HNI Corporation today announced sales for the first quarter ended March 28, 2020, of $468.7 million and net loss of $23.9 million. GAAP net income (loss) per diluted share was ($0.56), compared to $0.02 in the prior year. GAAP operating profit was impacted by intangible impairments and one-time charges related to the COVID-19 crisis of $37.7 million. Non-GAAP net income per diluted share was $0.21, compared to $0.02 in the prior year.

Pandemic Response Update

Health, safety, and community support

Earlier this month, the Corporation announced the implementation of workplace health and safety measures consistent with guidelines from the Centers for Disease Control and Prevention. The Corporation is taking strong measures to create social distancing and keep members safe. All members able to work remotely are currently doing so. In addition, the Corporation has reorganized production facilities to protect members and increased the frequency and depth of cleanings, among other measures.

To support local communities and health providers, the Corporation is producing, donating, and supporting the production of personal protective equipment (PPE) to first responders, healthcare systems, and hospitals utilizing HNI’s facilities in Iowa, New York, and North Carolina. These efforts include the manufacture of washable cloth facemasks, washable cloth facemask coverings, and washable and disposable protective gowns. Further, the Corporation is loaning equipment processing time to support local vendors’ PPE production efforts.

Cost savings and cash flow support

In its COVID-19 response update on April 6th, the Corporation provided details around its debt and liquidity levels and withdrew its fiscal 2020 sales and earnings guidance. The Corporation also announced plans to reduce operating costs, lower capital expenditures, and temporarily suspend share repurchase activity to support free cash flow. Since then, the Corporation has taken additional actions, including:

Salaries reduced. Base salaries for salaried exempt members were reduced by 10 percent; executive salaries were reduced by 15 percent; and CEO Jeff Lorenger’s salary was reduced by 25 percent. These measures will be reassessed in six months.
Board retainers reduced. The Corporation’s Board of Directors reduced its cash and equity retainers by 25 percent. This action will also be reassessed in six months.
Members furloughed. Members have been furloughed to better match staffing levels with demand activity. The Corporation will pay all health insurance premiums for these members during furlough.
Capital plan reduced. The Corporation reduced its capital expenditure budget for 2020 from approximately $65 million to $35 million.

"We are taking an aggressive, yet balanced approach to our pandemic response. Our primary focus is on the health and safety of our members, and we have implemented measures accordingly. Financially, we entered this crisis from a position of strength with modest debt levels, strong liquidity, and earnings momentum. To maintain that strength and ensure the long-term health of the organization, we are taking aggressive cost actions and other measures to support cash flow," stated Jeff Lorenger, HNI Corporation, Chairman, President, and Chief Executive Officer.

First Quarter Highlights

GAAP operating profit was impacted by intangible impairments and one-time charges related to the COVID-19 crisis. Non-GAAP operating profit expanded 279 percent from the prior-year quarter.
Gross margin and non-GAAP operating margin expanded 220 bps from the prior-year quarter. Both segments generated year-over-year non-GAAP operating margin expansion.
Hearth Products segment revenue increased 2.6 percent organically from the prior-year quarter and strengthened through the quarter.
Quarter-ending debt levels were $230 million, equal to a gross leverage ratio of approximately 1.0x. Liquidity, as measured by cash and borrowing availability at the end of Q1 was $356 million.

"Our first quarter results demonstrate the strength of our operating platform as our annual productivity and cost savings initiatives again drove improved profitability. Unfortunately, the COVID-19 pandemic has derailed what began as another strong year. While our continued focus is on the safety of our members and on managing through the near-term revenue pressure associated with the crisis, I remain confident in our long-term strategic direction," said Mr. Lorenger.

First Quarter Summary Comments

Consolidated net sales decreased 2.2 percent from the prior-year quarter to $468.7 million. On an organic basis, sales decreased 2.5 percent. The impact of acquiring small hearth companies increased sales $1.1 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 expanded 220 basis points compared to the prior-year quarter. This increase was primarily driven by price realization and net productivity, partially offset by lower office volume and increased tariff expense.
Selling and administrative expenses as a percent of sales increased 100 basis points compared to prior year, due to $5.0 million one-time costs related to the COVID-19 pandemic (of which $1.6 million was recorded as a corporate charge). Lower office volume was fully offset by lower core SG&A spend and reduced variable compensation.
The Corporation recorded charges of $32.7 million in the first quarter related to the impairment of goodwill and intangible assets.
Non-GAAP net income per diluted share was $0.21 compared to $0.02 in the prior-year quarter. The $0.19 increase was primarily due to price realization, net productivity, and lower core SG&A spend, partially offset by lower office volume and increased tariff expense.

Office furniture net sales decreased 4.3 percent from the prior-year quarter to $338.4 million.
Office furniture GAAP operating profit margin decreased 930 basis points versus the prior-year quarter. On a non-GAAP basis, segment operating margin expanded 130 basis points year-over-year, driven by price realization, net productivity, and lower core SG&A spend, partially offset by lower volume and higher tariff expense.
The office furniture segment recorded charges of $32.7 million in the first quarter related to the impairment of goodwill and intangible assets, as well as $3.4 million related to the COVID-19 pandemic.

Hearth products net sales increased 3.5 percent from the prior-year quarter to $130.3 million. On an organic basis, sales grew 2.6 percent. The impact of acquiring small hearth companies increased sales $1.1 million compared to the prior-year quarter.
Hearth products operating profit margin expanded 190 basis points, driven by price realization and higher volume, partially offset by increased tariff expense.

Concluding Remarks

"Although volumes and profit levels will be adversely impacted by the pandemic, we will adjust our business, maintain our long-term focus, and utilize our strong balance sheet to successfully weather this crisis. The HNI culture shines in times like these. Together, our members, dealers, suppliers, and communities will overcome the challenges presented by this crisis. Our business is strong, our leadership is seasoned, our members are capable and dedicated, and I am confident in our ability to effectively navigate this difficult period," Mr. Lorenger concluded.