HNI Corporation Reports Earnings for Second Quarter Fiscal Year 2022
HNI Corporation today announced sales for the second quarter ended July 2, 2022 of $621.7 million and net income of $30.3 million. GAAP net income per diluted share was $0.72, compared to $0.39 in the prior year. Non-GAAP net income per diluted share was $0.52, compared to $0.40 in the prior year.
Highlights
Strong earnings growth. In the second quarter, the Corporation delivered 23 percent operating income growth and increased non-GAAP earnings per share 30 percent on a year-over-year basis, driven by solid organic volume growth and positive price-cost.
Lamex divestiture allows for better focus on core strategies. Consistent with previously announced portfolio streamlining plans, last week the Corporation sold its China- and Hong Kong-based Lamex office furniture business for $75 million, subject to standard post-closing adjustments. The proceeds will be used to repay existing debt, providing additional financial flexibility.
Continued investment and capital deployment. During the second quarter, the Corporation completed the acquisition of an installing distributor located in Raleigh, North Carolina. Following the closing, the Corporation has 27 owned installing-distributor locations nationwide supporting its residential building products business. Additionally in the second quarter, the Corporation returned over $53 million to its shareholders in the form of dividends and share repurchases.
"Our members delivered strong top- and bottom-line performance in the second quarter while we invested to strengthen our operational network and go-to-market capabilities. We continued to improve our price-cost position, which also contributed to our profit growth. Our strategic initiatives focused on driving growth and simplifying our businesses have momentum and are positioning us for long-term success," stated Jeff Lorenger, Chairman, President, and Chief Executive Officer.
HNI Corporation – Financial Performance
Second Quarter Summary Comments
Consolidated net sales increased 21.8 percent from the prior-year quarter to $621.7 million. On an organic basis, sales increased 18.9 percent year-over-year. The acquisition of residential building products companies in 2021 and 2022 increased year-over-year sales by $14.6 million. A reconciliation of organic sales, a non-GAAP measure, follows the financial statements in this release.
Gross profit margin compressed 130 basis points compared to the prior-year quarter. This decrease was driven by price-cost dilution and lower net productivity, partially offset by higher volume.
Selling and administrative expenses as a percent of sales decreased 150 basis points compared to the prior-year quarter. The decrease was driven by dilution from price realization along with higher volume, partially offset by increased freight costs, higher investment spend, and higher core SG&A.
Non-GAAP net income per diluted share was $0.52 compared to $0.40 in the prior-year quarter. The increase was driven by higher volume and favorable price-cost, partially offset by lower net productivity, higher investment spend, and higher core SG&A.
Non-GAAP EPS in the current quarter includes an effective tax rate of 23.7 percent, compared to a GAAP tax rate of (9.0) percent.
Divestiture of Lamex
The Corporation sold its China- and Hong Kong-based Lamex office furniture business on July 20, 2022. The business was acquired by Kokuyo Co., Ltd. for $75 million, subject to standard post-closing adjustments. Kokuyo is a leading manufacturer and provider of office furniture in Japan and across Asia.
In the second quarter, the transaction created tax benefits that were excluded from non-GAAP results. It also resulted in Lamex’s assets and liabilities being classified as held-for-sale at the end of the quarter. The sale is expected to create a pretax gain in the Corporation’s third quarter of approximately $50 million.
Workplace Furnishings – Financial Performance
Workplace Furnishings net sales increased 18.2 percent from the prior-year quarter to $406.7 million.
Workplace Furnishings operating profit margin expanded 40 basis points year-over-year primarily driven by higher volume and favorable price-cost, partially offset by lower net productivity and increased investment spend.
Residential Building Products – Financial Performance
Residential Building Products net sales increased 29.3 percent from the prior-year quarter to $215.1 million. On an organic basis, sales increased 20.5 percent year-over-year. The impact of building products companies acquired in 2021 and 2022 increased sales $14.6 million compared to the prior-year quarter.
Residential Building Products operating profit margin compressed 120 basis points year-over-year, primarily driven by lower net productivity and the impact of acquisitions, partially offset by increased volume.
Second Quarter Orders
Normalized orders in the Workplace Furnishings segment increased four percent year-over-year led by price realization. Order growth softened late in the quarter, and orders from contract customers were stronger than those from small-to-medium sized customers.
Orders in the Residential Building Products segment increased 14 percent compared to the prior-year period. New construction order rates outperformed remodel/retrofit activity during the quarter.
2022 Outlook
Given signs that broader macroeconomic and recession concerns are negatively impacting demand in key markets, the Corporation is lowering its 2022 outlook.
Compared to its previous outlook, the Corporation now expects lower second half profit expansion due to slowing volume growth and the divestiture of Lamex, partially offset by improved price-cost and reduced expenses. Despite the increasingly challenging environment, the Corporation still expects strong revenue and profit growth compared to the prior year.
Workplace Furnishings 2022 revenue: the Corporation now expects revenue growth rates in the low teens for 2022. The new outlook compares to previously expected 2022 segment growth rates in the high teens to low 20s. Slower volume growth and the Lamex divestiture are driving the reduction.
When excluding impacts from the sale of Lamex and the previously announced restructuring of an eCommerce business, pricing benefits and increased volume are expected to drive segment growth rates in the low 20s. Those portfolio actions are expected to lower reported segment growth rates by approximately 10 percent.Residential Building Products 2022 revenue: pricing benefits, inorganic revenue from acquisitions, and continued benefits from multiple growth initiatives are expected to fuel growth rates in the high teens for 2022. This is on top of 25 percent organic growth generated by the segment in 2021. Compared to the previous outlook, segment growth is now expected to be softer in the second half of 2022.
Third quarter 2022 outlook: the Corporation expects third quarter earnings to improve sequentially from second quarter 2022 levels and be above prior year results primarily due to favorable price-cost. Pricing benefits are expected to drive third quarter revenue growth rates in the high single-digits to low-teens.
Expected seasonality: for 2022, earnings seasonality is now expected to be less weighted to the back half than in recent years when approximately 70 percent of total profit was generated during the second half.
Balance Sheet: the Corporation expects to maintain a strong balance sheet throughout 2022. Low leverage and continued free cash flow generation are expected to provide ample capacity for continued investment, M&A, dividend payments, and share buyback activity.
Concluding Remarks
"Although the operating environment is becoming more challenging, we are staying focused on our long-term strategies. We expect strong earnings growth in 2022 while maintaining a strong balance sheet. We continue to improve our long-term competitive position as we make progress on our core strategies of expanding margins in Workplace Furnishings and growing revenue in Residential Building Products. Our experienced team is prepared to confront an increasingly difficult economic environment, while driving our strategic initiatives," Mr. Lorenger concluded.