Attached files
file | filename |
---|---|
EX-23 - EXHIBIT 23 - HNI CORP | ex23.htm |
EX-21 - EXHIBIT 21 - HNI CORP | ex21.htm |
EX-3.2 - EXHIBIT 3.2 - HNI CORP | ex3_2.htm |
EX-3.1 - EXHIBIT 3.1 - HNI CORP | ex3_1.htm |
EX-31.1 - EXHIBIT 31.1 - HNI CORP | ex31_1.htm |
EX-10.6 - EXHIBIT 10.6 - HNI CORP | ex10_6.htm |
EX-10.2 - EXHIBIT 10.2 - HNI CORP | ex10_2.htm |
EX-31.2 - EXHIBIT 31.2 - HNI CORP | ex31_2.htm |
EX-32.1 - EXHIBIT 32.1 - HNI CORP | ex32_1.htm |
EX-10.15 - EXHIBIT 10.15 - HNI CORP | ex10_15.htm |
EX-10.25 - EXHIBIT 10.25 - HNI CORP | ex10_25.htm |
EX-10.26 - EXHIBIT 10.26 - HNI CORP | ex10_26.htm |
EX-10.12 - EXHIBIT 10.12 - HNI CORP | ex10_12.htm |
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-K
(Mark
One)
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
fiscal year ended January 2, 2010
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
Commission
File Number 1-14225
HNI
Corporation
An
Iowa Corporation
|
408
East Second Street
|
IRS
Employer No. 42-0617510
|
P. O. Box
1109
Muscatine,
IA 52761-0071
563/272-7400
Securities
registered pursuant to Section 12(b) of the Act:
Title of Each Class
|
Name of Each Exchange on Which
Registered
|
|
Common
Stock, with par value of $1.00 per share.
|
New
York Stock Exchange
|
Securities
registered pursuant to Section 12(g) of the Act: None.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes x No o
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes o No x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes o No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check One):
Large accelerated filer
|
T
|
Accelerated filer
|
o
|
|
Non-accelerated filer
|
o (Do not check if a smaller reporting company)
|
Smaller reporting company
|
o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes o No T
The
aggregate market value of the voting stock held by nonaffiliates of the
Registrant, as of
July 4,
2009 was $559,283,601, based on the New York Stock Exchange closing price for
such shares on that date, assuming for purposes of this calculation that all 5%
holders and all directors and executive officers of the Registrant are
affiliates.
The
number of shares outstanding of the Registrant's common stock, as of February 5,
2010 was 45,093,508.
Documents
Incorporated by Reference
Portions
of the Registrant's Proxy Statement dated March 26, 2010, for the May 11, 2010,
Annual Meeting of Shareholders are incorporated by reference into Part
III.
-2-
ANNUAL REPORT ON FORM 10-K
TABLE
OF CONTENTS
PART I | ||||
Page
|
||||
Item 1.
|
5
|
|||
Item
1A.
|
13
|
|||
Item
1B.
|
21
|
|||
Item 2.
|
21
|
|||
Item 3.
|
23
|
|||
Item 4.
|
23
|
|||
24
|
||||
PART II | ||||
Item 5.
|
25
|
|||
Item 6.
|
26
|
|||
Item 7.
|
27
|
|||
Item
7A.
|
39
|
|||
Item 8.
|
40
|
|||
Item 9.
|
40
|
|||
Item
9A.
|
40
|
|||
Item
9B.
|
40
|
|||
PART III | ||||
Item
10.
|
41
|
|||
Item
11.
|
41
|
|||
Item
12.
|
41
|
|||
Item
13.
|
41
|
|||
Item
14.
|
41
|
PART IV | ||||
Item
15.
|
42
|
|||
44
|
||||
46
|
||||
47
|
||||
48
|
||||
82
|
||||
83
|
ANNUAL
REPORT ON FORM 10-K
PART
I
ITEM
1. BUSINESS
General
HNI
Corporation (the “Corporation”, “we”, “us” or “our”) is an Iowa corporation
incorporated in 1944. The Corporation is a provider of office
furniture and hearth products. A broad office furniture product
offering is sold to dealers, wholesalers, retail superstores, end-user
customers, and federal, state and local governments. Dealers and
wholesalers are the major channels based on sales. Hearth products
include a full array of gas, electric, wood and biomass burning fireplaces,
inserts, stoves, facings and accessories. These products are sold
through a national system of dealers and distributors, as well as
Corporation-owned distribution and retail outlets. In fiscal 2009,
the Corporation had net sales of $1.7 billion, of which approximately $1.4
billion or 83% was attributable to office furniture products and $0.3 billion or
17% was attributable to hearth products. Please refer to Operating
Segment Information in the Notes to Consolidated Financial Statements for
further information about operating segments.
The
Corporation is organized into a corporate headquarters and operating units with
offices, manufacturing plants, distribution centers and sales showrooms in the
United States, Canada, China, Hong Kong and Taiwan. See Item 2.
Properties later in this report for additional related discussion.
Eight
operating units, marketing under various brand names, participate in the office
furniture industry. These operating units include: The HON
Company, Allsteel Inc., Maxon Furniture Inc., The Gunlocke Company L.L.C., Paoli
Inc., Hickory Business Furniture, LLC (“HBF”), HNI Hong Kong Limited (“Lamex”)
and Omni Workspace Company. Each of these operating units provides
products which are sold through various channels of distribution and segments of
the industry.
The
operating unit Hearth & Home Technologies Inc. (“Hearth & Home”)
participates in the hearth products industry. The retail and
distribution brand for this operating unit is Fireside Hearth &
Home.
HNI
International Inc. (“HNI International”) sells office furniture products
manufactured by the Corporation’s operating units in select markets outside the
United States and Canada. With dealers and servicing partners located
in more than fifty countries, HNI International provides project management
services virtually anywhere in the world.
Since its
inception, the Corporation has been committed to systematically eliminating
waste and in 1992 introduced its process improvement approach known as Rapid
Continuous Improvement (“RCI”), which focuses on streamlining design,
manufacturing and administrative processes. The Corporation's RCI
program, in which most members participate, has contributed to increased
productivity, lower costs, improved product quality and workplace
safety. In addition, the Corporation's RCI efforts enable it to offer
short average lead times, from receipt of order to delivery and installation,
for most of its products.
The
Corporation distributes its products through an extensive network of independent
office furniture dealers, office products dealers, wholesalers and
retailers. The Corporation is a supplier of office furniture to the
largest nationwide distributors of office products.
The
Corporation's product development efforts are focused on developing and
providing solutions that are relevant and differentiated, and deliver quality,
aesthetics and style.
An
important element of the Corporation's success has been its member-owner
culture, which has enabled it to attract, develop, retain and motivate skilled,
experienced and efficient members (i.e., employees). Each of the
Corporation's eligible members own stock in the Corporation through a number of
stock-based plans, including a member stock purchase plan and a profit-sharing
retirement plan, which drives a unique level of commitment to the Corporation’s
success throughout the entire workforce.
For
further financial-related information with respect to acquisitions,
restructuring and the Corporation’s operations in general, refer to “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations” later in this report, and the following sections in the Notes to
Consolidated Financial Statements: Nature of Operations, Business
Combinations and Operating Segment Information.
Industry
According
to the Business and Institutional Furniture Manufacturer's Association
(“BIFMA”), U.S. office furniture industry shipments were estimated to be $7.8
billion in 2009, a decrease of 30% compared to 2008, which was a 2% decrease
from 2007 levels. The Corporation believes the decrease in 2009 was
due to weakness in the overall economy, declining white collar employment and
corporate profitability and lack of small business confidence.
The U.S.
office furniture market consists of two primary channels—the project or contract
channel and the supplies-driven channel. The project channel has
traditionally been characterized by sales of office furniture and services to
large corporations, primarily for new office facilities, relocations or
department or office redesigns, which are frequently customized to meet specific
client and designer preferences. Project furniture is generally
purchased through office furniture dealers who typically prepare a
custom-designed office layout emphasizing image and design. The
selling process is often complex and lengthy and generally has several
manufacturers competing for the same projects.
The
supplies-driven channel of the market, in which the Corporation is a leader,
primarily represents smaller orders of office furniture purchased by businesses
and home office users on the basis of price, quality, selection and speed and
reliability of delivery. Office products dealers, wholesalers and
retailers, such as office products superstores, are the primary distribution
channels in this market channel. Office furniture and products
dealers publish periodic catalogs that display office furniture and products
from various manufacturers.
The
Corporation also competes in the domestic hearth products industry, where it is
a market leader. Hearth products are typically purchased by builders
during the construction of new homes and homeowners during the renovation of
existing homes. Both types of purchases involve seasonality with
remodel/retrofit activity being concentrated in the September to December
time-frame. Distribution is primarily through independent dealers,
who may buy direct from the manufacturer or from an intermediate
distributor. The Corporation sells approximately 45% of its hearth
products to the new construction/builder channel.
Growth
Strategy
The
Corporation's strategy is to build on its position as a leading manufacturer of
office furniture and hearth products in North America and pursue select global
markets where opportunities exist to create value. The components of
this growth strategy are to introduce new products, build brand equity, provide
outstanding customer satisfaction by focusing on the end-user, strengthen the
distribution network, respond to global competition, pursue complementary
strategic acquisitions, enter markets not currently served and continually
reduce costs.
The
Corporation’s strategy has a dual focus: working continuously to
extract new growth from its core markets while identifying and developing new,
adjacent potential areas of growth. The Corporation focuses on
extracting new growth from each of its existing businesses by deepening its
understanding of end-users, using new insights gained to refine branding,
selling and marketing and developing new products to serve them
better. The Corporation also pursues opportunities in potential
growth drivers outside of, but related to, its core business, such as vertical
markets or new distribution models.
Employees/Members
As of
January 2, 2010, the Corporation employed approximately 8,700 persons, 8,600 of
whom were full-time and 100 of whom were temporary personnel. The
Corporation employed approximately 100 persons who were members of
unions. The Corporation believes its labor relations are
good.
Products
and Solutions
Office
Furniture
The
Corporation designs, manufactures and markets a broad range of office furniture
in four basic categories: (i) storage, including vertical files, lateral files
and pedestals; (ii) seating, including task chairs, executive desk chairs,
conference/training chairs and side chairs; (iii) office systems (typically
modular and moveable workspaces with integrated work surfaces, space dividers
and lighting); and (iv) desks and related products, including tables, bookcases
and credenzas. In order to meet the demands of various markets, the
Corporation's products are sold under the Corporation's brands – HON®,
Allsteel®,
Maxon®,
Gunlocke®,
Paoli®, Whitehall®,
HBF®,
basyxTM and
Lamex®, as
well as private labels.
The
following is a description of the Corporation's major product categories and
product lines:
Storage
The
Corporation offers a variety of storage options designed either to be integrated
into the Corporation's office systems products or to function as freestanding
furniture in office applications. The Corporation sells most of its
freestanding storage through independent office products and office furniture
dealers, nationwide chains of office products dealers, wholesalers, office
products superstores and mail order distributors.
Seating
The
Corporation's seating line includes chairs designed for all types of office
work. The chairs are available in a variety of frame colors,
coverings and a wide range of price points. Key customer criteria in
seating includes superior design, ergonomics, aesthetics, comfort and
quality.
Office
Panel Systems
The
Corporation offers a complete line of office panel system products in order to
meet the needs of a wide spectrum of organizations. Office panel
systems may be used for team work settings, private offices and open floor
plans. They are typically modular and movable workspaces composed of
adjustable partitions, work surfaces, desk extensions, storage cabinets and
electrical lighting systems which can be moved, reconfigured and reused within
the office. Office panel systems offer a cost-effective and flexible
alternative to traditional drywall office construction. A typical
installation of office panels often includes related sales of seating, storage
and accessories.
The
Corporation offers whole office solutions, movable panels, storage units and
work surfaces that can be installed easily and reconfigured to accommodate
growth and change in organizations. The Corporation also offers
consultative selling and design services for its office system
products.
Desks
and Related Products
The
Corporation's offering of desks and related products includes stand-alone steel,
laminate and wood furniture items, such as desks, bookshelves, credenzas and
mobile desking. These products are available in a range of designs
and price points. The Corporation's desks and related products are
sold to a wide variety of customers from those designing large office
configurations to small retail and home office purchasers. The
Corporation offers a variety of tables designed for use in conference rooms,
private offices, training areas, team work settings and open floor
plans.
Hearth
Products
The
Corporation is North America’s largest manufacturer and marketer of
prefabricated fireplaces and related products, primarily for the home, which it
sells under its widely recognized Heatilator®, Heat
& Glo®,
Quadra-Fire® and
Harman StoveTM
brand names.
The
Corporation’s line of hearth products includes a full array of gas, electric and
wood burning fireplaces, inserts, stoves, facings and
accessories. Heatilator® and
Heat & Glo® are
brand leaders in the two largest segments of the home fireplace market:
vented-gas and wood fireplaces. The Corporation is the leader in
“direct vent” fireplaces, which replace the chimney-venting system used in
traditional fireplaces with a less expensive vent through the roof or an outer
wall. In addition, the Corporation is the leader in pellet-burning
stoves and furnaces with its Quadra-Fire and Harman product lines which provide
home heating solutions using renewable fuel, an environmentally friendly trend
that has come to the fore front in home heating and continues to
grow. See “Intellectual Property” under this Item 1. Business for
additional details.
Manufacturing
The
Corporation manufactures office furniture in Alabama, Georgia, Indiana, Iowa,
Kentucky, New York, North Carolina and China. The Corporation
manufactures hearth products in Iowa, Maryland, Minnesota, Washington,
California and Pennsylvania.
The
Corporation purchases raw materials and components from a variety of suppliers,
and generally most items are available from multiple sources. Major
raw materials and components include coil steel, aluminum, zinc, castings,
lumber, veneer, particleboard, fabric, paint, lacquer, hardware, plastic
products and shipping cartons.
Since its
inception, the Corporation has focused on making its manufacturing facilities
and processes more flexible while at the same time reducing cost, eliminating
waste and improving product quality. In 1992, the Corporation adopted
the principles of RCI, which focus on developing flexible and efficient design,
manufacturing and administrative processes that remove excess
cost. The Corporation’s lean manufacturing philosophy leverages the
creativity of its members to eliminate and reduce costs. To achieve
flexibility and attain efficiency goals, the Corporation has adopted a variety
of production techniques, including cellular manufacturing, focused factories,
just-in-time inventory management, value engineering, business simplification
and 80/20 principles. The application of RCI has increased
productivity by reducing set-up and processing times, square footage, inventory
levels, product costs and delivery times, while improving quality and enhancing
member safety. The Corporation's RCI process involves production and
administrative employees, management, customers and suppliers. The
Corporation has facilitators, coaches and consultants dedicated to the RCI
process and strives to involve all members in the RCI
process. Manufacturing also plays a key role in the Corporation's
concurrent product development process that primarily seeks to design new
products for ease of manufacturability.
Product
Development
The
Corporation's product development efforts are primarily focused on developing
end-user solutions that are relevant, differentiated and focused on quality,
aesthetics, style, sustainable design and on reducing manufacturing
costs. The Corporation accomplishes this through improving existing
products, extending product lines, applying ergonomic research, improving
manufacturing processes, applying alternative materials and providing
engineering support and training to its operating units. The
Corporation conducts its product development efforts at both the corporate and
operating unit level. The Corporation invested approximately $21.1
million, $27.8 million, and $24.0 million in product development during fiscal
2009, 2008, and 2007, respectively, and has budgeted $21 million for product
development in fiscal 2010.
Intellectual
Property
As of
January 2, 2010, the Corporation owned 333 U.S. and 305 foreign patents and had
applications pending for 32 U.S. and 64 foreign patents. In addition,
the Corporation holds 171 U.S. and 378 foreign trademark registrations and has
applications pending for 19 U.S. and 41 foreign trademarks.
The
Corporation's principal office furniture products do not require frequent
technical changes. The Corporation believes neither any individual
office furniture patent nor the Corporation's office furniture patents in the
aggregate are material to the Corporation's business as a whole.
The
Corporation’s patents covering its hearth products protect various technical
innovations. While the acquisition of patents reflects Hearth &
Home’s position in the market as an innovation leader, the Corporation believes
neither any individual hearth product patent nor the Corporation’s hearth
product patents in the aggregate are material to the Corporation’s business as a
whole.
The
Corporation applies for patent protection when it believes the expense of doing
so is justified, and the Corporation believes the duration of its registered
patents is adequate to protect these rights. The Corporation also
pays royalties in certain instances for the use of patents on products and
processes owned by others.
The
Corporation actively protects its trademarks it believes have significant
value.
Sales
and Distribution: Customers
The
Corporation sells its office furniture products through five principal
distribution channels. The first channel, which consists of
independent, local office furniture and office products dealers, specializes in
the sale of a broad range of office furniture and office furniture systems to
business, government, education, health care entities and home office
owners.
The
second distribution channel comprises national office product distributors
including Staples, Inc., Office Max Incorporated and Office Depot,
Inc. These distributors sell furniture along with office supplies
through a national network of dealerships and sales offices, which assist their
customers with the evaluation of office space requirements, systems layout and
product selection and design and office solution services provided by
professional designers. All of these distributors also sell through
retail office products superstores.
The third
distribution channel, comprising corporate accounts, is where the Corporation
has the lead selling relationship with the end-user. Installation and
service are normally provided through a dealer.
The
fourth distribution channel comprises wholesalers that serve as distributors of
the Corporation's products to independent dealers, national supply dealers and
superstores. The Corporation sells to the nation's largest
wholesalers, United Stationers Inc. and S.P. Richards
Company. Wholesalers maintain inventory of standard product lines for
resale to the various dealers and retailers. They also special order
products from the Corporation in customer-selected models and
colors. The Corporation's wholesalers maintain warehouse locations
throughout the United States, which enables the Corporation to make its products
available for rapid delivery to retailers anywhere in the country.
The fifth
distribution channel comprises direct sales of the Corporation's products to
federal, state and local government offices.
The
Corporation's office furniture sales force consists of regional sales managers,
salespersons and firms of independent manufacturers' representatives who
collectively provide national sales coverage. Sales managers and
salespersons are compensated by a combination of salary and incentive
bonus.
Office
products dealers, national wholesalers and retailers market their products over
the Internet and through catalogs published periodically. These
catalogs are distributed to existing and potential customers. The
Corporation believes the inclusion of the Corporation's product lines in
customer catalogs and e-business listings offers strong potential for increased
sales of the listed product lines due to the exposure provided.
The
Corporation also makes export sales through HNI International to office
furniture dealers and wholesale distributors serving select foreign
markets. Distributors are principally located in Latin America, the
Caribbean and Middle East. With the acquisition of Lamex in 2006 the
Corporation manufactures and distributes office furniture directly to end-users
through independent dealers and distributors in Greater China and
Asia.
Limited
quantities of select finished goods inventories primarily built to order
awaiting shipment are at the Corporation's principal manufacturing plants and at
its various distribution centers.
Hearth
& Home sells its fireplace and stove products through dealers, distributors
and Corporation-owned distribution and retail outlets. The
Corporation has a field sales organization of regional sales managers,
salespersons, and firms of independent manufacturers'
representatives.
The
Corporation had one customer, United Stationers Inc., which accounted for
approximately 9% of the Corporation’s consolidated net sales in fiscal 2009, 10%
in fiscal 2008, and 11% in fiscal 2007. The substantial purchasing
power exercised by large customers may adversely affect the prices at which the
Corporation can successfully offer its products. In addition, there
can be no assurance the Corporation will be able to maintain its customer
relationships.
As of
January 2, 2010, the Corporation had an order backlog of approximately $121.1
million, which will be filled in the ordinary course of business within the
first few weeks of the current fiscal year. This compares with $130.8
million as of January 3, 2009, and $162.0 million as of December 29,
2007. Backlog, in terms of percentage of net sales, was 7.3%, 5.3%,
and 6.3%, for fiscal 2009, 2008, and 2007, respectively. The
Corporation’s products are typically manufactured and shipped within a few weeks
following receipt of order. The dollar amount of the Corporation’s
order backlog is, therefore, not considered by management to be a leading
indicator of the Corporation’s expected sales in any particular fiscal
period.
Competition
The
Corporation is one of the largest office furniture manufacturers in the world
and believes it is the largest provider of furniture to small- and medium-sized
workplaces. The Corporation is the largest manufacturer and marketer
of fireplaces in North America.
The
office furniture industry is highly competitive, with a significant number of
competitors offering similar products. The Corporation competes by
emphasizing its ability to deliver compelling value products, solutions and a
high level of customer service. The Corporation competes with large
office furniture manufacturers, which cover a substantial portion of the North
America market share in the project-oriented office furniture market, such as
Steelcase Inc., Haworth, Inc., Herman Miller, Inc. and Knoll,
Inc. The Corporation also competes with a number of other office
furniture manufacturers, including The Global Group (a Canadian company),
Kimball International, Inc., KI and Teknion Corporation (a Canadian company), as
well as global importers. The Corporation faces significant price
competition from its competitors and may encounter competition from new market
entrants.
Hearth
products, consisting of prefabricated fireplaces and related products, are
manufactured by a number of national and regional competitors. The
Corporation competes primarily against a broad range of manufacturers, including
Travis Industries, Inc., Lennox International Inc., Monessen Hearth Systems
Company, DESA Fmi LLC, Wolf Steel Ltd. (Napolean) and FPI Fireplace Products
International Ltd.
Both
office furniture and hearth products compete on the basis of performance,
quality, price, complete and on-time delivery to the customer and customer
service and support. The Corporation believes it competes principally
by providing compelling value products designed to be among the best in their
price range for product quality and performance, superior customer service and
short lead-times. This is made possible, in part, by the
Corporation's on-going investment in product development, highly efficient and
low cost manufacturing operations and an extensive distribution
network.
For
further discussion of the Corporation's competitive situation, refer to “Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations” later in this report.
Effects
of Inflation
Certain
business costs may, from time to time, increase at a rate exceeding the general
rate of inflation. The Corporation’s objective is to offset the
effect of inflation on its costs primarily through productivity increases in
combination with certain adjustments to the selling price of its products as
competitive market and general economic conditions permit.
Investments
are routinely made in modernizing plants, equipment, support systems and RCI
programs. These investments collectively focus on business
simplification and increasing productivity which helps to offset the effect of
rising material and labor costs. The Corporation also routinely
employs ongoing cost control disciplines. In addition, the last-in,
first-out (LIFO) valuation method is used for most of the Corporation's
inventories, which ensures that changing material and labor costs are recognized
in reported income and, more importantly, these costs are recognized in pricing
decisions.
Environmental
The
Corporation is subject to a variety of environmental laws and regulations
governing use of materials and substances in products, the management of wastes
resulting from use of certain material and the remediation of contamination
associated with releases of hazardous substances used in the
past. Although the Corporation believes it is in material compliance
with all of the various regulations applicable to its business, there can be no
assurance requirements will not change in the future or that the Corporation
will not incur material costs to comply with such regulations. The
Corporation has trained staff responsible for monitoring compliance with
environmental, health and safety requirements. The Corporation’s
environmental staff works with responsible personnel at each manufacturing
facility, the Corporation’s environmental legal counsel and consultants on the
management of environmental, health and safety issues. The
Corporation’s ultimate goal is to reduce and, when practical, eliminate the
generation of environmental pollutants in its manufacturing
processes.
The
Corporation’s environmental management system has earned the recognition of
numerous state and federal agencies as well as non-government
organizations. The Corporation’s lean manufacturing philosophy
leverages the creativity of its members to eliminate waste and reduce
cost. Aligning these continuous improvement initiatives with the
Corporation’s environmental objectives creates a model of the triple bottom line
of sustainable development where members work toward shared goals of personal
growth, economic reward and a healthy environment for the future.
Over the
past several years, the Corporation has expanded its environmental management
system and established metrics to influence product design and development,
supplier and supply chain performance, energy and resource consumption and the
impacts of its facilities. In addition, the Corporation is providing
sustainability training to senior decision makers and has assigned resources to
documenting and communicating its progress to an increasingly knowledgable
market. Integrating sustainable objectives into core business systems
is consistent with the Corporation’s vision and ensures its commitment to being
a sustainable enterprise remains a priority for all members.
Compliance
with federal, state and local environmental regulations has not had a material
effect on the capital expenditures, earnings or competitive position of the
Corporation to date. The Corporation does not anticipate that
financially material capital expenditures will be required during fiscal 2010
for environmental control facilities. It is management’s judgment
that compliance with current regulations should not have a material effect on
the Corporation’s financial condition or results of
operations. However, there can be no assurance new environmental
legislation and technology in this area will not result in or require material
capital expenditures.
Business
Development
The
development of the Corporation's business during the fiscal years ended January
2, 2010, January 3, 2009, and December 29, 2007, is discussed in “Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations” later in this report.
Available
Information
Information
regarding the Corporation’s annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and any amendments to these reports,
will be made available, free of charge, on the Corporation’s website at www.hnicorp.com, as
soon as reasonably practicable after the Corporation electronically files such
reports with or furnishes them to the Securities and Exchange Commission (the
“SEC”). The Corporation’s information is also available from the
SEC’s Public Reference room at 100 F Street, N.E., Washington, D.C. 20549, or on
the SEC website at www.sec.gov.
Forward-Looking
Statements
Statements
in this Annual Report on Form 10-K to the extent that they are not statements of
historical or present fact, 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 and uncertainties, which may cause
the Corporation’s actual results in the future to differ materially from
expected results. The most significant factors known to the
Corporation that may adversely affect the Corporation’s business, operations,
industries, financial position or future financial performance are described
later in this report under the heading entitled “Item 1A. Risk
Factors.” The Corporation cautions readers not to place undue
reliance on any forward-looking statement which speaks only as of the date made
and to recognize that forward-looking statements are predictions of future
results, which may not occur as anticipated. Actual results could
differ materially from those anticipated in the forward-looking statements and
from historical results due to the risks and uncertainties described elsewhere
in this report, including under the heading “Item 1A. Risk Factors,” as well as
others that the Corporation may consider immaterial or does not anticipate at
this time. The risks and uncertainties described in this report,
including those under the heading “Item 1A. Risk Factors,” are not exclusive and
further information concerning the Corporation, including factors that
potentially could materially affect the Corporation’s financial results or
condition, may emerge from time to time.
The
Corporation assumes 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. The Corporation advises you,
however, to consult any further disclosures made on related subjects in future
quarterly reports on Form 10-Q and current reports on Form 8-K filed with or
furnished to the SEC.
ITEM
1A. RISK FACTORS
The
following risk factors and other information included in this Annual Report on
Form 10-K should be carefully considered. If any of the following
risks actually occur, our business, operating results, cash flows and financial
condition could be materially adversely affected.
Unfavorable
economic and market conditions could reduce our sales and profitability and as a
result, our operating results may be adversely affected.
Over the
past few years, economic conditions have deteriorated significantly in the U. S.
and many of the countries and regions in which we do business, and, despite the
possible beginning signs of the recovery in the U.S. and elsewhere, remain
challenging for the foreseeable future. The recent downturns in the
economy in the U.S. and in international markets have had, and may continue to
have, a significant adverse impact on demand for our
products. General business and economic conditions that could affect
us include short-term and long-term interest rates, unemployment, inflation,
fluctuations in debt and equity capital markets, limited availability of
consumer financing and weak credit markets, the strength of the U.S. economy and
the local economies in which we operate.
There
could be a number of effects from these economic developments on our business,
including: reduced demand for products; insolvency of our dealers,
resulting in increased provisions for credit losses; insolvency of our key
suppliers resulting in product delays; inability of customers to obtain credit
to finance purchases of our products; decreased customer demand, including order
delays or cancellations; and counterparty failures negatively impacting our
treasury operations.
In
addition, the current negative worldwide economic conditions and market
instability makes it increasingly difficult for us, our customers and our
suppliers to accurately forecast future product demand trends, which could cause
us to incur excess costs. Additionally, this forecasting difficulty
could cause a shortage of products, labor or materials used in our products that
could result in an inability to satisfy demand for our products and a loss of
market share.
We
may need to take additional impairment charges related to goodwill and
indefinite-lived intangible assets, which would adversely affect our results of
operations.
Goodwill
and other acquired intangible assets with indefinite lives are not amortized but
are annually tested for impairment, and when an event occurs or circumstances
change such that it is reasonably possible that an impairment may
exist. We test for impairment annually during the fourth quarter of
the year and whenever indicators of impairment exist. We test
goodwill for impairment by first comparing the carrying value of net assets to
the fair value of the reporting unit. If the fair value is determined
to be less than carrying value, a second step is performed to determine the
implied fair value of goodwill associated with the reporting unit. If
the carrying value of goodwill exceeds the implied fair value of goodwill, such
excess represents the amount of goodwill impairment, and, accordingly such
impairment is recognized.
We
estimate the fair values of the reporting units using discounted cash
flows. Forecasts of future cash flows are based on our best estimate
of longer-term broad market trends. We combine this trend data with
estimates of current economic conditions in the U.S., competitor behavior, the
mix of product sales, commodity costs, wage rates, the level of manufacturing
capacity and the pricing environment. In addition, estimates of fair
value are impacted by estimates of the market-participant-derived weighted
average cost of capital. Changes in these forecasts could
significantly change the amount of impairment recorded, if any.
We
operate in a highly competitive environment and, as a result, we may not always
be successful.
Both the
office furniture and hearth products industries are highly competitive, with a
significant number of competitors in both industries offering similar
products. While competitive factors vary geographically and between
differing sales situations, typical factors for both industries
include: price; delivery and service; product design and features;
product quality; strength of dealers and other distributors; and relationships
with customers and key influencers, such as architects, designers, home-builders
and facility managers. Our principal competitors in the office
furniture industry include The Global Group, Haworth, Inc., Kimball
International, Inc., Steelcase Inc., Herman Miller, Inc., Teknion Corporation,
KI and Knoll, Inc. Our principal competitors in the hearth products
industry include Travis Industries, Inc., Lennox International Inc., Monessen
Hearth Systems Company, DESA Fmi LLC, Wolf Steel Ltd. (Napolean) and FPI
Fireplace Products International Ltd. In both industries, most of our
top competitors have an installed base of products that can be a source of
significant future sales through repeat and expansion orders. These
competitors manufacture products with strong acceptance in the marketplace and
are capable of developing products that have a competitive advantage over our
products.
Our
continued success will depend on many factors, including our ability to continue
to manufacture and market high quality, high performance products at competitive
prices and our ability to adapt our business model to effectively compete in the
highly competitive environments of both the office furniture and hearth products
industries. Our success is also subject to our ability to sustain and
grow our positive brand reputation and recognition among existing and potential
customers and use our brands and trademarks effectively in entering new
markets.
In both
the office furniture and hearth products industries, we also face significant
price competition from our competitors and from new market entrants who
primarily manufacture and source products from lower-cost
countries. Such price competition impacts our ability to implement
price increases or, in some cases, even maintain prices, which could lower our
profit margins. In addition, we may not be able to maintain or raise
the prices of our products in response to rising raw material prices and other
inflationary pressures. Competition from low-cost Asian imports
continues to represent a threat to our current market share in the office
furniture industry.
The
concentration of our customer base, changes in demand and order patterns from
our customers, as well as the increased purchasing power of such customers,
could adversely affect our business, operating results or financial
condition.
We sell
our products through multiple distribution channels. These
distribution channels have been consolidating in the past several years and may
continue to consolidate in the future. Such consolidation may result
in a greater proportion of our sales being concentrated in fewer
customers. The increased purchasing power exercised by larger
customers may adversely affect the prices at which we can successfully offer our
products. As a result of this consolidation, changes in the purchase
patterns or the loss of a single customer may have a greater impact on our
business, operating results or financial condition than such events would have
had prior to such consolidation.
The
growth in sales of private label products by some of our largest office
furniture customers may reduce our revenue and adversely affect our business,
operating results or financial condition.
Private
label products are products sold under the name of the distributor or retailer,
but manufactured by another party. Some of our largest customers have
aggressive private label initiatives to increase sales of office
furniture. If successful, they may reduce our revenue and inhibit our
ability to raise prices and may, in some cases, even force us to lower prices,
which could result in an adverse effect on our business, operating results or
financial condition.
Increases
in basic commodity, raw material and component costs, as well as disruptions to
the supply of such basic commodities, raw materials and components, could
adversely affect our profitability.
Fluctuations
in the price, availability and quality of the commodities, raw materials and
components used by us in manufacturing could have an adverse effect on our costs
of sales, profitability and our ability to meet customers' demand. We
source commodities, raw materials, and components from low-cost, international
suppliers for both our office furniture and hearth products. From
both domestic and international suppliers, the cost, quality and availability of
commodities, raw materials and components, including steel, our largest raw
material category, have been significantly affected in recent years by, among
other things, changes in global supply and demand, changes in laws and
regulations (including tariffs and duties), changes in exchange rates and
worldwide price levels, natural disasters, labor disputes, terrorism and
political unrest or instability. These factors could lead to further
price increases or supply interruptions in the future. Our profit
margins could be adversely affected if commodity, raw material and component
costs remain high or escalate further, and we are either unable to offset such
costs through strategic sourcing initiatives and continuous improvement programs
or, as a result of competitive market dynamics, unable to pass along a portion
of the higher costs to our customers.
We
are affected by the cost of energy, and increases in energy prices could
adversely affect our gross margins and profitability.
Our gross
margins and the profitability of our business operations are sensitive to the
cost of energy because it is reflected in our cost of transportation,
petroleum-based materials like plastics and operation of our manufacturing
facilities. If the costs of petroleum-based products, operating our
manufacturing facilities or transportation increase, it could adversely affect
our gross margins and profitability.
We
may not be successful in implementing and managing the risks inherent in our
growth strategy.
As a part
of our growth strategy, we seek to increase sales and market share by
introducing new products, further enhancing our existing line of products and
continuing to pursue complementary acquisitions. This strategy
depends on our ability to increase sales through our existing customer network,
principally dealers, wholesalers and retailers. Furthermore, the
ability to effectuate and manage profitable growth will depend on our ability to
contain costs, including costs associated with increased manufacturing, sales
and marketing efforts, freight utilization, warehouse capacity, product
development and acquisition efforts.
Our
efforts to introduce new products that meet customer and workplace/home
requirements may not be successful, which could limit our sales growth or cause
our sales to decline.
To keep
pace with market trends in both the office furniture and hearth products
industries, we must periodically introduce new products. Such trends
include changes in workplace and home design and increases in the use of
technology, and evolving regulatory and industry requirements, including
environmental, health, safety and similar standards for the workplace and home
and for product performance. The introduction of new products in both
industries requires the coordination of the design, manufacturing and marketing
of such products, which may be affected by factors beyond our
control. The design and engineering of certain of our new products
can take up to a year or more, and further time may be required to achieve
client acceptance. In addition, we may face difficulties in
introducing new products if we cannot successfully align ourselves with
independent architects, home-builders and designers who are able to design, in a
timely manner, high quality products consistent with our
image. Accordingly, the launch of any particular product may be later
or less successful than we originally anticipated. Difficulties or
delays in introducing new products or lack of customer acceptance of new
products could limit our sales growth or cause our sales to decline, and may
result in an adverse effect on our business, operating results or financial
condition.
We
intend to grow our business through additional acquisitions, alliances and joint
venture arrangements, which could adversely affect our business, operating
results or financial condition.
One of
our growth strategies is to supplement our internal growth through acquisitions
of, and alliances and joint venture arrangements with, businesses with
technologies or products that complement or augment our existing products or
distribution or add new products or distribution to our business. The
benefits of an acquisition, alliance or joint venture may take more time than
expected to develop or integrate into our operations, and we cannot guarantee
any completed or future acquisitions, alliances or joint ventures will in fact
produce any benefits. In addition, acquisitions, alliances and joint
ventures involve a number of risks, including, without limitation:
|
·
|
diversion
of management’s attention;
|
|
·
|
difficulties
in assimilating the operations and products of an acquired business or in
realizing projected efficiencies, cost savings and revenue
synergies;
|
|
·
|
potential
loss of key employees or customers of the acquired businesses or adverse
effects on existing business relationships with suppliers and
customers;
|
|
·
|
adverse
impact on overall profitability if acquired businesses do not achieve the
financial results projected in our valuation
models;
|
|
·
|
reallocation
of amounts of capital from other operating initiatives or an increase in
our leverage and debt service requirements to pay the acquisition purchase
prices, which could in turn restrict our ability to access additional
capital when needed or to pursue other important elements of our business
strategy;
|
|
·
|
inaccurate
assessment of undisclosed, contingent or other liabilities or problems and
unanticipated costs associated with the acquisition;
and
|
|
·
|
incorrect
estimates made in accounting for acquisitions, incurrence of non-recurring
charges and write-off of significant amounts of goodwill that could
adversely affect our operating
results.
|
Our
ability to grow through acquisitions will depend, in part, on the availability
of suitable acquisition candidates at an acceptable price, our ability to
compete effectively for these acquisition candidates and the availability of
capital to complete such acquisitions. These risks could be
heightened if we complete several acquisitions within a relatively short period
of time. In addition, there can be no assurance we will be able to
continue to identify attractive opportunities or enter into any such
transactions with acceptable terms in the future. If an acquisition
is completed, there can be no assurance we will be able to successfully
integrate the acquired entity into our operations or that we will achieve sales
and profitability that justify our investment in such businesses. Any
potential acquisition may not be successful and could adversely affect our
business, operating results or financial condition.
We
are subject to extensive environmental regulation and have exposure to potential
environmental liabilities.
The past
and present operation and ownership by us of manufacturing facilities and real
property are subject to extensive and changing federal, state and local
environmental laws and regulations, including those relating to discharges in
air, water and land, the handling and disposal of solid and hazardous waste and
the remediation of contamination associated with releases of hazardous
substances. Compliance with environmental regulations has not had a
material affect on our capital expenditures, earnings or competitive position to
date; however, compliance with current laws or more stringent laws or
regulations which may be imposed on us in the future, stricter interpretation of
existing laws or discoveries of contamination at our real property sites which
occurred prior to our ownership or the advent of environmental regulation may
require us to incur additional expenditures in the future, some of which may be
material.
The
existence of various unfavorable macroeconomic and industry factors for a
prolonged period could adversely affect our business, operating results or
financial condition.
Office
furniture industry revenues are impacted by a variety of macroeconomic factors
such as service-sector employment levels, corporate profits, commercial
construction and office vacancy rates. Industry factors, such as
corporate restructuring, technology changes, corporate relocations, health and
safety concerns, including ergonomic considerations, and the globalization of
companies also influence office furniture industry revenues.
Hearth
products industry revenues are impacted by a variety of macroeconomic factors as
well, including housing starts, overall employment levels, interest rates,
consumer confidence, energy costs, disposable income and changing
demographics. Industry factors, such as technology changes, health
and safety concerns and environmental regulation, including indoor air quality
standards, also influence hearth products industry revenues. The U.S.
homebuilding industry is currently experiencing a significant downturn, the
duration and ultimate severity of which are still uncertain. Further
deterioration of the economic conditions in the homebuilding industry and the
hearth products market could further decrease demand for our hearth products and
have additional adverse effects on our operating results.
Increasing healthcare costs could
adversely affect our business, operating results and financial
condition.
We
provide healthcare benefits to the majority of our
members. Healthcare costs have continued to rise over time and could
adversely affect our business, operating results and financial
condition.
Our
inability to improve the quality/capability of our network of independent
dealers or the loss of a significant number of such dealers could adversely
affect our business, operating results or financial condition.
In both
the office furniture and hearth products industries, we rely in large part on a
network of independent dealers to market our products to
customers. We also rely upon these dealers to provide a variety of
important specification, installation and after-market services to our
customers. Our dealers may terminate their relationships with us at
any time and for any reason. The loss or termination of a significant
number of dealer relationships could cause difficulties for us in marketing and
distributing our products, resulting in a decline in our sales, which may
adversely affect our business, operating results or financial
condition.
Our
international operations expose us to risks related to conducting business in
multiple jurisdictions outside the United States.
We
primarily sell our products and report our financial results in U.S. dollars;
however, we have increasingly been conducting business in countries outside the
United States, which exposes us to fluctuations in foreign currency exchange
rates. Paying our expenses in other currencies can result in a
significant increase or decrease in the amount of those expenses in terms of
U.S. dollars, which may affect our profits. In the future, any
foreign currency appreciation relative to the U.S. dollar would increase our
expenses that are denominated in that currency. Additionally, as we
report currency in the U.S. dollar, our financial position is affected by the
strength of the currencies in countries where we have operations relative to the
strength of the U.S. dollar.
We
periodically review our foreign currency exposure and evaluate whether we should
enter into hedging transactions.
Our
international sales and operations are subject to a number of additional risks,
including, without limitation:
|
·
|
social
and political turmoil, official corruption and civil
unrest;
|
|
·
|
restrictive
government actions, such as the imposition of trade quotas and tariffs and
restrictions on transfers of funds;
|
|
·
|
changes
in labor laws and regulations affecting our ability to hire, retain or
dismiss employees;
|
|
·
|
the
need to comply with multiple and potentially conflicting laws and
regulations, including environmental laws and
regulations;
|
|
·
|
preference
for locally branded products and laws and business practices favoring
local competition;
|
|
·
|
less
effective protection of intellectual
property;
|
|
·
|
unfavorable
business conditions or economic instability in any particular country or
region; and
|
|
·
|
difficulty
in obtaining distribution and
support.
|
We
may not be able to maintain our effective tax rate.
We may
not be able to maintain our effective tax rate because: (1) of
future changes in tax laws or interpretations of such tax laws; (2) the
losses incurred in certain jurisdictions may not offset the tax expense in
profitable jurisdictions; (3) there are differences between foreign and
U.S. income tax rates; and (4) many tax years are subject to audit by
different tax jurisdictions, which may result in additional taxes
payable.
Restrictions imposed by the terms of
our existing credit facility and note purchase agreement may limit our operating
and financial flexibility.
Our
existing credit facility and note purchase agreement, dated as of April 6, 2006,
pursuant to which we issued $150 million of senior, unsecured notes designated
as Series 2006-A Senior Notes, limit our ability to finance operations, service
debt or engage in other business activities that may be in our
interest. Specifically, our credit facility restricts our ability to
incur additional indebtedness, create or incur certain liens with respect to any
of our properties or assets, engage in lines of business substantially different
than those currently conducted by us, sell, lease, license, or dispose of any of
our assets, enter into certain transactions with affiliates, make certain
restricted payments or take certain restricted actions and enter into certain
sale-leaseback arrangements. Our note purchase agreement contains
customary restrictive covenants that, among other things, place limits on our
ability to incur liens on assets, incur additional debt, transfer or sell our
assets, merge or consolidate with other persons or enter into material
transactions with affiliates. Our credit facility and note purchase
agreement also require us to maintain certain financial covenants.
Our
failure to comply with the obligations under our credit facility may result in
an event of default, which, if not cured or waived, may cause accelerated
repayment of the indebtedness under the credit facility and could result in a
cross default under our note purchase agreement. We cannot be certain
we will have sufficient funds available to pay any accelerated repayments or
that we will have the ability to refinance accelerated repayments on terms
favorable to us or at all.
Costs
related to product defects could adversely affect our
profitability.
We incur
various expenses related to product defects, including product warranty costs,
product recall and retrofit costs and product liability costs. These
expenses relative to product sales vary and could increase. We
maintain reserves for product defect-related costs based on estimates and our
knowledge of circumstances that indicate the need for such
reserves. We cannot, however, be certain these reserves will be
adequate to cover actual product defect-related claims in the
future. Any significant increase in the rate of our product defect
expenses could have a material adverse effect on operations.
We may require additional capital in
the future, which may not be available or may be available only on unfavorable
terms.
Our
capital requirements depend on many factors, including capital improvements,
tooling, new product development and acquisitions. To the extent our
existing capital is insufficient to meet these requirements and cover any
losses, we may need to raise additional funds through financings or curtail our
growth and reduce our assets. Our ability to generate cash depends on
economic, financial, competitive, legislative, regulatory and other factors that
may be beyond our control. Future borrowings or financings may not be
available to us under our credit facility or otherwise in an amount sufficient
to enable us to pay our debt or meet our liquidity needs.
Any
equity or debt financing, if available at all, could have terms that are not
favorable to us. In addition, financings could result in dilution to
our shareholders or the securities may have rights, preferences and privileges
that are senior to those of our common stock. If our need for capital
arises because of significant losses, the occurrence of these losses may make it
more difficult for us to raise the necessary capital.
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 not be a responsible supplier, or to have committed fraud or certain
criminal offenses, we could be suspended or debarred from all further federal,
state or local government contracting.
Disruptions
in financial markets may adversely impact availability and cost of credit and
business and consumer spending patterns.
As noted
in other risks identified above, our ability to make scheduled payments or to
refinance debt obligations will depend on our operating and financial
performance, which in turn is subject to prevailing economic conditions and to
financial, business and other factors beyond our control. Despite the
recent credit crisis and disruptions in the financial markets, including the
bankruptcy or restructuring of certain financial institutions, we continue to
believe the lenders participating in our revolving credit facility will be
willing and able to provide financing in accordance with their contractual
obligations. However, the current economic environment may adversely
impact the availability and cost of credit in the future.
Disruptions
in the financial markets may have an adverse effect on the U.S. and world
economy, which could negatively impact business and consumer spending
patterns. The overall tightening of credit in financial markets also
adversely affects the ability of customers and suppliers to obtain financing for
significant purchases and operations and could result in a decrease in or
cancellation of orders for our products. There is no assurance
on-going government responses to the disruptions in the financial markets will
restore business and consumer confidence, stabilize the markets or increase
liquidity and the availability of credit.
Changes
in government regulation and increased focus on enforcement may significantly
increase our operating costs.
The
federal government has a broad agenda of potential legislative and regulatory
changes, which if enacted, could significantly impact our profitability by
imposing on us additional costs that most likely could not be recovered by
increased pricing. These changes include, without limitation proposed
legislation relating to:
|
·
|
universal
healthcare and healthcare reform;
|
|
·
|
tax
regulations increasing our effective tax
rate;
|
|
·
|
union
organizing activities; and
|
|
·
|
energy
costs in manufacturing and cap and trade
proposals.
|
In
addition, the federal government has increased its focus on enforcement under a
wide range of laws and regulations impacting our business, particularly in the
following areas:
|
·
|
antitrust
and competition;
|
|
·
|
government
contracting;
|
|
·
|
securities
and public company reporting;
|
|
·
|
labor
and employment practices;
|
|
·
|
fraud
and abuse; and
|
|
·
|
tax
reporting.
|
Should we
become the target of a government investigation or enforcement action, we could
incur significant costs and suffer damage to our reputation which could
adversely impact our business, operating results or financial
condition.
Our
business is subject to a number of other miscellaneous risks that may adversely
affect our business, operating results or financial condition.
Other
miscellaneous risks include, without limitation:
|
·
|
uncertainty
related to disruptions of business by accidents, third-party labor
disputes, terrorism, military action, natural disasters, epidemic, acts of
God or other force majeure events;
|
|
·
|
reduced
demand for our storage products caused by changes in office technology,
including the change from paper record storage to electronic record
storage;
|
|
·
|
the
effects of economic conditions on demand for office furniture and hearth
products, customer insolvencies, bankruptcies and related bad debts and
claims against us that we received preferential
payments;
|
|
·
|
our
ability to realize cost savings and productivity improvements from our
cost containment, business simplification, manufacturing consolidation and
logistical realignment initiatives;
|
|
·
|
increased
foreign sourcing of components and finished goods could reduce our level
of manufacturing in the United States and cause us to have excess capacity
issues;
|
|
·
|
volatility
in the market price and trading volume of equity securities may adversely
affect the market price for our common
stock;
|
|
·
|
changes
in labor laws and regulations may affect our ability to hire, retain or
dismiss members and the cost and structure of our corporate compliance
practices;
|
|
·
|
changes
in securities laws, SEC rules or NYSE listing standards may increase
governmental and non-governmental organization oversight of our business,
dictate changes in some of our corporate governance, securities disclosure
and corporate compliance practices and cause our legal and financial
accounting costs to increase;
|
|
·
|
our
ability to protect our intellectual
property;
|
|
·
|
labor
or other manufacturing inefficiencies due to items such as new product
introductions, a new operating system or turnover in
personnel;
|
|
·
|
our
ability to effectively manage working
capital;
|
|
·
|
future
impairment of assets such as facilities or
equipment;
|
|
·
|
our
ability to successfully implement information technology
solutions;
|
|
·
|
potential
claims by third parties that we infringed upon their intellectual property
rights;
|
|
·
|
our
insurance may not adequately (1) insulate us from expenses for product
defects and the negligent acts and omissions of our members and agents and
(2) compensate us for damages to our facilities and equipment and loss of
business; and
|
|
·
|
our
ability to retain our experienced management team and recruit other key
personnel.
|
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
ITEM
2. PROPERTIES
The
Corporation maintains its corporate headquarters in Muscatine, Iowa, and
conducts its operations at locations throughout the United States, Canada,
China, Hong Kong and Taiwan, which house manufacturing, distribution and retail
operations and offices totaling an aggregate of approximately 10.4 million
square feet. Of this total, approximately 2.7 million square feet are
leased.
Although
the plants are of varying ages, the Corporation believes they are well
maintained, equipped with modern and efficient equipment, in good operating
condition and suitable for the purposes for which they are being
used. The Corporation has sufficient capacity to increase output at
most locations by increasing the use of overtime or the number of production
shifts employed.
The
Corporation's principal manufacturing and distribution facilities (200,000
square feet in size or larger) are as follows:
Location
|
Approximate
Square Feet
|
Owned
or
Leased
|
Description
of Use
|
Cedartown,
Georgia
|
555,559
|
Owned
|
Manufacturing
nonwood casegoods office furniture
|
Dongguan,
China
|
1,007,716
|
Owned
|
Manufacturing
wood and nonwood casegoods and seating office furniture
|
Florence,
Alabama
|
304,365
|
Owned
|
Manufacturing
wood and nonwood casegoods office furniture
|
Hickory,
North Carolina
|
206,316
|
Owned
|
Manufacturing
wood casegoods and seating office furniture
|
Lake
City, Minnesota
|
241,500
|
Owned
|
Manufacturing
metal prefabricated fireplaces (1)
|
Lithia
Springs, Georgia
|
585,000
|
Leased
|
Warehousing
office furniture
|
Mt.
Pleasant, Iowa
|
288,006
|
Owned
|
Manufacturing
metal prefabricated fireplaces (1)
|
Muscatine,
Iowa
|
272,900
|
Owned
|
Manufacturing
nonwood casegoods office furniture
|
Muscatine,
Iowa
|
578,284
|
Owned
|
Warehousing
office furniture
|
Muscatine,
Iowa
|
236,100
|
Owned
|
Manufacturing
nonwood casegoods office furniture
|
Muscatine,
Iowa
|
636,250
|
Owned
|
Manufacturing
nonwood casegoods and systems office furniture (1)
|
Muscatine,
Iowa
|
237,800
|
Owned
|
Manufacturing
nonwood seating office furniture
|
Orleans,
Indiana
|
1,196,946
|
Owned
|
Manufacturing
wood casegoods and seating office furniture (1)
|
Owensboro,
Kentucky
|
311,575
|
Owned
|
Manufacturing
wood seating office furniture
|
Wayland,
New York
|
716,484
|
Owned
|
Manufacturing
wood casegoods and seating office furniture (1)
|
|
(1)
|
Also
includes a regional warehouse/distribution
center
|
Other
Corporation facilities, under 200,000 square feet in size, are located in
various communities throughout the United States, Canada, China, Hong Kong and
Taiwan. These facilities total approximately 3.0 million square feet
with approximately 1.9 million square feet used for the manufacture and
distribution of office furniture and approximately 1.0 million square feet for
hearth products. Of this total, approximately 2.1 million square feet
are leased. The Corporation also leases sales showroom space in
office furniture market centers in several major metropolitan
areas.
There are
no major encumbrances on Corporation-owned properties. Refer to
Property, Plant, and Equipment in the Notes to Consolidated Financial Statements
for related cost, accumulated depreciation and net book value data.
ITEM
3. LEGAL PROCEEDINGS
The
Corporation is involved in various kinds of disputes and legal proceedings that
have arisen in the ordinary 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.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None.
PART I, TABLE I
EXECUTIVE
OFFICERS OF THE REGISTRANT
January
2, 2010
Name
|
Age
|
Family
Relationship
|
Position
|
Position
Held
Since
|
Other
Business Experience
During Past Five Years
|
Stan
A. Askren
|
49
|
None
|
Chairman
of the Board
Chief
Executive Officer
President
Director
|
2004
2004
2003
2003
|
|
Steven
M. Bradford
|
52
|
None
|
Vice
President, General
Counsel
and Secretary
|
2008
|
President
and Regional General Counsel for The Americas, ICI Group Services
(2003-08); General Counsel, North America, ICI Paints
(2004-08)
|
Gary
L. Carlson
|
59
|
None
|
Vice
President, Member and
Community
Relations
|
2007
|
President
and CEO, Greater Muscatine Chamber of Commerce and Industry
(2003-07)
|
Bradley
D. Determan
|
48
|
None
|
Executive
Vice President
President,
Hearth & Home
Technologies
Inc.
|
2005
2003
|
|
Jerald
K. Dittmer
|
52
|
None
|
Executive
Vice President, President, The HON Company
|
2008
|
Vice
President and Chief Financial Officer (2001-08)
|
Tamara
S. Feldman
|
49
|
None
|
Vice
President, Financial
Reporting
|
2001
|
|
Douglas
L. Jones
|
51
|
None
|
Vice
President and Chief Information Officer
|
2005
|
Vice
President, Business Systems (2001-05)
|
Kelly
J. McGriff
|
43
|
None
|
Treasurer
and Vice President, Investor Relations
|
2009
|
Director,
Marketing Services (2008-09); Manager, Bids and Marketing (2007-08); and
Commercial Controller (2005-07), The HON Company
|
Marco
V. Molinari
|
50
|
None
|
Executive
Vice President
President,
HNI International Inc.
|
2006
2003
|
President,
International and Business Development (2003-04); Vice President, HON
Products, The HON Company (2004-06)
|
Alan
R. Moorhead
|
58
|
None
|
Vice
President, Internal Audit
|
2008
|
Director,
Internal Audit (2006-08); Vice President, Audit Director, Assurance, Inc.
(2001-06)
|
Michael
Al. Mundy
|
38
|
None
|
Vice
President and Controller
|
2009
|
CFO
and Treasurer, Gencor Industries (2009); CFO, Stanley National Hardware
(Division) (2008); Director of Finance, Sun Chemical Corporation
(2003-08)
|
Jean
M. Reynolds
|
52
|
None
|
Vice
President, Corporate
Marketing
and e-Business
|
2008
|
President,
Maxon Furniture Inc. (1999-09)
|
Kurt
A. Tjaden
|
46
|
None
|
Vice
President and Chief Financial Officer
|
2008
|
Vice
President and Chief Financial Officer, Asia, Whirlpool Corporation
(2007-08); Vice President and Chief Financial Officer, Pure Fishing, LLC
(2001-06)
|
PART
II
ITEM
5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
The
Corporation’s common stock is listed for trading on the New York Stock Exchange
(NYSE), trading symbol HNI. As of year-end 2009, the Corporation had
8,257 stockholders of record.
Wells
Fargo Shareowner Services, St. Paul, Minnesota, serves as the Corporation’s
transfer agent and registrar of its common stock. Shareholders may
report a change of address or make inquiries by writing or
calling: Wells Fargo Shareowner Services, P.O. Box 64874, St. Paul,
MN 55164-0874 or telephone 800/468-9716.
Common
Stock Market Prices and Dividends (Unaudited) and Common Stock Market Price and
Price/Earnings Ratio (Unaudited) are presented in the Investor Information
section which follows the Notes to Consolidated Financial Statements filed as
part of this report.
The
Corporation expects to continue its policy of paying regular quarterly cash
dividends. Dividends have been paid each quarter since the
Corporation paid its first dividend in 1955. The average dividend
payout percentage for the most recent three-year period has been 39% of prior
year earnings. Future dividends are dependent on future earnings,
capital requirements and the Corporation’s financial condition, and are declared
in the sole discretion of the Corporation’s Board of Directors.
Directors
and members 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 fourth
quarter of 2009, the directors and members, as a group, were credited with 3,587
common stock equivalents under the Deferred Plans. The value of each
common stock equivalent, when credited, ranged from $25.27 to
$27.63.
The
information under the caption “Equity Compensation Plan Information: of the
Corporation’s Proxy Statement for the Annual Meeting of Shareholders to be held
on May 11, 2010, is incorporated herein by reference.
The
Corporation did not repurchase any of its shares during the fourth quarter ended
January 2, 2010. As of January 2, 2010, $163.6 million was authorized
and available for the repurchase of shares by the Corporation.
ITEM
6. SELECTED FINANCIAL DATA — FIVE-YEAR
SUMMARY
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
Per
Common Share Data (Basic and Dilutive)
|
||||||||||||||||||||
Income
(Loss) from Continuing Operations Attributable to Parent Company –
basic
|
$ | (0.14 | ) | $ | 1.03 | $ | 2.57 | $ | 2.59 | $ | 2.53 | |||||||||
Income
(Loss) from Continuing Operations Attributable to Parent Company –
diluted
|
$ | (0.14 | ) | 1.02 | 2.55 | 2.57 | 2.51 | |||||||||||||
Net
Income (Loss) Attributable to Parent Company – basic
|
$ | (0.14 | ) | 1.03 | 2.58 | 2.46 | 2.51 | |||||||||||||
Net
Income (Loss) Attributable to Parent Company – diluted
|
$ | (0.14 | ) | 1.02 | 2.57 | 2.45 | 2.50 | |||||||||||||
Cash
Dividends
|
.86 | .86 | .78 | .72 | .62 | |||||||||||||||
Book
Value – year-end
|
9.30 | 10.13 | 10.24 | 10.35 | 11.46 | |||||||||||||||
Net
Working Capital – year-end
|
1.33 | 1.00 | 2.33 | 3.04 | 2.48 | |||||||||||||||
Operating
Results (Thousands of Dollars)
|
||||||||||||||||||||
Net
Sales
|
$ | 1,656,289 | $ | 2,477,587 | $ | 2,570,472 | $ | 2,679,803 | $ | 2,433,316 | ||||||||||
Gross
Profit as a % of Net Sales
|
34.5 | % | 33.4 | % | 35.2 | % | 34.6 | % | 36.3 | % | ||||||||||
Interest
Expense
|
$ | 12,080 | $ | 16,865 | $ | 18,161 | $ | 14,323 | $ | 2,355 | ||||||||||
Income
(Loss) from Continuing Operations
|
(6,259 | ) | 45,607 | 119,446 | 129,499 | 138,156 | ||||||||||||||
Income
(Loss) from Continuing Operations as a % of Net Sales
|
(0.4 | )% | 1.8 | % | 4.7 | % | 4.8 | % | 5.7 | % | ||||||||||
Discontinued
Operations(a)
|
$ | - | $ | - | $ | 514 | $ | (6,297 | ) | $ | (746 | ) | ||||||||
Net
Income (Loss) Attributable to Parent Company
|
(6,442 | ) | 45,450 | 120,378 | 123,375 | 137,420 | ||||||||||||||
Net
Income (Loss) Attributable to Parent Company as a % of Net
Sales
|
(0.4 | )% | 1.8 | % | 4.7 | % | 4.6 | % | 5.6 | % | ||||||||||
Cash
Dividends
|
$ | 38,667 | $ | 38,095 | $ | 36,408 | $ | 36,028 | $ | 33,841 | ||||||||||
%
Return on Average Shareholders’ Equity
|
(1.5 | )% | 10.0 | % | 25.2 | % | 22.6 | % | 21.8 | % | ||||||||||
Depreciation
and Amortization
|
$ | 74,867 | $ | 70,155 | $ | 68,173 | $ | 69,503 | $ | 65,514 | ||||||||||
Financial
Position (Thousands of Dollars)
|
||||||||||||||||||||
Current
Assets
|
$ | 360,271 | $ | 417,841 | $ | 489,072 | $ | 504,174 | $ | 486,598 | ||||||||||
Current
Liabilities
|
300,142 | 373,625 | 384,461 | 358,542 | 358,174 | |||||||||||||||
Working
Capital
|
60,129 | 44,216 | 104,611 | 145,632 | 128,424 | |||||||||||||||
Current
Ratio
|
1.20 | 1.12 | 1.27 | 1.41 | 1.36 | |||||||||||||||
Total
Assets
|
$ | 994,326 | $ | 1,165,629 | $ | 1,206,976 | $ | 1,226,359 | $ | 1,140,271 | ||||||||||
%
Return on Beginning Assets Employed
|
0.3 | % | 7.0 | % | 15.8 | % | 18.1 | % | 21.2 | % | ||||||||||
Long-Term
Debt and Capital Lease Obligations
|
$ | 200,000 | $ | 267,343 | $ | 281,091 | $ | 285,974 | $ | 103,869 | ||||||||||
Shareholders’
Equity
|
419,283 | 448,833 | 458,908 | 495,919 | 593,944 | |||||||||||||||
Current
Share Data
|
||||||||||||||||||||
Number
of Shares Outstanding at Year-End
|
45,093,379 | 44,324,409 | 44,834,519 | 47,905,351 | 51,848,591 | |||||||||||||||
Weighted-Average
Shares Outstanding During Year – basic
|
44,888,809 | 44,309,765 | 46,684,774 | 50,059,443 | 54,649,199 | |||||||||||||||
Weighted-Average
Shares Outstanding During Year – diluted
|
44,888,809 | 44,433,945 | 46,925,161 | 50,374,758 | 55,033,741 | |||||||||||||||
Number
of Shareholders of Record at Year-End
|
8,257 | 8,274 | 7,625 | 7,475 | 6,702 | |||||||||||||||
Other
Operational Data
|
||||||||||||||||||||
Capital
Expenditures (Thousands of Dollars)
|
$ | 16,017 | $ | 70,083 | $ | 58,568 | $ | 58,921 | $ | 38,912 | ||||||||||
Members
(Employees) at Year-End
|
8,748 | 12,241 | (b) | 13,271 | (b) | 14,170 | (b) | 12,504 | (b) |
|
(a)
|
Component
reported as discontinued operations acquired in
2004.
|
|
(b)
|
Includes
acquisitions completed during the fiscal
year.
|
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The
following discussion of the Corporation’s historical results of operations and
of its liquidity and capital resources should be read in conjunction with the
Consolidated Financial Statements of the Corporation and related
notes. Statements that are not historical are forward-looking and
involve risks and uncertainties, including those discussed under the heading
“Item 1A Risk Factors” and elsewhere in this report.
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
various brands and selling models. The Corporation is focused on
growing its existing businesses while seeking out and developing new
opportunities for growth.
The
Corporation’s results continued to be negatively impacted by macroeconomic
pressures during 2009. Unemployment surged and small business
confidence sank. New housing starts, which have fallen steadily since
2006, declined even further. Credit markets continued to
contract. Businesses and individuals stopped spending on most
discretionary purchases. These factors impacted the Corporation’s
office furniture segment and the hearth segment dramatically during
2009. As a result the Corporation implemented actions to align its
businesses with market realities while investing to improve competitive
capabilities. These included reductions in staffing, short work weeks
and other actions to reduce labor costs. The Corporation made the
decision to close three office furniture manufacturing facilities and
consolidate production into existing manufacturing facilities in
2009. The Corporation also made the decision to consolidate
significant production from its Mount Pleasant hearth products plant to other
existing hearth products manufacturing facilities allowing it to close
distribution centers in other locations and move the operations to the Mount
Pleasant facility.
Net sales
during 2009 were $1.7 billion, a decrease of 33.1 percent, compared to net sales
of $2.5 billion in 2008. The sales decline was driven by substantial
weakness in both the supplies-driven and contract channels of the office
furniture segment as well as significant declines in both the new construction
and remodel-retrofit channels of the hearth products segment.
The
Corporation recorded $25.0 million of goodwill and intangible impairment charges
during 2009 related to reporting units acquired over the past five years in its
office furniture segment due to current and projected market and economic
conditions.
Management
expects the current challenging market conditions to continue in
2010. The Corporation will continue to mitigate substantial economic
and market weakness by eliminating waste, attacking structural cost and
streamlining its business.
Critical
Accounting Policies and Estimates
General
Management’s
Discussion and Analysis of Financial Condition and Results of Operations is
based upon the Consolidated Financial Statements, which have been prepared in
accordance with Generally Accepted Accounting Principles (GAAP). The
preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities, revenue
and expenses, and related disclosure of contingent assets and
liabilities. Management bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Senior management has discussed the development,
selection and disclosure of these estimates with the Audit Committee of the
Corporation’s Board of Directors (the “Board”). Actual results may
differ from these estimates under different assumptions or
conditions.
An
accounting policy is deemed to be critical if it requires an accounting estimate
to be made based on assumptions about matters that are uncertain at the time the
estimate is made, and if different estimates that reasonably could have been
used, or changes in the accounting estimates that are reasonably likely to occur
periodically, could materially impact the financial
statements. Management believes the following critical accounting
policies reflect its more significant estimates and assumptions used in the
preparation of the Consolidated Financial Statements.
Fiscal year-end – The
Corporation follows a 52/53-week fiscal year which ends on the Saturday nearest
December 31. Fiscal year 2009 ended on January 2, 2010; 2008 ended on
January 3, 2009; and 2007 ended on December 29, 2007. The financial
statements for fiscal year 2009 are on a 52-week basis; 2008 are on a 53-week
basis; and 2007 are on a 52-week basis. A 53-week year occurs
approximately every sixth year.
Revenue recognition – The
Corporation normally recognizes revenue upon shipment of goods to
customers. In certain circumstances, the Corporation does not
recognize revenue until the goods are received by the customer or upon
installation or customer acceptance based on the terms of the sale
agreement. Revenue includes freight charged to customers; related
costs are included in selling and administrative expense. Rebates,
discounts and other marketing program expenses directly related to the sale are
recorded as a reduction to sales. Marketing program accruals require
the use of management estimates and the consideration of contractual
arrangements subject to interpretation. Customer sales that achieve
or do not achieve certain award levels can affect the amount of such estimates,
and actual results could differ from these estimates. Future market
conditions may require increased incentive offerings, possibly resulting in an
incremental reduction in net sales at the time the incentive is
offered.
Allowance for doubtful
accounts receivable – The allowance
for doubtful accounts receivable is based on several factors, including overall
customer credit quality, historical write-off experience, the length of time a
receivable has been outstanding and specific account analysis that projects the
ultimate collectability of the account. As such, these factors may
change over time causing the Corporation to adjust the reserve level
accordingly.
When the
Corporation determines a customer is unlikely to pay, a charge is recorded to
bad debt expense in the income statement and the allowance for doubtful accounts
is increased. When the Corporation is reasonably certain the customer
cannot pay, the receivable is written off by removing the accounts receivable
amount and reducing the allowance for doubtful accounts
accordingly.
As of
January 2, 2010, there was approximately $170 million in outstanding accounts
receivable and $6 million recorded in the allowance for doubtful accounts to
cover potential future customer non-payments. However, if economic
conditions were to deteriorate significantly or one of the Corporation’s large
customers declares bankruptcy, a larger allowance for doubtful accounts might be
necessary. The allowance for doubtful accounts was approximately $9
million at year-end 2008 and $11 million at year-end 2007.
Inventory valuation – The
Corporation valued 82% of its inventory by the last-in, first-out (“LIFO”)
method at January 2, 2010. Additionally, the Corporation evaluates
inventory reserves in terms of excess and obsolete exposure. This
evaluation includes such factors as anticipated usage, inventory turnover,
inventory levels and ultimate product sales value. As such, these
factors may change over time causing the Corporation to adjust the reserve level
accordingly. The Corporation’s reserves for excess and obsolete
inventory were approximately $8 million at
year-end 2009, $8 million at year-end 2008, and $9 million at year-end
2007.
Long-lived assets - The
Corporation reviews long-lived assets for impairment as events or changes in
circumstances occur indicating the amount of the asset reflected in the
Corporation’s balance sheet may not be recoverable. The Corporation
compares an estimate of undiscounted cash flows produced by the asset, or the
appropriate group of assets, to the carrying value to determine whether
impairment exists. The estimates of future cash flows involve
considerable management judgment and are based upon the Corporation’s
assumptions about future operating performance. The actual cash flows
could differ from management’s estimates due to changes in business conditions,
operating performance and economic conditions. Asset impairment
charges associated with the Corporation’s restructuring activities are discussed
in Restructuring Related and Impairment Charges in the Notes to Consolidated
Financial Statements.
The
Corporation’s continuous focus on improving the manufacturing process tends to
increase the likelihood of assets being replaced; therefore, the Corporation is
regularly evaluating the expected useful lives of its equipment which can result
in accelerated depreciation.
Goodwill and other
intangibles – 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 analysis. The Corporation has eleven reporting
units within its office furniture and hearth products operating segments, of
which seven contained goodwill. These reporting units constitute
components for which discrete financial information is available and regularly
reviewed by segment management. Determining the fair value of a
reporting unit involves the use of significant estimates and
assumptions. The estimate of fair value of each reporting unit is
based on management’s projection of revenues, gross margin, operating costs and
cash flows considering historical and estimated future results, general economic
and market conditions as well as the impact of planned business and operational
strategies. The valuations employ present value techniques to measure
fair value and consider market factors. Management believes the
assumptions used for the impairment test are consistent with those utilized by a
market participant in performing similar valuations of its reporting
units. A separate discount rate was utilized for each reporting unit
with rates ranging from 11% to 12%. Management bases its fair value
estimates on assumptions they believe to be reasonable at the time, but such
assumptions are subject to inherent uncertainty. Actual results may
differ from those estimates. In addition, for reasonableness, the
summation of all reporting units’ fair values is compared to the Corporation’s
market capitalization.
If the
fair value of the reporting unit is less than its carrying value, an additional
step is required to determine the implied fair value of goodwill associated with
that reporting unit. The implied fair value of goodwill is determined
by first allocating the fair value of the reporting unit to all of its assets
and liabilities and then computing the excess of the reporting unit’s fair value
over the amounts assigned to the assets and liabilities. If the
carrying value of goodwill exceeds the implied fair value of goodwill, such
excess represents the amount of goodwill impairment, and, accordingly such
impairment is recognized.
As a
result of the review performed in the fourth quarter of 2009, the Corporation
determined the carrying amount of a reporting unit acquired the previous year in
the office furniture segment exceeded its fair value. Management then
compared the carrying value of goodwill to the implied fair value of the
goodwill of this reporting unit, and concluded that $7 million of impairment
charges needed to be recognized. Goodwill of $24 million remains on
the balance sheet of this reporting unit as of January 2, 2010. A
downward modification in forecasted results would result in additional
impairments. The Corporation recorded $17 million of impairment
charges in 2008 for reporting units acquired in the past few
years. The reporting units impacted included an office furniture
services unit, dealer distribution unit and a recent acquisition with goodwill
charges of approximately $10 million, $5 million and $2 million,
respectively.
The
changes to fair value in the reporting unit that triggered impairment charges in
the fourth quarter were primarily attributable to the continuing deterioration
in market conditions which became apparent in the fourth quarter as management
completed its annual strategic planning process and caused management to change
its estimates of the timing of market recovery. The Corporation
factored these current market conditions and estimates into its projected
forecasts of sales, operating income and cash flows of each reporting unit
through the course of its strategic planning process completed in the fourth
quarter.
The
significant estimates and assumptions used in estimating future cash flows of
its reporting units are based on management’s view of longer-term broad market
trends. Management combines this trend data with estimates of current
economic conditions in the U.S., competitor behavior, the mix of product sales,
commodity costs, wage rates, the level of manufacturing capacity, and the
pricing environment. In addition, estimates of fair value are
impacted by estimates of the market participant derived weighted average cost of
capital. The Corporation’s cash flow projections in most of its
reporting units assumed virtually flat revenue and cash flows in 2010 and that
significant recovery would not begin until 2011. As a reasonableness
test, management also compared the market capitalization of the Corporation at
January 2, 2010 to the aggregate fair value of the reporting units, resulting in
an implied control premium of approximately 25 percent. Management
believes this implied control premium is reasonable, in light of the synergies
across its operating units, lean manufacturing environment and strong position
in the markets it serves.
Goodwill
of approximately $261 million remains on the consolidated balance sheet as of
the end of fiscal 2009.
The
Corporation also 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 performed its fiscal 2009 assessment of
indefinite lived trade names during the fourth quarter. The estimate
of the fair value of the trade names was based on a discounted cash flow model
using inputs which included: projected revenues from management’s
long term plan, assumed royalty rates that could be payable if the trade names
were not owned and a discount rate. As a result of the review, the
Corporation determined the carrying value of certain trade names primarily
associated with acquisitions over the past few years in the office furniture
segment exceeded their fair value and concluded that an $18 million impairment
charge needed to be recognized. A carrying value of $30 million for
these trade names remains as of January 2, 2010. A minor downward
modification in projected revenues would result in additional impairments. The
Corporation recorded $5 million of impairment charges in 2008 related to trade
names acquired over the past few years in the office furniture
segment. A carrying value of all trade names of approximately $42
million remains on the consolidated balance sheet at the end of fiscal
2009.
The
Corporation has definite lived intangibles that are amortized over their
estimated useful lives. Impairment losses are recognized if the
carrying amount of an intangible, subject to amortization, is not recoverable
from expected future cash flows and its carrying amount exceeds its fair
value. No impairment losses related to definite lived intangibles
were recorded. Intangibles, net of amortization, of approximately $67
million are included on the consolidated balance sheet as of the end of fiscal
2009.
Key to
recoverability of goodwill, indefinite-lived intangibles and long-lived assets
is the forecast of the depth and duration of the economic downturn and its
impact on future revenues, operating margins, and cash
flows. Management’s projection for the U.S. office furniture and
domestic hearth markets and global economic conditions is inherently subject to
a number of uncertain factors, such as the depth and duration of the global
economic slowdown, U.S housing market, credit availability and borrowing rates,
and overall consumer confidence. In the near term, as management
monitors the above factors, it is possible they may change the revenue and cash
flow projections of certain reporting units, which may require the recording of
additional asset impairment charges. There are certain reporting
units that have been recently acquired and therefore have a historical cost that
is closer to the current fair value. In addition to the reporting
unit discussed above, a minor downward modification in forecasted results would
result in an impairment charge for one other reporting unit within the office
furniture segment. This reporting unit has approximately $7 million
of goodwill at January 2, 2010. For all other reporting units, where
impairment charges have not been recorded, the calculated fair value exceeds the
carrying value by a large margin with the closest margin at greater than 60
percent of the carrying value. While the Corporation has recorded
impairment charges connected to acquisitions in the office furniture segment
over the past few years, management’s strategy with regards to these reporting
units has not changed and the Corporation expects to receive additional value
from these reporting units as the economy stabilizes.
Self-insured reserves – The
Corporation is partially self-insured or carries high deductibles for general,
auto, and product liability; workers’ compensation; and certain employee health
benefits. The general, auto, product, and workers’ compensation
liabilities are managed via a wholly-owned insurance captive; the related
liabilities are included in the accompanying financial statements. As
of January 2, 2010, those liabilities totaled $27 million. The
Corporation’s policy is to accrue amounts in accordance with the actuarially
determined liabilities. The actuarial valuations are based on
historical information along with certain assumptions about future
events. Changes in assumptions for such matters as the number or
severity of claims, medical cost inflation, and magnitude of change in actual
experience development could cause these estimates to change in the near
term.
Stock-based compensation –
The Corporation measures the cost of employee services in exchange for an award
of equity instruments based on the grant-date fair value of the award and
recognizes cost over the requisite service period. This resulted in a
cost of approximately $3.8 million in 2009, $1.6 million in 2008, and $3.6
million in 2007. The decrease in cost in 2008 was due to a true-up
adjustment to estimated forfeitures based on current year events.
Income taxes – Deferred
income taxes are provided for the temporary differences between the financial
reporting basis and the tax basis of the Corporation’s assets and
liabilities. The Corporation provides for taxes that may be payable
if undistributed earnings of overseas subsidiaries were to be remitted to the
United States, except for those earnings that it considers to be permanently
reinvested.
Recent
Accounting Pronouncements
In
September 2006, 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, 2007, the
beginning of its 2008 fiscal year and with regard to its nonfinancial assets and
liabilities on January 4, 2009, the beginning of its 2009 fiscal
year. The adoption did not have a material impact on its financial
statements.
In
February, 2007, the FASB issued guidance 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. The
objective was 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 Corporation adopted the guidance December
30, 2007, the beginning of fiscal 2008. As the Corporation did not
elect to fair value any additional assets or liabilities, it did not have a
material impact on its financial statements.
In
December 2007, the FASB issued new guidance which requires a noncontrolling
interest in a subsidiary to 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 January 4, 2009, the beginning of fiscal 2009. As a result
of the adoption, the Corporation has reported noncontrolling interests as a
component of equity in its Consolidated Balance Sheets and the net income or
loss attributable to noncontrolling interests has been separately identified in
its 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.
In June
2009, the FASB issued guidance that identifies the sources of accounting
principles and the framework for selecting principles used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with US GAAP (the GAAP hierarchy). The Corporation adopted
the new guidance beginning October 3, 2009. This guidance had no
impact on the Corporation’s financial statements.
Results
of Operations
The
following table sets forth the percentage of consolidated net sales represented
by certain items reflected in the Corporation’s statements of income for the
periods indicated.
Fiscal
|
2009
|
2008
|
2007
|
|||||||||
Net
Sales
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
Cost
of products sold
|
65.5 | 66.6 | 64.8 | |||||||||
Gross
profit
|
34.5 | 33.4 | 35.2 | |||||||||
Selling
and administrative expenses
|
31.8 | 29.0 | 27.3 | |||||||||
Restructuring
related charges
|
2.4 | 1.0 | 0.4 | |||||||||
Operating
income
|
0.2 | 3.4 | 7.5 | |||||||||
Interest
income (expense) net
|
(0.7 | ) | (0.6 | ) | (0.7 | ) | ||||||
Income
(loss) from continuing operations before income taxes
|
(0.5 | ) | 2.8 | 6.9 | ||||||||
Income
taxes
|
(0.1 | ) | 1.0 | 2.2 | ||||||||
Net
income attributable to the noncontrolling interest
|
0.0 | 0.0 | 0.0 | |||||||||
Income
(loss) from continuing operations attributable to the Parent
Company
|
(0.4 | )% | 1.8 | % | 4.7 | % |
Net
Sales
Net sales
during 2009 were $1.7 billion, a decrease of 33.1 percent, compared to net sales
of $2.5 billion in 2008. Acquisitions contributed $10 million
or 0.4 percentage points of sales. Higher price realization of $83
million was offset by significant weakness in both the supplies driven and
contract channels of the office furniture segment and lower volume in the hearth
products segment. Net sales during 2008 were $2.5 billion, a decrease
of 3.6 percent, compared to net sales of $2.6 billion in
2007. Acquisitions contributed $118 million or 4.6 percentage points
of sales. Higher price realization of $66 million was offset by soft
demand in the supplies driven channel of the office furniture segment and lower
volume in the hearth products segment.
Gross
Profit
Gross
profit as a percent of net sales increased 1.1 percentage points in 2009 as
compared to 2008 due to better price realization, lower material costs and cost
reduction initiatives offset partially by lower volume. Gross profit
as a percent of net sales decreased 1.8 percentage points in 2008 as compared to
2007 due to lower volume, higher material costs and restructuring and transition
costs offset partially by better price realization.
Selling
and Administrative Expenses
Selling
and administrative expenses decreased 26.7 percent in 2009 and increased 2.2
percent in 2008. The decrease in 2009 was due to lower volume related
expenses, lower fuel costs, improved distribution efficiencies, cost control
initiatives and gains from the sale of a facility and a corporate
airplane. These were offset partially by the impact of prior year
favorable adjustments related to the fair value of mandatorily redeemable
liabilities from prior acquisitions, increased costs from acquisitions and
transition costs related to the various plant consolidations. The
increase in 2008 was due to increased freight and distribution costs due to
freight increases and fuel surcharges, additional costs from acquisitions,
increased costs related to new product development and gains recorded in 2007
from the sale of a facility and a corporate airplane. These were
offset partially by lower volume related expenses, lower incentive based
compensation costs, favorable adjustments to the current fair value of
mandatorily redeemable liabilities from prior acquisitions and cost control
initiatives.
Selling
and administrative expenses include freight expense for shipments to customers,
product development costs and amortization expense of intangible
assets. Refer to Summary of Significant Accounting Policies and
Goodwill and Other Intangible Assets in the Notes to Consolidated Financial
Statements for further information regarding the comparative expense levels for
these expense items.
Restructuring
and Impairment Charges
During
2009, the Corporation made the decision to close three office furniture
facilities in South Gate, California; Louisburg, North Carolina and Owensboro,
Kentucky and consolidate production into existing office furniture manufacturing
facilities. In connection with the closure of these facilities, the
Corporation recorded $12.6 million of pre-tax charges which included $2.7
million of accelerated depreciation of machinery and equipment recorded in cost
of sales, and $9.9 million of severance and facility exit costs which were
recorded as restructuring costs in 2009. The Corporation expects to
incur additional restructuring and transition costs in 2010 of approximately $3
to $4 million in connection with these closures.
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’s hearth product segment disposed and consolidated several retail
and distribution locations during 2009. In connection with these
activities, the Corporation recorded $6.7 million of pre-tax charges which
included $1.2 million of accelerated depreciation of machinery and equipment
recorded in cost of sales, and $5.5 million of severance and facility exit
costs, including accelerated depreciation of $1.4 million and write-off of
goodwill of $0.6 million, which were recorded as restructuring costs in
2009.
As part
of the Corporation’s annual impairment review, management concluded due to
market and economic conditions that a portion of its goodwill and
indefinite-lived intangibles had carrying values greater than their fair market
value and recorded an impairment charge of $25.0 million in 2009 and $21.8
million in 2008.
During
2008, the Corporation completed the shutdown of an office furniture facility in
Richmond, Virginia, consolidated production into other manufacturing locations,
closed two distribution centers and started up a new distribution
center. The Corporation announced and started these activities during
third quarter 2007. In connection with the shutdown of the
Richmond facility, the Corporation recorded $4.4 million of pre-tax charges
which included $0.6 million of accelerated depreciation of machinery and
equipment recorded in cost of sales, and $3.8 million of severance recorded as
restructuring costs during 2007. During 2008, the Corporation
incurred $4.2 million of current period charges which included $0.4 million of
accelerated depreciation of machinery and equipment recorded in cost of sales
and $3.8 million of other costs which were recorded as restructuring
costs.
The
Corporation made the decision in 2007 to sell several small non-core components
of its office furniture services business and recorded $2.7 million of
impairment charges, included in the restructuring related and impairment charges
line item on the statement of income, to reflect the fair market value of the
assets being held for sale.
The
Corporation’s hearth product segment consolidated some of its service and
distribution locations during 2007. In connection with those
consolidations, the Corporation recorded $1.1 million of severance and facility
exit costs which were recorded as restructuring costs in 2007. The
Corporation incurred $0.3 million of current period charges during 2008 which
were recorded as restructuring costs.
During
2007, the Corporation completed the shutdown of an office furniture facility,
which began in the fourth quarter of 2006. The facility was located
in Monterrey, Mexico and production from this facility was consolidated into
other locations. In connection with this shutdown, the Corporation
recorded $0.8 million of severance costs in 2006. The Corporation
incurred $2.1 million of current period charges during 2007.
Operating
Income
Operating
income was $4.0 million in 2009, a decrease of 95.3 percent compared to $84.9
million in 2008. The decrease was due to lower volume in all channels
of the office furniture and hearth products segments, higher restructuring,
transition and impairment charges and favorable adjustments recorded in 2008 to
the fair value of mandatorily redeemable liabilities from prior
acquisitions. These were offset partially by improved price
realization, lower input costs, improved distribution efficiencies, cost control
initiatives and gains recorded on the sale of a facility and a corporate
airplane. Operating income was $84.9 million in 2008, a decrease of
56.2 percent compared to $194 million in 2007. The decrease in 2008
was due to lower volume in the supplies-driven channel of the office furniture
segment and the hearth products segment, higher material and freight and
distribution costs, investments in product development, restructuring,
transition and impairment charges, gains recorded in 2007 from the sale of a
facility and a corporate airplane, and severance costs. These were
offset partially by improved price realization, lower volume related and
incentive based compensation expenses, favorable adjustments to the current fair
value of mandatorily redeemable liabilities from prior acquisitions and cost
control initiatives.
Income
(Loss) From Continuing Operations
Income
from continuing operations in 2009, which excludes the Corporation’s
discontinued business (see Discontinued Operations in the Notes to Consolidated
Financial Statements), was a loss of $6.3 million compared with income of $45.6
million in 2008, a 113.7 percent decrease. The current year loss from
continuing operations was positively impacted by decreased interest expense of
$4.8 million due to lower debt levels. Income from continuing
operations in 2008 was $45.6 million compared with $119.4 million in 2007, a
61.8 percent decrease. Income from continuing operations was
positively impacted by decreased interest expense of $1.3 million on moderate
debt levels due to lower average interest rates. Income from
continuing operations per diluted share decreased by 113.7 percent to ($0.14) in
2009 and decreased by 60.0 percent to $1.02 in 2008.
Discontinued
Operations
During
December 2006, the Corporation committed to a plan to sell a small non-core
component of its office furniture segment. The Corporation reduced
the assets to the fair market value and classified them as held for
sale. The sale was completed during the second quarter of
2007. Revenues and expenses associated with this component are
presented as discontinued operations for all periods presented. This
operation was formerly reported within the Office Furniture
segment. Refer to Discontinued Operations in the Notes to
Consolidated Financial Statements for further information.
Net
Income (Loss) Attributable to Parent Company
Net
income attributable to parent company decreased 114.1 percent to a loss of $6.4
million in 2009 compared to income of $45.5 million in 2008 which was a decrease
of 62.2 percent compared to 2007. Net income per diluted share
decreased by 113.7 percent to ($0.14) in 2009 and decreased by 60.3 percent to
$1.02 in 2008. Net income per diluted share was positively impacted
$0.05 per share in 2008 by the Corporation’s share repurchase
program.
Office
Furniture
Office
furniture comprised 83 percent, 83 percent and 82 percent of consolidated net
sales for 2009, 2008, and 2007, respectively. Net sales for office
furniture decreased 33 percent in 2009 to $1.37 billion compared to $2.05
billion in 2008. Acquisitions contributed $10 million of additional
sales. Organic sales decreased $694 million or 34 percent including
increased price realization of $77 million due to substantial weakness in both
the supplies-driven and contract channels which were both impacted by the
current economic conditions. Net sales for office furniture decreased
3 percent in 2008 to $2.05 billion compared to $2.11 billion in
2007. Acquisitions contributed $61 million of additional
sales. Organic sales decreased $115 million or 5 percent, including
increased price realization of $50 million, due to softness in the
supplies-driven channel. BIFMA reported 2009 shipments down 30
percent from 2008 levels which were down 2 percent from 2007
levels.
Operating
profit as a percent of net sales was 3.7 percent in 2009, 4.9 percent in 2008,
and 9.2 percent in 2007. The decrease in operating margins in 2009
was due to additional restructuring and impairment charges of $9 million
compared to 2008 as well as lower volume and the impact of prior year favorable
adjustments to the current fair value of mandatorily redeemable liabilities from
prior acquisitions. These were partially offset by increased price
realization, lower material costs, improved distribution efficiencies, lower
transition costs and cost control initiatives. The decrease in
operating margins in 2008 was due to additional restructuring and impairment
charges of $17 million compared to 2007 as well as lower volume, higher material
and fuel costs, transition costs and severance expenses offset partially by
better price realization, cost reduction initiatives, lower incentive based
compensation and favorable adjustments to the current fair value of mandatorily
redeemable liabilities from prior acquisitions.
Hearth
Products
Hearth
products sales decreased 32.5 percent in 2009 to $286 million compared to $424
million in 2008. The decrease was due to significant declines in both
the new construction and remodel-retrofit channels. Hearth products
sales decreased 8 percent in 2008 to $424 million compared to $462 million in
2007. New acquisitions contributed $57 million of net
sales. The decrease in organic sales was due to the continuing
decline in new home construction. This was partially offset by the
high demand for alternative fuel products.
Operating
loss as a percent of sales in 2009 was 6.0 percent compared to operating profit
as a percent of sales of 2.8 percent and 7.9 percent in 2008 and 2007,
respectively. The decrease in operating margins in 2009 was due to
lower volume and higher restructuring and transition costs offset partially by
cost reduction initiatives. The decrease in operating margins in 2008
was due to lower overall volume, rising material costs and increased mix of
lower margin remodel/retrofit business offset partially by price increases, cost
reduction initiatives and lower restructuring expenses.
Liquidity
and Capital Resources
Cash
Flow – Operating Activities
Cash
generated from operating activities in 2009 totaled $193.2 million compared to
$174.4 million generated in 2008. Changes in working capital balances
resulted in a $97.3 million source of cash in the current fiscal year compared
to a $30.3 million source of cash in the prior year.
The
source of cash related to working capital balances in 2009 was primarily driven
from lower trade receivables of $74.6 million and lower inventory of $19.1
million due to strong collection efforts and lower sales. These
sources of cash were offset partially by decreased current liabilities of $5.8
million. The decrease in current liabilities is comprised of $31.9
million of other accruals namely compensation, retirement and marketing expense
accruals offset by a $17.6 million increase in trade accounts payable and $8.5
million in tax-related accruals.
The
source of cash related to working capital balances in 2008 was primarily driven
by lower trade receivables of $58.6 million and lower inventory of $31.8 million
due to strong collection efforts and the company wide shutdown for the last two
weeks of the fiscal year. These sources of cash were offset partially
by decreased current liabilities of $60.4 million. The decrease in
current liabilities was comprised of $36.5 million of decreased trade accounts
payable, $1.3 million in tax-related accruals and $22.6 million of other
accruals namely compensation, retirement and marketing expense
accruals.
The
Corporation places special emphasis on the management and control of its working
capital with a particular focus on trade receivables and inventory
levels. The success achieved in managing receivables is in large part
a result of doing business with quality customers and maintaining close
communication with them. During these uncertain economic times
management is placing additional emphasis on monitoring its trade
receivables. Management believes its recorded trade receivable
valuation allowances at the end of 2009 are adequate to cover the risk of
potential bad debts. Allowances for non-collectible trade
receivables, as a percent of gross trade receivables, totaled 3.8 percent, 3.6
percent, and 3.8 percent at the end of fiscal years 2009, 2008, and 2007,
respectively. The Corporation’s inventory turns were 15, 17, and 16, for 2009,
2008, and 2007, respectively.
Cash
Flow – Investing Activities
Capital
expenditures including capitalized software were $17.6 million in 2009, $71.5
million in 2008, and $58.9 million in 2007. These expenditures have
consistently focused on machinery and equipment and tooling required to support
new products, continuous improvements in our manufacturing processes and cost
savings initiatives. The increase in capital expenditures in 2008 was
due to the facility consolidations that were completed in 2008. The
Corporation anticipates capital expenditures for 2010 to total $25 to $35
million and be primarily related to new products and operational process
improvement.
Included
in 2009 investing activities is a net cash outflow of $0.5 million for a
contingent purchase commitment related to the Harman Stove Company (“Harman”)
acquisition in 2007. In 2008, the investing activities reflected a
net cash outflow of $75.5 million related to the acquisition of
HBF. The addition of HBF bolstered the Corporation’s contract office
furniture business with its strong brand recognition among interior designers
and emphasis on new products. In 2007, the investing activities
reflected a cash outflow of $41.7 million related to the acquisition of Harman
and two small office furniture dealers. The acquisition of Harman
added to the hearth products segment alternative fuel business. Refer
to the Business Combination note in the Notes to Consolidated Financial
Statements for additional information.
In 2009,
the Corporation completed the sale of a corporate airplane and a facility
located in Lakeville, Minnesota. In 2008, the Corporation completed
the sale of a facility located in Richmond, Virginia. In 2007, the
Corporation completed the sale of a corporate airplane and a facility located in
Monterrey, Mexico. The proceeds from these sales of $5 million, $5
million and $11 million are reflected in the Consolidated Statement of Cash
Flows as “Proceeds from sale of property, plant and equipment” for 2009, 2008
and 2007, respectively.
In 2009,
the Corporation sold $21 million of long-term investments and used the proceeds
to repay debt.
Cash
Flow – Financing Activities
On June
30, 2008, the Corporation entered into a term loan credit agreement which
allowed for a one-time borrowing of $50 million in the form of a term
loan. The Corporation paid off the term loan during
2009.
The
Corporation has a revolving credit facility that provides for a maximum
borrowing of $300 million. Amounts borrowed under the revolving
credit facility may be borrowed, repaid and reborrowed from time to time until
January 28, 2011. As of January 2, 2010, $50 million was outstanding
under the revolving credit facility and classified as long-term as the
Corporation does not expect to repay the borrowings within a
year. The Corporation plans to negotiate a new revolving credit
facility before the current one expires.
In 2006,
the Corporation refinanced $150 million of borrowings outstanding under the
revolving credit facility with 5.54 percent, ten-year unsecured Senior Notes due
in 2016 issued through the private placement debt market. Interest
payments are due semi-annually on April 1 and October 1 of each year and the
principal is due in a lump sum in 2016.
Additional
borrowing capacity of $250 million, less amounts used for designated letters of
credit, is available through the revolving credit facility in the event cash
generated from operations should be inadequate to meet future
needs. The Corporation does not currently expect future capital
resources to be a constraint on planned growth. Certain of the
Corporation’s credit agreements include covenants that limit the assumption of
additional debt and lease obligations. Long-term debt, including
capital lease obligations, was 32% of total capitalization as of January 2,
2010, 37% as of January 3, 2009, and 38% as of December 29, 2007.
The
credit agreement pertaining to the revolving credit facility and the note
purchase agreement pertaining to the Senior Notes contain covenants that, among
other things, restrict, subject to certain exceptions, our ability
to:
|
·
|
incur
additional indebtedness and make
guarantees;
|
|
·
|
create
liens on assets;
|
|
·
|
engage
in any material line of business substantially different from existing
lines of business;
|
|
·
|
sell
assets;
|
|
·
|
make
investments, loans and advances, including
acquisitions;
|
|
·
|
engage
in sale-leaseback transactions in excess of $50 million in the
aggregate;
|
|
·
|
repay
the Senior Notes or enter into certain amendments thereof;
and
|
|
·
|
engage
in certain transactions with
affiliates.
|
The
credit agreement governing the Corporation’s revolving credit facility contains
a number of covenants, including covenants requiring maintenance of the
following financial ratios as of the end of any fiscal quarter:
|
·
|
a
consolidated interest coverage ratio of not less than 4.0 to 1.0, based
upon the ratio of (a) consolidated EBITDA (as defined in the credit
agreement) for the last four fiscal quarters to (b) the sum of
consolidated interest charges; and
|
|
·
|
a
consolidated leverage ratio of not greater than 3.0 to 1.0, based upon the
ratio of (a) the quarter-end consolidated funded indebtedness (as defined
in the credit agreement) to (b) consolidated EBITDA for the last four
fiscal quarters.
|
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
January 2, 2010, the Corporation was well below this ratio and was in compliance
with all of the covenants and other restrictions in the credit agreement and
note purchase agreement. The Corporation currently expects to remain
in compliance over the next twelve months.
In 2008,
the Corporation entered into an interest rate swap agreement with one of its
relationship banks, designated as a cash flow hedge, for purposes of managing
its benchmark interest rate fluctuation risk. The fair value of its
interest rate swap arrangement, as further described in the Derivative Financial
Instrument note in the Notes to Consolidated Financial Statements, was a
negative $2.5 million at the end of 2009. The fair value of the swap
arrangement changes based on fluctuations in market interest
rates. The changes in fair value are recorded as a component of
accumulated other comprehensive income in the equity section of the
Corporation’s consolidated balance sheet. This interest rate swap had
the effect of increasing total interest expense by $1.7 million in
2009.
During
2009, the Corporation did not repurchase any shares of its common
stock. During 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. The Board of Directors authorized $200 million
on August 8, 2006, and an additional $200 million on November 9, 2007, for
repurchases of the Corporation’s common stock. As of January 2, 2010,
approximately $163.6 million of this authorized amount remained
unspent. During 2007, the Corporation repurchased 3,581,707 shares of
its common stock at a cost of approximately $147.7 million, or an average price
of $41.23.
A cash
dividend has been paid every quarter since April 15, 1955, and quarterly
dividends are expected to continue. Cash dividends were $0.86 per
common share for 2009, $0.86 for 2008, and $0.78 for 2007. The last
increase was a 10.3 percent increase in the quarterly dividend effective with
the February 29, 2008, dividend payment for shareholders of record at the close
of business on February 22, 2008. The average dividend payout
percentage for the most recent three-year period has been 39 percent of prior
year earnings.
Cash,
cash equivalents and short-term investments totaled $93.4 million at the end of
2009 compared to $49.3 million at the end of 2008 and $43.8 million at the end
of 2007. These funds, coupled with cash from future operations and
additional borrowings, if needed, are expected to be adequate to finance
operations, planned improvements and internal growth. Due to the
volatile and uncertain economic outlook for 2010, the Corporation will manage
cash to maintain strategic flexibility. The Corporation currently
expects to be able to satisfy its cash flow needs over the next twelve months
with existing facilities.
Contractual
Obligations
The
following table discloses the Corporation’s obligations and commitments to make
future payments under contracts:
Payments
Due by Period
|
||||||||||||||||||||
(In
thousands)
|
Total
|
Less
than
1
Year
|
1 –
3
Years
|
3 –
5
Years
|
More
than
5
Years
|
|||||||||||||||
Long-term
debt obligations, including estimated interest (1)
|
$ | 255,247 | $ | 10,660 | $ | 67,579 | $ | 16,620 | $ | 160,388 | ||||||||||
Capital
lease obligations
|
40 | 40 | - | - | - | |||||||||||||||
Operating
lease obligations
|
97,791 | 31,640 | 39,957 | 12,503 | 13,691 | |||||||||||||||
Purchase
obligations (2)
|
62,490 | 62,490 | - | - | - | |||||||||||||||
Other
long-term obligations (3)
|
28,575 | 1,452 | 8,577 | 2,557 | 15,989 | |||||||||||||||
Total
|
$ | 444,143 | $ | 106,282 | $ | 116,113 | $ | 31,680 | $ | 190,068 |
|
(1)
|
Interest
has been included for all debt at either the fixed rate or variable rate
in effect as of January 2, 2010, as
applicable.
|
|
(2)
|
Purchase
obligations include agreements to purchase goods or services that are
enforceable, legally binding, and specify all significant terms, including
the quantity to be purchased, the price to be paid, and the timing of the
purchase.
|
|
(3)
|
Other
long-term obligations represent payments due to members who are
participants in the Corporation’s deferred and long-term incentive
compensation programs, mandatory purchases of the remaining unowned
interest in an acquisition, liability for unrecognized tax liabilities,
and contribution and benefit payments expected to be made pursuant to the
Corporation’s post-retirement benefit plans. It should be noted
the obligations related to post-retirement benefit plans are not
contractual and the plans could be amended at the discretion of the
Corporation. The disclosure of contributions and benefit
payments has been limited to 10 years, as information beyond this time
period was not available.
|
Litigation
and Uncertainties
The
Corporation is involved in various kinds of disputes and legal proceedings that
have arisen in the ordinary 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
Management
believes the challenging market conditions will continue in 2010. It
is unclear when recovery will occur in the office furniture market, and while
there are early indications the worst is over in housing, the recovery remains
uncertain with only modest improvement likely in 2010. The
Corporation has adjusted the cost structure of its various businesses to the
current conditions and believes they are strategically well positioned to
increase market share and grow sales.
The
Corporation will focus on its core customers and core market segments, respond
to customers’ needs and the demands of the market. It will continue
to adjust to changing market conditions and fiercely manage cash. The
Corporation will continue to invest in new products, brand development, selling
initiatives and build its e-business capabilities. The Corporation
will continue its drive for best-cost/lean enterprise.
The
Corporation remains focused on creating long-term shareholder value by growing
its business through investment in building brands, product solutions and
selling models, enhancing its strong member-owner culture and remaining focused
on its long-standing rapid continuous improvement programs to build best total
cost and a lean enterprise.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
During
the normal course of business, the Corporation is subjected to market risk
associated with interest rate movements. Interest rate risk arises
from our variable interest debt obligations. For information related
to the Corporation’s long-term debt, refer to the Long-Term Debt disclosure in
the Notes to Consolidated Financial Statements filed as part of this
report. As of January 2, 2010, the Corporation has one interest rate
swap agreement. 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
notational principal amount of $50 million. The interest rate swap
derivative instrument is held and used by the Corporation as a tool for managing
interest rate risk. It is not used for trading or speculative
purposes. The fair market value of the effective swap instrument was
negative $2.5 million at January 2, 2010. The impact of this swap
instrument on total interest expense was an addition to interest expense of $1.7
million in 2009. The Corporation does not currently have any
significant foreign currency exposure.
The
Corporation is exposed to risks arising from price changes for certain direct
materials and assembly components used in its operations. The most
significant material purchases and cost for the Corporation are for steel,
plastics, textiles, wood particleboard and cartoning. Steel is the
most significant raw material used in the manufacturing of
products. The market price of plastics and textiles in particular are
sensitive to the cost of oil and natural gas. Oil, natural gas and
diesel fuel prices have experienced high volatility in the last several years
and as a result the costs of plastics, textiles and transportation have also
been volatile. The cost of wood particleboard has been impacted by
continued downsizing of production capacity as well as increased volatility in
input and transportation costs. All of these materials are impacted
increasingly by global market pressure and impacts. The Corporation
works to offset these increased costs through global sourcing initiatives and
price increases on its products, however, historically margins have been
negatively impacted due to the lag between cost increases and the Corporation’s
ability to increase its prices. The Corporation believes future
market price increases on its key direct materials and assembly components are
likely. Consequently, it views the prospect of such increases as an
outlook risk to the business.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
The
financial statements listed under Item 15(a)(1) and (2) are filed as part of
this Report.
The
Summary of Unaudited Quarterly Results of Operations follows the Notes to
Consolidated Financial Statements filed as part of this Report.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM
9A. CONTROLS AND PROCEDURES
Disclosure
controls and procedures are designed to ensure that information required to be
disclosed by the Corporation in the reports that it files or submits under the
Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed,
summarized and reported, within the time periods specified in the SEC’s rules
and forms. Disclosure controls and procedures are also designed to
ensure that information is accumulated and communicated to management, including
the Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosures.
Under the
supervision and with the participation of management, the Chief Executive
Officer and Chief Financial Officer of the Corporation have evaluated the
effectiveness of the design and operation of the Corporation’s disclosure
controls and procedures as defined in Rules 13a – 15(e) and 15d – 15(e) under
the Exchange Act. As of January 2, 2010, and, based on their
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that these controls and procedures are effective. There
have not been any changes in the Corporation’s internal control over financial
reporting that occurred during the fiscal quarter ended January 2, 2010 that
have materially affected, or are reasonably likely to materially affect, the
Corporation’s internal control over financial reporting.
Management’s
annual report on internal control over financial reporting and the attestation
report of the Corporation’s independent registered public accounting firm are
included in Item 15. Exhibits, Financial Statement Schedules of this report
under the headings “Management Report on Internal Control Over Financial
Reporting” and “Report of Independent Registered Public Accounting Firm,”
respectively.
ITEM
9B. OTHER INFORMATION
None.
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
The
information under the caption "Election of Directors" of the Corporation's Proxy
Statement for the Annual Meeting of Shareholders to be held on May 11, 2010, is
incorporated herein by reference. For information with respect to
executive officers of the Corporation, see Part I, Table I "Executive Officers
of the Registrant" included in this report.
Information
relating to the identification of the audit committee, audit committee financial
expert and director nomination procedures of the registrant is contained under
the caption “Information Regarding the Board” of the Corporation’s Proxy
Statement for the Annual Meeting of Shareholders to be held on May 11, 2010, and
is incorporated herein by reference.
Code
of Ethics
The
information under the caption “Code of Business Conduct and Ethics” of the
Corporation’s Proxy Statement for the Annual Meeting of Shareholders to be held
on May 11, 2010, is incorporated herein by reference.
Section
16(a) Beneficial Ownership Reporting Compliance
The
information under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" of the Corporation's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 11, 2010, is incorporated herein by
reference.
ITEM
11. EXECUTIVE COMPENSATION
The
information under the captions “Executive Compensation” and “Director
Compensation” of the Corporation's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 11, 2010, is incorporated herein by
reference.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The
information under the captions “Security Ownership” and “Equity Compensation
Plan Information” of the Corporation's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 11, 2010, is incorporated herein by
reference.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The
information under the captions “Information Regarding the Board - Director
Independence” and “Review, Approval or Ratification of Transactions with Related
Persons” of the Corporation's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 11, 2010, is incorporated herein by
reference.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The
information under the caption “Fees Incurred for PricewaterhouseCoopers LLP” of
the Corporation’s Proxy Statement for the Annual Meeting of Shareholders to be
held on May 11, 2010, is incorporated herein by reference.
PART IV
ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
|
(a)
(1)
|
Financial
Statements
|
The
following consolidated financial statements of the Corporation and its
subsidiaries included in the Corporation's 2009 Annual Report to Shareholders
are filed as a part of this Report pursuant to Item 8:
Page
|
||
Management
Report on Internal Control Over Financial Reporting
|
46
|
|
Report
of Independent Registered Public Accounting Firm
|
47
|
|
Consolidated
Statements of Income for the Years Ended January
2, 2010, January 3, 2009, and December 29, 2007
|
48
|
|
Consolidated
Balance Sheets – January 2, 2010, January 3, 2009, and December 29,
2007
|
49
|
|
Consolidated
Statements of Shareholders’ Equity for the Years Ended January
2, 2010, January 3, 2009, and December 29, 2007
|
50
|
|
Consolidated
Statements of Cash Flows for the Years Ended January
2, 2010, January 3, 2009, and December 29, 2007
|
51
|
|
Notes
to Consolidated Financial Statements
|
52
|
|
Investor
Information
|
81
|
|
(2)
|
Financial Statement
Schedules
|
The
following consolidated financial statement schedule of the Corporation and its
subsidiaries is attached:
Schedule
II
|
Valuation
and Qualifying Accounts for the Years Ended January 2, 2010, January 3,
2009, and December 29, 2007
|
82
|
All other
schedules for which provision is made in the applicable accounting regulation of
the SEC are not required under the related instructions or are inapplicable and,
therefore, have been omitted.
|
(b)
|
Exhibits
|
An
exhibit index of all exhibits incorporated by reference into, or filed with,
this Report
appears
on Page 83. The following exhibits are filed herewith:
Exhibit
|
||
(3.1)
|
Articles
of Incorporation of HNI Corporation
|
|
(3.2)
|
By-laws
of HNI Corporation
|
|
(10.2)
|
2007
Equity Plan for Non-Employee Directors of HNI
Corporation
|
|
(10.6)
|
Form
of 2007 Equity Plan for Non-Employee Directors of HNI Corporation
Participant Agreement
|
|
(10.12)
|
HNI
Corporation Executive Deferred Compensation Plan
|
|
(10.15)
|
HNI
Corporation Directors Deferred Compensation
Plan
|
(10.25)
|
Form
of HNI Corporation Executive Deferred Compensation Plan Deferral Election
Agreement
|
|
(10.26)
|
Form
of HNI Corporation Directors Deferred Compensation Plan Deferral Election
Agreement
|
|
(21)
|
Subsidiaries
of the Registrant
|
|
(23)
|
Consent
of Independent Registered Public Accounting Firm
|
|
(31.1)
|
Certification
of the CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
(31.2)
|
Certification
of the CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
(32.1)
|
Certification
of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized.
HNI
Corporation
|
|||
Date:
February 26, 2010
|
By:
|
/s/ Stan A. Askren
|
|
Stan
A. Askren
|
|||
Chairman,
President and CEO
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated. Each Director whose signature
appears below authorizes and appoints Stan A. Askren as his or her
attorney-in-fact to sign and file on his or her behalf any and all amendments
and post-effective amendments to this report.
Signature
|
Title
|
Date
|
||
/s/
Stan A. Askren
|
Chairman,
President and CEO,
|
February
26, 2010
|
||
Stan
A. Askren
|
Principal
Executive Officer,
|
|||
and
Director
|
||||
/s/
Kurt A. Tjaden
|
Vice
President and Chief Financial
|
February
26, 2010
|
||
Kurt
A. Tjaden
|
Officer,
Principal Financial Officer and Principal Accounting
Officer
|
|||
/s/
Mary H. Bell
|
Director
|
February
26, 2010
|
||
Mary
H. Bell
|
||||
/s/
Miguel M. Calado
|
Director
|
February
26, 2010
|
||
Miguel
M. Calado
|
||||
/s/
Gary M. Christensen
|
Director
|
February
26, 2010
|
||
Gary
M. Christensen
|
||||
/s/
Cheryl A. Francis
|
Director
|
February
26, 2010
|
||
Cheryl
A. Francis
|
||||
/s/
John A. Halbrook
|
Director
|
February
26, 2010
|
||
John
A. Halbrook
|
||||
/s/
James R. Jenkins
|
Director
|
February
26, 2010
|
||
James
R. Jenkins
|
||||
/s/
Dennis J. Martin
|
Director
|
February
26, 2010
|
||
Dennis
J. Martin
|
Signature
|
Title
|
Date
|
||
/s/
Larry B. Porcellato
|
Director
|
February
26, 2010
|
||
Larry
B. Porcellato
|
||||
/s/
Abbie J. Smith
|
Director
|
February
26, 2010
|
||
Abbie
J. Smith
|
||||
/s/
Brian E. Stern
|
Director
|
February
26, 2010
|
||
Brian
E. Stern
|
||||
/s/
Ronald V. Waters, III
|
Director
|
February
26, 2010
|
||
Ronald
V. Waters, III
|
||||
Management Report on Internal Control Over Financial
Reporting
Management
of HNI Corporation is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934. HNI
Corporation’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of
America. HNI Corporation’s internal control over financial reporting
includes those written policies and procedures that:
|
·
|
pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of HNI
Corporation;
|
|
·
|
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America, and that
receipts and expenditures of HNI Corporation are being made only in
accordance with authorizations of management and directors of HNI
Corporation; and
|
|
·
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of assets that could have a
material effect on the consolidated financial
statements.
|
Internal
control over financial reporting includes the controls themselves, monitoring
(including internal auditing practices), and actions taken to correct
deficiencies as identified.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management
assessed the effectiveness of HNI Corporation’s internal control over financial
reporting as of January 2, 2010. Management based this assessment on
criteria for effective internal control over financial reporting described in
Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Management’s assessment included an evaluation
of the design of HNI Corporation’s internal control over financial reporting and
testing of the operational effectiveness of HNI Corporation’s internal control
over financial reporting. Management reviewed the results of its
assessment with the Audit Committee of the Board of Directors.
Based on
this assessment, management determined that, as of January 2, 2010, HNI
Corporation maintained effective internal control over financial
reporting.
Management’s
assessment of the effectiveness of HNI Corporation’s internal control over
financial reporting as of January 2, 2010 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in its report which appears herein.
February
26, 2010
Report of
Independent Registered Public Accounting Firm
To the
Board of Directors and Shareholders of HNI Corporation:
In our
opinion, the consolidated financial statements listed in the index appearing
under Item 15(a)(1), present fairly, in all material respects, the financial
position of HNI Corporation and its subsidiaries (the “Corporation”) at January
2, 2010, January 3, 2009, and December 29, 2007, and the results of their
operations and their cash flows for each of the three years in the period ended
January 2, 2010 in conformity with accounting principles generally accepted in
the United States of America. In addition, in our opinion, the
financial statement schedule listed in the index appearing under Item 15(a)(2)
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial
statements. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of
January 2, 2010, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Corporation's management is responsible for
these financial statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the
Management Report on Internal Control Over Financial Reporting appearing under
Item 15. Our responsibility is to express opinions on these financial
statements, on the financial statement schedule, and on the Corporation's
internal control over financial reporting based on our integrated
audits. We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our
opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/PricewaterhouseCoopers
LLP
Chicago,
Illinois
February
26, 2010
HNI
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
(Amounts
in thousands, except for per share data)
|
||||||||||||
For
the Years
|
2009
|
2008
|
2007
|
|||||||||
Net
sales
|
$ | 1,656,289 | $ | 2,477,587 | $ | 2,570,472 | ||||||
Cost
of products sold
|
1,085,508 | 1,648,975 | 1,664,697 | |||||||||
Gross
profit
|
570,781 | 828,612 | 905,775 | |||||||||
Selling
and administrative expenses
|
526,346 | 717,870 | 702,329 | |||||||||
Restructuring
related and impairment charges
|
40,443 | 25,859 | 9,788 | |||||||||
Operating
income
|
3,992 | 84,883 | 193,658 | |||||||||
Interest
income
|
415 | 1,172 | 1,229 | |||||||||
Interest
expense
|
12,080 | 16,865 | 18,161 | |||||||||
Income
(loss) from continuing operations before tax
|
(7,673 | ) | 69,190 | 176,726 | ||||||||
Income
taxes
|
(1,414 | ) | 23,583 | 57,280 | ||||||||
Income
(loss) from continuing operations, less applicable income
taxes
|
(6,259 | ) | 45,607 | 119,446 | ||||||||
Discontinued
operations, less applicable income taxes
|
- | - | 514 | |||||||||
Net
income (loss)
|
(6,259 | ) | 45,607 | 119,960 | ||||||||
Less:
Net income attributable to the noncontrolling
interest
|
183 | 157 | (418 | ) | ||||||||
Net
income (loss) attributable to Parent Company
|
$ | (6,442 | ) | $ | 45,450 | $ | 120,378 | |||||
Income
(loss) from continuing operations attributable to Parent Company per
common share – basic
|
$ | (0.14 | ) | $ | 1.03 | $ | 2.57 | |||||
Discontinued
operations attributable to Parent Company per common share –
basic
|
- | - | 0.01 | |||||||||
Net
income (loss) attributable to Parent Company per common share –
basic
|
$ | (0.14 | ) | $ | 1.03 | $ | 2.58 | |||||
Weighted
average shares outstanding – basic
|
44,888,809 | 44,309,765 | 46,684,774 | |||||||||
Net
income (loss) attributable to Parent Company per common share –
diluted
|
$ | (0.14 | ) | $ | 1.02 | $ | 2.55 | |||||
Discontinued
operations attributable to Parent Company per common share –
diluted
|
- | - | 0.02 | |||||||||
Net
income (loss) attributable to Parent Company per common share –
diluted
|
$ | (0.14 | ) | $ | 1.02 | $ | 2.57 | |||||
Weighted
average shares outstanding - diluted
|
44,888,809 | 44,433,945 | 46,925,161 |
The
accompanying notes are an integral part of the consolidated financial
statements.
HNI CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(Amounts
in thousands of dollars and shares except par value)
As
of Year-end
|
2009
|
2008
|
2007
|
|||||||||
Assets
|
||||||||||||
Current
Assets
|
||||||||||||
Cash
and cash equivalents
|
$ | 87,374 | $ | 39,538 | $ | 33,881 | ||||||
Short-term
investments
|
5,994 | 9,750 | 9,900 | |||||||||
Receivables,
net
|
163,732 | 238,327 | 288,777 | |||||||||
Inventories
|
65,144 | 84,290 | 108,541 | |||||||||
Deferred
income taxes
|
20,299 | 16,313 | 17,828 | |||||||||
Prepaid
expenses and other current assets
|
17,728 | 29,623 | 30,145 | |||||||||
Total
Current Assets
|
360,271 | 417,841 | 489,072 | |||||||||
Property,
Plant, and Equipment
|
260,102 | 315,606 | 305,431 | |||||||||
Goodwill
|
261,114 | 268,392 | 256,834 | |||||||||
Other
Assets
|
112,839 | 163,790 | 155,639 | |||||||||
Total
Assets
|
$ | 994,326 | $ | 1,165,629 | $ | 1,206,976 | ||||||
Liabilities
and Shareholders’ Equity
|
||||||||||||
Current
Liabilities
|
||||||||||||
Accounts
payable and accrued expenses
|
$ | 299,718 | $ | 313,431 | $ | 367,320 | ||||||
Note
payable and current maturities of long-term debt and capital lease
obligations
|
39 | 54,494 | 14,715 | |||||||||
Current
maturities of other long-term obligations
|
385 | 5,700 | 2,426 | |||||||||
Total
Current Liabilities
|
300,142 | 373,625 | 384,461 | |||||||||
Long-Term
Debt
|
200,000 | 267,300 | 280,315 | |||||||||
Capital
Lease Obligations
|
- | 43 | 776 | |||||||||
Other
Long-Term Liabilities
|
50,332 | 50,399 | 55,843 | |||||||||
Deferred
Income Taxes
|
24,227 | 25,271 | 26,672 | |||||||||
Commitments
and Contingencies
|
||||||||||||
Shareholders’
Equity
|
||||||||||||
Preferred
stock - $1 par value
|
- | - | - | |||||||||
Authorized: 2,000
|
||||||||||||
Issued: None
|
||||||||||||
Common
stock - $1 par value
|
45,093 | 44,324 | 44,835 | |||||||||
Authorized: 200,000
|
||||||||||||
Issued
and outstanding: 2009-45,093; 2008-44,324;
2007-44,835
|
||||||||||||
Additional
paid-in capital
|
19,695 | 6,037 | 3,152 | |||||||||
Retained
Earnings
|
355,270 | 400,379 | 410,075 | |||||||||
Accumulated
other comprehensive income
|
(774 | ) | (1,907 | ) | 846 | |||||||
Total
Parent Company shareholders’ equity
|
419,284 | 448,833 | 458,908 | |||||||||
Noncontrolling
interest
|
341 | 158 | 1 | |||||||||
Total Equity
|
419,625 | 448,991 | 458,909 | |||||||||
Total
Liabilities and Equity
|
$ | 994,326 | $ | 1,165,629 | $ | 1,206,976 |
The
accompanying notes are an integral part of the consolidated financial
statements.
HNI
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
Parent
Company Shareholders’ Equity
|
||||||||||||||||||||||||
(Amounts
in thousands)
|
Common
Stock
|
Additional
Paid-in
Capital
|
Retained
Earnings
|
Accumulated
Other
Comprehensive
(Loss)/Income
|
Non-
controlling
Interest
|
Total
Shareholders’
Equity
|
||||||||||||||||||
Balance,
December 30, 2006
|
$ | 47,906 | $ | 2,807 | 448,268 | $ | (3,062 | ) | $ | 500 | $ | 496,419 | ||||||||||||
Comprehensive
income:
|
||||||||||||||||||||||||
Net
income
|
120,378 | (418 | ) | 119,960 | ||||||||||||||||||||
Other
comprehensive income
|
3,908 | 3,908 | ||||||||||||||||||||||
Comprehensive
income
|
123,868 | |||||||||||||||||||||||
Adoption
of FIN 48 impact
|
(509 | ) | (509 | ) | ||||||||||||||||||||
Change
in ownership of noncontrolling interest
|
(81 | ) | (81 | ) | ||||||||||||||||||||
Cash
dividends; $0.78 per share
|
(36,408 | ) | (36,408 | ) | ||||||||||||||||||||
Common
shares – treasury:
|
||||||||||||||||||||||||
Shares
purchased
|
(3,582 | ) | (22,439 | ) | (121,654 | ) | (147,675 | ) | ||||||||||||||||
Shares
issued under Members’ Stock Purchase Plan and stock awards
|
511 | 22,784 | 23,295 | |||||||||||||||||||||
Balance,
December 29, 2007
|
$ | 44,835 | $ | 3,152 | $ | 410,075 | $ | 846 | $ | 1 | $ | 458,909 | ||||||||||||
Comprehensive
income:
|
||||||||||||||||||||||||
Net
income
|
45,450 | 157 | 45,607 | |||||||||||||||||||||
Other
comprehensive income
|
(2,753 | ) | (2,753 | ) | ||||||||||||||||||||
Comprehensive
income
|
42,854 | |||||||||||||||||||||||
Cash
dividends; $0.86 per share
|
(38,095 | ) | (38,095 | ) | ||||||||||||||||||||
Common
shares – treasury:
|
||||||||||||||||||||||||
Shares
purchased
|
(1,005 | ) | (10,497 | ) | (17,051 | ) | (28,553 | ) | ||||||||||||||||
Shares
issued under Members’ Stock Purchase Plan and stock awards
|
494 | 13,382 | 13,876 | |||||||||||||||||||||
Balance,
January 3, 2009
|
$ | 44,324 | $ | 6,037 | $ | 400,379 | $ | (1,907 | ) | $ | 158 | $ | 448,991 | |||||||||||
Comprehensive
income:
|
||||||||||||||||||||||||
Net
income (loss)
|
(6,442 | ) | 183 | (6,259 | ) | |||||||||||||||||||
Other
comprehensive income
|
1,133 | 1,133 | ||||||||||||||||||||||
Comprehensive
income (loss)
|
(5,126 | ) | ||||||||||||||||||||||
Cash
dividends; $0.86 per share
|
(38,667 | ) | (38,667 | ) | ||||||||||||||||||||
Common
shares – treasury:
|
||||||||||||||||||||||||
Shares
purchased
|
||||||||||||||||||||||||
Shares
issued under Members’ Stock Purchase Plan and stock awards
|
769 | 13,658 | 14,426 | |||||||||||||||||||||
Balance,
January 2, 2010
|
$ | 45,093 | $ | 19,695 | $ | 355,270 | $ | (774 | ) | $ | 341 | $ | 419,625 |
The
accompanying notes are an integral part of the consolidated financial
statements.
HNI
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Amounts
in thousands)
For
the Years
|
2009
|
2008
|
2007
|
|||||||||
Net
Cash Flows From (To) Operating Activities:
|
||||||||||||
Net
income (loss)
|
$ | (6,259 | ) | $ | 45,607 | $ | 119,960 | |||||
Noncash
items included in net income:
|
||||||||||||
Depreciation
and amortization
|
74,867 | 70,155 | 68,173 | |||||||||
Other
postretirement and post-employment benefits
|
1,849 | 1,509 | 2,132 | |||||||||
Stock-based
compensation
|
3,830 | 1,616 | 3,603 | |||||||||
Excess
tax benefits from stock compensation
|
(8 | ) | (11 | ) | (808 | ) | ||||||
Deferred
income taxes
|
(5,844 | ) | 2,600 | (4,935 | ) | |||||||
Net
loss on sales, retirements and impairments of long-lived assets and
intangibles
|
26,025 | 22,691 | 1,662 | |||||||||
Stock
issued to retirement plan
|
6,565 | 6,592 | 6,611 | |||||||||
Other
– net
|
2,338 | (4,065 | ) | (744 | ) | |||||||
Changes
in working capital, excluding acquisition and disposition:
|
||||||||||||
Receivables
|
74,593 | 58,570 | 39,941 | |||||||||
Inventories
|
19,146 | 31,842 | 20,380 | |||||||||
Prepaid
expenses and other current assets
|
9,317 | 306 | 2,264 | |||||||||
Accounts
payable and accrued expenses
|
(14,313 | ) | (59,145 | ) | 30,944 | |||||||
Income
taxes
|
8,514 | (1,255 | ) | 1,169 | ||||||||
Increase
(decrease) in other liabilities
|
(7,415 | ) | (2,643 | ) | 835 | |||||||
Net
cash flows from (to) operating activities
|
193,205 | 174,369 | 291,187 | |||||||||
Net
Cash Flows From (To) Investing Activities:
|
||||||||||||
Capital
expenditures
|
(16,017 | ) | (70,083 | ) | (58,568 | ) | ||||||
Proceeds
from sale of property, plant and equipment
|
6,733 | 6,191 | 12,145 | |||||||||
Capitalized
software
|
(1,537 | ) | (1,413 | ) | (346 | ) | ||||||
Acquisition
spending, net of cash acquired
|
(500 | ) | (75,479 | ) | (41,696 | ) | ||||||
Short-term
investments – net
|
- | (250 | ) | - | ||||||||
Purchase
of long-term investments
|
(9,710 | ) | (10,650 | ) | (24,427 | ) | ||||||
Sales
or maturities of long-term investments
|
33,872 | 20,158 | 20,576 | |||||||||
Other
– net
|
440 | - | 294 | |||||||||
Net
cash flows from (to) investing activities
|
13,281 | (131,526 | ) | (92,022 | ) | |||||||
Net
Cash Flows From (To) Financing Activities:
|
||||||||||||
Purchase
of HNI Corporation common stock
|
- | (28,553 | ) | (147,675 | ) | |||||||
Proceeds
from long-term debt
|
97,000 | 359,500 | 289,503 | |||||||||
Payments
of note and long-term debt and other financing
|
(219,884 | ) | (334,200 | ) | (309,297 | ) | ||||||
Proceeds
from sale of HNI Corporation common stock
|
2,893 | 4,151 | 9,708 | |||||||||
Excess
tax benefits from stock compensation
|
8 | 11 | 808 | |||||||||
Dividends
paid
|
(38,667 | ) | (38,095 | ) | (36,408 | ) | ||||||
Net
cash flows from (to) financing activities
|
(158,650 | ) | (37,186 | ) | (193,361 | ) | ||||||
Net
increase (decrease) in cash and cash equivalents
|
47,836 | 5,657 | 5,804 | |||||||||
Cash
and cash equivalents at beginning of year
|
39,538 | 33,881 | 28,077 | |||||||||
Cash
and cash equivalents at end of year
|
$ | 87,374 | $ | 39,538 | $ | 33,881 | ||||||
Supplemental
Disclosures of Cash Flow Information:
|
||||||||||||
Cash
paid during the year for:
|
||||||||||||
Interest
|
$ | 12,316 | $ | 17,160 | $ | 18,213 | ||||||
Income
taxes
|
$ | (4,528 | ) | $ | 22,852 | $ | 57,128 |
The
accompanying notes are an integral part of the consolidated financial
statements.
HNI
CORPORATION and subsidiaries
Notes
to Consolidated Financial Statements
Nature
of Operations
HNI
Corporation with its subsidiaries (the “Corporation”), is a provider of office
furniture and hearth products. Both industries are reportable
segments; however, the Corporation’s office furniture business is its principal
line of business. Refer to Operating Segment Information for further
information. Office furniture products are sold through a national
system of dealers, wholesalers, retail superstores, and directly to end-user
customers, and federal and state governments. Dealers and wholesalers are the
major channels based on sales. Hearth products include a full array
of gas, electric, and wood burning fireplaces, inserts, stoves, facings, and
accessories. These products are sold through a national system of
dealers and distributors, as well as Corporation-owned distribution and retail
outlets. The Corporation’s products are marketed predominantly in the
United States and Canada. The Corporation exports select products to
a limited number of markets outside North America, principally Latin America and
the Caribbean, through its export subsidiary and manufactures and markets office
furniture in Asia; however, based on sales, these activities are not
significant.
Summary
of Significant Accounting Policies
Principles
of Consolidation and Fiscal Year-End
The
consolidated financial statements include the accounts and transactions of the
Corporation and its subsidiaries. Intercompany accounts and
transactions have been eliminated in consolidation.
The
Corporation follows a 52/53 week fiscal year which ends on the Saturday nearest
December 31. Fiscal year 2009 ended on January 2, 2010, 2008 ended on January 3,
2009; and 2007 ended on December 29, 2007. The financial statements
for fiscal year 2009 are on a 52-week basis; fiscal 2008 are on a 53-week basis;
and fiscal 2007 52-week basis. A 53-week year occurs approximately
every sixth year.
Cash,
Cash Equivalents and Investments
Cash and
cash equivalents generally consist of cash and money market
accounts. These securities have original maturity dates not exceeding
three months from date of purchase. The Corporation has short-term
investments with maturities of less than one year and also has investments with
maturities greater than one year that are included in Other Assets on the
Consolidated Balance Sheet. Management classifies investments in
marketable securities at the time of purchase and reevaluates such
classification at each balance sheet date. Equity securities are
classified as available-for-sale and are stated at current market value with
unrealized gains and losses included as a separate component of equity, net of
any related tax effect. The Corporation recognized $1.5 million of
other than temporary impairments on these investments during 2008 due to the
length of time and extent of which the market value was below cost and current
financial conditions. These investments were sold in 2009 resulting
in a loss of $0.2 million. Debt securities are normally classified as
held-to-maturity and are stated at amortized cost. Certain debt
securities were reclassified to trading securities at the end of 2008 due to the
Corporation’s intentions to sell. A loss of $41,000 was recognized on
these securities. These debt securities were sold in 2009 resulting
in a gain of $59,000. The specific identification method is used to
determine realized gains and losses on the trade date. The
Corporation has invested in an investment fund in which the Corporation’s
ownership in this investment fund is such that the underlying investments are
recorded at fair market value through the income statement.
At
January 2, 2010, January 3, 2009, and December 29, 2007, cash, cash equivalents
and investments consisted of the following:
Year-End 2009
(In
thousands)
|
Cash
and cash equivalents
|
Short-term
investments
|
Long-term
investments
|
|||||||||
Held-to-maturity
securities
|
||||||||||||
Certificates
of deposit
|
$ | - | $ | 250 | $ | - | ||||||
Investment
in target fund
|
- | 5,744 | - | |||||||||
Cash
and money market accounts
|
87,374 | - | - | |||||||||
Total
|
$ | 87,374 | $ | 5,994 | $ | - |
Year-End 2008
(In
thousands)
|
Cash
and cash equivalents
|
Short-term
investments
|
Long-term
investments
|
|||||||||
Trading
securities
|
||||||||||||
Debt
securities
|
$ | - | $ | - | $ | 1,541 | ||||||
Held-to-maturity
securities
|
||||||||||||
Certificates
of deposit
|
- | - | 250 | |||||||||
Debt
securities
|
- | - | 181 | |||||||||
Available
for sale securities
|
||||||||||||
Equity
securities
|
- | - | 1,974 | |||||||||
Investment
in target fund
|
- | 9,750 | 15,297 | |||||||||
Cash
and money market accounts
|
39,538 | |||||||||||
Total
|
$ | 39,538 | $ | 9,750 | $ | 19,243 |
Year-End 2007
(In
thousands)
|
Cash
and cash equivalents
|
Short-term
investments
|
Long-term
investments
|
|||||||||
Held-to-maturity
securities
|
|
|||||||||||
Debt
securities
|
$ | - | $ | - | $ | 1,858 | ||||||
Available
for sale securities
|
||||||||||||
Equity
securities
|
- | - | 3,138 | |||||||||
Investment
in target fund
|
- | 9,900 | 25,705 | |||||||||
Cash
and money market accounts
|
33,881 | - | - | |||||||||
Total
|
$ | 33,881 | $ | 9,900 | $ | 30,701 |
Receivables
Accounts
receivable are presented net of an allowance for doubtful accounts of $6.4
million, $8.8 million, and $11.5 million, for 2009, 2008, and 2007,
respectively. The allowance is developed based on several factors
including overall customer credit quality, historical write-off experience, and
specific account analyses that project the ultimate collectibility of the
account. As such, these factors may change over time causing the
reserve level to adjust accordingly.
Inventories
The
Corporation valued 82%, 83%, and 87% of its inventory by the last-in, first-out
(“LIFO”) method at January 2, 2010, January 3, 2009, and December 29, 2007,
respectively. During 2009 and 2008, inventory quantities were
reduced. This reduction resulted in a liquidation of LIFO inventory
quantities carried at lower costs prevailing in prior years as compared with the
cost of current year purchases, the effect of which decreased cost of goods sold
by approximately $2.4 million and $3.7 million in 2009 and 2008,
respectively. Additionally, the Corporation evaluates its inventory
reserves in terms of excess and obsolete exposures. This evaluation
includes such factors as anticipated usage, inventory turnover, inventory
levels, and ultimate product sales value. As such, these factors may
change over time causing the reserve level to adjust accordingly. The
reserves for excess and obsolete inventory were $8.2 million, $7.8 million, and
$9.1 million, at year-end 2009, 2008, and 2007, respectively.
Property,
Plant and Equipment
Property,
plant and equipment are carried at cost. Depreciation has been
computed using the straight-line method over estimated useful
lives: land improvements, 10 – 20 years; buildings, 10 – 40 years;
and machinery and equipment, 3 – 12 years.
Long-Lived
Assets
Long-lived
assets are reviewed for impairment as events or changes in circumstances occur
indicating the amount of the asset reflected in the Corporation’s balance sheet
may not be recoverable. An estimate of undiscounted cash flows
produced by the asset, or the appropriate group of assets, is compared to the
carrying value to determine whether impairment exists. The estimates
of future cash flows involve considerable management judgment and are based upon
assumptions about expected future operating performance. The actual
cash flows could differ from management’s estimates due to changes in business
conditions, operating performance and economic conditions. Asset
impairment charges recorded in connection with the Corporation’s restructuring
activities are discussed in Restructuring Related Charges. These
assets included real estate, manufacturing equipment and certain other fixed
assets. The Corporation’s continuous focus on improving the
manufacturing process tends to increase the likelihood of assets being replaced;
therefore, the Corporation is regularly evaluating the expected lives of its
equipment and accelerating depreciation where appropriate.
Goodwill
and Other Intangible Assets
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. Determining the fair value of a reporting unit involves the
use of significant estimates and assumptions. Management bases its
fair value estimates on assumptions it believes to be reasonable at the time,
but such assumptions are subject to inherent uncertainty. Actual
results may differ from those estimates.
The
Corporation also determines the fair value of indefinite-lived trade names on an
annual basis or whenever indications of impairment exist. The
Corporation estimates the fair value of the trade names based on a discounted
cash flow model using inputs which include projected revenues from management’s
long term plan, assumed royalty rates that could be payable if the trade names
were not owned and a discount rate. Determining the fair value of a
trade name involves the use of significant estimates and
assumptions. Actual results may differ from those
estimates.
The
Corporation has definite-lived intangibles that are amortized over their
estimated useful lives. Impairment losses are recognized if the
carrying amount of an intangible, subject to amortization, is not recoverable
from expected future cash flows and its carrying amount exceeds its fair
value. Intangibles, net of amortization, of approximately $67 million
are included on the consolidated balance sheet as of the end of fiscal
2009.
See
Goodwill and Other Intangible Assets footnote for further
information.
Product
Warranties
The
Corporation issues certain warranty policies on its furniture and hearth
products that provides for repair or replacement of any covered product or
component that fails during normal use because of a defect in design, materials
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:
(In
thousands)
|
2009
|
2008
|
2007
|
|||||||||
Balance
at the beginning of the period
|
$ | 13,948 | $ | 12,123 | $ | 10,624 | ||||||
Accrual
assumed from acquisition
|
- | 250 | 703 | |||||||||
Accruals
for warranties issued during the period
|
13,111 | 20,008 | 14,831 | |||||||||
Accrual
related to pre-existing warranties
|
(357 | ) | 1,368 | 600 | ||||||||
Settlements
made during the period
|
(14,018 | ) | (19,801 | ) | (14,635 | ) | ||||||
Balance
at the end of the period
|
$ | 12,684 | $ | 13,948 | $ | 12,123 |
Revenue
Recognition
Revenue
is normally recognized upon shipment of goods to customers. In
certain circumstances revenue is not recognized until the goods are received by
the customer or upon installation and customer acceptance based on the terms of
the sales agreement. Revenue includes freight charged to customers;
the related costs are recorded in selling and administrative
expense. Rebates, discounts and other marketing program expenses that
are directly related to the sale are recorded as a reduction to net
sales. Marketing program accruals require the use of management
estimates and the consideration of contractual arrangements that are subject to
interpretation. Customer sales that achieve or do not achieve certain
award levels can affect the amount of such estimates and actual results could
differ from these estimates.
Product
Development Costs
Product
development costs relating to the development of new products and processes,
including significant improvements and refinements to existing products, are
expensed as incurred. These costs include salaries, contractor fees,
building costs, utilities and administrative fees. The amounts
charged against income were $21.1 million in 2009, $27.8 million in 2008, and
$24.0 million in 2007 and were recorded in Selling and Administrative Expenses
on the Consolidated Statements of Income.
Freight
Expense
The
Corporation records freight expense to customers in Selling and Administrative
Expenses on the Consolidated Statements of Income. The amounts
recorded were $97.1 million in 2009, $169.2 million in 2008 and $164.1 million
in 2007.
Stock-Based
Compensation
The
Corporation measures the cost of employee services in exchange for an award of
equity instruments based on the grant-date fair value of the award and
recognizes cost over the requisite service period. See the
Stock-Based Compensation footnote for further information.
Income
Taxes
The
Corporation uses an asset and liability approach that requires the recognition
of deferred tax assets and liabilities for the expected future tax consequences
of events that have been recognized in the Corporation’s financial statements or
tax returns. Deferred income taxes are provided to reflect the
differences between the tax bases of assets and liabilities and their reported
amounts in the financial statements. The Corporation provides for
taxes that may be payable if undistributed earnings of overseas subsidiaries
were to be remitted to the United States, except for those earnings it considers
to be permanently reinvested. There were approximately $12.4 million
of accumulated earnings considered to be permanently reinvested as of January 2,
2010. See the Income Tax footnote for further
information.
Earnings
Per Share
Basic
earnings per share are based on the weighted-average number of common shares
outstanding during the year. Shares potentially issuable under
options and deferred restricted stock have been considered outstanding for
purposes of the diluted earnings per share calculation.
The
following table reconciles the numerators and denominators used in the
calculation of basic and diluted earnings per share (EPS):
(In
thousands, except per share data)
|
2009
|
2008
|
2007
|
Numerators:
|
|||
Numerators
for both basic and diluted EPS net income (loss) attributable to parent
company
|
$
(6,442)
|
$
45,450
|
$120,378
|
Denominators:
|
|||
Denominator
for basic EPS weighted- average common shares outstanding
|
44,889
|
44,310
|
46,685
|
Potentially
dilutive shares from stock option plans
|
-
|
124
|
240
|
Denominator
for diluted EPS
|
44,889
|
44,434
|
46,925
|
Earnings
per share – basic
|
$(0.14)
|
$1.03
|
$2.58
|
Earnings
per share – diluted
|
$(0.14)
|
$1.02
|
$2.57
|
None of
the outstanding stock options or restricted stock units was included in the
computation of diluted EPS at January 2, 2010, as all would be anti-dilutive due
to the current period loss.
Certain
exercisable and non-exercisable stock options were not included in the
computation of diluted EPS for fiscal years 2008 and 2007, because their
inclusion would have been anti-dilutive. The number of stock options
outstanding, which met this criterion for 2008 was 1,350,886; and for 2007 was
412,916.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. The more significant areas requiring the use of
management estimates relate to allowance for doubtful accounts, inventory
reserves, marketing program accruals, warranty accruals, accruals for
self-insured medical claims, workers’ compensation, legal contingencies, general
liability and auto insurance claims, valuation of long-lived assets, and useful
lives for depreciation and amortization. Actual results could differ
from those estimates.
Self-Insurance
The
Corporation is partially self-insured for general, auto and product liability,
workers’ compensation, and certain employee health benefits. The
general, auto, product and workers’ compensation liabilities are managed using a
wholly owned insurance captive; the related liabilities are included in the
accompanying consolidated financial statements. As of January 2,
2010, these liabilities totaled $27 million. The Corporation’s policy
is to accrue amounts in accordance with the actuarially determined
liabilities. The actuarial valuations are based on historical
information along with certain assumptions about future
events. Changes in assumptions for such matters as legal actions,
medical cost inflation and magnitude of change in actual experience development
could cause these estimates to change in the future.
Foreign
Currency Translations
Foreign
currency financial statements of foreign operations where the local currency is
the functional currency are translated using exchange rates in effect at period
end for assets and liabilities and average exchange rates during the period for
results of operations. Related translation adjustments are reported
as a component of Shareholders’ Equity. Gains and losses on foreign
currency transactions are included in the “Selling and administrative expenses”
caption of the Consolidated Statements of Income.
Reclassifications
Prior
periods Statements of Income, Balance Sheets, Statements of Shareholders’ Equity
and Statements of Cash Flows have been restated in accordance with the new
guidance on noncontrolling interest classification
requirements. Certain reclassifications have been made within the
footnotes to conform to the current year presentation.
Recent
Accounting Pronouncements
In
September 2006, 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, 2007, the
beginning of its 2008 fiscal year and with regard to its nonfinancial assets and
liabilities on January 4, 2009, the beginning of its 2009 fiscal
year. The adoption did not have a material impact on its financial
statements.
In
February, 2007, the FASB issued guidance 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. The
objective was 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 Corporation adopted the guidance December
30, 2007, the beginning of fiscal 2008. As the Corporation did not
elect to fair value any additional assets or liabilities it did not have a
material impact on its financial statements.
In
December 2007, the FASB issued new guidance which requires a noncontrolling
interest in a subsidiary to 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 January 4, 2009, the beginning of fiscal 2009. As a result
of the adoption, the Corporation has reported noncontrolling interests as a
component of equity in its Consolidated Balance Sheets and the net income or
loss attributable to noncontrolling interests has been separately identified in
its 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.
In June
2009, the FASB issued guidance that identifies the sources of accounting
principles and the framework for selecting principles used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with US GAAP (the GAAP hierarchy). The Corporation adopted
the new guidance beginning October 3, 2009. This guidance had no
impact on the Corporation’s financial statements.
Restructuring
Related and Impairment Charges
During
2009, the Corporation made the decision to close three office furniture
facilities in South Gate, California; Louisburg, North Carolina and Owensboro,
Kentucky and consolidate production into existing office furniture manufacturing
facilities. In connection with the closure of these facilities, the
Corporation recorded $12.6 million of pre-tax charges which included $2.7
million of accelerated depreciation of machinery and equipment recorded in cost
of sales, and $9.9 million of severance and facility exit costs which were
recorded as restructuring costs in 2009. The Corporation expects to
incur additional restructuring and transition costs in 2010 of approximately $3
to $4 million in connection with these closures.
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’s hearth product segment disposed and consolidated several retail
and distribution locations during 2009. In connection with these
activities, the Corporation recorded $6.7 million of pre-tax charges which
included $1.2 million of accelerated depreciation of machinery and equipment
recorded in cost of sales, and $5.5 million of severance and facility exit costs
which were recorded as restructuring costs in 2009. These included
accelerated depreciation of $1.4 million and write-off of goodwill of $0.6
million, which were non-cash transactions.
During
2008, the Corporation completed the shutdown of an office furniture facility in
Richmond, Virginia, consolidated production into other manufacturing locations,
closed two distribution centers and started up a new distribution center that
began in third quarter 2007. In connection with these activities the
Corporation recorded $4.4 million of pre-tax charges which included $0.6 million
of accelerated deprecation of machinery and equipment recorded in cost of sales
and $3.8 million of severance which were recorded as restructuring costs in
2007. The Corporation incurred $4.2 million of current period charges
during 2008 which included $0.4 million of accelerated depreciation of machinery
and equipment recorded in cost of sales and $3.8 million of other costs which
were recorded as restructuring costs.
The
Corporation’s hearth product segment consolidated some of its service and
distribution locations during 2007. In connection with those
consolidations, the Corporation recorded $1.1 million of severance and facility
exit costs which were recorded as restructuring costs in 2007. The
Corporation incurred $0.3 million of current period charges during 2008 which
were recorded as restructuring costs.
During
2007, the Corporation completed the shutdown of an office furniture facility,
which began in the fourth quarter of 2006. The facility was located
in Monterrey, Mexico and production from this facility was consolidated into
other locations. In connection with this shutdown, the Corporation
recorded $0.8 million of severance costs in 2006. The Corporation
incurred $2.1 million of current period charges during 2007.
The
following table summarizes the restructuring accrual activity since the
beginning of fiscal 2007.
(In
thousands)
|
Severance
Costs
|
Facility
Termination
&
Other
Costs
|
Total
|
|||||||||
Restructuring
reserve at December 30, 2006
|
$ | 841 | $ | - | $ | 841 | ||||||
Restructuring
charges
|
3,539 | 3,523 | 7,062 | |||||||||
Cash
payments
|
(522 | ) | (2,533 | ) | (3,055 | ) | ||||||
Restructuring
reserve at December 29, 2007
|
$ | 3,858 | $ | 990 | $ | 4,848 | ||||||
Restructuring
charges
|
(135 | ) | 4,197 | 4,062 | ||||||||
Cash
payments
|
(3,568 | ) | (4,963 | ) | (8,531 | ) | ||||||
Restructuring
reserve at January 3, 2009
|
$ | 155 | $ | 224 | $ | 379 | ||||||
Restructuring
charges
|
8,168 | 5,166 | 13,334 | |||||||||
Cash
Payments
|
(3,934 | ) | (3,821 | ) | (7,755 | ) | ||||||
Restructuring
reserve At January 2, 2010
|
$ | 4,389 | $ | 1,569 | $ | 5,958 |
The
Corporation recorded $25.0 million and $21.8 million of goodwill and trade name
impairment charges in 2009 and 2008, respectively, included in the
“Restructuring Related and Impairment Charges” line item on the Consolidated
Statements of Income, as a result of its annual impairment
testing. See Goodwill and Other Intangible Assets footnote for more
information.
The
Corporation made the decision in 2007 to sell several small non-core components
of its office furniture services business and recorded $2.7 million of
impairment charges, included in the “Restructuring Related and Impairment
Charges” line item on the Consolidated Statements of Income, to reduce the
assets being held for sale to fair market value.
Business
Combinations
The
Corporation completed the acquisition of 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 finalized the allocation of the purchase price during the fourth
quarter of 2008. There were approximately $32.7 million of intangible
assets other than goodwill associated with this acquisition. Of these
acquired intangible assets, $19.8 million was assigned to a trade name that is
not subject to amortization. The remaining $12.9 million have
estimated useful lives ranging from four to twenty years with amortization
recorded based on the projected cash flow associated with the respective
intangible assets’ existing relationship. There was approximately
$33.0 million of goodwill associated with this acquisition assigned to the
office furniture segment. The goodwill is deductible for income tax
purposes.
The
Corporation completed the acquisition of Harman, a privately held domestic
manufacturer of free-standing stoves and fireplace inserts, as well as two small
office furniture dealers during 2007. The combined purchase price of
these acquisitions less cash acquired totaled $40.9 million. The
Corporation finalized the allocation of the purchase price for the Harman Stove
Company acquisition in 2008. A reclassification of $4.2 million
between goodwill and other intangible assets occurred in 2008 based on the final
valuation report for the Harman Stove Company acquisition. There are
approximately $5.7 million of intangibles associated with these
acquisitions. Of these acquired intangibles, $2.5 million was
assigned to trade names that are not subject to amortization. The
remaining $3.2 million have estimated useful lives ranging from one to fifteen
years with amortization recorded based on the projected cash flow associated
with the respective intangible assets’ existing relationships. There
is approximately $4.4 million of goodwill associated with these acquisitions of
which $3.6 million was assigned to the office furniture segment and $0.8 million
was assigned to the hearth products segment. All goodwill is
deductible for income tax purposes.
The
results of the acquired entities have been included in the Consolidated
Financial Statements since the date of acquisition.
Discontinued
Operations
During
December 2006, the Corporation committed to a plan to sell a small non-core
component of its office furniture segment. The sale was completed
during the second quarter of 2007. Revenues and expenses associated
with this component are presented as discontinued operations for all periods
presented. During the fourth quarter 2006 the Corporation recorded a
pre-tax charge of approximately $7.1 million to reduce the assets to the fair
market value. The charge was mainly due to the writedown of goodwill
and other intangibles not deductible for tax purposes.
Summarized
financial information for discontinued operations is as follows:
(in
thousands)
|
2009
|
2008
|
2007
|
|||||||||
Discontinued
Operations:
|
||||||||||||
Operating
income (loss) before tax
|
$ | - | $ | - | $ | 796 | ||||||
Income
tax
|
- | - | 282 | |||||||||
Net
income (loss) from discontinued operations
|
- | - | 514 | |||||||||
Impairment
Loss on Discontinued Operations:
|
||||||||||||
Impairment
loss on discontinued operations before tax
|
- | - | - | |||||||||
Benefit
for income tax
|
- | - | - | |||||||||
Net
impairment loss on discontinued operations
|
- | - | - | |||||||||
Discontinued
operations, net of income tax
|
$ | - | $ | - | $ | 514 |
Inventories
|
||||||||||||
(In
thousands)
|
2009
|
2008
|
2007
|
|||||||||
Finished
products
|
$ | 48,198 | $ | 51,807 | $ | 76,804 | ||||||
Materials
and work in process
|
40,322 | 60,155 | 52,641 | |||||||||
LIFO
reserve
|
(23,376 | ) | (27,672 | ) | (20,904 | ) | ||||||
$ | 65,144 | $ | 84,290 | $ | 108,541 | |||||||
Property,
Plant, and Equipment
|
||||||||||||
(In
thousands)
|
2009 | 2008 | 2007 | |||||||||
Land
and land improvements
|
$ | 21,815 | $ | 23,753 | $ | 23,805 | ||||||
Buildings
|
267,596 | 277,898 | 268,650 | |||||||||
Machinery
and equipment
|
490,287 | 525,996 | 501,950 | |||||||||
Construction
and equipment installation in progress
|
8,377 | 21,738 | 25,858 | |||||||||
788,075 | 849,385 | 820,263 | ||||||||||
Less: accumulated
depreciation
|
527,973 | 533,779 | 514,832 | |||||||||
$ | 260,102 | $ | 315,606 | $ | 305,431 |
Goodwill
and Other Intangible Assets
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
analysis. The Corporation has eleven reporting units within its
office furniture and hearth products operating segments, of which seven
contained goodwill during the fourth quarter analysis. These
reporting units constitute components for which discrete financial information
is available and regularly reviewed by segment
management. Determining the fair value of a reporting unit involves
the use of significant estimates and assumptions. The estimate of
fair value of each reporting unit is based on management’s projection of
revenues, gross margin, operating costs and cash flows considering historical
and estimated future results, general economic and market conditions as well as
the impact of planned business and operational strategies. The
valuations employ present value techniques to measure fair value and consider
market factors. Management believes the assumptions used for the
impairment test are consistent with those utilized by a market participant in
performing similar valuations of its reporting units. A separate
discount rate was utilized for each reporting unit with rates ranging from 11.0%
to 12.0%. Management bases its fair value estimates on assumptions
they believe to be reasonable at the time, but such assumptions are subject to
inherent uncertainty. Actual results may differ from those
estimates. In addition, for reasonableness, the summation of all the
reporting units’ fair values is compared to the Corporation’s market
capitalization.
If the
fair value of the reporting unit is less than its carrying value, an additional
step is required to determine the implied fair value of goodwill associated with
that reporting unit. The implied fair value of goodwill is determined
by first allocating the fair value of the reporting unit to all of its assets
and liabilities and then computing the excess of the reporting unit’s fair value
over the amounts assigned to the assets and liabilities. If the
carrying value of goodwill exceeds the implied fair value of goodwill, such
excess represents the amount of goodwill impairment, and, accordingly such
impairment is recognized.
As a
result of the review performed in the fourth quarter of 2009, the Corporation
determined the carrying amount of a reporting unit acquired in the previous year
in the office furniture segment exceeded its fair value. Management
then compared the carrying value of goodwill to the implied fair value of the
goodwill of this reporting unit, and concluded that $7 million of impairment
charges needed to be recognized. Goodwill of $24 million remains on
the balance sheet of this reporting unit as of January 2, 2010. The
Corporation recorded $17 million of impairment charges in 2008. The
reporting units impacted included an office furniture services unit, dealer
distribution unit, and a recent acquisition with goodwill charges of
approximately $10 million, $5 million and $2 million, respectively.
The
changes to fair value in the reporting unit that triggered impairment charges in
the fourth quarter were primarily attributable to the continued deterioration in
market conditions which became apparent in the fourth quarter as management
completed its annual strategic planning process and caused management to change
its estimates of the timing of market recovery. The Corporation
factored these current market conditions and estimates into its projected
forecasts of sales, operating income and cash flows of each reporting unit
through the course of its strategic planning process completed in the fourth
quarter.
The
significant estimates and assumptions used in estimating future cash flows of
its reporting units are based on management’s view of longer-term broad market
trends. Management combines this trend data with estimates of current
economic conditions in the U.S., competitor behavior, the mix of products sales,
commodity costs, wage rates, the level of manufacturing capacity, and the
pricing environment. In addition, estimates of fair value are
impacted by estimates of the market participant derived weighted average cost of
capital. The Corporation’s cash flow projections in most of its
reporting units assumed virtually flat revenue and cash flows in 2010 and that
significant recovery would not begin until 2011. As a reasonableness
test, management also compared the market capitalization of the Corporation at
January 2, 2010 to the aggregate fair value of the reporting units, resulting in
an implied control premium of approximately 25
percent. Management believes this implied control premium is
reasonable, in light of the synergies across its operating units, lean
manufacturing environment and strong position in the markets it
serves.
The
Corporation also owns trade names having a net value of $42.1 million as of
January 2, 2010, $60.6 million as of January 3, 2009, and $43.5 million as of
December 29, 2007. The trade names are deemed to have an indefinite
useful life because they are expected to generate cash flow
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 performed its fiscal
2009 assessment of indefinite lived trade names during the fourth
quarter. The estimate of the fair value of the trade names was based
on a discounted cash flow model using inputs which
included: projected revenues from management’s long term plan,
assumed royalty rates that could be payable if the trade names were not owned
and a discount rate. As a result of the review the Corporation
determined the carrying value of certain trade names acquired over the past few
years in the office furniture segment exceeded their fair value and recorded a
$18 million impairment charge. The Corporation recorded a $5 million
impairment charge for certain office furniture trade names in 2008.
The table
below summarizes amortizable definite-lived intangible assets, which are
reflected in Other Assets in the Corporation’s Consolidated Balance
Sheets:
(In
thousands)
|
2009
|
2008
|
2007
|
|||||||||
Patents
|
$ | 19,325 | $ | 19,325 | $ | 18,780 | ||||||
Customer
lists and other
|
115,451 | 115,664 | 101,320 | |||||||||
Less: accumulated
amortization
|
68,004 | 56,098 | 45,833 | |||||||||
Net
intangible assets
|
$ | 66,772 | $ | 78,891 | $ | 74,267 |
Amortization
expense for definite-lived intangibles for 2009, 2008, and 2007, was $12.1
million, $10.3 million, and $9.2 million, respectively and was recorded in
Selling and Administrative Expenses on the Consolidated Statements of
Income. 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)
|
2010
|
2011
|
2012
|
2013
|
2014
|
|||||||||||||||
Amortization
expense
|
$ | 9.0 | $ | 6.8 | $ | 5.9 | $ | 5.4 | $ | 4.8 |
The
occurrence of events such as acquisitions, dispositions, or impairments in the
future may result in changes to amounts.
The
changes in the carrying amount of goodwill since December 30, 2006, are as
follows by reporting segment:
(In
thousands)
|
Office
Furniture
|
Hearth
Products
|
Total
|
|||||||||
Balance
as of December 30, 2006
|
||||||||||||
Goodwill
|
$ | 90,469 | $ | 166,946 | $ | 257,415 | ||||||
Accumulated
impairment losses
|
(5,654 | ) | - | (5,654 | ) | |||||||
84,815 | 166,946 | 251,761 | ||||||||||
Goodwill
acquired during the year
|
3,510 | 5,003 | 8,513 | |||||||||
Impairment
losses
|
- | - | - | |||||||||
Goodwill
related to the sale of business units
|
(710 | ) | (389 | ) | (1,099 | ) | ||||||
Final
purchase price allocations/contingent payments from prior year
acquisitions
|
(2,341 | ) | - | (2,341 | ) | |||||||
Balance
as of December 29, 2007
|
||||||||||||
Goodwill
|
90,928 | 171,560 | 262,488 | |||||||||
Accumulated
impairment losses
|
(5,654 | ) | - | (5,654 | ) | |||||||
85,274 | 171,560 | 256,834 | ||||||||||
Goodwill
acquired during the year
|
33,020 | - | 33,020 | |||||||||
Impairment
losses
|
(16,955 | ) | - | (16,955 | ) | |||||||
Goodwill
related to the sale of business units
|
(355 | ) | (355 | ) | ||||||||
Final
purchase price allocations/contingent payments from prior year
acquisitions
|
(4,152 | ) | (4,152 | ) | ||||||||
Balance
as of January 3, 2009
|
||||||||||||
Goodwill
|
123,948 | 167,053 | 291,001 | |||||||||
Accumulated
impairment losses
|
(22,609 | ) | - | (22,609 | ) | |||||||
101,339 | 167,053 | 268,392 | ||||||||||
Goodwill
acquired during the year
|
- | - | - | |||||||||
Impairment
losses
|
(6,750 | ) | - | (6,750 | ) | |||||||
Goodwill
related to the sale of business units
|
- | (1,028 | ) | (1,028 | ) | |||||||
Final
purchase price allocations/contingent payments from prior year
acquisitions
|
- | 500 | 500 | |||||||||
Balance
as of January 2, 2010
|
||||||||||||
Goodwill
|
123,948 | 166,525 | 290,473 | |||||||||
Accumulated
impairment losses
|
(29,359 | ) | - | (29,359 | ) | |||||||
$ | 94,589 | $ | 166,525 | $ | 261,114 |
The
goodwill increases relate to acquisitions completed. See the Business
Combinations note. The decreases in goodwill in the office furniture
segment in 2009 and 2008 were due to the impairment charges described
above. The decrease in goodwill in the office furniture segment in
2007 is due to goodwill associated with office services business units held for
sale and final purchase price allocations for previous
acquisitions. The decreases in the hearth products segment relates to
the sale of a few small service and distribution locations and final purchase
price allocations for previous acquisitions.
Accounts
Payable and Accrued Expenses
|
||||||||||||
(In
thousands)
|
2009
|
2008
|
2007
|
|||||||||
Trade
accounts payable
|
$ | 114,448 | $ | 96,820 | $ | 133,293 | ||||||
Compensation
|
24,978 | 27,764 | 30,544 | |||||||||
Profit
sharing and retirement expense
|
19,668 | 26,905 | 30,441 | |||||||||
Marketing
expenses
|
26,391 | 51,786 | 61,568 | |||||||||
Freight
|
15,972 | 11,586 | 13,980 | |||||||||
Other
accrued expenses
|
98,261 | 98,570 | 97,494 | |||||||||
$ | 299,718 | $ | 313,431 | $ | 367,320 |
Long-Term
Debt
|
||||||||||||
(In
thousands)
|
2009
|
2008
|
2007
|
|||||||||
Note
payable to bank, revolving credit agreement with interest at a variable
rate (2009-0.54%;
2008-0.79%; 2007-5.46%)
|
$ | 50,000 | $ | 107,500 | $ | 128,000 | ||||||
Note
payable to bank, with interest at a fixed rate (2008-3.08%;
2007-5.03%)
|
- | 14,294 | 14,205 | |||||||||
Senior
notes due in 2016 with interest at a fixed rate of 5.54% per
annum.
|
150,000 | 150,000 | 150,000 | |||||||||
Note
payable to bank, with interest at a variable rate
(2008-2.36%)
|
- | 47,500 | - | |||||||||
Industrial
development revenue bonds, payable 2018 with interest at a variable rate
(2008-1.40%; 2007-3.55%)
|
- | 2,300 | 2,300 | |||||||||
Other
notes and amounts
|
- | - | 63 | |||||||||
Total
debt
|
200,000 | 321,594 | 294,568 | |||||||||
Less: current
portion
|
- | 54,294 | 14,253 | |||||||||
Long-term
debt
|
$ | 200,000 | $ | 267,300 | $ | 280,315 |
Aggregate
maturities of long-term debt are as follows:
|
||||
(In
thousands)
|
||||
2010
|
$ | - | ||
2011
|
50,000 | |||
2012
|
- | |||
2013
|
- | |||
2014
|
- | |||
Thereafter
|
$ | 150,000 |
On
January 28, 2005, the Corporation replaced a $136 million revolving credit
facility entered into on May 10, 2002 with a new revolving credit facility that
provided for a maximum borrowing of $150 million subject to increase (to a
maximum amount of $300 million) or reduction from time to time according to the
terms of the facility. On December 22, 2005, the Corporation
increased the facility to the maximum amount of $300 million. Amounts
borrowed under the revolving credit facility may be borrowed, repaid, and
reborrowed from time to time until January 28, 2011. As of January 2,
2010, $50 million was outstanding under the revolving credit facility and
classified as long-term.
On April
6, 2006, the Corporation refinanced $150 million of borrowings outstanding under
the revolving credit facility with 5.54 percent ten-year unsecured Senior Notes
due in 2016 issued through the private placement debt
market. Interest payments are due semi-annually on April 1 and
October 1 of each year and the principal is due in a lump sum in
2016. The Corporation maintained the revolving credit facility with a
maximum borrowing of $300 million.
On June
30, 2008, the Corporation entered into a Credit Agreement which allowed for a
one-time borrowing of $50 million in the form of a term loan. The
Corporation paid off the term loan during 2009.
Certain
of the above borrowing arrangements include covenants which limit the assumption
of additional debt and lease obligations. The Corporation has been
and currently is in compliance with the covenants related to these debt
agreements. The fair value of the Corporation’s outstanding variable
rate long-term debt obligations at year-end 2009 approximates the carrying
value. The fair value of the Corporation’s outstanding fixed rate
long-term debt obligations is estimated to be $151 million, slightly above the
carrying value of $150 million.
Income
Taxes
Significant
components of the provision for income taxes including those related to
noncontrolling interest and discontinued operations are as follows:
(In
thousands)
|
2009
|
2008
|
2007
|
|||||||||
Current:
|
||||||||||||
Federal
|
$ | 5,400 | $ | 18,165 | $ | 53,965 | ||||||
State
|
(278 | ) | 2,402 | 6,588 | ||||||||
Foreign
|
780 | 482 | 811 | |||||||||
Current
provision
|
5,902 | 21,049 | 61,364 | |||||||||
Deferred:
|
||||||||||||
Federal
|
(5,065 | ) | 3,265 | (3,031 | ) | |||||||
State
|
(2,673 | ) | 222 | (353 | ) | |||||||
Foreign
|
422 | (954 | ) | (418 | ) | |||||||
Deferred
provision
|
(7,316 | ) | 2,533 | (3,802 | ) | |||||||
$ | (1,414 | ) | $ | 23,582 | $ | 57,562 |
The
differences between the actual tax expense (benefit) and tax expense (benefit)
computed at the statutory U.S. Federal tax rate are explained as
follows:
2009
|
2008
|
2007
|
||||||||||
Federal
statutory tax expense (benefit)
|
$ | (2,750 | ) | $ | 24,161 | $ | 62,000 | |||||
State
taxes, net of federal tax effect
|
(1,919 | ) | 1,813 | 4,049 | ||||||||
Credit
for increasing research activities
|
(1,100 | ) | (1,700 | ) | (1,600 | ) | ||||||
Deduction
related to domestic production activities
|
(316 | ) | (1,242 | ) | (2,383 | ) | ||||||
Foreign
income tax
|
1,202 | 543 | 393 | |||||||||
Excludable
foreign income
|
(670 | ) | (1,096 | ) | (3,555 | ) | ||||||
True-up
of deferred tax items
|
2,137 | 436 | (1,028 | ) | ||||||||
Basis
in subsidiary
|
4,378 | (3,073 | ) | - | ||||||||
Valuation
allowance
|
(3,073 | ) | 3,073 | - | ||||||||
Uncertain
tax positions
|
636 | 814 | 911 | |||||||||
Other
tax credits
|
(213 | ) | (400 | ) | (400 | ) | ||||||
Other
– net
|
274 | 254 | (1,107 | ) | ||||||||
Total
income tax expense (benefit)
|
$ | (1,414 | ) | $ | 23,583 | $ | 57,280 |
The
Corporation recorded additional deferred tax assets in 2008 for the tax basis in
the stock of a subsidiary in excess of the net tax basis of the subsidiary’s
assets and liabilities. As a result of managements change in intent
of potential disposition of this subsidiary the deferred tax assets and related
valuation allowance were reduced.
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.
Significant
components of the Corporation’s deferred tax liabilities and assets are as
follows:
(In
thousands)
|
2009
|
2008
|
2007
|
|||||||||
Net
long-term deferred tax liabilities:
|
||||||||||||
Tax
over book depreciation
|
$ | 1,334 | $ | (1,028 | ) | $ | 1,614 | |||||
Compensation
|
3,221 | 3,175 | 4,624 | |||||||||
Goodwill
|
(40,314 | ) | (42,802 | ) | (38,559 | ) | ||||||
Basis
in subsidiary
|
- | 5,314 | - | |||||||||
Valuation
allowance
|
- | (1,981 | ) | - | ||||||||
Other
– net
|
11,532 | 12,051 | 5,649 | |||||||||
Total
net long-term deferred tax liabilities
|
(24,227 | ) | (25,271 | ) | (26,672 | ) | ||||||
Net
current deferred tax assets:
|
||||||||||||
Allowance
for doubtful accounts
|
2,337 | 2,601 | 3,491 | |||||||||
Vacation
accrual
|
4,029 | 3,646 | 5,302 | |||||||||
Inventory
differences
|
3,845 | 3,878 | 2,572 | |||||||||
Deferred
income
|
(2,798 | ) | (3,836 | ) | (4,484 | ) | ||||||
Warranty
accruals
|
4,742 | 5,177 | 4,234 | |||||||||
Valuation
allowance
|
- | (1,092 | ) | - | ||||||||
Other
– net
|
8,144 | 5,939 | 6,713 | |||||||||
Total
net current deferred tax assets
|
20,299 | 16,313 | 17,828 | |||||||||
Net
deferred tax (liabilities) assets
|
$ | (3,928 | ) | $ | (8,958 | ) | $ | (8,844 | ) |
The
Corporation adopted new FASB authoritative guidance on accounting for
uncertainty in income taxes effective December 31, 2006, the beginning of fiscal
2007. As a result of the adoption, the Corporation recognized a $1.7
million increase in the liability for unrecognized benefits. This
increase in liability resulted in a decrease to the December 31, 2006 retained
earnings balance in the amount of $0.5 million and a reduction in deferred tax
liabilities of $1.2 million.
A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:
(in
thousands)
|
2009
|
2008
|
2007
|
|||||||||
Unrecognized
tax benefits, beginning of period
|
$ | 3,646 | $ | 2,839 | $ | 3,895 | ||||||
Increases
(decreases) in positions taken in a prior period
|
(71 | ) | 796 | 49 | ||||||||
Decreases
in positions taken in a prior period
|
(500 | ) | (52 | ) | (6 | ) | ||||||
Increases
in positions taken in a current period
|
651 | 834 | 1,018 | |||||||||
Decrease
due to settlements
|
(204 | ) | (391 | ) | (2,117 | ) | ||||||
Decrease
due to lapse of statute of limitations
|
(76 | ) | (380 | ) | - | |||||||
Unrecognized
tax benefits, end of period
|
$ | 3,446 | $ | 3,646 | $ | 2,839 |
The
amount of unrecognized tax benefits which would impact the Corporation’s
effective tax rate, if recognized, was $3.2 million at January 2, 2010, $3.2
million at January 3, 2009 and $2.3 million at December 29, 2007.
The
Corporation recognized interest accrued related to unrecognized tax benefits in
interest expense and penalties in operating expenses which is consistent with
the recognition of these items in prior reporting. Interest and
penalties recognized in the Consolidated Statements of Income amounted to a
benefit of $0.1 million. The Corporation had recorded a liability for
interest and penalties related to unrecognized tax benefits of $0.4
million, $0.4 million, and $0.4 million as of January 2, 2010,
January 3, 2009, and December 29, 2007, respectively.
The
Internal Revenue Service (the “IRS”) has completed the examination of all
federal income tax returns through 2004 with no issues pending or
unresolved. The years 2005 through 2009 remain open for examination
by the IRS. The years 2005 through 2009 are currently under
examination or remain open to examination by several states.
As of
January 2, 2010, it is reasonably possible the amount of unrecognized tax
benefits may increase or decrease within the twelve months following the
reporting date. These increases or decreases in the unrecognized tax
benefits would be due to new positions that may be taken on income tax returns,
settlement of tax positions and the closing of statues of
limitation. It is not expected that any of the changes will be
material individually or in total to the results or financial position of the
Corporation.
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 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 in 2011.
The
aggregate fair market value of the interest rate swap as of January 2, 2010 was
a liability of $2.5 million, of which $1.9 million is included in current
liabilities and $0.6 million is included in long-term liabilities in the
Corporation's Consolidated Balance Sheet as of January 2, 2010. For
the year ended January 2, 2010, the Corporation recorded a deferred net loss of
$1.1 million in other comprehensive income and reclassified $1.7 million of
losses from other comprehensive income to current period earnings as interest
expense in its Consolidated Statements of Income.
As of
January 2, 2010, $1.2 million of deferred net losses, net of tax, included in
equity (“Accumulated other comprehensive income” in the Corporation’s
Consolidated Balance Sheets) related to this interest rate swap, are expected to
be reclassified to current earnings (“Interest expense” in the Corporation’s
Consolidated Statement of Income) over the next twelve months.
Fair
Value Measurements of Financial Instruments
For
recognition purposes, on a recurring basis the Corporation is required to
measure at fair value its marketable securities and its investment in target
funds. The marketable securities were comprised of investments in
money market funds. The target funds are reported as both current and
noncurrent assets based on the portion that is anticipated to be used for
current operations. When available the Corporation uses quoted market
prices to determine fair value and classify such measurements within Level
1. In some cases where market prices are not available, the
Corporation makes use of observable market based inputs to calculate fair value,
in which case the measurements are classified within Level 2.
Assets
measured at fair value for the year ended January 2, 2010 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
|
$ | 5,744 | $ | - | $ | 5,744 | $ | - | ||||||||
Derivative
financial instrument
|
$ | (2,548 | ) | $ | - | $ | (2,548 | ) | $ | - |
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 | ) | $ | - |
Shareholders’
Equity
2009
|
2008
|
2007
|
||||||||||
Common
Stock, $1 Par Value
|
||||||||||||
Authorized
|
200,000,000 | 200,000,000 | 200,000,000 | |||||||||
Issued
and outstanding
|
45,093,379 | 44,324,409 | 44,834,519 | |||||||||
Preferred
Stock, $1 Par Value
|
||||||||||||
Authorized
|
2,000,000 | 2,000,000 | 2,000,000 | |||||||||
Issued
and outstanding
|
- | - |
The
Corporation purchased 0; 1,004,700; and 3,581,707 shares of its common stock
during 2009, 2008, and 2007, respectively. The par value method of
accounting is used for common stock repurchases. The excess of the
cost of shares acquired over their par value is allocated to Additional Paid-In
Capital with the excess charged to Retained Earnings on the Corporation’s
Consolidated Balance Sheet.
The
following table reconciles net income to comprehensive income attributable to
HNI Corporation:
(in
thousands)
|
2009
|
2008
|
2007
|
|||||||||
Net
income (loss)
|
$ | (6,259 | ) | $ | 45,607 | $ | 119,960 | |||||
Other
comprehensive income, net of income tax as applicable:
|
||||||||||||
Foreign
currency translation adjustments
|
(94 | ) | 1,355 | 765 | ||||||||
Change
in unrealized gains (losses) on marketable securities
|
134 | 14 | (148 | ) | ||||||||
Change
in pension and postretirement liability
|
745 | (2,184 | ) | 3,291 | ||||||||
Change
in derivative financial instruments
|
348 | (1,938 | ) | - | ||||||||
Comprehensive
income (loss)
|
(5,126 | ) | 42,854 | 123,868 | ||||||||
Comprehensive
income attributable to noncontrolling interest
|
183 | 157 | (418 | ) | ||||||||
Comprehensive
income (loss) attributable to HNI Corporation
|
$ | (5,309 | ) | $ | 42,697 | $ | 124,286 |
The
following table summarizes the components of accumulated other comprehensive
loss and the changes in accumulated other comprehensive loss, net of tax as
applicable:
(in
thousands)
|
Foreign
Currency Translation Adjustment
|
Unrealized
Gains (Losses) on Marketable Securities
|
Pension
Postretirement Liability
|
Derivative
Financial Instruments
|
Accumulated
Other Comprehensive Loss
|
|||||||||||||||
Balance
at December 30, 2006
|
$ | 1,500 | $ | - | $ | (4,562 | ) | $ | - | $ | (3,062 | ) | ||||||||
Change
during year
|
765 | (148 | ) | 3,291 | - | 3,908 | ||||||||||||||
Balance
at December 29, 2007
|
2,265 | (148 | ) | (1,271 | ) | - | 846 | |||||||||||||
Change
during year
|
1,355 | 14 | (2,184 | ) | (1,938 | ) | (2,753 | ) | ||||||||||||
Balance
at January 3, 2009
|
3,620 | (134 | ) | (3,455 | ) | (1,938 | ) | (1,907 | ) | |||||||||||
Change
during year
|
(94 | ) | 134 | 745 | 348 | 1,133 | ||||||||||||||
Balance
at January 2, 2010
|
$ | 3,526 | $ | - | $ | (2,710 | ) | $ | (1,590 | ) | $ | (774 | ) |
In May
2007, the Corporation registered 300,000 shares of its common stock under its
2007 Equity Plan for Non-Employee Directors of HNI Corporation, as amended (the
“Director Plan”). This plan permits the Corporation to issue to its
non-employee directors options to purchase shares of Corporation common stock,
restricted stock of the Corporation and awards of Corporation common
stock. The plan also permits non-employee directors to elect to
receive all or a portion of their annual retainers and other compensation in the
form of shares of Corporation common stock. Upon approval of this plan in May
2007, no awards are granted under the 1997 Equity Plan for Non-Employee
Directors of HNI Corporation, but all outstanding awards previously granted
under that plan shall remain outstanding in accordance with their
terms. During 2009, 2008, and 2007, 39,914; 31,599; and 17,349
shares, respectively, of Corporation common stock were issued under these
plans.
Cash
dividends declared and paid per share for each year are:
(In
dollars)
|
2009
|
2008
|
2007
|
|||||||||
Common
shares
|
$ | .86 | $ | .86 | $ | .78 |
During
2002, shareholders approved the 2002 Members’ Stock Purchase Plan, as amended
January 1, 2007. Under the plan, 800,000 shares of common stock were
registered for issuance to participating members. On June 12, 2009 an
additional 1,000,000 shares of common stock were registered for issuance to
participating members. Beginning on June 30, 2002, rights to purchase
stock are granted on a quarterly basis to all members who customarily work 20
hours or more per week and who customarily work for five months or more in any
calendar year. The price of the stock purchased under the plan is 85%
of the closing price on the exercise date. No member may purchase
stock under the plan in an amount which exceeds a maximum fair value of $25,000
in any calendar year. During 2009, 147,723 shares of common stock
were issued under the plan at an average price of $13.77. During
2008, 209,061 shares of common stock were issued under the plan at an average
price of $17.90. During 2007, 127,436 shares of common stock were
issued under the plan at an average price of $33.43. An additional
923,396 shares were available for issuance under the plan at January 2,
2010.
The
Corporation has entered into change in control employment agreements with
certain corporate officers and other key members. According to the
agreements, a change in control occurs when a third person or entity becomes the
beneficial owner of 20% or more of the Corporation’s common stock when more than
one-third of the Board is composed of persons not recommended by at least
three-fourths of the incumbent Board, upon certain business combinations
involving the Corporation or upon approval by the Corporation’s shareholders of
a complete liquidation or dissolution. Upon a change in control, a
key member is deemed to have a two-year employment agreement with the
Corporation, and all of his or her benefits vest under the Corporation’s
compensation plans. If, at any time within two years of the change in
control, his or her employment is terminated by the Corporation for any reason
other than cause or disability, or by the key member for good reason, as such
terms are defined in the agreement, then the key member is entitled to receive,
among other benefits, a severance payment equal to two times (three times for
the Corporation’s Chairman, President and CEO) annual salary and the average of
the prior two years’ bonuses.
Stock-Based
Compensation
Under the
Corporation’s 2007 Stock-Based Compensation Plan (the “Plan”), as amended
effective May 8, 2007, the Corporation may award options to purchase shares of
the Corporation’s common stock and grant other stock awards to executives,
managers and key personnel. Upon shareholder approval of the Plan in
May 2007, no future awards were granted under the Corporation’s 1995 Stock-Based
Compensation Plan, but all outstanding awards previously granted under that plan
shall remain outstanding in accordance with their terms. As of
January 2, 2010, there were approximately 3.3 million shares available for
future issuance under the Plan. The Plan is administered by the Human
Resources and Compensation Committee of the Board. Restricted stock
awarded under the Plan is expensed ratably over the vesting period of the
awards. Stock options awarded to members under the Plan must be at
exercise prices equal to or exceeding the fair market value of the Corporation’s
common stock on the date of grant. Stock options are generally
subject to four-year cliff vesting and must be exercised within 10 years from
the date of grant.
As
discussed above, the Corporation also has a shareholder approved Members’ Stock
Purchase Plan (the “MSP Plan”). The price of the stock purchased
under the MSP Plan is 85% of the closing price on the applicable purchase
date. During 2009, 147,723 shares of the Corporation’s common stock
were issued under the MSP Plan at an average price of $13.77.
The
Corporation measures the cost of employee services in exchange for an award of
equity instruments based on the grant-date fair value of the award and
recognizes cost over the requisite service period.
Compensation
cost that has been charged against operations for the two plans described above
was $3.8 million, $1.6 million, and $3.6 million for the years ended January 2,
2010, January 3, 2009, and December 29, 2007, respectively. The total
income tax benefit recognized in the income statement for share-based
compensation arrangements was $1.3 million, $0.5 million, and $1.2 million for
the years ended January 2, 2010, January 3, 2009, and December 29, 2007,
respectively.
The stock
compensation expense for the years ended January 2, 2010, January 3, 2009, and
December 29, 2007, was estimated on the date of grant using the Black-Scholes
option-pricing model that used the following assumptions by grant
year:
Year
Ended
Jan.
2, 2010
|
Year
Ended
Jan.
3, 2009
|
Year
Ended
Dec.
29, 2007
|
||||||||||
Expected
term
|
7
years
|
7
years
|
7
years
|
|||||||||
Expected
volatility:
|
||||||||||||
Range
used
|
33.83 | % | 25.62% - 30.61 | % | 26.97 | % | ||||||
Weighted-average
|
33.83 | % | 26.15 | % | 26.97 | % | ||||||
Expected
dividend yield:
|
||||||||||||
Range
used
|
4.00 | % | 2.71% - 5.06 | % | 1.60 | % | ||||||
Weighted-average
|
4.00 | % | 3.11 | % | 1.60 | % | ||||||
Risk-free
interest rate:
|
||||||||||||
Range
used
|
3.04 | % | 3.48% - 4.62 | % | 4.71 | % |
Expected
volatilities are based on historical volatility as the Corporation does not feel
that future volatility over the expected term of the options is likely to differ
from the past. The Corporation used a simple-average calculation
method based on monthly frequency points for the prior seven
years. The Corporation normally uses the current dividend yield as
there are no plans to substantially increase or decrease its
dividends. For options issued in February, 2009 the Corporation used
the average dividend yield over the prior two years due to the large drop in the
market at the date of grant resulting in an unsustainable dividend
yield. The Corporation elected to continue to use the simplified
method to determine the expected term since the awards qualified as “plain
vanilla” options. The risk-free interest rate was selected based on
yields from U.S. Treasury zero-coupon issues with a remaining term equal to the
expected term of the options being valued.
The
following table summarizes the changes in outstanding stock options since the
beginning of fiscal 2007.
Number
of
Shares
|
Weighted-Average
Exercise
Price
|
|||||||
Outstanding
at December 30, 2006
|
1,173,616 | $ | 35.27 | |||||
Granted
|
185,823 | 48.66 | ||||||
Exercised
|
(214,000 | ) | 24.86 | |||||
Forfeited
|
(102,373 | ) | 46.14 | |||||
Outstanding
at December 29, 2007
|
1,043,066 | $ | 38.72 | |||||
Granted
|
560,786 | 28.70 | ||||||
Exercised
|
(19,500 | ) | 21.00 | |||||
Forfeited
or Expired
|
(119,293 | ) | 38.13 | |||||
Outstanding
at January 3, 2009
|
1,465,059 | $ | 35.17 | |||||
Granted
|
497,734 | 10.36 | ||||||
Exercised
|
(41,750 | ) | 18.31 | |||||
Forfeited
or Expired
|
(65,409 | ) | 31.22 | |||||
Outstanding
at January 2, 2010
|
1,855,634 | $ | 29.03 |
A summary
of the Corporation’s nonvested shares as of January 2, 2010 and changes during
the year are presented below:
Nonvested
Shares
|
Shares
|
Weighted-Average
Grant-Date
Fair
Value
|
||||||
Nonvested
at January 3, 2009
|
872,409 | $ | 11.11 | |||||
Granted
|
497,734 | 2.53 | ||||||
Vested
|
(121,200 | ) | 15.77 | |||||
Forfeited
|
(35,009 | ) | 9.59 | |||||
Nonvested
at January 2, 2010
|
1,213,934 | $ | 7.17 |
At
January 2, 2010, there was $3.0 million of unrecognized compensation cost
related to nonvested stock option awards, which the Corporation expects to
recognize over a weighted-average period of 1.2 years. Information
about stock options that are vested or expected to vest and that are exercisable
at January 2, 2010, follows:
Options
|
Number
|
Weighted-Average
Exercise
Price
|
Weighted-Average
Remaining
Life in
Years
|
Aggregate
Intrinsic
Value
($000s)
|
||||||||||||
Vested
or expected to vest
|
1,720,542 | $ | 29.50 | 6.6 | - | |||||||||||
Exercisable
|
670,700 | $ | 34.43 | 3.6 | - |
The
weighted-average grant-date fair value of options granted was $2.53, $6.64, and
$15.67, for 2009, 2008, and 2007, respectively. Other
information for the last three years follows:
(In
thousands)
|
Jan.
2, 2010
|
Jan.
3, 2009
|
Dec.
29, 2007
|
|||||||||
Total
fair value of shares vested
|
$ | 1,911 | $ | 2,358 | $ | 2,261 | ||||||
Total
intrinsic value of options exercised
|
312 | 222 | 4,673 | |||||||||
Cash
received from exercise of stock options
|
307 | 410 | 5,321 | |||||||||
Tax
benefit realized from exercise of stock options
|
109 | 79 | 1,551 |
In 2009
the Corporation issued restricted stock units (“RSUs”) to executives, managers
and key personnel. The RSUs vest at the end of three years after the
grant date. No dividends are accrued on the RSUs. The
share-based compensation expense associated with the RSUs is based on the quoted
market price of HNI Corporation shares on the date of grant less the discounted
present value of dividends not received on the shares and is amortized to
expense using the straight-line method from the grant date through the earlier
of the vesting date or the estimated retirement eligibility date.
During
the year ended January 2, 2010, RSU activity was as follows:
Number
of
Shares
|
Weighted-Average
Grant
Date
Fair
Value
|
|||||||
Outstanding
at January 3, 2009
|
- | |||||||
Granted
|
698,641 | $ | 7.87 | |||||
Vested
|
- | - | ||||||
Forfeited
|
(17,685 | ) | 7.84 | |||||
Outstanding
at January 2, 2010
|
680,956 | $ | 7.87 |
At
January 2, 2010, there was $3.4 million of unrecognized compensation cost
related to RSUs which the Corporation expects to recognize over a weighted
average period of 1.2 years.
Retirement
Benefits
The
Corporation has defined contribution profit-sharing plans covering substantially
all employees who are not participants in certain defined benefit
plans. The Corporation’s annual contribution to the defined
contribution plans is based on employee eligible earnings and results of
operations and amounted to $20.3 million, $24.5 million, and $28.1 million, in
2009, 2008, and 2007, respectively. A portion of the annual
contribution is in the form of common stock of the Corporation. The
amount of the stock contribution was $6.6 million in 2009, 2008, and
2007.
The
Corporation sponsors defined benefit plans which include a limited number of
salaried and hourly members at certain subsidiaries. The
Corporation’s funding policy is generally to contribute annually the minimum
actuarially computed amount. Net pension costs relating to these
plans were $291,000, $0, and $0, in 2009, 2008, and 2007,
respectively. The actuarial present value of obligations, less
related plan assets at fair value, is not significant.
The
Corporation also participates in a multi-employer plan, which provides defined
benefits to certain of the Corporation’s union employees. Pension
expense for this plan amounted to $217,000, $320,000, and $376,000, in 2009,
2008, and 2007, respectively.
Postretirement
Health Care
Guidance
on employers’ accounting for other postretirement plans requires recognition of
the overfunded or underfunded status on the balance sheet. Under this
guidance, gains and losses, prior services costs and credits and any remaining
transition amounts under previous guidance that have not yet been recognized
through net periodic benefit cost are recognized in accumulated other
comprehensive income (loss), net of tax effects, until they are amortized as a
component of net periodic benefit cost. Also, the measurement date –
the date at which the benefit obligation and plan assets are measured – is
required to be the Corporation’s fiscal year-end.
(In
thousands)
|
2009
|
2008
|
2007
|
|||||||||
Change
in benefit obligation
|
||||||||||||
Benefit
obligation at beginning of year
|
$ | 14,864 | $ | 15,603 | $ | 19,082 | ||||||
Service
cost
|
391 | 396 | 480 | |||||||||
Interest
cost
|
959 | 963 | 1,067 | |||||||||
Plan
changes
|
- | - | (584 | ) | ||||||||
Benefits
paid
|
(823 | ) | (1,147 | ) | (1,361 | ) | ||||||
Actuarial
(gain)/loss
|
(137 | ) | (951 | ) | (3,081 | ) | ||||||
Benefit
obligation at end of year
|
$ | 15,254 | $ | 14,864 | $ | 15,603 | ||||||
Change
in plan assets
|
||||||||||||
Fair
value at beginning of year
|
$ | - | $ | 5,819 | $ | 6,693 | ||||||
Actual
return on assets
|
- | (274 | ) | 487 | ||||||||
Employer
contribution
|
823 | 159 | - | |||||||||
Transferred
out
|
- | (4,557 | ) | - | ||||||||
Benefits
paid
|
(823 | ) | (1,147 | ) | (1,361 | ) | ||||||
Fair
value at end of year
|
$ | - | $ | - | $ | 5,819 | ||||||
Funded
Status of Plan
|
$ | (15,254 | ) | $ | (14,864 | ) | $ | (9,784 | ) | |||
Amounts
recognized in the Statement of Financial Position consist
of:
|
||||||||||||
Current
liabilities
|
$ | 1,067 | $ | 1,089 | $ | - | ||||||
Noncurrent
liabilities
|
$ | 14,187 | $ | 13,775 | $ | 9,784 | ||||||
Amounts
recognized in Accumulated Other Comprehensive Income (before tax) consist
of:
|
||||||||||||
Actuarial
(gain)/loss
|
$ | (1,720 | ) | $ | (1,592 | ) | $ | (1,273 | ) | |||
Transition
(asset)/obligation
|
1,639 | 2,147 | 2,654 | |||||||||
Prior
service cost
|
- | - | - | |||||||||
$ | (81 | ) | $ | 555 | $ | 1,381 | ||||||
Change
in Accumulated Other Comprehensive Income (before tax):
|
||||||||||||
Amount
disclosed at beginning of year
|
$ | 555 | $ | 1,381 | $ | 6,118 | ||||||
Actuarial
(gain)/loss
|
(137 | ) | (319 | ) | - | |||||||
Amortization
of actuarial gain or loss
|
9 | - | (3,342 | ) | ||||||||
Amortization
of transition amount
|
(508 | ) | (507 | ) | (964 | ) | ||||||
Amortization
of prior service cost
|
- | - | (431 | ) | ||||||||
Amount
disclosed at end of year
|
$ | (81 | ) | $ | 555 | $ | 1,381 |
Estimated Future Benefit
Payments (In thousands)
|
||||
Fiscal
2010
|
1,067 | |||
Fiscal
2011
|
1,055 | |||
Fiscal
2012
|
1,047 | |||
Fiscal
2013
|
1,046 | |||
Fiscal
2014
|
1,052 | |||
Fiscal
2015 – 2019
|
5,738 | |||
Expected
Contributions During Fiscal 2010
|
||||
Total
|
$ | 1,067 |
The
discount rates at fiscal year-end 2009, 2008, and 2007, were 5.7%, 6.7%, and
6.4%, respectively. The Corporation payment for these benefits has
reached the maximum amounts per the plan; therefore, healthcare trend rates have
no impact on the Corporation’s cost. Approximately $4.5 million of
assets previously held in a voluntary employee benefit association (VEBA) fund
designated to pay retiree healthcare claims were transferred into a VEBA fund
designated to pay active healthcare claims during 2008. As such there
were no funds designated as plan assets as of end of 2008 and 2009.
Components of Net Periodic
Postretirement Benefit Cost (in thousands)
|
2010
|
|||
Service
cost
|
$ | 391 | ||
Interest
cost
|
959 | |||
Amortization
of net (gain)/loss
|
(9 | ) | ||
Amortization
of unrecognized transition (asset)/obligation
|
508 | |||
Net
periodic postretirement benefit cost/(income)
|
$ | 1,849 |
A
discount rate of 5.7% was used to determine net periodic benefit cost for
2010. The discount rate is set at the measurement date to reflect the
yield of a portfolio of high quality, fixed income debt
instruments. There are no plan assets invested.
Leases
The
Corporation leases certain warehouse and plant facilities and
equipment. Commitments for minimum rentals under non-cancelable
leases at the end of 2009 are as follows:
(In
thousands)
|
Capitalized
Leases
|
Operating
Leases
|
||||||
2010
|
$ | 40 | $ | 31,640 | ||||
2011
|
0 | 26,863 | ||||||
2012
|
- | 13,094 | ||||||
2013
|
- | 6,648 | ||||||
2014
|
- | 5,855 | ||||||
Thereafter
|
- | 13,691 | ||||||
Total
minimum lease payments
|
40 | $ | 97,791 | |||||
Less: amount
representing interest
|
1 | |||||||
Present
value of net minimum lease payments, including current maturities of
$39
|
$ | 39 |
Property,
plant and equipment at year-end include the following amounts for capitalized
leases:
(In
thousands)
|
2009
|
2008
|
2007
|
|||||||||
Buildings
|
$ | - | $ | - | $ | 3,299 | ||||||
Machinery
and equipment
|
438 | 869 | 906 | |||||||||
Office
equipment
|
- | - | - | |||||||||
438 | 869 | 4,205 | ||||||||||
Less: allowances
for depreciation
|
148 | 126 | 3,084 | |||||||||
$ | 290 | $ | 743 | $ | 1,121 |
The
Corporation purchased the leased building and sold it during 2008.
Rent
expense for the years 2009, 2008, and 2007, amounted to approximately $39.4
million, $43.2 million, and $35.6 million, respectively. The
Corporation has an operating lease for a production facility with annual rentals
totaling approximately $401,000 with a corporation in which the minority owner
of one of the Corporation’s consolidated subsidiaries is an
investor. There was no contingent rent expense under either
capitalized and operating leases (generally based on mileage of transportation
equipment) for the years 2009, 2008, and 2007.
Guarantees,
Commitments and Contingencies
The
Corporation utilizes letters of credit in the amount of $18 million to back
certain financing instruments, insurance policies and payment
obligations. The letters of credit reflect fair value as a condition
of their underlying purpose and are subject to fees competitively
determined.
The
Corporation 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 quarterly or annual operating
results and cash flows when resolved in a future period.
Significant
Customer
One
office furniture customer accounted for approximately 9%, 10%, and 11% of
consolidated net sales in 2009, 2008, and 2007, respectively.
Operating
Segment Information
Management
views the Corporation as being in two operating segments: office
furniture and hearth products, with the former being the principal
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 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 costs of the Corporation’s corporate operations,
interest income, and interest expense. Management views interest
income and expense as corporate financing costs and not as an operating segment
cost. In addition, management applies an effective income tax rate to
its consolidated income before income taxes so income taxes are not reported or
viewed internally on a segment basis. Identifiable assets by segment
are those assets applicable to the respective industry
segments. Corporate assets consist principally of cash and cash
equivalents, short-term investments, long-term investments and corporate office
real estate and related equipment.
No
geographic information for revenues from external customers or for long-lived
assets is disclosed since 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 years
ended 2009, 2008, and 2007, is as follows for continuing
operations:
(In
thousands)
|
2009
|
2008
|
2007
|
|||||||||
Net
sales:
|
||||||||||||
Office
furniture
|
$ | 1,370,197 | $ | 2,054,037 | $ | 2,108,439 | ||||||
Hearth
products
|
286,092 | 423,550 | 462,033 | |||||||||
$ | 1,656,289 | $ | 2,477,587 | $ | 2,570,472 | |||||||
Operating
profit:
|
||||||||||||
Office
furniture (a)
|
$ | 50,376 | $ | 101,447 | $ | 195,274 | ||||||
Hearth
products (b)
|
(17,194 | ) | 11,759 | 36,444 | ||||||||
Total
operating profit
|
33,182 | 113,206 | 231,718 | |||||||||
Unallocated
corporate expenses
|
(40,855 | ) | (44,016 | ) | (53,992 | ) | ||||||
Income
(loss) before income taxes
|
$ | (7,673 | ) | $ | 69,190 | $ | 177,726 | |||||
Depreciation
and amortization expense:
|
||||||||||||
Office
furniture
|
$ | 52,137 | $ | 50,511 | $ | 49,294 | ||||||
Hearth
products
|
19,041 | 15,212 | 14,453 | |||||||||
General
corporate
|
3,689 | 4,432 | 4,426 | |||||||||
$ | 74,867 | $ | 70,155 | $ | 68,173 | |||||||
Capital
expenditures:
|
||||||||||||
Office
furniture
|
$ | 13,482 | $ | 59,101 | $ | 47,408 | ||||||
Hearth
products
|
3,484 | 10,530 | 8,736 | |||||||||
General
corporate
|
588 | 1,865 | 2,770 | |||||||||
$ | 17,554 | $ | 71,496 | $ | 58,914 | |||||||
Identifiable
assets:
|
||||||||||||
Office
furniture
|
$ | 579,187 | $ | 730,348 | $ | 724,447 | ||||||
Hearth
products
|
291,518 | 326,168 | 356,273 | |||||||||
General
corporate
|
123,621 | 109,113 | 126,256 | |||||||||
$ | 994,326 | $ | 1,165,629 | $ | 1,206,976 |
|
(a)
|
Included
in operating profit for the office furniture segment are pretax charges of
$34.9, $25.5 million, and $8.7 million, for closing of facilities and
impairment charges in 2009, 2008, and 2007,
respectively.
|
|
(b)
|
Included
in operating profit for the hearth products segment are pretax charges of
$5.5, $0.3 million, and $1.1 million for closing facilities in 2009, 2008,
and 2007, respectively.
|
Summary
of Quarterly Results of Operations (Unaudited)
The
following table presents certain unaudited quarterly financial information for
each of the past 12 quarters. In the opinion of the Corporation’s
management, this information has been prepared on the same basis as the
consolidated financial statements appearing elsewhere in this report and
includes all adjustments (consisting only of normal recurring accruals)
necessary to present fairly the financial results set forth
herein. Results of operations for any previous quarter are not
necessarily indicative of results for any future period.
Year-End 2009:
(In thousands, except per share data)
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
||||||||||||
Net
sales
|
$ | 405,666 | $ | 382,990 | $ | 453,956 | $ | 413,677 | ||||||||
Cost
of products sold
|
280,931 | 253,509 | 287,352 | 263,716 | ||||||||||||
Gross
profit
|
124,735 | 129,481 | 166,604 | 149,961 | ||||||||||||
Selling
and administrative expenses
|
136,257 | 124,766 | 129,897 | 135,426 | ||||||||||||
Restructuring
related charges (income)
|
5,085 | 3,878 | 4,440 | 27,040 | ||||||||||||
Operating
income (loss)
|
(16,607 | ) | 837 | 32,267 | (12,505 | ) | ||||||||||
Interest
income (expense) – net
|
(3,063 | ) | (2,924 | ) | (3,116 | ) | (2,562 | ) | ||||||||
Income
(loss) from continuing operations before tax
|
(19,670 | ) | (2,087 | ) | 29,151 | (15,067 | ) | |||||||||
Income
taxes
|
(7,811 | ) | (697 | ) | 11,391 | (4,297 | ) | |||||||||
Net
income attributable to the noncontrolling interest
|
27 | 7 | 146 | 3 | ||||||||||||
Net
income (loss) attributable to Parent Company
|
$ | (11,886 | ) | $ | ( 1,397 | ) | $ | 17,614 | $ | (10,773 | ) | |||||
Net
income (loss) per common share – basic
|
$ | (0.27 | ) | $ | (0.03 | ) | $ | 0.39 | $ | (0.24 | ) | |||||
Weighted-average
common shares outstanding – basic
|
44,612 | 44,895 | 44,994 | 45,054 | ||||||||||||
Net
income (loss) per common share – diluted
|
$ | (0.27 | ) | $ | (0.03 | ) | $ | 0.39 | $ | (0.24 | ) | |||||
Weighted-average
common shares outstanding – diluted
|
44,612 | 44,895 | 45,598 | 45,054 | ||||||||||||
As a Percentage of Net
Sales
|
||||||||||||||||
Net
sales
|
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Gross
profit
|
30.7 | 33.8 | 36.7 | 36.3 | ||||||||||||
Selling
and administrative expenses
|
33.6 | 32.6 | 28.6 | 32.7 | ||||||||||||
Restructuring
related charges
|
1.3 | 1.0 | 1.0 | 6.5 | ||||||||||||
Operating
income (loss)
|
(4.1 | ) | 0.2 | 7.1 | (3.0 | ) | ||||||||||
Income
taxes
|
(1.9 | ) | (0.2 | ) | 2.5 | (1.0 | ) | |||||||||
Net
income (loss) attributable to Parent Company
|
(2.9 | ) | (0.4 | ) | 3.9 | (2.6 | ) |
Year-End
2008:
(In
thousands, except per share data)
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
||||||||||||
Net
sales
|
$ | 563,383 | $ | 613,114 | $ | 663,141 | $ | 637,949 | ||||||||
Cost
of products sold
|
379,345 | 403,671 | 438,423 | 427,536 | ||||||||||||
Gross
profit
|
184,038 | 209,443 | 224,718 | 210,413 | ||||||||||||
Selling
and administrative expenses
|
172,555 | 182,673 | 189,577 | 173,065 | ||||||||||||
Restructuring
related charges (income)
|
818 | 2,029 | 1,497 | 21,515 | ||||||||||||
Operating
income
|
10,665 | 24,741 | 33,644 | 15,833 | ||||||||||||
Interest
income (expense) – net
|
(3,414 | ) | (4,184 | ) | (4,037 | ) | (4,058 | ) | ||||||||
Income
from continuing operations before tax
|
7,251 | 20,557 | 29,607 | 11,775 | ||||||||||||
Income
taxes
|
3,130 | 7,098 | 10,101 | 3,254 | ||||||||||||
Net
income attributable to the noncontrolling interest
|
144 | (10 | ) | 17 | 6 | |||||||||||
Net
income attributable to Parent Company
|
$ | 3,977 | $ | 13,469 | $ | 19,489 | $ | 8,515 | ||||||||
Net
income per common share – basic
|
$ | 0.09 | $ | 0.30 | $ | 0.44 | $ | 0.19 | ||||||||
Weighted-average
common shares outstanding – basic
|
44,537 | 44,233 | 44,213 | 44,259 | ||||||||||||
Net
income per common share – diluted
|
$ | 0.09 | $ | 0.30 | $ | 0.44 | $ | 0.19 | ||||||||
Weighted-average
common shares outstanding – diluted
|
44,706 | 44,370 | 44,340 | 44,386 | ||||||||||||
As a Percentage of Net
Sales
|
||||||||||||||||
Net
sales
|
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Gross
profit
|
32.7 | 34.2 | 33.9 | 33.0 | ||||||||||||
Selling
and administrative expenses
|
30.6 | 29.8 | 28.6 | 27.1 | ||||||||||||
Restructuring
related charges
|
0.1 | 0.3 | 0.2 | 3.4 | ||||||||||||
Operating
income
|
1.9 | 4.0 | 5.1 | 2.5 | ||||||||||||
Income
taxes
|
0.6 | 1.2 | 1.5 | 0.5 | ||||||||||||
Net
income attributable to Parent Company
|
0.7 | 2.2 | 2.9 | 1.3 |
Year-End 2007:
(In thousands, except per share data)
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
||||||||||||
Net
sales
|
$ | 609,200 | $ | 618,160 | $ | 674,628 | $ | 668,484 | ||||||||
Cost
of products sold
|
402,500 | 402,523 | 434,385 | 425,289 | ||||||||||||
Gross
profit
|
206,700 | 215,637 | 240,243 | 243,195 | ||||||||||||
Selling
and administrative expenses
|
170,814 | 169,559 | 176,904 | 185,052 | ||||||||||||
Restructuring
related charges (income)
|
(136 | ) | 728 | 4,264 | 4,932 | |||||||||||
Operating
income
|
36,022 | 45,350 | 59,075 | 53,211 | ||||||||||||
Interest
income (expense) – net
|
(4,036 | ) | (4,578 | ) | (4,489 | ) | (3,829 | ) | ||||||||
Income
from continuing operations before tax
|
31,986 | 40,772 | 54,586 | 49,382 | ||||||||||||
Income
taxes
|
11,379 | 14,417 | 19,377 | 12,107 | ||||||||||||
Net
income attributable to the noncontrolling interest
|
(44 | ) | (38 | ) | (98 | ) | (238 | ) | ||||||||
Income
from continuing operations
|
20,651 | 26,393 | 35,307 | 37,513 | ||||||||||||
Discontinued
operations, less applicable taxes
|
30 | 484 | - | - | ||||||||||||
Net
income attributable to Parent Company
|
$ | 20,681 | $ | 26,877 | $ | 35,307 | $ | 37,513 | ||||||||
Net
income from continuing operations – basic
|
$ | .43 | $ | .56 | $ | .76 | $ | .82 | ||||||||
Net
income from discontinued operations – basic
|
.00 | .01 | - | - | ||||||||||||
Net
income per common share – basic
|
$ | .43 | $ | .57 | $ | .76 | $ | .82 | ||||||||
Weighted-average
common shares outstanding – basic
|
47,996 | 46,937 | 46,256 | 45,550 | ||||||||||||
Net
income from continuing operations – diluted
|
$ | .43 | $ | .56 | $ | .76 | $ | .82 | ||||||||
Net
income from discontinued operations – diluted
|
.00 | .01 | - | - | ||||||||||||
Net
income per common share – diluted
|
$ | .43 | $ | .57 | $ | .76 | $ | .82 | ||||||||
Weighted-average
common shares outstanding – diluted
|
48,278 | 47,199 | 46,487 | 45,775 | ||||||||||||
As a Percentage of Net
Sales
|
||||||||||||||||
Net
sales
|
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Gross
profit
|
33.9 | 34.9 | 35.6 | 36.4 | ||||||||||||
Selling
and administrative expenses
|
28.0 | 27.4 | 26.2 | 27.7 | ||||||||||||
Restructuring
related charges
|
(0.0 | ) | 0.1 | 0.6 | 0.7 | |||||||||||
Operating
income
|
5.9 | 7.3 | 8.8 | 8.0 | ||||||||||||
Income
taxes
|
1.9 | 2.3 | 2.9 | 1.8 | ||||||||||||
Income
from continuing operations
|
3.4 | 4.3 | 5.2 | 5.6 | ||||||||||||
Discontinued
operations, less applicable taxes
|
0.0 | 0.1 | - | - | ||||||||||||
Net
income attributable to Parent Company
|
3.4 | 4.3 | 5.2 | 5.6 |
INVESTOR
INFORMATION
Common
Stock Market Prices and Dividends (Unaudited)
Quarterly
2009 – 2007
2009
by
Quarter
|
High
|
Low
|
Dividends
per
Share
|
|||||||||
1st
|
$ | 17.29 | $ | 7.70 | $ | .215 | ||||||
2nd
|
19.00 | 11.00 | .215 | |||||||||
3rd
|
24.26 | 15.85 | .215 | |||||||||
4th
|
29.40 | 21.94 | .215 | |||||||||
Total
Dividends Paid
|
$ | .86 | ||||||||||
2008
by
Quarter
|
High
|
Low
|
Dividends
per
Share
|
|||||||||
1st
|
$ | 37.97 | $ | 26.64 | $ | .215 | ||||||
2nd
|
28.37 | 18.07 | .215 | |||||||||
3rd
|
34.37 | 16.71 | .215 | |||||||||
4th
|
25.76 | 9.09 | .215 | |||||||||
Total
Dividends Paid
|
$ | .86 | ||||||||||
2007
by
Quarter
|
High
|
Low
|
Dividends
per
Share
|
|||||||||
1st
|
$ | 51.65 | $ | 43.95 | $ | .195 | ||||||
2nd
|
47.94 | 40.14 | .195 | |||||||||
3rd
|
45.35 | 35.56 | .195 | |||||||||
4th
|
44.32 | 33.79 | .195 | |||||||||
Total
Dividends Paid
|
$ | .78 |
Common
Stock Market Price and Price/Earnings Ratio (Unaudited)
Fiscal
Years 2009 – 2005
Market
Price
|
Diluted
Earnings
per
Share
|
Price/Earnings
Ratio
|
||||||||||||||||||
Year
|
High
|
Low
|
High
|
Low
|
||||||||||||||||
2009
|
$ | 29.40 | $ | 7.70 | $ | (0.14 | ) | (210 | ) | (55 | ) | |||||||||
2008
|
37.97 | 9.09 | 1.02 | 37 | 9 | |||||||||||||||
2007
|
51.65 | 33.79 | 2.57 | 20 | 13 | |||||||||||||||
2006
|
61.68 | 38.34 | 2.45 | 25 | 16 | |||||||||||||||
2005
|
62.41 | 38.80 | 2.50 | 25 | 16 | |||||||||||||||
Five-Year
Average
|
(21 | ) | (0 | ) |
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
HNI
CORPORATION AND SUBSIDIARIES
January
2, 2010
COL.
A
|
COL.
B
|
COL.
C
|
COL.
D
|
COL.
E
|
||||||||||||||||
ADDITIONS
|
||||||||||||||||||||
DESCRIPTION
|
BALANCE
AT BEGINNING OF PERIOD
|
(1)
CHARGED TO COSTS AND EXPENSES
|
(2)
CHARGED TO OTHER ACCOUNTS (DESCRIBE)
|
DEDUCTIONS
(DESCRIBE)
|
BALANCE
AT END OF PERIOD
|
|||||||||||||||
(In
thousands)
|
||||||||||||||||||||
Year
ended January 2, 2010:
|
||||||||||||||||||||
Allowance
for doubtful accounts
|
$ | 8,788 | $ | 2,511 | - | $ | 4,889 | (A) | $ | 6,410 | ||||||||||
Valuation
allowance for deferred tax asset
|
3,073 | (3,073 | ) | - | - | - | ||||||||||||||
Year ended January 3, 2009: | ||||||||||||||||||||
Allowance
for doubtful accounts
|
$ | 11,458 | $ | 3,107 | - | $ | 5,777 | (A) | $ | 8,788 | ||||||||||
Valuation
allowance for deferred tax asset
|
- | $ | 3,073 | - | - | $ | 3,073 | |||||||||||||
Year ended December 29, 2007: | ||||||||||||||||||||
Allowance
for doubtful accounts
|
$ | 12,796 | $ | 3,906 | - | $ | 5,244 | (A) | $ | 11,458 |
Note
A: Excess of accounts written off over recoveries.
ITEM 15(c) -
INDEX OF EXHIBITS
Exhibit Number
|
Description of Document
|
|
Articles
of Incorporation of HNI Corporation, as amended+
|
||
By-laws
of HNI Corporation, as amended+
|
||
(10.1)
|
HNI
Corporation 2007 Stock-Based Compensation Plan, as amended, incorporated
by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended April 4, 2009*
|
|
2007
Equity Plan for Non-Employee Directors of HNI Corporation, as
amended*+
|
||
(10.3)
|
Form
of HNI Corporation Change In Control Employment Agreement, incorporated by
reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
filed November 16, 2006*
|
|
(10.4)
|
HNI
Corporation ERISA Supplemental Retirement Plan, as amended effective
January 1, 2005, incorporated by reference to Exhibit 10.3 to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended September
29, 2007*
|
|
(10.5)
|
Form
of HNI Corporation Amended and Restated Indemnity Agreement, incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed November 14, 2007*
|
|
Form
of 2007 Equity Plan For Non-Employee Directors of HNI Corporation
Participation Agreement*+
|
||
(10.7)
|
Form
of HNI Corporation 2007 Stock-Based Compensation Plan Stock Option Award
Agreement, incorporated by reference to Exhibit 10.1 to the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended July 4,
2009*
|
|
(10.8)
|
Credit
Agreement dated as of January 28, 2005, by and among HNI Corporation, as
Borrower, certain domestic subsidiaries of the Borrower from time to time
party thereto, as Guarantors, the lenders parties 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 February 2, 2005
|
|
(10.9)
|
Description
of Material Compensatory Arrangements Contained in Offer Letter between
HNI Corporation and Kurt Tjaden, incorporated by reference to Exhibit 10.3
to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
September 27, 2008*
|
|
(10.10)
|
HNI
Corporation Long-Term Performance Plan, as amended effective January 1,
2005, incorporated by reference to Exhibit 10.6 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 29,
2007*
|
Exhibit Number
|
Description of Document
|
|
(10.11)
|
First
Amendment to Credit Agreement dated as of December 22, 2005, by and among
HNI Corporation, as Borrower, certain domestic subsidiaries of the
Borrower from time to time party thereto, as Guarantors, the lenders
parties thereto and Wachovia Bank, National Association, as Administrative
Agent, incorporated by reference to Exhibit 99.1 to the Registrant’s
Current Report on Form 8-K filed February 17, 2006
|
|
HNI
Corporation Executive Deferred Compensation Plan, as amended*+
|
||
(10.13)
|
Second
Amendment to Credit Agreement dated as of April 6, 2006, by and among HNI
Corporation as Borrower, certain domestic subsidiaries of the Borrower
from time to time party thereto, as Guarantors, the lenders parties
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 April 10, 2006
|
|
(10.14)
|
Note
Purchase Agreement dated as of April 6, 2006, by and among HNI Corporation
and the Purchasers named therein, incorporated by reference to Exhibit
10.2 to the Registrant’s Current Report on Form 8-K filed April 10,
2006
|
|
HNI
Corporation Directors Deferred Compensation Plan, as amended*+
|
||
(10.16)
|
Third
Amendment to Credit Agreement dated as of November 8, 2006, by and among
HNI Corporation as Borrower, certain domestic subsidiaries of the Borrower
from time to time party thereto, as Guarantors, the lenders parties
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 November 8, 2006
|
|
(10.17)
|
HNI
Corporation Executive Bonus Plan as amended effective January 1, 2005,
incorporated by reference to Exhibit 10.4 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 29,
2007*
|
|
(10.18)
|
Form
of HNI Corporation Amendment No. 1 to Change in Control Employment
Agreement incorporated by reference to Exhibit 10.1 to the Registrant's
Current Report on Form 8-K filed August 10, 2007*
|
|
(10.19)
|
HNI
Corporation Stock-Based Compensation Plan, as amended effective August 8,
2006, incorporated by reference to Exhibit 10.1 to the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended September 30,
2006*
|
|
(10.20)
|
Form
of Exercise of Stock Option granted under the HNI Corporation Stock-Based
Compensation Plan, incorporated by reference to Exhibit 10.2 to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended September
27, 2008*
|
|
(10.21)
|
Form
of HNI Corporation Stock-Based Compensation Plan Stock Option Award
Agreement, incorporated by reference to Exhibit 99D to the Registrant’s
Current Report on Form 8-K filed February 22,
2005*
|
Exhibit Number
|
Description of Document
|
|
(10.22)
|
Fourth
Amendment to Credit Agreement dated as of June 20, 2008, by and among HNI
Corporation as Borrower, certain domestic subsidiaries of the Borrower
from time to time party thereto as Guarantors, the lenders parties 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
|
|
(10.23)
|
Credit
Agreement dated as of June 30, 2008, by and among HNI Corporation, as
Borrower, certain domestic subsidiaries of HNI Corporation from time to
time party thereto, as Guarantors, certain lenders party thereto and
Wachovia Bank, National Association, as Administrative Agent, incorporated
by reference to Exhibit 10.2 to the Registrant’s Current Report on Form
8-K filed July 7, 2008
|
|
(10.24)
|
Form
of HNI Corporation 2007 Stock-Based Compensation Plan Restricted Stock
Unit Award Agreement, incorporated by reference to Exhibit 10.2 to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended April 4,
2009*
|
|
Form
of HNI Corporation Executive Deferred Compensation Plan Deferral Election
Agreement*+
|
||
Form
of HNI Corporation Directors Deferred Compensation Plan Deferral Election
Agreement*+
|
||
Subsidiaries
of the Registrant+
|
||
Consent
of Independent Registered Public Accounting Firm+
|
||
Certification
of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002+
|
||
Certification
of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002+
|
||
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+
|
*
Indicates management contract or compensatory plan.
+ Filed
herewith.
-85-