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Hni Corp (HNI) SEC Filing 10-Q Quarterly Report for the period ending Saturday, October 2, 2021

Hni Corp

CIK: 48287 Ticker: HNI




HNI Corporation 600 East Second Street, Muscatine, Iowa 52761, Tel 563 272 7400, Fax 563 272 7347, www.hnicorp.com

hni_logoa09a.gif
News Release
                                    
For Information Contact:
Marshall H. Bridges, Senior Vice President and Chief Financial Officer (563) 272-7400
Matthew S. McCall, Vice President, Investor Relations and Corporate Development (563) 275-8898

HNI CORPORATION REPORTS EARNINGS
FOR THIRD QUARTER FISCAL YEAR 2021

MUSCATINE, Iowa (October 25, 2021) –
HNI Corporation (NYSE: HNI) today announced sales for the third quarter ended October 2, 2021 of $586.7 million and net income of $19.2 million. GAAP net income per diluted share was $0.43, compared to $0.71 in the prior year. There was no variation between GAAP and Non-GAAP net income per diluted share in the third quarter of 2021 or 2020.

Third Quarter Highlights
Strong growth in Residential Building Products: Third quarter 2021 revenue grew 26 percent on a year-over-year basis, and operating profit increased more than 10 percent versus third quarter 2020 levels despite multiple sources of pressure.
Continuing recovery in Workplace Furnishings: Third quarter 2021 revenue was up approximately 11 percent from the third quarter of 2020.
Expanding capacity: In September, the Corporation announced plans to expand production by opening a new seating facility in Mexico. The facility, along with continued domestic hiring, will provide capacity to help meet growing customer demand.
Residential Building Products acquisition: Earlier this month, the Corporation completed the acquisition of Trinity Hearth and Home, an installing distributor in North Texas. Trinity adds to the Corporation’s leading installing distributor platform and will allow the Corporation’s Residential Building Products segment to better serve its customers in the rapidly growing Southwest region.

“Our members stayed focused on serving customers in the third quarter as the continued ripple effects of the pandemic created near-term headwinds. While we drove strong order growth, the ongoing difficulties tied to labor availability, supply chain disruptions, and inflation in all categories of input costs negatively impacted our results. Despite these pressures, we are increasingly encouraged about 2022 given the actions we are taking,
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The following information was filed by Hni Corp (HNI) on Monday, October 25, 2021 as an 8K 2.02 statement, which is an earnings press release pertaining to results of operations and financial condition. It may be helpful to assess the quality of management by comparing the information in the press release to the information in the accompanying 10-Q Quarterly Report statement of earnings and operation as management may choose to highlight particular information in the press release.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period endedOctober 2, 2021
 
OR
  
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  
Commission File Number:1-14225
  
HNI Corporation
Iowa42-0617510
(State of Incorporation)(I.R.S. Employer No.)
600 East Second Street
P.O. Box 1109
Muscatine,Iowa52761-0071
(563)272-7400
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common StockHNINew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.       
Yes
                            No     
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  
Yes
                            No     
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Smaller reporting companyNon-accelerated filer
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No     
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Common Stock, $1 Par ValueOutstanding as ofOctober 2, 202143,559,359



HNI Corporation and Subsidiaries
Quarterly Report on Form 10-Q
Table of Contents
  
PART I.  FINANCIAL INFORMATION
 Page
Item 1.Financial Statements (Unaudited) 
  
  
  
Item 2.
  
Item 3.
  
Item 4.
  
PART II.  OTHER INFORMATION
  
Item 1.
  
Item 1A.
  
Item 2.
  
Item 3.Defaults Upon Senior Securities - None-
Item 4.Mine Safety Disclosures - Not Applicable-
  
Item 5.Other Information - None-
  
Item 6.
  
  

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PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements

HNI Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(In thousands, except per share data)
(Unaudited)
 Three Months EndedNine Months Ended
October 2,
2021
September 26,
2020
October 2,
2021
September 26,
2020
 
Net sales$586,750 $507,063 $1,581,498 $1,393,224 
Cost of sales391,394 321,516 1,018,334 880,754 
Gross profit195,356 185,547 563,164 512,470 
Selling and administrative expenses169,113 146,785 489,634 449,933 
Impairment charges— — — 32,661 
Operating income26,243 38,762 73,530 29,876 
Interest expense, net1,853 1,517 5,465 5,271 
Income before income taxes24,390 37,245 68,065 24,605 
Income taxes5,232 6,558 16,476 5,259 
Net income19,158 30,687 51,589 19,346 
Less: Net loss attributable to non-controlling interest(1)(3)(3)
Net income attributable to HNI Corporation$19,158 $30,688 $51,592 $19,349 
Average number of common shares outstanding – basic43,781 42,684 43,573 42,651 
Net income attributable to HNI Corporation per common share – basic$0.44 $0.72 $1.18 $0.45 
Average number of common shares outstanding – diluted44,342 43,010 44,045 42,905 
Net income attributable to HNI Corporation per common share – diluted$0.43 $0.71 $1.17 $0.45 
Foreign currency translation adjustments$46 $923 $107 $368 
Change in unrealized gains (losses) on marketable securities, net of tax(32)(33)(157)269 
Change in derivative financial instruments, net of tax170 106 577 (2,393)
Other comprehensive income (loss), net of tax184 996 527 (1,756)
Comprehensive income19,342 31,683 52,116 17,590 
Less: Comprehensive loss attributable to non-controlling interest(1)(3)(3)
Comprehensive income attributable to HNI Corporation$19,342 $31,684 $52,119 $17,593 
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).


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HNI Corporation and Subsidiaries
Condensed Consolidated Balance Sheets

(In thousands)
(Unaudited)
October 2,
2021
January 2,
2021
Assets
Current Assets:  
Cash and cash equivalents$126,436 $116,120 
Short-term investments1,299 1,687 
Receivables238,620 207,971 
Allowance for doubtful accounts(4,185)(5,514)
Inventories188,590 137,811 
Prepaid expenses and other current assets44,702 37,660 
Total Current Assets595,462 495,735 
Property, Plant, and Equipment: 
Land and land improvements29,983 29,691 
Buildings294,240 293,708 
Machinery and equipment588,126 578,643 
Construction in progress26,082 17,750 
 938,431 919,792 
Less: Accumulated depreciation576,423 553,835 
Net Property, Plant, and Equipment362,008 365,957 
Right-of-use Finance Leases9,940 6,095 
Right-of-use Operating Leases80,223 70,219 
Goodwill and Other Intangible Assets446,758 458,896 
Other Assets39,975 21,130 
Total Assets$1,534,366 $1,418,032 
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

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HNI Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands)

(Unaudited)
 October 2,
2021
January 2,
2021
Liabilities and Equity
Current Liabilities:  
Accounts payable and accrued expenses$464,599 $413,638 
Current maturities of long-term debt3,345 841 
Current maturities of other long-term obligations3,598 2,990 
Current lease obligations - finance2,632 1,589 
Current lease obligations - operating19,970 19,970 
Total Current Liabilities494,144 439,028 
Long-Term Debt174,587 174,524 
Long-Term Lease Obligations - Finance7,270 4,516 
Long-Term Lease Obligations - Operating64,634 53,249 
Other Long-Term Liabilities91,270 81,264 
Deferred Income Taxes72,754 74,706 
     Total Liabilities904,659 827,287 
Equity:  
HNI Corporation shareholders' equity629,384 590,419 
Non-controlling interest323 326 
Total Equity629,707 590,745 
Total Liabilities and Equity$1,534,366 $1,418,032 
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

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HNI Corporation and Subsidiaries
Condensed Consolidated Statements of Equity
(In thousands, except per share data)
(Unaudited)
Three Months Ended - October 2, 2021
Common StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive Income (Loss)Non-controlling InterestTotal Shareholders’ Equity
Balance, July 3, 2021$43,875 $76,275 $523,120 $(8,810)$323 $634,783 
Comprehensive income:
Net income (loss)— — 19,158 — 19,158 
Other comprehensive income (loss), net of tax— — — 184 — 184 
Dividends payable— — (132)— — (132)
Cash dividends; $0.310 per share
— — (13,578)— — (13,578)
Common shares – treasury:
Shares purchased(345)(12,712)— — — (13,057)
Shares issued under Members' Stock Purchase Plan and stock awards, net of tax29 2,320 — — — 2,349 
Balance, October 2, 2021$43,559 $65,883 $528,568 $(8,626)$323 $629,707 

Nine Months Ended - October 2, 2021
Common StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive Income (Loss)Non-controlling InterestTotal Shareholders’ Equity
Balance, January 2, 2021$42,919 $38,659 $517,994 $(9,153)$326 $590,745 
Comprehensive income:
Net income (loss)— — 51,592 — (3)51,589 
Other comprehensive income (loss), net of tax— — — 527 — 527 
Dividends payable— — (660)— — (660)
Cash dividends; $0.925 per share
— — (40,358)— — (40,358)
Common shares – treasury:
Shares purchased(500)(19,274)— — — (19,774)
Shares issued under Members' Stock Purchase Plan and stock awards, net of tax1,140 46,498 — — — 47,638 
Balance, October 2, 2021$43,559 $65,883 $528,568 $(8,626)$323 $629,707 


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HNI Corporation and Subsidiaries
Condensed Consolidated Statements of Equity
(In thousands, except per share data)
(Unaudited)
Three Months Ended - September 26, 2020
Common StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive Income (Loss)Non-controlling InterestTotal Shareholders’ Equity
Balance, June 27, 2020$42,675 $29,988 $490,909 $(10,825)$322 $553,069 
Comprehensive income:
Net income (loss)— — 30,688 — (1)30,687 
Other comprehensive income (loss), net of tax— — — 996 — 996 
Dividends payable— — (58)— — (58)
Cash dividends; $0.305 per share
— — (13,021)— — (13,021)
Common shares – treasury:
Shares issued under Members' Stock Purchase Plan and stock awards, net of tax40 1,877 — — — 1,917 
Balance, September 26, 2020$42,715 $31,865 $508,518 $(9,829)$321 $573,590 

Nine Months Ended - September 26, 2020
Common StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive Income (Loss)Non-controlling InterestTotal Shareholders’ Equity
Balance, December 28, 2019$42,595 $19,799 $529,723 $(8,073)$324 $584,368 
Comprehensive income:
Net income (loss)— — 19,349 — (3)19,346 
Other comprehensive income (loss), net of tax— — — (1,756)— (1,756)
Impact of new accounting standard related to credit losses— — (131)— — (131)
Dividends payable— — (175)— — (175)
Cash dividends; $0.915 per share
— — (39,060)— — (39,060)
Common shares – treasury:
Shares purchased(214)(4,988)(1,188)— — (6,390)
Shares issued under Members' Stock Purchase Plan and stock awards, net of tax334 17,054 — — — 17,388 
Balance, September 26, 2020$42,715 $31,865 $508,518 $(9,829)$321 $573,590 
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).



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HNI Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 Nine Months Ended
 October 2,
2021
September 26,
2020
Net Cash Flows From (To) Operating Activities:  
Net income$51,589 $19,346 
Non-cash items included in net income:
Depreciation and amortization62,010 57,917 
Other post-retirement and post-employment benefits996 1,104 
Stock-based compensation9,540 6,746 
Reduction in carrying amount of right-of-use assets18,964 16,965 
Deferred income taxes(2,057)(3,730)
Impairment of goodwill and intangible assets— 32,661 
Other – net2,640 815 
Net increase (decrease) in cash from operating assets and liabilities(64,073)13,316 
Increase (decrease) in other liabilities8,925 (1,779)
Net cash flows from (to) operating activities88,534 143,361 
Net Cash Flows From (To) Investing Activities:  
Capital expenditures(38,182)(24,751)
Proceeds from sale of property, plant, and equipment193 81 
Capitalized software(9,613)(7,250)
Acquisition spending, net of cash acquired(1,530)(10,857)
Purchase of investments(3,273)(3,922)
Sales or maturities of investments3,164 3,246 
Net cash flows from (to) investing activities(49,241)(43,453)
Net Cash Flows From (To) Financing Activities:  
Payments of long-term debt(1,810)(82,828)
Proceeds from long-term debt4,335 82,119 
Dividends paid(40,419)(39,060)
Purchase of HNI Corporation common stock(18,461)(6,764)
Proceeds from sales of HNI Corporation common stock29,944 2,210 
Other – net(2,566)1,727 
Net cash flows from (to) financing activities(28,977)(42,596)
Net increase in cash and cash equivalents10,316 57,312 
Cash and cash equivalents at beginning of period116,120 52,073 
Cash and cash equivalents at end of period$126,436 $109,385 
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).


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HNI Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)
October 2, 2021

Note 1.  Basis of Presentation

The accompanying unaudited, condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements.  The January 2, 2021, consolidated balance sheet included in this Form 10-Q was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included. Operating results for the nine-month period ended October 2, 2021, are not necessarily indicative of the results expected for the fiscal year ending January 1, 2022.  For further information, refer to the consolidated financial statements and accompanying notes included in HNI Corporation's (the "Corporation") Annual Report on Form 10-K for the fiscal year ended January 2, 2021.

Note 2. Revenue from Contracts with Customers

Disaggregation of Revenue
Revenue from contracts with customers disaggregated by product category is as follows (in thousands):
Three Months EndedNine Months Ended
October 2,
2021
September 26,
2020
October 2,
2021
September 26,
2020
Systems and storage$227,827 $207,549 $611,097 $578,601 
Seating134,248 127,294 349,572 358,005 
Other31,066 18,518 79,357 63,221 
Total workplace furnishings393,141 353,361 1,040,026 999,827 
Residential building products193,609 153,702 541,472 393,397 
Net sales$586,750 $507,063 $1,581,498 $1,393,224 

Sales by product category are subject to similar economic factors and market conditions. See “Note 16. Reportable Segment Information” in the Notes to Condensed Consolidated Financial Statements for further information about operating segments.

Contract Assets and Contract Liabilities
In addition to trade receivables, the Corporation has contract assets consisting of funds paid to certain workplace furnishings dealers in exchange for their multi-year commitment to market and sell the Corporation’s products. These contract assets are amortized over the term of the contracts and recognized as a reduction of revenue. For contracts with a duration of less than one year, the Corporation has elected the practical expedient to recognize incremental costs to obtain a contract as an expense when incurred. The Corporation has contract liabilities consisting of customer deposits and rebate and marketing program liabilities.

Contract assets and contract liabilities were as follows (in thousands):
October 2,
2021
January 2,
2021
Trade receivables (1)$238,620 $207,971 
Contract assets (current) (2)$1,265 $761 
Contract assets (long-term) (3)$16,876 $2,486 
Contract liabilities (4)$58,976 $53,070 


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The index below indicates the line item in the Condensed Consolidated Balance Sheets where contract assets and contract liabilities are reported:

(1)     "Receivables"
(2)     "Prepaid expenses and other current assets"
(3)     "Other Assets"
(4)     "Accounts payable and accrued expenses"

The increase in long-term contract assets is related to distribution agreements in the workplace furnishings segment. Contract liabilities for customer deposits paid to the Corporation prior to the satisfaction of performance obligations are recognized as revenue upon completion of the performance obligations. The contract liability balance related to customer deposits was $21.1 million as of January 2, 2021, all of which was recognized as revenue in the first quarter of 2021.

Performance Obligations
The Corporation recognizes revenue for sales of workplace furnishings and residential building products at a point in time following the transfer of control of such products to the customer, which typically occurs upon shipment of the product. In certain circumstances, transfer of control to the customer does not occur until the goods are received by the customer or upon installation and/or customer acceptance, depending on the terms of the underlying contracts. Contracts typically have a duration of less than one year and normally do not include a significant financing component. Generally, payment is due within 30 days of invoicing.

The Corporation's backlog orders are typically cancellable for a period of time and almost all contracts have an original duration of one year or less. As a result, the Corporation has elected the practical expedient permitted in the revenue accounting standard not to disclose the unsatisfied performance obligation as of period end. The backlog is typically fulfilled within a few months.

Significant Judgments
The amount of consideration the Corporation receives and revenue recognized varies with changes in rebate and marketing program incentives, as well as early pay discounts, offered to customers. The Corporation uses significant judgment throughout the year in estimating the reduction in net sales driven by variable consideration for rebate and marketing programs. Judgments made include expected sales levels and utilization of funds. However, this judgment factor is significantly reduced at the end of each year when sales volumes and the impact to rebate and marketing programs are known and recorded as the programs typically end near the Corporation's fiscal year end.

Note 3. Acquisitions

During the first quarter of 2021, the Corporation acquired the assets of a residential building products installing distributor in an all-cash deal. The aggregate purchase price was approximately $1.6 million, and includes $1.2 million of tax deductible goodwill. The purchase accounting is complete, and the remaining assets and liabilities acquired were not material.

On December 31, 2020, the Corporation acquired Design Public Group ("DPG"), a leading e-Commerce distributor of high-design furniture and accessories for the office and home. This transaction, which was structured as an asset acquisition and consummated entirely in cash of approximately $50 million, aligns with the Corporation's long-term strategies related to digital and e-Commerce initiatives. DPG's assets and liabilities are included in the Corporation's workplace furnishings segment, and goodwill, which is tax-deductible, is assigned to its own reporting unit.














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The DPG purchase price allocation and weighted average amortization periods of identified intangible assets as of the date of acquisition is as follows (dollars in thousands):
Fair ValueWeighted Average Amortization Period
Inventories$1,597 
Receivables
Prepaid expenses and other current assets467 
Accounts payable and accrued expenses(8,035)
Goodwill33,588 
Customer lists11,500 11 years
Software5,500 5 years
Trade names5,200 10 years
Other intangible assets300 3 years
Total net assets$50,121 

The valuation analysis required the use of complex management estimates and assumptions such as future cash flows, discount rates, royalty rates, long-term growth rates, and technology build costs. As a result of further reviews, measurement period adjustments were recorded in the third quarter of 2021 that increased working capital and decreased goodwill by $0.5 million. As of October 2, 2021, the DPG purchase accounting is complete.

All transactions disclosed above were deemed to be acquisitions of businesses, and were accounted for using the acquisition method pursuant to ASC 805, with goodwill being recorded as a result of future cash flows and related fair value exceeding the fair value of the identified assets and liabilities.

Note 4.  Inventories

The Corporation values its inventory at the lower of cost or net realizable value. Inventories included in the Condensed Consolidated Balance Sheets consisted of the following (in thousands):
October 2,
2021
January 2,
2021
Finished products$140,955 $98,527 
Materials and work in process86,615 70,264 
Last-in, first-out ("LIFO") allowance(38,980)(30,980)
Total inventories$188,590 $137,811 
Inventory valued by the LIFO costing method76 %75 %

Note 5. Goodwill and Other Intangible Assets

Goodwill and other intangible assets included in the Condensed Consolidated Balance Sheets consisted of the following (in thousands):
October 2,
2021
January 2,
2021
Goodwill$287,443 $292,434 
Definite-lived intangible assets132,763 139,863 
Indefinite-lived intangible assets26,552 26,599 
Total goodwill and other intangible assets$446,758 $458,896 




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Goodwill
The changes in the carrying amount of goodwill, by reporting segment, are as follows (in thousands):
Workplace FurnishingsResidential Building ProductsTotal
Balance as of January 2, 2021   
Goodwill$168,477 $196,976 $365,453 
Accumulated impairment losses(72,876)(143)(73,019)
Net goodwill balance as of January 2, 202195,601 196,833 292,434 
Goodwill acquired / measurement period adjustments(6,211)1,220 (4,991)
Balance as of October 2, 2021  
Goodwill162,266 198,196 360,462 
Accumulated impairment losses(72,876)(143)(73,019)
Net goodwill balance as of October 2, 2021$89,390 $198,053 $287,443 

See "Note 3. Acquisitions" for additional information regarding goodwill acquired and related adjustments in the year-to-date period.

Definite-lived intangible assets
The table below summarizes amortizable definite-lived intangible assets, which are reflected in "Goodwill and Other Intangible Assets" in the Condensed Consolidated Balance Sheets (in thousands):
October 2, 2021January 2, 2021
GrossAccumulated AmortizationNetGrossAccumulated AmortizationNet
Software$193,634 $96,041 $97,593 $182,127 $78,619 $103,508 
Trademarks and trade names11,764 4,337 7,427 9,964 3,546 6,418 
Customer lists and other92,777 65,034 27,743 91,002 61,065 29,937 
Net definite-lived intangible assets$298,175 $165,412 $132,763 $283,093 $143,230 $139,863 


Amortization expense is reflected in "Selling and administrative expenses" in the Condensed Consolidated Statements of Comprehensive Income and was as follows (in thousands):
Three Months EndedNine Months Ended
October 2,
2021
September 26,
2020
October 2,
2021
September 26,
2020
Capitalized software$6,070 $4,910 $17,497 $14,288 
Other definite-lived intangibles$1,626 $1,136 $4,881 $3,811 

The occurrence of events such as acquisitions, dispositions, or impairments may impact future amortization expense. Based on the current amount of intangible assets subject to amortization, the estimated amortization expense for each of the following five years is as follows (in millions):
20212022202320242025
Amortization expense$29.9 $27.3 $23.1 $19.0 $17.3 




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Indefinite-lived intangible assets
The Corporation also owns certain intangible assets, which are deemed to have indefinite useful lives because they are expected to generate cash flows indefinitely. These indefinite-lived intangible assets are reflected in "Goodwill and Other Intangible Assets" in the Condensed Consolidated Balance Sheets (in thousands):
October 2,
2021
January 2,
2021
Trademarks and trade names$26,552 $26,599 

The immaterial change in the indefinite-lived intangible assets balances shown above is related to foreign currency translation impacts.

Impairment Analysis
The Corporation evaluates its goodwill and indefinite-lived intangible assets for impairment on an annual basis during the fourth quarter, or whenever indicators of impairment exist. The Corporation also evaluates long-lived assets (which include definite-lived intangible assets) for impairment if indicators exist.

Note 6.  Product Warranties

The Corporation issues certain warranty policies on its workplace furnishings and residential building products that provide for repair or replacement of any covered product or component that fails during normal use because of a defect in design, materials, or workmanship. Allowances have been established for the anticipated future costs associated with the Corporation's warranty programs.

A warranty allowance is determined by recording a specific allowance for known warranty issues and an additional allowance for unknown claims expected to be incurred based on historical claims experience.  Actual costs incurred could differ from the original estimates, requiring adjustments to the allowance.  Activity associated with warranty obligations was as follows (in thousands):
Nine Months Ended
October 2,
2021
September 26,
2020
Balance at beginning of period$16,109 $15,865 
Accruals for warranties issued during period6,580 5,483 
Adjustments related to pre-existing warranties— (272)
Settlements made during the period(5,411)(6,013)
Balance at end of period$17,278 $15,063 

The current and long-term portions of the allowance for estimated settlements are included within "Accounts payable and accrued expenses" and "Other Long-Term Liabilities", respectively, in the Condensed Consolidated Balance Sheets. The following table summarizes when these estimated settlements are expected to be paid (in thousands):
October 2,
2021
January 2,
2021
Current - in the next twelve months$6,080 $5,918 
Long-term - beyond one year11,198 10,191 
Total$17,278 $16,109 











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Note 7.  Long-Term Debt

Long-term debt is as follows (in thousands):
October 2,
2021
January 2,
2021
Revolving credit facility with interest at a variable rate
 (October 2, 2021 - 1.1%; January 2, 2021 - 1.2%)
$75,000 $75,000 
Fixed rate notes due in 2025 with an interest rate of 4.22%
50,000 50,000 
Fixed rate notes due in 2028 with an interest rate of 4.40%
50,000 50,000 
Other amounts3,345 841 
Deferred debt issuance costs(413)(476)
Total debt177,932 175,365 
Less: Current maturities of long-term debt3,345 841 
Long-term debt$174,587 $174,524 

The carrying value of the Corporation's outstanding variable-rate, long-term debt obligations at October 2, 2021, was $75 million, which approximated fair value. The fair value of the fixed rate notes was estimated based on a discounted cash flow method (Level 2) to be $116 million at October 2, 2021.

As of October 2, 2021, the Corporation’s revolving credit facility borrowings were under the credit agreement entered into on April 20, 2018, with a scheduled maturity of April 20, 2023. The Corporation deferred the debt issuance costs related to the credit agreement, which are classified as assets, and is amortizing them over the term of the credit agreement. The current portion of debt issuance costs of $0.4 million is the amount to be amortized over the next twelve months based on the current credit agreement and is reflected in "Prepaid expenses and other current assets" in the Condensed Consolidated Balance Sheets. The long-term portion of debt issuance costs of $0.2 million is reflected in "Other Assets" in the Condensed Consolidated Balance Sheets.

As of October 2, 2021, there was $75 million outstanding under the $450 million revolving credit facility. The entire amount drawn under the revolving credit facility is considered long-term as the Corporation assumes no obligation to repay any of the amounts borrowed in the next twelve months. Based on current earnings before interest, taxes, depreciation and amortization, the Corporation can access the full remaining $375 million of borrowing capacity available under the revolving credit facility and maintain compliance with applicable covenants.

In addition to cash flows from operations, the revolving credit facility under the credit agreement is the primary source of daily operating capital for the Corporation and provides additional financial capacity for capital expenditures, repurchases of common stock, and strategic initiatives, such as acquisitions.

In addition to the revolving credit facility, the Corporation also has $100 million of borrowings outstanding under private placement note agreements entered into on May 31, 2018. Under the agreements, the Corporation issued $50 million of seven-year fixed rate notes with an interest rate of 4.22 percent, due May 31, 2025, and $50 million of ten-year fixed rate notes with an interest rate of 4.40 percent, due May 31, 2028. The Corporation deferred the debt issuance costs related to the private placement note agreements, which are classified as a reduction of long-term debt, and is amortizing them over the terms of the private placement note agreements. The deferred debt issuance costs do not reduce the amount owed by the Corporation under the terms of the private placement note agreements. As of October 2, 2021, the debt issuance costs balance of $0.4 million related to the private placement note agreements is reflected in "Long-Term Debt" in the Condensed Consolidated Balance Sheets.

The credit agreement and private placement notes both contain financial and non-financial covenants. The covenants under both are substantially the same. Non-compliance with covenants under the agreements could prevent the Corporation from being able to access further borrowings, require immediate repayment of all amounts outstanding, and/or increase the cost of borrowing.

Covenants require maintenance of financial ratios as of the end of any fiscal quarter, including:

a consolidated interest coverage ratio (as defined in the credit agreement) of not less than 4.0 to 1.0, based upon the ratio of (a) consolidated EBITDA for the last four fiscal quarters to (b) the sum of consolidated interest charges; and

14


a consolidated leverage ratio (as defined in the credit agreement) of not greater than 3.5 to 1.0, based upon the ratio of (a) the quarter-end consolidated funded indebtedness to (b) consolidated EBITDA for the last four fiscal quarters.

The most restrictive of the financial covenants is the consolidated leverage ratio requirement of 3.5 to 1.0.  Under the credit agreement, consolidated EBITDA is defined as consolidated net income before interest expense, income taxes, and depreciation and amortization of intangibles, as well as non-cash items that increase or decrease net income.  As of October 2, 2021, the Corporation was below the maximum allowable ratio and was in compliance with all of the covenants and other restrictions in the credit agreement.  The Corporation expects to remain in compliance with all of the covenants and other restrictions in the credit agreement over the next twelve months.

Note 8.  Income Taxes

The Corporation's tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items. The following table summarizes the Corporation's income tax provision (dollars in thousands):
Three Months EndedNine Months Ended
October 2,
2021
September 26,
2020
October 2,
2021
September 26,
2020
Income before income taxes$24,390 $37,245 $68,065 $24,605 
Income taxes$5,232 $6,558 $16,476 $5,259 
Effective tax rate21.5 %17.6 %24.2 %21.4 %

The Corporation's effective tax rate was higher in the three and nine months ended October 2, 2021, compared to the same periods last year. The variance was driven by an improved full year 2021 income outlook, relative to the prior-year full year outlook which was adversely impacted by the onset of the COVID-19 pandemic, resulting in asset impairment charges and other one-time costs recorded in the U.S. jurisdictions. These factors drove a greater rate benefit from tax credits in the prior-year periods. Additionally, the increased rate was impacted by higher equity-based compensation and the timing of tax reserves released year-over-year.

Note 9.  Fair Value Measurements of Financial Instruments

For recognition purposes, on a recurring basis, the Corporation is required to measure at fair value its marketable securities, derivative financial instruments, put option liabilities and deferred stock-based compensation.  The marketable securities comprise money market funds, government securities, and corporate bonds. When available, the Corporation uses quoted market prices to determine fair value and classifies such measurements within Level 1.  Where market prices are not available, the Corporation makes use of observable market-based inputs (prices or quotes from published exchanges and indexes) to calculate fair value using the market approach, in which case the measurements are classified within Level 2. Significant unobservable inputs, which are classified within Level 3, are used in the estimation of the fair value of put option liabilities, determined using a simulation model based on assumptions including future cash flows, discount rates, and volatility.




















15


Financial instruments measured at fair value were as follows (in thousands):
Fair value as of measurement dateQuoted prices in active markets for identical assets
(Level 1)
Significant other observable inputs
(Level 2)
Significant unobservable inputs
(Level 3)
Balance as of October 2, 2021
Cash and cash equivalents (including money market funds) (1)$126,436 $126,436 $— $— 
Government securities (2)$5,557 $— $5,557 $— 
Corporate bonds (2)$7,936 $— $7,936 $— 
Derivative financial instruments - liability (3)$1,543 $— $1,543 $— 
Deferred stock-based compensation (4)$7,245 $— $7,245 $— 
Put option liability (5)$5,100 $— $— $5,100 
Balance as of January 2, 2021
Cash and cash equivalents (including money market funds) (1)$116,120 $116,120 $— $— 
Government securities (2)$6,371 $— $6,371 $— 
Corporate bonds (2)$7,228 $— $7,228 $— 
Derivative financial instruments - liability (3)$2,328 $— $2,328 $— 
Deferred stock-based compensation (4)$7,207 $— $7,207 $— 

The index below indicates the line item in the Condensed Consolidated Balance Sheets where the financial instruments are reported:

(1) "Cash and cash equivalents"
(2) Current portion - "Short-term investments"; Long-term portion - "Other Assets"
(3) Current portion - "Accounts payable and accrued expenses"; Long-term portion - "Other Long-Term Liabilities"
(4) Current portion - "Current maturities of other long-term obligations"; Long-term portion - "Other Long-Term Liabilities"
(5) "Other Long-Term Liabilities"

Note 10.  Accumulated Other Comprehensive Income (Loss) and Shareholders' Equity

The following tables summarize the components of accumulated other comprehensive income (loss) and the changes in accumulated other comprehensive income (loss), net of tax, as applicable (in thousands):
Foreign Currency Translation AdjustmentUnrealized Gains (Losses) on Debt SecuritiesPension and Post-retirement LiabilitiesDerivative Financial InstrumentsAccumulated Other Comprehensive Income (Loss)
Balance as of January 2, 2021$(1,071)$360 $(6,682)$(1,760)$(9,153)
Other comprehensive income (loss) before reclassifications107 (199)— 42 (50)
Tax (expense) or benefit— 42 — (10)32 
Amounts reclassified from accumulated other comprehensive income (loss), net of tax— — — 545 545 
Balance as of October 2, 2021$(964)$203 $(6,682)$(1,183)$(8,626)
Amounts in parentheses indicate reductions to equity.

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Foreign Currency Translation AdjustmentUnrealized Gains (Losses) on Debt SecuritiesPension and Post-retirement LiabilitiesDerivative Financial InstrumentsAccumulated Other Comprehensive Income (Loss)
Balance as of December 28, 2019$(2,912)$95 $(5,762)$506 $(8,073)
Other comprehensive income (loss) before reclassifications368 341 — (3,236)(2,527)
Tax (expense) or benefit— (72)— 758 686 
Amounts reclassified from accumulated other comprehensive income (loss), net of tax— — — 85 85 
Balance as of September 26, 2020$(2,544)$364 $(5,762)$(1,887)$(9,829)
Amounts in parentheses indicate reductions to equity.

Interest Rate Swap
In 2019, the Corporation entered into an interest rate swap transaction to hedge $75 million of outstanding variable rate revolver borrowings against future interest rate volatility. Under the terms of this interest rate swap, the Corporation pays a fixed rate of 1.42 percent and receives one month LIBOR on a $75 million notional value expiring April 2023.  As of October 2, 2021, the fair value of the Corporation's interest rate swap liability was $1.5 million; see "Note 9. Fair Value Measurements of Financial Instruments". The unrecognized change in value of the interest rate swap is reported net of tax as $(1.2) million in "HNI Corporation Shareholders' Equity" in the Condensed Consolidated Balance Sheets.

The following table details the reclassifications from accumulated other comprehensive income (loss) (in thousands):
Three Months EndedNine Months Ended
Details about Accumulated Other Comprehensive Income (Loss) ComponentsAffected Line Item in the Statement Where Net Income is PresentedOctober 2,
2021
September 26,
2020
October 2,
2021
September 26,
2020
Derivative financial instruments
Interest rate swapInterest expense, net$(250)$(147)$(713)$(107)
Income taxes59 33 168 22 
Net of tax$(191)$(114)$(545)$(85)
Amounts in parentheses indicate reductions to profit.

Dividend
The Corporation declared and paid cash dividends per common share as follows (in dollars):
Nine Months Ended
October 2,
2021
September 26,
2020
Dividends per common share$0.925 $0.915 

Stock Repurchase
The following table summarizes shares repurchased and settled by the Corporation (in thousands, except per share data):
Nine Months Ended
October 2,
2021
September 26,
2020
Shares repurchased500 214 
Average price per share$39.52 $29.83 
Cash purchase price$(19,774)$(6,390)
Purchases unsettled as of quarter end1,313 — 
Prior year purchases settled in current year— (374)
Shares repurchased per cash flow$(18,461)$(6,764)

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As of October 2, 2021, approximately $138.5 million of the Corporation's Board of Directors' ("Board") current repurchase authorization remained unspent.

Note 11.  Earnings Per Share

The following table reconciles the numerators and denominators used in the calculation of basic and diluted earnings per share ("EPS") (in thousands, except per share data):
 Three Months EndedNine Months Ended
October 2,
2021
September 26,
2020
October 2,
2021
September 26,
2020
Numerator:  
Numerator for both basic and diluted EPS attributable to HNI Corporation net income$19,158 $30,688 $51,592 $19,349 
Denominators:  
Denominator for basic EPS weighted-average common shares outstanding43,781 42,684 43,573 42,651 
Potentially dilutive shares from stock-based compensation plans561 326 472 254 
Denominator for diluted EPS44,342 43,010 44,045 42,905 
Earnings per share – basic$0.44 $0.72 $1.18 $0.45 
Earnings per share – diluted$0.43 $0.71 $1.17 $0.45 

The weighted-average common stock equivalents presented above do not include the effect of the common stock equivalents in the table below because their inclusion would be anti-dilutive (in thousands):
Three Months EndedNine Months Ended
October 2,
2021
September 26,
2020
October 2,
2021
September 26,
2020
Common stock equivalents excluded because their inclusion would be anti-dilutive1,768 3,124 1,671 3,183 

Note 12. Stock-Based Compensation

The Corporation measures stock-based compensation expense at grant date, based on the fair value of the award. Forms of awards issued under shareholder approved plans include stock options, restricted stock units based on a service condition ("restricted stock units"), restricted stock units based on both performance and service conditions ("performance stock units"), and shares issued under member stock purchase plans. Stock-based compensation expense related to stock options, restricted stock units, and performance stock units is recognized over the employees' requisite service periods, adjusted for an estimated forfeiture rate for those shares not expected to vest. Additionally, expense related to performance stock units is adjusted for the probability that the Corporation will perform within an established target range of cumulative profitability over a multi-year period.

The following table summarizes expense associated with these plans (in thousands):
Three Months EndedNine Months Ended
October 2,
2021
September 26,
2020
October 2,
2021
September 26,
2020
Compensation cost$1,752 $1,087 $9,540 $6,746 








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The units granted by the Corporation had fair values as follows (in thousands):
Nine Months Ended
October 2,
2021
September 26,
2020
Restricted stock units$15,923 $6,431 
Performance stock units$6,054 $5,920 

The following table summarizes unrecognized compensation expense and the weighted-average remaining service period for non-vested stock options and stock units as of October 2, 2021:
Unrecognized Compensation Expense
(in thousands)
Weighted-Average Remaining
Service Period (years)
Non-vested stock options$709 0.7
Non-vested restricted stock units$8,005 1.1
Non-vested performance stock units$4,249 1.2

Note 13.  Recently Adopted Accounting Standards

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes. This update simplifies various aspects related to accounting for income taxes, removes certain exceptions to the general principles in ASC 740, and clarifies and amends existing guidance to improve consistent application. The Corporation adopted ASC 740 in the first quarter of fiscal 2021, with no material effect on the Condensed Consolidated Financial Statements and related footnote disclosures.

Note 14.  Guarantees, Commitments, and Contingencies

The Corporation utilizes letters of credit and surety bonds in the amount of approximately $31 million to back certain insurance policies and payment obligations.  Additionally, the Corporation periodically utilizes trade letters of credit and banker's acceptances to guarantee certain payments to overseas suppliers; as of October 2, 2021, there were no outstanding amounts related to these types of guarantees. The letters of credit, bonds, and banker's acceptances reflect fair value as a condition of their underlying purpose and are subject to competitively determined fees.

The Corporation has contingent liabilities which have arisen in the ordinary course of its business, including liabilities relating to pending litigation, environmental remediation, taxes, and other claims.  It is the Corporation's opinion, after consultation with legal counsel, that liabilities, if any, resulting from these matters are not expected to have a material adverse effect on the Corporation's financial condition, cash flows, or on the Corporation's quarterly or annual operating results when resolved in a future period.

Note 15. Subsequent Events

In October 2021, the Corporation acquired a residential building products installing distributor at a purchase price of approximately $30 million. The acquired company builds on the Corporation's strategy to expand the Fireside Hearth & Home owned-distribution component of the residential building products segment.

Due to the recent timing of the close of the acquisition, the Corporation has not yet allocated the purchase price to the fair value of the assets acquired and the liabilities assumed at the acquisition date.

Note 16.  Reportable Segment Information

Management views the Corporation as having two reportable segments based on industries: workplace furnishings and residential building products.

The aggregated workplace furnishings segment manufactures and markets a broad line of commercial and home office furniture which includes panel-based and freestanding furniture systems, seating, storage, tables, and architectural products.  The

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residential building products segment manufactures and markets a full array of gas, wood, electric, and pellet fueled fireplaces, inserts, stoves, facings, and accessories.

For purposes of segment reporting, intercompany sales between segments are not material, and operating profit is income before income taxes exclusive of certain unallocated general corporate expenses.  These unallocated general corporate expenses include the net costs of the Corporation's corporate operations.  Management views interest income and expense as corporate financing costs and not as a reportable segment cost.  In addition, management applies an effective income tax rate to its consolidated income before income taxes so income taxes are not reported or viewed internally on a segment basis. Identifiable assets by segment are those assets applicable to the respective industry segments. Corporate assets consist principally of cash and cash equivalents, short-term investments, long-term investments, IT infrastructure, and corporate office real estate and related equipment.

No geographic information for revenues from external customers or for long-lived assets is disclosed since the Corporation's primary market and capital investments are concentrated in the United States.



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Reportable segment data reconciled to the Corporation's condensed consolidated financial statements was as follows (in thousands):
 Three Months EndedNine Months Ended
October 2,
2021
September 26,
2020
October 2,
2021
September 26,
2020
Net Sales:
Workplace furnishings$393,141 $353,361 $1,040,026 $999,827 
Residential building products193,609 153,702 541,472 393,397 
Total$586,750 $507,063 $1,581,498 $1,393,224 
Income (Loss) Before Income Taxes:
Workplace furnishings$3,893 $16,826 $9,578 $(8,619)
Residential building products33,392 30,197 103,766 65,232 
General corporate(11,042)(8,261)(39,814)(26,737)
Operating income26,243 38,762 73,530 29,876 
Interest expense, net1,853 1,517 5,465 5,271 
Total$24,390 $37,245 $68,065 $24,605 
Depreciation and Amortization Expense:
Workplace furnishings$11,882 $11,065 $35,918 $33,177 
Residential building products2,545 2,351 7,403 6,976 
General corporate6,443 5,896 18,689 17,764 
Total$20,870 $19,312 $62,010 $57,917 
Capital Expenditures (including capitalized software):
Workplace furnishings$6,494 $6,946 $24,001 $18,340 
Residential building products5,456 2,695 12,113 5,874 
General corporate3,549 1,584 11,681 7,787 
Total$15,499 $11,225 $47,795 $32,001 
As of,
October 2, 2021
As of
January 2, 2021
Identifiable Assets:
Workplace furnishings$832,055 $762,780 
Residential building products415,092 381,550 
General corporate287,219 273,702 
Total$1,534,366 $1,418,032 













21


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of the Corporation's historical results of operations and of its liquidity and capital resources should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements of the Corporation and related notes. Statements that are not historical are forward-looking and involve risks and uncertainties. See "Forward-Looking Statements" at the end of this section for further information.

Overview

The Corporation has two reportable segments: workplace furnishings and residential building products. The Corporation is a leading global designer and provider of commercial furnishings, and a leading manufacturer and marketer of hearth products. The Corporation utilizes a decentralized business model to deliver value to customers via various brands and selling models. The Corporation is focused on growing its existing businesses while seeking out and developing new opportunities for growth.

Consolidated net sales for the third quarter of 2021 were $586.7 million, an increase of 15.7 percent compared to net sales of $507.1 million in the prior-year quarter.  The change was due to a 26.0 percent increase in the residential building products segment and an 11.3 percent increase in the workplace furnishings segment. The acquisition of DPG increased current-year quarter sales by $8.9 million, and the acquisition of residential building products distributors increased current-year quarter sales by $0.9 million.

Net income attributable to the Corporation in the third quarter of 2021 was $19.2 million compared to $30.7 million in the third quarter of 2020. The majority of the decrease was driven by unfavorable price-cost along with the return of costs related to temporary actions taken in the prior-year quarter and increased investment spend, which was partially offset by increased volume.

Overall, the Corporation has experienced strong order trends in both of its segments in the third quarter of 2021. However, ongoing pandemic-induced difficulties tied to labor availability, supply chain issues, and input cost inflation have persisted. These constraints, when combined with continued staffing shortages both internally and at the Corporation's suppliers, are limiting production capacity growth, and have negatively impacted revenue and profit levels in the quarter. The Corporation expects these constraints to continue through the remainder of 2021 and is taking action to mitigate them, including the opening of a new manufacturing facility in Mexico, increased insourcing and strengthened resourcing of critical parts, and accelerated efforts to drive productivity through process changes and automation to reduce labor requirements.

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Results of Operations

The following table presents certain key highlights from the results of operations (in thousands):    
 Three Months EndedNine Months Ended
October 2,
2021
September 26,
2020
ChangeOctober 2,
2021
September 26,
2020
Change
Net sales$586,750 $507,063 15.7%$1,581,498 $1,393,224 13.5%
Cost of sales391,394 321,516 21.7%1,018,334 880,754 15.6%
Gross profit195,356 185,547 5.3%563,164 512,470 9.9%
Selling and administrative expenses169,113 146,785 15.2%489,634 449,933 8.8%
Impairment charges— — —%— 32,661 (100.0)%
Operating income26,243 38,762 (32.3)%73,530 29,876 146.1%
Interest expense, net1,853 1,517 22.1%5,465 5,271 3.7%
Income before income taxes24,390 37,245 (34.5)%68,065 24,605 176.6%
Income taxes5,232 6,558 (20.2)%16,476 5,259 213.3%
Net loss attributable to non-controlling interest(1)100.0%(3)(3)0.0%
Net income attributable to HNI Corporation$19,158 $30,688 (37.6)%$51,592 $19,349 166.6%
As a Percentage of Net Sales:
Net sales100.0 %100.0 %100.0 %100.0 %
Gross profit33.3 36.6 -330  bps35.6 36.8 -120  bps
Selling and administrative expenses28.8 28.9 -10  bps31.0 32.3 -130  bps
Impairment charges— — —  bps— 2.3 -230  bps
Operating income4.5 7.6 -310  bps4.6 2.1 250  bps
Income taxes0.9 1.3 -40  bps1.0 0.4 60  bps
Net income attributable to HNI Corporation3.3 6.1 -280  bps3.3 1.4 190  bps

Results of Operations - Three Months Ended

Net Sales

Consolidated net sales for the third quarter of 2021 increased 15.7 percent compared to the same quarter last year. The change was driven by increases of 26.0 percent and 11.3 percent in the residential building products and workplace furnishings segments, respectively. Included in the sales results for the current quarter was a $9.8 million favorable impact from acquiring DPG and residential building products installing distributors.

Gross Profit

Gross profit as a percentage of net sales decreased 330 basis points in the third quarter of 2021 compared to the same quarter last year, driven by unfavorable price-cost, which was partially offset by higher volume and improved net productivity.

Selling and Administrative Expenses

Selling and administrative expenses ("SG&A") as a percentage of net sales decreased 10 basis points in the third quarter of 2021 compared to the same quarter last year due to improved leverage from higher volume, partially offset by the return of costs related to temporary actions taken in the prior-year quarter, higher investment spend, and increased freight costs.




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Operating Income

In the third quarter of 2021, operating income was $26.2 million, compared to $38.8 million in the same quarter last year. The majority of the decrease was driven by unfavorable price-cost, along with the return of costs related to temporary actions taken in the prior-year quarter and increased investment spend, which was partially offset by increased volume.

Interest Expense, Net

Interest expense, net for the third quarter of 2021 was $1.9 million, compared to $1.5 million in the same quarter last year.

Income Taxes

The Corporation's income tax provision for the third quarter of 2021 was an expense of $5.2 million on income before taxes of $24.4 million, or an effective tax rate of 21.5 percent. For the third quarter of 2020, the Corporation's income tax provision was an expense of $6.6 million on pre-tax income of $37.2 million, or an effective tax rate of 17.6 percent. The variance was driven by an improved full year 2021 income outlook, relative to the prior-year full outlook which was adversely impacted by the onset of the COVID-19 pandemic, resulting in asset impairment charges and other one-time costs recorded in the U.S. jurisdictions. These factors drove a greater rate of benefit from tax credits in the prior-year periods. Additionally, the increased rate was impacted by higher equity-based compensation and the timing of tax reserves released year-over-year.

Net Income Attributable to HNI Corporation

Net income attributable to the Corporation was $19.2 million, or $0.43 per diluted share in the third quarter of 2021, compared to $30.7 million, or $0.71 per diluted share in the third quarter of 2020.

Results of Operations - Nine Months Ended

Net Sales

Consolidated net sales for the first nine months of 2021 increased 13.5 percent compared to the same period last year. The change was driven by increases of 37.6 percent and 4.0 percent in the residential building products and workplace furnishings segments, respectively. Included in the sales results for the current period was a $28.8 million favorable impact from acquiring DPG and residential building products installing distributors.

Gross Profit

Gross profit as a percentage of net sales decreased 120 basis points in the first nine months of 2021 compared to the same period last year, driven by unfavorable price-cost, which was partially offset by higher residential building products volume and improved net productivity.

Selling and Administrative Expenses

SG&A as a percentage of net sales decreased 130 basis points in the first nine months of 2021 compared to the same period last year due to higher residential building products volume and lower core SG&A, partially offset by the return of costs related to temporary actions taken in the prior-year period and higher investment spend. Included in current-year period SG&A was $1.4 million of one-time costs from exiting workplace furnishings showrooms. The prior-year period included $5.0 million of one-time costs incurred as the result of the COVID-19 pandemic (of which $1.6 million was recorded as a corporate charge).

Impairment Charges

In the first nine months of 2020, the Corporation recorded $32.7 million of impairment charges on goodwill and intangible assets as a result of the COVID-19 pandemic and related economic disruption. The Corporation did not record any impairment charges during the first nine months of 2021.

Operating Income

In the first nine months of 2021, operating income was $73.5 million, compared to $29.9 million in the same period last year. Results improved compared to the prior-year period driven by higher residential building products volume, improved net productivity, and lower core SG&A, partially offset by unfavorable price-cost, the return of costs related to temporary actions

24


taken in the prior-year period, and higher investment spend. Additionally, the prior-year period included $37.7 million of impairment charges and costs related to the COVID-19 pandemic and resulting economic disruption.

Interest Expense, Net

Interest expense, net for the first nine months of 2021 was $5.5 million, compared to $5.3 million in the same period last year.

Income Taxes

The Corporation's income tax provision for the first nine months of 2021 was an expense of $16.5 million on income before taxes of $68.1 million, or an effective tax rate of 24.2 percent. For the first nine months of 2020, the Corporation's income tax provision was an expense of $5.3 million on income before taxes of $24.6 million, or an effective tax rate of 21.4 percent. The variance was driven by higher income and an improved full year 2021 income outlook, relative to the prior-year period performance and full year outlook which was adversely impacted by the onset of the COVID-19 pandemic, resulting in asset impairment charges and other one-time costs recorded in the U.S. jurisdictions. Additionally, the increased rate was impacted by higher equity-based compensation and the timing of tax reserves released year-over-year.

Net Income Attributable to HNI Corporation

Net income attributable to the Corporation was $51.6 million, or $1.17 per diluted share in the first nine months of 2021, compared to $19.3 million, or $0.45 per diluted share in the first nine months of 2020.

Workplace Furnishings

The following table presents certain key highlights from the results of operations in the workplace furnishings segment (in thousands):    
 Three Months EndedNine Months Ended
October 2,
2021
September 26,
2020
ChangeOctober 2,
2021
September 26,
2020
Change
Net sales$393,141 $353,361 11.3 %$1,040,026 $999,827 4.0 %
Operating profit (loss)$3,893 $16,826 (76.9 %)$9,578 $(8,619)211.1 %
Operating profit (loss) %1.0 %4.8 %-380  bps0.9 %(0.9)%180  bps
Three months ended
Third quarter 2021 net sales for the workplace furnishings segment increased 11.3 percent compared to the same quarter last year. Included in the sales results was an $8.9 million favorable impact from acquiring DPG.

Operating profit as a percentage of net sales in the third quarter of 2021 decreased by 380 basis points compared to the third quarter of 2020. The decrease was driven by unfavorable price-cost and the return of costs related to temporary actions taken in the prior-year quarter, partially offset by higher volume and improved net productivity.

Nine months ended
Net sales for the first nine months of 2021 for the workplace furnishings segment increased 4.0 percent compared to the same period last year. Included in the sales results was a $24.0 million favorable impact from acquiring DPG.

Operating profit (loss) as a percentage of net sales increased 180 basis points in the first nine months of 2021 compared to the same period last year. The workplace furnishings segment recorded $1.4 million of one-time costs in the current period from exiting showrooms. The prior-year period included $32.7 million of charges related to the impairment of goodwill and intangible assets, as well as $3.4 million of one-time costs incurred as the result of the COVID-19 pandemic. Aside from these charges, the workplace furnishings segment operating profit as a percentage of net sales decreased 170 basis points compared to the prior-year period driven by unfavorable price-cost and the return of costs related to temporary actions taken in the prior-year period, partially offset by improved net productivity and lower core SG&A spend.





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Residential Building Products

The following table presents certain key highlights from the results of operations in the residential building products segment (in thousands):
 Three Months EndedNine Months Ended
October 2,
2021
September 26,
2020
ChangeOctober 2,
2021
September 26,
2020
Change
Net sales$193,609 $153,702 26.0 %$541,472 $393,397 37.6 %
Operating profit$33,392 $30,197 10.6 %$103,766 $65,232 59.1 %
Operating profit %17.2 %19.6 %-240  bps19.2 %16.6 %260  bps

Three months ended
Third quarter 2021 net sales for the residential building products segment increased 26.0 percent compared to the same quarter last year. Included in the sales results was a $0.9 million favorable impact from acquiring residential building products installing distributors.

Operating profit as a percentage of net sales decreased 240 basis points in the third quarter of 2021 compared to the same quarter last year. The decrease compared to the prior-year quarter was primarily driven by unfavorable price-cost, lower productivity, higher freight costs, and increased investment spend, partially offset by increased volume and lower variable compensation.

Nine months ended
Net sales for the first nine months of 2021 for the residential building products segment increased 37.6 percent compared to the same period last year. Included in the sales results was a $4.8 million favorable impact from acquiring residential building products installing distributors.

Operating profit as a percentage of net sales increased 260 basis points in the first nine months of 2021 compared to the same period last year. The increase was primarily driven by strong volume growth, partially offset by unfavorable price-cost, the return of costs related to temporary actions taken in the prior-year period, normalized variable compensation, and lower productivity.

Liquidity and Capital Resources

Cash, cash equivalents, and short-term investments, coupled with cash flow from future operations, borrowing capacity under the existing credit agreement, and the ability to access capital markets, are expected to be adequate to fund operations and satisfy cash flow needs for at least the next twelve months. Additionally, based on current earnings before interest, taxes, depreciation, and amortization, the Corporation can access the full $450 million of borrowing capacity available under the revolving credit facility, which includes the $75 million currently outstanding, and maintain compliance with applicable covenants.

Cash Flow – Operating Activities
Operating activities were a source of $88.5 million of cash in the first nine months of 2021 compared to a source of $143.4 million of cash in the first nine months of 2020. The decrease in operating cash flows was driven by timing of working capital fluctuations and lower noncash items, partially offset by higher income.

Cash Flow – Investing Activities
Capital expenditures, including capitalized software, for the first nine months of 2021 were $47.8 million compared to $32.0 million in the same period last year. These expenditures are primarily focused on machinery, equipment, and tooling required to support new products, continuous improvements, and cost savings initiatives in manufacturing processes.  Additionally, in support of the Corporation's long-term strategy to create effortless winning experiences for customers, the Corporation continues to invest in technology and digital assets. For the full year 2021, capital expenditures are expected to be approximately $60 to $65 million.

Current year and prior year investing activities include acquisition spending for residential building products installing distributors, while current year activity also includes spending related to the acquisition of DPG. See "Note 3. Acquisitions" in the Notes to the Condensed Consolidated Financial Statements for further information.

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Cash Flow – Financing Activities
Long-Term Debt - The Corporation maintains a revolving credit facility as the primary source of committed funding from which the Corporation finances its planned capital expenditures, strategic initiatives, and seasonal working capital needs. Cash flows included in financing activities represent periodic borrowings and repayments under the revolving credit facility. See "Note 7. Long-Term Debt" in the Notes to Condensed Consolidated Financial Statements for further information.

Dividend - The Corporation is committed to maintaining or modestly growing the quarterly dividend. Cash dividends declared and paid per common share were as follows (in dollars):
Three Months EndedNine Months Ended
October 2,
2021
September 26,
2020
October 2,
2021
September 26,
2020
Dividends per common share$0.310 $0.305 $0.925 $0.915 

During the third quarter, the Board declared the regular quarterly cash dividend on August 10, 2021. The dividend was paid on September 1, 2021, to shareholders of record as of August 20, 2021.

Stock Repurchase - The Corporation’s capital strategy related to stock repurchase is focused on offsetting the dilutive impact of issuances for various compensation related matters. The Corporation may elect to opportunistically purchase additional shares based on excess cash generation and/or share price considerations. The Board most recently authorized $200 million on February 13, 2019, for repurchases of the Corporation’s common stock. As of October 2, 2021, approximately $138.5 million of the Board's current repurchase authorization remained unspent. See "Note 10. Accumulated Other Comprehensive Income (Loss) and Shareholders' Equity" in the Notes to Condensed Consolidated Financial Statements for further information.

Off-Balance Sheet Arrangements

The Corporation does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on the Corporation's financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

Contractual Obligations

Contractual obligations associated with ongoing business and financing activities will result in cash payments in future periods.  A table summarizing the amounts and estimated timing of these future cash payments was provided in the Corporation's Annual Report on Form 10-K for the fiscal year ended January 2, 2021.  There were no material changes outside the ordinary course of business in the Corporation's contractual obligations or the estimated timing of the future cash payments during the first nine months of 2021.

Commitments and Contingencies

See "Note 14. Guarantees, Commitments, and Contingencies" in the Notes to Condensed Consolidated Financial Statements for further information.

Critical Accounting Policies and Estimates

Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon the Consolidated Financial Statements, prepared in accordance with Generally Accepted Accounting Principles ("GAAP"). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses, and related disclosure of contingent assets and liabilities.  Management bases its estimates on historical experience and on a variety of other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Senior management has discussed the development, selection, and disclosure of these estimates with the Audit Committee of the Board.  Actual results may differ from these estimates under different assumptions or conditions.  A summary of the more significant accounting policies requiring the use of estimates and assumptions in preparing the financial statements is provided in the Corporation's Annual Report on Form 10-K for the fiscal year ended January 2, 2021.




27


Looking Ahead

The Corporation continues to navigate near-term uncertainty driven by the ongoing COVID-19 pandemic and recent dynamics around labor availability, supply chain capacity, and cost inflation. However, management believes the Corporation is well positioned to grow revenues, expand margins, and generate cash flows as it moves into the next stage of the recovery. Strength in residential building products is expected to continue, with improving conditions being observed in workplace furnishings.

Management remains optimistic about the long-term prospects in the workplace furnishings and residential building products markets. Management believes the Corporation continues to compete well and remains confident the investments made in the business will continue to generate strong returns for shareholders.

Forward-Looking Statements

Statements in this report to the extent they are not statements of historical or present fact, including statements as to plans, outlook, objectives, and future financial performance, are "forward-looking" statements, within the meaning of Section 21 of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995.  Words such as "anticipate," "believe," "could," "confident," "estimate," "expect," "forecast," "hope," "intend," "likely," "may," "plan," "possible," "potential," "predict," "project," "should," "will," "would," and variations of such words and similar expressions identify forward-looking statements.

Forward-looking statements involve known and unknown risks and uncertainties, which may cause the Corporation's actual results in the future to differ materially from expected results. The most significant factors known to the Corporation that may adversely affect the Corporation’s business, operations, industries, financial position, or future financial performance are described within Item 1A of the Corporation's Annual Report on Form 10-K for the fiscal year ended January 2, 2021.  The Corporation cautions readers not to place undue reliance on any forward-looking statement, which speaks only as of the date made, and to recognize forward-looking statements are predictions of future results, which may not occur as anticipated.  Actual results could differ materially from those anticipated in the forward-looking statements and from historical results due to the risks and uncertainties described elsewhere in this report, including but not limited to: the duration and scope of the COVID-19 pandemic and its effect on people and the economy; 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; changes 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; force majeure events outside the Corporation's control; and other risks described in the Corporation's annual and quarterly reports filed with the Securities and Exchange Commission on Forms 10-K and 10-Q, as well as others the Corporation may consider not material or does not anticipate at this time. The risks and uncertainties described in this report, as well as those described within Item 1A of the Corporation's Annual Report on Form 10-K for the fiscal year ended January 2, 2021, are not exclusive and further information concerning the Corporation, including factors that potentially could have a material effect on the Corporation's financial results or condition, may emerge from time to time.

The Corporation assumes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law. The Corporation advises you, however, to consult any further disclosures made on related subjects in future quarterly reports on Form 10-Q and current reports on Form 8-K filed with or furnished to the SEC.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As of October 2, 2021, there were no material changes to the financial market risks affecting the quantitative and qualitative disclosures presented in Item 7A of the Corporation's Annual Report on Form 10-K for the fiscal year ended January 2, 2021.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Corporation in the reports it files or submits under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.  Disclosure

28


controls and procedures are also designed to ensure information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer of the Corporation, the Corporation's management carried out an evaluation of the Corporation's disclosure controls and procedures pursuant to Exchange Act Rules 13a – 15(e) and 15d – 15(e).  As of October 2, 2021, based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded these disclosure controls and procedures are effective.

Changes in Internal Controls
There have been no changes in the Corporation's internal controls over financial reporting during the fiscal quarter covered by this quarterly report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

In December 2020, the Corporation acquired DPG (see Note 3). In conducting its evaluation of the effectiveness of internal control over financial reporting, management has elected to exclude the acquisition from the evaluation as of October 2, 2021, as permitted by the regulations of the Securities and Exchange Commission. The Corporation is currently instituting internal controls over DPG's financial information and anticipates these controls to be implemented by the end of fiscal year 2021.


29


PART II.  OTHER INFORMATION

Item 1. Legal Proceedings

For information regarding legal proceedings, see "Note 14. Guarantees, Commitments, and Contingencies" in the Notes to Condensed Consolidated Financial Statements, which information is incorporated herein by reference.

Item 1A. Risk Factors

There have been no additional material changes from the risk factors disclosed in the "Risk Factors" section of the Corporation's Annual Report on Form 10-K for the fiscal year ended January 2, 2021.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities:

The Corporation repurchases shares under previously announced plans authorized by the Board. The Corporation's share purchase authorization from February 13, 2019, provides for repurchases of $200,000,000 with no specific expiration date. The authorization does not obligate the Corporation to purchase any shares and the authorization may be terminated, increased, or decreased by the Board at any time. No repurchase plans expired or were terminated during the third quarter of fiscal 2021, and no plans are currently in place under which further purchases are not intended.

The following is a summary of share repurchase activity during the quarter (in thousands, except per share data):
PeriodTotal Number of Shares (or Units) Purchased (1)Average Price
Paid per Share
(or Unit)
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or ProgramsMaximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet be Purchased Under the Plans or Programs
07/04/21 – 07/31/2182 $40.77 82 $148,225 
08/01/21 – 08/28/21— $— — $148,225 
08/29/21 – 10/02/21263 $37.00 263 $138,513 
Total345 345  
(1) No shares were purchased outside of a publicly announced plan or program

30


Item 6. Exhibits
31.1
31.2
32.1
101The following materials from HNI Corporation's Quarterly Report on Form 10-Q for the fiscal quarter ended October 2, 2021 are formatted in Inline XBRL (eXtensible Business Reporting Language) and filed electronically herewith: (i) Condensed Consolidated Statements of Comprehensive Income; (ii) Condensed Consolidated Balance Sheets; (iii) Condensed Consolidated Statements of Equity; (iv) Condensed Consolidated Statements of Cash Flows; and (v) Notes to Condensed Consolidated Financial Statements+
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
+    Filed or furnished herewith.


31


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 HNI Corporation 
    
Date: November 2, 2021By:/s/ Marshall H. Bridges 
  Marshall H. Bridges 
  Senior Vice President and Chief Financial Officer 
  

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