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Susan Lin

HNI AT A GLANCE

P/E ► 287 VERY HIGH EV/EBITDA ► 28.1 VERY HIGH ROA ► 1.2% AVG ROE ► 1% AVG Debt to Equity ► 1.35 AVG Current Ratio ► 1.15 VERY LOW Interest Coverage Ratio ► 1.79 AVG

 

 

 

 

 

 

HNI Corporation (NYSE:HNI) is the second-largest maker of office furniture in the world with a 16% market share of the industry.^[1] It is also the largest manufacturer of fireplaces and stoves, capturing 30% share of the $1.5 billion U.S. hearth products market^[2]. In 2007, the sale of office furniture accounted for the majority (82%) of HNI's total revenue, while sale of hearth products made up the remaining 18%.^[3]

Since HNI's core product is office furniture, its revenues are heavily influenced by new office construction or renovation as well as employment growth or decline. In an economic downcycle, office properties see slower growth, and this hurts HNI's overall sales. HNI has countered slow U.S. sales with an expansion effort overseas. In 2006 HNI acquired Lamex, a Chinese manufacturer of office furniture, in order to take advantage of the Chinese market for office furniture that is at $3B and growing.^[4] As HNI tries to gain share in international markets, however, it faces challenges in its own backyard - from 2000 to 2007, the percentage of office furniture imports to the U.S. (as a percentage of total consumption) increased from 14% to 19%, while exports stayed at around 3%-4%. Low-cost imports from Asian countries, especially China, threaten to take away HNI's strength, its ability to sell products at lower cost than other domestic competitors.^[5].

Business Financials

HNI mainly sells its office furniture products through dealers, wholesalers, and retail superstores^[6] to government, education and health care organizations, large corporations, small businesses and individual consumers. Individual consumers and small businesses buy HNI's products through retail superstores such as Staples, Officemax (OMX), Office Depot (ODP), and Corporate Express, while large government and corporate accounts are mostly handled by office furniture dealers. HNI's revenues are split fairly evenly between the two main types of office furniture customers - the contract segment and the commercial segment, with the commercial segment making up 53%^[7] of total sales from office furniture. The contract segment includes large corporations that buy office furniture for new office facilities, relocations and office redesigns. These customers often need custom-designed furniture. The commercial segment includes smaller orders of office furniture purchased by small businesses and home office users. The office furniture market is influenced by the general economic outlook, corporate profits, new office construction and white-collar employment.

HNI's hearth products are sold through dealers, distributors and company-owned retail outlets to home construction companies, builders and individual customers. The company sells approximately 70% of its products to the constructors and builders of new homes^[8]. Hearth products are typically purchased by builders during the construction of new homes, and homeowners during the renovation of existing homes. The market is thus sensitive to new home construction and remodeling projects and is heavily influenced by the general housing market. Purchases of hearth products by construction companies and homeowners fluctuate depending on the season, as most of the remodeling and building activity is concentrated from September to December^[9].

As seen from the graph of revenue vs. operating income below, HNI's revenues grew steadily from 2003 to 2006 at an average of 11.2% per year. In particular, net sales increased 10.1% from $2.4 billion in 2005 to $2.7 billion in 2006. This growth in revenue was mainly due to additional customers and sales from acquiring Harman Stove Company (a manufacturer of stoves and fireplaces) and two small office furniture dealers as well as price increases for individual products in the office furniture segment (combined with steady demand). However, revenues decreased 4.1% to $2.6 billion in 2007. This was mainly caused by lower demand for office furniture from small offices and home offices customers and lower sales in the hearth products segment^[10].

Operating income, on the other hand, grew steadily from 2003 to 2005 at an average of 13.5% per year, but decreased 4.8% in 2006 to $206 million. It further decreased 6.2% in 2007 to $194 million. This recent decline in operating income is due to lower sales in the hearth products segment and decreasing operating margins caused by increased expenses related to research and development (for new products), raw materials costs and transportation costs^[11].

As seen from the graph above, office furniture products account for the majority of HNI's net sales. This proportion has also grown from 76% to 82% during 2005 to 2007, mainly due to the lower volume of hearth products sold^[12]. The firm has a high customer concentration, with the top ten clients accounting for 37% of revenue^[13], making them more vulnerable to changes in purchase patterns from individual customers. In particular, their largest customer, United Stationers, accounted for 11% of total sales alone in 2007^[14].

Key Trends and Forces

Economic slow down and decreasing corporate profits lower demand for HNI's office furniture

The economic slow down caused by the 2007 subprime mortgage crisis has lead to decreasing corporate profits, especially for banks and real estate firms. This will affect the demand for office furniture, as office furniture purchases depend heavily on new office construction, renovation and employment. Unemployment levels rose by 5.2% in Q1 2008^[15] and vacancy rates of office buildings rose to 12.8%^[16], the highest in 4 years. The demand for office furniture is thus expected to decrease, affecting HNI's sales in that segment.

Housing crisis decreases the demand for HNI's hearth products

The recent subprime mortgage crisis has greatly affected the U.S. housing market, leading to plummeting housing prices and consumer confidence. This has caused the number of new homes built in the U.S. in March 2008 to drop by 11.9% to a record low of 17 years^[17]. As 70% of HNI's hearth products are purchased for new homes, this lowers demand for HNI's hearth products and affects the company's net sales.^[18]

Surging steel prices will increase HNI's input costs

Global steel prices have risen by 40% so far in 2008 as an export tax in China has stopped supplies out of the country, affecting the world market. This trend will continue as long as the prices of key steel making ingredients such as coal and iron keep rising - and they have risen by 300% and 65% respectively in 2008^[19]. Steel is the most significant raw material in HNI's manufacturing process^[20] and is used heavily in the production of filing cabinets, storage units and shelves. This jump in steel prices will increase HNI's input costs. Along with the increase in transportation costs, such as freight costs (caused by rising oil prices), HNI's profit margins will likely fall. As HNI mainly competes in the low-price end of the office furniture market, if they are going to remain competitive, they cannot pass on all of these increased input costs to their customers by increasing the price of their products.

More low-cost imports from Asian countries creates greater competition for HNI

From 2000 to 2007, the percentage of office furniture imports to the U.S. (as a percentage of total consumption) increased from 14% to 19%, while exports stayed at around 3%-4%. This trend is expected to continue as low-cost imports from Asian countries, especially China, rise^[21]. As HNI's primary strength is their ability to sell their products at a lower cost than domestic competitors, these low-cost imports will compete with HNI's share of the U.S. market.

HNI's acquisition of Lamex opens up opportunities for further growth in China

China's office furniture market, estimated at $2.5 to $3 billion^[22], is one of the fastest growing in the world. The market demand for new offices and new office furniture in China is expected to rise even more with the recent construction boom in China's major cities (which has lead to more prime office space), zero import tariffs for furniture, and a GDP growth rate that remains at 10%^[23]. As HNI acquired Lamex, a Chinese manufacturer of office furniture, in 2006, HNI will be able to use Lamex’s strong local presence to expand their sales in China. Lamex already has showrooms and sales offices in Hong Kong, Shanghai and Beijing and a network of franchisees throughout Mainland China. This opportunity to expand in the Chinese market would then lead to increased revenues for HNI.

Competition

The office furniture industry is highly competitive, and the low-cost niche market that HNI competes in is particularly price sensitive. HNI's main competitors in the office furniture industry include manufacturers Steelcase, Haworth, Herman Miller, Knoll, and Kimball International.

In the hearth products industry, HNI primarily competes against other large manufacturers including Travis Industries and Lennox International.

• Steelcase : Steelcase is a designer and manufacturer of office furniture and complementary products and services, including furniture systems, storage, seating, tables, textiles, desks, interior architecture services, lighting and infrastructure. The company sells its products under the brands of Steelcase, Designtex, Brayton, Vecta, Metro and PolyVision^[24].

• Herman Miller : Herman Miller manufactures and distributes interior furnishings for use in various environments, including office, healthcare, educational and residential settings.

• Knoll : Knoll is a designer and manufacturer of office furniture products, textiles and fine leathers.

• Kimball International : Kimball provides products and services for both the furniture segment and the electronic contract assemblies segment. The furniture segment offers furniture for the office and hospitality industries, while the electronic contract assemblies segment provides engineering and manufacturing services to a variety of industries globally^[25].

• Lennox International: Lennox International designs and manufactures products for the heating, ventilation, air conditioning and refrigeration (HVACR) markets^[26].

Market Share

HNI has the second largest market share (16%) in the office furniture industry globally, which is where the majority (82%) of their revenue comes from. Market share for each individual company below is based on their net sales of office furniture as a percentage of the overall industry sales ($13 billion)^[27]

References

1. ↑ Baird Select Growth Research: HNI Corporation, July 20 2007, page 5
2. ↑ HNI 2007 10-K, Item 1: Business, page 9
3. ↑ HNI 2007 10-K, Item 6: Selected Financial Data, page 29
4. ↑ China Daily, "US firm HNI opens Lamex showroom", January 26 2007
5. ↑ The Business and Institutional Furniture Manufacturer's Association Statistics: The U.S. Office Furniture Market
6. ↑ HNI 2007 10-K, Item 15: Financial Statements, page 46
7. ↑ Seeking Alpha, "HNI Corporation Q1 2008 Earnings Call Transcript", April 17 2008
8. ↑ HNI 2007 10-K, Item 1: Business, page 5
9. ↑ HNI 2007 10-K, Item 1: Business, page 5
10. ↑ HNI 2007 10-K, Item 6: Selected Financial Data, page 27
11. ↑ HNI 2007 10-K, Item 6: Selected Financial Data, page 28
12. ↑ HNI 2007 10-K, Item 6: Selected Financial Data, page 29
13. ↑ HNI 2007 10-K, Item 2: Risk Factors, page 12
14. ↑ HNI 2007 10-K, Item 1: Business, page 8
15. ↑ Bloomberg, "U.S. Probably Lost Jobs in April, Unemployment Rate Increased", May 2 2008
16. ↑ Reuters, "U.S. office sector shows signs of weakness", April 3 2008
17. ↑ International Herald Tribune, "Housing construction in US falls sharply in March with building permits down as well", April 16 2008
18. ↑ HNI 2007 10-K, Item 1: Business, page 5
19. ↑ The Guardian, "Global steel prices - brace for a correction?", April 29 2008
20. ↑ HNI 2007 10-K, Item 7A: Quantitative and Qualitative Disclosures about Market Risk, page 32
21. ↑ The Business and Institutional Furniture Manufacturer's Association Statistics: The U.S. Office Furniture Market
22. ↑ China Daily, "US firm HNI opens Lamex showroom", January 26 2007
23. ↑ China Daily, "US firm HNI opens Lamex showroom", January 26 2007
24. ↑ Reuters Stocks: Steelcase
25. ↑ Reuters Stocks: Kimball International
26. ↑ Reuters Stocks: Lennox International
27. ↑ Baird Select Growth Research: HNI Corporation, July 20 2007, page 5