HNI Corp.: Inside Angles

Fireplace and office furniture maker consolidates facilities to endure housing slump.

Depending on what part of the country you call home, the winter months have many of us spending an inordinate amount of time cooped up indoors to avoid the cold -- so the thought of curling up in front of a fire should sound pretty appealing. However, it doesn't seem to be translating into profits these days for fireplace and office furniture manufacturer HNI Corp.

In fact, the Muscatine, Iowa-based company recently reported a 1.7% fall in third-quarter profits, as a soft housing market continues to slow demand for some of its home products. In response to the market's long bout of misfortune, the IW 50 Best Manufacturer tried a few things in recent months to help its profit center stay warm.

For one, HNI announced on Oct. 5, 2007, plans to close the company's Richmond, Va., manufacturing plant during the first half of 2008, consolidating production into its Cedartown, Georgia and Muscatine facilities. The initiatives are being undertaken to reduce structural cost and streamline customer fulfillment at The HON Company, an office furniture operating subsidiary of HNI.

As part of the consolidation, HON will transition distribution centers located in Richmond and Cedartown to a third-party logistics provider. The realignment is estimated to save in excess of $10 million annually once fully implemented in 2009, according to a release. As a result of the changes, the company anticipates spending $3 million in capital expenditures in 2008 (in addition to the $6 million that was planned for the remainder of 2007). Resulting charges will impact pre-tax earnings an estimated $15 million to $17 million over the 2007 to 2009 period.

Another move involved repurchasing more than 2.3 million shares of its common stock at a cost of approximately $102 million over the first nine months of 2007, which was announced on Oct. 18, 2007. The next day, HNI reported a fall in third-quarter profits from $35.8 million, or 72 cents per share, in third-quarter 2006 down to $35.3 million, or 76 cents per share. However, earnings per share actually increased as a result of the share repurchase. Restructuring and impairment charges totaled to $4.26 million, which included $3.5 million related to the Richmond plant shutdown.

In the earnings release, HNI said its office furniture business operating profit for the third quarter rose 15.2% in the corresponding quarter last year, while sales grew 4.2%. Incremental restructuring related costs of $4.3 million negatively impacted operating profit for the office furniture business. For its hearth products, HNI reported a fall in operating profit of 53.3% to $8.7 million. Sales slid 21.9% to $115.8 million from $148.3 million a year ago.

HNI Corp.
At A Glance

HNI Corp.
Muscatine, Iowa
Primary Industry: Furniture & Fixtures
Number of Employees: 14,200
2006 In Review
Revenue: $2.68 billion
Profit Margin: 4.6%
Sales Turnover: 2.19
Inventory Turnover: 17.81
Revenue Growth: 9.35%
Return On Assets: 10.82%
Return On Equity: 20.77

The company said the decline in hearth sales was the result of lower volume, but was partially offset by cost-reduction initiatives. Sales were said to be "dull" because of continued weakness in housing and market conditions. Looking forward, HNI said it anticipates a solid fourth quarter as it continues to implement business process improvements and reduce structural costs. The company's office furniture business is expected to fare similar to last quarter, while the hearth business is predicted to suffer due to the general housing market.

Less than a month after the earnings report, HNI approved an additional $200 million for share repurchase on Nov. 9, 2007. Time will tell if any of the company's recent moves will pay off, but lately Wall Street has been a tough critic. Having beaten third-quarter estimates, HNI rode the news for a couple of weeks, climbing just over 20%. The ride was short-lived, however, as shares have since tumbled back more than 30%, registering a new 52-week low on Jan. 9 and slipping below $30 per share for the first time in almost five years.


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