r10q6282008.htm
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 June 28, 2008
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OR
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/ / TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
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For
the transition period from ____________________ to
____________________
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Commission
File Number 1-14225
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HNI
Corporation
(Exact
name of registrant as specified in its charter)
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Iowa
(State
or other jurisdiction of
incorporation
or organization)
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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, a non-accelerated filer, or a smaller reporting
company. See definition of "large accelerated filer",
"accelerated filer" and "smaller reporting company" in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer X Accelerated
filer
Non-accelerated
filer Smaller
reporting company
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES
NO
X
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Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practical date.
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Class
Common
Shares, $1 Par Value
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Outstanding
at June 28, 2008
44,211,457
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HNI
Corporation and SUBSIDIARIES
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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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3
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5
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6
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7
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8
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17
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23
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23
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PART
II. OTHER INFORMATION
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24
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24
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25
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Item
3. Defaults Upon Senior Securities -
None
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-
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26
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Item
5. Other Information – None
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-
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26
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27
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28
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Item
1. Financial Statements
(Unaudited)
HNI
Corporation and SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
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Jun.
28,
2008
(Unaudited)
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Dec.
29,
2007
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ASSETS
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(In
thousands)
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|
|
|
|
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CURRENT
ASSETS
|
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Cash
and cash equivalents
|
|
$ |
23,028 |
|
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$ |
33,881 |
|
Short-term
investments
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9,650 |
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9,900 |
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Receivables
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277,553 |
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288,777 |
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Inventories
(Note C)
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103,868 |
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108,541 |
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Deferred
income taxes
|
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|
17,704 |
|
|
|
17,828 |
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Prepaid
expenses and other current assets
|
|
|
29,793 |
|
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|
30,145 |
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Total
Current Assets
|
|
|
461,596 |
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489,072 |
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PROPERTY,
PLANT, AND EQUIPMENT, at cost
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Land
and land improvements
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24,277 |
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23,805 |
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Buildings
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265,801 |
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268,650 |
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Machinery
and equipment
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504,292 |
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501,950 |
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Construction
in progress
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29,677 |
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25,858 |
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824,047 |
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820,263 |
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Less
accumulated depreciation
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511,721 |
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514,832 |
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Net
Property, Plant, and Equipment
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312,326 |
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305,431 |
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GOODWILL
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279,178 |
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256,834 |
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OTHER
ASSETS
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190,743 |
|
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155,639 |
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Total
Assets
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$ |
1,243,843 |
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$ |
1,206,976 |
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See
accompanying Notes to Condensed Consolidated Financial
Statements.
HNI
Corporation and SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
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Jun.
28,
2008
(Unaudited)
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Dec.
29,
2007
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|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
(In
thousands, except share and per share value data)
|
|
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CURRENT
LIABILITIES
|
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Accounts
payable and accrued expenses
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$ |
339,396 |
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$ |
367,320 |
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Note
payable and current maturities of long-term debt
and capital lease obligations
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37,605 |
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14,715 |
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Current
maturities of other long-term obligations
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302 |
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2,426 |
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Total
Current Liabilities
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377,303 |
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384,461 |
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LONG-TERM
DEBT
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342,300 |
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280,315 |
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CAPITAL
LEASE OBLIGATIONS
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|
601 |
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776 |
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OTHER
LONG-TERM LIABILITIES
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55,709 |
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55,843 |
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DEFERRED
INCOME TAXES
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26,822 |
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26,672 |
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MINORITY
INTEREST IN SUBSIDIARY
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135 |
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1 |
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SHAREHOLDERS'
EQUITY
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Capital
Stock:
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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,
$1 par value, authorized 200,000,000
shares, outstanding -
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44,211 |
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44,835 |
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June
28, 2008 – 44,211,457 shares;
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Dec.
29, 2007 – 44,834,519 shares
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Additional
paid-in capital
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3,482 |
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3,152 |
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Retained
earnings
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|
391,396 |
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410,075 |
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Accumulated
other comprehensive income
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|
1,884 |
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|
846 |
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Total
Shareholders' Equity
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|
440,973 |
|
|
|
458,908 |
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Total
Liabilities and Shareholders' Equity
|
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$ |
1,243,843 |
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$ |
1,206,976 |
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See
accompanying Notes to Condensed Consolidated Financial
Statements.
HNI
Corporation and SUBSIDIARIES
(Unaudited)
|
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|
Three
Months Ended
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Jun.
28,
2008
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Jun.
30,
2007
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(In
thousands, except share and per share data)
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Net
sales
|
|
$ |
613,114 |
|
|
$ |
618,160 |
|
Cost
of sales
|
|
|
403,671 |
|
|
|
402,523 |
|
Gross
profit
|
|
|
209,443 |
|
|
|
215,637 |
|
Selling
and administrative expenses
|
|
|
182,673 |
|
|
|
169,559 |
|
Restructuring
and impairment
|
|
|
2,029 |
|
|
|
728 |
|
Operating
income
|
|
|
24,741 |
|
|
|
45,350 |
|
Interest
income
|
|
|
175 |
|
|
|
196 |
|
Interest
expense
|
|
|
4,359 |
|
|
|
4,774 |
|
Earnings
from continuing operations before income taxes and minority
interest
|
|
|
20,557 |
|
|
|
40,772 |
|
Income
taxes
|
|
|
7,095 |
|
|
|
14,404 |
|
Earnings
from continuing operations before minority interest
|
|
|
13,462 |
|
|
|
26,368 |
|
Minority
interest in earnings of subsidiary
|
|
|
(7 |
) |
|
|
(25 |
) |
Income
from continuing operations
|
|
|
13,469 |
|
|
|
26,393 |
|
Discontinued
operations, less applicable taxes
|
|
|
- |
|
|
|
484 |
|
Net
income
|
|
$ |
13,469 |
|
|
$ |
26,877 |
|
|
|
|
|
|
|
|
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|
Net
income from continuing operations – basic
|
|
$ |
0.30 |
|
|
$ |
0.56 |
|
Net
income from discontinued operations – basic
|
|
|
- |
|
|
$ |
0.01 |
|
Net
income per common share – basic
|
|
$ |
0.30 |
|
|
$ |
0.57 |
|
Average
number of common shares outstanding – basic
|
|
|
44,233,402 |
|
|
|
46,936,567 |
|
Net
income from continuing operations – diluted
|
|
$ |
0.30 |
|
|
$ |
0.56 |
|
Net
income from discontinued operations – diluted
|
|
|
- |
|
|
$ |
0.01 |
|
Net
income per common share – diluted
|
|
$ |
0.30 |
|
|
$ |
0.57 |
|
Average
number of common shares outstanding – diluted
|
|
|
44,370,451 |
|
|
|
47,199,397 |
|
Cash
dividends per common share
|
|
$ |
0.215 |
|
|
$ |
0.195 |
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
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|
HNI
Corporation and SUBSIDIARIES
(Unaudited)
|
|
|
|
Six
Months Ended
|
|
|
|
Jun.
28,
2008
|
|
|
Jun.
30,
2007
|
|
|
|
(In
thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
1,176,497 |
|
|
$ |
1,227,360 |
|
Cost
of sales
|
|
|
783,016 |
|
|
|
805,023 |
|
Gross
profit
|
|
|
393,481 |
|
|
|
422,337 |
|
Selling
and administrative expenses
|
|
|
355,228 |
|
|
|
340,373 |
|
Restructuring
and impairment
|
|
|
2,847 |
|
|
|
592 |
|
Operating
income
|
|
|
35,406 |
|
|
|
81,372 |
|
Interest
income
|
|
|
638 |
|
|
|
448 |
|
Interest
expense
|
|
|
8,236 |
|
|
|
9,062 |
|
Earnings
from continuing operations before income taxes and minority
interest
|
|
|
27,808 |
|
|
|
72,758 |
|
Income
taxes
|
|
|
10,275 |
|
|
|
25,767 |
|
Earnings
from continuing operations before minority interest
|
|
|
17,533 |
|
|
|
46,991 |
|
Minority
interest in earnings of subsidiary
|
|
|
87 |
|
|
|
(53 |
) |
Income
from continuing operations
|
|
|
17,446 |
|
|
|
47,044 |
|
Discontinued
operations, less applicable taxes
|
|
|
- |
|
|
|
514 |
|
Net
income
|
|
$ |
17,446 |
|
|
$ |
47,558 |
|
|
|
|
|
|
|
|
|
|
Net
income from continuing operations – basic
|
|
$ |
0.39 |
|
|
$ |
0.99 |
|
Net
income from discontinued operations – basic
|
|
|
- |
|
|
$ |
0.01 |
|
Net
income per common share – basic
|
|
$ |
0.39 |
|
|
$ |
1.00 |
|
Average
number of common shares outstanding – basic
|
|
|
44,385,400 |
|
|
|
47,466,147 |
|
Net
income from continuing operations – diluted
|
|
$ |
0.39 |
|
|
$ |
0.99 |
|
Net
income from discontinued operations – diluted
|
|
|
- |
|
|
$ |
0.01 |
|
Net
income per common share – diluted
|
|
$ |
0.39 |
|
|
$ |
1.00 |
|
Average
number of common shares outstanding – diluted
|
|
|
44,541,467 |
|
|
|
47,733,977 |
|
Cash
dividends per common share
|
|
$ |
0.43 |
|
|
$ |
0.39 |
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
|
|
HNI
Corporation and SUBSIDIARIES
(Unaudited)
|
|
|
|
Six Months Ended
|
|
|
|
Jun.
28, 2008
|
|
|
Jun.
30, 2007
|
|
|
|
(In
thousands)
|
|
Net
Cash Flows From (To) Operating Activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
17,446 |
|
|
$ |
47,558 |
|
Noncash
items included in net income:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
34,566 |
|
|
|
33,730 |
|
Other
postretirement and post employment benefits
|
|
|
754 |
|
|
|
1,066 |
|
Stock-based
compensation
|
|
|
952 |
|
|
|
1,909 |
|
Excess
tax benefits from stock compensation
|
|
|
(11 |
) |
|
|
(654 |
) |
Deferred
income taxes
|
|
|
379 |
|
|
|
(10,344 |
) |
Loss
on sale, retirement and impairment of long-lived
assets and intangibles
|
|
|
2,131 |
|
|
|
2,384 |
|
Stock
issued to retirement plan
|
|
|
6,592 |
|
|
|
6,611 |
|
Other
– net
|
|
|
1,202 |
|
|
|
754 |
|
Net
increase (decrease) in non-cash operating assets
and liabilities
|
|
|
(953 |
) |
|
|
14,598 |
|
Increase
(decrease) in other liabilities
|
|
|
(2,863 |
) |
|
|
(1,941 |
) |
Net
cash flows from (to) operating activities
|
|
|
60,195 |
|
|
|
95,671 |
|
|
|
|
|
|
|
|
|
|
Net
Cash Flows From (To) Investing Activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(35,939 |
) |
|
|
(29,148 |
) |
Proceeds
from sale of property, plant and equipment
|
|
|
638 |
|
|
|
305 |
|
Acquisition
spending, net of cash acquired
|
|
|
(75,330 |
) |
|
|
(1,509 |
) |
Short-term
investments – net
|
|
|
(250 |
) |
|
|
- |
|
Purchase
of long-term investments
|
|
|
(8,098 |
) |
|
|
(17,287 |
) |
Sales
or maturities of long-term investments
|
|
|
10,608 |
|
|
|
15,267 |
|
Other
– net
|
|
|
- |
|
|
|
100 |
|
Net
cash flows from (to) investing activities
|
|
|
(108,371 |
) |
|
|
(32,272 |
) |
|
|
|
|
|
|
|
|
|
Net
Cash Flows From (To) Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds
from sales of HNI Corporation common
stock
|
|
|
2,327 |
|
|
|
5,456 |
|
Purchase
of HNI Corporation common stock
|
|
|
(28,553 |
) |
|
|
(85,000 |
) |
Excess
tax benefits from stock compensation
|
|
|
11 |
|
|
|
654 |
|
Proceeds
from long-term debt
|
|
|
214,000 |
|
|
|
141,470 |
|
Payments
of note and long-term debt and other financing
|
|
|
(131,389 |
) |
|
|
(111,594 |
) |
Dividends
paid
|
|
|
(19,073 |
) |
|
|
(18,473 |
) |
Net
cash flows from (to) financing activities
|
|
|
37,323 |
|
|
|
(67,487 |
) |
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash
equivalents
|
|
|
(10,853 |
) |
|
|
(4,088 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
33,881 |
|
|
|
28,077 |
|
Cash
and cash equivalents at end of period
|
|
$ |
23,028 |
|
|
$ |
23,989 |
|
|
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
|
|
HNI
Corporation and SUBSIDIARIES
June 28,
2008
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 29, 2007 consolidated
balance sheet included in this Form 10-Q was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the
three-month and six-month periods ended June 28, 2008 are not necessarily
indicative of the results that may be expected for the year ending January 3,
2009. 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 29, 2007.
Note B.
Stock-Based Compensation
Effective
January 1, 2006, the Corporation adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based
Payment." Accordingly, stock-based compensation expense is measured
at grant date, based on the fair value of the award and is recognized as expense
over the employee requisite service period. For the three and six
months ended June 28, 2008, and June 30, 2007, the Corporation recognized $0.7
million and $1.0 million, and $0.9 million and $1.9 million, respectively, of
stock-based compensation for the cost of stock options and shares issued under
the Corporation's Members' Stock Purchase Plan.
At June
28, 2008, there was $5.3 million of unrecognized compensation cost related to
nonvested awards, which the Corporation expects to recognize over a
weighted-average period of 1.6 years.
Note
C. Inventories
The
Corporation values its inventory at the lower of cost or market with
approximately 81% valued by the last-in, first-out ("LIFO") method.
(In
thousands)
|
|
Jun.
28, 2008
(Unaudited)
|
|
|
Dec.
29, 2007
|
|
Finished
products
|
|
$ |
66,415 |
|
|
$ |
76,804 |
|
Materials
and work in process
|
|
|
58,362 |
|
|
|
52,641 |
|
LIFO
allowance
|
|
|
(20,909 |
) |
|
|
(20,904 |
) |
|
|
$ |
103,868 |
|
|
$ |
108,541 |
|
Note
D. Comprehensive Income and Shareholders' Equity
Components
of accumulated other comprehensive income (loss) consist of the
following:
|
|
June
28, 2008
|
|
(In
thousands)
|
|
Three
Months
Ended
|
|
|
Six
Months
Ended
|
|
Balance
at beginning of period
|
|
|
1,567 |
|
|
|
846 |
|
Foreign
currency translation adjustments – net of tax
|
|
|
420 |
|
|
|
1,215 |
|
Change
in unrealized gains (losses) on marketable securities – net of
tax
|
|
|
(50 |
) |
|
|
(203 |
) |
Change
in pension and postretirement liability – net of tax
|
|
|
79 |
|
|
|
158 |
|
Change
in fair value of derivative financial instrument – net of
tax
|
|
|
(132 |
) |
|
|
(132 |
) |
Balance
at end of period
|
|
|
1,884 |
|
|
|
1,884 |
|
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)
|
|
Jun.
28,
2008
|
|
|
Jun.
30,
2007
|
|
|
Jun.
28,
2008
|
|
|
Jun.
30,
2007
|
|
Numerators:
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
for both basic
and diluted EPS net
income
|
|
$ |
13,469 |
|
|
$ |
26,877 |
|
|
$ |
17,446 |
|
|
$ |
47,558 |
|
Denominators:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic EPS weighted-average
common shares
outstanding
|
|
|
44,233 |
|
|
|
46,937 |
|
|
|
44,385 |
|
|
|
47,466 |
|
Potentially
dilutive shares from
stock option plans
|
|
|
137 |
|
|
|
262 |
|
|
|
156 |
|
|
|
268 |
|
Denominator
for diluted EPS
|
|
|
44,370 |
|
|
|
47,199 |
|
|
|
44,541 |
|
|
|
47,734 |
|
Earnings
per share – basic
|
|
$ |
0.30 |
|
|
$ |
0.57 |
|
|
$ |
0.39 |
|
|
$ |
1.00 |
|
Earnings
per share – diluted
|
|
$ |
0.30 |
|
|
$ |
0.57 |
|
|
$ |
0.39 |
|
|
$ |
1.00 |
|
Certain
exercisable and non-exercisable stock options were not included in the
computation of diluted EPS at June 28, 2008, and June 30, 2007, because their
inclusion would have been anti-dilutive. The number of stock options
outstanding, which met this anti-dilutive criterion for the three and six months
ended June 28, 2008 was 1,186,428 and 1,166,602,
respectively. The number of stock options outstanding which met
this anti-dilutive criterion for the three and six months ended June 30, 2007
was 469,878.
Note
F. Restructuring Reserve and Plant Shutdowns
As a
result of the Corporation's ongoing business simplification and cost reduction
strategies, management made the decision in the third quarter of 2007 to close
an office furniture facility, consolidate production into other manufacturing
locations, close two distribution centers, and start up a new distribution
center. The Corporation expects that the closures and consolidations
will be completed in the third quarter of 2008. The Corporation
anticipates additional restructuring charges and transition costs of
approximately $0.9 million.
The
following is a summary of changes in restructuring accruals during the six
months ended June 28, 2008:
(In
thousands)
|
|
Severance
|
|
|
Facility
Exit Costs & Other
|
|
|
Total
|
|
Balance
as of December 29, 2007
|
|
$ |
3,858 |
|
|
$ |
990 |
|
|
$ |
4,848 |
|
Restructuring
charges
|
|
|
71 |
|
|
|
2,776 |
|
|
|
2,847 |
|
Cash
payments
|
|
|
(3,399 |
) |
|
|
(3,654 |
) |
|
|
(7,053 |
) |
Balance
as of June 28, 2008
|
|
$ |
530 |
|
|
$ |
112 |
|
|
$ |
642 |
|
Note
G. Business Combinations
The
Corporation completed the acquisition of Hickory Business Furniture, LLC
("HBF"), a leading provider of premium upholstered seating, textiles, wood
tables and wood case goods for the office environment on March 29, 2008 for a
purchase price of approximately $75 million. The transaction was
funded on March 31, 2008 with the proceeds of the Corporation's revolving credit
facility. The Corporation is in the process of finalizing the
allocation of the purchase price, with valuations and determination of working
capital adjustments to be completed. There are approximately $65.5
million of intangibles associated with this acquisition. Of these
acquired intangible assets, the Corporation has categorized $26.9 million as
indefinite-lived intangibles, $11.8 million as definite-lived intangibles and
$26.8 million as goodwill based on a preliminary valuation. These
amounts will be reclassified, as necessary, based on final
valuations.
Note
H. Discontinued Operations
The
Corporation completed the sale of a small non-core component of its office
furniture segment during the second quarter of 2007. Revenues and
expenses associated with this component are presented as discontinued operations
for the periods presented.
Summarized
financial information for discontinued operations is as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
(In
thousands)
|
|
Jun.
28, 2008
|
|
|
Jun.
30, 2007
|
|
|
Jun.
28, 2008
|
|
|
Jun.
30, 2007
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income/(loss) before tax
|
|
$ |
- |
|
|
$ |
749 |
|
|
$ |
- |
|
|
$ |
796 |
|
Tax
impact
|
|
|
- |
|
|
|
265 |
|
|
|
- |
|
|
|
282 |
|
Income/(loss)
from discontinued operations,
net of income tax
|
|
$ |
- |
|
|
$ |
484 |
|
|
$ |
- |
|
|
$ |
514 |
|
Note I.
Goodwill and Other Intangible Assets
The table
below summarizes amortizable definite-lived intangible assets as of June 28,
2008 and December 29, 2007, which are reflected in the "Other Assets" line item
in the Corporation's condensed consolidated balance sheets:
(In
thousands)
|
|
Jun.
28, 2008
|
|
|
Dec.
29, 2007
|
|
Patents
|
|
$ |
19,325 |
|
|
$ |
18,780 |
|
Customer
relationships and other
|
|
|
114,554 |
|
|
|
101,320 |
|
Less: accumulated
amortization
|
|
|
50,688 |
|
|
|
45,833 |
|
|
|
$ |
83,191 |
|
|
$ |
74,267 |
|
Aggregate
amortization expense for the three and six months ended June 28, 2008 and June
30, 2007 was $2.7 million and $4.9 million, and $2.3 million and $4.7 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)
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
Amortization
Expense
|
|
$ |
10.1 |
|
|
$ |
9.3 |
|
|
$ |
8.7 |
|
|
$ |
7.5 |
|
|
$ |
6.2 |
|
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
$72.6 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 29, 2007, are as
follows by reporting segment:
(In
thousands)
|
|
Office
Furniture
|
|
|
Hearth
Products
|
|
|
Total
|
|
Balance
as of December 29, 2007
|
|
$ |
85,274 |
|
|
$ |
171,560 |
|
|
$ |
256,834 |
|
Goodwill
increase (decrease) during period
|
|
|
26,851 |
|
|
|
(4,507 |
) |
|
|
22,344 |
|
Balance
as of June 28, 2008
|
|
$ |
112,125 |
|
|
$ |
167,053 |
|
|
$ |
279,178 |
|
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
units exceeds their carrying value so no impairment of goodwill was recognized
in the quarter. The increase in the office furniture segment goodwill
relates to the HBF acquisition completed during the first quarter of
2008. The decrease in the hearth products segment relates to final
purchase price allocations for a previous acquisition and the sale of a few
small distribution and service locations.
Note
J. Product Warranties
The
Corporation issues certain warranty policies on its office furniture and hearth
products that provide for repair or replacement of any covered product or
component that fails during normal use because of a defect in design or
workmanship.
A
warranty reserve is determined by recording a specific reserve for known
warranty issues and an additional reserve for unknown claims that are expected
to be incurred based on historical claims experience. Actual claims
incurred could differ from the original estimates, requiring adjustments to the
reserve. Activity associated with warranty obligations was as follows
during the period:
|
|
Six Months Ended
|
|
(In
thousands)
|
|
Jun.
28, 2008
|
|
|
Jun.
30, 2007
|
|
Balance
at beginning of period
|
|
$ |
12,123 |
|
|
$ |
10,624 |
|
Accrual
assumed from acquisition
|
|
|
250 |
|
|
|
|
|
Accruals
for warranties issued during period
|
|
|
9,757 |
|
|
|
7,152 |
|
Adjustments
related to pre-existing warranties
|
|
|
927 |
|
|
|
(42 |
) |
Settlements
made during the period
|
|
|
(9,981 |
) |
|
|
(7,098 |
) |
Balance
at end of period
|
|
$ |
13,076 |
|
|
$ |
10,636 |
|
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:
|
|
Six
Months Ended
|
|
(In
thousands)
|
|
Jun.
28, 2008
|
|
|
Jun.
30, 2007
|
|
Service
cost
|
|
$ |
198 |
|
|
$ |
240 |
|
Interest
cost
|
|
|
481 |
|
|
|
533 |
|
Expected
return on plan assets
|
|
|
(179 |
) |
|
|
(120 |
) |
Amortization
of transition obligation
|
|
|
254 |
|
|
|
291 |
|
Amortization
of prior service cost
|
|
|
- |
|
|
|
115 |
|
Amortization
of (gain)/loss
|
|
|
- |
|
|
|
7 |
|
Net
periodic benefit cost
|
|
$ |
754 |
|
|
$ |
1,066 |
|
Note
L. Income Taxes
In the
first quarter of 2008, the Corporation completed a detailed analysis and
reconciliation of a fixed asset system conversion, and determined that net
deferred income tax liabilities were
understated
by $0.6 million. This understatement is primarily related to a
deferred tax liability associated with computer software. To
correct this difference, the Corporation increased income tax expense in the
first quarter of 2008 by $0.6 million.
Note
M. Derivative Financial Instruments
The
Corporation uses derivative financial instruments, to reduce its exposure to
adverse fluctuations in interest rates. In accordance with Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," on the date a derivative is entered into,
the Corporation designates the derivative as (i) a fair value hedge, (ii) a cash
flow hedge, (iii) a hedge of a net investment in a foreign operation, or (iv) a
risk management instrument not eligible for hedge accounting. The
Corporation recognizes all derivatives on the consolidated balance sheet at fair
value.
In June
2008, the Corporation entered into an interest rate swap agreement, designated
as a cash flow hedge, for purposes of managing its benchmark interest rate
fluctuation risk. Under the interest rate swap agreement, the
Corporation pays a fixed rate of interest and receives a variable rate of
interest equal to the one-month London Interbank Offered Rate ("LIBOR") as
determined on the last day of each monthly settlement period on an aggregated
notional principal amount of $50 million. The net amount paid or
received upon monthly settlements is recorded as an adjustment to interest
expense, while the change in fair value is recorded as a component of
accumulated other comprehensive income in the equity section of the balance
sheet. The interest rate swap agreement matures on May 27,
2011.
The
aggregate fair market value of the interest rate swap as of June 28, 2008 was a
liability of $0.2 million, of which $0.1 million is included in current
liabilities and $0.1 million is included in long-term liabilities in the
Corporation's consolidated balance sheet as of June 28, 2008. For the
three month period ended June 28, 2008, the Corporation recognized an aggregate
net loss related to the agreement of $227,000 of which $15,000 was recorded as
interest expense and $212,000 pre-tax was recorded in other comprehensive
income.
Note
N. Commitments and Contingencies
The
Corporation utilizes letters of credit in the amount of $25.4 million to back
certain financing instruments, insurance policies and payment
obligations. The letters of credit reflect fair value as a condition
of their underlying purpose and are subject to competitively determined
fees.
The
Corporation has contingent liabilities, which have arisen in the course of its
business, including pending litigation, environmental remediation, taxes, and
other claims. It is the Corporation's opinion, after consultation
with legal counsel, that 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.
Note O. New Accounting Standards
The
Corporation partially adopted SFAS No. 157 "Fair Value Measurements" ("SFAS No.
157") which provides enhanced guidance for using fair value to measure assets
and liabilities on December 30, 2007, the beginning of its 2008 fiscal
year. The standard also expands the amount of required disclosure
regarding the extent to which companies measure assets and liabilities at fair
value, the information used to measure fair value, and the effect of fair value
measurements on earnings. The 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. The Corporation has not applied the provisions of SFAS
No. 157 to goodwill and intangibles in accordance with Financial Accounting
Standards Board Staff Position 157-2. The Corporation will adopt this
new standard on January 4, 2009, the beginning of its fiscal
year. The Corporation does not expect the adoption to have a material
impact on its financial statements.
For
recognition purposes, on a recurring basis the Corporation is required to
measure at fair value its marketable securities, which are classified as
available-for-sale, and its investment in target funds. The
marketable securities were comprised of investments in money market
funds. They are reported as noncurrent assets as they are not
anticipated to be used for current operations. The target funds are
reported as both current and noncurrent assets based on the portion that is
anticipated to be used for current operations.
Assets
measured at fair value during the six months ended June 28, 2008 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)
|
|
Marketable
securities
|
|
$ |
4,754 |
|
|
$ |
4,754 |
|
|
$ |
- |
|
|
$ |
- |
|
Investment
in target funds
|
|
$ |
33,113 |
|
|
$ |
- |
|
|
$ |
33,113 |
|
|
$ |
- |
|
The
Corporation adopted SFAS No. 159, "The Fair Value Option for Financial Assets
and Financial Liabilities" ("SFAS 159") which permits entities to choose to
measure many financial instruments and certain other items at fair value that
are not currently required to be measured at fair value on December 30, 2007,
the beginning of its 2008 fiscal year. The objective of SFAS 159 is
to improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The adoption of this Statement did not have a material
impact on its financial statements.
In
December 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141(Revised), "Business Combinations" ("SFAS No. 141(R)"), replacing SFAS No.
141, "Business Combinations" and SFAS No. 160, "Noncontrolling Interests in
Consolidation Financial Statements – An Amendment of ARB No. 51" ("SFAS No.
160"). SFAS No. 141(R) retains the fundamental requirements of SFAS
No. 141, broadens its scope by applying the acquisition method to all
transactions and other events in which one entity obtains control over one or
more other businesses, and requires, among other things, that assets acquired
and liabilities assumed be measured at fair value as of the acquisition date,
that liabilities related to contingent considerations be recognized at the
acquisition date and remeasured at fair value in each subsequent reporting
period, that acquisition-related costs be expensed as incurred, and that
income be
recognized if the fair value of the net assets acquired exceeds the fair value
of the consideration transferred. SFAS No. 160 establishes accounting
and reporting standards for noncontrolling interests (i.e., minority interests)
in a subsidiary, including changes in a parent's ownership interest in a
subsidiary and requires among other things, that noncontrolling interests in
subsidiaries be classified as a separate component of equity. Except
for the presentation and disclosure requirements of SFAS No. 160, which are to
be applied retrospectively for all periods presented, SFAS No. 141(R) and SFAS
No. 160 are to be applied prospectively in financial statements issued for
fiscal years beginning after December 15, 2008. The Corporation does
not anticipate any material impact to its financial statements from the adoption
of SFAS No. 160.
In March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
and Hedging Activities – an amendment of FASB Statement No.
133." SFAS 161 expands disclosures for derivative instruments by
requiring entities to disclose the fair value of derivative instruments and
their gains or losses in tabular format. SFAS 161 also requires
disclosure of information about credit risk-related contingent features in
derivative agreements, counterparty credit risk, and strategies, and objectives
for using derivative instruments. SFAS 161 will become effective for
fiscal years beginning after November 15, 2008. The Corporation will
adopt this new accounting standard on January 4, 2009, the beginning of its
fiscal year. The Corporation does not expect the adoption to have a
material impact on its financial statements.
Note
P. Business Segment Information
Management
views the Corporation as operating in two business segments: office furniture
and hearth products with the former being the principal business
segment.
The
office furniture segment manufactures and markets a broad line of metal and wood
commercial and home office furniture which includes file cabinets, desks,
credenzas, chairs, storage cabinets, tables, bookcases, freestanding office
partitions and panel systems, and other related products. The hearth
products segment manufactures and markets a broad line of manufactured gas-,
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 decrease in unallocated
corporate expenses compared to prior year is due to decreased interest expense
and group medical and incentive compensation costs. Management views
interest income and expense as corporate financing costs rather than a business
segment cost. In addition, management applies one effective tax rate
to its consolidated income before income taxes so income taxes are not reported
or viewed internally on a 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 six month periods ended June 28, 2008, and June 30, 2007, is as
follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
(In
thousands)
|
|
Jun.
28, 2008
|
|
|
Jun.
30,
2007
|
|
|
Jun.
28,
2008
|
|
|
Jun.
30,
2007
|
|
Net
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
Furniture
|
|
$ |
514,521 |
|
|
$ |
503,587 |
|
|
$ |
980,546 |
|
|
$ |
1,001,438 |
|
Hearth
Products
|
|
|
98,593 |
|
|
|
114,573 |
|
|
|
195,951 |
|
|
|
225,922 |
|
|
|
$ |
613,114 |
|
|
$ |
618,160 |
|
|
$ |
1,176,497 |
|
|
$ |
1,227,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
furniture (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
before restructuring charges
|
|
$ |
32,194 |
|
|
$ |
45,317 |
|
|
$ |
51,744 |
|
|
$ |
84,243 |
|
Restructuring
and impairment charges
|
|
|
(2,072 |
) |
|
|
(728 |
) |
|
|
(2,871 |
) |
|
|
(592 |
) |
Office
furniture – net
|
|
|
30,122 |
|
|
|
44,589 |
|
|
|
48,873 |
|
|
|
83,651 |
|
Hearth
products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
before restructuring charges
|
|
|
1,542 |
|
|
|
9,723 |
|
|
|
(1,305 |
) |
|
|
17,444 |
|
Restructuring
and impairment charges
|
|
|
43 |
|
|
|
- |
|
|
|
24 |
|
|
|
- |
|
Hearth
products – net
|
|
|
1,585 |
|
|
|
9,723 |
|
|
|
(1,281 |
) |
|
|
17,444 |
|
Total
operating profit
|
|
|
31,707 |
|
|
|
54,312 |
|
|
|
47,592 |
|
|
|
101,095 |
|
Unallocated
corporate expense
|
|
|
(11,140 |
) |
|
|
(13,502 |
) |
|
|
(19,918 |
) |
|
|
(28,255 |
) |
Income
before income taxes
|
|
$ |
20,567 |
|
|
$ |
40,810 |
|
|
$ |
27,674 |
|
|
$ |
72,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
& Amortization Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
furniture
|
|
$ |
12,571 |
|
|
$ |
11,923 |
|
|
$ |
24,647 |
|
|
$ |
24,277 |
|
Hearth
products
|
|
|
3,848 |
|
|
|
3,529 |
|
|
|
7,694 |
|
|
|
7,217 |
|
General
corporate
|
|
|
1,125 |
|
|
|
1,096 |
|
|
|
2,224 |
|
|
|
2,236 |
|
|
|
$ |
17,544 |
|
|
$ |
16,548 |
|
|
$ |
34,565 |
|
|
$ |
33,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
furniture
|
|
$ |
15,936 |
|
|
$ |
11,268 |
|
|
$ |
29,848 |
|
|
$ |
22,093 |
|
Hearth
products
|
|
|
2,343 |
|
|
|
4,172 |
|
|
|
5,187 |
|
|
|
6,379 |
|
General
corporate
|
|
|
36 |
|
|
|
383 |
|
|
|
904 |
|
|
|
676 |
|
|
|
$ |
18,315 |
|
|
$ |
15,823 |
|
|
$ |
35,939 |
|
|
$ |
29,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of
Jun.
28,
2008
|
|
|
As
of
Jun.
30,
2007
|
|
Identifiable
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
furniture
|
|
|
|
|
|
|
|
|
|
$ |
801,532 |
|
|
$ |
734,835 |
|
Hearth
products
|
|
|
|
|
|
|
|
|
|
|
333,406 |
|
|
|
361,431 |
|
General
corporate
|
|
|
|
|
|
|
|
|
|
|
108,905 |
|
|
|
106,357 |
|
|
|
|
|
|
|
|
|
|
|
$ |
1,243,843 |
|
|
$ |
1,202,623 |
|
(1) Includes
minority interest.
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 second quarter of 2008 decreased 0.8 percent to $613.1
million. The decrease was driven by a decline in the new construction
channel of the hearth products business and weakness in the supplies-driven
channel of the office furniture business. Gross margins for the
quarter decreased from prior year levels due primarily to decreased volume,
increased material costs and accelerated depreciation and transition costs
related to consolidation of office furniture facilities. Selling and
administrative expenses increased due to higher non-volume related freight
costs, increased restructuring and transition costs associated with the facility
consolidation and costs associated with new acquisitions.
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 29, 2007. During the
first six months of 2008, there were no material changes in the accounting
policies and assumptions previously disclosed, except for the Corporation's
adoption of SFAS No. 157 and the derivative financial instrument activity as
described in Note M.
New Accounting
Standards
The
Corporation partially adopted SFAS No. 157 "Fair Value Measurements" which
provides enhanced guidance for using fair value to measure assets and
liabilities on December 30, 2007, the beginning of its 2008 fiscal
year. 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. The Corporation has not applied the provisions of SFAS
No. 157 to goodwill and intangibles in accordance with FASB Staff Position
157-2. The Corporation will adopt this new standard on January 4,
2009, the beginning of its fiscal year. The Corporation does not
expect the adoption to have a material impact on its financial
statements.
The
Corporation adopted SFAS No. 159, "The Fair Value Option for Financial Assets
and Financial Liabilities" ("SFAS 159") which permits entities to choose to
measure many financial instruments and certain other items at fair value that
are not currently required to be measured at fair value on December 30, 2007,
the beginning of its 2008 fiscal year. The objective of SFAS 159 is
to improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The adoption of this Statement did not have a material
impact on its financial statements.
In
December 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141(Revised), "Business Combinations" ("SFAS No. 141(R)"), replacing SFAS No.
141, "Business Combinations" and SFAS No. 160, "Noncontrolling Interests in
Consolidation Financial Statements – An Amendment of ARB No. 51" ("SFAS No.
160"). SFAS No. 141(R) retains the fundamental requirements of SFAS
No. 141, broadens its scope by applying the acquisition method to all
transactions and other events in which one entity obtains control over one or
more other businesses, and requires, among other things, that assets acquired
and liabilities assumed be measured at fair value as of the acquisition date,
that liabilities related to contingent considerations be recognized at the
acquisition date and remeasured at fair value in each subsequent reporting
period, that acquisition-related costs be expensed as incurred, and that income
be recognized if the fair value of the net assets acquired exceeds the fair
value of the consideration transferred. SFAS No. 160 establishes
accounting and reporting standards for noncontrolling interests (i.e., minority
interests) in a subsidiary, including changes in a parent's ownership interest
in a subsidiary and requires among other things, that noncontrolling interests
in subsidiaries be classified as a separate component of
equity. Except for the presentation and disclosure requirements of
SFAS No. 160, which are to be applied retrospectively for all periods presented,
SFAS No. 141(R) and SFAS No. 160 are to be applied prospectively in financial
statements issued for fiscal years beginning after December 15,
2008. The Corporation does not anticipate any material impact to its
financial statements from the adoption of SFAS No. 160.
In March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
and Hedging Activities – an amendment of FASB Statement No.
133." SFAS 161 expands disclosures for derivative instruments by
requiring entities to disclose the fair value of derivative instruments and
their gains or losses in tabular format. SFAS 161 also requires
disclosure of information about credit risk-related contingent features in
derivative agreements, counterparty credit risk, and strategies, and objectives
for using derivative instruments. SFAS 161 will become effective for
fiscal years beginning after November 15, 2008. The Corporation will
adopt this new accounting standard on January 4, 2009, the beginning of its
fiscal year. The Corporation does not expect the adoption to have a
material impact on its financial statements.
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)
|
|
Jun.
28,
2008
|
|
|
Jun.
30,
2007
|
|
|
Percent
Change
|
|
|
Jun.
28,
2008
|
|
|
Jun.
30,
2007
|
|
|
Percent
Change
|
|
Net
sales
|
|
$ |
613,114 |
|
|
$ |
618,160 |
|
|
|
-0.8 |
% |
|
$ |
1,176,497 |
|
|
$ |
1,227,360 |
|
|
|
-4.1 |
% |
Cost
of sales
|
|
|
403,671 |
|
|
|
402,523 |
|
|
|
0.3 |
|
|
|
783,016 |
|
|
|
805,023 |
|
|
|
-2.7 |
|
Gross
profit
|
|
|
209,443 |
|
|
|
215,637 |
|
|
|
-2.9 |
|
|
|
393,481 |
|
|
|
422,337 |
|
|
|
-6.8 |
|
Selling
& administrative expenses
|
|
|
182,673 |
|
|
|
169,559 |
|
|
|
7.7 |
|
|
|
355,228 |
|
|
|
340,373 |
|
|
|
4.4 |
|
Restructuring
& impairment charges
|
|
|
2,029 |
|
|
|
728 |
|
|
|
178.7 |
|
|
|
2,847 |
|
|
|
592 |
|
|
|
380.9 |
|
Operating
income
|
|
|
24,741 |
|
|
|
45,350 |
|
|
|
-45.4 |
|
|
|
35,406 |
|
|
|
81,372 |
|
|
|
-56.5 |
|
Interest
expense, net
|
|
|
4,184 |
|
|
|
4,578 |
|
|
|
-8.6 |
|
|
|
7,598 |
|
|
|
8,614 |
|
|
|
-11.8 |
|
Earnings
from continuing operations
before
income taxes and minority interest
|
|
|
20,557 |
|
|
|
40,772 |
|
|
|
-49.6 |
|
|
|
27,808 |
|
|
|
72,758 |
|
|
|
-61.8 |
|
Income
taxes
|
|
|
7,095 |
|
|
|
14,404 |
|
|
|
-50.7 |
|
|
|
10,275 |
|
|
|
25,767 |
|
|
|
-60.1 |
|
Minority
interest in earnings of a subsidiary
|
|
|
(7 |
) |
|
|
(25 |
) |
|
|
-72.0 |
|
|
|
87 |
|
|
|
(53 |
) |
|
|
-264.2 |
|
Income
from continuing operations
|
|
$ |
13,469 |
|
|
$ |
26,393 |
|
|
|
-49.0 |
|
|
$ |
17,446 |
|
|
$ |
47,044 |
|
|
|
-62.9 |
|
Consolidated
net sales for the second quarter decreased 0.8 percent or $5.0 million compared
to the same quarter last year. Acquisitions contributed $36.5 million
or 5.9 percentage points of sales. Organic sales growth was down due
primarily to the decline in the new construction channel of the hearth products
business and weakness in the supplies-driven channel of the office furniture
business.
Gross
margins for the second quarter decreased to 34.2 percent compared to 34.9
percent for the same quarter last year. The reduction in gross margin
was due to decreased volume, increased material costs, as well as accelerated
depreciation and transition costs related to the consolidation of office
furniture facilities.
Total
selling and administrative expenses, including restructuring charges, as a
percent of sales increased to 30.1 percent compared to 27.5 percent for the same
quarter last year. The increase was driven by higher freight costs,
increased investment in product development and selling initiatives, and
increased restructuring and transition costs associated with facility
consolidation.
The
Corporation continued its plan of a facility shutdown, a facility ramp-up,
closure of two distribution centers and consolidation and start-up of a new
distribution center that was announced in 2007. Second quarter 2008
included $3.6 million of restructuring charges and transition costs in
connection with this project. These included $0.1 million of
accelerated depreciation and $1.5 million of other transition costs recorded in
cost of sales, and $2.0 million of costs recorded as restructuring
costs.
Income
from continuing operations decreased 49.0 percent and income from continuing
operations per diluted share decreased 46.4 percent compared to the same quarter
in 2007. Interest expense decreased $0.4 million during the quarter
due to lower average interest rates partially offset by increased
borrowings. Income from continuing operations per share was
positively impacted $0.01 per share as a result of the Corporation's share
repurchase program.
The
effective tax rate for second quarter 2008 was 34.5 percent compared to 35.3
percent in second quarter 2007 due to a reduction in state taxes. The
Corporation anticipates the annualized tax rate for 2008 to be approximately
35.7 percent.
For the
first six months of 2008, consolidated net sales decreased $50.9 million, or 4.1
percent, to $1.18 billion compared to $1.23 billion in
2007. Acquisitions added $56.7 million or 4.6 percentage points of
sales. Gross margins decreased to 33.4 percent compared to 34.4
percent for the same period last year. Income from continuing
operations was $17.4 million compared to $47.0 million in 2007, a decrease of
62.9 percent. Earnings per share from continuing operations decreased
60.6 percent to $0.39 per diluted share compared to $0.99 per diluted share for
the same period last year. Earnings per share was positively impacted
$0.02 as a result of the Corporation's share repurchase program.
Office
Furniture
Second
quarter sales for the office furniture segment increased 2.2 percent or $10.9
million to $514.5 million from $503.6 million for the same quarter last year due
to acquisitions contributing $21.5 million or 4.3 percentage points of
sales. Organic sales decreased due to lower sales in the
supplies-driven channel. Operating profit prior to unallocated
corporate expenses decreased $14.5 million to $30.1 million as a result of lower
organic volume, increased non-volume related freight primarily due to higher
fuel costs, restructuring and transition costs related to a plant shutdown, a
plant ramp-up, closure of two distribution centers and start-up of a new
distribution center, and increased investments in selling initiatives and
product development.
Net sales
for the first six months of 2008 decreased 2.1 percent or $20.9 million to
$980.5 million compared to $1,001.4 million in 2007. Operating profit
decreased 41.6 percent or $34.8 million to $48.9 million.
Hearth
Products
Second
quarter net sales for the hearth products segment decreased 13.9 percent or
$16.0 million to $98.6 million from $114.6 million for the same quarter last
year. The Corporation's acquisition completed during 2007 contributed
$15.0 million or 13.1 percentage points. Excluding acquisitions,
sales declined 27.0 percent driven by a 36.5 percent decrease in new
construction channel revenue. The Corporation continued to be
negatively impacted by housing market conditions. The hearth products
segment did experience strong demand for alternative fuel/biomass products
during the quarter driven by high energy costs. Operating profit
prior to unallocated corporate expenses decreased $8.1 million to $1.6 million
due to lower volume and a larger mix of lower margin remodel/retrofit
business.
Net sales
for the first six months of 2008 decreased 13.3 percent or $30.0 million to
$196.0 million compared to $225.9 million in 2007. Operating profit
decreased $18.7 million to a $1.3 million loss.
Liquidity and Capital
Resources
As of
June 28, 2008, cash and short-term investments were $32.7 million compared to
$43.8 million at year-end 2007. Cash flow from operations for the
first six months of fiscal 2008 was $60.2 million compared to $95.7 million in
2007 due to lower net income and the timing of working capital
requirements. Cash flow and working capital management continue to be
a major focus of management to ensure the Corporation is poised for
growth. The Corporation
believes
it has sufficient liquidity to manage its operations and as of June 28, 2008
maintained additional borrowing capacity of $62 million, net of amounts
designated for letters of credit, through a $300 million revolving bank credit
agreement. On June 30, 2008 the Corporation increased its borrowing
capacity by entering into a $50 million three-year term loan as further
described in its Current Report on Form 8-K filed on July 7, 2008.
Capital
expenditures for the first six months of fiscal 2008 were $35.9 million compared
to $29.1 million in 2007 and were primarily for tooling and equipment for new
products and facility consolidation and renovation. For the full year
2008, capital expenditures are expected to be $65 to $70 million due to new
product development and related tooling and other infrastructure
efficiencies.
The
Corporation completed the acquisition of HBF during the first quarter ended
March 29, 2008 for a purchase price of approximately $75.3 million, however, the
funding of the transaction did not occur until March 31, 2008. During
the first six months of 2008, net borrowings under the Corporation's revolving
credit facility increased $85 million to fund the acquisition, capital
expenditures and share repurchase. As of June 28, 2008, $213 million
of the revolving credit facility was outstanding with $23 million classified as
short-term as the Corporation expects to repay that portion of the borrowings
within the next twelve months.
The
Corporation's Board of Directors (the "Board") declared a regular quarterly cash
dividend of $0.215 per share on the Corporation's common stock on May 6, 2008,
to shareholders of record at the close of business on May 16,
2008. It was paid on May 30, 2008. This was the 213th
consecutive quarterly dividend paid by the Corporation.
For the
six months ended June 28, 2008, the Corporation repurchased 1,004,700 shares of
its common stock at a cost of approximately $28.6 million, or an average price
of $28.42 per share. As of June 28, 2008, approximately $163.6
million of the Board's current repurchase authorization remained
unspent.
Off-Balance Sheet
Arrangements
The
Corporation does not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future material effect on the
Corporation's financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources.
Contractual
Obligations
Contractual
obligations associated with ongoing business and financing activities will
result in cash payments in future periods. A table summarizing the
amounts and estimated timing of these future cash payments was provided in the
Corporation's Annual Report on Form 10-K for the year ended December 29,
2007. During the first six months of fiscal 2008 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,
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
Management
expects the economy to continue to be difficult. Weakness in the
supplies-driven channel of the office furniture business is expected to
continue. Management also anticipates that the project portion of the
office furniture business will soften some with the economy as organizations
reduce or defer capital spending. The Corporation expects to continue
its investment in growth opportunities and position for the market recovery by
enhancing its selling capabilities and launching a significant number of new
products. The Corporation will work to offset the market softness and
rising fuel and material costs by implementing price increases, eliminating
waste, attacking structural cost and streamlining its businesses.
The
hearth products business continues to be negatively impacted by housing market
conditions. The timing of any housing market recovery remains
uncertain. Despite strong sales of its alternative fuels appliances,
which are driven by high energy costs, sales and profitability will be
challenged through 2008. The Corporation will continue to tightly
manage its costs and improve its competitive position.
The
Corporation continues to focus on creating long-term shareholder value by
growing its businesses through investment in building brands, product solutions,
and selling models, enhancing its strong member-owner culture and remaining
focused on its long-standing continuous improvement programs to build best total
cost and a lean enterprise.
Forward-Looking
Statements
Statements
in this report that are not strictly historical, including statements as to
plans, outlook, objectives, and future financial performance, are
"forward-looking" statements, within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934
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,"
and variations of such words, and similar expressions identify forward-looking
statements. Forward-looking statements involve known and unknown
risks, which may cause the Corporation's actual results in the future to differ
materially from expected results. These risks include, without
limitation: the Corporation's ability to realize financial benefits
from its (a) price increases, (b) cost containment and business simplification
initiatives for the entire Corporation, (c) investments in strategic
acquisitions, new products and brand building, (d) investments in distribution
and rapid continuous improvement, (e) repurchases of common stock, (f) ability
to maintain its effective tax rate, and (g) consolidation and logistical
realignment initiatives; 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, including, with respect to the
Corporation's hearth products, the protracted decline in the 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;
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, term loan credit agreement 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.
As of
June 28, 2008, 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 29,
2007.
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 (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 acting 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 acting 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(b) and 15d – 15(b). As of June 28,
2008, and, based on this evaluation, the chief executive officer and acting
chief financial officer has concluded that these disclosure controls and
procedures are effective.
Furthermore,
there have been no changes in the Corporation's internal control over financial
reporting during the fiscal quarter covered by this quarterly report on Form
10-Q that have materially affected, or are reasonably likely to materially
affect, its internal control over financial reporting.
PART
II. OTHER INFORMATION
There are
no new legal proceedings or material developments to report other than ordinary
routine litigation incidental to the business.
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 29, 2007 except for the items listed below.
Restrictions
imposed by the terms of our new term loan credit agreement may limit our
operating and financial flexibility.
Our new
term loan credit agreement, dated as of June 30, 2008, pursuant to which we
borrowed $50 million in the form of a term loan, limits our ability to finance
operations, service debt or engage in other business activities that may be in
our interest. Among other restrictions, the new term loan credit
agreement restricts our ability to incur additional indebtedness, create or
incur certain liens with respect to any of our properties or assets, engage in
lines of business substantially different than those currently conducted by us,
sell, lease, license, or dispose of any of our assets, enter into certain
transactions with affiliates, make certain restricted payments or take certain
restricted actions, and enter into certain sale-leaseback
arrangements. The new term loan credit agreement also requires us to
maintain certain financial covenants.
Our
failure to comply with the obligations under the new term loan credit agreement
may result in an event of default, which, if not cured or waived, may permit
acceleration of the indebtedness under the term loan credit agreement and could
result in a cross-default under our existing credit facility and note purchase
agreement. We cannot be certain that we will have sufficient funds
available to pay any accelerated indebtedness or that we will have the ability
to refinance accelerated indebtedness on terms favorable to us or at
all.
Our
relationship with the U.S. government and various state and local governments is
subject to uncertain future funding levels and federal, state and local
procurement laws and is governed by restrictive contract terms; any of these
factors could limit current or future business.
We derive
a significant portion of our revenue from sales to various U.S. federal,
state, and local government agencies and departments. Our ability to
compete successfully for and retain business with the U.S. government, as well
as with state and local governments, is highly dependent on cost-effective
performance. Our government business is highly sensitive to changes
in procurement laws, national, international, state, and local public priorities
and budgets at all levels of government.
Our
contracts with these government entities are subject to various statutes and
regulations that apply to companies doing business with the
government. The U.S. government as well as state and local
governments can typically terminate or modify their contracts with us either for
their convenience or if we default by failing to perform under the terms of the
applicable contract. A
termination
arising out of our default could expose us to liability and impede our ability
to compete in the future for contracts and orders with agencies and departments
at all levels of government. Moreover, we are subject to
investigation and audit for compliance with the requirements governing
government contracts, including requirements related to procurement integrity,
export controls, employment practices, the accuracy of records and reporting of
costs. If we were found to have committed fraud or certain criminal
offenses, we could be suspended or debarred from all further federal, state or
local government contracting.
Issuer
Purchases of Equity Securities
The
following is a summary of share repurchase activity during the second quarter
ended June 28, 2008.
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
|
|
3/30/08
– 4/26/08
|
|
|
300,000 |
|
|
$ |
21.59 |
|
|
|
300,000 |
|
|
$ |
163,612,128 |
|
4/27/08
– 5/24/08
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
163,612,128 |
|
5/25/08
– 6/28/08
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
163,612,128 |
|
Total
|
|
|
300,000 |
|
|
|
|
|
|
|
300,000 |
|
|
|
|
|
(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 2008, nor do any plans exist under which the Corporation does not
intend to make further purchases.
|
The
Annual Meeting of Shareholders of HNI Corporation was held on May 6, 2008, to
elect four Directors to the Board and ratify the Audit Committee's selection of
PricewaterhouseCoopers LLP as the Corporation's independent registered public
accountant for the fiscal year ended January 3, 2009. As of March 3,
2008, the record date for the meeting, there were 44,504,669 shares of the
Corporation's common stock issued and outstanding and entitled to vote at the
meeting. The first proposal voted upon was the election of four
Directors for a term of three years or until their successors are elected and
qualify. The four persons nominated by the Board received the
following votes and were elected.
Three-Year
Term:
|
For
|
Against
|
Miguel
M. Calado
|
34,569,824
or 96.78%
|
1,148,211
or
3.22%
|
Cheryl
A. Francis
|
34,924,663
or
97.77%
|
793,372
or
2.23%
|
Larry
B. Porcellato
|
34,654,188
or
97.02%
|
1,063,847
or
2.98%
|
Brian
E. Stern
|
34,906,800
or
97.72%
|
811,235
or
2.28%
|
Other
Directors whose term of office as a Director continued after the meeting
are: Stan A. Askren, Mary H. Bell, Gary M. Christensen, John A.
Halbrook, James R. Jenkins, Dennis J. Martin, Joseph E. Scalzo, Abbie J. Smith,
and Ronald V. Waters, III.
The
second proposal voted upon was the ratification of the Audit Committee's
selection of PricewaterhouseCoopers LLP as the Corporation's independent
registered public accountant for the fiscal year ended January 3,
2009. The proposal was approved with 35,223,925 votes, or 79.15% of
the outstanding shares voting for; 185,646 votes or 0.42% of the outstanding
shares voting against; and 306,464 votes, or 0.69% of the outstanding shares
abstaining.
See
Exhibit Index.
|
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:
July 30, 2008
|
By:
|
/s/ Stan
A. Askren |
|
|
|
Stan
A. Askren |
|
|
|
Chairman,
President and Chief Executive Officer and |
|
|
|
Acting Chief Financial Officer |
|
|
|
(10.1)
|
Fourth
Amendment to Credit Agreement dated as of June 20, 2008, by and among HNI
Corporation as borrower, certain domestic subsidiaries of HNI Corporation,
as Guarantors, certain lenders party thereto and Wachovia Bank, National
Association, as Administrative Agent, incorporated by reference to Exhibit
10.1 to the Registrant's Current Report on Form 8-K filed July 7,
2008
|
(31.1)
|
|
(32.1)
|
|