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HNI Corporation Reports Earnings for Second Quarter Fiscal Year 2023

HNI Corporation (NYSE: HNI) today announced sales for the second quarter ended July 1, 2023 of $563.5 million and a net loss of $12.8 million. GAAP earnings per diluted share declined from $0.72 in the prior year to ($0.30) in the current year primarily due to transaction expenses related to the acquisition of Kimball International. When excluding acquisition expenses and select other items, non-GAAP net income per diluted share was $0.55, compared to $0.52 in the prior year. GAAP to non-GAAP reconciliations follow the financial statements in this release.

Second Quarter Highlights

  • Grew non-GAAP profit in a challenging demand environment. Although one-time expenses related to the Kimball International acquisition impacted GAAP profit measures, non-GAAP EPS grew six percent despite a nine percent (15 percent organic) decline in net sales compared to the prior year. Improved price-cost and recent profit improvement actions more than offset lower volume.
  • Delivered significant profit improvement in Workplace Furnishings. Segment GAAP operating profit grew 33 percent driven by a 90 basis point expansion of GAAP operating margin to 3.8 percent. On a year-over-year basis and excluding the impact of the Kimball International acquisition, segment non-GAAP operating margin expanded 550 basis points to 8.5 percent. This is the highest non-GAAP margin level since the third quarter of fiscal year 2019. Segment non-GAAP operating profit, excluding the impact of the Kimball International acquisition, grew 149 percent compared to the prior year, marking the fifth consecutive quarterly period of year-over-year improvement.
  • Kimball International accretion moves significantly higher due to planned exit of Poppin. The Corporation intends to divest Poppin, which was acquired by Kimball International in 2020. Based on trailing 12-month results, exiting Poppin is estimated to increase annual operating profit by $20 million while reducing annual revenue by $56 million. Poppin is classified as “held for sale” on the Corporation’s financial statements, and the divestiture is expected to be completed during the third quarter of 2023.Poppin’s losses have masked the strength of Kimball International’s core businesses, which collectively generate strong operating margins. Further, the Corporation is increasingly confident in the strategic and financial rationale for the combination of HNI and Kimball International and confirms the previously announced annual run-rate synergies of $25 million, not including eliminating Poppin’s $20 million annual loss. In addition, the Corporation now sees the strong potential for additional synergies and will provide updates as the integration process progresses.
  • Profit support actions in place in Residential Building Products. The Residential Building Products segment continues to face volume pressure, consistent with general weakness in the broader housing market. In response to the volume declines, the Corporation enacted new cost reduction actions. These actions will begin to support profitability in the third quarter of 2023. The intermediate- to long-term demand dynamics remain encouraging for the segment, and the Corporation is well positioned for sustained long-term profit growth.

“Our members delivered an excellent quarter. In Workplace Furnishings, our profit transformation efforts are ahead of schedule as evidenced by our margin expansion and profit growth. And since closing, we are even more confident our combination with Kimball International will give us a stronger platform for growth in our Workplace Furnishings segment. In Residential Building Products, we are taking actions to support near-term profitability while staying focused on our attractive long-term opportunities in both the new construction and remodel/retrofit spaces,” stated Jeff Lorenger, Chairman, President, and Chief Executive Officer.

Second Quarter Summary Comments

  • Consolidated net sales decreased 9.4 percent from the prior-year quarter to $563.5 million. On an organic basis, sales decreased 14.8 percent year-over-year. The acquisition of Kimball International in the current quarter increased year-over-year net sales by $56.0 million, while the acquisition of a residential building products company in the second quarter of 2022 increased year-over-year sales by $0.9 million. The sale of the Corporation’s China- and Hong Kong-based Lamex office furniture business in the third quarter of 2022 decreased year-over-year sales by $27.0 million. A reconciliation of organic sales, a non-GAAP measure, follows the financial statements in this release.
  • Gross profit margin expanded 280 basis points compared to the prior-year quarter. This increase was driven by favorable price-cost, improved net productivity, and the impact of the Kimball International acquisition, partially offset by lower volume.
  • Selling and administrative expenses as a percent of sales increased 690 basis points compared to the prior-year quarter. The increase was primarily driven by $31.3 million of costs associated with the acquisition of Kimball International. Also contributing to the increase was lower volume, partially offset by price realization and lower core SG&A.
  • Restructuring and impairment charges totaled $8.1 million in the current quarter, primarily in connection with the planned exit of the Poppin business.
  • Non-GAAP net income per diluted share was $0.55 compared to $0.52 in the prior-year quarter. The increase was driven by favorable price-cost, lower core SG&A, and improved net productivity, partially offset by lower volume and higher interest expense.
  • Non-GAAP net income per diluted share in the current quarter includes an effective tax rate of 22.4 percent, compared to a GAAP tax rate of (41.8) percent. The negative GAAP tax rate in the current-year period was driven by non-deductible costs related to the acquisition of Kimball International.

Workplace Furnishings – Financial Performance

  • Workplace Furnishings net sales increased 1.6 percent from the prior-year quarter to $413.0 million. On an organic basis, sales decreased 5.9 percent year-over-year. The impact of the Kimball International acquisition in the current quarter increased sales by $56.0 million over the prior-year quarter, while the sale of Lamex in the third quarter of 2022 decreased sales $27.0 million compared to the prior-year quarter.
  • Workplace Furnishings GAAP operating margin improved 90 basis points versus the prior-year quarter, driven by favorable price-cost, lower core SG&A, and improved net productivity, partially offset by $10.3 million in Kimball International acquisition costs and $6.0 million of costs related to the planned exit of Poppin.

Residential Building Products – Financial Performance

  • Residential Building Products net sales decreased 30.1 percent from the prior-year quarter to $150.4 million. On an organic basis, sales decreased 30.5 percent year-over-year primarily due to housing market weakness. Remodel/retrofit sales, which also were negatively impacted by the normalization of trade inventory, declined more than new construction sales. The impact of a residential building products company acquired in the second quarter of 2022 increased sales $0.9 million compared to the prior-year quarter.
  • Residential Building Products operating profit margin compressed 690 basis points year-over-year, driven by lower volume, partially offset by favorable price-cost, improved net productivity, and lower variable compensation.

Order Rates

  • In the Workplace Furnishings segment, organic orders during the first six months of 2023 grew three percent year-over-year. Orders from small-to-medium sized customers outperformed orders from contract customers.Second quarter organic orders in the segment decreased six percent compared to the prior year, which benefited from pull ahead activity related to price increases. Comparing orders over the first half smooths the distortion related to price increase timing and offers clearer indication of demand.
  • Orders in the Residential Building Products segment decreased 16 percent versus the second quarter of 2022. During the quarter, orders in the new construction market were weaker than those in the remodel/retrofit channel.

Fiscal Year 2023 Outlook

  • Demand environment. The Corporation expects second half organic revenue to grow at a rate in the low single-digits for Workplace Furnishings. This outlook is consistent with first half order patterns. In Residential Building Products, the Corporation expects year-over-year revenue declines to moderate in the second half due to lower prior-year comparisons, moving past the normalization of trade inventory in the remodel/retrofit channel, and improved trends in new construction. The Corporation expects Residential Building Products revenue to decline at a year-over-year rate in the high teens during the second half of 2023 with the fourth quarter declining at a slower rate than the third quarter.
  • Third quarter commentary. The Corporation expects third quarter 2023 non-GAAP EPS to be modestly below third quarter 2022 levels primarily due to lower volume in Residential Building Products and normalization of variable compensation, partially offset by higher profitability in Workplace Furnishings.
  • Impact of Kimball International excluding Poppin. For 2023, the Corporation expects the Kimball International acquisition excluding the impact of Poppin to be solidly accretive to non-GAAP EPS and add $340 to $370 million of revenue. The benefit to non-GAAP EPS is expected to be greatest in the fourth quarter.
  • Impact of Poppin. The Corporation expects to complete the divestiture of Poppin during the third quarter of 2023. Prior to the exit, Poppin is expected to generate an operating loss of $3.5 to $4.0 million and revenue of $7 to $9 million during the third quarter.

Concluding Remarks

“Our second quarter results show the ongoing potential of our profit transformation initiatives, and there are many additional opportunities ahead. As we look to the remainder of the year, we expect continued year-over-year profit and margin improvement in Workplace Furnishings.

“The addition of Kimball International will strengthen our business. It better positions us to lead in the evolving workplace environment and provides new opportunities for profit growth. We are increasingly confident in the combination’s strategic and financial benefits.

“In Residential Building Products, we have demonstrated the ability to grow profit over the long-term and will continue to invest in our growth strategies, even as we navigate near-term headwinds in the housing space. The intermediate- to long-term fundamentals of the housing market are strong as the market remains undersupplied, and demographic trends will continue to support demand. Our market-leading brands, product depth, and price-point breadth uniquely position us to drive high-margin growth through category awareness and product innovation as we continue to leverage our owned installing-distribution footprint.

“Our core strategies are unchanged and gaining momentum. We will continue to expand margins in Workplace Furnishings and drive long-term revenue growth in Residential Building Products,” concluded Mr. Lorenger.

Conference Call

HNI Corporation will host a conference call on Tuesday, August 8, 2023 at 10:00 a.m. (Central) to discuss second quarter fiscal year 2023 results. To participate, call 1-855-761-5600 – conference ID number 7175411.

The full text of HNI’s 2Q23 earnings release, including all tables, may be accessed at https://investors.hnicorp.com/home/default.aspx. An archived replay of HNI’s Aug. 8 conference call webcast is available at https://investors.hnicorp.com/events-and-presentations. A telephone replay of the call will available be through Tuesday, Aug. 15, 2023, 10:59 p.m. (Central) by dialing 1-800-770-2030 – Conference ID: 7175411.

About HNI Corporation

HNI Corporation (NYSE: HNI) has been improving where people live, work, and gather for more than 75 years. HNI is a manufacturer of workplace furnishings and residential building products, operating under two segments. The Workplace Furnishings segment is a leading global designer and provider of commercial furnishings, going to market under multiple unique brands. The Residential Building Products segment is the nation’s leading manufacturer and marketer of hearth products, which include a full array of gas, electric, wood, and pellet-burning fireplaces, inserts, stoves, facings, and accessories. More information can be found on the Corporation’s website at www.hnicorp.com.