HNI Corporation Monday announced sales for the full year ended January 2, 2021, of $1.955 billion and net income of $41.9 million. GAAP net income per diluted share was $0.98, compared to $2.54 in the prior year. Non-GAAP net income per diluted share was $1.79, compared to $2.59 in the prior year.
Fourth-quarter sales of $562.1 million were down 9 percent from year-ago levels, and fourth-quarter net income was $22.6 million. GAAP net income per diluted share was $0.52, compared to $1.10 in the prior year. Non-GAAP net income per diluted share was $0.66, compared to $1.12 in the prior year.
Fourth Quarter Highlights
Double-digit revenue and profit growth in Residential Building Products. Fourth quarter segment revenue increased 15.9 percent organically year-over-year, while operating profit was 11.4 percent higher than the year-ago period.
Solid profitability in Workplace Furnishings. Fourth-quarter segment operating profit exceeded $11 million, despite an 18.6 percent year-over-year top line contraction.
Strong cash flow generation. Fourth quarter operating cash flow totaled $71 million, and full year operating cash flow was $214 million. Full year operating cash flow was only slightly below the $219 million generated in fiscal year 2019 despite year-over-year total revenue and non-GAAP operating profit declines of 13 percent and 30 percent, respectively.
High quality balance sheet. Debt at the end of the fourth quarter totaled $175 million— unchanged from last quarter and prior-year levels. The Corporation’s gross leverage ratio remained low at 1.0x. Additionally, the Corporation ended the quarter with $116 million of cash, an increase of $7 million from the end of the third quarter and a $64 million increase from the end of fiscal year 2019. The quarter-ending balance sheet reflects the impacts of the acquisition of Design Public Group at the end of fiscal year 2020.
“Our members finished a challenging year by delivering another solid quarter. Our performance has enabled us to invest more aggressively to improve our competitive position. The acquisition of Design Public Group is a great example of these efforts, as it accelerates our initiatives around eCommerce while providing access to a broader customer group,” stated Jeff Lorenger, Chairman, President, and Chief Executive Officer.
Fourth Quarter Summary Comments
Consolidated net sales decreased 8.8 percent from the prior-year quarter to $562.1 million. On an organic basis, sales decreased 9.2 percent. The impact of building products distributors acquired in 2020 increased sales $3.0 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 90 basis points compared to the prior-year quarter. This decrease was primarily due to lower Workplace Furnishings volume and unfavorable mix, partially offset by improved net productivity and higher Residential Building Products volume.
Selling and administrative expenses as a percent of sales increased 300 basis points compared to the prior-year quarter. This increase was primarily due to lower Workplace Furnishings volume and higher investments, partially offset by volume growth in Residential Building Products and freight & distribution productivity. Included in current year quarter SG&A was $1.8 million of one-time costs from exiting workplace furnishings showrooms, driven by conditions related to the COVID-19 pandemic.
The Corporation recorded net charges of $6.2 million in the current year quarter related to the impairment of goodwill and other assets in the Workplace Furnishings segment. In the prior-year quarter, the Corporation recorded $1.2 million of restructuring costs in connection with structural realignments in the Workplace Furnishings segment.
Non-GAAP net income per diluted share was $0.66 compared to $1.12 in the prior-year quarter. The $0.46 decrease was primarily driven by lower Workplace Furnishings volume and unfavorable mix, partially offset by strong Residential Building Products volume and net productivity.
Full Year Summary Comments
Consolidated net sales decreased 13.0 percent from the prior year to $1.955 billion. On an organic basis, sales decreased 13.4 percent year-over-year. The impact of building products distributors acquired in 2020 increased sales $9.4 million compared to the prior year.
Gross profit margin decreased 20 basis points compared to the prior year. This decrease was driven by lower Workplace Furnishings volume, partially offset by net productivity and higher Residential Building Products volume.
Selling and administrative expenses as a percent of sales increased 150 basis points compared to the prior year. This increase was driven by lower Workplace Furnishings volume, partially offset by lower core SG&A and freight & distribution productivity. Included in current year SG&A was $6.8 million of one-time costs incurred as a result of the COVID-19 pandemic (of which $1.6 million was recorded as a corporate charge).
The Corporation recorded net charges of $38.8 million related to impairments of goodwill, intangibles, and other assets in the Workplace Furnishings segment. In the prior year, the Corporation recorded $2.4 million of restructuring costs in connection with structural realignments in the Workplace Furnishings segment.
Non-GAAP net income per diluted share was $1.79, compared to $2.59 in the prior year. The $0.80 decrease was due to lower Workplace Furnishings volume, partially offset by improved net productivity, lower core SG&A, and higher Residential Building Products volume.
Fourth Quarter Balance Sheet and Cash Flow
The Corporation’s cash balance at the end of the fourth quarter of 2020 totaled $116 million—representing a $7 million increase from third quarter-ending levels and a $64 million increase from the total reported at the end of the fourth quarter of 2019. The Corporation built cash during the fourth quarter while funding the acquisition of Design Public Group.
Quarter-ending debt levels were $175 million—approximately equal to the prior quarter and prior year balances. The outstanding debt consisted of $100 million in private placement notes and $75 million drawn on the Corporation’s $450 million revolving credit facility. The gross leverage ratio was 1.0x at the end of the fourth quarter, which was up slightly from 0.9x last quarter but well below the Corporation’s debt covenant of 3.5x.
Full-year cash flow from operations of $214 million was only modestly below the $219 million generated in 2019 despite challenging conditions throughout 2020.
Capital expenditures in 2020 of $32.3 million were down 47 percent from the $60.8 million in 2019. The decrease reflects the Corporation’s adjustment to the pandemic-related conditions. Investment in capitalized software increased 57 percent on a year-over-year basis to $9.5 million, reflecting the Corporation’s emphasis on digital initiatives. Cash flow used for acquisitions totaled $58.3 million in 2020.
Fourth Quarter Orders
Orders in the Workplace Furnishings segment excluding eCommerce declined 21 percent year-over-year in the fourth quarter. December year-over-year trends improved from those in October and November. Order rates in the business focused on small to mid-sized customers were better than those with contract customers.
Orders in eCommerce increased 51 percent year-over-year in the fourth quarter. While sales growth continued to be impacted by supply constraints and tough year-ago comparables, year-over-year order growth trends (adjusted for the extra week) were consistently above 23 percent in each month of the quarter.
Orders in the Residential Building Products segment increased 24 percent year-over-year in the fourth quarter. Order growth in the quarter was comparable in the new construction and repair/remodel markets, and total segment order growth strengthened in December.
The Corporation estimates the extra week in the fourth quarter of 2020 added approximately five percentage points on a year-over-year basis to total order growth.
Fourth Quarter Summary Comments - Workplace Furnishings
Workplace Furnishings net sales decreased 18.6 percent from the prior-year quarter to $365.9 million.
Workplace Furnishings GAAP operating profit margin decreased 690 basis points versus the prior-year period. On a non-GAAP basis, segment operating margin decreased 500 basis points driven by lower volume and unfavorable mix, partially offset by net productivity.
The Workplace Furnishings segment recorded net charges of $6.2 million in the current year quarter related to the impairment of goodwill and other assets; as well as $1.8 million of one-time costs from exiting workplace furnishings showrooms, driven by conditions related to the COVID-19 pandemic.
Full Year Summary Comments - Workplace Furnishings
Workplace Furnishings net sales decreased 19.5 percent from the prior year to $1.366 billion.
Workplace Furnishings GAAP operating profit margin decreased 650 basis points. On a non-GAAP basis, segment operating margin decreased 340 basis points year-over-year, driven by lower volume, partially offset by net productivity, and lower core SG&A spend.
The Workplace Furnishings segment recorded net charges of $38.8 million during the current year related to impairments of goodwill, intangibles, and other assets, as well as $5.2 million of one-time costs as a result of the COVID-19 pandemic.
Fourth Quarter Summary Comments - Residential Building Products
Residential Building Products net sales increased 17.8 percent from the prior-year quarter to $196.3 million. On an organic basis, sales increased 15.9 percent year-over-year. The impact of building products distributors acquired in 2020 increased sales $3.0 million compared to prior-year quarter.
Residential Building Products operating profit margin decreased 130 basis points, driven by increased investment spending and higher variable compensation, partially offset by strong volume growth.
Full Year Summary Comments - Residential Building Products
Residential Building Products net sales increased 7.3 percent from the prior year to $589.7 million. On an organic basis, sales increased 5.6 percent year-over-year. The impact of building product distributors acquired in 2020 increased sales $9.4 million compared to prior year.
Residential Building Products operating profit margin expanded 130 basis points, driven by higher volume and favorable price-cost, partially offset by higher variable compensation.
Concluding Remarks
“In 2020, our members adapted, stayed agile, and kept HNI strong in the face of challenging conditions. I am extremely proud of and grateful for the efforts of all HNI members. I have no doubt we are a stronger company because of what we experienced and how we performed this past year.
As we look toward 2021, we see strengthening growth and momentum in our Residential Building Products segment. Activity in both new construction and remodeling are rising and continue to be supported by demographics, deurbanization, nesting trends, and low housing inventories.
In Workplace Furnishings, we are optimistic our environments will improve as we progress through the year and continue to see some signs of initial recovery. The vaccine roll-out, associated return-to-the-office programs, and our ability to capture work-from-home demand support revenue and profit growth as we move through 2021. However, the precise timing and rate of improvement remain uncertain.
In the first quarter of 2021, we expect the conditions we experienced last quarter to generally continue,” Mr. Lorenger concluded.
First Quarter Outlook
Residential Building Products revenue: Cyclical strength, secular support, company-specific initiatives, and a strong competitive position will continue to drive revenue growth in this segment. Recent trends point to first quarter year-over-year total segment revenue growth rates in the mid-20 percent range.
Workplace Furnishings revenue: Pandemic-related uncertainty remains and limits the Corporation’s visibility. However, recent order trends point to continued moderation in year-over-year revenue declines driven by small to mid-sized customers and public sector activity. Assuming recent trends continue, first quarter segment revenue, including acquisition impacts, would decline at a year-over-year rate in the high-single digits to low-teens.
Profitability drivers: The Corporation expects lower first quarter profit margins compared to the prior year due to reduced Workplace Furnishings volume, rising input costs, and higher investment levels. However, first quarter earnings are expected to be positive and will benefit from continued year-over-year improvement in Residential Building Products volume, net productivity benefits, and SG&A cost management.
Balance sheet and cash flow: The Corporation expects to maintain a strong balance sheet throughout 2021 with leverage ratios in-line with those seen in recent quarters. Low leverage and continued free cash flow generation will provide ample capacity for continued investment, dividend payments, and opportunistic M&A and share buyback activity.