HNI Corp.: Hearth Business Burns Earnings

Furniture and fireplace manufacturer combats slow housing market with tough decisions.

HNI Corp., the Muscatine, Iowa-based maker of office furniture and gas- and wood-burning fireplaces, had to adjust its business plan when the housing market drastically declined at the end of last year.

"For the year and for the quarter, we reported record sales and profitability in our office furniture business. During the same period, our hearth business experienced strong results in the first half of fiscal 2006 followed by a dramatic decline in the second half as a result of the largest annual decline in the housing market since the 1991 recession," said Stan Askren, HNI Corp. chairman, president and CEO, in a Feb. 7 statement.

HNI Corp.
At A Glance


HNI Corp.
Muscatine, Iowa
Primary Industry: Furniture and Fixtures
Number of Employees: 11,304
2005 In Review
Revenue: $2.5 billion
Profit Margin: 5.61%
Sales Turnover: 2.15
Inventory Turnover: 18.53
Revenue Growth: 17.06%
Return On Assets: 13.45%
Return On Equity: 20.54%

According to fourth-quarter financials, which ended Dec. 30, 2006, net sales rose 3.8% to $682 million but operating income declined 12.2% to $51.1 million. Net income also declined from $35.8 million in fourth quarter 2005 to $30.5 million in fourth quarter 2006. Year-on-year net income declined from $137.4 million in 2005 to $123.4 million in 2006.

For HNI -- one of IndustryWeek's 50 Best Manufacturing Companies for 2006 -- things needed to change.

According to the statement, the company adjusted its cost structure and resized its hearth business to reflect lower demand levels. HNI also aggressively implemented cost-reduction initiatives that included reducing employment levels more than 20%, and consolidated and divested several retail and distribution locations.

"Operating profitability remained challenged as the impact of cost-reduction initiatives were not yet fully reflected in our results," said Askren. "During the quarter, we also continued efforts to streamline our office furniture operations. We continue to focus on reducing structural costs across the organization while maintaining our industry leading customer service."

HNI also made the decision to close its office furniture facility in Monterrey, Mexico, and consolidate production into other locations, which will be completed during the first half of 2007. During the fourth quarter $900,000 of costs were recorded in connection with the shutdown as well as final costs associated with the shutdown of two facilities completed earlier in the year. Fourth-quarter 2005 included $2.4 million of restructuring charges from the shutdown of two office furniture facilities that began in the third-quarter 2005.

"With respect to our hearth business, market conditions remain uncertain. Due to the three-month to six-month lag in trends between the housing market and our hearth business and higher than anticipated inventories in the remodel/retrofit channel, we anticipate 2007 will be challenging," said Askren. "We are continuing to implement restructuring initiatives to ensure our cost structure is appropriately aligned with market conditions and anticipate emerging from the downturn well positioned for an industry recovery in the future. Hearth sales and profitability will be challenged through the first half of 2007."


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