UNITED STATES SECURITIES AND
EXCHANGE COMMISSION |
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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 OR |
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to _____________________ |
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Commission File Number 0-2648 |
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HNI Corporation |
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Iowa |
42-0617510 |
P. O. Box 1109, 414 East
Third Street |
52761-0071 |
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 required reports to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO |
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large accelerated filer X Accelerated filer _____ Non-accelerated filer _____ |
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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. |
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Class |
Outstanding at April 1, 2006 |
HNI Corporation and SUBSIDIARIES |
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INDEX |
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PART I. FINANCIAL INFORMATION |
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Page |
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Item 1. Financial Statements (Unaudited) |
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Condensed Consolidated Balance Sheets April 1, 2006, and December 31, 2005 |
3 |
Condensed Consolidated Statements of Income Three Months Ended April 1, 2006, and April 2, 2005 |
5 |
Condensed Consolidated Statements of Cash Flows Three Months Ended April 1, 2006, and April 2, 2005 |
6 |
Notes to Condensed Consolidated Financial Statements |
7 |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
16 |
Item 3. Quantitative and Qualitative Disclosure about Market Risk |
20 |
Item 4. Controls and Procedures |
21 |
PART II. OTHER INFORMATION |
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Item 1. Legal Proceedings |
22 |
Item 1A. Risk Factors |
22 |
Item 2. Unregistered Sales of Securities and Use of Proceeds |
22 |
Item 3. Defaults Upon Senior Securities - None |
- |
Item 4. Submission of Matters to a Vote of Security Holders - None |
- |
Item 5. Other Information - None |
- |
Item 6. Exhibits |
23 |
SIGNATURES |
24 |
EXHIBIT INDEX |
25 |
Item 1. Financial Statements (Unaudited)
HNI Corporation and SUBSIDIARIES |
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April 1, |
December 31, |
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ASSETS |
(In thousands) |
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CURRENT ASSETS |
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Cash and cash equivalents |
$ 52,898 |
$ 75,707 |
Total Current Assets |
479,543 |
486,598 |
Land and land improvements |
25,874 |
26,361 |
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830,544 522,835 |
813,751 519,091 |
Net Property, Plant, and Equipment |
307,709 |
294,660 |
GOODWILL |
254,378 |
242,244 |
OTHER ASSETS |
166,356 |
116,769 |
Total Assets |
$ 1,207,986 |
$ 1,140,271 |
See accompanying Notes to Condensed Consolidated Financial Statements.
HNI Corporation and SUBSIDIARIES |
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April 1, |
December 31, |
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LIABILITIES AND SHAREHOLDERS' EQUITY |
(In thousands, except share and per share value data) |
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CURRENT LIABILITIES |
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Accounts payable and accrued
expenses |
$ 280,697 |
$ 307,952 |
Total Current Liabilities |
334,747 |
358,174 |
LONG-TERM DEBT |
187,050 |
103,050 |
CAPITAL LEASE OBLIGATIONS |
786 |
819 |
OTHER LONG-TERM LIABILITIES |
49,283 |
48,671 |
DEFERRED INCOME TAXES |
26,013 |
35,473 |
MINORITY INTEREST IN SUBSIDIARY |
451 |
140 |
SHAREHOLDERS' EQUITY |
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Capital Stock: |
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Common, $1 par value,
authorized
2006 - 51,810,658 shares |
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Paid-in capital |
3,459 |
941 |
Total Shareholders' Equity |
609,656 |
593,944 |
Total Liabilities and Shareholders' Equity |
$ 1,207,986 |
$ 1,140,271 |
See accompanying Notes to Condensed Consolidated Financial Statements.
HNI Corporation and SUBSIDIARIES |
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Three Months Ended |
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April 1, |
April 2, |
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(In thousands, except share |
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Net sales |
$ 648,677 |
$ 562,261 |
Net income per common share (basic and diluted) |
$0.55 |
$0.47 |
Average number of common shares outstanding - basic |
51,836,006 |
55,175,803 |
Average number of common shares outstanding - diluted |
52,229,322 |
55,551,134 |
Cash dividends per common share |
$0.18 |
$0.155 |
See accompanying Notes to Condensed Consolidated Financial Statements.
HNI Corporation and SUBSIDIARIES
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Three Months Ended |
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April 1, 2006 |
April 2, 2005 |
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(In thousands) |
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Net Cash Flows From (To) Operating
Activities:
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501 |
Net Cash Flows From (To) Investing
Activities:
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Net Cash Flows From (To) Financing
Activities:
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Net increase (decrease) in cash and cash
equivalents
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(22,809) |
(3,369) |
Cash and cash equivalents at end of period |
$ 52,898 |
$ 26,307 |
See accompanying Notes to Condensed Consolidated Financial Statements.
HNI Corporation and
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
April 1, 2006
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 December 31, 2005
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 the
three-month period ended April 1, 2006 are not necessarily indicative of the
results that may be expected for the year ending December 30, 2006. For further information, refer to the
consolidated financial statements and footnotes included in the Corporation's
annual report on Form 10-K for the year ended December 31, 2005.
Note B. Stock Based Compensation
Under the Corporation's 1995 Stock-Based Compensation Plan (the
"Plan"), as amended and restated effective November 10, 2000, the
Corporation may award options to purchase shares of the Corporation's common
stock and grant other stock awards to executives, managers, and key
personnel. As of April 1, 2006 there
are approximately 2.5 million shares available for future issuance under the
Plan. The Plan is administered by the
Human Resources and Compensation Committee of the Board of Directors. Restricted stock awarded under the Plan is
expensed ratably over the vesting period of the awards. Stock options awarded to employees under the
Plan must be at exercise prices equal to or exceeding the fair market value of
the Corporation's common stock on the date of grant. Stock options are generally subject to four-year cliff vesting
and must be exercised within 10 years from the date of grant.
The Corporation also has a shareholder approved Members' Stock Purchase Plan
(the "MSP Plan"). The price
of the stock purchased under the MSP Plan is 85% of the closing price on the
applicable purchase date. During the
three months ended April 1, 2006, 23,363 shares of common stock were issued under
the MSP Plan at an average price of $59.00.
The Corporation adopted the provisions of Statement of Financial Accounting
Standards No. 123(R), "Share-Based Payment" (SFAS 123(R)), beginning
January 1, 2006, using the modified prospective transition method. This statement requires the Corporation to
measure the cost of employee services in exchange for an award of equity
instruments based on the grant-date fair value of the award and to recognize
cost over the requisite service period.
Under the modified prospective transition method, financial statements
for periods prior to the date of adoption are not adjusted for the change in
accounting.
Prior to January 1, 2006, the Corporation used the
intrinsic value method to account for stock-based employee compensation under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," and therefore did not recognize compensation expense in
association with options granted at or above the market price of common stock
at the date of grant.
As a result of adopting the new
standard, earnings before income taxes for the three months ended April 1, 2006
decreased by $0.8 million, and net earnings decreased by $0.5 million, or
$0.009 per basic share and $0.004 per diluted share. These results reflect stock compensation expense of $0.8 million
and tax benefits of $0.3 million for the period.
Adoption of the new standard also affected the presentation of cash flows. The change is related to tax benefits
associated with tax deductions that exceed the amount of compensation expense
recognized in the financial statements.
For the three months ended April 1, 2006, cash flow from operating
activities was reduced by $0.6 million and cash flow from financing activities
was increased by $0.6 million from amounts that would have been reported if the
Corporation had not adopted the new accounting standard.
Concurrent with the adoption of the new statement, the Corporation began to use
the non-substantive vesting period approach for attributing stock compensation
to individual periods. The nominal
vesting period approach was used in determining the stock compensation expense
for the Corporation's pro forma net earnings disclosure for the three months
ended April 2, 2005, as presented in the table that follows. The change in the attribution method will
not affect the ultimate amount of stock compensation expense recognized, but it
has accelerated the recognition of such expense for non-substantive vesting
conditions, such as retirement eligibility provisions. Under both approaches, the Corporation
elected to recognize stock compensation on a straight-line basis.
The following table presents a reconciliation of reported net earnings and per
share information to pro forma net earnings and per share information that
would have been reported if the fair value method had been used to account for
stock-based employee compensation last year:
Three Months Ended |
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(in thousands) |
April 2, 2005 |
Net income, as reported |
$ 26,122 |
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
(434) |
Pro forma net income |
$ 25,688 |
Earnings per share: |
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Basic - as reported |
$0.47 |
Basic - pro forma |
$0.47 |
Diluted - as reported |
$0.47 |
Diluted - pro forma |
$0.46 |
The stock compensation expense for the three months ended April 1, 2006 and the stock compensation expense used in the preceding disclosure of pro forma net earnings for the three months ended April 2, 2005 was estimated on the date of grant using the Black-Scholes option-pricing model that used the following assumptions by grant year:
Three Months Ended |
Year Ended |
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Apr. 1, 2006 |
Dec. 31, 2005 |
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Expected term |
7 years |
7 years |
Expected volatility: |
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Range used |
31.23% |
33.49% - 31.77% |
Weighted-average |
33.46% |
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Expected dividend yield: |
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Range used |
1.24% |
1.17% - 1.45% |
Weighted-average |
1.45% |
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Risk-free interest rate |
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Range used |
4.62% |
4.21% - 4.57% |
Expected volatilities are
based on historical volatility due to the fact that the Corporation did not
feel that future volatility over the expected term of the options is likely to
differ from the past. The Corporation
used a simple-average calculation method based on monthly frequency points for
the prior seven years. The Corporation
used the current dividend yield as there are no plans to substantially increase
or decrease its dividends. The
Corporation elected to use the simplified method as allowed by Staff Accounting
Bulletin (the "SAB") No. 107 "Share Based Payment" to
determine the expected term since the awards qualified as "plain
vanilla" options as defined in the SAB.
The risk-free interest rate was selected based on yields from U.S.
Treasury zero-coupon issues with a remaining term equal to the expected term of
the options being valued.
Changes in outstanding stock options for the three months ended April 1, 2006
were as follows:
Number |
Weighted-Average |
|
Balance at December 31, 2005 |
1,128,650 |
$31.84 |
Options granted |
134,328 |
58.06 |
Options exercised |
(25,000) |
25.08 |
Balance at April 1, 2006 |
1,237,978 |
$34.82 |
A summary of the Corporation's nonvested shares as of April 1, 2006 and changes during the quarter are presented below:
Nonvested Shares |
Shares |
Weighted-Average |
Nonvested at January 1, 2006 |
695,400 |
$14.07 |
Granted |
134,328 |
21.46 |
Vested |
(142,900) |
11.91 |
Forfeited |
- |
- |
Nonvested at April 1, 2006 |
686,828 |
$15.97 |
At April 1, 2006, there was $6.0 million of unrecognized compensation cost related to nonvested awards, which the Corporation expects to recognize over a weighted-average period of 1.6 years. Information about stock options that are vested or expected to vest and that are exercisable at April 1, 2006, follows:
Options |
Number |
Weighted-Average Exercise Price |
Weighted-Average Remaining Life |
Aggregate Intrinsic Value ($000s) |
Vested or expected to vest |
1,180,178 |
$34.49 |
6.0 |
$ 28,926 |
Exercisable |
551,150 |
$27.98 |
3.4 |
$ 17,097 |
The weighted-average grant-date fair value of options granted was $21.46 for the three months ended April 1, 2006. Other information for the three-month period follows:
Three months ended |
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(In thousands) |
Apr. 1, 2006 |
Apr. 2, 2005 |
Total fair value of shares vested |
$1,702 |
$875 |
Total intrinsic value of options exercised |
842 |
890 |
Cash received from exercise of stock options |
627 |
873 |
Tax benefit realized from exercise of stock options |
307 |
316 |
Note C.
Inventories
The Corporation values approximately 81.2% of its inventory at the lower of
cost or market by the last-in, first-out ("LIFO") method.
(In thousands) |
Apr. 1, 2006 |
Dec. 31, |
Finished products |
$ 67,700 |
$ 61,027 |
Materials and work in process |
48,492 |
46,398 |
LIFO allowance |
(15,910) |
(16,315) |
$ 100,282 |
$ 91,110 |
Note D. Comprehensive Income and
Shareholders' Equity
The Corporation's comprehensive income in 2006 consisted of additional minimum
pension liability and foreign currency adjustments.
For the three months ended April 1, 2006, the Corporation repurchased 290,875
shares of its common stock at a cost of approximately $16.6 million. As of April 1, 2006, $126.9 million of the
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"):
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Three Months Ended |
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Apr. 1, 2006 |
Apr. 2, 2005 |
Numerators: |
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Denominators: |
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Potentially dilutive shares |
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|
Denominator for diluted EPS |
52,229,322 |
55,551,134 |
Certain exercisable and non-exercisable stock options were not included in the
computation of diluted EPS at April 1, 2006 and April 2, 2005, because their
inclusion would have been anti-dilutive.
The number of stock options outstanding which met this criterion for the
three months ended April 1, 2006 was 136,828.
The number of stock options outstanding which met this criterion for the
three months ended April 2, 2005 was 15,000.
Note F. Restructuring Reserve and Plant Shutdowns
As a result of the Corporation's business simplification and cost reduction
strategies, the Corporation began the shutdown of two office furniture
facilities in the third quarter of 2005.
In connection with those shutdowns, the Corporation incurred $1.8
million of current period charges, including $0.1 million of accelerated
depreciation recorded as cost of sales, during the quarter ended April 1, 2006. The closures and consolidations are
virtually complete. The following is a
summary of changes in restructuring accruals during the first quarter of 2006:
(In thousands) |
Severance |
Facility Exit Costs & Other |
|
Balance as of December 31, 2005 |
$ 817 |
$ 1,244 |
$ 2,061 |
Restructuring charges |
24 |
1,695 |
1,719 |
Cash payments |
(841) |
(2,402) |
(3,243) |
Balance as of April 1, 2006 |
$ - |
$ 537 |
$ 537 |
Note G. Business
Combinations
The Corporation completed the acquisition of Lamex, a privately held Chinese
manufacturer and marketer of office furniture, as well as a small office
furniture services company and a small manufacturer of fireplace facings during
the first quarter ending April 1, 2006.
The combined purchase price for these acquisitions totaled approximately
$77.8 million, of which $63.6 million was paid in cash and the remaining is due
over the next few months. The
Corporation did increase its borrowings under its revolving credit facility to
help fund the acquisitions. The
Corporation is in the process of finalizing the allocation of the purchase
price, with valuations and determination of working capital adjustments to
finalize. There are approximately $51.2
million of intangibles associated with these acquisitions. Of these acquired intangible assets, $14
million was assigned to a trade name that is not subject to amortization. The remaining $37.2 million have estimated
useful lives ranging from two to fifteen years. There is approximately $10.8 million of goodwill associated with
these acquisitions, of which $8.1 million was assigned to the furniture segment
and $2.7 was assigned to the hearth segment.
Approximately $7.8 million of the goodwill is not deductible for income tax
purposes.
Note H. Goodwill and Other Intangible Assets
The table below summarizes amortizable definite-lived intangible assets as of
April 1, 2006 and December 31, 2005, which are reflected in Other Assets in the
Corporation's condensed consolidated balance sheets:
(In thousands) |
Apr. 1, 2006 |
Dec. 31, 2005 |
Patents |
$ 18,754 |
$ 18,480 |
Customer relationships and other |
104,171 |
67,211 |
Less: accumulated amortization |
(31,048) |
(28,758) |
|
$ 91,877 |
$ 56,933 |
Aggregate amortization expense for the three-months ended April 1, 2006 and
April 2, 2005 was $2.3 million and $1.5 million, respectively. Amortization expense is estimated to range
between $6.8 million and $10.4 million per year over the next five years.
The Corporation also owns trademarks and trade names with a net carrying amount
of $44.2 million. These trademarks are
deemed to have indefinite useful lives because they are expected to generate
cash flows indefinitely.
The changes in the carrying amount of goodwill since December 31, 2005, are as
follows by reporting segment:
Office |
Hearth |
|
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Balance as of December 31, 2005 |
$ 77,659 |
$ 164,585 |
$ 242,244 |
Goodwill increase during period |
9,364 |
2,770 |
12,134 |
Balance as of April 1, 2006 |
$ 87,023 |
$ 167,355 |
$ 254,378 |
In accordance with SFAS No. 142 "Goodwill and Other
Intangible Assets," the Corporation evaluates its goodwill for impairment
on an annual basis based on values at the end of the third quarter or whenever
indicators of impairment exist. The
Corporation has previously evaluated its goodwill for impairment and has
determined that the fair value of the reporting unit exceeds its carrying value
so no impairment of goodwill was recognized.
The increase in goodwill relates primarily to the acquisitions completed
during the quarter and final purchase price adjustments related to prior
acquisitions. See Note G, Business
Combinations for further information.
Note I. Product
Warranties
The Corporation issues certain warranty policies on its furniture and hearth products
that provide for repair or replacement of any covered product or component that
fails during normal use because of a defect in design or workmanship.
A warranty reserve is determined by recording a specific reserve for known
warranty issues and an additional reserve for unknown claims that are expected
to be incurred based on historical claims experience. Actual claims incurred could differ from the original estimates,
requiring adjustments to the reserve.
Activity associated with warranty obligations during the three-month
periods ended April 1, 2006 and April 2, 2006 was as follows:
Three Months Ended
(In thousands) |
Apr. 1, |
Apr. 2, |
Balance
at beginning of period |
$ 10,157 |
$ 10,794 |
Balance at end of period |
$ 10,646 |
$ 11,136 |
Note
J. Postretirement Health Care
In accordance with the interim disclosure requirements of revised SFAS No. 132,
"Employers' Disclosures about Pensions and other Postretirement
Benefits," the following table sets forth the components of net periodic
benefit cost included in the Corporation's income statement for:
Three Months Ended |
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(In thousands) |
Apr. 1, |
Apr. 2, |
Service cost |
$ 82 |
$ 76 |
Interest cost |
263 |
264 |
Expected return on plan assets |
(44) |
(51) |
Amortization of transition obligation |
145 |
145 |
Amortization of prior service cost |
58 |
58 |
Amortization of (gain)/loss |
23 |
9 |
Net periodic benefit cost |
$ 527 |
$ 501 |
In
May 2004, The Financial Accounting Standards Board (the "FASB")
issued FASB Staff Position No. 106-2, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003" ("FSP 106-2"). The Corporation has determined that the
benefits provided by the plan are not actuarially equivalent to the Medicare
Part D benefit under the Act based on the percentage of the cost of the plan
that the Corporation provides.
Note
K. Commitments and Contingencies
During the second quarter ended June 28, 2003, the Corporation entered into a
one-year financial agreement for the benefit of one of its distributor chain
partners, which was subsequently extended through August 31, 2005. During the third quarter of 2005, the
Corporation paid $1.2 million associated with this guarantee. As of April 1, 2006, the Corporation has
recovered substantially all of this amount through liquidations of secured
collateral and settlements.
The Corporation utilizes letters of credit in the amount of $24 million to back
certain financing instruments, insurance policies and payment obligations. The letters of credit reflect fair value as
a condition of their underlying purpose and are subject to fees competitively
determined.
The
Corporation replaced a previously existing transportation service contract during
the first quarter of 2006 with a new six-year contract. The contract
provides for minimum payments of approximately $10 million a year of which $3.3
million are related to the equipment portion of the contract which has been
determined to be an operating lease.
The Corporation has contingent
liabilities, which have arisen in the course of its business, including pending
litigation, preferential payment claims in customer bankruptcies, environmental
remediation, taxes, and other claims.
Note L. New Accounting Standards
In December 2004, the FASB issued SFAS No. 123(R) which
replaces Original SFAS No. 123 and supercedes Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25").
SFAS No. 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the financial
statements based on their fair values, beginning with the first annual fiscal
period after June 15, 2005. Under the
Original SFAS No. 123, this accounting treatment was optional with pro forma
disclosures required. The Corporation
adopted SFAS No. 123(R) in the first quarter of fiscal 2006, beginning January
1, 2006. See Note B, Stock Based
Compensation for the impact of the adoption of SFAS No. 123(R) on net income
and net income per share.
Note M. Business
Segment Information
Management views the Corporation as being in two business segments: office furniture and hearth products with
the former being the principal business segment.
The office furniture segment manufactures and markets a broad line of metal and
wood commercial and home office furniture, which includes file cabinets, desks,
credenzas, chairs, storage cabinets, tables, bookcases, freestanding office
partitions and panel systems, and other related products. The hearth product segment manufactures and
markets a broad line of manufactured electric, gas-, pellet- and wood-burning
fireplaces and stoves, fireplace inserts, gas logs, and chimney systems
principally for the home.
For purposes of segment reporting, intercompany sales transfers between
segments are not material and operating profit is income before income taxes
exclusive of certain unallocated corporate expenses. These unallocated corporate expenses include the net cost of the
Corporation's corporate operations, interest income, and interest expense. Management views interest income and expense
as corporate financing costs and not as a business segment cost. In addition, management applies one
effective tax rate to its consolidated income before income taxes so income
taxes are not reported or viewed internally on a segment basis.
No geographic information for revenues from external customers or for
long-lived assets is disclosed as the 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-month periods ended April 1, 2006 and April 2, 2005, is as follows:
Three Months Ended |
|||
(In thousands) |
Apr. 1, |
Apr. 2, |
|
Net
Sales: |
|
|
|
$ 648,677 |
$ 562,261 |
||
Operating
Profit: |
|
|
|
Depreciation
& Amortization Expense: |
$ 11,155 |
$ 10,968 |
|
Capital
Expenditures (including capitalized software): |
|
|
|
As
of |
As of |
||
Identifiable
Assets: |
|
|
(1) Includes minority interest.
Note N. Subsequent
Event
On April 6, 2006 the Corporation issued $150 million of senior unsecured notes
through the private placement debt market.
The Notes were sold at par and have a maturity date of April 6, 2016 and
bear interest at a rate of 5.54% per annum.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of
Operations
Overview
The Corporation has two reportable core operating 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.
The first quarter of 2006 was another record quarter for the Corporation. Net sales were up 15.4 percent while net
income increased 9.0 percent and earnings per diluted share increased 17.0
percent over the same quarter last year.
The Corporation experienced solid growth in both the office furniture
and hearth products businesses driven by solid organic growth and contributions
from acquisitions completed in the second half of 2005 and early 2006. Gross margins for the quarter exceeded prior
year levels as the Corporation recognized the full effect of the price
increases implemented last year.
However, gross margins were negatively impacted by increases in material
costs from first quarter 2005 levels.
Selling and administrative expenses increased driven by significantly
higher transportation costs, the effect of acquisitions and investments in
market initiatives.
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 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 Annual Report on Form
10-K for the year ended December 31, 2005.
As of January 1, 2006, the Corporation adopted FAS123(R)
"Share-Based Payment" which requires the Corporation to measure the
cost of employee services in exchange for an award of equity instruments based
on the grant-date fair value of the award and to recognize cost of the
requisite service period. During the
first three months of 2006, there was no material change in the accounting
policies and assumptions previously disclosed except for the adoption of FAS123(R).
Results of Operations
The following table presents certain
key highlights from the results of operations for the periods indicated
Three Months Ended |
|||
|
Apr. 1, |
Apr. 2, |
Percent |
Net sales |
$648,677 |
$562,261 |
15.4% |
Cost of products sold |
419,067 |
366,416 |
14.4 |
Gross profit |
229,610 |
195,845 |
17.2 |
Selling & administrative expenses |
182,010 |
155,400 |
17.1 |
Restructuring & impairment charges |
1,719 |
- |
- |
Operating income |
45,881 |
40,445 |
13.4 |
Interest income(expense) net |
(1,108) |
55 |
- |
Income before income taxes
and minority |
44,773 |
40,500 |
10.6 |
Minority interest in |
|
|
|
Income taxes |
16,342 |
14,378 |
13.7 |
Net income |
$ 28,470 |
$ 26,122 |
9.0% |
The Corporation experienced
solid sales growth in the quarter, up 15.4 percent or $86.4 million compared to
the same quarter last year. During the
first quarter of 2006, the Corporation completed the acquisition of Lamex, a
privately held Chinese manufacturer and marketer of office furniture, as well
as a small office furniture services company and a small manufacturer of
fireplace facings. Those acquisitions,
along with previous acquisitions completed subsequent to the first quarter of
2005, accounted for $21 million of the increase in sales.
Gross margins for the first quarter increased to 35.4 percent compared to 34.8
percent in the prior year as a result of increased price realization partially
offset by increases in material costs.
Total selling and administrative expenses for the quarter increased $28.3
million to 28.3 percent of net sales compared to 27.6 percent in first quarter
2005. Included in first quarter 2006
were increased freight and distribution costs of $12 million due to volume,
rate increases, and fuel surcharges; additional selling and administrative
costs of $9 million associated with new acquisitions; $1.7 million of
restructuring charges from the shutdown of two office furniture facilities that
began in the third quarter of 2005; $0.8 million of stock-based compensation
expense due to the adoption of SFAS 123(R); and investments in selling and
marketing initiatives.
Net income increased 9.0 percent and net income per diluted share increased
17.0 percent compared to the same quarter in 2005. Net income per share was positively impacted $0.04 per share as a
result of the Corporation's share repurchase program.
The Corporation increased its annualized effective tax rate at the beginning of
the year to 36.5 percent compared to 35.5 percent in 2005 due primarily to
increased state taxes and the expiration of the research investment tax credit.
Office Furniture
First quarter sales for the office
furniture segment increased 14.8 percent or $63.2 million to $490.7 million
from $427.5 million for the same quarter last year. The Corporation's acquisitions since first quarter 2005 accounted
for $17 million of the increase.
Operating profit prior to unallocated corporate expenses as a percent of
sales decreased to 8.2 percent versus 9.1 percent in 2005. Operating profit was negatively impacted by
$1.8 million of costs related to facility shutdowns, of which a portion were
classified as cost of goods sold. The
acquisition of Lamex, as well as recent distribution acquisitions completed in
2005, had an expected negative impact on profitability. These investments in the front-end of the
business are consistent with the Corporation's strategy of creating long-term
economic profit; however, as planned, these investments negatively impact
profitability in the short-term.
Hearth Products
First quarter net sales for the hearth products segment increased 17.3 percent
or $23.2 million to $158.0 million compared to $134.7 million for the same
quarter last year due to strong organic growth. The Corporation's acquisitions completed since the first quarter
of 2005 accounted for $4 million of the increase. Operating profit prior to unallocated corporate expenses
increased to $11.7 million from $10.5 million in the same quarter last
year. Operating profit as a percent of
net sales decreased to 7.4 percent compared to 7.8 percent in 2005 due to
increased freight and distribution costs, higher volume of lower margin
products and brand building initiatives.
Liquidity and Capital Resources
As of April 1, 2006, cash and short-term investments decreased to $61.7
million compared to $84.7 million at year-end 2005. Cash flow from operations for the first three months was $8.7
million compared to $18.7 million at year-end 2005. The decline in operating cash flow was primarily due to higher
marketing program and incentive compensation payouts in the first quarter 2006
driven by strong 2005 results. Trade
receivables and inventory have increased from year-end due to seasonality,
increased volume and acquisitions completed during the quarter. Cash flow and working capital management
continue to be a major focus of management to ensure the Corporation is poised
for growth. The Corporation has
sufficient liquidity to manage its operations and as of April 1, 2006
maintained additional borrowing capacity of $66 million, net of amounts
designated for letters of credit, through a revolving bank credit
agreement.
Net capital expenditures, including capitalized software, for the first three
months of 2006 were $14.2 million compared to $9.4 million in 2005 and were
primarily for tooling and equipment for new products and efficiency
initiatives. For the full year 2006,
capital expenditures are expected to be approximately 30 to 40 percent higher
than 2005 due to increased focus on new products and process improvement, and
increased investment in distribution.
The Corporation completed the acquisition of Lamex, a privately held Chinese
manufacturer and marketer of office furniture, as well as a small office furniture
services company and a small manufacturer of fireplace facings, for a total of
$63.6 million in cash. During the first
quarter of 2006, net borrowings under the Corporation's revolving credit
facility increased $70 million to fund acquisitions, share repurchases, and
seasonal cash requirements. As of April
1, 2006, $210 million was outstanding with $26 million classified as short-term
as the Corporation expects to repay that portion of the borrowings prior to
year end. In early April, the Corporation
refinanced $150 million of the revolver borrowings with 5.54 percent ten-year
Senior Notes due in 2016 issued through the private placement debt market.
On February 15, 2006, the Board approved a 16.1 percent increase in the common
stock quarterly cash dividend from $0.155 per share to $0.18 per share. The dividend was paid on March 1, 2006, to
shareholders of record on February 24, 2006.
This was the 204th consecutive quarterly dividend paid by the
Corporation.
During the three months ended April 1, 2006, the Corporation repurchased
290,875 shares of its common stock at a cost of approximately $16.6 million, or
an average price of $57.18. As of April
1, 2006, $126.9 million of the Board of Directors' current repurchase
authorization remained unspent.
On May 2, 2006, the Board of Directors declared a $0.18 per common share cash
dividend to shareholders of record on May 12, 2006, to be paid on June 1, 2006.
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 effect on financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to investors.
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 December 31,
2005. During the first three months of
fiscal 2006, with the exception of a new transportation service contract (as
described in Note K), 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 course of its business, including pending
litigation, preferential payment claims in customer bankruptcies, environmental
remediation, taxes and other claims. It
is the Corporation's opinion, after consultation with legal counsel, that
additional 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
Global Insight, BIFMA's forecasting consultant, estimates U.S. office
furniture shipments to increase 7 percent in 2006 compared to 13 percent in
2005. The housing market, a key
indicator for the hearth industry, has begun to slow from its record levels.
Management expects to continue to outperform the industry for the full
year. However, profitability will be
challenged in the second quarter. The
Corporation's planned expenditures and investments to support growth initiatives,
as well as negative trends in input costs, freight and distribution will
negatively impact profitability in the short-term. However, management believes these investments will continue to
drive growth and create positive economic profit in the mid- to long-term.
The Corporation continues its focus on creating long-term shareholder value by
growing its business 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, objectives, and future financial performance, are
"forward-looking" statements that are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. Words, such as "anticipate," "believe,"
"could," "confident," "estimate,"
"expect," "forecast," "intend,"
"likely," "may," "plan," "possible,"
"potential," "predict," "project,"
"should," 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, (c) investments in strategic acquisitions, new products and brand
building, (d) investments in distribution and rapid continuous improvement, (e)
repurchases of common stock, and (f) ability to maintain its effective tax
rate; uncertainty related to the availability of cash to fund future growth;
lower than expected demand for the Corporation's products due to uncertain
political and economic conditions; lower industry growth 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, 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; 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 Disclosure about Market Risk
As
of April 1, 2006, 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 December 31,
2005.
Item 4. Controls and Procedures
Disclosure controls and
procedures are designed to ensure that information required to be disclosed by
the Corporation in the reports that it files or submits under the Securities
Exchange Act of 1934 as amended, 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.
On March 1, 2006, the Corporation
completed the acquisition of Lamex as discussed in Note G to the Corporation's
condensed consolidated financial statements.
As of December 30, 2006, the Corporation's management will exclude Lamex
from its assessment of the Corporation's internal control over financial
reporting as it was acquired during the fiscal year. The Corporation is in the process of assessing Lamex's internal
control over financial reporting and will be implementing changes to better
align its reporting and controls with those of the Corporation. Lamex's results of operations and financial
position for the fiscal quarter ended April 1, 2006, were insignificant to the
Corporation's consolidated financial statements. There have not been any changes in the Corporation's internal
control over financial reporting, due to the Lamex acquisition or otherwise,
during the fiscal quarter ended April 1, 2006, that have materially affected,
or are reasonably likely to materially affect, the Corporation's internal
control over financial reporting.
Under the supervision and with the participation of
management, the chief executive officer and chief financial officer of the
Corporation have evaluated the effectiveness of the design and operation of the
Corporation's disclosure controls and procedures as of April 1, 2006, and,
based on their evaluation, the chief executive officer and chief financial
officer have concluded that these controls and procedures are effective.
PART
II. OTHER INFORMATION
Item 1. Legal Proceedings
There are no new legal proceedings or
material developments to report.
Item 1A. Risk 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 December 31, 2005 except for the item below.
Restrictions imposed by the terms of our
existing credit facility and note purchase agreement may limit our operating
and financial flexibility.
Our existing credit facility and note purchase agreement, dated as of April 7,
2006, pursuant to which we issued $150 million of senior, unsecured notes
designated as Series 2006-A Senior Notes, limit our ability to finance
operations, service debt or engage in other business activities that may be in
our interest. Specifically, our credit
facility restricts our ability to incur additional indebtedness, create or
incur certain liens with respect to any of our properties or assets, engage in
lines of business substantially different than those currently conducted by us,
sell, lease, license or dispose of any of our assets, enter into certain
transactions with affiliates, make certain restricted payments or take certain restricted
actions, and enter into certain sale-leaseback arrangements. Our note purchase agreement contains
customary restrictive covenants that, among other things, place limits on our
ability to incur liens on assets, incur additional debt, transfer or sell our
assets, merge or consolidate with other persons or enter into material
transactions with affiliates. Both our
credit facility and note purchase agreement also require us to maintain certain
financial covenants.
Our failure to comply with the obligations under our credit facility may result
in an event of default, which, if not cured or waived, may permit acceleration
of the indebtedness under the credit facility and result in a cross default
under our note purchase agreement. We
cannot be certain that we will have sufficient funds available to pay any
accelerated indebtedness or that we will have the ability to refinance
accelerated indebtedness on terms favorable to us or at all.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
(E) Issuer
Purchases of Equity Securities
The following is a
summary of share repurchase activity during the first quarter ended April 1,
2006.
|
|
|
|
(d) Maximum Number (or |
1/1/06 - 1/28/06 |
62,500 |
$54.91 |
62,500 |
$ 140,054,521 |
1/29/06 - 2/25/06 |
69,244 |
$57.42 |
69,244 |
$ 136,078,227 |
2/26/06 - 4/1/06 |
159,131 |
$57.97 |
159,131 |
$ 126,853,054 |
Total |
290,875 |
$57.18 |
290,875 |
$ 126,853,054 |
(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 of Directors as follows:
No repurchase plans expired
or were terminated during the first quarter, 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 duly authorized. |
|
|
HNI
Corporation |
EXHIBIT
INDEX |
|
(10.1) |
Second Amendment to Credit Agreement dated as of April 6, 2006, by and among HNI Corporation as borrower, certain domestic subsidiaries of HNI Corporation, as Guarantors, certain lenders party thereto and Wachovia Bank, National Association, as Administrative Agent is incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed April 10, 2006 |
(10.2) |
Note Purchase Agreement dated as of April 6, 2006, by and among HNI Corporation and the Purchasers named therein is incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed April 10, 2006 |
(31.1) |
Certification of the CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
(31.2) |
Certification of the CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
(32.1) |
Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
EXHIBIT 31.1
CERTIFICATION OF CHIEF
EXECUTIVE OFFICER |
|
5. The
registrant's other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors: |
|
|
|
Date: May 5, 2006 |
Name: Stan
A. Askren |
|
|
CERTIFICATION OF CHIEF
FINANCIAL OFFICER |
|
I,
Jerald K. Dittmer, Vice President and Chief Financial Officer of HNI
Corporation, certify that: |
|
|
|
Date: May 5, 2006 |
Name: Jerald
K. Dittmer |
EXHIBIT
32.1
Certification of CEO and
CFO Pursuant to |
|
In
connection with the Quarterly Report on Form 10-Q of HNI Corporation (the
"Corporation") for the quarterly period ended April 1, 2006, as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), Stan A. Askren, as Chairman, President and Chief
Executive Officer of the Corporation, and Jerald K. Dittmer, as Vice
President and Chief Financial Officer of the Corporation, each hereby
certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge: |
|
|
|
Name: Stan
A. Askren |
|
|
|
Name: Jerald
K. Dittmer |
|
This
certification accompanies the Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by
the Sarbanes-Oxley Act of 2002, be deemed filed by the Corporation for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended. |