HNI CORPORATION 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 Unaudited Condensed Consolidated Financial Statements of the Corporation and related notes. Statements that are not historical are forward-looking and involve risks and uncertainties. See "Forward-Looking Statements" at the end of this section for further information.
Overview
The Corporation has two reportable segments: workplace furnishings and residential building products. The Corporation is a leading global designer and provider of commercial furnishings, and a leading manufacturer and marketer of hearth products. The Corporation utilizes a decentralized business model to deliver value to customers via various brands and selling models. The Corporation is focused on growing its existing businesses while seeking out and developing new opportunities for growth. Consolidated net sales for the second quarter of 2021 were$510.5 million , an increase of 22.3 percent compared to net sales of$417.5 million in the prior-year quarter. The change was due to a 52.1 percent increase in the residential building products segment and an 11.7 percent increase in the workplace furnishings segment. The acquisition of DPG increased current-year quarter sales by$8.7 million , and the acquisition of residential building products distributors increased current-year quarter sales by$1.5 million . Net income attributable to the Corporation in the second quarter of 2021 was$17.4 million compared to$12.6 million in the second quarter of 2020. The increase was driven by higher volume and improved net productivity, partially offset by unfavorable price-cost, the return of costs related to temporary actions taken in the prior-year quarter, higher investment spend, and normalized variable compensation. 22
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Results of Operations
The following table presents certain key highlights from the results of operations (in thousands):
Three Months Ended Six Months Ended
July 3, June 27, July 3, June 27,
2021 2020 Change 2021 2020 Change
Net sales $ 510,455 $ 417,456 22.3% $ 994,748 $ 886,161 12.3%
Cost of sales 322,593 266,551 21.0% 626,940 559,238 12.1%
Gross profit 187,862 150,905 24.5% 367,808 326,923 12.5%
Selling and administrative expenses 163,175 136,063 19.9% 320,521 303,148 5.7%
Impairment charges - - -% - 32,661 (100.0)%
Operating income (loss) 24,687 14,842 66.3% 47,287 (8,886) NM
Interest expense, net 1,857 1,943 (4.4)% 3,612 3,754 (3.8)%
Income (loss) before income taxes 22,830 12,899 77.0% 43,675 (12,640) NM
Income taxes 5,418 345 NM 11,245 (1,299) NM
Net loss attributable to
non-controlling interest (2) (2) 0.0% (3) (2) (50.0)%
Net income (loss) attributable to HNI
Corporation $ 17,414 $ 12,556 38.7% $ 32,433 $ (11,339) NM
As a Percentage of Net Sales :
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Gross profit 36.8 36.1 70 bps 37.0 36.9 10 bps
Selling and administrative expenses 32.0 32.6 -60 bps 32.2 34.2 -200 bps
Impairment charges - - - bps - 3.7 -370 bps
Operating income (loss) 4.8 3.6 120 bps 4.8 (1.0) 580 bps
Income taxes 1.1 0.1 100 bps 1.1 (0.1) 120 bps
Net income (loss) attributable to HNI
Corporation 3.4 3.0 40 bps 3.3 (1.3) 460 bps
Results of Operations - Three Months Ended
Consolidated net sales for the second quarter of 2021 increased 22.3 percent compared to the same quarter last year. The change was driven by an increase in both the workplace furnishings segment and the residential building products segment. Included in the sales results for the current quarter was a$10.2 million favorable impact from acquiring DPG and residential building products distributors. Gross Profit Gross profit as a percentage of net sales increased 70 basis points in the second quarter of 2021 compared to the same quarter last year primarily driven by higher volume and improved net productivity, partially offset by unfavorable price-cost and the return of costs related to temporary actions taken in the prior-year quarter.
Selling and Administrative Expenses
Selling and administrative expenses as a percentage of net sales decreased 60
basis points in the second quarter of 2021 compared to the same quarter last
year due to improved leverage from higher volume, partially offset by the return
of costs related to temporary actions taken in the prior-year quarter, higher
investment spend, increased freight costs, and normalized
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variable compensation. Included in current-year quarter SG&A was
Operating Income
In the second quarter of 2021, operating income was$24.7 million , compared to$14.8 million in the same quarter last year. Results improved compared to the prior-year quarter driven by higher volume and improved net productivity, partially offset by unfavorable price-cost, the return of costs related to temporary actions taken in the prior-year quarter, higher investment spend, and normalized variable compensation.
Interest Expense, Net
Interest expense, net for the second quarter of 2021 was
Income Taxes
The Corporation's income tax provision for the second quarter of 2021 was$5.4 million on income before taxes of$22.8 million , or an effective tax rate of 23.7 percent. For the second quarter of 2020, the Corporation's income tax provision was$0.3 million on income before taxes of$12.9 million , or an effective tax rate of 2.7 percent. The variance was driven by higher income and an improved full year 2021 income outlook, relative to the prior-year performance and full year outlook which was adversely impacted by the onset of the COVID-19 pandemic, resulting in asset impairment charges and other one-time costs recorded in theU.S. jurisdictions. These factors drove a greater rate benefit from tax credits in the prior-year period. Refer to "Note 8. Income Taxes" for further information.
Net Income Attributable to
Net income attributable to the Corporation was
Results of Operations - Six Months Ended
Consolidated net sales for the first six months of 2021 increased 12.3 percent compared to the same period last year. The change was driven by a 45.1 percent increase in the residential building products segment. The workplace furnishings segment posted a modest 0.1 percent increase from the prior-year period. Included in the sales results for the current period was a$19.0 million favorable impact from acquiring DPG and residential building products distributors.
Gross Profit
Gross profit as a percentage of net sales increased 10 basis points in the first six months of 2021 compared to the same period last year primarily driven by higher residential building products volume and improved net productivity, partially offset by unfavorable price-cost.
Selling and Administrative Expenses
Selling and administrative expenses as a percentage of net sales decreased 200 basis points in the first six months of 2021 compared to the same period last year due to higher residential building products volume, lower core SG&A, and freight and distribution productivity, partially offset by normalized variable compensation, the return of costs related to temporary actions taken in the prior-year period, and higher investment spend. Included in current-year period SG&A was$1.4 million of one-time costs from exiting workplace furnishings showrooms. The prior-year period included$5.0 million of one-time costs incurred as the result of the COVID-19 pandemic (of which$1.6 million was recorded as a corporate charge). 24
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Impairment Charges
In the first six months of 2020, the Corporation recorded$32.7 million of impairment charges on goodwill and intangible assets as a result of the COVID-19 pandemic and related economic disruption. The Corporation did not record any impairment charges during the first six months of 2021.
Operating Income (Loss)
In the first six months of 2021, operating income was$47.3 million , compared to operating loss of$8.9 million in the same period last year. Results improved compared to the prior-year period driven by higher residential building products volume, improved net productivity, and lower core SG&A, partially offset by unfavorable price-cost, the return of costs related to temporary actions taken in the prior-year period, normalized variable compensation, and higher investment spend. Additionally, the prior-year period included$37.7 million of impairment charges and costs related to the COVID-19 pandemic and resulting economic disruption.
Interest Expense, Net
Interest expense, net for the first six months of 2021 was
Income Taxes
The Corporation's income tax provision for the first six months of 2021 was$11.2 million on income before taxes of$43.7 million , or an effective tax rate of 25.7 percent. For the first six months of 2020, the Corporation's income tax provision was a benefit of$1.3 million on loss before taxes of$12.6 million , or an effective tax rate of 10.3 percent. The variance was driven by higher income and an improved full year 2021 income outlook, relative to the prior-year period performance and full year outlook which was adversely impacted by the onset of the COVID-19 pandemic, resulting in asset impairment charges and other one-time costs recorded in theU.S. jurisdictions. These factors drove a greater rate benefit from tax credits in the prior-year period. Refer to "Note 8. Income Taxes" for further information.
Net Income (Loss) Attributable to
Net income attributable to the Corporation was$32.4 million , or$0.74 per diluted share in the first six months of 2021, compared to net loss attributable to the Corporation of$11.3 million , or$0.27 per diluted share in the first six months of 2020. Workplace Furnishings
The following table presents certain key highlights from the results of operations in the workplace furnishings segment (in thousands):
Three Months Ended Six Months Ended
July 3, June 27, July 3, June 27,
2021 2020 Change 2021 2020 Change
Net sales $ 344,137 $ 308,081 11.7 % $ 646,885 $ 646,467 0.1 %
Operating profit (loss) $ 8,756 $ 7,785 12.5 % $ 5,685 $ (25,446) 122.3 %
Operating profit (loss) % 2.5 % 2.5 % 0 bps 0.9 % (3.9) % 480 bps
Three months ended
Second quarter 2021 net sales for the workplace furnishings segment increased
11.7 percent compared to the same quarter last year. Included in the sales
results was a $8.7 million favorable impact from acquiring DPG.
Operating profit as a percentage of net sales in the second quarter of 2021 was
flat compared to the same quarter last year. An increase driven by higher volume
and improved productivity was fully offset by unfavorable price-cost, the return
of costs related to temporary actions taken in the prior-year quarter, and $0.6
million of one-time costs in the current-year quarter from exiting showrooms.
25-------------------------------------------------------------------------------- Six months ended Net sales for the first six months of 2021 for the workplace furnishings segment increased 0.1 percent compared to the same period last year. Included in the sales results was a$15.1 million favorable impact from acquiring DPG. Operating profit (loss) as a percentage of net sales increased 480 basis points in the first six months of 2021 compared to the same period last year. The workplace furnishings segment recorded$1.4 million of one-time costs in the current period from exiting showrooms. The prior-year period included$32.7 million of charges related to the impairment of goodwill and intangible assets, as well as$3.4 million of one-time costs incurred as the result of the COVID-19 pandemic. Aside from these charges, the workplace furnishings segment operating profit as a percentage of net sales decreased 60 basis points compared to the prior-year period driven by unfavorable price-cost and the return of costs related to temporary actions taken in the prior-year period, partially offset by improved net productivity and lower core SG&A spend.
Residential Building Products
The following table presents certain key highlights from the results of operations in the residential building products segment (in thousands):
Three Months Ended Six Months Ended
July 3, June 27, July 3, June 27,
2021 2020 Change 2021 2020 Change
Net sales $ 166,318 $ 109,375 52.1 % $ 347,863 $ 239,694 45.1 %
Operating profit $ 30,525 $ 14,365 112.5 % $ 70,374 $ 35,036 100.9 %
Operating profit % 18.4 % 13.1 % 530 bps 20.2 % 14.6 % 560 bps
Three months ended
Second quarter 2021 net sales for the residential building products segment
increased 52.1 percent compared to the same quarter last year. Included in the
sales results was a $1.5 million favorable impact from acquiring residential
building products distributors.
Operating profit as a percentage of net sales increased 530 basis points in the
second quarter of 2021 compared to the same quarter last year. The increase was
primarily driven by strong volume growth, partially offset by unfavorable
price-cost, the return of costs related to temporary actions taken in the
prior-year quarter, and normalized variable compensation.
Six months ended
Net sales for the first six months of 2021 for the residential building products
segment increased 45.1 percent compared to the same period last year. Included
in the sales results was a $4.0 million favorable impact from acquiring
residential building products distributors.
Operating profit as a percentage of net sales increased 560 basis points in the
first six months of 2021 compared to the same period last year. The increase was
primarily driven by strong volume growth, partially offset by unfavorable
price-cost, normalized variable compensation, and the return of costs related to
temporary actions taken in the prior-year period.
Liquidity and Capital Resources
Cash, cash equivalents, and short-term investments, coupled with cash flow from future operations, borrowing capacity under the existing credit agreement, and the ability to access capital markets, are expected to be adequate to fund operations and satisfy cash flow needs for at least the next twelve months. Additionally, based on current earnings before interest, taxes, depreciation, and amortization, the Corporation can access the full$450 million of borrowing capacity available under the revolving credit facility, which includes the$75 million currently outstanding, and maintain compliance with applicable covenants. Cash Flow - Operating Activities Operating activities were a source of$37.3 million of cash in the first six months of 2021 compared to a source of$27.8 million of cash in the first six months of 2020. The increase in operating cash flows was driven by higher net income, partially offset by lower noncash items and working capital fluctuations. 26 -------------------------------------------------------------------------------- Cash Flow - Investing Activities Capital expenditures, including capitalized software, for the first six months of 2021 were$32.3 million compared to$20.8 million in the same period last year. These expenditures are primarily focused on machinery, equipment, and tooling required to support new products, continuous improvements, and cost savings initiatives in manufacturing processes. Additionally, in support of the Corporation's long-term strategy to create effortless winning experiences for customers, the Corporation continues to invest in technology and digital assets. For the full year 2021, capital expenditures are expected to be approximately$60 to$65 million . Current year and prior year investing activities include acquisition spending for residential building products distributors, while current year activity also includes spending related to the acquisition of DPG. See "Note 3. Acquisitions" in the Notes to the Condensed Consolidated Financial Statements for further information. Cash Flow - Financing Activities Long-Term Debt - The Corporation maintains a revolving credit facility as the primary source of committed funding from which the Corporation finances its planned capital expenditures, strategic initiatives, and seasonal working capital needs. Cash flows included in financing activities represent periodic borrowings and repayments under the revolving credit facility. See "Note 7. Long-Term Debt" in the Notes to Condensed Consolidated Financial Statements for further information. Dividend - The Corporation is committed to maintaining or modestly growing the quarterly dividend. Cash dividends declared and paid per common share were as follows (in dollars): Three Months Ended Six Months Ended July 3, June 27, July 3, June 27, 2021 2020 2021 2020 Dividends per common share$ 0.310 $ 0.305 $ 0.615 $ 0.610
During the second quarter, the Board declared the regular quarterly cash
dividend on
Stock Repurchase - The Corporation's capital strategy related to stock repurchase is focused on offsetting the dilutive impact of issuances for various compensation related matters. The Corporation may elect to opportunistically purchase additional shares based on excess cash generation and/or share price considerations. The Board authorized$200 million onNovember 9, 2007 and an additional$200 million each onNovember 7, 2014 andFebruary 13, 2019 for repurchases of the Corporation's common stock. As ofJuly 3, 2021 , approximately$151.6 million of the Board's current repurchase authorization remained unspent. See "Note 10. Accumulated Other Comprehensive Income (Loss) and Shareholders' Equity" in the Notes to Condensed Consolidated Financial Statements for further information.
Off-Balance Sheet Arrangements
The Corporation does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on the Corporation's financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.
Contractual Obligations
Contractual obligations associated with ongoing business and financing activities will result in cash payments in future periods. A table summarizing the amounts and estimated timing of these future cash payments was provided in the Corporation's Annual Report on Form 10-K for the fiscal year endedJanuary 2, 2021 . There were no material changes outside the ordinary course of business in the Corporation's contractual obligations or the estimated timing of the future cash payments during the first six months of 2021.
Commitments and Contingencies
See "Note 14. Guarantees, Commitments, and Contingencies" in the Notes to Condensed Consolidated Financial Statements for further information.
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--------------------------------------------------------------------------------Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based upon the Consolidated Financial Statements, 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 a
variety of 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 Board. Actual
results may differ from these estimates under different assumptions or
conditions. A summary of the more significant accounting policies requiring the
use of estimates and assumptions in preparing the financial statements is
provided in the Corporation's Annual Report on Form 10-K for the fiscal year
ended January 2, 2021 .
Looking Ahead
The Corporation continues to navigate near-term uncertainty driven by the
ongoing COVID-19 pandemic and recent constraints around labor and supply chain
capacity. However, management believes the Corporation is well positioned to
grow revenues, expand margins, and generate cash flows as it moves into the next
stage of the recovery. Recent strength in residential building products is
expected to continue, with improving conditions starting to be observed in
workplace furnishings.
Management remains optimistic about the long-term prospects in the workplace
furnishings and residential building products markets. Management believes the
Corporation continues to compete well and remains confident the investments made
in the business will continue to generate strong returns for shareholders.
Forward-Looking Statements
Statements in this report to the extent 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 21 of the Securities Exchange Act of 1934, as amended, and 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 within Item 1A of the Corporation's Annual Report on Form 10-K for the fiscal year endedJanuary 2, 2021 . 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 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 but not limited to: the duration and scope of the COVID-19 pandemic and its effect on people and the economy; the levels of office furniture needs and housing starts; overall demand for the Corporation's products; general economic and market conditions inthe United States and internationally; industry and competitive conditions; the consolidation and concentration of the Corporation's customers; the Corporation's reliance on its network of independent dealers; changes in trade policy; changes in raw material, component, or commodity pricing; market acceptance and demand for the Corporation's new products; changing legal, regulatory, environmental, and healthcare conditions; the risks associated with international operations; the potential impact of product defects; the various restrictions on the Corporation's financing activities; an inability to protect the Corporation's intellectual property; impacts of tax legislation; force majeure events outside the Corporation's control; and other risks described in the Corporation's annual and quarterly reports filed with theSecurities and Exchange Commission on Forms 10-K and 10-Q, as well as others the Corporation may consider not material or does not anticipate at this time. The risks and uncertainties described in this report, as well as those described within Item 1A of the Corporation's Annual Report on Form 10-K for the fiscal year endedJanuary 2, 2021 , are not exclusive and further information concerning the Corporation, including factors that potentially could have a material effect on 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
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