HNI Corporation Reports Earnings for Second Quarter Fiscal Year 2019

HNI Corporation HNI today announced sales for the second quarter ended June 29, 2019 of $526.0 million and net income of $15.8 million. GAAP net income per diluted share was $0.36 compared to $0.42 in the prior year. Non-GAAP net income per diluted share was $0.38 compared to $0.44 in the prior year.

Second Quarter Summary Comments

"Our teams are performing well - managing through dynamic market conditions while staying focused on our key initiatives. Our efforts to drive operational efficiencies are on-track and bearing fruit. We are seeing strong momentum in our contract business. Our hearth business is executing well while navigating a slower housing market. We continue to see inconsistent demand in our supplies-driven business, which negatively impacted the quarter. We are confident in our ability to deliver profit improvement in the second half," said Jeff Lorenger, HNI Corporation President and Chief Executive Officer.

Second Quarter Summary Comments

• Consolidated net sales decreased $17.6 million or 3.2 percent from the prior year quarter to $526.0 million. On an organic basis, sales decreased 2.3 percent. The net impact of closing and divesting small office furniture companies decreased sales $5.0 million compared to the prior year quarter. A reconciliation of organic sales, a non-GAAP measure, follows the financial statements in this release.

• Gross profit margin decreased 40 basis points compared to the prior year quarter. This decrease was driven by lower volume and higher input costs, partially offset by price realization and improved operational performance.

• Selling and administrative expenses as a percent of sales increased 20 basis points compared to the prior year quarter. This increase was primarily due to lower sales volume, partially offset by lower Business System Transformation costs and freight expenses.

• The Corporation recorded $0.9 million of restructuring charges in connection with a structural realignment in the office furniture segment. In the prior year quarter, $0.8 million of restructuring and impairment charges were recorded in connection with previously announced facilities closures.

• Non-GAAP net income per diluted share was $0.38 compared to $0.44 in the prior year. This $0.06 decline was due to lower sales volume and higher input costs, partially offset by price realization and improved operational performance.

• Office furniture net sales decreased $14.4 million or 3.4 percent from the prior year quarter to $409.5 million. On an organic basis, sales decreased 2.2 percent primarily due to a decrease in the supplies-driven business. The net impact of closing and divesting small office furniture companies decreased sales $5.0 million compared to the prior year quarter.

• Office furniture GAAP operating profit margin decreased 10 basis points. Lower sales volume, higher input costs, and investments were fully offset by improved price realization, operational performance, Business System Transformation costs, and freight expenses. Higher current year restructuring charges drove a 10 basis points decrease.

• Hearth products net sales decreased $3.2 million or 2.7 percent from the prior year quarter to $116.5 million with decreases in both the new construction and retail businesses.

• Hearth products GAAP operating profit margin decreased 210 basis points for the quarter. Of this decrease, 280 basis points were driven by lower sales volume, higher input costs, and investments, partially offset by price realization and lower core SG&A spend. This decline was partially offset by a 70 basis points increase due to restructuring and impairment charges and other one-time costs incurred in the prior year quarter.

Outlook

The Corporation expects full year organic sales to be up 1 to 4 percent. This compares to the previous organic sales growth expectation of up 2 to 6 percent. The change is primarily driven by lower sales in the supplies-driven business. Including the impact of closing and divesting small office furniture companies, full year sales are expected to be flat to up 3 percent. The Corporation's estimate of full year earnings per diluted share has narrowed and is expected to be in the range of $2.50 to $2.70 versus the previous guidance range of $2.50 to $2.90.

"As we look at the second half of the year, our operational cost efforts are ramping up and will deliver significant benefits. We are also seeing improved second half demand, driven by strong sales growth in our contract and e-commerce office furniture businesses. We expect our supplies-driven business to stabilize in the second half. Our hearth business will deliver modest growth as strength in our retail products channel is partially offset by slow new construction sales.

We are focused on strengthening our operational excellence position and creating effortless experiences for our customers through deepening customer insights. We remain confident in our strategies and continue to invest in critical capabilities to drive long-term results," said Mr. Lorenger.

Conference Call

HNI Corporation will host a conference call on Thursday, July 25, 2019 at 10:00 a.m. (Central) to discuss second quarter fiscal year 2019 results. To participate, call 1-877-512-9166 – conference ID number 8295057. A live webcast of the call will be available on HNI Corporation's website at http://www.hnicorp.com (under Investors – News Releases & Events). A replay of the webcast will also be made available at that website address. An audio replay of the call will be available until Thursday, August 1, 2019, 10:59 p.m. (Central) by dialing 1-855-859-2056 or 1-404-537-3406 – Conference ID number 8295057.

About HNI Corporation

HNI Corporation is an NYSE traded company (ticker symbol: HNI) providing products and solutions for the home and workplace environments. HNI Corporation is a leading global office furniture manufacturer and is the nation's leading manufacturer of hearth products. The Corporation's strong brands have leading positions in their markets. More information can be found on the Corporation's website at www.hnicorp.com.

Forward-Looking Statements

This release contains "forward-looking" statements based on current expectations regarding future plans, events, outlook, objectives, financial performance, expectations for sales growth, and earnings per diluted share (GAAP and non-GAAP). Forward-looking statements can be identified by words including "expect," "believe," "anticipate," "estimate," "may," "will," "would," "could," "confident", or other similar words, phrases, or expressions. Forward-looking statements involve known and unknown risks and uncertainties, which may cause the Corporation's actual future results and performance to differ materially from expected results. These risks include but are not limited to: the levels of office furniture needs and housing starts; overall demand for the Corporation's products; general economic and market conditions in the United States and internationally; industry and competitive conditions; the consolidation and concentration of the Corporation's customers; the Corporation's reliance on its network of independent dealers; change in trade policy; changes in raw material, component, or commodity pricing; market acceptance and demand for the Corporation's new products; changing legal, regulatory, environmental, and healthcare conditions; the risks associated with international operations; the potential impact of product defects; the various restrictions on the Corporation's financing activities; an inability to protect the Corporation's intellectual property; impacts of tax legislation; and force majeure events outside the Corporation's control. A description of these risks and additional risks can be found in the Corporation's annual and quarterly reports filed with the Securities and Exchange Commission on Forms 10-K and 10-Q. The Corporation assumes no obligation to update, amend, or clarify forward-looking statements, except as required by applicable law.

Non-GAAP Financial Measures

This earnings release includes certain non-GAAP financial information as defined by Securities and Exchange Commission Regulation G. Pursuant to the requirements of this regulation, reconciliations of this non-GAAP financial information to HNI's financial statements as prepared in accordance with GAAP are included below and throughout this earnings release. This information gives investors additional insights into HNI's financial performance and operations. While HNI's management believes the non-GAAP financial measures are useful in evaluating HNI's operations, this information should be considered supplemental and not in isolation or as a substitute for, or superior to, financial information prepared and presented in accordance with GAAP. In addition, these measures may be different from non-GAAP financial measures used by other companies, limiting their usefulness for comparison purposes.

To supplement our condensed consolidated financial statements, which are prepared and presented in accordance with GAAP, we use the following non-GAAP financial measures within this earnings release: organic sales, gross profit, operating income, operating profit, income taxes, net income, and net income per diluted share (i.e., EPS). These measures are adjusted from the comparable GAAP measures to exclude the impacts of the selected items as summarized in the table below. Generally, non-GAAP EPS is calculated using HNI's overall effective tax rate for the period, as this rate is reflective of the tax applicable to most non-GAAP adjustments.

The sales adjustments to arrive at our non-GAAP organic sales information included in this earnings release excludes the impact of closing and divesting small office furniture companies. The transactions excluded for purposes of our other non-GAAP financial information included in this earnings release for both periods presented include restructuring charges, impairment charges, and/or transition costs. Restructuring charges incurred in the current year period presented are primarily comprised of severance costs related to a structural realignment in the office furniture segment. In the prior year period presented, costs were incurred as part of the previously announced closures of the hearth manufacturing facility in Paris, Kentucky, the office furniture manufacturing facility in Orleans, Indiana, and structural realignments in China. Restructuring items incurred include severance, while impairment charges recorded in the second quarter of 2018 relate to a closed manufacturing facility previously held for sale. Transition items incurred include production move costs.

This earnings release also contains a forward-looking estimate of non-GAAP earnings per diluted share for the full fiscal year. We provide such non-GAAP measure to investors on a prospective basis for the same reasons we provide it to investors on a historical basis. We are unable to provide a reconciliation of our forward-looking estimate of non-GAAP earnings per diluted share to a forward-looking estimate of GAAP earnings per diluted share without unreasonable efforts because certain information needed to make a reasonable forward-looking estimate of GAAP earnings per diluted share is highly variable and difficult to predict and estimate, and is dependent on future events which are uncertain or outside of our control. These may include unanticipated charges related to asset impairments (fixed assets, intangibles, or goodwill), unanticipated acquisition related costs, and other unanticipated nonrecurring items not reflective of ongoing operations. We expect the variability of these charges to have a potentially unpredictable, and potentially significant, impact on our GAAP earnings per diluted share.

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