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HNI CORP - Quarter Report: 2014 June (Form 10-Q)



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
 
FORM 10-Q
 
 
(MARK ONE)
 
 
 
     / X /   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended June 28, 2014.
 
 
OR
 
 
     /    /   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from ____________________ to ____________________
 
 
Commission File Number: 1-14225
 
 
HNI Corporation
(Exact name of registrant as specified in its charter)
 
 
Iowa
(State or other jurisdiction of
incorporation or organization)
42-0617510
(I.R.S. Employer
Identification Number)
 
 
P. O. Box 1109, 408 East Second Street
Muscatine, Iowa 52761-0071
(Address of principal executive offices)
52761-0071
(Zip Code)
 
 
Registrant's telephone number, including area code:  563/272-7400
 
 
Indicate by check mark whether the registrant (1) has filed all reports required 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     o               
 
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 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   
YES       x                     NO     o  
 
 
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       o     
Non-accelerated filer        o   (Do not check if a smaller reporting company)                    Smaller reporting company     o       
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).                                                             YES        o                   NO      x        
 
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 June 28, 2014
44,951,350




HNI Corporation and SUBSIDIARIES
 
 
INDEX
 
 
PART I.    FINANCIAL INFORMATION
 
Page
 
 
Item 1.    Financial Statements (Unaudited)
 
 
 
Condensed Consolidated Balance Sheets - June 28, 2014, and December 28, 2013
 
 
Condensed Consolidated Statements of Comprehensive Income - Three Months Ended June 28, 2014, and June 29, 2013
 
 
Condensed Consolidated Statements of Comprehensive Income - Six Months Ended June 28, 2014, and June 29, 2013
 
 
Condensed Consolidated Statements of Cash Flows - Six Months Ended June 28, 2014, and June 29, 2013
 
 
Notes to Condensed Consolidated Financial Statements
 
 
Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
Item 3.    Quantitative and Qualitative Disclosures About Market Risk
 
 
Item 4.    Controls and Procedures
 
 
PART II.    OTHER INFORMATION
 
 
Item 1.    Legal Proceedings
 
 
Item 1A. Risk Factors
 
 
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
 
 
Item 3.    Defaults Upon Senior Securities - None
-
 
 
Item 4.    Mine Safety Disclosures - Not Applicable
-
 
 
Item 5.    Other Information - None
-
 
 
Item 6.    Exhibits
 
 
SIGNATURES
 
 
EXHIBIT INDEX
  

2



PART I.     FINANCIAL INFORMATION

Item 1. Financial Statements

HNI Corporation and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
June 28,
2014
 
December 28,
2013
 
 
ASSETS
(In thousands)
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
29,278

 
$
65,030

Short-term investments
2,852

 
7,251

Receivables
238,076

 
228,715

Inventories
128,377

 
89,516

Deferred income taxes
14,855

 
16,051

Prepaid expenses and other current assets
26,037

 
26,665

Total Current Assets
439,475

 
433,228

 
 
 
 
PROPERTY, PLANT, AND EQUIPMENT
 
 
 

Land and land improvements
27,587

 
27,465

Buildings
287,743

 
284,484

Machinery and equipment
477,620

 
470,748

Construction in progress
27,459

 
24,209

 
820,409

 
806,906

Less accumulated depreciation
541,970

 
539,505

 
 
 
 
Net Property, Plant, and Equipment
278,439

 
267,401

 
 
 
 
GOODWILL
278,125

 
286,655

 
 
 
 
OTHER ASSETS
164,233

 
147,421

 
 
 
 
Total Assets
$
1,160,272

 
$
1,134,705


See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
 


 


3



HNI Corporation and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
June 28,
2014
 
December 28,
2013
 
 
LIABILITIES AND  EQUITY
(In thousands, except share and per share value data)
CURRENT LIABILITIES
 
 
 
Accounts payable and accrued expenses
$
396,203

 
$
407,799

  Note payable and current maturities of long-term
    debt and capital lease obligations
35,702

 
484

Current maturities of other long-term obligations
3,089

 
3,301

Total Current Liabilities
434,994

 
411,584

 
 
 
 
LONG-TERM DEBT
150,064

 
150,091

 
 
 
 
CAPITAL LEASE OBLIGATIONS
46

 
106

 
 
 
 
OTHER LONG-TERM LIABILITIES
68,804

 
67,543

 
 
 
 
DEFERRED INCOME TAXES
69,366

 
68,964

 
 
 
 
COMMITMENTS AND CONTINGENCIES


 


 
 
 
 
EQUITY
 

 
 

HNI Corporation shareholders' equity:
 

 
 

Capital Stock:
 

 
 

    Preferred, $1 par value, authorized 2,000,000 shares, no shares outstanding

 

 
 
 
 
    Common, $1 par value, authorized 200,000,000 shares, outstanding -


 


June 28, 2014 – 44,951,350 shares;


 


December 28, 2013 – 44,981,865 shares
44,951

 
44,982

 
 
 
 
Additional paid-in capital
18,302

 
16,729

Retained earnings
372,412

 
373,652

Accumulated other comprehensive income
1,363

 
965

Total HNI Corporation shareholders' equity
437,028

 
436,328

 
 
 
 
Noncontrolling interest
(30
)
 
89

 
 
 
 
Total Equity
436,998

 
436,417

 
 
 
 
Total Liabilities and Equity
$
1,160,272

 
$
1,134,705


See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
 

 


4



HNI Corporation and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three Months Ended
 
June 28,
2014
 
June 29,
2013
 
 
 
(In thousands, except share and per share data)
Net sales
$
509,143

 
$
510,698

Cost of sales
328,010

 
336,040

Gross profit
181,133

 
174,658

Selling and administrative expenses
155,288

 
152,078

(Gain) loss on sale of assets
(1,346
)
 
2,460

Restructuring and impairment
10,282

 
(35
)
Operating income
16,909

 
20,155

Interest income
146

 
158

Interest expense
2,187

 
2,725

Income before income taxes
14,868

 
17,588

Income taxes
5,203

 
6,189

Net income
9,665

 
11,399

Less: Net (loss) attributable to the noncontrolling interest
(40
)
 
(22
)
Net income attributable to HNI Corporation
$
9,705

 
$
11,421

 
 
 
 
Net income attributable to HNI Corporation per common share – basic
$
0.22

 
$
0.25

Average number of common shares outstanding – basic
45,019,783

 
45,412,668

Net income attributable to HNI Corporation per common share – diluted
$
0.21

 
$
0.25

Average number of common shares outstanding – diluted
45,867,927

 
46,109,563

Cash dividends per common share
$
0.25

 
$
0.24

 
 
 
 
 
 
 
 
Other comprehensive income, net of tax: 2014 $30; 2013 $103
(49
)
 
(2,086
)
Comprehensive income
9,616

 
9,313

Less: Comprehensive (loss) attributable to noncontrolling interest
(40
)
 
(22
)
Comprehensive income attributable to HNI Corporation
$
9,656

 
$
9,335




See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).


5



HNI Corporation and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Six Months Ended
 
June 28,
2014
 
June 29,
2013
 
 
 
(In thousands, except share and per share data)
Net sales
$
961,344

 
$
952,995

Cost of sales
625,039

 
630,555

Gross profit
336,305

 
322,440

Selling and administrative expenses
300,498

 
296,634

(Gain) loss on sale of assets
(9,746
)
 
2,460

Restructuring and impairment
10,254

 
121

Operating income
35,299

 
23,225

Interest income
216

 
310

Interest expense
4,389

 
5,393

Income before income taxes
31,126

 
18,142

Income taxes
10,445

 
5,564

Net income
20,681

 
12,578

Less: Net (loss) attributable to the noncontrolling interest
(120
)
 
(251
)
Net income attributable to HNI Corporation
$
20,801

 
$
12,829

 
 
 
 
Net income attributable to HNI Corporation per common share – basic
$
0.46

 
$
0.28

Average number of common shares outstanding – basic
45,029,148

 
45,283,716

Net income attributable to HNI Corporation per common share – diluted
$
0.45

 
$
0.28

Average number of common shares outstanding – diluted
45,843,118

 
45,891,246

Cash dividends per common share
$
0.49

 
$
0.48

 
 
 
 
 
 
 
 
Other comprehensive income, net of tax: 2014 $(18); 2013 $41
398

 
(2,057
)
Comprehensive income
21,079

 
10,521

Less: Comprehensive (loss) attributable to noncontrolling interest
(120
)
 
(251
)
Comprehensive income attributable to HNI Corporation
$
21,199

 
$
10,772




See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).


6



HNI Corporation and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six Months Ended
 
June 28, 2014
 
June 29, 2013
 
(In thousands)
Net Cash Flows From (To) Operating Activities:
 
 
 
Net income
$
20,681

 
$
12,578

Noncash items included in net income:


 


Depreciation and amortization
26,952

 
22,838

Other postretirement and post employment benefits
620

 
713

Stock-based compensation
4,752

 
3,864

Excess tax benefits from stock compensation
(144
)
 
(2,114
)
Deferred income taxes
1,550

 
5,673

(Gain) loss on sale, retirement and impairment of long-lived assets and intangibles, net
(581
)
 
120

Loss on sale of business

 
2,177

Stock issued to retirement plan
6,005

 
5,352

Other – net
1,255

 
2,953

Net increase (decrease) in operating assets and liabilities
(68,437
)
 
(76,816
)
Increase (decrease) in other liabilities
355

 
4,433

Net cash flows from (to) operating activities
(6,992
)
 
(18,229
)
 
 
 
 
Net Cash Flows From (To) Investing Activities:
 

 
 

Capital expenditures
(34,710
)
 
(26,132
)
Proceeds from sale of property, plant and equipment
13,588

 
196

Capitalized software
(16,412
)
 
(7,487
)
Purchase of investments
(798
)
 
(1,106
)
Sales or maturities of investments
4,770

 
2,250

Other – net


 
(578
)
Net cash flows from (to) investing activities
(33,562
)
 
(32,857
)
 
 
 
 
Net Cash Flows From (To) Financing Activities:
 

 
 

Proceeds from sales of HNI Corporation common stock
3,143

 
6,440

Withholdings related to net share settlements of equity based awards
(79
)
 
(1,599
)
Purchase of HNI Corporation common stock
(13,051
)
 
(7,711
)
Proceeds from note and long-term debt
100,473

 
129,353

Payments of note and long-term debt and other financing
(63,787
)
 
(63,773
)
Excess tax benefits from stock compensation
144

 
2,114

Dividends paid
(22,041
)
 
(21,769
)
Net cash flows from (to) financing activities
4,802

 
43,055

 
 
 
 
Net increase (decrease) in cash and cash equivalents
(35,752
)
 
(8,031
)
Cash and cash equivalents at beginning of period
65,030

 
41,782

Cash and cash equivalents at end of period
$
29,278

 
$
33,751

 

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

 

7



HNI Corporation and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 28, 2014

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 28, 2013 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 statement have been included. Operating results for the six-month period ended June 28, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending January 3, 2015.  For further information, refer to the consolidated financial statements and accompanying notes included in HNI Corporation's (the "Corporation") Annual Report on Form 10-K for the fiscal year ended December 28, 2013.

During 2014 the Corporation changed its estimate regarding the quarterly accrual of annual incentive plan expense to more accurately match expense with earnings. The impact to the three-month and six-month period ended June 28, 2014 was to reduce expense by $0.8 million and $2.4 million or increase net income attributable to HNI Corporation $0.01 and $0.04 per diluted share, respectively. There will be no impact from the accrual change on the Corporation's full year financial statements.

The Corporation has certain non-cash operating and investing activities related to accrued purchases of property and equipment and capitalized software. A revision was made to the Condensed Consolidated Statement of Cash Flow for the six months ended June 29, 2013 which decreased operating cash flows related to the change in accounts payable and accrued expenses $5.7 million and increased investing cash flows $4.4 million and $1.3 million related to capital expenditures of property and equipment and capitalized software, respectively. The revisions in the Condensed Consolidated Statement of Cash Flows noted above represent errors that are not deemed material, individually or in the aggregate, to the prior period consolidated financial statements.

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 six months ended June 28, 2014, and June 29, 2013, the Corporation recognized $2.1 million and $4.8 million and $1.6 million and $3.9 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 June 28, 2014, there was $9.6 million of unrecognized compensation cost related to nonvested stock-based compensation awards, which the Corporation expects to recognize over a weighted-average remaining service period of 1.1 years.


Note C.  Inventories

The Corporation values its inventory at the lower of cost or market with approximately 73% valued by the last-in, first-out ("LIFO") costing method.

 
(In thousands)
 
June 28, 2014
 
December 28, 2013
 
 
Finished products
 
$
81,549

 
$
51,991

Materials and work in process
 
74,416

 
65,247

LIFO allowance
 
(27,588
)
 
(27,722
)
 
 
$
128,377

 
$
89,516




8



Note D.  Accumulated Other Comprehensive Income (Loss) and Shareholders' Equity

The following table summarizes the components of accumulated other comprehensive income (loss) and the changes in accumulated other comprehensive income (loss), net of tax, as applicable for the six months ended June 28, 2014:
 
 
 
 
(In thousands)
 
Foreign Currency Translation Adjustment
 
Unrealized Gains (Losses) on Marketable Securities
 
 
Pension Postretirement Liability
 
 
Derivative Financial Instruments
 
Accumulated Other Comprehensive Income (Loss)
Balance at December 28, 2013
 
$
2,913

 
$
81

 
$
(2,140
)
 
$
111

 
$
965

Other comprehensive income before reclassifications
 
431

 
(12
)
 

 
34

 
453

Amounts reclassified from accumulated other comprehensive income
 

 

 

 
(55
)
 
(55
)
Balance at June 28, 2014
 
$
3,344

 
$
69

 
$
(2,140
)
 
$
90

 
$
1,363

All amounts are net-of tax. Amounts in parentheses indicate debits.


The following table details the reclassifications from accumulated other comprehensive income (loss) for the three months and six months ended June 28, 2014 and June 29, 2013 (in thousands):
 
 
 
 
Three Months Ended
 
Six Months Ended
Details about Accumulated Other Comprehensive Income (Loss) Components
 
Affected Line Item in the Statement Where Net Income Is Presented
 
June 28, 2014
 
June 29, 2013
 
June 28, 2014
 
June 29, 2013
Pension postretirement liability
 
 
 
 
 
 
 
 
 
 
  Transition obligation
 
Selling and administrative expenses
 
$

 
$

 
$

 
$
(116
)
 
 
Tax (expense) or benefit
 

 

 

 
42

 
 
Net of tax
 
$

 
$

 
$

 
$
(74
)
Derivative financial instruments
 
 
 
 
 
 
 
 
 
 
  Diesel hedge
 
Selling and administrative expenses
 
$
32

 
$
95

 
$
87

 
$
212

 
 
Tax (expense) or benefit
 
(12
)
 
(36
)
 
(32
)
 
(78
)
 
 
Net of tax
 
$
20

 
$
59

 
$
55

 
$
134

Total reclassifications for the period
 
Net of tax
 
$
20

 
$
59

 
$
55

 
$
60

Amounts in parentheses indicate reductions to profit.

During the six months ended June 28, 2014, the Corporation repurchased 364,000 shares of its common stock at a cost of approximately $13.1 million.  As of June 28, 2014, $74.2 million of the Corporation's Board of Directors' current repurchase authorization remained unspent.

During the six months ended June 28, 2014, the Corporation paid dividends to shareholders of $0.49 per share.



9



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
 
Six Months Ended
(In thousands, except per share data)
 
June 28, 2014
 
June 29, 2013
 
June 28, 2014
 
June 29, 2013
Numerators:
 
 
 
 
 
 
 
 
Numerator for both basic and diluted EPS attributable to HNI Corporation net income
 
$
9,705

 
$
11,421

 
$
20,801

 
$
12,829

Denominators:
 
 

 
 

 
 
 
 
Denominator for basic EPS weighted-average common shares outstanding
 
45,020

 
45,413

 
45,029

 
45,284

Potentially dilutive shares from stock-based compensation plans
 
848

 
697

 
813

 
608

Denominator for diluted EPS
 
45,868

 
46,110

 
45,843

 
45,891

Earnings per share – basic
 
$
0.22

 
$
0.25

 
$
0.46

 
$
0.28

Earnings per share – diluted
 
$
0.21

 
$
0.25

 
$
0.45

 
$
0.28


The weighted average common stock equivalents presented above do not include the effect of 945,338 and 999,423 and 880,657 and 1,303,625 common stock equivalents for the three and six months ended June 28, 2014 and June 29, 2013, respectively, because their inclusion would be anti-dilutive.
  

Note F.  Restructuring Reserve and Plant Closures

As a result of the Corporation's ongoing business simplification and cost reduction strategies, the Corporation made the decision to close an office furniture manufacturing facility located in Florence, Alabama and consolidate production into existing office furniture manufacturing facilities. The Corporation also notified its members and the union representing the bargaining unit at its office furniture manufacturing facility located in Chicago, Illinois of its tentative decision, pending negotiations and consultation with the union, to close the facility and consolidate production into an existing facility. In connection with these decisions the Corporation recorded $4.8 million of pre-tax charges which included $2.6 million of accelerated depreciation on machinery and equipment and $0.8 million of transition costs recorded in cost of sales and $1.4 million of severance and facility exit costs which were recorded as restructuring charges during the quarter. The closure and consolidation of these facilities is expected to be substantially completed by the first quarter of 2015. The Corporation anticipates additional restructuring and transition costs of approximately $8.8 million related to these closures during the remainder of 2014. See Note G. Goodwill and Other Intangible Assets for further impact of these decisions.
  
The following is a summary of changes in restructuring accruals during the six months ended June 28, 2014.  

 
(In thousands)
 
Severance
 
Facility Exit Costs & Other
 
Total
Balance as of December 28, 2013
 
$
49

 
$
6

 
$
55

Restructuring charges
 
1,362

 
8

 
1,370

Cash payments
 
(33
)
 
(14
)
 
(47
)
Balance as of June 28, 2014
 
$
1,378

 
$

 
$
1,378


During the first quarter 2014 the Corporation completed the sale of a vacated office furniture manufacturing facility from a prior plant closure. The net sales price was $12.0 million resulting in a gain of $5.7 million, net of $2.7 million income tax expense for the quarter ended March 29, 2014.

10



Note G. Goodwill and Other Intangible Assets

The table below summarizes amortizable definite-lived intangible assets as of June 28, 2014 and December 28, 2013, which are reflected in the "Other Assets" line item in the Corporation's Condensed Consolidated Balance Sheets:
 
 
 
 
 
(In thousands)
 
June 28, 2014
 
December 28, 2013
Patents
 
$
18,905

 
$
18,905

Less: accumulated amortization
 
18,704

 
18,685

Net patents
 
201

 
220

Software
 
74,428

 
52,778

Less: accumulated amortization
 
16,079

 
14,380

Net software
 
58,349

 
38,398

Customer lists and other
 
110,851

 
110,609

Less: accumulated amortization
 
58,010

 
54,592

Net customer lists and other
 
52,841

 
56,017

Net intangible assets
 
$
111,391

 
$
94,635


Aggregate amortization expense for the six months ended June 28, 2014 and June 29, 2013 was $5.1 million and $5.1 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)
 
2014
 
2015
 
2016
 
2017
 
2018
Amortization Expense
 
$
10.1

 
$
13.8

 
$
13.1

 
$
12.1

 
$
11.9


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 $41.0 million.  The trademarks and trade names 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 28, 2013 are as follows by reporting segment:
 
(In thousands)
 
Office
Furniture
 
Hearth
Products
 
Total
Balance as of December 28, 2013
 
 
 
 
 
 
Goodwill
 
$
149,969

 
$
166,188

 
$
316,157

Accumulated impairment losses
 
(29,359
)
 
(143
)
 
(29,502
)
 
 
120,610

 
166,045

 
286,655

Goodwill acquired
 

 

 

Impairment Losses
 
(8,884
)
 

 
(8,884
)
Foreign currency translation adjustments
 
354

 

 
354

Balance as of June 28, 2014
 
 

 
 

 
 
Goodwill
 
150,323

 
166,188

 
316,511

Accumulated impairment losses
 
(38,243
)
 
(143
)
 
(38,386
)
 
 
$
112,080

 
$
166,045

 
$
278,125


The Corporation evaluates its goodwill and indefinite-lived intangible assets 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 market participant based assumptions.


11



The tentative decision, pending negotiation and consultation with the union, was made during the quarter ended June 28, 2014 to close a facility and exit a product line at one of the recently acquired reporting units within the office furniture segment. These decisions, along with slower order growth than projected in the second quarter, were considered a triggering event and, accordingly, the Corporation tested long-lived assets and goodwill at that reporting unit for impairment. The Corporation estimated the fair value of the reporting unit using a discounted cash flow approach along with a market multiple approach. The estimated fair value was below the carrying value indicating a potential impairment existed. The Corporation performed the second step of the test which requires a fair value assessment of all assets and liabilities of the reporting unit to calculate an implied goodwill amount. This resulted in an $8.9 million goodwill impairment charge during the quarter.  

Note H.  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. Reserves have been established for the various costs associated with the Corporation's warranty programs.

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 periods noted:
 
 
Six Months Ended
(In thousands)
 
June 28, 2014
 
June 29, 2013
Balance at beginning of period
 
$
13,840

 
$
13,055

Accruals for warranties issued during period
 
10,465

 
9,564

Adjustments related to pre-existing warranties
 
(14
)
 
347

Settlements made during the period
 
(9,248
)
 
(9,823
)
Balance at end of period
 
$
15,043

 
$
13,143


During the fourth quarter of 2013, the Corporation corrected a classification error by reclassifying a portion of the reserve for product warranties which was previously all classified as a current liability, including the related deferred tax impacts, to long-term. The portion of the reserve for estimated settlements expected to be paid in the next twelve months was $7.7 million and $6.4 million as of June 28, 2014 and June 29, 2013, respectively, and are included in "Accounts payable and accrued expenses" in the Condensed Consolidated Balance Sheets. The portion of the reserve for settlements expected to be paid beyond one year was $7.4 million and $6.8 million, respectively, and are included in "Other Long-Term Liabilities" in the Condensed Consolidated Balance Sheets. The revisions in the Condensed Consolidated Balance Sheets noted above represent errors that are not deemed material, individually or in the aggregate, to the prior period consolidated financial statements.

Note I.  Postretirement Health Care

The following table sets forth the components of net periodic benefit cost included in the Corporation's Condensed Consolidated Statements of Comprehensive Income for:
 
 
Three Months Ended
 
Six Months Ended
(In thousands)
 
June 28, 2014
 
June 29, 2013
 
June 28, 2014
 
June 29, 2013
Service cost
 
$
126

 
$
131

 
$
252

 
$
262

Interest cost
 
184

 
167

 
368

 
334

Amortization of transition obligation
 

 

 

 
116

Amortization of (gain)/loss
 

 

 

 

Net periodic benefit cost
 
$
310

 
$
298

 
$
620

 
$
712

  

Note J.  Income Taxes

The provision for income taxes for the three months ended June 28, 2014 reflects an effective tax rate of 35.0 percent compared to 35.2 percent for the same period last year. The 2014 estimated annual effective tax rate is expected to be 35.0 percent.

12





Note K.  Derivative Financial Instruments

The Corporation uses derivative financial instruments to reduce its exposure to adverse fluctuations in diesel fuel prices.  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 designated for hedge accounting.  The Corporation recognizes all derivatives on its Condensed Consolidated Balance Sheets at fair value.

Diesel Fuel Risk
The Corporation uses independent freight carriers to deliver its products.  These carriers charge the Corporation a basic rate per mile that is subject to a mileage surcharge for diesel fuel price increases.  The Corporation enters into variable to fixed rate commodity swap agreements with two financial counterparties to manage fluctuations in fuel costs.  The Corporation hedges approximately 50% of its diesel fuel surcharge exposure for the next twelve months.  The Corporation uses the hedge agreements to mitigate the volatility of diesel fuel prices and related fuel surcharges, and not to speculate on the future price of diesel fuel.  The hedge agreements are designed to add stability to the Corporation's costs, enabling the Corporation to make pricing decisions and lessen the economic impact of abrupt changes in diesel fuel prices over the term of the contract.  The hedging instruments consist of a series of financially settled fixed forward contracts with expiration dates ranging up to twelve months.  The contracts have been designated as cash flow hedges of future diesel purchases, and as such, the net amount paid or received upon monthly settlements is recorded as an adjustment to freight expense, while the effective change in fair value is recorded as a component of accumulated other comprehensive income in the equity section of the Corporation's Condensed Consolidated Balance Sheets.

As of June 28, 2014, $0.1 million of deferred net gains, net of tax, included in equity ("Accumulated other comprehensive income" in the Corporation's Condensed Consolidated Balance Sheets) related to the diesel hedge agreements are expected to be reclassified to current earnings ("Selling and administrative expenses" in the Corporation's Condensed Consolidated Statements of Comprehensive Income) over the next twelve months.

The location and fair value of derivative instruments reported in the Corporation's Condensed Consolidated Balance Sheets are as follows (in thousands):
 
 
 
 
Asset (Liability) Fair Value
 
 
Balance Sheet Location
 
June 28, 2014
 
December 28, 2013
Diesel fuel swap
 
Accounts payable and accrued expenses
 
$
(1
)
 
$

Diesel fuel swap
 
Prepaid expenses and other current assets
 
146

 
176

 
 
 
 
$
145

 
$
176



The effect of derivative instruments on the Corporation's Condensed Consolidated Statements of Comprehensive Income for the three months ended June 28, 2014 was as follows (in thousands):
Derivatives in Cash Flow Hedge Relationship
 
Before-tax Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)
 
Locations of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)
 
Before-Tax Gain (Loss) Reclassified from AOCI Into Income (Effective Portion)
 
Locations of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)
 
Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)
Diesel fuel swap
 
$
153

 
Selling and administrative expenses
 
$
32

 
Selling and administrative expenses
 
$
(3
)
Total
 
$
153

 
 
 
$
32

 
 
 
$
(3
)








13




The effect of derivative instruments on the Corporation's Condensed Consolidated Statements of Comprehensive Income for the six months ended June 28, 2014 was as follows (in thousands):
Derivatives in Cash Flow Hedge Relationship
 
Before-tax Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)
 
Locations of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)
 
Before-Tax Gain (Loss) Reclassified from AOCI Into Income (Effective Portion)
 
Locations of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)
 
Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)
Diesel fuel swap
 
$
55

 
Selling and administrative expenses
 
$
87

 
Selling and administrative expenses
 
$
(4
)
Total
 
$
55

 
 
 
$
87

 
 
 
$
(4
)

The effect of derivative instruments on the Corporation's Condensed Consolidated Statements of Comprehensive Income for the three months ended June 29, 2013 was as follows (in thousands):
Derivatives in Cash Flow Hedge Relationship
 
Before-tax Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)
 
Locations of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)
 
Before-Tax Gain (Loss) Reclassified from AOCI Into Income (Effective Portion)
 
Locations of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)
 
Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)
Diesel fuel swap
 
$
412

 
Selling and administrative expenses
 
$
95

 
Selling and administrative expenses
 
$
(5
)
Total
 
$
412

 
 
 
$
95

 
 
 
$
(5
)

The effect of derivative instruments on the Corporation's Condensed Consolidated Statements of Comprehensive Income for the six months ended June 29, 2013 was as follows (in thousands):
Derivatives in Cash Flow Hedge Relationship
 
Before-tax Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)
 
Locations of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)
 
Before-Tax Gain (Loss) Reclassified from AOCI Into Income (Effective Portion)
 
Locations of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)
 
Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)
Diesel fuel swap
 
$
390

 
Selling and administrative expenses
 
$
212

 
Selling and administrative expenses
 
$
(4
)
Total
 
$
390

 
 
 
$
212

 
 
 
$
(4
)

The Corporation entered into master netting agreements with the two financial counterparties where they entered into commodity swap agreements that permit the net settlement of amounts owed under their respective derivative contracts. Under these master netting agreements, net settlement of all outstanding contracts with a counterparty in the case of an event of default or a termination event is allowed. The amounts under the master netting agreement are immaterial and no further disclosure is deemed necessary.


Note L.  Fair Value Measurements

For recognition purposes, on a recurring basis the Corporation is required to measure at fair value its marketable securities and derivative instruments.  The marketable securities are comprised of government securities, corporate bonds and money market funds. When available the Corporation uses quoted market prices to determine fair value and classifies such measurements within Level 1.  Where market prices are not available, the Corporation makes use of observable market-based inputs (prices or quotes from published exchanges/indexes) to calculate fair value using the market approach, in which case the measurements are classified within Level 2.




14




Assets measured at fair value as of June 28, 2014 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)
Government securities
 
$
10,907

 
$

 
$
10,907

 
$

Corporate bonds
 
$
1,208

 
$

 
$
1,208

 
$

Derivative financial instruments
 
$
145

 
$

 
$
145

 
$



Assets measured at fair value as of December 28, 2013 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)
Government securities
 
$
11,254

 
$

 
$
11,254

 
$

Corporate bonds
 
$
4,859

 
$

 
$
4,859

 
$

Derivative financial instruments
 
$
176

 
$

 
$
176

 
$


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.

Cash and cash equivalents - Level 1
The carrying amount approximated fair value and includes money market funds.


Long-term debt (including current portion) - Level 2
The carrying value of the Corporation's outstanding variable-rate, long-term debt obligations at June 28, 2014 and December 28, 2013, the end of the Corporation's 2013 fiscal year, approximated the fair value.  The fair value of the Corporation's outstanding fixed-rate, long-term debt obligations is estimated based on discounted cash flow method to be $157 million at June 28, 2014 and $159 million at December 28, 2013, compared to the carrying value of $150 million.


Note M.  Commitments and Contingencies

The Corporation utilizes letters of credit in the amount of $11 million to back certain 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 liabilities relating to pending litigation, environmental remediation, taxes, and other claims.  It is the Corporation's opinion that liabilities, if any, resulting from these matters are not expected to have a material adverse effect on the Corporation's financial condition, cash flows or on the Corporation's quarterly or annual operating results when resolved in a future period.


Note N.  New Accounting Standards

In January 2013, the FASB issued accounting guidance clarifying the scope of disclosures about offsetting assets and liabilities.
This guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those
annual periods. The Corporation adopted the guidance effective December 29, 2013, the beginning of the Corporation's 2014 fiscal year. The guidance did not have a material impact on the Corporation's financial statements.

In July 2013, the FASB issued accounting guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, or similar tax loss, or a tax carryforward exists. The Corporation adopted the guidance effective

15



December 29, 2013, the beginning of the Corporation's 2014 fiscal year. The guidance did not have a material impact on the Corporation's financial statements.

In April 2014, the FASB issued accounting guidance which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. The guidance will be effective for fiscal years beginning on or after December 15, 2014 and interim periods within those annual periods with early adoption allowed. The Corporation does not expect the adoption to have a material impact on its financial statements.

In May 2014, the FASB issued accounting guidance which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of the revenue model is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is not permitted. The Corporation is currently evaluating the impact of adopting this standard on its financial statements.


Note O.  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 office furniture which includes storage products, desks, credenzas, chairs, tables, bookcases, classroom solutions, 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 and 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.  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 segment basis.

The Corporation's primary market and capital investments are concentrated in the United States.

16




Reportable segment data reconciled to the Corporation's condensed consolidated financial statements for the three and six month periods ended June 28, 2014, and June 29, 2013, is as follows:
 
Three Months Ended
 
Six Months Ended
(In thousands)
June 28, 2014
 
June 29, 2013
 
June 28, 2014
 
June 29, 2013
Net Sales:
 
 
 
 
 
 
 
Office Furniture
$
423,423

 
$
436,169

 
$
781,792

 
$
802,001

Hearth Products
85,720

 
74,529

 
179,552

 
150,994

 
$
509,143

 
$
510,698

 
$
961,344

 
$
952,995

Operating Profit:
 
 
 
 
 
 
 
Office furniture
 
 
 
 
 
 
 
Operations before restructuring charges
$
28,524

 
$
22,092

 
$
44,989

 
$
30,948

Restructuring and impairment charges
(10,282
)
 
35

 
(10,254
)
 
(121
)
Office furniture – net
18,242

 
22,127

 
34,735

 
30,827

Hearth products
8,481

 
5,699

 
20,189

 
9,290

Total operating profit
26,723

 
27,826

 
54,924

 
40,117

Unallocated corporate expense
(11,855
)
 
(10,238
)
 
(23,798
)
 
(21,975
)
Income before income taxes
$
14,868

 
$
17,588

 
$
31,126

 
$
18,142

 
 
 
 
 
 
 
 
Depreciation & Amortization Expense:
 
 
 
 
 
 
 
Office furniture
$
12,472

 
$
9,304

 
$
21,971

 
$
18,127

Hearth products
1,158

 
1,372

 
2,334

 
2,765

General corporate
1,298

 
1,073

 
2,647

 
1,946

 
$
14,928

 
$
11,749

 
$
26,952

 
$
22,838

 
 
 
 
 
 
 
 
Capital Expenditures (including capitalized software):
 
 
 
 
 
 
 
Office furniture
$
16,348

 
$
13,017

 
$
29,836

 
$
22,949

Hearth products
1,187

 
1,051

 
2,698

 
1,665

General corporate
10,894

 
4,758

 
18,587

 
9,005

 
$
28,429

 
$
18,826

 
$
51,121

 
$
33,619

 
 
 
 
 
 
 
 
 
 
 
 
 
As of
 
As of
 
 
 
 
 
June 28,
2014
 
December 28,
2013
Identifiable Assets:
 
 
 
 
 
 
 
Office furniture
 
 
 
 
$
756,888

 
$
722,697

Hearth products
 
 
 
 
266,617

 
255,978

General corporate
 
 
 
 
136,767

 
156,030

 
 
 
 
 
$
1,160,272

 
$
1,134,705



17



Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations


Overview

The Corporation has two reportable segments:  office furniture and hearth products.  The Corporation is a leading global office furniture manufacturer 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 second quarter of fiscal 2014 decreased 0.3 percent to $509.1 million when compared to the second quarter of fiscal 2013.  The change was driven by the effect of divestitures and a decline in sales in the contract channel of the office furniture segment, partially offset by an increase in hearth product sales across both the new construction and remodel-retrofit channels as well as an increase in office furniture sales in the supplies-driven channel.  Gross margin for the quarter increased from prior year levels due to increased price realization, strong operational performance and higher volume in the hearth products segment partially offset by lower volume and restructuring and transition charges in the office furniture segment.  Total selling and administrative expenses increased due mainly to higher incentive based compensation.

During the second quarter of fiscal 2014, as part of continuing efforts to reduce structural costs, the Corporation made the decision to close two office furniture manufacturing facilities and consolidate production into existing manufacturing facilities. In connection with these consolidations the Corporation recorded $4.8 million of restructuring and transition costs of which $3.4 million were included in cost of sales. A triggering event occurred during the second quarter of 2014 for a reporting unit in the office furniture segment resulting in a $8.9 million goodwill impairment charge.

Results of Operations

The following table presents certain key highlights from the results of operations for the periods indicated:

        
 
Three Months Ended
 
Six Months Ended
 
(In thousands)
June 28, 2014
 
June 29, 2013
 
Percent
Change
 
June 28, 2014
 
June 29, 2013
 
Percent
Change
Net sales
$
509,143

 
$
510,698

 
(0.3
)%
 
$
961,344

 
$
952,995

 
0.9
 %
Cost of sales
328,010

 
336,040

 
(2.4
)%
 
625,039

 
630,555

 
(0.9
)%
Gross profit
181,133

 
174,658

 
3.7
 %
 
336,305

 
322,440

 
4.3
 %
Selling and administrative expenses
155,288

 
152,078

 
2.1
 %
 
300,498

 
296,634

 
1.3
 %
(Gain) loss on sale of assets
(1,346
)
 
2,460

 
NM

 
(9,746
)
 
2,460

 
NM

Restructuring and impairment charges
10,282

 
(35
)
 
NM

 
10,254

 
121

 
NM

Operating income
16,909

 
20,155

 
(16.1
)%
 
35,299

 
23,225

 
52.0
 %
Interest expense, net
2,041

 
2,567

 
(20.5
)%
 
4,173

 
5,083

 
(17.9
)%
Income before income taxes
14,868

 
17,588

 
(15.5
)%
 
31,126

 
18,142

 
71.6
 %
Income taxes
5,203

 
6,189

 
(15.9
)%
 
10,445

 
5,564

 
87.7
 %
Net income
$
9,665

 
$
11,399

 
(15.2
)%
 
$
20,681

 
$
12,578

 
64.4
 %
 
 

 
 

 
 

 
 
 
 
 
 

Consolidated net sales for the second quarter of 2014 decreased 0.3 percent or $1.6 million compared to the same quarter last year. The change was driven by the effect of divestitures and a decline in sales in the contract channel of the office furniture segment, partially offset by an increase in hearth product sales across both the new construction and remodel-retrofit channels as well as an increase in office furniture sales in the supplies-driven channel. Compared to prior year quarter, divestitures of several small businesses, including office furniture dealers, resulted in a $8.1 million sales decline.

Gross margin for the second quarter of 2014 increased to 35.6 percent compared to 34.2 percent for the same quarter last year.  The increase in gross margin was driven by increased price realization, strong operational performance and higher hearth products

18



sales volume partially offset by lower volume and restructuring and transition charges in the office furniture segment. Second quarter 2014 included $3.4 million of accelerated depreciation and transition costs related to the closure and consolidation of office furniture manufacturing facilities.
  
As a result of the Corporation's ongoing business simplification and cost reduction strategies, the Corporation made the decision in the second quarter 2014 to close an office furniture manufacturing facility located in Florence, Alabama and consolidate production into existing office furniture manufacturing facilities. The Corporation also notified its members and the union representing the bargaining unit at its office furniture manufacturing facility located in Chicago, Illinois of its tentative decision, pending negotiations and consultation with the union, to close the facility and consolidate production into an existing facility. In connection with these decisions the Corporation recorded $4.8 million of pre-tax charges which included $2.6 million of accelerated depreciation on machinery and equipment and $0.8 million of transition costs recorded in cost of sales and $1.4 million of severance and facility exit costs which were recorded as restructuring charges during the quarter. The closure and consolidation of these facilities is expected to be substantially completed by the first quarter of 2015. The Corporation anticipates additional restructuring and transition costs of approximately $8.8 million related to these closures during the remainder of 2014.

The tentative decision to close a facility and exit a product line, as well as lower growth than projected at one of the Corporation's recently acquired reporting units in the office furniture segment, were identified as a triggering event for purposes of long-lived asset and goodwill impairment testing. As a result, the Corporation recognized pre-tax goodwill impairment expense of $8.9 million during the second quarter of 2014.

Total selling and administrative expenses as a percentage of net sales increased to 30.5 percent compared to 29.8 percent for the same quarter last year due mainly to increased incentive based compensation.

The Corporation realized a $1.3 million gain on the sale of California air emission credits in the second quarter of 2014. The Corporation realized a $2.5 million loss on the sale of a non-core office furniture business in the second quarter of 2013.
 
The provision for income taxes for continuing operations for the three months ended June 28, 2014 reflects an effective tax rate of 35.0 percent compared to 35.2 percent for the same period last year. The 2014 estimated annual effective tax rate is expected to be 35.0 percent.

Net income attributable to HNI Corporation was $9.7 million or $0.21 per diluted share in the second quarter of 2014 compared to $11.4 million or $0.25 per diluted share in the second quarter of 2013.

For the first six months of 2014, consolidated net sales increased $8.3 million, or 0.9 percent, to $961.3 million compared to
$953.0 million for the first six months of 2013 driven by higher sales in the hearth products segment. Gross margins increased to 35.0 percent compared to 33.8 percent for the same period last year driven by better price realization, strong operational performance and higher volume in the hearth products segment partially offset by lower volume, unfavorable mix and restructuring and transition charges in the office furniture segment. Net income attributable to HNI Corporation was $20.8 million for the first six months of 2014 compared to $12.8 million for the first six months of 2013. Earnings per share increased to $0.45 per diluted share compared to $0.28 per diluted share for the same period last year.


Office Furniture

Second quarter 2014 sales for the office furniture segment decreased 2.9 percent or $12.7 million to $423.4 million from $436.2 million for the same quarter last year. Compared to the prior year quarter, divestitures resulted in a $8.1 million sales decline. Net sales in the contract channel decreased due to strong year over year comparisons and timing of large projects. This decrease was offset partially by an increase in the supplies-driven channel. Second quarter 2014 operating profit prior to unallocated corporate expenses decreased 17.6 percent or $3.9 million to $18.2 million as a result of lower volume, unfavorable mix and restructuring, transition and impairment charges. These were partially offset by increased price realization, strong operational performance and the loss on sale of a small non-core business in the prior year quarter. Second quarter 2014 included $13.7 million of restructuring, transition and impairment costs.

Net sales for the first six months of 2014 decreased 2.5 percent or $20.2 million to $781.8 million compared to $802.0 million
for the same period in 2013. Compared to the prior year period, divestitures resulted in a $14.9 million sales decline. Net sales in the supplies-driven channel decreased due to harsh weather in the first quarter of 2014. This decrease was partially offset by an increase in the other office furniture channels. Operating profit for the first six months of 2014 increased 12.7 percent or $3.9 million to $34.7 million compared to $30.8 million for the same period in 2013 driven by the same drivers experienced in the current quarter plus an $8.4 million gain on the sale of a vacated facility during the first quarter of 2014.

19





Hearth Products

Second quarter 2014 net sales for the hearth products segment increased 15.0 percent or $11.2 million to $85.7 million from $74.5 million for the same quarter last year. The increase was driven by an increase in both the new construction channel due to housing market recovery and the remodel-retrofit channel due to strong remodeling activity and demand for alternative fuel products.  Operating profit prior to unallocated corporate expenses increased $2.8 million to $8.5 million compared to $5.7 million in the prior year quarter due to increased volume and higher price realization offset partially by increased warranty expense and higher incentive-based compensation. 

Net sales for the first six months of 2014 increased 18.9 percent or $28.6 million to $179.6 million compared to $151.0 million
for the same period in 2013. Operating profit for the first six months of 2014 increased $10.9 million to $20.2 million compared to $9.3 million for the same period in 2013. The year-to-date increases in sales and operating profit were driven by the same drivers experienced in the current quarter.

Liquidity and Capital Resources

Cash Flow – Operating Activities
Operating activities used $7.0 million of cash in the first six months of 2014 compared to $18.2 million in the first six months of 2013.  Working capital resulted in a $68.4 million use of cash in the first six months of the current fiscal year compared to a $76.8 million use of cash in the same period of the prior year. The change in working capital is due mainly to timing of accounts receivable collections. 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 six months of fiscal 2014 were $51.1 million compared to $33.6 million in the same period of fiscal 2013 and were primarily for tooling, equipment and capacity for new products, continuous improvements in manufacturing processes and the on-going implementation of new integrated information systems to support business process transformation.  For the full year 2014, capital expenditures are expected to be approximately $90 to $95 million, primarily related to new products, operational process improvements and capabilities and the business process transformation project referred to above.

During the first quarter of 2014 the Corporation completed the sale of a facility located in South Gate, California. The proceeds from the sale of $12.0 million are reflected in the Condensed Consolidated Statement of Cash Flows as "Proceeds from property, plant and equipment".

Cash Flow – Financing Activities
The net borrowings under the revolving credit agreement at the end of second quarter were $35 million and are classified as short-term as the Corporation expects to repay the borrowings within a year.
 
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 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 Credit Agreement) to (b) consolidated EBITDA for the last four fiscal quarters; or
a consolidated leverage ratio of not greater than 3.5 to 1.0, based upon the ratio of (a) the quarter-end consolidated funded indebtedness to (b) consolidated EBITDA for the last four fiscal quarters following any qualifying debt financed acquisition.
 
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.

Additional borrowing capacity of $215 million is available through the revolving credit facility. The revolving credit facility is the primary source of committed funding from which the Corporation finances its planned capital expenditures and strategic initiatives, such as acquisitions, repurchases of common stock and certain working capital needs.  Non-compliance with the various

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financial covenant ratios in the revolving credit facility or the Senior Notes 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 and/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.  Under the Credit Agreement, consolidated 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 June 28, 2014, the Corporation was well below the maximum allowable ratio and was in compliance with all of the covenants and other restrictions in the Credit Agreement and the note purchase agreement.  The Corporation currently expects to remain in compliance over the next twelve months.

On May 6, 2014, the Corporation's Board of Directors (the "Board") approved a 4.2 percent increase in the common stock quarterly cash dividend from $0.24 per share to $0.25 per share. The dividend was paid on May 30, 2014, to shareholders of record at the close of business on May 16, 2014.

During the six months ended June 28, 2014, the Corporation repurchased 364,000 shares of common stock at a cost of approximately $13.1 million, or an average price of $35.85 per share.  As of June 28, 2014, approximately $74.2 million of the Board's current repurchase authorization remained unspent.

Cash, cash equivalents and short-term investments, coupled with cash from future operations, borrowing capacity under the existing facility and the ability to access capital markets, are expected to be adequate to fund operations and satisfy cash flow needs for at least the next twelve months.

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 December 28, 2013.  During the first six months of fiscal 2014, 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 business, including pending litigation, 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, cash flows or on the Corporation's quarterly or annual operating results when resolved in a future period.

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 Annual Report on Form 10-K for the year ended December 28, 2013.  During 2014 the Corporation changed its estimate regarding the quarterly accrual of annual incentive plan expense to more accurately match expense with earnings. During the first six months of fiscal 2014, there were no material changes in the accounting policies and assumptions previously disclosed.



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New Accounting Standards

For information pertaining to the Corporation's adoption of new accounting standards and any resulting impact to the Corporation's financial statements, please refer to Note N. New Accounting Standards of the Notes to the Condensed Consolidated Financial Statements, in Part 1, Item 1 of this Quarterly Report on Form 10-Q.
 
Looking Ahead

Management remains optimistic about the office furniture and hearth products markets.  Management believes the Corporation is well positioned to drive sales and significantly increase profits in 2014.

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 continuing to execute its long-standing continuous improvement discipline 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, including its business system transformation (c) investments in strategic acquisitions, production capacity, 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 (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, slow or negative growth rates in global and domestic economies or in the domestic housing market; lower industry growth than expected; major disruptions at our key facilities or in the supply of any key raw materials, components or finished goods; competitive pricing pressure from foreign and domestic competitors; higher than expected costs and lower than expected supplies of materials; higher 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 and 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.


Item 3. Quantitative and Qualitative Disclosures About Market Risk

As of June 28, 2014, 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 28, 2013.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and 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 June 28, 2014, based on this evaluation, the chief executive officer and chief financial officer have concluded these disclosure controls and procedures are effective.

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Furthermore, there have been no changes in the Corporation's internal control over financial reporting during the fiscal quarter covered by this quarterly report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.


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PART II.     OTHER INFORMATION


Item 1. Legal 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

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 28, 2013.


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities:

The following is a summary of share repurchase activity during the quarter ended June 28, 2014.
 
 
 
 
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
03/30/14 – 04/26/14
 
7,000

 
$
36.06

 
7,000

 
$
82,360,642

04/27/14 – 05/24/14
 
140,000

 
$
35.75

 
140,000

 
$
77,355,954

05/25/14 – 06/28/14
 
84,000

 
$
37.15

 
84,000

 
$
74,235,486

Total
 
231,000

 
 
 
231,000

 
 

(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 second quarter of fiscal 2014, nor do any plans exist under which the Corporation does not intend to make further purchases.




Item 6. Exhibits

See Exhibit Index.


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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
 
 
 
 
 
Date: August 1, 2014
By:
/s/ Kurt A. Tjaden
 
 
 
Kurt A. Tjaden
 
 
 
Vice President and Chief Financial Officer
 
  

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EXHIBIT INDEX
(31.1)
Certification of the CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
(31.2)
Certification of the CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
(32.1)
Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101
The following materials from HNI Corporation's Quarterly Report on Form 10-Q for the fiscal quarter ended June 28, 2014 formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Comprehensive Income; (iii) Condensed Consolidated Statements of Cash Flows; and (iv) Notes to Condensed Consolidated Financial Statements(a)


(a)
Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
 

 
 
 
 


 
 
 
 


 
 
 
 

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