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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
 
FORM 10-Q
 
 
(MARK ONE)
 
 
 
     / X /   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended October 2, 2010.
 
 
OR
 
 
     /    /   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from ____________________ to ____________________
 
 
Commission File Number: 1-14225
 
 
HNI Corporation
(Exact name of registrant as specified in its charter)
 
 
Iowa
(State or other jurisdiction of
incorporation or organization)
42-0617510
(I.R.S. Employer
Identification Number)
 
 
P. O. Box 1109, 408 East Second Street
Muscatine, Iowa 52761-0071
(Address of principal executive offices)
52761-0071
(Zip Code)
 
 
Registrant's telephone number, including area code:  563/272-7400
 
 
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       x                     NO     o               
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).   
YES       x                     NO     o  
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer      x                                                                                                      Accelerated filer       o     
Non-accelerated filer        o   (Do not check if a smaller reporting company)                    Smaller reporting company     o       
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).                                                            YES        o                   NO      x        
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date.
Class
Common Shares, $1 Par Value
Outstanding at October 2, 2010
44,799,378
 

HNI Corporation and SUBSIDIARIES
 
 
INDEX
 
 
PART I.    FINANCIAL INFORMATION
 
Page
 
 
Item 1.    Financial Statements
 
 
 
Condensed Consolidated Balance Sheets - October 2, 2010, and January 2, 2010
 
 
Condensed Consolidated Statements of Income - Three Months Ended October 2, 2010, and October 3, 2009
 
 
Condensed Consolidated Statements of Income - Nine Months Ended October 2, 2010, and October 3, 2009
 
 
Condensed Consolidated Statements of Cash Flows - Nine Months Ended October 2, 2010, and October 3, 2009
 
 
Notes to Condensed Consolidated Financial Statements
 
 
Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
Item 3.    Quantitative and Qualitative Disclosures About Market Risk
 
 
Item 4.    Controls and Procedures
 
 
PART II.    OTHER INFORMATION
 
 
Item 1.    Legal Proceedings
 
 
Item 1A. Risk Factors
 
 
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
 
 
Item 3.    Defaults Upon Senior Securities - None
-
 
 
Item 5.    Other Information - None
-
 
 
Item 6.    Exhibits
 
 
SIGNATURES
 
 
EXHIBIT INDEX
 
 
 
 
 

2
 

PART I.     FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
HNI Corporation and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
October 2,
2010
 
January 2,
2010
 
(Unaudited)
 
ASSETS
(In thousands)
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
72,239
 
 
$
87,374
 
Short-term investments
9,125
 
 
5,994
 
Receivables
194,070
 
 
163,732
 
Inventories (Note C)
85,529
 
 
65,144
 
Deferred income taxes
17,751
 
 
20,299
 
Prepaid expenses and other current assets
21,344
 
 
17,728
 
Total Current Assets
400,058
 
 
360,271
 
 
 
 
 
PROPERTY, PLANT, AND EQUIPMENT, at cost
 
 
 
 
Land and land improvements
21,550
 
 
21,815
 
Buildings
259,379
 
 
267,596
 
Machinery and equipment
478,133
 
 
490,287
 
Construction in progress
12,762
 
 
8,377
 
 
771,824
 
 
788,075
 
Less accumulated depreciation
534,390
 
 
527,973
 
 
 
 
 
Net Property, Plant, and Equipment
237,434
 
 
260,102
 
 
 
 
 
GOODWILL
260,628
 
 
261,114
 
 
 
 
 
OTHER ASSETS
104,646
 
 
112,839
 
 
 
 
 
Total Assets
$
1,002,766
 
 
$
994,326
 
 
See accompanying Notes to Condensed Consolidated Financial Statements.
 
 
 
 
 

3
 

HNI Corporation and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
October 2,
2010
 
January 2,
2010
 
(Unaudited)
 
LIABILITIES AND  EQUITY
(In thousands, except share and per share value data)
 
 
 
 
CURRENT LIABILITIES
 
 
 
Accounts payable and accrued expenses
$
323,131
 
 
$
299,718
 
  Note payable and current maturities of long-term
    debt and capital lease obligations
50,030
 
 
39
 
Current maturities of other long-term obligations
251
 
 
385
 
Total Current Liabilities
373,412
 
 
300,142
 
 
 
 
 
LONG-TERM DEBT
150,000
 
 
200,000
 
 
 
 
 
CAPITAL LEASE OBLIGATIONS
118
 
 
—
 
 
 
 
 
OTHER LONG-TERM LIABILITIES
46,446
 
 
50,332
 
 
 
 
 
DEFERRED INCOME TAXES
30,809
 
 
24,227
 
 
 
 
 
EQUITY
 
 
 
 
 
HNI Corporation shareholders' equity:
 
 
 
 
 
Capital Stock:
 
 
 
 
 
    Preferred, $1 par value, authorized 2,000,000 shares, no shares outstanding
—
 
 
—
 
 
 
 
 
    Common, $1 par value, authorized 200,000,000 shares, outstanding -
 
 
 
 
 
October 2, 2010 – 44,799,378 shares;
 
 
 
 
 
January 2, 2010 – 45,093,504 shares
44,799
 
 
45,093
 
 
 
 
 
Additional paid-in capital
15,512
 
 
19,695
 
Retained earnings
340,570
 
 
355,270
 
Accumulated other comprehensive income
647
 
 
(774
)
Total HNI Corporation shareholders' equity
401,528
 
 
419,284
 
 
 
 
 
Noncontrolling interest
453
 
 
341
 
 
 
 
 
Total  Equity
401,981
 
 
419,625
 
 
 
 
 
Total Liabilities and  Equity
$
1,002,766
 
 
$
994,326
 
 
See accompanying Notes to Condensed Consolidated Financial Statements.
 
 
 
 

4
 

HNI Corporation and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
Three Months Ended
 
October 2,
2010
 
October 3,
2009
 
 
(As Adjusted)
 
(In thousands, except share and per share data)
Net sales
$
458,853
 
 
$
446,172
 
Cost of sales
297,635
 
 
281,527
 
Gross profit
161,218
 
 
164,645
 
Selling and administrative expenses
130,514
 
 
126,091
 
Restructuring and impairment
(251
)
 
4,440
 
Operating income
30,955
 
 
34,114
 
Interest income
166
 
 
51
 
Interest expense
2,843
 
 
3,167
 
Earnings before income taxes
28,278
 
 
30,998
 
Income taxes
12,630
 
 
10,382
 
  Income from continuing operations, less applicable
  income taxes
15,648
 
 
20,616
 
Discontinued operations, less applicable income taxes
(13
)
 
(2,856
)
Net income
15,635
 
 
17,760
 
Less: Net income (loss) attributable to the noncontrolling interest
(46
)
 
146
 
Net income attributable to HNI Corporation
$
15,681
 
 
$
17,614
 
 
 
 
 
Income from continuing operations attributable to HNI Corporation per common share – basic
$
0.35
 
 
$
0.46
 
Discontinued operations attributable to HNI Corporation per common share – basic
$
—
 
 
$
(0.06
)
Net income attributable to HNI Corporation per common share – basic
$
0.35
 
 
$
0.39
 
Average number of common shares outstanding – basic
44,800,821
 
 
44,994,399
 
Income from continuing operations attributable to HNI Corporation per common share – diluted
$
0.34
 
 
$
0.45
 
Discontinued operations attributable to HNI Corporation per common share – diluted
$
—
 
 
$
(0.06
)
Net income attributable to HNI Corporation per common share – diluted
$
0.34
 
 
$
0.39
 
Average number of common shares outstanding – diluted
45,601,327
 
 
45,598,155
 
Cash dividends per common share
$
0.215
 
 
$
0.215
 
 
 See accompanying Notes to Condensed Consolidated Financial Statements.
 
 
 

5
 

HNI Corporation and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
Nine Months Ended
 
October 2, 2010
 
October 3, 2009
 
 
(As Adjusted)
 
(In thousands, except share and per share data)
Net sales
$
1,220,581
 
 
$
1,217,774
 
Cost of sales
798,866
 
 
802,925
 
Gross profit
421,715
 
 
414,849
 
Selling and administrative expenses
381,346
 
 
382,666
 
Restructuring and impairment
2,821
 
 
13,403
 
Operating income
37,548
 
 
18,780
 
Interest income
346
 
 
311
 
Interest expense
8,620
 
 
9,414
 
Earnings before income taxes
29,274
 
 
9,677
 
Income taxes
12,176
 
 
2,005
 
Income from continuing operations, less applicable income taxes
17,098
 
 
7,672
 
Discontinued operations, less applicable income taxes
(2,551
)
 
(3,161
)
Net income
14,547
 
 
4,511
 
Less: Net income attributable to the noncontrolling interest
149
 
 
180
 
Net income attributable to HNI Corporation
$
14,398
 
 
$
4,331
 
 
 
 
 
Income from continuing operations attributable to HNI Corporation per common share – basic
$
0.38
 
 
$
0.17
 
Discontinued operations attributable to HNI Corporation per common share – basic
$
(0.06
)
 
$
(0.07
)
Net income attributable to HNI Corporation per common share – basic
$
0.32
 
 
$
0.10
 
Average number of common shares outstanding – basic
45,053,536
 
 
44,833,711
 
Income from continuing operations attributable to HNI Corporation per common share – diluted
$
0.37
 
 
$
0.17
 
Discontinued operations attributable to HNI Corporation per common share – diluted
$
(0.06
)
 
$
(0.07
)
Net income attributable to HNI Corporation per common share – diluted
$
0.31
 
 
$
0.10
 
Average number of common shares outstanding – diluted
45,831,091
 
 
45,272,912
 
Cash dividends per common share
$
0.645
 
 
$
0.645
 
 
See accompanying Notes to Condensed Consolidated Financial Statements.
 
 

6
 

HNI Corporation and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended
 
October 2, 2010
 
October 3, 2009
 
(In thousands)
Net Cash Flows From (To) Operating Activities:
 
 
 
Net income (loss)
$
14,547
 
 
$
4,511
 
Noncash items included in net income:
 
 
 
 
 
Depreciation and amortization
45,361
 
 
55,715
 
Other postretirement and post employment benefits
1,268
 
 
1,386
 
Stock-based compensation
5,020
 
 
2,869
 
Deferred income taxes
8,579
 
 
4,197
 
Loss on sale, retirement and impairment of long-lived assets and intangibles
2,468
 
 
81
 
Stock issued to retirement plan
5,400
 
 
6,565
 
Other – net
1,918
 
 
891
 
Net increase (decrease) in operating assets and liabilities
(31,885
)
 
66,554
 
Increase (decrease) in other liabilities
(3,557
)
 
(6,848
)
Net cash flows from (to) operating activities
49,119
 
 
135,921
 
 
 
 
 
Net Cash Flows From (To) Investing Activities:
 
 
 
 
 
Capital expenditures
(17,834
)
 
(9,715
)
Proceeds from sale of property, plant and equipment
2,217
 
 
6,569
 
Acquisition spending, net of cash acquired
—
 
 
(500
)
Capitalized software
(842
)
 
(1,159
)
Purchase of long-term investments
(11,209
)
 
(9,710
)
Sales or maturities of long-term investments
8,320
 
 
31,672
 
Other - Net
3,444
 
 
400
 
Net cash flows from (to) investing activities
(15,904
)
 
17,557
 
 
 
 
 
Net Cash Flows From (To) Financing Activities:
 
 
 
 
 
Proceeds from sales of HNI Corporation common stock
2,242
 
 
2,191
 
Purchase of HNI Corporation common stock
(17,806
)
 
—
 
Proceeds from long-term debt
50,157
 
 
97,000
 
Payments of note and long-term debt and other financing
(53,845
)
 
(217,261
)
Dividends paid
(29,098
)
 
(28,978
)
Net cash flows from (to) financing activities
(48,350
)
 
(147,048
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
(15,135
)
 
6,430
 
Cash and cash equivalents at beginning of period
87,374
 
 
39,538
 
Cash and cash equivalents at end of period
$
72,239
 
 
$
45,968
 
 
See accompanying Notes to Condensed Consolidated Financial Statements.
 
 

7
 

HNI Corporation and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
October 2, 2010
 
Note A.  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 footnotes required by generally accepted accounting principles for complete financial statements.  The January 2, 2010 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 presentation have been included.  Operating results for the nine-month period ended October 2, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending January 1, 2011.  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, 2010.
 
 
Note B. Stock-Based Compensation
 
The Corporation measures stock-based compensation expense at grant date, based on the fair value of the award and recognizes expense over the employee requisite service period.  For the three and nine months ended October 2, 2010, and October 3, 2009, the Corporation recognized $1.9 million and $5.0 million, and $1.0 million and $2.9 million, respectively, of stock-based compensation expense for the cost of stock options and time-based restricted stock units issued under the HNI Corporation 2007 Stock-Based Compensation Plan and shares issued under the HNI Corporation 2002 Members' Stock Purchase Plan.
 
At October 2, 2010, there was $10.8 million of unrecognized compensation cost related to nonvested stock-based compensation awards, which the Corporation expects to recognize over a weighted-average remaining requisite service period of 1.3 years.
 
 
Note C.  Inventories
 
The Corporation values its inventory at the lower of cost or market with approximately 83% valued by the last-in, first-out ("LIFO") method.
 
 
(In thousands)
 
October 2, 2010
 
January 2, 2010
 
(Unaudited)
 
Finished products
 
$
60,130
 
 
$
48,198
 
Materials and work in process
 
48,775
 
 
40,322
 
LIFO allowance
 
(23,376
)
 
(23,376
)
 
 
$
85,529
 
 
$
65,144
 
 
 

8
 

Note D.  Comprehensive Income and Shareholders' Equity
 
The following table reconciles net income to comprehensive income attributable to HNI Corporation:
 
 
Three Months Ended
 
Nine Months Ended
 
(In thousands)
 
October 2, 2010
 
October 3, 2009
 
October 2, 2010
 
October 3, 2009
Net income
 
$
15,635
 
 
$
17,760
 
 
$
14,547
 
 
$
4,511
 
Other comprehensive income, net of income tax as applicable:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
361
 
 
16
 
 
508
 
 
(85
)
Change in unrealized gains (losses) on marketable securities
 
8
 
 
—
 
 
8
 
 
134
 
Change in pension and postretirement liability
 
79
 
 
79
 
 
237
 
 
238
 
Change in derivative financial instruments
 
805
 
 
49
 
 
668
 
 
150
 
Comprehensive income
 
16,888
 
 
17,904
 
 
15,968
 
 
4,948
 
Comprehensive income (loss) attributable to noncontrolling interest
 
(46
)
 
146
 
 
149
 
 
180
 
Comprehensive income attributable to HNI Corporation
 
$
16,934
 
 
$
17,758
 
 
$
15,819
 
 
$
4,768
 
 
The following table summarizes the components of accumulated other comprehensive loss and the changes in accumulated other comprehensive loss, net of tax, as applicable for the nine months ended October 2, 2010:
 
 
 
 
(in thousands)
 
Foreign Currency Translation Adjustment
 
Unrealized Gains(Losses) on Marketable Securities
 
 
Pension Postretirement Liability
 
 
Derivative Financial Instruments
 
Accumulated Other Comprehensive Loss
Balance at January 2, 2010
 
$
3,526
 
 
—
 
 
$
(2,710
)
 
$
(1,590
)
 
$
(774
)
Year-to date change
 
508
 
 
8
 
 
237
 
 
668
 
 
1,421
 
Balance at October 2, 2010
 
$
4,034
 
 
$
8
 
 
$
(2,473
)
 
$
(922
)
 
$
647
 
 
 
During the nine months ended October 2, 2010, the Corporation repurchased 654,664 shares of its common stock at a cost of approximately $17.8 million.  As of October 2, 2010, $145.8 million of the Corporation's Board of Directors' current repurchase authorization remained unspent.
 
 

9
 

Note E.  Earnings Per Share
 
The following table reconciles the numerators and denominators used in the calculation of basic and diluted earnings per share ("EPS"):
 
 
 
Three Months Ended
 
Nine Months Ended
(In thousands, except per share data)
 
October 2, 2010
 
October 3, 2009
 
October 2, 2010
 
October 3, 2009
Numerators:
 
 
 
 
 
 
 
 
Numerator for both basic and diluted EPS attributable to Parent Company net income
 
$
15,681
 
 
$
17,614
 
 
$
14,398
 
 
$
4,331
 
Denominators:
 
 
 
 
 
 
 
 
 
 
 
 
Denominator for basic EPS weighted-average common shares outstanding
 
44,801
 
 
44,994
 
 
45,053
 
 
44,834
 
Potentially dilutive shares from stock-based compensation plans
 
800
 
 
604
 
 
778
 
 
439
 
Denominator for diluted EPS
 
45,601
 
 
45,598
 
 
45,831
 
 
45,273
 
Earnings per share – basic
 
$
0.35
 
 
$
0.39
 
 
$
0.32
 
 
$
0.10
 
Earnings per share – diluted
 
$
0.34
 
 
$
0.39
 
 
$
0.31
 
 
$
0.10
 
 
Certain exercisable and non-exercisable stock options were not included in the computation of diluted EPS at October 2, 2010 and October 3, 2009, because their inclusion would have been anti-dilutive. The number of stock options outstanding which met this anti-dilutive criterion for the three and nine months ended October 2, 2010 was 1,763,464 and 1,738,464 respectively. The number of stock options outstanding which met this anti-dilutive criterion for the three and nine months ended October 3, 2009 was 1,325,023 and 1,394,946 respectively.
 
 
Note F.  Restructuring Reserve and Plant Closures
 
As a result of challenging market conditions and the Corporation's ongoing business simplification and cost reduction strategies, management made the decision in the first quarter of fiscal 2010 to close an office furniture manufacturing facility located in Salisbury, North Carolina and consolidate production into existing office furniture manufacturing facilities.  In connection with the closure of the Salisbury facility and other office furniture plant closures announced in 2009, the Corporation recorded $0.6 million of charges during the quarter ended October 2, 2010 which included $0.9 million of accelerated depreciation recorded in cost of sales net of a $0.3 million reduction in restructuring costs.  The Corporation reduced a previously recorded accrual related to a withdrawal liability associated with a multi-employer pension plan due to an increase in the market value of the plan assets. The Corporation had previously recorded $1.3 million of severance costs for approximately 125 members during the first quarter in connection with the closure of the Salisbury facility.  The closure and consolidation of the Salisbury facility is expected to be substantially completed by the end of 2010.
 
The following is a summary of changes in restructuring accruals during the nine months ended October 2, 2010.  This summary does not include accelerated depreciation as this item was not accounted for through the restructuring accrual on the Condensed Consolidated Balance Sheets but is included as a component of "Restructuring and Impairment" in the Corporation's Condensed Consolidated Statements of Income.
 
 
(In thousands)
 
Severance
 
Facility Exit Costs & Other
 
Total
Balance as of January 2, 2010
 
$
4,389
 
 
$
1,569
 
 
$
5,958
 
Restructuring charges
 
1,229
 
 
1,592
 
 
2,821
 
Cash payments
 
(2,954
)
 
(2,697
)
 
(5,651
)
Balance as of October 2, 2010
 
$
2,664
 
 
$
464
 
 
$
3,128
 
 
 

10
 

Note G.  Discontinued Operations
 
The Corporation completed the sale of a small, non-core business in the office furniture segment during the third quarter of 2010.  A pre-tax charge of $0.6 million was recorded at the time of sale. The Corporation previously recorded $2.7 million of pre-tax charges during the first half of the year to reduce the assets held for sale to fair market value.  In addition, the Corporation sold a small non-core component of its hearth products segment during the first quarter of 2010.  A pre-tax charge of $0.4 million was recorded at the time of the sale.  Revenues and expenses associated with these business operations are presented as discontinued operations for all periods presented in the financial statements.
 
 
Summarized financial information for discontinued operations is as follows:
 
 
 
Three Months Ended
 
Nine Months Ended
(in thousands)
 
October 2, 2010
 
October 3, 2009
 
October 2, 2010
 
October 3, 2009
Discontinued operations:
 
 
 
 
 
 
 
 
Operating profit (loss) before tax
 
$
200
 
 
$
(1,849
)
 
$
(794
)
 
$
(2,283
)
Income tax provision (benefit)
 
73
 
 
1,007
 
 
(315
)
 
878
 
Net profit (loss) from discontinued
  operations, net of income tax
 
127
 
 
(2,856
)
 
(479
)
 
(3,161
)
Impairment loss and loss on sale of
  discontinued operations:
 
 
 
 
 
 
 
 
 
 
 
Impairment loss and loss on sale of discontinued operations before tax
 
(563
)
 
—
 
 
(3,639
)
 
—
 
Income tax provision (benefit)
 
(423
)
 
—
 
 
(1,567
)
 
—
 
Net impairment loss and loss on sale
  of discontinued operations
 
(140
)
 
—
 
 
(2,072
)
 
—
 
Loss from discontinued operations, net
of income tax benefit
 
$
(13
)
 
$
(2,856
)
 
$
(2,551
)
 
$
(3,161
)
 
 
 
Note H. Goodwill and Other Intangible Assets
 
The table below summarizes amortizable definite-lived intangible assets as of October 2, 2010 and January 2, 2010, which are reflected in the "Other Assets" line item in the Corporation's Condensed Consolidated Balance Sheets:
 
(In thousands)
 
October 2, 2010
 
January 2, 2010
Patents
 
$
19,325
 
 
$
19,325
 
Customer relationships and other
 
108,464
 
 
115,451
 
Less:  accumulated amortization
 
69,476
 
 
68,004
 
 
 
$
58,313
 
 
$
66,772
 
 
Aggregate amortization expense for the nine months ended October 2, 2010 and October 3, 2009 was $6.7 million and $7.5 million, respectively.  Based on the current amount of intangible assets subject to amortization, the estimated amortization expense for each of the following five fiscal years is as follows:
 
(In millions)
 
2010
 
2011
 
2012
 
2013
 
2014
Amortization Expense
 
$
8.5
 
 
$
6.3
 
 
$
5.7
 
 
$
5.3
 
 
$
4.7
 
 
As events such as potential acquisitions, dispositions or impairments occur in the future, these amounts may change.
 
The Corporation also owns trademarks and trade names with a net carrying amount of $41.0 million.  The trademarks are deemed to have indefinite useful lives because they are expected to generate cash flows indefinitely.
 

11
 

The changes in the carrying amount of goodwill since January 2, 2010 are as follows by reporting segment:
 
 
(In thousands)
 
Office
Furniture
 
Hearth
Products
 
Total
Balance as of January 2, 2010
 
 
 
 
 
 
Goodwill
 
$
123,948
 
 
$
166,525
 
 
$
290,473
 
Accumulated impairment losses
 
(29,359
)
 
—
 
 
(29,359
)
 
 
94,589
 
 
166,525
 
 
261,114
 
Goodwill acquired during the quarter
 
—
 
 
—
 
 
—
 
Impairment losses
 
—
 
 
—
 
 
—
 
Goodwill related to the sale of business units
 
—
 
 
(486
)
 
(486
)
Balance as of October 2, 2010
 
 
 
 
 
 
 
—
 
Goodwill
 
123,948
 
 
166,039
 
 
289,987
 
Accumulated impairment losses
 
(29,359
)
 
—
 
 
(29,359
)
 
 
$
94,589
 
 
$
166,039
 
 
$
260,628
 
 
The Corporation evaluates its goodwill for impairment on an annual basis during the fourth quarter, or whenever indicators of impairment exist of which none existed during the nine months ended October 2, 2010.  The Corporation estimates the fair value of its reporting units using various valuation techniques, with the primary technique being a discounted cash flow method.  This method employs assumptions that are market participant based.  The decrease in the hearth products segment is related to the sale of a non-core component during the first quarter.
 
 
Note I.  Product Warranties
 
The Corporation issues certain warranty policies on its office furniture and hearth products that provide for repair or replacement of any covered product or component that fails during normal use because of a defect in design or workmanship.
 
A warranty reserve is determined by recording a specific reserve for known warranty issues and an additional reserve for unknown claims that are expected to be incurred based on historical claims experience.  Actual claims incurred could differ from the original estimates, requiring adjustments to the reserve.  Activity associated with warranty obligations was as follows during the periods noted:
 
 
 
Nine Months Ended
(In thousands)
 
October 2, 2010
 
October 3, 2009
Balance at beginning of period
 
$
12,684
 
 
$
13,948
 
Accruals for warranties issued during period
 
11,309
 
 
9,715
 
Adjustments related to pre-existing warranties
 
1,008
 
 
(78
)
Settlements made during the period
 
(12,746
)
 
(10,772
)
Balance at end of period
 
$
12,255
 
 
$
12,813
 
 
 

12
 

Note J.  Postretirement Health Care
 
The following table sets forth the components of net periodic benefit cost included in the Corporation's Condensed Consolidated Statements of Income for:
 
 
 
Nine Months Ended
(In thousands)
 
October 2, 2010
 
October 3, 2009
Service cost
 
$
271
 
 
$
293
 
Interest cost
 
629
 
 
719
 
Amortization of transition obligation
 
381
 
 
381
 
Amortization of (gain)/loss
 
(13
)
 
(7
)
Net periodic benefit cost
 
$
1,268
 
 
$
1,386
 
  
 
Note K.  Income Taxes
 
The provision for income taxes for continuing operations in the third quarter of 2010 reflects an actual effective tax rate of 44.6 percent, compared to a discrete period effective tax rate of 33.7 percent for the third quarter of 2009.   The third quarter 2010 tax rate was negatively impacted due to a reduction in the anticipated capital gain from the sale of a closed manufacturing facility negatively impacting capital loss carry-forward utilization. The 2010 estimated annual effective tax rate including discontinued operations is expected to be 40.6 percent, higher than the U.S. tax rate of 35 percent, primarily due to increased profitability, the lack of U.S. research and development tax credits which have not been extended past 2009 and a valuation adjustment due to the inability to utilize capital loss carry-forwards.  A discrete calculation was used to report the 2009 third quarter tax provision rather than an estimated annual tax rate as uncertainty in the full year outlook produced significant variability and made it difficult to reasonably estimate the 2009 annual effective tax rate.
 
 
Note L.  Derivative Financial Instruments
 
The Corporation uses derivative financial instruments to reduce its exposure to adverse fluctuations in interest rates and diesel fuel.  On the date a derivative is entered into, the Corporation designates the derivative as (i) a fair value hedge, (ii) a cash flow hedge, (iii) a hedge of a net investment in a foreign operation, or (iv) a risk management instrument not designated for hedge accounting.  The Corporation recognizes all derivatives on its Condensed Consolidated Balance Sheets at fair value.
 
Interest Rate Risk
In June 2008, the Corporation entered into an interest rate swap agreement, designated as a cash flow hedge, for purposes of managing its benchmark interest rate fluctuation risk.  Under the interest rate swap agreement, the Corporation pays a fixed rate of interest and receives a variable rate of interest equal to the one-month London Interbank Offered Rate (LIBOR) as determined on the last day of each monthly settlement period on an aggregated notional principal amount of $50 million.  The net amount paid or received upon monthly settlements is recorded as an adjustment to interest expense, while the effective change in fair value is recorded as a component of accumulated other comprehensive income in the equity section of the Corporation's Condensed Consolidated Balance Sheets.  The interest rate swap agreement matures on May 27, 2011.
 
As of October 2, 2010, $885,996 of deferred net losses, net of tax, included in equity ("Accumulated other comprehensive income (loss)" in the Corporation's Condensed Consolidated Balance Sheet) related to this interest rate swap, are expected to be reclassified to current earnings ("Interest expense" in the Corporation's Condensed Consolidated Statements of Income) over the next twelve months.
 
Diesel Fuel Risk
The Corporation uses independent freight carriers to deliver its products.  These carriers charge the Corporation a basic rate per mile that is subject to a mileage surcharge for diesel fuel price increases.  The Corporation entered into variable to fixed rate commodity swap agreements beginning in April 2010 with two financial counterparties to manage fluctuations in fuel costs.  The Corporation will hedge approximately 40% of its diesel fuel requirements for the next twelve months.  The Corporation uses the hedge agreements to mitigate the volatility of diesel fuel prices and related fuel surcharges, and not to speculate the future price of diesel fuel.  The hedge agreements are designed to add stability to the Corporation's costs, enabling the Corporation to make pricing decisions and lessen the economic impact of abrupt changes in diesel fuel prices over the term of the contract.  The hedging instruments consist of a series of financially settled fixed forward contracts with expiration dates ranging up to twelve months.  The

13
 

contracts have been designated as cash flow hedges of future diesel purchases, and as such, the net amount paid or received upon monthly settlements is recorded as an adjustment to freight expense, while the effective change in fair value is recorded as a component of accumulated other comprehensive income in the equity section of the Corporation's Condensed Consolidated Balance Sheets.
 
As of October 2, 2010, $35,576 of deferred net losses, net of tax, included in equity ("Accumulated other comprehensive income (loss)" in the Corporation's Condensed Consolidated Balance Sheets) related to the diesel hedge agreements, are expected to be reclassified to current earnings ("Selling and administrative expense" in the Corporation's Condensed Consolidated Statements of Income) over the next twelve months.
 
The location and fair value of derivative instruments reported in the Corporation's Condensed Consolidated Balance Sheets are as follows (in thousands):
 
 
 
 
Asset (Liability) Fair Value
 
 
Balance Sheet Location
 
October 2, 2010
 
January 2, 2010
Interest rate swap
 
Accounts payable and accrued expenses
 
$
(1,420
)
 
$
(1,922
)
Interest rate swap
 
Other long-term liabilities
 
$
—
 
 
$
(626
)
Diesel fuel swap
 
Accounts payable and accrued expenses
 
$
(103
)
 
$
—
 
Diesel fuel swap
 
Prepaid expenses and other current assets
 
45
 
 
—
 
 
 
 
 
$
(1,478
)
 
$
(2,548
)
 
The effect of derivative instruments on the Corporation's Condensed Consolidated Statements of Income for the nine months ended October 2, 2010 was as follows (in thousands):
 
Derivatives in Cash Flow Hedge Relationship
 
Before-tax Gain (Loss) Recognized in OCI on Derivative (Effective Portion)
 
Locations of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)
 
Before-Tax Gain (Loss) Reclassified from AOCI Into Income (Effective Portion)
 
Locations of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)
 
Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)
Interest rate swap
 
$
(435
)
 
Interest expense
 
$
(1,563
)
 
None
 
$
—
 
Diesel fuel swap
 
(387
)
 
Selling and administrative expense
 
(330
)
 
None
 
(1
)
Total
 
$
(822
)
 
 
 
$
(1,893
)
 
 
 
$
(1
)
 
 
The effect of derivative instruments on the Corporation's Condensed Consolidated Statements of Income for the nine months ended October 3, 2009 was as follows (in thousands):
 
Derivatives in Cash Flow Hedge Relationship
 
Before-tax Gain (Loss) Recognized in OCI on Derivative (Effective Portion)
 
Locations of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)
 
Before-Tax Gain (Loss) Reclassified from AOCI Into Income (Effective Portion)
 
Locations of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)
 
Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)
Interest rate swap
 
$
(987
)
 
Interest expense
 
$
(1,228
)
 
None
 
—
 
Diesel fuel swap
 
—
 
 
Selling and administrative expense
 
—
 
 
None
 
—
 
Total
 
$
(987
)
 
 
 
$
(1,228
)
 
 
 
—
 
 
 

14
 

Note M.  Fair Value Measurements
 
For recognition purposes, on a recurring basis the Corporation is required to measure at fair value its available for sale securities and its investment in target funds.  The available for sale securities were comprised of government securities and corporate bonds. When available the Corporation uses quoted market prices to determine fair value and classify such measurements within Level 1.  In some cases where market prices are not available, the Corporation makes use of observable market-based inputs to calculate fair value, in which case the measurements are classified within Level 2.
 
Assets measured at fair value during the three months ended October 2, 2010 were as follows:
 
 
 
 
 
(in thousands)
 
 
Fair value as of measurement date
 
Quoted prices in active markets for identical assets
(Level 1)
 
Significant other observable inputs
(Level 2)
 
Significant unobservable inputs
(Level 3)
Investment in target funds
 
$
2,454
 
 
$
—
 
 
$
2,454
 
 
$
—
 
Government securities
 
$
6,100
 
 
$
—
 
 
$
6,100
 
 
$
—
 
Corporate bonds
 
$
316
 
 
$
—
 
 
$
316
 
 
$
—
 
Derivative financial instrument
 
$
(1,478
)
 
$
—
 
 
$
(1,478
)
 
$
—
 
 
 
Assets measured at fair value for the year ended January 2, 2010 were as follows:
 
 
 
 
 
(in thousands)
 
 
Fair value as of measurement date
 
Quoted prices in active markets for identical assets
(Level 1)
 
Significant other observable inputs
(Level 2)
 
Significant unobservable inputs
(Level 3)
Investment in target funds
 
$
5,744
 
 
$
—
 
 
$
5,744
 
 
$
—
 
Derivative financial instrument
 
$
(2,548
)
 
$
—
 
 
$
(2,548
)
 
$
—
 
 
In addition to the methods and assumptions the Corporation uses to record the fair value of financial instruments as discussed in the section above, it uses the following methods and assumptions to estimate the fair value of its financial instruments.
 
Cash and cash equivalents
The carrying amount approximated fair value.
 
Long-term debt (including current portion)
The carrying value of the Corporation's outstanding variable-rate, long-term debt obligations at October 2, 2010 and January 2, 2010, the end of the Corporation's 2009 fiscal year, approximated the fair value.  The fair value of the Corporation's outstanding fixed-rate, long-term debt obligations is estimated to be $161 million at October 2, 2010 and $151 million at January 2, 2010, compared to the carrying value of $150 million.
 
 
Note N.  Commitments and Contingencies
 
The Corporation utilizes letters of credit in the amount of $19.0 million to back certain insurance policies and payment obligations.  The letters of credit 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 pending litigation, environmental remediation, taxes, and other claims.  It is the Corporation's opinion that liabilities, if any, resulting from these matters are not expected to have a material adverse effect on the Corporation's financial condition, although such matters could have a material effect on the Corporation's quarterly or annual operating results and cash flows when resolved in a future period.
 
 

15
 

Note O.  New Accounting Standards
 
There were no new accounting standards issued during the quarter that the Corporation expects to have a material impact on the financial statements.
 
 
Note P.  Business Segment Information
 
Management views the Corporation as operating in two business segments: office furniture and hearth products with the former being the principal business segment.
 
The office furniture segment manufactures and markets a broad line of metal and wood office furniture which includes storage products, desks, credenzas, chairs, tables, bookcases, freestanding office partitions and panel systems and other related products.  The hearth products segment manufactures and markets a broad line of manufactured gas, electric, wood and biomass burning fireplaces, inserts, stoves, facings and accessories, principally for the home.
 
For purposes of segment reporting, intercompany sales transfers between segments are not material and operating profit is income before income taxes exclusive of certain unallocated corporate expenses.  These unallocated corporate expenses include the net cost of the Corporation's corporate operations, interest income and interest expense.  Management views interest income and expense as corporate financing costs rather than a business segment cost.  In addition, management applies one effective tax rate to its consolidated income before income taxes so income taxes are not reported or viewed internally on a segment basis.
 
The Corporation's primary market and capital investments are concentrated in the United States.

16
 

 
Reportable segment data reconciled to the consolidated financial statements for the three- and nine-month periods ended October 2, 2010, and October 3, 2009, is as follows:
 
Three Months Ended
 
Nine Months Ended
(In thousands)
October 2, 2010
 
October 3, 2009
 
October 2, 2010
 
October 3, 2009
Net Sales:
 
 
 
 
 
 
 
Office Furniture
$
387,382
 
 
$
374,150
 
 
$
1,030,112
 
 
$
1,022,905
 
Hearth Products
71,471
 
 
72,022
 
 
190,469
 
 
194,869
 
 
458,853
 
 
446,172
 
 
1,220,581
 
 
1,217,774
 
Operating Profit (Loss):
 
 
 
 
 
 
 
 
 
 
 
Office furniture
 
 
 
 
 
 
 
 
 
 
 
Operations before restructuring charges
$
33,776
 
 
$
42,992
 
 
$
65,701
 
 
$
66,252
 
Restructuring and impairment charges
251
 
 
(2,954
)
 
(2,720
)
 
(8,451
)
Office furniture – net
34,027
 
 
40,038
 
 
62,981
 
 
57,801
 
Hearth products
 
 
 
 
 
 
 
 
 
 
 
Operations before restructuring charges
3,041
 
 
3,354
 
 
(2,397
)
 
(13,519
)
Restructuring and impairment charges
—
 
 
(1,486
)
 
(101
)
 
(4,952
)
Hearth products – net
3,041
 
 
1,868
 
 
(2,498
)
 
(18,471
)
Total operating profit
37,068
 
 
41,906
 
 
60,483
 
 
39,330
 
Unallocated corporate expense
(8,790
)
 
(10,908
)
 
(31,209
)
 
(29,653
)
Income before income taxes
$
28,278
 
 
$
30,998
 
 
$
29,274
 
 
$
9,677
 
Depreciation & Amortization Expense:
 
 
 
 
 
 
 
 
 
 
 
Office furniture
$
11,096
 
 
$
12,958
 
 
$
34,468
 
 
$
39,857
 
Hearth products
2,559
 
 
4,237
 
 
9,052
 
 
13,117
 
General corporate
602
 
 
738
 
 
1,841
 
 
2,741
 
 
$
14,257
 
 
$
17,933
 
 
$
45,361
 
 
$
55,715
 
 
 
 
 
 
 
 
 
Capital Expenditures:
 
 
 
 
 
 
 
 
 
 
 
Office furniture
$
4,018
 
 
$
2,498
 
 
$
14,625
 
 
$
8,227
 
Hearth products
614
 
 
537
 
 
1,443
 
 
2,237
 
General corporate
1,616
 
 
86
 
 
2,608
 
 
410
 
 
$
6,248
 
 
$
3,121
 
 
$
18,676
 
 
$
10,874
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of
 
As of
 
 
 
 
 
 
 
October 2,
2010
 
October 3,
2009
Identifiable Assets:
 
 
 
 
 
 
 
 
 
 
 
Office furniture
 
 
 
 
 
 
$
601,661
 
 
$
631,369
 
Hearth products
 
 
 
 
 
 
291,213
 
 
309,219
 
General corporate
 
 
 
 
 
 
109,892
 
 
83,796
 
 
 
 
 
 
 
 
$
1,002,766
 
 
$
1,024,384
 
 

17
 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Overview
 
The Corporation has two reportable segments:  office furniture and hearth products.  The Corporation is the second largest office furniture manufacturer in the world and the nation's leading manufacturer and marketer of gas- and wood-burning fireplaces.  The Corporation utilizes its split and focus, decentralized business model to deliver value to its customers with its various brands and selling models.  The Corporation is focused on growing its existing businesses while seeking out and developing new opportunities for growth.
 
Net sales for the third quarter of fiscal 2010 increased 2.8 percent to $458.9 million when compared to the third quarter of fiscal 2009.  The increase was driven by the contract and international channels of the office furniture segment.  Gross margins for the quarter decreased from prior year levels due to increased material costs and higher mix of lower margin product in the office furniture segment partially offset by higher volume and cost reduction initiatives.  Selling and administrative expenses, as a percent of sales, decreased due to higher volume, distribution efficiencies and lower restructuring charges partially offset by higher fuel costs and investments in selling, marketing and product initiatives.
 
The Corporation recorded $0.7 million of restructuring and transition costs in the third quarter in connection with office furniture plant closures announced in first quarter 2010 and 2009.
 
The Corporation completed the sale of a non-core business in the office furniture segment during the third quarter of 2010 and sold a non-core component of the hearth products segment during the first quarter of 2010.  Revenues and expenses associated with these business operations are presented as discontinued operations for all periods presented in the Corporation's Condensed Consolidated Financial Statements.
 
Critical Accounting Policies
 
The preparation of the financial statements requires the Corporation to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  The Corporation continually evaluates its accounting policies and estimates.  The Corporation bases its estimates on historical experience and on a variety of other assumptions believed by management to be reasonable in order to make judgments about the carrying value of assets and liabilities.  Actual results may differ from these estimates under different assumptions or conditions.  A summary of the more significant accounting policies that require the use of estimates and judgments in preparing the financial statements is provided in the Corporation's Annual Report on Form 10-K for the year ended January 2, 2010.  During the first nine months of fiscal 2010, there were no material changes in the accounting policies and assumptions previously disclosed.
 
New Accounting Standards
 
There were no new accounting standards issued during the quarter that the Corporation expects to have a material impact on the financial statements.
 

18
 

Results of Operations
 
The following table presents certain key highlights from the results of operations for the periods indicated:
 
 
Three Months Ended
 
Nine Months Ended
 
(In thousands)
October 2, 2010
 
October 3, 2009
 
Percent
Change
 
October 2, 2010
 
October 3, 2009
 
Percent
Change
Net sales
$
458,853
 
 
$
446,172
 
 
2.8
 %
 
$
1,220,581
 
 
$
1,217,774
 
 
0.2
 %
Cost of sales
297,635
 
 
281,527
 
 
5.7
 %
 
798,866
 
 
802,925
 
 
(0.5
)%
Gross profit
161,218
 
 
164,645
 
 
(2.1
)%
 
421,715
 
 
414,849
 
 
1.7
 %
Selling & administrative expenses
130,514
 
 
126,091
 
 
3.5
 %
 
381,346
 
 
382,666
 
 
(0.3
)%
Restructuring & impairment charges
(251
)
 
4,440
 
 
(105.7
)%
 
2,821
 
 
13,403
 
 
(79.0
)%
Operating income (loss)
30,955
 
 
34,114
 
 
(9.3
)%
 
37,548
 
 
18,780
 
 
99.9
 %
Interest expense, net
2,677
 
 
3,116
 
 
(14.1
)%
 
8,274
 
 
9,103
 
 
(9.1
)%
Earnings (loss) before income taxes
28,278
 
 
30,998
 
 
(8.8
)%
 
29,274
 
 
9,677
 
 
202.5
 %
Income taxes
12,630
 
 
10,382
 
 
21.7
 %
 
12,176
 
 
2,005
 
 
507.3
 %
Income (loss) from continuing operations
$
15,648
 
 
$
20,616
 
 
(24.1
)%
 
$
17,098
 
 
$
7,672
 
 
122.9
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated net sales for the third quarter increased 2.8 percent or $12.7 million compared to the same quarter last year.  The increase occurred in the office furniture segment offset by a small decline in the hearth products segment.
 
Gross margin for the third quarter decreased to 35.1 percent compared to 36.9 percent for the same quarter last year.  The decrease in gross margin was driven by increased material costs and higher mix of lower margin products in the office furniture segment partially offset by higher volume and cost reduction initiatives.  Third quarter 2010 included $1.0 million of accelerated depreciation and transition costs related to the closure and consolidation of office furniture manufacturing facilities compared to $1.6 million in third quarter 2009.
 
As a result of challenging market conditions and the Corporation's ongoing business simplification and cost reduction strategies, management made the decision in the first quarter of fiscal 2010 to close an office furniture manufacturing facility located in Salisbury, North Carolina and consolidate production into existing office furniture manufacturing facilities.  In connection with the closure of the Salisbury facility and other office furniture plant closures announced in 2009, the Corporation recorded $0.6 million of charges during the quarter ended October 2, 2010 which included $0.9 million of accelerated depreciation recorded in cost of sales net of a $0.3 million reduction in restructuring expenses. The Corporation reduced a previously recorded accrual related to withdrawal liability associated with a multi-employer pension plan due to an increase in the market value of the plant assets.  The Corporation had previously recorded $1.3 million of severance costs for approximately 125 members during the first quarter in connection with the closure of the Salisbury facility.  The closure and consolidation of the Salisbury facility is expected to be substantially completed by the end of 2010.  The Corporation anticipates additional restructuring and transition costs of approximately $1.2 million related to the various closures over the remainder of 2010.
 
Total selling and administrative expenses, including restructuring charges, as a percent of sales decreased to 28.4 percent compared to 29.3 percent for the same quarter last year due to higher volume, distribution efficiencies and lower restructuring charges partially offset by investments in selling, marketing and product initiatives.  Third quarter 2009 included $4.4 million of restructuring charges associated with plant consolidations.
 
Income from continuing operations for the third quarter of 2010 was $15.6 million or $0.34 per diluted share in the third quarter of 2010 compared to $20.6 million or $0.45 per diluted share in the third quarter of 2009.
 
The provision for income taxes for continuing operations in the third quarter of 2010 reflects an actual effective tax rate of 44.6 percent, compared to a discrete period effective tax rate of 33.7 percent for the third quarter of 2009.   The third quarter 2010 tax rate was negatively impacted due to a reduction in the anticipated capital gain from the sale of a closed manufacturing facility negatively impacting capital loss carry-forward utilization. The 2010 estimated annual effective tax rate including discontinued operations is expected to be 40.6 percent, higher than the U.S. tax rate of 35 percent, primarily due to increased profitability, the lack of U.S. research and development tax credits which have not been extended past 2009 and a valuation adjustment due to the

19
 

inability to utilize capital loss carry-forwards.  A discrete calculation was used to report the 2009 third quarter tax provision rather than an estimated annual tax rate as uncertainty in the full year outlook produced significant variability and made it difficult to reasonably estimate the 2009 annual effective tax rate.
 
The Corporation completed the sale of a small, non-core business in the office furniture segment during the third quarter of 2010.  A pre-tax charge of $0.6 million was recorded at the time of sale. The Corporation previously recorded $2.7 million of pre-tax charges during the first half of the year to reduce the assets held for sale to fair market value.  In addition, the Corporation sold a small non-core component of its hearth products segment during the first quarter of 2010.  A pre-tax charge of $0.4 million was recorded at the time of the sale.  Revenues and expenses associated with these business operations are presented as discontinued operations for all periods presented in the financial statements.
 
For the first nine months of 2010, consolidated net sales increased $2.8 million, or 0.2 percent, to $1.221 billion compared to $1.218 billion in the first nine months of 2009.  Gross margins increased to 34.6 percent compared to 34.1 percent for the same period last year.  Income from continuing operations was $17.1 million for the first nine months of 2010 compared to $7.7 million for the first nine months of 2009.  Earnings per share from continuing operations increased to $0.37 per diluted share compared to $0.17 per diluted share for the same period last year.
 
Office Furniture
 
Third quarter 2010 sales for the office furniture segment increased 3.5 percent or $13.2 million to $387.4 million from $374.2 million for the same quarter last year driven by growth in the contract and international channels partially offset by a decline in the supplies driven channel.  Operating profit prior to unallocated corporate expenses decreased $6.0 million to $34.0 million as a result of lower price realization, higher mix of lower margin products, increased input costs and investments in selling, marketing and product initiatives.  These were partially offset by higher volume, improved distribution efficiencies, cost reduction initiatives and lower restructuring and transition costs.  Third quarter 2010 included $0.7 million of restructuring and transition costs including accelerated depreciation compared to $4.2 million of restructuring and transition costs including accelerated depreciation in third quarter 2009.
 
Net sales for the first nine months of 2010 increased 0.7 percent or $7.2 million to $1.03 billion compared to $1.02 billion for the same period in 2009.  Operating profit increased 9.0 percent or $5.2 million to $63.0 million. 
 
Hearth Products
 
Third quarter 2010 net sales for the hearth products segment decreased 0.8 percent or $0.6 million to $71.5 million from $72.0 million for the same quarter last year driven by a decline in the new construction channel partially offset by an increase in the remodel-retrofit channel.  Operating profit prior to unallocated corporate expenses increased $1.2 million to $3.0 million due to better price realization and lower restructuring costs partially offset by lower volume, higher material costs and a $0.3 million gain on the sale of a facility in the prior year quarter.  Third quarter 2009 included $2.2 million of restructuring and transition costs.
 
Net sales for the first nine months of 2010 decreased 2.3 percent or $4.4 million to $190.5 million compared to $194.9 million for the same period in 2009.  Operating profit increased $16.0 million to a $2.5 million loss when compared to the same period last year.
 
Liquidity and Capital Resources
 
Cash Flow – Operating Activities
Cash generated from operating activities for the first nine months of 2010 totaled $49.1 million compared to $135.9 million generated in the first nine months of 2009.  Changes in working capital performance resulted in a $31.9 million use of cash in the first nine months of the current fiscal year compared to a $66.6 million source of cash in the prior year.  Working capital in the first nine months of 2010, particularly receivables and inventory, was impacted by seasonality, customer mix and timing of shipments. Working capital in the first nine months of 2009 was positively impacted by reductions in accounts receivable due to a significant decrease in revenue.
 
Cash Flow – Investing Activities
Capital expenditures including capitalized software for the first nine months of fiscal 2010 were $18.7 million compared to $10.9 million in the same period of fiscal 2009 and were primarily for tooling and equipment for new products.  For the full year 2010, capital expenditures are expected to be approximately $30 million primarily focused on new product development and related tooling.

20
 

 
Cash Flow – Financing Activities
On June 11, 2010, the Corporation replaced a $300 million revolving credit facility entered into on January 28, 2005 with a new revolving credit facility that provided for a maximum borrowing of $150 million subject to increase (to a maximum amount of $250 million) or reduction from time to time according to the terms of the underlying credit agreement.  Amounts borrowed under the credit agreement may be borrowed, repaid and reborrowed from time to time until June 11, 2014.  The Corporation paid approximately $1.6 million of debt issuance costs that are being amortized straight-line over the term of the credit agreement.  As of October 2, 2010 and during the third quarter, net borrowings under the revolving credit facility were at $50 million and are classified as short-term as the Corporation expects to repay the borrowings within a year.
 
The credit agreement governing the Corporation's revolving credit facility contains a number of covenants, including covenants requiring maintenance of the following financial ratios as of the end of any fiscal quarter:
 
•    
a consolidated interest coverage ratio of not less than 4.0 to 1.0, based upon the ratio of (a) consolidated EBITDA (as defined in the credit agreement) for the last four fiscal quarters to (b) the sum of consolidated interest charges; and
•    
a consolidated leverage ratio of not greater than 3.0 to 1.0, based upon the ratio of (a) the quarter-end consolidated funded indebtedness (as defined in the credit agreement) to (b) consolidated EBITDA for the last four fiscal quarters.
 
The note purchase agreement pertaining to the Corporation's Senior Notes also contains a number of covenants, including a covenant requiring maintenance of consolidated debt to consolidated EBITDA (as defined in the note purchase agreement) of not greater than 3.5 to 1.0, based upon the ratio of (a) the quarter-end consolidated funded indebtedness (as defined in the note purchase agreement) to (b) consolidated EBITDA for the last four fiscal quarters.
 
The revolving credit facility and Senior Notes are the primary sources of committed funding from which the Corporation finances its planned capital expenditures, strategic initiatives, such as acquisitions, repurchases of common stock and certain working capital needs.  Non-compliance with the various financial covenant ratios could prevent the Corporation from being able to access further borrowings under the revolving credit facility, require immediate repayment of all amounts outstanding with respect to the revolving credit facility and Senior Notes and/or increase the cost of borrowing.
 
The most restrictive of the financial covenants is the consolidated leverage ratio requirement of 3.0 to 1.0 included in the credit agreement governing the revolving credit facility.  Under that credit agreement, adjusted EBITDA is defined as consolidated net income before interest expense, income taxes and depreciation and amortization of intangibles, as well as non-cash, nonrecurring charges and all non-cash items increasing net income.  At October 2, 2010, the Corporation was well below this ratio and was in compliance with all of the covenants and other restrictions in the credit agreements and the note purchase agreement.  The Corporation currently expects to remain in compliance over the next twelve months.
 
The Corporation's Board of Directors (the "Board") declared a regular quarterly cash dividend of $0.215 per share on the Corporation's common stock on August 10, 2010, to shareholders of record at the close of business on August 20, 2010.  It was paid on September 1, 2010.
 
During the nine months ended October 2, 2010, the Corporation repurchased 654,664 shares of common stock at a cost of approximately $17.8 million, or an average price of $27.20 per share.  For the nine months ended October 3, 2009, the Corporation did not repurchase any shares of common stock.  As of October 2, 2010, approximately $145.8 million of the Board's current repurchase authorization remained unspent.
 
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 year ended January 2, 2010.  During the first nine months of fiscal 2010 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.
 

21
 

Commitments and Contingencies
 
The Corporation is involved in various kinds of disputes and legal proceedings that have arisen in the ordinary course of its business, including pending litigation, environmental remediation, taxes and other claims.  It is the Corporation's opinion that liabilities, if any, resulting from these matters are not expected to have a material adverse effect on the Corporation's financial condition, although such matters could have a material effect on the Corporation's quarterly or annual operating results and cash flows when resolved in a future period.
 
Looking Ahead
 
Management remains optimistic about the office furniture and hearth products markets.  The Corporation continues its investments in selling, marketing and product initiatives to drive improvement.  Management believes the Corporation is financially sound and positioned for growth.
 
The Corporation continues to focus on creating long-term shareholder value by growing its businesses through investment in building brands, product solutions and selling models, enhancing its strong member-owner culture and remaining focused on its long-standing continuous improvement programs to build best total cost and a lean enterprise.
 
Forward-Looking Statements
 
Statements in this report that are not strictly historical, including statements as to plans, outlook, objectives and future financial performance, are "forward-looking" statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are made pursuant to the safe harbor provisions of 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, which may cause the Corporation's actual results in the future to differ materially from expected results.  These risks include, without limitation:  the Corporation's ability to realize financial benefits from its (a) price increases, (b) cost containment and business simplification initiatives for the entire Corporation, (c) investments in strategic acquisitions, new products and brand building, (d) investments in distribution and rapid continuous improvement, (e) ability to maintain its effective tax rate, (f) repurchases of common stock, and (g) consolidation and logistical realignment initiatives; uncertainty related to the availability of cash and credit, and the terms and interest rates on which credit would be available, to fund operations and future growth; lower than expected demand for the Corporation's products due to uncertain political and economic conditions, including the recent credit crisis, slow or negative growth rates in global and domestic economies and the protracted decline in the housing market; lower industry growth than expected; major disruptions at our key facilities or in the supply of any key raw materials, components or finished goods; uncertainty related to disruptions of business by terrorism, military action, epidemic, acts of God or other Force Majeure events; competitive pricing pressure from foreign and domestic competitors; higher than expected costs and lower than expected supplies of materials (including steel and petroleum based materials); higher than expected costs for energy and fuel; changes in the mix of products sold and of customers purchasing; relationships with distribution channel partners, including the financial viability of distributors and dealers; restrictions imposed by the terms of the Corporation's revolving credit facility and note purchase agreement; currency fluctuations and other factors described in the Corporation's annual and quarterly reports filed with the Securities and Exchange Commission on Forms 10-K and 10-Q.  The Corporation undertakes 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.
 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
As of October 2, 2010, there were no material changes to the financial market risks that affect the quantitative and qualitative disclosures presented in Item 7A of the Corporation's Annual Report on Form 10-K for the year ended January 2, 2010.
 

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Item 4. Controls and Procedures
 
Disclosure controls and procedures are designed to ensure 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 controls and procedures are also designed to ensure that 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 management, the chief executive officer and chief financial officer of the Corporation 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, 2010, and, based on this evaluation, the chief executive officer and chief financial officer have concluded these disclosure controls and procedures are effective.
 
Furthermore, there have been no changes in the Corporation's internal control 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.
 

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PART II.     OTHER INFORMATION
 
 
Item 1. Legal Proceedings
 
There are no new legal proceedings or material developments to report other than ordinary routine litigation incidental to the business.
 
 
Item 1A. Risk Factors
 
There have been no material changes from the risk factors disclosed in the "Risk Factors" section of the Corporation's Annual Report on Form 10-K for the year ended January 2, 2010 and the Corporation's Quarterly Report on Form 10-Q for the quarter ended July 3, 2010.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
Unregistered Sales of Equity Securities:
 
Directors and members (i.e., employees) of the Corporation receive common stock equivalents pursuant to the HNI Corporation Executive Deferred Compensation Plan and the HNI Corporation Directors Deferred Compensation Plan, respectively (collectively, the "Deferred Plans").  Common stock equivalents are hypothetical shares of common stock having a value on any given date equal to the value of a share of common stock.  Common stock equivalents earn dividend equivalents that are converted into additional common stock equivalents but carry no voting rights or other rights afforded to a holder of common stock.  The common stock equivalents credited to members and directors under the Deferred Plans are exempt from registration under Section 4(2) of the Securities Act of 1933 as private offerings made only to directors and members of the Corporation in accordance with the provisions of the Deferred Plans.
 
Under the Deferred Plans, each director or member participating in the Deferred Plans, may elect to defer the receipt of all or any portion of the compensation paid to such director or member by the Corporation to a cash or stock sub-account.  All deferred payments to the stock sub-account are held in the form of common stock equivalents.  Payments out of the deferred stock sub-accounts are made in the form of common stock of the Corporation (and cash as to any fractional common stock equivalent).  In the third quarter of 2010, the directors and members, as a group, were credited with 2,178 common stock equivalents under the Deferred Plans.  The value of each common stock equivalent, when credited, ranged from $23.37 to $28.76.
 
Issuer Purchases of Equity Securities:
 
The following is a summary of share repurchase activity during the quarter ended October 2, 2010.
 
 
 
 
Period
 
(a) Total Number of Shares (or Units) Purchased (1)
 
(b) Average
price Paid
per Share or
Unit
 
(c) Total Number of
Shares (or Units)
Purchased as Part of Publicly Announced
Plans or Programs
 
(d) Maximum
Number (or
Approximate
Dollar Value) of
Shares (or Units)
that May Yet be
Purchased Under
the Plans or
Programs
07/04/10 – 07/31/10
 
281,842
 
 
26.64
 
 
281,842
 
 
$
145,806,616
 
08/01/10 – 08/28/10
 
—
 
 
 
 
—
 
 
$
145,806,616
 
08/29/10 – 10/02/10
 
—
 
 
 
 
—
 
 
$
145,806,616
 
Total
 
281,842
 
 
 
 
 
281,842
 
 
 
 
(1) No shares were purchased outside of a publicly announced plan or program.
 
The Corporation repurchases shares under previously announced plans authorized by the Board as follows:
•    
Plan announced November 9, 2007, providing share repurchase authorization of $200,000,000 with no specific expiration date.
•    
No repurchase plans expired or were terminated during the third quarter of fiscal 2010, nor do any plans exist under which the Corporation does not intend to make further purchases.

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Item 6. Exhibits
 
See Exhibit Index.
 

25
 

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 4, 2010
By:
/s/ Kurt A. Tjaden
 
 
 
Kurt A. Tjaden
 
 
 
Vice President and Chief Financial Officer
 
  

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EXHIBIT INDEX
(31.1)
Certification of the CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
(31.2)
Certification of the CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
(32.1)
Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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