation Plan, respectively (collectively, the "Deferred Plans"). Common stock equivalents are hypothetical shares of common stock having a value on any given date equal to the value of a share of common stock. Common stock equivalents earn dividend equivalents that are converted into additional common stock equivalents but carry no voting rights or other rights afforded to a holder of common stock. The common stock equivalents credited to members and directors under the Deferred Plans are exempt from registration under Section 4(2) of the Securities Act of 1933 as private offerings made only to directorsdir ectors and members of the Corporation in accordance with the provisions of the Deferred Plans.
Under the Deferred Plans, each director or member participating in the Deferred Plans, may elect to defer the receipt of all or any portion of the compensation paid to such director or member by the Corporation to a cash or stock sub-account. All deferred payments to the stock sub-account are held in the form of common stock equivalents. Payments out of the deferred stock sub-accounts are made in the form of common stock of the Corporation (and cash as to any fractional common stock equivalent). In the thirdfirst quarter of 2009,2010, the directors and members, as a group, were credited with 4,4895,294 common stock equivalents under the Deferred Plans. The value of each common stock equivalent, when credited, ranged from $21.19$23.77 to $23.33.
The Corporation did not repurchase any of its shares during the third quarter ended October 3, 2009. As of October 3, 2009, $163.6 million was authorized and available for the repurchase of shares by the Corporation.$26.63.
Issuer Purchases of Equity Securities:
The following is a summary of share repurchase activity during the quarter ended April 3, 2010.
(1) No shares were purchased outside of a publicly announced plan or program.
Period | | (a) Total Number of Shares (or Units) Purchased (1) | | | (b) Average Price Paid per Share or Unit | | | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | | | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet be Purchased Under the Plans or Programs | |
1/03/10 – 1/30/10 | | | - | | | $ | - | | | | - | | | $ | 163,612,128 | |
1/31/10 – 2/27/10 | | | - | | | $ | - | | | | - | | | $ | 163,612,128 | |
2/28/10 – 4/03/10 | | | 135,000 | | | $ | 24.38 | | | | 135,000 | | | $ | 160,320,828 | |
Total | | | 135,000 | | | | | | | | 135,000 | | | | | |
(1) No shares were purchased outside of a publicly announced plan or program.The Corporation repurchases shares under previously announced plans authorized by the Board as follows:· | Plan announced November 9, 2007, providing share repurchase authorization of $200,000,000 with no specific expiration date. |
· | No repurchase plans expired or were terminated during the first quarter of fiscal 2010, nor do any plans exist under which the Corporation does not intend to make further purchases. |
Item 6. Exhibits.Exhibits
See Exhibit Index.
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 duyduly authorized.
| HNI Corporation | |
| | | |
Dated: NovemberDate: May 5, 20092010 | By: | /s/ Kurt A. Tjaden | |
| | Name: Kurt A. Tjaden | |
| | Title : Vice President and Chief Financial Officer | |
| | | |
|
EXHIBIT INDEX |
(10.1) | Form of HNI Corporation 2007 Stock-Based Compensation Plan Restricted Stock Unit Award Agreement*+ |
(10.2) | HNI Corporation 2007 Stock-Based Compensation Plan, as amended and restated, incorporated by reference to Appendix A to the Registrant's Proxy Statement on Schedule 14A filed March 26, 2010* |
(10.3) | HNI Corporation Annual Incentive Plan (f/k/a HNI Corporation Executive Bonus Plan), as amended and restated, incorporated by reference to Appendix B to the Registrant's Proxy Statement on Schedule 14A filed March 26, 2010* |
(10.4) | HNI Corporation Long-Term Performance Plan, as amended and restated, incorporated by reference to Appendix C to the Registrant's Proxy Statement on Schedule 14A filed March 26, 2010* |
(10.5) | HNI Corporation Supplemental Income Plan (f/k/a HNI Corporation ERISA Supplemental Retirement Plan), as amended and restated, incorporated by reference to Exhibit 10.4 to the Registrant's Current Report on Form 8-K filed February 22, 2010* |
(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 |
*Indicates management contract or compensatory plan.
+ Filed herewith.