r10q3q2009.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 October 3, 2009.
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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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|
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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 has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files). YES 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 the definitions of "large accelerated filer,"
"accelerated filer" and "smaller reporting company" in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer X Accelerated
filer
Non-accelerated
filer
(Do not check if a smaller reporting company)
Smaller
reporting company
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|
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES
NO
X
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|
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practical date.
|
Class
Common
Shares, $1 Par Value
|
Outstanding
at October 3, 2009
45,037,287
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HNI
Corporation and SUBSIDIARIES
|
|
|
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 October
3, 2009, and January 3, 2009
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3
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Condensed
Consolidated Statements of Income Three
Months Ended October 3, 2009, and September 27, 2008
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5
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Condensed
Consolidated Statements of Income Nine
Months Ended October 3, 2009, and September 27, 2008
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6
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Condensed
Consolidated Statements of Cash Flows Nine
Months Ended October 3, 2009, and September 27, 2008
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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 Disclosures About
Market Risk.
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25
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Item
4. Controls and Procedures.
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25
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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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26
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SIGNATURES
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27
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EXHIBIT
INDEX
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28
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PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements
(Unaudited).
HNI
Corporation and SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
Oct.
3,
2009
(Unaudited)
|
|
|
Jan.
3,
2009
|
|
ASSETS
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
45,968 |
|
|
$ |
39,538 |
|
Short-term
investments
|
|
|
8,151 |
|
|
|
9,750 |
|
Receivables
|
|
|
187,916 |
|
|
|
238,327 |
|
Inventories
(Note C)
|
|
|
67,011 |
|
|
|
84,290 |
|
Deferred
income taxes
|
|
|
20,022 |
|
|
|
16,313 |
|
Prepaid
expenses and other current assets
|
|
|
19,128 |
|
|
|
29,623 |
|
Total
Current Assets
|
|
|
348,196 |
|
|
|
417,841 |
|
|
|
|
|
|
|
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PROPERTY,
PLANT, AND EQUIPMENT, at cost
|
|
|
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Land
and land improvements
|
|
|
23,757 |
|
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23,753 |
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Buildings
|
|
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279,020 |
|
|
|
277,898 |
|
Machinery
and equipment
|
|
|
499,608 |
|
|
|
525,996 |
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Construction
in progress
|
|
|
5,804 |
|
|
|
21,738 |
|
|
|
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808,189 |
|
|
|
849,385 |
|
Less
accumulated depreciation
|
|
|
535,999 |
|
|
|
533,779 |
|
|
|
|
|
|
|
|
|
|
Net
Property, Plant, and Equipment
|
|
|
272,190 |
|
|
|
315,606 |
|
|
|
|
|
|
|
|
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|
GOODWILL
|
|
|
267,865 |
|
|
|
268,392 |
|
|
|
|
|
|
|
|
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|
OTHER
ASSETS
|
|
|
136,133 |
|
|
|
163,790 |
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
1,024,384 |
|
|
$ |
1,165,629 |
|
|
|
|
|
|
|
|
|
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
HNI
Corporation and SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
Oct.
3,
2009
(Unaudited)
|
|
|
Jan.
3,
2009
(As
Adjusted)
|
|
LIABILITIES
AND EQUITY
|
|
(In
thousands, except share and per share value data)
|
|
|
|
|
|
|
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|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$ |
300,301 |
|
|
$ |
313,431 |
|
Note
payable and current maturities of long-term
debt
and capital lease obligations
|
|
|
2,374 |
|
|
|
54,494 |
|
Current
maturities of other long-term obligations
|
|
|
478 |
|
|
|
5,700 |
|
Total
Current Liabilities
|
|
|
303,153 |
|
|
|
373,625 |
|
|
|
|
|
|
|
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LONG-TERM
DEBT
|
|
|
200,000 |
|
|
|
267,300 |
|
|
|
|
|
|
|
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|
CAPITAL
LEASE OBLIGATIONS
|
|
|
1 |
|
|
|
43 |
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|
|
|
|
|
|
|
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OTHER
LONG-TERM LIABILITIES
|
|
|
50,557 |
|
|
|
50,399 |
|
|
|
|
|
|
|
|
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|
DEFERRED
INCOME TAXES
|
|
|
33,565 |
|
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|
25,271 |
|
|
|
|
|
|
|
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EQUITY
|
|
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Parent
Company shareholders' equity:
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|
|
|
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|
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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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Common,
$1 par value, authorized
200,000,000
shares, outstanding -
|
|
|
45,037 |
|
|
|
44,324 |
|
October
3, 2009 – 45,037,287
shares;
|
|
|
|
|
|
|
|
|
January
3, 2009 – 44,324,409 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
paid-in capital
|
|
|
17,471 |
|
|
|
6,037 |
|
Retained
earnings
|
|
|
375,733 |
|
|
|
400,379 |
|
Accumulated
other comprehensive income
|
|
|
(1,471 |
) |
|
|
(1,907 |
) |
Total
Parent Company shareholders' equity
|
|
|
436,770 |
|
|
|
448,833 |
|
|
|
|
|
|
|
|
|
|
Noncontrolling
interest
|
|
|
338 |
|
|
|
158 |
|
|
|
|
|
|
|
|
|
|
Total Equity
|
|
|
437,108 |
|
|
|
448,991 |
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Equity
|
|
$ |
1,024,384 |
|
|
$ |
1,165,629 |
|
|
|
|
|
|
|
|
|
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
HNI
Corporation and SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
|
|
Three
Months Ended
|
|
|
Oct.
3,
2009
|
|
|
Sep.
27,
2008
(As
Adjusted)
|
|
|
(In
thousands, except share and per share data)
|
|
|
|
|
Net
sales
|
|
$ |
453,956 |
|
|
$ |
663,141 |
|
Cost
of sales
|
|
|
287,352 |
|
|
|
438,423 |
|
Gross
profit
|
|
|
166,604 |
|
|
|
224,718 |
|
Selling
and administrative expenses
|
|
|
129,897 |
|
|
|
189,577 |
|
Restructuring
and impairment
|
|
|
4,440 |
|
|
|
1,497 |
|
Operating
income
|
|
|
32,267 |
|
|
|
33,644 |
|
Interest
income
|
|
|
51 |
|
|
|
208 |
|
Interest
expense
|
|
|
3,167 |
|
|
|
4,245 |
|
Earnings
before income taxes
|
|
|
29,151 |
|
|
|
29,607 |
|
Income
taxes
|
|
|
11,441 |
|
|
|
10,107 |
|
Net
income
|
|
|
17,710 |
|
|
|
19,500 |
|
Less:
Net income attributable to the noncontrolling interest
|
|
|
96 |
|
|
|
11 |
|
Net
income attributable to Parent Company
|
|
$ |
17,614 |
|
|
$ |
19,489 |
|
|
|
|
|
|
|
|
|
|
Net
income attributable to Parent Company per common share –
basic
|
|
$ |
0.39 |
|
|
$ |
0.44 |
|
Average
number of common shares outstanding – basic
|
|
|
44,994,399 |
|
|
|
44,213,017 |
|
Net
income attributable to Parent Company per common share –
diluted
|
|
$ |
0.39 |
|
|
$ |
0.44 |
|
Average
number of common shares outstanding – diluted
|
|
|
45,598,155 |
|
|
|
44,340,220 |
|
Cash
dividends per common share
|
|
$ |
0.215 |
|
|
$ |
0.215 |
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
|
5
HNI
Corporation and SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
|
|
Nine
Months Ended
|
|
|
Oct.
3,
2009
|
|
|
Sep.
27,
2008
(As
Adjusted)
|
|
|
(In
thousands, except share and per share data)
|
|
|
|
|
Net
sales
|
|
$ |
1,242,612 |
|
|
$ |
1,839,638 |
|
Cost
of sales
|
|
|
821,792 |
|
|
|
1,221,439 |
|
Gross
profit
|
|
|
420,820 |
|
|
|
618,199 |
|
Selling
and administrative expenses
|
|
|
390,920 |
|
|
|
544,805 |
|
Restructuring
and impairment
|
|
|
13,403 |
|
|
|
4,344 |
|
Operating
income
|
|
|
16,497 |
|
|
|
69,050 |
|
Interest
income
|
|
|
311 |
|
|
|
846 |
|
Interest
expense
|
|
|
9,414 |
|
|
|
12,481 |
|
Earnings
before income taxes
|
|
|
7,394 |
|
|
|
57,415 |
|
Income
taxes
|
|
|
2,944 |
|
|
|
20,382 |
|
Net
income
|
|
|
4,450 |
|
|
|
37,033 |
|
Less:
Net income attributable to the noncontrolling interest
|
|
|
119 |
|
|
|
98 |
|
Net
income attributable to Parent Company
|
|
$ |
4,331 |
|
|
$ |
36,935 |
|
|
|
|
|
|
|
|
|
|
Net
income attributable to Parent Company per common share –
basic
|
|
$ |
0.10 |
|
|
$ |
0.83 |
|
Average
number of common shares outstanding – basic
|
|
|
44,833,711 |
|
|
|
44,327,939 |
|
Net
income attributable to Parent Company per common share –
diluted
|
|
$ |
0.10 |
|
|
$ |
0.83 |
|
Average
number of common shares outstanding – diluted
|
|
|
45,272,912 |
|
|
|
44,453,445 |
|
Cash
dividends per common share
|
|
$ |
0.645 |
|
|
$ |
0.645 |
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
|
HNI
Corporation and SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
Nine
Months Ended
|
|
|
|
Oct.
3, 2009
|
|
|
Sep.
27, 2008
|
|
|
|
(In
thousands)
|
|
Net
Cash Flows From (To) Operating Activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
4,450 |
|
|
$ |
37,033 |
|
Noncash
items included in net income:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
55,715 |
|
|
|
52,407 |
|
Other
postretirement and post employment benefits
|
|
|
1,386 |
|
|
|
1,132 |
|
Stock-based
compensation
|
|
|
2,869 |
|
|
|
1,373 |
|
Excess
tax benefits from stock compensation
|
|
|
- |
|
|
|
(11 |
) |
Deferred
income taxes
|
|
|
4,197 |
|
|
|
1,196 |
|
(Gain)/Loss
on sale, retirement and impairment of
long-lived
assets and intangibles
|
|
|
81 |
|
|
|
1,346 |
|
Stock
issued to retirement plan
|
|
|
6,565 |
|
|
|
6,592 |
|
Other
– net
|
|
|
891 |
|
|
|
1,801 |
|
Net
increase (decrease) in operating assets
and liabilities
|
|
|
66,615 |
|
|
|
4,266 |
|
Increase
(decrease) in other liabilities
|
|
|
(6,848 |
) |
|
|
(2,537 |
) |
Net
cash flows from (to) operating activities
|
|
|
135,921 |
|
|
|
104,598 |
|
|
|
|
|
|
|
|
|
|
Net
Cash Flows From (To) Investing Activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(9,715 |
) |
|
|
(53,664 |
) |
Proceeds
from sale of property, plant and equipment
|
|
|
6,569 |
|
|
|
1,009 |
|
Acquisition
spending, net of cash acquired
|
|
|
(500 |
) |
|
|
(75,479 |
) |
Capitalized
software
|
|
|
(1,159 |
) |
|
|
(926 |
) |
Short-term
investments – net
|
|
|
- |
|
|
|
(250 |
) |
Purchase
of long-term investments
|
|
|
(9,710 |
) |
|
|
(10,531 |
) |
Sales
or maturities of long-term investments
|
|
|
31,672 |
|
|
|
12,758 |
|
Other
– net
|
|
|
400 |
|
|
|
- |
|
Net
cash flows from (to) investing activities
|
|
|
17,557 |
|
|
|
(127,083 |
) |
|
|
|
|
|
|
|
|
|
Net
Cash Flows From (To) Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds
from sales of HNI Corporation common
stock
|
|
|
2,191 |
|
|
|
3,251 |
|
Purchase
of HNI Corporation common stock
|
|
|
- |
|
|
|
(28,553 |
) |
Excess
tax benefits from stock compensation
|
|
|
- |
|
|
|
11 |
|
Proceeds
from long-term debt
|
|
|
97,000 |
|
|
|
306,000 |
|
Payments
of note and long-term debt and other financing
|
|
|
(217,261 |
) |
|
|
(236,298 |
) |
Dividends
paid
|
|
|
(28,978 |
) |
|
|
(28,579 |
) |
Net
cash flows from (to) financing activities
|
|
|
(147,048 |
) |
|
|
15,832 |
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash
equivalents
|
|
|
6,430 |
|
|
|
(6,653 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
39,538 |
|
|
|
33,881 |
|
Cash
and cash equivalents at end of period
|
|
$ |
45,968 |
|
|
$ |
27,228 |
|
|
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
|
|
HNI
Corporation and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
October
3, 2009
Note
A. Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The January 3, 2009 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 nine-month periods ended October 3, 2009 are not necessarily
indicative of the results that may be expected for the year ending January 2,
2010. 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 January 3, 2009.
Note B.
Stock-Based Compensation
The
Corporation measures stock-based compensation expense at grant date, based on
the fair value of the award and recognizes expense over the employee requisite
service period. For the three and nine months ended October 3, 2009,
and September 27, 2008, the Corporation recognized $1.0 million and $2.9
million, and $0.4 million and $1.4 million, respectively, of stock-based
compensation expense for the cost of stock options and time-based restricted
stock units issued under the HNI Corporation 2007 Stock-Based Compensation Plan
and shares issued under the HNI Corporation 2002 Members' Stock Purchase
Plan.
At
October 3, 2009, there was $7.2 million of unrecognized compensation cost
related to nonvested stock-based compensation awards, which the Corporation
expects to recognize over a weighted-average remaining requisite service period
of 1.3 years.
Note
C. Inventories
The
Corporation values its inventory at the lower of cost or market with
approximately 85% valued by the last-in, first-out ("LIFO") method.
(In
thousands)
|
|
Oct.
3, 2009
(Unaudited)
|
|
|
Jan.
3, 2009
|
|
Finished
products
|
|
$ |
54,717 |
|
|
$ |
51,807 |
|
Materials
and work in process
|
|
|
39,966 |
|
|
|
60,155 |
|
LIFO
allowance
|
|
|
(27,672 |
) |
|
|
(27,672 |
) |
|
|
$ |
67,011 |
|
|
$ |
84,290 |
|
Note
D. Comprehensive Income and Shareholders' Equity
The
following table reconciles net income to comprehensive income attributable to
HNI Corporation:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
(In
thousands)
|
|
Oct.
3,
2009
|
|
|
Sep.
27,
2008
|
|
|
Oct.
3,
2009
|
|
|
Sep.
27,
2008
|
|
Net
income
|
|
$ |
17,710 |
|
|
$ |
19,500 |
|
|
$ |
4,450 |
|
|
$ |
37,033 |
|
Other
comprehensive income, net of income tax as applicable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
15 |
|
|
|
72 |
|
|
|
(86 |
) |
|
|
1,287 |
|
Change
in unrealized gains (losses) on
marketable
securities
|
|
|
- |
|
|
|
107 |
|
|
|
134 |
|
|
|
(96 |
) |
Change
in pension and postretirement liability
|
|
|
79 |
|
|
|
79 |
|
|
|
237 |
|
|
|
237 |
|
Change
in derivative financial instruments
|
|
|
49 |
|
|
|
(224 |
) |
|
|
151 |
|
|
|
(356 |
) |
Comprehensive
income
|
|
|
17,853 |
|
|
|
19,534 |
|
|
|
4,886 |
|
|
|
38,105 |
|
Comprehensive
income attributable to
noncontrolling
interest
|
|
|
96 |
|
|
|
11 |
|
|
|
119 |
|
|
|
98 |
|
Comprehensive
income attributable to HNI
Corporation
|
|
$ |
17,757 |
|
|
$ |
19,523 |
|
|
$ |
4,767 |
|
|
$ |
38,007 |
|
The
following table summarizes the components of accumulated other comprehensive
loss and the changes in accumulated other comprehensive loss, net of tax as
applicable for the nine months ended October 3, 2009:
(in
thousands)
|
|
Foreign
Currency Translation Adjustment
|
|
|
Unrealized
Gains (Losses) on Marketable Securities
|
|
|
Pension
Postretirement Liability
|
|
|
Derivative
Financial Instruments
|
|
|
Accumulated
Other Comprehensive Loss
|
|
Balance
at January 3, 2009
|
|
$ |
3,620 |
|
|
$ |
(134 |
) |
|
$ |
(3,455 |
) |
|
$ |
(1,938 |
) |
|
$ |
(1,907 |
) |
Year-to
date change
|
|
|
(86 |
) |
|
|
134 |
|
|
|
237 |
|
|
|
151 |
|
|
|
436 |
|
Balance
at October
3, 2009
|
|
$ |
3,534 |
|
|
$ |
- |
|
|
$ |
(3,218 |
) |
|
$ |
(1,787 |
) |
|
$ |
(1,471 |
) |
For the
nine months ended October 3, 2009, the Corporation did not repurchase any of its
common stock. As of October 3, 2009, $163.6 million of the
Corporation's Board of Directors' current repurchase authorization remained
unspent.
Note
E. Earnings Per Share
The
following table reconciles the numerators and denominators used in the
calculation of basic and diluted earnings per share ("EPS"):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
(In
thousands, except per share data)
|
|
Oct.
3,
2009
|
|
|
Sep.
27,
2008
|
|
|
Oct.
3,
2009
|
|
|
Sep.27,
2008
|
|
Numerators:
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
for both basic and diluted EPS attributable to Parent Company net income
(loss)
|
|
$ |
17,614 |
|
|
$ |
19,489 |
|
|
$ |
4,331 |
|
|
$ |
36,935 |
|
Denominators:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic EPS weighted-average common shares outstanding
|
|
|
44,994 |
|
|
|
44,213 |
|
|
|
44,834 |
|
|
|
44,328 |
|
Potentially
dilutive shares from stock-based compensation plans
|
|
|
604 |
|
|
|
127 |
|
|
|
439 |
|
|
|
125 |
|
Denominator
for diluted EPS
|
|
|
45,598 |
|
|
|
44,340 |
|
|
|
45,273 |
|
|
|
44,453 |
|
Earnings
per share – basic
|
|
$ |
0.39 |
|
|
$ |
0.44 |
|
|
$ |
0.10 |
|
|
$ |
0.83 |
|
Earnings
per share – diluted
|
|
$ |
0.39 |
|
|
$ |
0.44 |
|
|
$ |
0.10 |
|
|
$ |
0.83 |
|
Certain
exercisable and non-exercisable stock options were not included in the
computation of diluted EPS at October 3, 2009 and September 27, 2008, because
their inclusion would have been anti-dilutive. The number of stock
options outstanding which met this anti-dilutive criterion for the three and
nine months ended October 3, 2009 was 1,325,023 and 1,394,946,
respectively. The number of stock options outstanding which met this
anti-dilutive criterion for the three and nine months ended September 27, 2008
was 1,403,584 and 1,352,258, respectively.
Note
F. Restructuring Reserve and Plant Closures
As a
result of challenging market conditions and the Corporation's ongoing business
simplification and cost reduction strategies, management made the decision to
close an additional office furniture manufacturing facility located in
Owensboro, Kentucky and consolidate production into existing office furniture
manufacturing facilities. During the quarter ended October 3, 2009,
in connection with the closure of the Owensboro facility the Corporation
recorded $0.5 million of severance costs for approximately 28 non-bargaining
unit members and $1.7 million of costs to withdraw from the multi-employer
pension plan. The Corporation anticipates the closure and
consolidation of this facility will be substantially complete by the end of the
second quarter of 2010. In connection with the closure of the South
Gate, California and Louisburg, North Carolina office furniture manufacturing
facilities announced earlier this year, the Corporation recorded $1.6 million of
charges during the third quarter which included $0.8 million of accelerated
depreciation of machinery and equipment recorded in cost of sales and $0.8
million of other costs which were recorded as restructuring
costs. The Corporation had previously recorded $3.8 million of
severance costs for approximately 340 members during the first half of the year
in connection with the closure of the South Gate and Louisburg
facilities. The Corporation anticipates the closure and consolidation
of these two facilities will be substantially complete by the end of
2009.
The
Corporation made the decision to consolidate significant production from its
hearth product Mount Pleasant, Iowa plant to other existing hearth products
manufacturing facilities. Additionally, the Corporation will close
hearth products distribution centers in Alsip, Illinois and Lake City, Minnesota
and transfer operations to its Mount Pleasant facility. The
Corporation recorded $2.1 million of charges during the third quarter which
included $0.6 million of accelerated depreciation recorded in cost of sales and
$1.3 million of severance costs for approximately 160 members and $0.2 million
of other costs which were recorded as restructuring costs. The
Corporation anticipates these structural changes will be substantially complete
during the first quarter of 2010.
Following
is a summary of changes in restructuring accruals during the nine months ended
October 3, 2009. This summary does not include accelerated
depreciation of $1.4 million as this item was not accounted for through the
restructuring accrual on the Corporation's Condensed Consolidated Balance Sheets
but is included in the "Restructuring and impairment" line item in the
Corporation's Condensed Consolidated Statements of Income.
(In
thousands)
|
|
Severance
and Member Related Costs
|
|
|
Facility
Exit Costs & Other
|
|
|
Total
|
|
Balance
as of January 3, 2009
|
|
$ |
155 |
|
|
$ |
224 |
|
|
$ |
379 |
|
Restructuring
charges
|
|
|
7,731 |
|
|
|
3,707 |
|
|
|
11,438 |
|
Cash
payments
|
|
|
(2,724 |
) |
|
|
(3,057 |
) |
|
|
(5,781 |
) |
Balance
as of October 3, 2009
|
|
$ |
5,162 |
|
|
$ |
874 |
|
|
$ |
6,036 |
|
The
Corporation completed the sale of a hearth distribution location and recorded
$0.6 million of goodwill impairment charges, included in the "Restructuring and
impairment" line item in the Corporation's Condensed Consolidated Statements of
Income, to reduce the assets being held for sale to fair market
value.
Note G.
Goodwill and Other Intangible Assets
The table
below summarizes amortizable definite-lived intangible assets as of October 3,
2009 and January 3, 2009, which are reflected in the "Other Assets" line item in
the Corporation's Condensed Consolidated Balance Sheets:
(In
thousands)
|
|
Oct.
3, 2009
|
|
|
Jan.
3, 2009
|
|
Patents
|
|
$ |
19,325 |
|
|
$ |
19,325 |
|
Customer
relationships and other
|
|
|
115,664 |
|
|
|
115,664 |
|
Less: accumulated
amortization
|
|
|
63,615 |
|
|
|
56,098 |
|
|
|
$ |
71,374 |
|
|
$ |
78,891 |
|
Aggregate
amortization expense for the three and nine months ended October 3, 2009 and
September 27, 2008 was $2.6 million and $7.5 million, and $3.1 million and $8.0
million, respectively. Based on the current amount of intangible
assets subject to amortization, the estimated amortization expense for each of
the following five fiscal years is as follows:
(In millions)
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
Amortization
Expense
|
|
$ |
10.0 |
|
|
$ |
8.6 |
|
|
$ |
7.2 |
|
|
$ |
6.2 |
|
|
$ |
5.8 |
|
As events
such as potential acquisitions, dispositions or impairments occur in the future,
these amounts may change.
The
Corporation owns trademarks and trade names with a net carrying amount of $60.6
million. The trademarks are deemed to have indefinite useful lives
because they are expected to generate cash flows indefinitely. The
Corporation determines the fair value of indefinite lived trade names on an
annual basis during the fourth quarter or whenever indication of impairment
exists. The Corporation concluded that there was not a need for an
interim assessment as performance is in line with management’s
expectations.
The
changes in the carrying amount of goodwill since January 3, 2009, are as follows
by reporting segment:
(In
thousands)
|
|
Office
Furniture
|
|
|
Hearth
Products
|
|
|
Total
|
|
Balance
as of January 3, 2009
|
|
$ |
101,339 |
|
|
$ |
167,053 |
|
|
$ |
268,392 |
|
Goodwill
increase during period
|
|
|
- |
|
|
|
500 |
|
|
|
500 |
|
Goodwill
decrease during period
|
|
|
- |
|
|
|
(1,027 |
) |
|
|
(1,027 |
) |
Balance
as of October 3, 2009
|
|
$ |
101,339 |
|
|
$ |
166,526 |
|
|
$ |
267,865 |
|
The
Corporation evaluates its goodwill for impairment on an annual basis during the
fourth quarter, or whenever indicators of impairment exist. The
Corporation estimates the fair value of its reporting units using various
valuation techniques, with the primary technique being a discounted cash flow
method. This method employs assumptions that are market participant
based. The increase in the hearth segment goodwill is for contingent
consideration payments related to a previous acquisition.
The
Corporation completed the sale of a hearth distribution location, included in
the Hearth & Home Technologies reporting unit during the third
quarter. The Corporation determined the fair value of goodwill
associated with this location to be $1.0 million during the second quarter and
recorded an impairment charge of $0.6 million, included in the "Restructuring
and impairment" line item in the Corporation's Condensed Consolidated Statements
of Income during the second quarter.
As a
result, management reviewed the valuation of the remaining Hearth & Home
Technologies reporting unit during the second quarter, excluding the cash flows
association with the location discussed above. The Corporation's
analysis of this reporting unit concluded the fair value exceeded the carrying
value by approximately 15% and as such, no impairment charges during second
quarter were necessary. For the quarter ended October 3, 2009, all
reporting units continue to perform in line with management’s expectations since
the last assessment therefore the Corporation concluded there was not a need for
an interim assessment.
Note
H. 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:
|
|
Nine
Months Ended
|
|
(In
thousands)
|
|
Oct.
3, 2009
|
|
|
Sep.
27, 2008
|
|
Balance
at beginning of period
|
|
$ |
13,948 |
|
|
$ |
12,123 |
|
Accrual
assumed from acquisition
|
|
|
- |
|
|
|
250 |
|
Accruals
for warranties issued during period
|
|
|
9,715 |
|
|
|
14,449 |
|
Adjustments
related to pre-existing warranties
|
|
|
(78 |
) |
|
|
1,190 |
|
Settlements
made during the period
|
|
|
(10,772 |
) |
|
|
(14,690 |
) |
Balance
at end of period
|
|
$ |
12,813 |
|
|
$ |
13,322 |
|
Note
I. Postretirement Health Care
The
following table sets forth the components of net periodic benefit cost included
in the Corporation's income statement for:
|
|
Nine Months
Ended
|
|
(In
thousands)
|
|
Oct.
3, 2009
|
|
|
Sep.
27, 2008
|
|
Service
cost
|
|
$ |
293 |
|
|
$ |
297 |
|
Interest
cost
|
|
|
719 |
|
|
|
722 |
|
Expected
return on plan assets
|
|
|
- |
|
|
|
(268 |
) |
Amortization
of transition obligation
|
|
|
381 |
|
|
|
381 |
|
Amortization
of (gain)/loss
|
|
|
(7 |
) |
|
|
- |
|
Net
periodic benefit cost
|
|
$ |
1,386 |
|
|
$ |
1,132 |
|
Note
J. Income Taxes
The
provision for income taxes in the third quarter of fiscal 2009 reflects an
actual effective tax rate of 39.2 percent, compared to an estimated annual tax
rate of 34.1 percent for the third quarter of fiscal 2008 and actual tax rate
for the full year 2008 of 34.2 percent. A discrete calculation was
used to report the 2009 third quarter tax provision rather than an estimated
annual tax rate as uncertainty in the full year outlook produces significant
variability in the estimated annual effective tax rate.
Note
K. Derivative Financial Instruments
The
Corporation uses derivative financial instruments to reduce its exposure to
adverse fluctuations in interest rates. On the date a derivative is
entered into, the Corporation designates the derivative as (i) a fair value
hedge, (ii) a cash flow hedge, (iii) a hedge of a net investment in a foreign
operation, or (iv) a risk management instrument not eligible for hedge
accounting. The Corporation recognizes all derivatives on its
consolidated balance sheet at fair value.
In June
2008, the Corporation entered into an interest rate swap agreement, designated
as a cash flow hedge, for purposes of managing its benchmark interest rate
fluctuation risk. Under the interest rate swap agreement, the
Corporation pays a fixed rate of interest and receives a variable rate of
interest equal to the one-month London Interbank Offered Rate (LIBOR) as
determined on the last day of each monthly settlement period on an aggregated
notional principal amount of $50 million. The net amount paid or
received upon monthly settlements is recorded as an adjustment to interest
expense, while the change in fair value is recorded as a component of
accumulated other comprehensive income in the equity section of the
Corporation’s consolidated balance sheet. The interest rate swap
agreement matures on May 27, 2011.
The
aggregate fair market value of the interest rate swap as of October 3, 2009 was
a liability of $2.9 million, of which $1.9 million is included in current
liabilities and $1.0 million is included in long-term liabilities in the
Corporation's Condensed Consolidated Balance Sheet as of October 3,
2009. For the nine-month period ended October 3, 2009, the
Corporation recorded a deferred net loss of $987,000 in other comprehensive
income and reclassified $1,228,000 from other comprehensive income to current
period earnings as interest expense in its Condensed Consolidated Statements of
Income. As of October 3, 2009, $1.2 million of deferred net losses,
net of tax, included in equity ("Accumulated other comprehensive income (loss)"
in the Corporation's Condensed Consolidated Balance Sheets) related to this
interest rate swap, are expected to be reclassified to current earnings
("Interest expense" in the Corporation's Condensed Consolidated Statement of
Income) over the next twelve months.
Note
L. Fair Value Measurements
The
Financial Accounting Standards Board ("FASB") provided enhanced guidance for
using fair value to measure assets and liabilities for financial assets and
liabilities. The guidance also expanded the amount of required
disclosure regarding the extent to which companies measure assets and
liabilities at fair value, the information used to measure fair value and the
effect of fair value measurements on earnings. The guidance applies
whenever other guidance requires (or permits) assets or liabilities to be
measured at fair value but does not expand the use of fair value in any new
circumstances. The Corporation adopted the guidance with regard to
its financial assets and liabilities on December 30, 2008 and with regard to its
nonfinancial assets and liabilities on January 4, 2009. The adoption
did not have a material impact on the Corporation’s financial
statements.
For
recognition purposes, on a recurring basis, the Corporation is required to
measure at fair value its marketable securities, which are classified as
available-for-sale, and its investment in target funds. The
marketable securities were comprised of investments in money market
funds. They are reported as noncurrent assets as they are not
anticipated to be used for current operations. The target funds are
reported as both current and noncurrent assets based on the portion that is
anticipated to be used for current operations.
Assets
measured at fair value during the nine months ended October 3, 2009 were as
follows:
(in
thousands)
|
|
Fair
value as of measurement date
|
|
|
Quoted
prices in active markets for identical assets
(Level
1)
|
|
|
Significant
other observable inputs
(Level
2)
|
|
|
Significant
unobservable inputs
(Level
3)
|
|
Investment
in target funds
|
|
$ |
7,901 |
|
|
$ |
- |
|
|
$ |
7,901 |
|
|
$ |
- |
|
Derivative
financial instrument
|
|
$ |
(2,864 |
) |
|
$ |
- |
|
|
$ |
(2,864 |
) |
|
$ |
- |
|
Assets
measured at fair value for the Corporation's fiscal year ended January 3, 2009
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
|
|
$ |
3,696 |
|
|
$ |
3,696 |
|
|
$ |
- |
|
|
$ |
- |
|
Investment
in target funds
|
|
$ |
25,047 |
|
|
$ |
- |
|
|
$ |
25,047 |
|
|
$ |
- |
|
Derivative
financial instrument
|
|
$ |
(
3,106 |
) |
|
$ |
- |
|
|
$ |
(
3,106 |
) |
|
$ |
- |
|
In
addition to the methods and assumptions the Corporation uses to record the fair
value of financial instruments as discussed in the section above, it uses the
following methods and assumptions to estimate the fair value of its financial
instruments. Effective April 5, 2009, the Corporation adopted the
guidance on interim disclosures about fair value of financial
instruments. See Note N. New Accounting Standards for
additional information.
Cash and cash
equivalents
Carrying
amount approximated fair value.
Available-for-sale
securities
Fair
value for available-for-sale securities was estimated based on quoted market
prices.
Long-term
debt
The fair
value of the Corporation’s outstanding variable rate long-term debt obligations
at October 3, 2009 and January 3, 2009, the end of the Corporation's fiscal
year, approximates the carrying value. The fair value of the
Corporation's outstanding fixed rate long-term debt obligations is estimated to
be $137 million at October 3, 2009 and January 3, 2009, below the carrying value
of $150 million.
Note
M. Commitments and Contingencies
The
Corporation utilizes letters of credit in the amount of $20.9 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 liabilities, if any, resulting from these matters are
not expected to have a material adverse effect on the Corporation's financial
condition, although such matters could have a material effect on the
Corporation's quarterly or annual operating results and cash flows when resolved
in a future period.
Note
N. New Accounting Standards
In
December 2007, the FASB issued amended guidance regarding accounting for
business combinations. The amended guidance applies the acquisition
method to all transactions and other events in which one entity obtains control
over one or more other businesses, and requires, among other things, that assets
acquired and liabilities assumed be measured at fair value as of the acquisition
date, that liabilities related to contingent considerations be recognized at the
acquisition date and remeasured at fair value in each subsequent reporting
period, that acquisition-related costs be expensed as incurred, and that income
be recognized if the fair value of the net assets acquired exceeds the fair
value of the consideration transferred. The Corporation will apply
the guidance as amended prospectively to business combinations for which the
acquisition date is on or after January 3, 2009 and can only assess the impact
of the amended guidance once an acquisition is consummated.
In
December 2007, the FASB issued new guidance which requires a noncontrolling
interest in a subsidiary be reported as equity and the amount of consolidated
net income specifically attributable to the noncontrolling interest be
identified in the consolidated financial statements. It also requires
consistency in the manner of reporting changes in the parent’s ownership
interest and requires fair value measurement of any noncontrolling equity
investment retained in a deconsolidation. The Corporation adopted the
guidance in the first quarter of 2009. As a result of the adoption,
the Corporation has reported noncontrolling interests as a component of equity
in its Condensed Consolidated Balance Sheets and the net income or loss
attributable to noncontrolling interests has been separately identified in its
Condensed Consolidated Statements of Income. The prior periods
presented have also been reclassified to conform to the current classification
requirements.
In March
2008, the FASB expanded the disclosure requirements for derivative instruments
and hedging activities with the intent to provide users of financial statements
with an enhanced understanding of an entity’s derivative activity. The
Corporation adopted the new guidance as of January 4, 2009 and has included
related disclosures in Note K. Derivative Financial
Instruments.
In April
2009, the FASB issued guidance requiring the disclosures about fair value of
financial instruments to be included for interim reporting
periods. The Corporation adopted the new guidance effective April 5,
2009 and has included related disclosures in Note L. Fair Value
Measurements.
In April
2009, the FASB issued guidance on determining when the trading volume and
activity for an asset or liability has significantly decreased, which may
indicate an inactive market, and on measuring the fair value of an asset or
liability in inactive markets. The Corporation adopted the guidance
effective April 5, 2009. The adoption did not have a material impact
on the financial statements.
In May
2009, the FASB established general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. The Corporation adopted the
guidelines as of July 4, 2009. The Corporation has performed an
evaluation of subsequent events through November 5, 2009, the date the financial
statements were issued.
Note
O. Business Segment Information
Management
views the Corporation as operating in two business segments: office
furniture and hearth products with the former being the principal business
segment.
The
office furniture segment manufactures and markets a broad line of metal and wood
commercial and home office furniture which includes storage products, desks,
credenzas, chairs, tables, bookcases, freestanding office partitions and panel
systems and other related products. The hearth products segment
manufactures and markets a broad line of manufactured gas, electric, wood and
biomass burning fireplaces, inserts, stoves, facings and accessories,
principally for the home.
For
purposes of segment reporting, intercompany sales transfers between segments are
not material and operating profit is income before income taxes exclusive of
certain unallocated corporate expenses. These unallocated corporate
expenses include the net cost of the Corporation's corporate operations,
interest income, and interest expense. The decrease in unallocated
corporate expenses compared to prior year is due primarily to decreased interest
expense and cost control initiatives. 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-months periods ended October 3, 2009, and September 27, 2008, is as
follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
(In
thousands)
|
|
Oct.
3,
2009
|
|
|
Sep.
27,
2008
|
|
|
Oct.
3,
2009
|
|
|
Sep.
27,
2008
|
|
Net
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
Furniture
|
|
$ |
379,913 |
|
|
$ |
560,661 |
|
|
$ |
1,041,747 |
|
|
$ |
1,541,207 |
|
Hearth
Products
|
|
|
74,043 |
|
|
|
102,480 |
|
|
|
200,865 |
|
|
|
298,431 |
|
|
|
$ |
453,956 |
|
|
$ |
663,141 |
|
|
$ |
1,242,612 |
|
|
$ |
1,839,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Profit (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
furniture (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
before restructuring charges
|
|
$ |
41,048 |
|
|
$ |
40,583 |
|
|
$ |
64,001 |
|
|
$ |
92,327 |
|
Restructuring
and impairment charges
|
|
|
(2,954 |
) |
|
|
(1,072 |
) |
|
|
(8,451 |
) |
|
|
(3,943 |
) |
Office
furniture – net
|
|
|
38,094 |
|
|
|
39,511 |
|
|
|
55,550 |
|
|
|
88,384 |
|
Hearth
products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
before restructuring charges
|
|
|
3,305 |
|
|
|
4,148 |
|
|
|
(13,731 |
) |
|
|
2,843 |
|
Restructuring
and impairment charges
|
|
|
(1,486 |
) |
|
|
(425 |
) |
|
|
(4,952 |
) |
|
|
(401 |
) |
Hearth
products – net
|
|
|
1,819 |
|
|
|
3,723 |
|
|
|
(18,683 |
) |
|
|
2,442 |
|
Total
operating profit
|
|
|
39,913 |
|
|
|
43,234 |
|
|
|
36,867 |
|
|
|
90,826 |
|
Unallocated
corporate expense
|
|
|
(10,908 |
) |
|
|
(13,644 |
) |
|
|
(29,653 |
) |
|
|
(33,562 |
) |
Income
(loss) before income taxes
|
|
$ |
29,005 |
|
|
$ |
29,590 |
|
|
$ |
7,214 |
|
|
$ |
57,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
& Amortization Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
furniture
|
|
$ |
12,958 |
|
|
$ |
12,936 |
|
|
$ |
39,857 |
|
|
$ |
37,583 |
|
Hearth
products
|
|
|
4,237 |
|
|
|
3,785 |
|
|
|
13,117 |
|
|
|
11,479 |
|
General
corporate
|
|
|
738 |
|
|
|
1,121 |
|
|
|
2,741 |
|
|
|
3,345 |
|
|
|
$ |
17,933 |
|
|
$ |
17,842 |
|
|
$ |
55,715 |
|
|
$ |
52,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
furniture
|
|
$ |
2,498 |
|
|
$ |
15,125 |
|
|
$ |
8,227 |
|
|
$ |
44,973 |
|
Hearth
products
|
|
|
537 |
|
|
|
3,163 |
|
|
|
2,237 |
|
|
|
8,350 |
|
General
corporate
|
|
|
86 |
|
|
|
363 |
|
|
|
410 |
|
|
|
1,267 |
|
|
|
$ |
3,121 |
|
|
$ |
18,651 |
|
|
$ |
10,874 |
|
|
$ |
54,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of
Oct.
3,
2009
|
|
|
As
of
Sep.
27,
2008
|
|
Identifiable
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
furniture
|
|
|
|
|
|
|
|
|
|
$ |
631,369 |
|
|
$ |
828,095 |
|
Hearth
products
|
|
|
|
|
|
|
|
|
|
|
309,219 |
|
|
|
340,467 |
|
General
corporate
|
|
|
|
|
|
|
|
|
|
|
83,796 |
|
|
|
107,638 |
|
|
|
|
|
|
|
|
|
|
|
$ |
1,024,384 |
|
|
$ |
1,276,200 |
|
(1) Includes
noncontrolling interest.
Item
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Overview
The
Corporation has two reportable segments: office furniture and hearth
products. The Corporation is 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 fiscal 2009 decreased 31.5 percent to $454.0 million as
compared to the third quarter of the prior year. The decrease was
driven by large declines in both segments due to adverse market
conditions. Gross margins for the quarter increased from prior year
levels due primarily to increased price realization, lower material costs and
cost reduction initiatives offset partially by decreased
volume. Selling and administrative expenses decreased due to cost
control initiatives, lower volume related costs and improved distribution
efficiencies offset partially by increased restructuring and transition
costs.
The
Corporation continues to take actions to reset its cost structure due to
challenging market conditions and pursuant to its ongoing business
simplification and cost reduction strategies. The Corporation
announced the decision to shutdown an office furniture manufacturing facility
and recorded $4.1 million of restructuring and transition costs in the third
quarter in connection with this shutdown as well as previously announced
shutdowns. In addition, $1.8 million of charges related to the
restructuring of hearth operations were recorded during the third
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 by
management to be reasonable in order to make judgments about the carrying value
of assets and liabilities. Actual results may differ from these
estimates under different assumptions or conditions. A summary of the
more significant accounting policies that require the use of estimates and
judgments in preparing the financial statements is provided in the Corporation's
Annual Report on Form 10-K for the year ended January 3, 2009. During
the first nine months of fiscal 2009, there were no material changes in the
accounting policies and assumptions previously disclosed.
New Accounting
Standards
For
information pertaining to the Corporation's adoption of new accounting standards
and any resulting impact to the Corporation's financial statements, please refer
to the first paragraph of Note L. Fair Value Measurements and
the entirety of Note N. New
Accounting Standards of the Notes to the Condensed Consolidated Financial
Statements included in Part I, Item 1 of this Quarterly Report on Form
10-Q.
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)
|
|
Oct.
3,
2009
|
|
|
Sep.
27,
2008
|
|
|
Percent
Change
|
|
|
Oct.
3,
2009
|
|
|
Sep.
27,
2008
|
|
|
Percent
Change
|
|
Net
sales
|
|
$ |
453,956 |
|
|
$ |
663,141 |
|
|
|
-31.5 |
|
|
$ |
1,242,612 |
|
|
$ |
1,839,638 |
|
|
|
-32.5 |
|
Cost
of sales
|
|
|
287,352 |
|
|
|
438,423 |
|
|
|
-34.5 |
|
|
|
821,792 |
|
|
|
1,221,439 |
|
|
|
-32.7 |
|
Gross
profit
|
|
|
166,604 |
|
|
|
224,718 |
|
|
|
-25.9 |
|
|
|
420,820 |
|
|
|
618,199 |
|
|
|
-31.9 |
|
Selling
& administrative expenses
|
|
|
129,897 |
|
|
|
189,577 |
|
|
|
-31.5 |
|
|
|
390,920 |
|
|
|
544,805 |
|
|
|
-28.2 |
|
Restructuring
& impairment charges
|
|
|
4,440 |
|
|
|
1,497 |
|
|
|
196.6 |
|
|
|
13,403 |
|
|
|
4,344 |
|
|
|
208.5 |
|
Operating
income (loss)
|
|
|
32,267 |
|
|
|
33,644 |
|
|
|
-4.1 |
|
|
|
16,497 |
|
|
|
69,050 |
|
|
|
-76.1 |
|
Interest
expense, net
|
|
|
3,116 |
|
|
|
4,037 |
|
|
|
-22.8 |
|
|
|
9,103 |
|
|
|
11,635 |
|
|
|
-21.8 |
|
Earnings
(loss) before income taxes
|
|
|
29,151 |
|
|
|
29,607 |
|
|
|
-1.5 |
|
|
|
7,394 |
|
|
|
57,415 |
|
|
|
-87.1 |
|
Income
taxes
|
|
|
11,441 |
|
|
|
10,107 |
|
|
|
13.2 |
|
|
|
2,944 |
|
|
|
20,382 |
|
|
|
-85.6 |
|
Less: Net
income attributable to the noncontrolling interest
|
|
|
96 |
|
|
|
11 |
|
|
|
772.7 |
|
|
|
119 |
|
|
|
98 |
|
|
|
21.4 |
|
Net
income (loss) attributable to Parent Company
|
|
$ |
17,614 |
|
|
$ |
19,489 |
|
|
|
-9.6 |
|
|
$ |
4,331 |
|
|
$ |
36,935 |
|
|
|
-88.3 |
|
Consolidated
net sales for the third quarter of 2009 decreased 31.5 percent or $209.2 million
compared to the same quarter last year due to challenging market conditions in
both the office furniture and hearth products segments.
Gross
margins for the third quarter of 2009 increased to 36.7 percent compared to 33.9
percent for the same quarter last year. The improvement in gross
margin was due to increased price realization, lower material costs and cost
reduction initiatives offset partially by decreased volume. Third
quarter 2009 included $1.6 million of accelerated depreciation and transition
costs related to the shutdown and consolidation of office furniture
manufacturing facilities and hearth restructuring.
As a
result of challenging market conditions and the Corporation's ongoing business
simplification and cost reduction strategies, management made the decision to
close an office furniture manufacturing facility located in Owensboro,
Kentucky and consolidate production into existing office furniture manufacturing
facilities. In connection with the closure of the Owensboro facility
the Corporation recorded $0.5 million of severance costs for approximately 30
non-bargaining unit members and $1.7 million of costs to withdraw from the
multi-employer pension plan during the quarter ended October 3,
2009. The Corporation anticipates the closure and consolidation of
this facility will be substantially complete by the end of the second quarter of
2010. In connection with the closure of two office furniture
facilities announced earlier this year, the Corporation recorded $2.0 million of
charges during the third quarter which included $0.8 million of accelerated
depreciation and $0.2 million of other transition costs recorded in cost of
sales, $0.8 million of costs recorded as restructuring costs and $0.2 million of
other transition costs recorded in selling and administrative
expense. The Corporation anticipates the closure and consolidation of
these two facilities will be substantially complete by the end of
2009. The Corporation made the decision to consolidate significant
production from its hearth product Mount Pleasant, Iowa plant to other
existing
hearth products manufacturing facilities. Additionally, the
Corporation will close hearth products distribution centers in Alsip, Illinois
and Lake City, Minnesota and transfer operations to its Mount Pleasant
facility. In connection with the hearth restructuring the Corporation
recorded $2.1 million of charges during the third quarter which included $0.6
million of accelerated depreciation recorded in cost of sales and $1.3 million
of severance costs for approximately 160 members and $0.2 million of other costs
which were recorded as restructuring costs. The Corporation expects
these changes will be substantially complete during the first quarter of 2010.
The Corporation anticipates additional restructuring and transition charges of
approximately $9.2 million related to the various closures of which $4.2 million
will impact the remainder of 2009 and $5.0 million will impact the first two
quarters of 2010. The Corporation is currently in negotiations with
the union representing the bargaining unit at the Owensboro facility and
therefore is not able to estimate all of the charges associated with that
closure until the negotiations conclude.
Total
selling and administrative expenses, including restructuring charges, as a
percent of sales increased to 29.6 percent compared to 28.8 percent for the same
quarter last year due to lower volume. Actual selling and
administrative expenses decreased $56.7 million as a result of cost control
initiatives, lower volume related expenses, improved distribution efficiencies
and a gain of $0.3 million on the sale of a building. Third quarter
2009 included $4.4 million of restructuring charges compared to $1.5 million in
2008.
Net
income attributable to parent company for the third quarter of 2009 was $17.6
million or $0.39 per diluted share compared to net income of $19.5 million or
$0.44 per diluted share in third quarter 2008. Net interest expense
decreased $0.9 million during the quarter as compared to third quarter 2008 due
to reduced borrowing.
The
provision for income taxes in the third quarter of fiscal 2009 reflects an
actual effective tax rate of 39.2 percent, compared to an estimated annual tax
rate of 34.1 percent for the third quarter of fiscal 2008 and actual tax rate
for the full year 2008 of 34.2 percent. A discrete calculation was
used to report the third quarter tax provision rather than an estimated annual
tax rate as uncertainty in the full year outlook produces significant
variability in the estimated annual effective tax rate.
For the
first nine months of 2009, consolidated net sales decreased $0.6 billion, or
32.5 percent, to $1.2 billion compared to $1.8 billion for the same period in
the prior year. Acquisitions added $10.2 million or 0.6 percentage
points of sales. Gross margins increased to 33.9 percent compared to
33.6 percent for the same period last year. Operating income was
$16.5 million for the first nine months of 2009 compared to $69.1 million for
the first nine months of 2008. Earnings per share decreased to $0.10
per diluted share compared to $0.83 per diluted share for the same period last
year.
Office
Furniture
Third
quarter sales for the office furniture segment decreased 32.2 percent or $180.7
million to $379.9 million from $560.7 million for the same quarter last year
driven by substantial weakness in both the supplies-driven and contract channels
of the office furniture industry. Operating profit prior to
unallocated corporate expenses for the quarter decreased $1.4 million to $38.1
million when compared to the same period last year as a result of
lower volume and increased restructuring and transition costs partially offset
by price realization, lower input costs, distribution efficiencies and cost
control initiatives. Third quarter 2009 included $4.1 million of
restructuring and transition costs including accelerated depreciation compared
to $1.1 million of restructuring costs in third quarter 2008.
Net sales
for the first nine months of 2009 decreased 32.4 percent or $0.5 billion to $1.0
billion compared to $1.5 billion for the same period in
2008. Acquisitions added $10.2 million or 0.7 percentage points of
sales. Operating profit decreased 37.1 percent or $32.8 million to
$55.6 million over the first nine months of 2009 when compared to the same
period in 2008.
Hearth
Products
Third
quarter net sales for the hearth products segment decreased 27.7 percent or
$28.4 million to $74.0 million from $102.5 million for the same quarter last
year driven by significant declines in both the new construction and
remodel-retrofit channels. Operating profit prior to unallocated
corporate expenses for the quarter decreased $1.9 million to $1.8 million when
compared to third quarter 2008 due to lower volume and higher restructuring
expenses partially offset by cost reduction initiatives, lower incentive based
compensation costs and a non-operating gain related to the sale of a
building.
Net sales
for the first nine months of 2009 decreased 32.7 percent or $97.6 million to
$200.9 million compared to $298.4 million for the same period in
2008. Operating profit decreased $21.1 million to a $18.7 million
loss over the first nine months of 2009.
Liquidity and Capital
Resources
Cash
Flow – Operating Activities
Cash
generated from operating activities for the first nine months of 2009 totaled
$135.9 million compared to $104.6 million generated in the first nine months of
2008. Improved working capital performance resulted in a $66.6
million source of cash in the current fiscal year compared to $4.2 million in
the prior year.
Cash
Flow – Investing Activities
Capital
expenditures including capitalized software for the first nine months of fiscal
2009 were $10.9 million compared to $54.6 million in the same period of fiscal
2008 and were primarily for tooling and equipment for new
products. For the full year 2009, capital expenditures are expected
to be approximately $20 million primarily for new product development and
related tooling. The Corporation sold $21 million of long-term
investments during the first nine months and used the proceeds to repay
debt.
Cash
Flow – Financing Activities
During
the first nine months of fiscal 2009, net borrowings under the Corporation's
revolving credit facility decreased $57.5 million. As of October 3,
2009, $50 million of the revolving credit facility was outstanding and all
classified as long-term. The Corporation paid off its $47.5 million
term loan during the first nine months of 2009. Included in current
liabilities is $2.3 million outstanding under the Corporation’s industrial
revenue bonds as of October 3, 2009. The Corporation expects to repay
that portion of the bonds within the next twelve months.
The
credit agreement governing the Corporation's revolving credit facility contains
a number of covenants, including covenants requiring maintenance of the
following financial ratios as of the end of any fiscal quarter:
·
|
a
consolidated interest coverage ratio of not less than 4.0 to 1.0, based
upon the ratio of (a) consolidated EBITDA (as defined in the respective
credit agreement) for the last four fiscal quarters to (b) the sum of
consolidated interest charges; and
|
·
|
a
consolidated leverage ratio of not greater than 3.0 to 1.0, based upon the
ratio of (a) the quarter-end consolidated funded indebtedness (as defined
in the respective credit agreement) to (b) consolidated EBITDA for the
last four fiscal quarters.
|
The note
purchase agreement pertaining to the Corporation's Senior Notes also contains a
number of covenants, including a covenant requiring maintenance of consolidated
debt to consolidated EBITDA (as defined in the note purchase agreement) of not
greater than 3.5 to 1.0, based upon the ratio of (a) the quarter-end
consolidated funded indebtedness (as defined in the note purchase agreement) to
(b) consolidated EBITDA for the last four fiscal quarters.
The
revolving credit facility and Senior Notes are the primary sources of committed
funding from which the Corporation finances its planned capital expenditures,
strategic initiatives such as repurchases of common stock and certain working
capital needs. Non-compliance with the various financial covenant
ratios could prevent the Corporation from being able to access further
borrowings under the revolving credit facility, require immediate repayment of
all amounts outstanding with respect to the revolving credit facility and Senior
Notes and increase the cost of borrowing.
The most
restrictive of the financial covenants is the consolidated leverage ratio
requirement of 3.0 to 1.0 included in the credit agreement governing the
revolving credit facility. Under that credit agreement, adjusted
EBITDA is defined as consolidated net income before interest expense, income
taxes and depreciation and amortization of intangibles, as well as non-cash,
nonrecurring charges and all non-cash items increasing net income. At
October 3, 2009, the Corporation was well below this ratio and was in compliance
with all of the covenants and other restrictions in the credit agreements and
note purchase agreement. The Corporation currently expects to remain
in compliance over the next twelve months. If the Corporation’s
actual results over the next twelve months are lower than current projections,
the margin by which the Corporation is below the consolidated leverage ratio
will decrease. However, even if a 20 percent decline in expected
results over the next twelve months were to occur, the Corporation would remain
in compliance with the covenant.
The
Corporation's Board of Directors (the "Board") declared a regular quarterly cash
dividend of $0.215 per share on the Corporation's common stock on August 19,
2009, to shareholders of record at the close of business on August 31,
2009. It was paid on September 8, 2009.
The
Corporation did not repurchase any shares of common stock during the third
quarter of 2009. For the nine months ended September 27, 2008, the
Corporation repurchased 1,004,700 shares of its common stock at a cost of
approximately $28.6 million, or an average price of $28.42 per
share. As of October 3, 2009, 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 January 3,
2009. During the first nine months of fiscal 2009, 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 liabilities,
if any, resulting from these matters are not expected to have a material adverse
effect on the Corporation's financial condition, although such matters could
have a material effect on the Corporation's quarterly or annual operating
results and cash flows when resolved in a future period.
Looking
Ahead
Although
management sees signs of stabilization in many of the Corporation's markets,
management expects weak demand to continue across its businesses during the
remainder of 2009. The Corporation continues to reset its cost
structure to market conditions while investing in new products, selling
initiatives and operational improvements.
The
Corporation continues to focus on creating long-term shareholder value by
growing its businesses through investment in building brands, product solutions
and selling models, enhancing its strong member-owner culture and remaining
focused on its long-standing continuous improvement programs to build best total
cost and a lean enterprise.
Forward-Looking
Statements
Statements
in this report that are not strictly historical, including statements as to
plans, outlook, objectives and future financial performance, are
"forward-looking" statements, within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934
and are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Words, such as "anticipate,"
"believe," "could," "confident," "estimate," "expect," "forecast," "hope,"
"intend," "likely," "may," "plan," "possible," "potential," "predict,"
"project," "should," "will," "would" and variations of such words, and similar
expressions identify forward-looking statements. Forward-looking
statements involve known and unknown risks, which may cause the Corporation's
actual results in the future to differ materially from expected
results. These risks include, without limitation: the
Corporation's ability to realize financial benefits from its (a) price
increases, (b) cost containment and business simplification initiatives for the
entire Corporation,
(c)
investments in strategic acquisitions, new products and brand building, (d)
investments in distribution and rapid continuous improvement, (e) ability to
maintain its effective tax rate and (f) consolidation and logistical realignment
initiatives; uncertainty related to the availability of cash and credit, and the
terms and interest rates on which credit would be available, to fund operations
and future growth; lower than expected demand for the Corporation's products due
to uncertain political and economic conditions, including the recent credit
crisis, slow or negative growth rates in global and domestic economies and the
protracted decline in the housing market; lower industry 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, epidemic, acts of God or other Force
Majeure events; competitive pricing pressure from foreign and domestic
competitors; higher than expected costs and lower than expected supplies of
materials (including steel and petroleum based materials); higher than expected
costs for energy and fuel; changes in the mix of products sold and of customers
purchasing; relationships with distribution channel partners, including the
financial viability of distributors and dealers; restrictions imposed by the
terms of the Corporation's revolving credit facility, term loan credit
agreement; currency fluctuations and other factors described in the
Corporation's annual and quarterly reports filed with the Securities and
Exchange Commission on Forms 10-K and 10-Q. The Corporation
undertakes no obligation to update, amend, or clarify forward-looking
statements, whether as a result of new information, future events, or otherwise,
except as required by applicable law.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk.
As of
October 3, 2009, there were no material changes to the financial market risks
that affect the quantitative and qualitative disclosures presented in Item 7A of
the Corporation's Annual Report on Form 10-K for the year ended January 3,
2009.
Item 4. Controls
and Procedures.
Disclosure
controls and procedures are designed to ensure information required to be
disclosed by the Corporation in the reports it files or submits under the
Securities Exchange Act of 1934 (the "Exchange Act"), is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
are also designed to ensure information is accumulated and communicated to
management, including the chief executive officer and chief financial officer,
as appropriate, to allow timely decisions regarding required
disclosure.
Under the
supervision and with the participation of management, the chief executive
officer and chief financial officer of the Corporation carried out an evaluation
of the Corporation's disclosure controls and procedures pursuant to Exchange Act
Rules 13a – 15(e) and 15d – 15(e). As of October 3, 2009, and,
based on this evaluation, the chief executive officer and chief financial
officer have concluded these disclosure controls and procedures are
effective.
Furthermore,
there have been no changes in the Corporation's internal control over financial
reporting during the fiscal quarter covered by this Quarterly Report on Form
10-Q that have materially affected, or are reasonably likely to materially
affect, its internal control over financial reporting.
PART
II. OTHER INFORMATION
Item 1. Legal
Proceedings.
There are
no new legal proceedings or material developments to report other than ordinary
routine litigation incidental to the business.
Item 1A. Risk
Factors.
There
have been no material changes from the risk factors disclosed in the "Risk
Factors" section of the Corporation's Annual Report on Form 10-K for the year
ended January 3, 2009.
Item
2. Unregistered Sales of Equity Securities
and Use of Proceeds.
Directors
and members (i.e., employees) of the Corporation receive common stock
equivalents pursuant to the HNI Corporation Executive Deferred Compensation Plan
and the HNI Corporation Directors Deferred Compensation Plan, respectively
(collectively, the "Deferred Plans"). Common
stock equivalents are hypothetical shares of common stock having a value on any
given date equal to the value of a share of common stock. Common
stock equivalents earn dividend equivalents that are converted into additional
common stock equivalents but carry no voting rights or other rights afforded to
a holder of common stock. The common stock equivalents credited to
members and directors under the Deferred Plans are exempt from registration
under Section 4(2) of the Securities Act of 1933 as private offerings made only
to directors and members of the Corporation in accordance with the provisions of
the Deferred Plans.
Under the
Deferred Plans, each director or member participating in the Deferred Plans, may
elect to defer the receipt of all or any portion of the compensation paid to
such director or member by the Corporation to a cash or stock
sub-account. All deferred payments to the stock sub-account are held
in the form of common stock equivalents. Payments out of the deferred
stock sub-accounts are made in the form of common stock of the Corporation (and
cash as to any fractional common stock equivalent). In the third
quarter of 2009, the directors and members, as a group, were credited with 4,489
common stock equivalents under the Deferred Plans. The value of each
common stock equivalent, when credited, ranged from $21.19 to
$23.33.
The
Corporation did not repurchase any of its shares during the third quarter ended
October 3, 2009. As of October 3, 2009, $163.6 million was authorized
and available for the repurchase of shares by the Corporation.
Item
6. Exhibits.
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 duy authorized.
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HNI
Corporation
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Dated:
November 5, 2009
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By:
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/s/ Kurt
A. Tjaden |
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Kurt
A. Tjaden |
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Vice
President and Chief Financial Officer |
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EXHIBIT
INDEX
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(31.1)
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Certification
of the CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
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(31.2)
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Certification
of the CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
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(32.1)
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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
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