HNI (HNI) - 2022 Q4 - Annual Report

Part I Business HNI Corporation provides workplace furnishings and residential building products through two primary segments | Segment | 2022 Net Sales (Billions) | Percentage of Total | | :--- | :--- | :--- | | Workplace Furnishings | $1.5 | 63% | | Residential Building Products | $0.9 | 37% | | Total | $2.4 | 100% | - The company's strategy is founded on its member-owner culture and executed through three pillars: a Customer-First Mindset, creating Effortless Winning Experiences, and Owning Operational Excellence through lean principles[32][34] - The workplace furnishings market is divided into the contract channel and the SMB channel, where HNI is a market leader[24][25][26] - HNI is the market leader in hearth products within the residential building products industry[28][30] - In fiscal 2022, the Corporation's five largest customers accounted for approximately 18% of consolidated net sales, with no single customer representing 10% or more[39] - As of December 31, 2022, the Corporation employed approximately 7,300 people, including about 200 temporary personnel[53] Risk Factors The company faces a range of industry, economic, strategic, operational, legal, and financing risks Industry and Economic Risks Performance is susceptible to macroeconomic factors, intense competition, and international trade policy uncertainty - Sales are impacted by service-sector employment, corporate profits, office occupancy levels, housing starts, and interest rates[64][65][66] - Both business segments operate in highly competitive industries, facing pressure on pricing that could impact profit margins[68][70] - The company relies on a network of independent dealers, and the loss of a significant number of these partners could adversely affect sales[71][72] - Increases in raw material and commodity costs, along with transportation challenges, could adversely affect profitability[80][81] Strategic and Operational Risks Key risks include brand reputation, new product failures, pandemic effects, labor shortages, and M&A integration challenges - The COVID-19 pandemic has had and may continue to have adverse effects, including labor shortages and supply chain disruptions[86] - A continued shortage of qualified labor could negatively affect production capacity, increase wage costs, and reduce earnings[89] - The company's growth strategy includes acquisitions, which carry risks such as failing to successfully integrate acquired businesses[91][93] - Goodwill and other intangible assets represent a significant portion of total assets, and an impairment charge would adversely affect financial results[94] Legal and Regulatory Risks The company is subject to environmental regulations, product defect liabilities, and intellectual property risks - The company is subject to extensive environmental laws, and compliance with more stringent future regulations could require material expenditures[111] - Costs related to product defects, including warranty, recall, and liability costs, could adversely affect profitability[112] - An inability to protect intellectual property rights or facing claims of infringement could harm the business[116][118] Financing Risks Financing risks stem from restrictive debt covenants and the potential need for future capital - The company's debt agreements contain restrictive covenants that limit its operational flexibility, and failure to comply could result in default[119][120] - Future capital requirements may necessitate raising additional funds, which may not be available or could be on unfavorable terms[122][123] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[124] Properties The Corporation operates approximately 8.4 million square feet of space across the US, India, and Mexico | Location | Workplace Furnishings Facilities | Residential Building Products Facilities | Owned (sq ft, thousands) | Leased (sq ft, thousands) | | :--- | :--- | :--- | :--- | :--- | | Muscatine, IA | 6 | — | 2,211 | — | | Lake City, MN | — | 2 | 342 | — | | Other U.S. | 9 | 6 | 1,966 | 1,556 | | Outside U.S. | 2 | — | 355 | 159 | Legal Proceedings Management does not expect liabilities from ordinary course legal proceedings to have a material adverse effect - The Corporation is involved in various disputes and legal proceedings but believes any resulting liabilities are not expected to have a material adverse effect[128] Mine Safety Disclosures This item is not applicable to the Corporation - Not applicable[129] Part II Market for Registrant's Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities The company's stock trades on the NYSE, with a history of paying dividends and an active share repurchase program - The Corporation has paid dividends each quarter since 1955, with an average payout for the last three years of 75% of prior year earnings[136] - As of December 31, 2022, $234.0 million remained authorized and available for share repurchases under its plan[138] [Reserved] This item is reserved and contains no information - Item 6 is reserved[139] Management's Discussion and Analysis of Financial Condition and Results of Operations Net sales grew 8.1% in 2022, driven by price realization, with net income significantly boosted by a subsidiary sale - In 2022, the Corporation achieved solid gross and operating margin improvement and strong earnings growth[142] - Consolidated net sales for 2022 increased 8.1% to $2.362 billion, while net income rose to $123.9 million, including a $49.4 million net gain from the sale of the Lamex business[143][144] - The company initiated cost savings actions estimated to save approximately $30 million annually[145] Results of Operations Net sales increased 8.1%, operating income surged 81.7% boosted by the Lamex sale, and net income grew 107.1% | Metric | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $2,361.8M | $2,184.4M | 8.1% | | Gross Profit | $834.9M | $757.4M | 10.2% | | Operating Income | $155.2M | $85.4M | 81.7% | | Net Income | $123.9M | $59.8M | 107.1% | - The 2022 results include a pre-tax gain of $50.4 million from the divestiture of the Lamex subsidiary[152] - The effective tax rate for 2022 was 15.4%, down from 23.6% in 2021, primarily due to tax benefits related to the Lamex sale[156] Segment Analysis Workplace Furnishings sales grew 3.6% while Residential Building Products sales increased 16.7% Workplace Furnishings Net sales increased 3.6% to $1.486 billion, with operating profit turning positive due to favorable price-cost | Metric | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $1,486.2M | $1,434.0M | 3.6% | | Operating Profit (Loss) | $3.4M | $(0.5)M | 734.6% | | Operating Profit % | 0.2% | (0.0)% | +20 bps | Residential Building Products Net sales grew 16.7% to $875.6 million, driven by price realization and volume growth | Metric | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $875.6M | $750.4M | 16.7% | | Operating Profit | $158.7M | $141.9M | 11.9% | | Operating Profit % | 18.1% | 18.9% | -80 bps | Liquidity and Capital Resources Operating cash flow decreased due to working capital changes, while the company maintained a solid balance sheet - Cash from operating activities decreased to $81.2 million in 2022 from $131.6 million in 2021, primarily due to a $72.7 million use of cash from changes in working capital[164] - Capital expenditures were $68.4 million in 2022, with $60 million to $70 million anticipated for 2023[166] - In Q2 2022, the company amended its revolving credit facility, extending the maturity to June 2027 with a maximum borrowing capacity of $400 million[167] | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Dividends per common share | $1.270 | $1.235 | Quantitative and Qualitative Disclosures About Market Risk The Corporation is primarily exposed to interest rate risk on variable-rate debt and price risk for raw materials - The company is subject to interest rate risk from its $89 million of variable-rate debt outstanding as of December 31, 2022[188] - The Corporation is exposed to price risk for key materials such as steel, plastics, textiles, and wood particleboard[191] Financial Statements and Supplementary Data This section incorporates by reference the financial statements listed under Item 15 - The financial statements are filed as part of this report under Item 15(a)(1) and (2)[192] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants - None[193] Controls and Procedures Management concluded that disclosure controls and procedures are effective as of year-end 2022 - As of December 31, 2022, the CEO and CFO concluded that the Corporation's disclosure controls and procedures are effective[197] - No material changes in internal control over financial reporting occurred during the fourth quarter of 2022[198] Other Information The company reports no other information - None[200] Disclosure Regarding Foreign Jurisdictions that Prevent Inspection This item is not applicable to the Corporation - Not applicable[201] Part III Directors, Executive Officers, and Corporate Governance Required information is incorporated by reference from the company's 2023 Definitive Proxy Statement - Information required by this item is incorporated by reference from the Corporation's Definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 17, 2023[203][204][205] Executive Compensation Information regarding executive and director compensation is incorporated by reference from the 2023 Proxy Statement - Information required by this item is incorporated by reference from the Corporation's 2023 Proxy Statement[206] Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters Information regarding security ownership is incorporated by reference from the 2023 Proxy Statement - Information required by this item is incorporated by reference from the Corporation's 2023 Proxy Statement[207] Certain Relationships and Related Transactions, and Director Independence Information regarding related transactions and director independence is incorporated by reference from the 2023 Proxy Statement - Information required by this item is incorporated by reference from the Corporation's 2023 Proxy Statement[208] Principal Accounting Fees and Services Information regarding accounting fees is incorporated by reference from the 2023 Proxy Statement - The Corporation's independent registered public accounting firm is KPMG LLP[209] - Information regarding audit and non-audit fees is incorporated by reference from the 2023 Proxy Statement[210] Part IV Exhibits, Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the report - The consolidated financial statements, including the Report of Independent Registered Public Accounting Firm and Notes to Consolidated Financial Statements, are filed as part of this report[212] Form 10-K Summary The company provides no summary for its Form 10-K - None[216] Financial Statements and Notes Financial Statements The statements show 2022 net sales of $2.36 billion, net income of $123.9 million, and total assets of $1.41 billion | (In millions, except per share data) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net sales | $2,361.8 | $2,184.4 | $1,955.4 | | Operating income | $155.2 | $85.4 | $61.4 | | Net income attributable to HNI Corporation | $123.9 | $59.8 | $41.9 | | Net income per common share – diluted | $2.94 | $1.36 | $0.98 | | (In millions) | Dec 31, 2022 | Jan 1, 2022 | | :--- | :--- | :--- | | Total Current Assets | $469.2 | $523.5 | | Total Assets | $1,414.5 | $1,497.9 | | Total Current Liabilities | $395.1 | $506.4 | | Total Liabilities | $797.7 | $907.9 | | Total Equity | $616.8 | $590.0 | Notes to Consolidated Financial Statements The notes detail accounting policies, including LIFO inventory valuation, goodwill testing, and revenue recognition Note 2. Summary of Significant Accounting Policies Key policies include LIFO for inventories, annual impairment testing, and expensing R&D costs as incurred - The majority of inventories (91% in 2022) are valued using the last-in, first-out (LIFO) method; if FIFO had been used, inventories would have been $53.7 million higher[269] - The company is primarily self-insured for various liabilities, with total estimated liabilities of $23.8 million as of December 31, 2022[294] | Expense (in millions) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Research and development costs | $47.8 | $39.4 | $35.3 | | Freight expense | $142.0 | $118.2 | $98.4 | Note 3. Revenue from Contracts with Customers This note disaggregates revenue by major product category for each business segment | Revenue (in millions) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Workplace Furnishings | | | | | Systems and storage | $889.6 | $833.2 | $741.2 | | Seating | $473.7 | $481.7 | $489.3 | | Other | $123.0 | $119.0 | $135.2 | | Total Workplace Furnishings | $1,486.2 | $1,434.0 | $1,365.7 | | Residential Building Products | $875.6 | $750.4 | $589.7 | | Total Net Sales | $2,361.8 | $2,184.4 | $1,955.4 | Note 4. Acquisitions and Divestitures The company sold its Lamex business for ~$75 million and made several acquisitions in residential building products - In July 2022, the Corporation sold its Lamex office furniture business for approximately $75 million, recording a pre-tax gain of $50.4 million[303] - The company acquired Dickerson Hearth Products for ~$8 million in June 2022, The Outdoor GreatRoom Company for ~$15 million in December 2021, and Trinity Hearth & Home for ~$31 million in October 2021[305][306][307] Note 6. Goodwill and Other Intangible Assets The company held $305.9 million in goodwill at year-end, with no material impairments identified in 2022 | (in millions) | Workplace Furnishings | Residential Building Products | Total | | :--- | :--- | :--- | :--- | | Net Goodwill Balance as of Jan 1, 2022 | $83.6 | $213.7 | $297.3 | | Goodwill acquired (disposed) / adjustments | $(13.6) | $8.6 | $(5.0) | | Accumulated impairment losses disposed | $13.6 | — | $13.6 | | Net Goodwill Balance as of Dec 31, 2022 | $83.6 | $222.3 | $305.9 | - The annual impairment testing for goodwill and indefinite-lived intangible assets in Q4 2022 resulted in no identified impairments[321][323] Note 7. Debt Total debt was $190.1 million, consisting of a revolving credit facility and fixed-rate notes | Debt Component (as of Dec 31, 2022) | Amount (in millions) | Interest Rate/Maturity | | :--- | :--- | :--- | | Revolving credit facility | $89.1 | Variable (5.6%), due 2027 | | Fixed rate notes | $50.0 | 4.22%, due 2025 | | Fixed rate notes | $50.0 | 4.40%, due 2028 | | Other | $1.3 | N/A | | Total Debt | $190.4 | | - The company's $400 million revolving credit facility matures in June 2027, with $311 million of borrowing capacity available at year-end[326][327] Note 10. Accumulated Other Comprehensive Income (Loss) and Shareholders' Equity This note details changes in shareholders' equity, the stock repurchase program, and dividends paid | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Shares repurchased (millions) | 1.7 | 1.5 | 0.2 | | Average price per share | $38.11 | $39.89 | $29.83 | | Cash purchase price (millions) | $(63.9) | $(60.4) | $(6.4) | | Year | Dividends per common share | | :--- | :--- | | 2022 | $1.27 | | 2021 | $1.24 | | 2020 | $1.22 | Note 11. Stock-Based Compensation Total stock-based compensation cost was $9.0 million in 2022, with no stock options granted | (in millions) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Compensation cost | $9.0 | $12.9 | $7.8 | - No stock options were granted in 2022, 2021, or 2020[364] - As of December 31, 2022, there was $4.5 million of unrecognized compensation cost related to RSUs and $2.3 million related to PSUs[360][361] Note 16. Reportable Segment Information This note provides key financial data for the Workplace Furnishings and Residential Building Products segments | (in millions) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net Sales | | | | | Workplace furnishings | $1,486.2 | $1,434.0 | $1,365.7 | | Residential building products | $875.6 | $750.4 | $589.7 | | Income (Loss) Before Income Taxes | | | | | Workplace furnishings | $3.4 | $(0.5) | $(5.0) | | Residential building products | $158.7 | $141.9 | $109.3 | | Identifiable Assets | | | | | Workplace furnishings | $761.5 | $809.0 | $762.8 | | Residential building products | $493.0 | $479.5 | $381.6 |