HNI (HNI) - 2023 Q4 - Annual Report

Part I Business HNI Corporation provides workplace furnishings and residential building products, with fiscal 2023 net sales of $2.4 billion, significantly impacted by the Kimball International acquisition - HNI Corporation operates in two reportable segments: workplace furnishings and residential building products[20] Fiscal 2023 Net Sales by Segment | Segment | Net Sales (Billion USD) | Percentage of Total | | :--- | :--- | :--- | | Workplace Furnishings | $1.7 | 71% | | Residential Building Products | $0.7 | 29% | | Total | $2.4 | 100% | - On June 1, 2023, the Corporation acquired Kimball International, Inc. in a cash and stock transaction valued at $503.7 million[22] - The company's strategy is based on a customer-first mindset, creating effortless winning experiences, and owning operational excellence through Rapid Continuous Improvement (RCI)[33][34] Markets The company competes in the workplace furnishings market through contract and SMB channels and is the North American leader in hearth products - The North American workplace furnishings market consists of two primary channels: the contract channel (large corporations) and the small and medium-sized business (SMB) channel, where HNI is a market leader[25][27] - Key competitors in workplace furnishings include MillerKnoll, Inc., Steelcase, Inc., and Haworth, Inc[29] - HNI is the North American market leader in hearth products, which are sold for both new home construction and renovation of existing homes[30] - Competitors in the hearth products market include Travis Industries, Inc., Innovative Hearth Products, and Wolf Steel Ltd. (Napoleon)[31] Sales Workplace furnishings are sold under brands like HON and Kimball, while residential products include Heatilator and Heat & Glo - Workplace furnishings are sold under multiple brands, including HON®, Allsteel®, Gunlocke®, and the newly acquired Kimball® and National® brands[36] - Residential building products are sold under widely recognized brands such as Heatilator®, Heat & Glo®, and Majestic®[39] - In fiscal 2023, the Corporation's five largest customers represented approximately 17% of its consolidated net sales, with no single customer accounting for 10% or more[41] Resources HNI operates manufacturing facilities in the U.S., India, and Mexico, holding numerous patents and trademarks critical to its business - Manufacturing facilities for workplace furnishings are in Georgia, Indiana, Iowa, Kentucky, New York, North Carolina, India, and Mexico, while hearth products are manufactured in Iowa, Minnesota, Pennsylvania, and Vermont[42] - As of December 30, 2023, the Corporation owned 183 U.S. and 127 foreign patents, and 281 U.S. and 420 foreign trademark registrations[46] - The company considers the HON®, Allsteel®, Kimball®, National®, Heat & Glo®, and Heatilator® trademarks to be material to its business[48] Human Capital and Sustainability HNI employed approximately 8,200 people as of December 2023, committed to diversity, development, and 100% renewable electricity by 2030 - The Corporation employed approximately 8,200 persons as of December 30, 2023[52] - HNI has committed to 100% renewable electricity annually by 2030 and has set science-based carbon emission reduction goals[51] Risk Factors The company faces economic, strategic, operational, financing, legal, and regulatory risks, including challenges from the Kimball International acquisition - Industry/Economic Risks: Unfavorable economic conditions, such as lower office occupancy, high interest rates, and slowdowns in homebuilding, could decrease demand for the Corporation's products[63][64][65] - Strategic/Operational Risks: The company may not achieve the intended benefits of its merger with Kimball International due to integration challenges, alongside risks like supply chain disruptions, labor shortages, and potential cybersecurity threats[90][85][113] - Financing Risks: The company incurred significant new indebtedness to finance the Kimball International merger, which contains restrictive covenants and increases exposure to rising interest rates[96][124][127] - Legal/Regulatory Risks: The business is subject to extensive environmental regulations, potential product defect liabilities, and risks related to protecting its intellectual property, particularly key trademarks[115][116][119] Unresolved Staff Comments There are no unresolved staff comments - None[131] Cybersecurity HNI's cybersecurity program, aligned with NIST and overseen by the Audit Committee, has not identified material threats to date - The cybersecurity risk management program is generally based on the framework established by the National Institute of Standards and Technology (NIST)[132] - Oversight of cybersecurity risks is delegated to the Audit Committee of the Board of Directors, with day-to-day management handled by the Chief Information and Digital Officer (CIDO)[135][137] - The Corporation has not identified any cybersecurity threats that have materially affected or are reasonably likely to affect the Corporation[140] Properties The company operates approximately 11.6 million square feet of well-maintained facilities in the U.S., India, and Mexico Principal Manufacturing and Distribution Facilities (100,000 sq. ft. or larger) | Location | Workplace Furnishings Facilities | Residential Building Products Facilities | Owned Sq. Ft. (thousands) | Leased Sq. Ft. (thousands) | | :--- | :--- | :--- | :--- | :--- | | Muscatine, IA | 6 | — | 2,211 | — | | Jasper, IN | 5 | — | 1,223 | — | | Santa Claus, IN | 2 | — | 684 | — | | Lake City, MN | — | 2 | 342 | — | | Other U.S. | 11 | 6 | 2,669 | 1,554 | | Outside U.S. | 2 | — | 355 | 540 | Legal Proceedings The Corporation is involved in various legal proceedings, but management expects no material adverse effect on its financial condition - After consultation with legal counsel, the Corporation does not expect liabilities from various disputes and legal proceedings to have a material adverse effect on its financial condition or results[146] Mine Safety Disclosures This item is not applicable to the Corporation - Not applicable[147] Information about our Executive Officers This section provides a table listing the Corporation's executive officers, their ages, positions, and business experience - The table lists key executive officers including Jeffrey D. Lorenger (Chairman, President, and CEO), Marshall H. Bridges (SVP and CFO), and presidents of the major business units like The HON Company and Allsteel LLC[149] Part II Market for Registrant's Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities HNI common stock trades on NYSE, with a regular dividend policy and an active share repurchase program - The Corporation's common stock is listed on the New York Stock Exchange (NYSE) under the trading symbol HNI[151] - As of December 30, 2023, $233.5 million was authorized and available for the repurchase of shares[154] Share Repurchase Activity - Q4 2023 | Period | Total Shares Purchased (thousands) | Average Price Paid per Share | | :--- | :--- | :--- | | 10/01/23 - 10/28/23 | — | $ — | | 10/29/23 - 11/25/23 | — | $ — | | 11/26/23 - 12/30/23 | 10.0 | $41.98 | | Total | 10.0 | | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2023, net sales increased to $2.434 billion due to the Kimball acquisition, while net income decreased due to acquisition and impairment costs - Significant developments in 2023 included the acquisition of Kimball International and the divestiture of Poppin Furniture, Inc[160] Consolidated Results of Operations (2023 vs. 2022) | Metric | 2023 (in millions) | 2022 (in millions) | Change | Change (bps) | | :--- | :--- | :--- | :--- | :--- | | Net sales | $2,434.0 | $2,361.8 | 3.1% | | | Gross profit | $948.3 | $834.9 | 13.6% | | | Gross profit % | 39.0% | 35.4% | | 360 bps | | Operating income | $90.3 | $155.2 | (41.8)% | | | Operating income % | 3.7% | 6.6% | | -290 bps | | Net income attributable to HNI | $49.2 | $123.9 | (60.3)% | | - The decrease in net income was primarily due to a $50.4 million pre-tax gain on the sale of Lamex in 2022, compared to $41.2 million in acquisition costs and $31.0 million in impairment charges in 2023[162] Segment Results Workplace Furnishings sales increased due to the Kimball acquisition, while Residential Building Products sales decreased due to housing market weakness Workplace Furnishings Segment Performance (2023 vs. 2022) | Metric | 2023 (in millions) | 2022 (in millions) | Change | | :--- | :--- | :--- | :--- | | Net sales | $1,740.3 | $1,486.2 | 17.1% | | Operating profit | $68.6 | $3.4 | NM | | Operating profit % | 3.9% | 0.2% | 370 bps | - The increase in Workplace Furnishings sales was driven by the $361.4 million impact from the Kimball International acquisition, partially offset by a $46.9 million decrease from the Lamex divestiture[179] Residential Building Products Segment Performance (2023 vs. 2022) | Metric | 2023 (in millions) | 2022 (in millions) | Change | | :--- | :--- | :--- | :--- | | Net sales | $693.7 | $875.6 | (20.8%) | | Operating profit | $116.6 | $158.7 | (26.5%) | | Operating profit % | 16.8% | 18.1% | -130 bps | - The sales decrease in Residential Building Products was driven by lower volume in both new construction and existing home channels due to housing market weakness and reduced remodeling activity[181] Liquidity and Capital Resources Operating cash flow significantly increased to $267.5 million in 2023, while investing activities were dominated by the Kimball acquisition - Cash from operating activities increased to $267.5 million in 2023 from $81.2 million in 2022, mainly due to favorable changes in working capital, including lower inventory[185] - Investing activities included $369.7 million for the Kimball International acquisition and capital expenditures of $79.1 million[187][188] - Financing activities included borrowing $300 million via a term loan to support the Kimball acquisition and paying $58.5 million in dividends[189][190] - The Corporation anticipates capital expenditures for 2024 to be in an estimated range of $90 million to $100 million[187] Critical Accounting Policies and Estimates Goodwill and Intangible Assets and Self-Insurance are critical accounting policies, with a $27.6 million goodwill impairment charge in 2023 - Goodwill is tested for impairment annually in the fourth quarter, with a quantitative test in 2023 for a small workplace furnishings reporting unit resulting in a pretax goodwill impairment charge of $27.6 million[205][374] - The company is primarily self-insured for general, auto, product liability, and workers' compensation, with estimated liabilities of $24.8 million as of December 30, 2023, determined by actuarial valuations[214] - The acquisition of Kimball International resulted in the recognition of approximately $110 million in intangible assets, with the largest being customer lists valued at $47 million[212] Quantitative and Qualitative Disclosures About Market Risk The Corporation faces market risk from variable-rate debt and material price changes, with foreign currency exposure not significant - The Corporation has variable interest rate risk on its $425 million revolving credit facility and $300 million term loan, with an interest rate swap fixing the rate on $100 million of the term loan at 4.7%[220] - The Corporation is exposed to price risk for direct materials such as steel, plastics, textiles, and wood particleboard[223] - Foreign currency exposure is currently not significant[222] Controls and Procedures Disclosure controls were effective as of December 2023, but Kimball International was excluded from the internal control assessment due to acquisition timing - The CEO and CFO concluded that the Corporation's disclosure controls and procedures were effective as of December 30, 2023[227] - Kimball International was excluded from the annual assessment of the effectiveness of internal control over financial reporting due to the timing of the acquisition[231] - There were no changes in internal control over financial reporting during the fourth quarter of 2023 that materially affected, or are reasonably likely to materially affect, internal controls[229] Other Information Several directors and officers adopted Rule 10b5-1 trading arrangements during the fourth quarter of 2023 - During the fourth quarter of 2023, five directors and officers, including Donna D. Meade, Larry B. Porcellato, Miguel M. Calado, Vincent P. Berger, and Mary A. Bell, adopted Rule 10b5-1 trading arrangements[232] Part III Directors, Executive Officers, and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2024 Proxy Statement - Information required for this item is incorporated by reference from the company's Definitive Proxy Statement for the Annual Meeting on May 16, 2024[236] Executive Compensation Information regarding executive and director compensation is incorporated by reference from the 2024 Proxy Statement - Information required for this item is incorporated by reference from the company's 2024 Proxy Statement[239] Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters Information on security ownership and equity compensation plans is incorporated by reference from the 2024 Proxy Statement - Information required for this item is incorporated by reference from the company's 2024 Proxy Statement[240] Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2024 Proxy Statement - Information required for this item is incorporated by reference from the company's 2024 Proxy Statement[241] Principal Accountant Fees and Services KPMG LLP is the independent registered public accounting firm, with fee information incorporated by reference from the 2024 Proxy Statement - The Corporation's independent registered public accounting firm is KPMG LLP, Chicago, IL[242] - Information regarding accountant fees and services is incorporated by reference from the company's 2024 Proxy Statement[243] Part IV Exhibit and Financial Statement Schedules This section lists financial statements, schedules, and exhibits filed as part of the Form 10-K report, including merger and credit agreements - This section lists all financial statements, schedules, and exhibits filed with the report, including the Consolidated Statements of Comprehensive Income, Balance Sheets, Equity, and Cash Flows[246] Management Report on Internal Control Over Financial Reporting Management concluded that HNI maintained effective internal control over financial reporting as of December 2023, excluding Kimball International - Management concluded that HNI Corporation maintained effective internal control over financial reporting as of December 30, 2023[262] - The assessment of internal controls excluded Kimball International, which was acquired in the second quarter of 2023, representing approximately 32% of consolidated total assets and 15% of net sales for the year[260] Report of Independent Registered Public Accounting Firm KPMG LLP issued an unqualified opinion on HNI's financial statements and internal controls, identifying critical audit matters related to Kimball acquisition intangibles and self-insurance liabilities - The auditor, KPMG LLP, issued an unqualified opinion on both the consolidated financial statements and the effectiveness of internal control over financial reporting[266] - The audit of internal control over financial reporting excluded an evaluation of Kimball International, consistent with management's exclusion[267] - Critical Audit Matters included: 1) The fair value of the customer relationship intangible asset acquired in the Kimball acquisition, due to the subjective judgment required for the customer retention rate assumption 2) The valuation of workers' compensation and product liabilities, due to the inherent uncertainty in estimating ultimate settlement costs[276][279]