3Q 2006 Form 10-Q
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
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FORM
10-Q
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(MARK
ONE)
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/
X / QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15 (d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
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For
the quarterly period ended September 30, 2006
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OR
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/
/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15
(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
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For
the transition period from ____________________ to
____________________
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Commission
File Number 0-2648
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HNI
Corporation
(Exact
name of Registrant as specified in its charter)
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Iowa
(State
or other jurisdiction of
incorporation
or organization)
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42-0617510
(I.R.S.
Employer
Identification
Number)
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P.
O. Box 1109, 408 East Second Street
Muscatine,
Iowa 52761-0071
(Address
of principal executive offices)
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52761-0071
(Zip
Code)
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Registrant’'s
telephone number, including area code:
563/272-7400
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Indicate
by check mark whether the registrant (1) has filed all reports required
to
be filed by Section 13 or 15 (d) 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
Common
Shares, $1 Par Value
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Outstanding
at September 30, 2006
48,617,261
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HNI
Corporation and SUBSIDIARIES
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INDEX
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PART
I. FINANCIAL INFORMATION
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Page
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Item
1. Financial Statements (Unaudited)
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Condensed
Consolidated Balance Sheets September
30, 2006, and December 31, 2005
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3
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Condensed
Consolidated Statements of Income Three
Months Ended September 30, 2006, and October 1, 2005
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5
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Condensed
Consolidated Statements of Income Nine
Months Ended September 30, 2006, and October 1, 2005
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6
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Condensed
Consolidated Statements of Cash Flows Nine
Months Ended September 30, 2006, and October 1, 2005
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7
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Notes
to Condensed Consolidated Financial Statements
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8
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Item
2. Management's
Discussion and Analysis of Financial
Condition and Results of Operations
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19
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Item
3. Quantitative and Qualitative Disclosure about Market
Risk
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24
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Item
4. Controls and Procedures
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24
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PART
II. OTHER INFORMATION
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Item
1. Legal Proceedings
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26
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Item
1A. Risk Factors
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26
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Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
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26
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Item
3. Defaults Upon Senior Securities -
None
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-
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Item
4. Submission of Matters to a Vote of Security Holders -
None
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-
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Item
5. Other Information - None
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-
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Item
6. Exhibits
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27
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SIGNATURES
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28
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EXHIBIT
INDEX
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29
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PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements
(Unaudited)
HNI
Corporation and SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
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Sep.
30,
2006
(Unaudited)
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Dec.
31,
2005
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ASSETS
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(In
thousands)
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CURRENT
ASSETS
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Cash
and cash equivalents
Short-term
investments
Receivables
Inventories
(Note C)
Deferred
income taxes
Prepaid
expenses and other current assets
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$
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34,151
8,716
324,472
123,900
16,745
17,168
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$
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75,707
9,035
278,515
91,110
15,831
16,400
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Total
Current Assets
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525,152
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486,598
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PROPERTY,
PLANT, AND EQUIPMENT, at cost
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Land
and land improvements
Buildings
Machinery
and equipment
Construction
in progress
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27,536
262,218
544,467
20,425
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26,361
240,174
523,240
23,976
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Less
accumulated depreciation
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854,646
540,820
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813,751
519,091
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Net
Property, Plant, and Equipment
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313,826
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294,660
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GOODWILL
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253,892
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242,244
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OTHER
ASSETS
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164,742
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116,769
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Total
Assets
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$
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1,257,612
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$
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1,140,271
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See
accompanying Notes to Condensed Consolidated Financial
Statements.
HNI
Corporation and SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
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Sep.
30,
2006
(Unaudited)
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Dec.
31,
2005
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LIABILITIES
AND SHAREHOLDERS''
EQUITY
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(In
thousands, except share and per
share
value data)
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CURRENT
LIABILITIES
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Accounts payable and accrued expenses
Income
taxes
Note payable and current maturities of long-term debt
Current maturities of other long-term obligations
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$
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303,207
6,642
51,660
3,505
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$
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307,952
1,270
40,350
8,602
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Total Current Liabilities
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365,014
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358,174
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LONG-TERM
DEBT
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299,740
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103,050
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CAPITAL
LEASE OBLIGATIONS
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728
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819
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OTHER
LONG-TERM LIABILITIES
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52,135
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48,671
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DEFERRED
INCOME TAXES
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31,545
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35,473
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MINORITY
INTEREST IN SUBSIDIARY
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538
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140
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SHAREHOLDERS''
EQUITY
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Capital Stock:
Preferred,
$1 par value, authorized 2,000,000
shares, no shares outstanding
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-
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-
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Common, $1 par value, authorized 200,000,000
shares, outstanding -
2006 -
48,617,261 shares;
2005 -
51,848,591 shares
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48,617
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51,849
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Paid-in capital
Retained earnings
Accumulated other comprehensive income
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2,323
456,901
71
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941
540,822
332
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Total Shareholders'
Equity
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507,912
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593,944
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Total Liabilities and Shareholders'
Equity
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$
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1,257,612
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$
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1,140,271
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See
accompanying Notes to Condensed Consolidated Financial
Statements.
HNI
Corporation and SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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Three
Months Ended
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Sep.
30,
2006
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Oct.
1,
2005
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(In
thousands, except share
and
per share data)
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Net
sales
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$
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687,732
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$
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632,280
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Cost
of sales
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450,309
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396,042
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Gross profit
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237,423
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236,238
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Selling
and administrative expenses
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177,059
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171,802
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Restructuring
and impairment charges
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(27
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)
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1,071
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Operating income
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60,391
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63,365
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Interest
income
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339
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195
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Interest
expense
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4,450
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693
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Earnings before income taxes and minority interest
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56,280
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62,867
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Income
taxes
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20,542
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22,317
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Earnings before minority interest
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35,738
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40,550
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Minority
interest in earnings of subsidiary
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(24
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)
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(11
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)
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Net income
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$
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35,762
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$
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40,561
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Net
income per common share - basic
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$
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0.73
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$
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0.74
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Average
number of common shares outstanding - basic
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49,323,698
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55,011,758
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Net
income per common share - diluted
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$
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0.72
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$
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0.73
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Average
number of common shares outstanding - diluted
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49,591,889
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55,447,480
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Cash
dividends per common share
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$
|
0.18
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$
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0.155
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|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
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HNI
Corporation and SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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Nine
Months Ended
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Sep.
30,
2006
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Oct.
1,
2005
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(In
thousands, except share
and
per share data)
|
|
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|
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Net
sales
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$
|
2,007,680
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$
|
1,788,709
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Cost
of sales
|
|
|
1,306,134
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|
1,142,338
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Gross profit
|
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|
701,546
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646,371
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Selling
and administrative expenses
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544,843
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487,348
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Restructuring
and impairment charges
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1,920
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|
1,071
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Operating income
|
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|
154,783
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|
157,952
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Interest
income
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|
810
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|
1,175
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Interest
expense
|
|
|
9,454
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|
1,520
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Earnings before income taxes and minority interest
|
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|
146,139
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|
157,607
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Income
taxes
|
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53,341
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55,950
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Earnings before minority interest
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92,798
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101,657
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Minority
interest in earnings of subsidiary
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(86
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)
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(11
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)
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Net income
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$
|
92,884
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$
|
101,668
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Net
income per common share - basic
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$
|
1.83
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$
|
1.84
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Average
number of common shares outstanding - basic
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50,722,997
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55,106,182
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Net
income per common share - diluted
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|
$
|
1.82
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$
|
1.83
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Average
number of common shares outstanding - diluted
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51,051,237
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55,484,189
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Cash
dividends per common share
|
|
$
|
0.54
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|
$
|
0.465
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|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
HNI
Corporation and SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
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|
Nine
Months Ended
|
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Sep.
30, 2006
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Oct.
1, 2005
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(In
thousands)
|
Net
Cash Flows From (To) Operating Activities:
|
|
|
|
|
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Net income
|
|
$
|
92,884
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$
|
101,668
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Noncash items included in net income:
|
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|
|
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Depreciation and amortization
|
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|
52,044
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49,565
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Other postretirement and post employment benefits
|
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1,582
|
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|
1,502
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Excess tax benefits from stock compensation
|
|
|
(742
|
)
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|
-
|
|
Deferred income taxes
|
|
|
(4,725
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)
|
|
(10,485
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)
|
(Gain)/Loss on sale, retirement and impairment of
property, plant and equipment
|
|
|
(2,878
|
)
|
|
924
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Stock issued to retirement plan
|
|
|
7,948
|
|
|
6,199
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Other - net
|
|
|
4,660
|
|
|
1,213
|
|
Net increase (decrease) in non-cash operating assets
and liabilities
|
|
|
(76,530
|
)
|
|
(49,610
|
)
|
Increase (decrease) in other liabilities
|
|
|
(3,094
|
)
|
|
1,618
|
|
Net cash flows from (to) operating activities
|
|
|
71,149
|
|
|
102,594
|
|
|
|
|
|
|
|
|
|
Net
Cash Flows From (To) Investing Activities:
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(47,443
|
)
|
|
(25,968
|
)
|
Proceeds from sale of property, plant and equip.
|
|
|
5,266
|
|
|
286
|
|
Capitalized software
|
|
|
(903
|
)
|
|
(2,264
|
)
|
Acquisition spending, net of cash acquired
|
|
|
(78,292
|
)
|
|
(25,678
|
)
|
Short-term investments - net
|
|
|
926
|
|
|
2,400
|
|
Purchase of long-term investments
|
|
|
(9,600
|
)
|
|
(31,495
|
)
|
Sales or maturities of long-term investments
|
|
|
6,100
|
|
|
30,205
|
|
Other - net
|
|
|
-
|
|
|
(68
|
)
|
Net cash flows from (to) investing activities
|
|
|
(123,946
|
)
|
|
(52,582
|
)
|
|
|
|
|
|
|
|
|
Net
Cash Flows From (To) Financing Activities:
|
|
|
|
|
|
|
|
Proceeds from sales of HNI Corporation common
stock
|
|
|
4,291
|
|
|
13,900
|
|
Purchase of HNI Corporation common stock
|
|
|
(170,309
|
)
|
|
(54,800
|
)
|
Excess tax benefits from stock compensation
|
|
|
742
|
|
|
-
|
|
Proceeds from long-term debt
|
|
|
497,531
|
|
|
59,000
|
|
Payments of note and long-term debt and other financing
|
|
|
(293,605
|
)
|
|
(35,601
|
)
|
Dividends paid
|
|
|
(27,409
|
)
|
|
(25,661
|
)
|
Net cash flows from (to) financing activities
|
|
|
11,241
|
|
|
(43,162
|
)
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash
equivalents
|
|
|
(41,556
|
)
|
|
6,850
|
|
Cash
and cash equivalents at beginning of period
|
|
|
75,707
|
|
|
29,676
|
|
Cash
and cash equivalents at end of period
|
|
$
|
34,151
|
|
$
|
36,526
|
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
|
HNI
Corporation and SUBSIDIARIES
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September
30, 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 nine-month period ended September 30, 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 HNI Corporation's
(the
"Corporation")
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 September 30, 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 nine months ended September
30, 2006, 86,503 shares of the Corporation's
common
stock were issued under the MSP Plan at an average price of $40.45.
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 September 30, 2006 decreased by $0.8 million, and net earnings
decreased by $0.5 million, or $.01 per basic share and $.01 per diluted
share. These results reflect stock compensation expense of $0.8 million
and tax benefits of $0.3 million for the period. Earnings before income
taxes for the nine months ended September 30, 2006 decreased by $2.4 million,
and net earnings decreased by $1.5 million, or $.03 per basic share and $.03
per
diluted share. These results reflect stock compensation expense of $2.4 million
and tax benefits of $0.9 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 nine
months ended September 30, 2006, cash flow from operating activities was reduced
by $0.7 million and cash flow from financing activities was increased by $0.7
million as a result of the new 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 and nine months ended October 1,
2005, as presented in the table below. 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
|
|
|
Nine
Months
Ended
|
|
(in
thousands)
|
|
|
Oct.
1, 2005
|
|
|
Oct.
1, 2005
|
|
Net
income, as reported
|
|
$
|
40,561
|
|
$
|
101,668
|
|
Deduct:
Total stock-based employee compensation expense determined under
fair
value based method for all
awards, net of related tax effects
|
|
|
(464
|
)
|
|
(1,354
|
)
|
Pro
forma net income
|
|
$
|
40,097
|
|
$
|
100,314
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
Basic - as reported
|
|
$
|
0.74
|
|
$
|
1.84
|
|
Basic - pro forma
|
|
$
|
0.73
|
|
$
|
1.82
|
|
Diluted - as reported
|
|
$
|
0.73
|
|
$
|
1.83
|
|
Diluted - pro forma
|
|
$
|
0.72
|
|
$
|
1.81
|
|
The
stock
compensation expense for the nine months ended September 30, 2006 and the stock
compensation expense used in the preceding disclosure of pro forma net earnings
for the nine months ended October 1, 2005 was estimated on the date of grant
using the Black-Scholes option-pricing model that used the following assumptions
by grant year:
|
Nine
Months Ended
|
Year
Ended
|
|
Sep.
30, 2006
|
Dec.
31, 2005
|
Expected
term
|
7
years
|
7
years
|
Expected
volatility:
|
|
|
Range used
|
29.75%
- 31.23%
|
31.77%
- 33.49%
|
Weighted-average
|
31.21%
|
33.46%
|
Expected
dividend yield:
|
|
|
Range used
|
1.24%
- 1.43%
|
1.17%
- 1.45%
|
Weighted-average
|
1.24%
|
1.45%
|
Risk-free
interest rate:
|
|
|
Range used
|
4.62%
- 5.08%
|
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 No. 107 "Share
Based Payment"
("SAB
No.
107")
to
determine the expected term since the awards qualified as "plain
vanilla"
options
as defined in SAB No. 107. 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 nine months ended September 30, 2006 were
as follows:
|
|
|
Number
|
|
|
Weighted-Average
Exercise Price
|
|
Balance
at December 31, 2005
|
|
|
1,128,650
|
|
$
|
31.84
|
|
Options
granted
|
|
|
135,946
|
|
|
58.06
|
|
Options
exercised
|
|
|
(47,000
|
)
|
|
23.40
|
|
Options
forfeited
|
|
|
(22,480
|
)
|
|
39.91
|
|
Balance
at September 30, 2006
|
|
|
1,195,116
|
|
$
|
35.67
|
|
A
summary
of the Corporation's
nonvested shares as of September 30, 2006 and changes during the nine-month
period are presented below:
Nonvested
Shares
|
|
|
Shares
|
|
|
Weighted-Average
Grant-Date
Fair
Value
|
|
Nonvested
at December 31, 2005
|
|
|
695,400
|
|
$
|
14.07
|
|
Granted
|
|
|
135,946
|
|
|
21.39
|
|
Vested
|
|
|
(142,900
|
)
|
|
11.91
|
|
Forfeited
|
|
|
(22,480
|
)
|
|
15.90
|
|
Nonvested
at September 30, 2006
|
|
|
665,966
|
|
$
|
15.97
|
|
At
September 30, 2006, there was $4.8 million of unrecognized compensation cost
related to nonvested awards, which the Corporation expects to recognize over
a
weighted-average period of 1.4 years. Information about stock options that
are vested or expected to vest and that are exercisable at September 30, 2006,
follows:
Options
|
Number
|
Weighted-Average
Exercise Price
|
Weighted-Average
Remaining Life in Years
|
Aggregate
Intrinsic Value ($000s)
|
Vested
or expected to vest
|
1,159,796
|
$34.68
|
5.5
|
$8,003
|
Exercisable
|
529,150
|
$28.24
|
2.9
|
$7,059
|
The
weighted-average grant-date fair value of options granted was $21.39 for the
nine months ended September 30, 2006. Other information for the three and
nine-month periods follows:
|
|
Three
months ended
|
Nine
months ended
|
(In
thousands)
|
|
|
Sep.
30, 2006
|
|
|
Oct.
1, 2005
|
|
|
Sep.
30, 2006
|
|
|
Oct.
1, 2005
|
|
Total
fair value of shares vested
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,702
|
|
$
|
875
|
|
Total
intrinsic value of options exercised
|
|
|
145
|
|
|
776
|
|
|
1,446
|
|
|
8,447
|
|
Cash
received from exercise of stock options
|
|
|
207
|
|
|
801
|
|
|
1,100
|
|
|
8,334
|
|
Tax
benefit realized from exercise of stock options
|
|
|
53
|
|
|
276
|
|
|
528
|
|
|
2,999
|
|
Note
C.
Inventories
The
Corporation values its inventory at the lower of cost or market with
approximately 87% valued by the last-in, first-out (LIFO) method.
(In
thousands)
|
|
|
Sep.
30, 2006
(Unaudited)
|
|
|
Dec.
31, 2005
|
|
Finished
products
|
|
$
|
78,220
|
|
$
|
61,027
|
|
Materials
and work in process
|
|
|
63,490
|
|
|
46,398
|
|
LIFO
allowance
|
|
|
(17,810
|
)
|
|
(16,315
|
)
|
|
|
$
|
123,900
|
|
$
|
91,110
|
|
Note
D.
Comprehensive Income and Shareholders'
Equity
The
Corporation's
comprehensive income for the first nine months of 2006 consisted of additional
minimum pension liability and foreign currency adjustments.
For
the
nine months ended September 30, 2006, the Corporation repurchased 3,574,803
shares of its common stock at a cost of approximately $170.3 million. As
of September 30, 2006, $173.2 million of the Board of Director's
current
repurchase authorization remained unspent.
Note
E.
Earnings Per Share
The
following table reconciles the numerators and denominators used in the
calculation of basic and diluted earnings per share (EPS):
|
|
Three
Months Ended
|
Nine
Months Ended
|
|
|
|
Sep.
30, 2006
|
|
|
Oct.
1, 2005
|
|
|
Sep.
30, 2006
|
|
|
Oct.
1, 2005
|
|
Numerators:
Numerator
for both
basic and diluted EPS
net income (in thousands)
|
|
$
|
35,762
|
|
$
|
40,561
|
|
$
|
92,884
|
|
$
|
101,668
|
|
Denominators:
Denominator
for basic EPS
weighted-average common shares
outstanding
|
|
|
49,323,698
|
|
|
55,011,758
|
|
|
50,722,997
|
|
|
55,106,182
|
|
Potentially
dilutive shares from
stock option plans
|
|
|
268,191
|
|
|
435,722
|
|
|
328,240
|
|
|
378,007
|
|
Denominator
for diluted EPS
|
|
|
49,591,889
|
|
|
55,447,480
|
|
|
51,051,237
|
|
|
55,484,189
|
|
Earnings
per share - basic
|
|
$
|
0.73
|
|
$
|
0.74
|
|
$
|
1.83
|
|
$
|
1.84
|
|
Earnings
per share - diluted
|
|
$
|
0.72
|
|
$
|
0.73
|
|
$
|
1.82
|
|
$
|
1.83
|
|
Certain
exercisable and non-exercisable stock options were not included in the
computation of diluted EPS at September 30, 2006 because their inclusion would
have been anti-dilutive. There were no stock options outstanding, which met
this
criterion for the three and nine months ended October 1, 2005. The number
of stock options outstanding, which met this criterion for the three and nine
months ended September 30, 2006, was 300,466 and 290,366,
respectively.
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 manufacturing facilities in the third quarter
of 2005. The shutdowns are now complete. The following is a summary
of changes in restructuring accruals during the third quarter of
2006:
(In
thousands)
|
|
|
Severance
|
|
|
Facility
Exit Costs & Other
|
|
|
Total
|
|
Balance
as of July 1, 2006
|
|
$
|
-
|
|
$
|
93
|
|
$
|
93
|
|
Restructuring
charges
|
|
|
-
|
|
|
(27
|
)
|
|
(27
|
)
|
Cash
payments
|
|
|
-
|
|
|
(66
|
)
|
|
(66
|
)
|
Balance
as of September 30, 2006
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
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 less cash acquired totaled approximately $77.9 million. The
Corporation did increase its borrowings under its revolving credit facility
to
fund the acquisitions. The Corporation is in the process of finalizing the
allocation of the
purchase
price, primarily with respect to deferred taxes and pension plans. There
are approximately $51.7 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 $37.7 million have estimated useful lives ranging from two to fifteen
years. There is approximately $10.2 million of goodwill associated with these
acquisitions, of which $7.4 million was assigned to the furniture segment and
$2.8 million was assigned to the hearth segment. Approximately $7.2
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 September
30, 2006 and December 31, 2005, which are reflected in the "Other
Assets"
line
item in the Corporation's
condensed consolidated balance sheets:
(In
thousands)
|
|
|
Sep.
30, 2006
|
|
|
Dec.
31, 2005
|
|
Patents
|
|
$
|
18,780
|
|
$
|
18,480
|
|
Customer
relationships and other
|
|
|
106,171
|
|
|
67,211
|
|
Less:
accumulated amortization
|
|
|
(37,182
|
)
|
|
(28,758
|
)
|
|
|
$
|
87,769
|
|
$
|
56,933
|
|
Aggregate
amortization expense for the three and nine months ended September 30, 2006
and
October 1, 2005 was $2.9 million and $8.1 million, and $1.8 million and $5.4
million, respectively. Amortization expense is estimated to range between
$5.9 to $9.2 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. The trademarks are deemed to have indefinite useful lives
because they are expected to generate cash flows indefinitely.
The
changes in the carrying amount of goodwill since December 31, 2005, are as
follows by reporting segment:
(In
thousands)
|
|
|
Office
Furniture
|
|
|
Hearth
Products
|
|
|
Total
|
|
Balance
as of December 31, 2005
|
|
$
|
77,659
|
|
$
|
164,585
|
|
$
|
242,244
|
|
Goodwill
increase during period
|
|
|
8,858
|
|
|
2,790
|
|
|
11,648
|
|
Balance
as of September 30, 2006
|
|
$
|
86,517
|
|
$
|
167,375
|
|
$
|
253,892
|
|
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
their carrying value so no impairment of goodwill was recognized. The
increase in goodwill relates to the acquisitions completed during the first
quarter and final purchase price adjustments related to prior
acquisitions. See Note G for further information.
Note
I.
Long-Term Debt
On
April
6, 2006, the Corporation refinanced $150 million of borrowings outstanding
under
its revolving credit facility with 5.54 percent ten-year unsecured Senior Notes
due in 2016 issued through the private placement debt market. Interest
payments are due biannually on April 1 and October 1 of each year and the
principal is due in a lump sum in 2016. The Corporation maintained the
revolving credit facility with a maximum borrowing of $300 million.
Amounts borrowed under the revolving credit facility may be borrowed, repaid
and
reborrowed from time to time until January 28, 2011. As of September 30,
2006, $184 million of the revolving credit facility was outstanding with $37
million classified as short-term as the Corporation expects to repay that
portion of the borrowings within a year.
Certain
of the Corporation's
borrowing arrangements include covenants which limit the assumption of
additional debt and lease obligations. The Corporation has been and
currently is in compliance with the covenants related to these debt
agreements.
Note
J.
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 was as follows
during the period:
|
Nine
Months Ended
|
(In
thousands)
|
Sep.
30,
2006
|
|
Oct.
1,
2005
|
|
Balance
at beginning of period
Accrual
assumed from acquisition
Accruals
for warranties issued during the period
Accrual
related to pre-existing warranties
Settlements
made during the period
|
$10,157
125
8,642
366
(9,242
|
) |
$10,794
-
6,948
1,405
(9,003
|
) |
Balance
at end of period
|
$10,048
|
|
$10,144
|
|
Note
K.
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:
|
|
Nine
Months Ended
|
(In
thousands)
|
|
|
Sep.
30,
2006
|
|
|
Oct.
1,
2005
|
|
Service
cost
|
|
$
|
245
|
|
$
|
228
|
|
Interest
cost
|
|
|
789
|
|
|
792
|
|
Expected
return on plan assets
|
|
|
(131
|
)
|
|
(153
|
)
|
Amortization
of transition obligation
|
|
|
436
|
|
|
435
|
|
Amortization
of prior service cost
|
|
|
173
|
|
|
173
|
|
Amortization
of (gain)/loss
|
|
|
70
|
|
|
27
|
|
Net
periodic benefit cost
|
|
$
|
1,582
|
|
$
|
1,502
|
|
In
May
2004, The Financial Accounting Standards Board ("FASB")
issued
FASB Staff Position No. 106-2. "Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug
Improvement and Modernization Act of 2003"
(the
"Act").
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
L.
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 September 30, 2006, the Corporation has recovered
substantially all of this amount through liquidation of secured collateral
and
settlements.
The
Corporation utilizes letters of credit in the amount of $25 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
M.
New Accounting Standards
In
December 2004, the FASB issued SFAS No. 123(R) which replaces original SFAS
No.
123 and supersedes 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.
In
July
2006, the FASB issued Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes"
("FIN
48").
FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in an
enterprise's
financial statements in accordance with SFAS No. 109, "Accounting
for Income Taxes."
FIN 48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. This Interpretation is effective for
fiscal years beginning after December 15, 2006. The Corporation is
currently reviewing the impact, if any, that FIN 48 will have on its
consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 157 "Fair
Value Measurements"
("SFAS
157")
which
provides enhanced guidance for using fair value to measure assets and
liabilities. The standard also expands the amount of disclosure regarding the
extent to which companies measure assets and liabilities at fair value, the
information used to measure fair value, and the effect of fair value
measurements on earnings. The standard applies whenever other standards
require (or permit) assets or liabilities to be measured at fair value but
does
not expand the use of fair value in any new circumstances. This statement
is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The
Corporation is currently reviewing the impact, if any, that SFAS 157 will have
on its consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 158 "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statements No. 87, 88, 106, and 132(R) ("SFAS
158")."
This statement requires an employer that is a business entity to recognize
in
its statement of financial position the over funded or under funded status
of a
defined benefit postretirement plan measured as the difference between the
fair
value of plan assets and the benefit obligation. The recognition of the
net liability or asset will require an offsetting adjustment to accumulated
other comprehensive income in shareholders'
equity. SFAS 158 does not change how pensions and other postretirement
benefits are accounted for and reported in the income statement. This
statement is effective for fiscal years ending after December 15, 2006.
The Corporation will be required to apply the new standard for its 2006 year-end
financial statements and recognize on the 2006 balance sheet the funded status
of pension and other postretirement benefit plans. The Corporation
estimates that adoption of this statement will increase the
Corporation's
recorded liabilities by approximately $8 million with no impact to the income
statement.
Note
N.
Business Segment Information
Management
views the Corporation as operating in two business segments: office
furniture and hearth products with the former being the principal business
segment.
The
office furniture segment manufactures and markets a broad line of metal and
wood
commercial and home office furniture which includes file cabinets, desks,
credenzas, chairs, storage cabinets, tables, bookcases, freestanding office
partitions and panel systems, and other related products. The hearth
product segment manufactures and markets a broad line of manufactured gas-,
pellet- and wood-burning fireplaces and stoves, fireplace inserts, and chimney
systems principally for the home.
For
purposes of segment reporting, intercompany sales transfers between segments
are
not material and operating profit is income before income taxes exclusive of
certain unallocated corporate expenses. These unallocated corporate expenses
include the net cost of the Corporation's
corporate operations, interest income, and interest expense. The increase in
unallocated corporate expenses compared to prior year is due to increased
interest expense and stock-based compensation 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.
Reportable
segment data reconciled to the consolidated financial statements for the three
and nine month periods ended September 30, 2006, and October 1, 2005, is as
follows:
|
|
Three
Months Ended
|
Nine
Months Ended
|
(in
thousands)
|
|
|
Sep.
30,
2006
|
|
|
Oct.
1,
2005
|
|
|
Sep.
30,
2006
|
|
|
Oct.
1,
2005
|
|
Net
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office Furniture
|
|
$
|
539,460
|
|
$
|
477,295
|
|
$
|
1,544,484
|
|
$
|
1,360,088
|
|
Hearth Products
|
|
|
148,272
|
|
|
154,985
|
|
|
463,196
|
|
|
428,621
|
|
|
|
$
|
687,732
|
|
$
|
632,280
|
|
$
|
2,007,680
|
|
$
|
1,788,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office furniture (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations before restructuring charges
|
|
$
|
50,169
|
|
$
|
49,977
|
|
$
|
130,848
|
|
$
|
135,186
|
|
Restructuring and impairment charges
|
|
|
27
|
|
|
(1,071
|
)
|
|
(1,920
|
)
|
|
(1,071
|
)
|
Office Furniture - net
|
|
|
50,196
|
|
|
48,906
|
|
|
128,928
|
|
|
134,115
|
|
Hearth products
|
|
|
18,524
|
|
|
22,371
|
|
|
48,463
|
|
|
49,714
|
|
Total operating profit
|
|
|
68,720
|
|
|
71,277
|
|
|
177,391
|
|
|
183,829
|
|
Unallocated corporate expense
|
|
|
(12,402
|
)
|
|
(8,393
|
)
|
|
(31,119
|
)
|
|
(26,205
|
)
|
Income before income taxes
|
|
$
|
56,318
|
|
$
|
62,884
|
|
$
|
146,272
|
|
$
|
157,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
& Amortization Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office furniture
|
|
$
|
12,149
|
|
$
|
10,814
|
|
$
|
36,276
|
|
$
|
32,742
|
|
Hearth products
|
|
|
3,992
|
|
|
3,799
|
|
|
12,689
|
|
|
11,852
|
|
General corporate
|
|
|
1,045
|
|
|
1,567
|
|
|
3,079
|
|
|
4,971
|
|
|
|
$
|
17,186
|
|
$
|
16,180
|
|
$
|
52,044
|
|
$
|
49,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Expenditures (including capitalized software):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office furniture
|
|
$
|
11,478
|
|
$
|
6,539
|
|
$
|
33,337
|
|
$
|
18,481
|
|
Hearth products
|
|
|
3,047
|
|
|
2,101
|
|
|
8,491
|
|
|
6,700
|
|
General corporate
|
|
|
648
|
|
|
2,097
|
|
|
6,518
|
|
|
3,051
|
|
|
|
$
|
15,173
|
|
$
|
10,737
|
|
$
|
48,346
|
|
$
|
28,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of
Sept.
30,
2006
|
|
|
As
of
Oct.
1,
2005
|
|
Identifiable
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office furniture
|
|
|
|
|
|
|
|
$
|
746,007
|
|
$
|
631,672
|
|
Hearth products
|
|
|
|
|
|
|
|
|
396,733
|
|
|
370,620
|
|
General corporate
|
|
|
|
|
|
|
|
|
114,872
|
|
|
112,305
|
|
|
|
|
|
|
|
|
|
$
|
1,257,612
|
|
$
|
1,114,597
|
|
(1)
Includes minority interest.
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.
Net
sales
for the third quarter of 2006 increased 8.8 percent over third quarter
2005. The Corporation continued to experience solid growth in its office
furniture business including acquisitions offset by a decline in its hearth
business. Gross margins for the quarter decreased from prior year levels
due to broad based increases in material costs. Selling and administrative
expenses increased driven by higher transportation costs and the effect of
acquisitions offset by a gain on the sale of a vacated facility and cost
reduction initiatives. As a result of the higher material and
transportation costs and interest expense, net income decreased 11.8 percent
for
the quarter.
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 nine months of 2006, there were no material changes in the accounting
policies and assumptions previously disclosed, except for the
Corporation's
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
|
Nine
Months Ended
|
(In
thousands)
|
|
|
Sep.
30,
2006
|
|
|
Oct.1,
2005
|
|
|
Percent
Change
|
|
|
Sep.
30,
2006
|
|
|
Oct.
1,
2005
|
|
|
Percent
Change
|
|
Net
sales
|
|
$
|
687,732
|
|
$
|
632,280
|
|
|
8.8
|
|
$
|
2,007,680
|
|
$
|
1,788,709
|
|
|
12.2
|
|
Cost
of sales
|
|
|
450,309
|
|
|
396,042
|
|
|
13.7
|
|
|
1,306,134
|
|
|
1,142,338
|
|
|
14.3
|
|
Gross
profit
|
|
|
237,423
|
|
|
236,238
|
|
|
0.5
|
|
|
701,546
|
|
|
646,371
|
|
|
8.5
|
|
Selling
& administrative expenses
|
|
|
177,059
|
|
|
171,802
|
|
|
3.1
|
|
|
544,843
|
|
|
487,348
|
|
|
11.8
|
|
Restructuring
& impairment charges
|
|
|
(27
|
)
|
|
1,071
|
|
|
NM
|
|
|
1,920
|
|
|
1,071
|
|
|
79.3
|
|
Operating
income
|
|
|
60,391
|
|
|
63,365
|
|
|
(4.7
|
)
|
|
154.783
|
|
|
157,952
|
|
|
(2.0
|
)
|
Interest
income(expense) net
|
|
|
(4,111
|
)
|
|
(498
|
)
|
|
(725.5
|
)
|
|
(8,644
|
)
|
|
(345
|
)
|
|
NM
|
|
Earnings
before income taxes
and minority interest
|
|
|
56,280
|
|
|
62,867
|
|
|
(10.5
|
)
|
|
146,139
|
|
|
157,607
|
|
|
(7.3
|
)
|
Income
taxes
|
|
|
20,542
|
|
|
22,317
|
|
|
(8.0
|
)
|
|
53,341
|
|
|
55,950
|
|
|
(4.7
|
)
|
Minority
interest in earnings of
a subsidiary
|
|
|
(24
|
)
|
|
(11
|
)
|
|
NM
|
|
|
(86
|
)
|
|
(11
|
)
|
|
NM
|
|
Net
income
|
|
$
|
35,762
|
|
$
|
40,561
|
|
|
(11.8
|
)
|
$
|
92,884
|
|
$
|
101,668
|
|
|
(8.6
|
)
|
Results
of Operations
The
Corporation experienced solid sales growth in the quarter, up 8.8 percent or
$55.5 million compared to the same quarter last year. Acquisitions
completed during the first quarter, along with acquisitions completed during
the
fourth quarter of 2005, accounted for $33 million, or 5.2 percentage points,
of
the increase in sales.
Gross
margins for the third quarter decreased to 34.5 percent compared to 37.4 percent
for the same quarter last year. The decrease was primarily due to broad
based increases in material costs.
Total
selling and administrative expenses for the quarter increased by $4.2 million
compared to the same quarter last year. However, total selling and
administrative expenses decreased as a percent of sales to 25.7 percent compared
to 27.3 percent in third quarter 2005. Included in third quarter 2006 were
increased freight and distribution costs of $9 million due to volume, rate
increases, and fuel surcharges; additional selling and administrative costs
of
$11 million associated with new acquisitions; and $0.8 million of stock-based
compensation expense due to the adoption of SFAS 123(R). These increases
were offset by a $3.4 million gain on the sale of a facility vacated due to
the
consolidation of production, which began in third quarter 2005. The
Corporation continued to implement cost reduction initiatives to adjust to
a
higher material cost environment and a declining housing market. Third
quarter 2005 included $1.1 million of restructuring costs.
Net
income decreased 11.8 percent and net income per diluted share decreased 1.4
percent compared to the same quarter in 2005. Interest expense increased
$3.8 million during the quarter on moderate debt levels, consistent with the
Corporation's
capital
structure strategy. Net income per share was positively impacted $0.08 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.
For
the
first nine months of 2006 consolidated net sales increased $219.0 million,
or
12.2 percent, to $2.0 billion compared to $1.8 billion in 2005. Acquisitions
accounted for approximately $89 million or 5.0 percentage points of the
increase. Gross margins year-to-date decreased to 34.9 percent compared to
36.1
percent last year due to increased material costs. Net income was $92.9
million compared to $101.7 million in 2005, a decrease of 8.6 percent. Net
income per share was $1.82 per diluted share compared to $1.83 per diluted
share
in 2005. Net income per share was positively impacted $0.15 per share due
to the Corporation's
share
repurchase program that reduced average shares outstanding by 4.4 million
shares, or 8.0 percent, compared to 2005.
Office
Furniture
Third
quarter sales for the office furniture segment increased 13.0 percent or $62.2
million to $539.5 million from $477.3 million for the same quarter last
year. Sales from the Corporation's
acquisitions since third quarter 2005 accounted for $27 million, or 5.7
percentage points, of the increase. Operating profit prior to unallocated
corporate expenses as a percent of sales decreased to 9.3 percent versus 10.2
percent in the same quarter last year. Operating profit was negatively
impacted by higher material, transportation and other input costs. In
addition, acquisitions negatively impacted profitability during the quarter
as
anticipated. Operating profit was positively impacted by a $3.4 million
gain on the sale of a vacated plant facility.
Net
sales
for the first nine months of 2006 increased $184.4 million, or 13.6 percent,
to
$1.5 billion compared to $1.4 billion in 2005. Acquisitions accounted for
$74 million, or 5.4 percentage points, of the increase in sales. Operating
profit as a percentage of sales decreased to 8.3 percent compared to 9.9 percent
in the prior year.
Hearth
Products
Third
quarter net sales for the hearth products segment decreased 4.3 percent or
$6.7
million to $148.3 million from $155.0 million for the same quarter last
year. The Corporation's
acquisitions completed since the third quarter of 2005 contributed approximately
$6 million of new sales. The Corporation experienced a rapid and
pronounced decline in the new construction related business in conjunction
with
a dramatic decline in housing starts. The decline was partially offset by
continued strong demand in its remodel/retrofit business. Operating profit
prior
to unallocated corporate expenses decreased to $18.5 million from $22.4 million
in the same quarter last year. Operating profit as a percent of net sales
decreased to 12.5 percent compared to 14.4 percent in 2005 due to lower volume,
increased freight and distribution costs, and a higher mix of lower margin
remodel/retrofit business.
Net
sales
for the first nine months of 2006 increased 8.1 percent to $463.2 million
compared to $428.6 million in 2005. Acquisitions accounted for $15
million, or 3.6 percentage points, of the increase. Operating profit as a
percentage of sales decreased to 10.5 percent compared to 11.6 percent in the
prior year.
Liquidity
and Capital Resources
As
of
September 30, 2006, cash and short-term investments were $42.9 million compared
to $84.7 million at year-end 2005. Cash flow from operations for the first
nine months was $71.1 million compared to $102.6 million in 2005. The
decline in operating cash flow was primarily due to lower profits, increased
inventory levels to achieve best total cost and seasonal build in the hearth
stove business, and lower accruals for incentive costs and compensation.
Trade receivables increased from year-end due to seasonality particularly in
the
hearth segment, increased volume and acquisitions completed during the year.
Inventory increased from year-end due to seasonality particularly in the hearth
segment, increased volume, acquisitions completed during the year, and
additional imported inventory with longer lead times. 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 September 30, 2006 maintained
additional borrowing capacity of $91 million, net of amounts designated for
letters of credit, through a $300 million revolving bank credit
agreement.
Capital
expenditures, including capitalized software, for the first nine months of
2006
were $48.3 million compared to $28.2 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 35 to
45
percent higher than 2005 due to new product introductions, 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 $78.3 million in cash. During the first nine months of 2006, net
borrowings under the Corporation's
revolving credit facility increased $194 million to fund acquisitions, share
repurchases, and seasonal cash requirements. In early April, the
Corporation refinanced $150 million of borrowings outstanding under its
revolving credit facility, with 5.54 percent ten-year Senior Notes due in 2016
issued through the private placement debt market. As of September 30,
2006, $184 million of the revolving credit facility was outstanding with $37
million classified as short-term as the Corporation expects to repay that
portion of the borrowings within a year.
The
Board
of Directors declared a regular quarterly cash dividend of $0.18 per share
on
its common stock on August 8, 2006, to shareholders of record at the close
of
business on August 18, 2006. It was paid on September 1, 2006. This
was the 206th
consecutive quarterly dividend paid by the Corporation.
For
the
nine months ended September 30, 2006, the Corporation repurchased 3,574,803
shares of its common stock at a cost of approximately $170.3 million, or an
average price of $47.64. The Board of Directors authorized an additional $200
million on August 8, 2006 for repurchases of the Corporation's
common
stock. As of September 30, 2006, $173.2 million of the Board of
Directors'
current
repurchase authorization remained unspent.
Off-Balance
Sheet Arrangements
The
Corporation does not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures
or
capital resources that are material.
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
nine months of fiscal 2006, with the exception of Senior Notes issued through
the private placement debt market (as described in Note I), and a new
transportation service contract (as described in Note L), 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, the Business and Institutional Furniture Manufacturer's
Association's
forecasting consultant, estimates U.S. office furniture shipments to increase
9
percent in 2006 compared to 13 percent in 2005. The outlook for the office
furniture business continues to remain positive as core fundamentals are
solid. Management believes that its office furniture businesses are well
positioned in their markets, are competing well and the strategic growth
initiatives are on track for solid performance. The Corporation expects to
close the material cost gap and experience positive profit momentum as it begins
to realize the benefit of price increases.
Housing
starts, a key indicator for the hearth industry, have declined dramatically
and
market conditions remain uncertain. The Corporation's
new
construction business in its hearth segment will remain under stress in the
mid-term. The Corporation maintains a market leadership position and is
aggressively resizing its cost structure to adjust to lower demand
levels.
The
Corporation continues to 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; 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, 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
September 30, 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 September
30,
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 September 30, 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 September 30, 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 and the
Corporation's
Quarterly Report on Form 10-Q for the quarter ended April 1, 2006.
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 third quarter
ended September 30, 2006.
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
|
7/2/06
- 7/29/06
|
240,000
|
$45.11
|
240,000
|
$
24,801,590
|
7/30/06
- 8/26/06
|
796,627
|
$40.72
|
796,627
|
$192,360,337
|
8/27/06
- 9/30/06
|
480,000
|
$39.96
|
480,000
|
$173,178,131
|
Total
|
1,516,627
|
$41.18
|
1,516,627
|
$173,178,131
|
(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:
§
Plan
announced August 8, 2006, providing share
repurchase authorization of $200,000,000 with no specific expiration
date.
§
Plan
announced November 11, 2005, providing
share repurchase authorization of $200,000,000 with no specified expiration
date.
§
No
repurchase plans expired or were terminated
during the third quarter, nor do any plans exist under which the Corporation
does not intend to make further purchases.
Item
6. 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 |
|
|
|
Dated:
November 2, 2006 |
By: |
/s/ Jerald
K.
Dittmer |
|
Jerald
K. Dittmer |
|
Vice
President and Chief Financial Officer |
|
EXHIBIT
INDEX
|
10.1
|
1995
Stock-Based Compensation Plan, as amended August 8, 2006
|
10.2
|
1997
Equity Plan for Non-Employee Directors,
as amended August 8, 2006
|
10.3
|
HNI
Corporation Long-Term Performance Plan, as amended August 8,
2006
|
10.4
|
HNI
Corporation Executive Bonus Plan, as amended August 8, 2006
|
10.5
|
Executive
Deferred Compensation Plan,
as amended August 8, 2006
|
10.6
|
Directors
Deferred Compensation Plan,
as amended August 8, 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
Sarbanes-Oxley
Act Section 302
I,
Stan
A. Askren, Chairman, President and Chief Executive Officer of HNI Corporation,
certify that:
1. I
have
reviewed this quarterly report on Form 10-Q of HNI Corporation;
2.
Based on
my knowledge, this quarterly report does not contain any untrue statement of
a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made,
not
misleading with respect to the period covered by this quarterly report; and
3. Based
on
my knowledge, the financial statements, and other financial information included
in this quarterly report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this quarterly report; and
4.
The
registrant's other certifying officer and I are responsible for establishing
and
maintaining disclosure controls and procedures (as defined in Exchange Act
Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15(d) - 15(f)) for the registrant
and we have:
a.
designed
such disclosure controls and procedures, or caused such disclosure controls
and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly, during the
period in which this quarterly report is being prepared;
b. designed
such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c. evaluated
the effectiveness of the registrant's disclosure controls and procedures, and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by
this
report based on such evaluation; and
d. disclosed
in this report any change in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal quarter
that
has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
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:
a. all
significant deficiencies and material weaknesses in the design or operation
of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and
report financial information; and
b. any
fraud, whether or not material, that involves management or other employees
who
have a significant role in the registrant's internal controls over financial
reporting.
Date: November
2, 2006
|
By:
|
/s/
Stan A. Askren
|
|
|
Name:
Stan A. Askren
Title:
Chairman, President and Chief Executive
Officer
|
EXHIBIT
31.2
CERTIFICATION
OF CHIEF EXECUTIVE OFFICER
Sarbanes-Oxley
Act Section 302
I,
Jerald
K. Dittmer, Vice President and Chief Financial Officer of HNI Corporation,
certify that:
1. I
have
reviewed this quarterly report on Form 10-Q of HNI Corporation;
2.
Based on
my knowledge, this quarterly report does not contain any untrue statement of
a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made,
not
misleading with respect to the period covered by this quarterly report; and
3. Based
on
my knowledge, the financial statements, and other financial information included
in this quarterly report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this quarterly report; and
4.
The
registrant's other certifying officer and I are responsible for establishing
and
maintaining disclosure controls and procedures (as defined in Exchange Act
Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15(d) - 15(f)) for the registrant
and we have:
a.
designed
such disclosure controls and procedures, or caused such disclosure controls
and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly, during the
period in which this quarterly report is being prepared;
b. designed
such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c. evaluated
the effectiveness of the registrant's disclosure controls and procedures, and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by
this
report based on such evaluation; and
d. disclosed
in this report any change in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal quarter
that
has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
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:
b. all
significant deficiencies and material weaknesses in the design or operation
of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and
report financial information; and
b. any
fraud, whether or not material, that involves management or other employees
who
have a significant role in the registrant's internal controls over financial
reporting.
Date: November
2, 2006
|
By:
|
/s/
Jerald K. Dittmer
|
|
|
Name:
Jerald K. Dittmer
Title:
Vice President and Chief
Financial Officer
|
EXHIBIT
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
|
In
connection with the Quarterly Report on Form 10-Q of HNI Corporation
(the
"Corporation")
for the quarterly period ended September 30, 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:
1. The
Report fully complies with the requirements of Section 13(a) or 15(d)
of
the Securities Exchange Act of 1934; and
2. The
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Corporation as of the dates and for the periods expressed in the
Report.
|
|
/s/
Stan A. Askren
|
|
Name:
Stan A. Askren
Title:
Chairman, President and Chief
Executive Officer
Date:
November 2, 2006
|
|
/s/
Jerald K. Dittmer
|
|
Name: Jerald
K. Dittmer
Title:
Vice President and Chief
Financial Officer
Date:
November 2, 2006
|
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.
|