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Raymond James Brief On HNI
7.23.10 | St. Petersburg, FL |
Investment analysis firm Raymond James & Associates
reaffirmed its Outperform rating on HNI
Corp. and increased its earnings estimates following release
of the company's significantly better-than-expected second-quarter 2010
results and management's conference call.
HNI: 2Q10 $0.15 Adjusted EPS vs. $0.11 Consensus; Awaiting Outlook
Analyst(s): Budd Bugatch
>After Wednesday's market close, HNI reported 2Q GAAP earnings of $0.12 per share from continuing operations. Adjusted for restructuring and transition costs associated with the company's ongoing cost structural cost reset initiatives, adjusted EPS were $0.15, well above our $0.10 estimate and the $0.11 consensus mean.
>Total sales for the second quarter advanced 6.3% to $398.2 million versus $374.8 million last year and $8.0 million above our estimate. In looking at the revenues versus our model, office furniture sales were $11.6 million higher than forecast while hearth product sales were $3.6 million below our forecast. Given recent demonstrated strength in office furniture industry orders and shipments and more recent malaise in housing activity, these revenue results do not appear all that surprising.
>Total reported revenues were at, or just above, the high end of management guidance for the second quarter versus restated results, adjusted for discontinued and divested operations.
>On a reported basis, operating EPS was $0.07 better than our forecast, driven primarily by improved gross margin (35.5% versus 34.0% last year and our 32.8% estimate) that drove a $0.15 positive variance offset by a drag of $0.08 from SG&A expense that included "investments in selling initiatives and increased incentive based compensation." Reported gross margin improved 145 basis points versus last year due to higher volume and cost reduction initiatives. Lower price realization and a higher mix of lower margin office furniture products, however, were drags on reported gross margin.
>Called out items accounted for $0.03 of EPS, thereby, bringing the adjusted EPS to $0.15. The total pretax dollar amount of the called-out items was $2.4 million, all in office furniture, accounted for roughly half in cost of goods sold and half as a separated listed restructuring charge. On an adjusted basis, operating results beat our model by $0.05 per share.
>As noted earlier, office furniture drove the better-than-expected results. For that segment, the adjusted EBIT margin was 7.3%, up 78 basis points versus last year's restated results and 184 basis points above our 5.5% projection. Although Hearth Products lost money at the operating line, it also had a much-improved result versus last year, posting a -4.7% operating margin versus last year's -13.4% restated operating loss margin. This improvement was realized despite modestly lower Hearth revenues and demonstrates management cost control acumen, in our view.
>Keeping with its typical practice, HNI did not offer specific forward guidance in its press release, though we expect detailed guidance elements on this morning's 11:00 (ET) conference call.
>HNI's balance sheet remains strong. Debt to capital remains ~33% (~1.6 times trailing EBITDA). In the quarter, inventories did rise ~10% y/y versus the 6+% sales increase.
>Given the headline beat and shares' recent pullback, HNI should react favorably in Thursday's early trading, though investors will be focused on the forward outlook.
Raymond James Brief 7.22.10
HNI: Raising Estimates Post-Call; Reaffirm Outperform
Analyst(s): Budd Bugatch
>We reaffirm our Outperform rating on HNI while increasing EPS estimates following its significant 2Q10 beat and management’s conference call. Out $38.00 12-month target price is unchanged, and represents 24x our FY11 EPS estimate. While this is a premium to the company’s 10-year median forward P/E of ~18x, current EPS levels are depressed, and we continue to forecast a meaningful improvement in out-years. In the meantime, our target is justified by our EVA/FCF-derived estimate of intrinsic worth.
>As detailed in an earlier brief, HNI reported adjusted 2Q10 EPS of $0.15, well above our $0.10 estimate and the $0.11 consensus. Total sales increased 6.3% year-over-year to $398.2 million, also better than our $390.2 million estimate. Notably, this marks the company’s first consolidated year-over-year revenue increase since 4Q06. Office Furniture sales increased 7.8% year-over-year (Supplies driven channel +4.7%; all other +11.5%) to $342.7 million, above our $331.1 million estimate. Hearth Products sales fell 2.3%, driven by a 22.3% decline in the Remodel/Retrofit channel, offset partially by a 24.2% increase in the New Construction channel (fueled by spiking demand ahead of the homebuyer tax credit expiration)
>Management guided 3Q10 revenue growth to the range of 7% to 9%, implying total sales of $476 million to $488 million after adjusting for $8 million of divestitures. Our previous 3Q10 revenue estimate had been $464 million; consensus is $477 million. Office Furniture sales are expected to increase 7% to 10%, driven by improvement in both the supplies driven channel (up 5% to 7%) and the contract business (up 10% to 14%). Hearth Products sales are expected to increase 5% to 7% driven by growth in the remodel/retrofit business.
>Additionally, management anticipates gross margin (excluding restructuring) of 36.0% to 36.1% (down 120 to 130 basis year-over-year); SG&A ratio (excluding restructuring) of 28.0% to 28.6%; interest expense of $3.2 million; and an effective tax rate of 38%. By our pencil, this implies normalized operating margin of approximately 7.5% to 8.0% and adjusted EPS of $0.44 to $0.49- above our prior $0.43 estimate, yet below the $0.52 consensus.
>The midpoint of guidance implies operating income of approximately $37 million (7.8% of sales), a $2.8 million year-over-year decline despite a $36.1 million increase in sales. Given HNI’s “normal” EBIT contribution margin of ~30%, we would have estimated 3Q10 operating income of just over $50 million. The delta is due to an anticipated $6.5 million drag from higher commodity prices (net of pricing increases and productivity gains), an incremental $5 million of growth investments, continued negative mix in Office, and some other timing issues. We are increasing our 3Q10 EPS estimate from $0.43 to $0.49. FY10 and FY11 are now $0.97 and $1.58, up from $0.81 and $1.45, previously.
HNI: 2Q10 $0.15 Adjusted EPS vs. $0.11 Consensus; Awaiting Outlook
Analyst(s): Budd Bugatch
>After Wednesday's market close, HNI reported 2Q GAAP earnings of $0.12 per share from continuing operations. Adjusted for restructuring and transition costs associated with the company's ongoing cost structural cost reset initiatives, adjusted EPS were $0.15, well above our $0.10 estimate and the $0.11 consensus mean.
>Total sales for the second quarter advanced 6.3% to $398.2 million versus $374.8 million last year and $8.0 million above our estimate. In looking at the revenues versus our model, office furniture sales were $11.6 million higher than forecast while hearth product sales were $3.6 million below our forecast. Given recent demonstrated strength in office furniture industry orders and shipments and more recent malaise in housing activity, these revenue results do not appear all that surprising.
>Total reported revenues were at, or just above, the high end of management guidance for the second quarter versus restated results, adjusted for discontinued and divested operations.
>On a reported basis, operating EPS was $0.07 better than our forecast, driven primarily by improved gross margin (35.5% versus 34.0% last year and our 32.8% estimate) that drove a $0.15 positive variance offset by a drag of $0.08 from SG&A expense that included "investments in selling initiatives and increased incentive based compensation." Reported gross margin improved 145 basis points versus last year due to higher volume and cost reduction initiatives. Lower price realization and a higher mix of lower margin office furniture products, however, were drags on reported gross margin.
>Called out items accounted for $0.03 of EPS, thereby, bringing the adjusted EPS to $0.15. The total pretax dollar amount of the called-out items was $2.4 million, all in office furniture, accounted for roughly half in cost of goods sold and half as a separated listed restructuring charge. On an adjusted basis, operating results beat our model by $0.05 per share.
>As noted earlier, office furniture drove the better-than-expected results. For that segment, the adjusted EBIT margin was 7.3%, up 78 basis points versus last year's restated results and 184 basis points above our 5.5% projection. Although Hearth Products lost money at the operating line, it also had a much-improved result versus last year, posting a -4.7% operating margin versus last year's -13.4% restated operating loss margin. This improvement was realized despite modestly lower Hearth revenues and demonstrates management cost control acumen, in our view.
>Keeping with its typical practice, HNI did not offer specific forward guidance in its press release, though we expect detailed guidance elements on this morning's 11:00 (ET) conference call.
>HNI's balance sheet remains strong. Debt to capital remains ~33% (~1.6 times trailing EBITDA). In the quarter, inventories did rise ~10% y/y versus the 6+% sales increase.
>Given the headline beat and shares' recent pullback, HNI should react favorably in Thursday's early trading, though investors will be focused on the forward outlook.
Raymond James Brief 7.22.10
HNI: Raising Estimates Post-Call; Reaffirm Outperform
Analyst(s): Budd Bugatch
>We reaffirm our Outperform rating on HNI while increasing EPS estimates following its significant 2Q10 beat and management’s conference call. Out $38.00 12-month target price is unchanged, and represents 24x our FY11 EPS estimate. While this is a premium to the company’s 10-year median forward P/E of ~18x, current EPS levels are depressed, and we continue to forecast a meaningful improvement in out-years. In the meantime, our target is justified by our EVA/FCF-derived estimate of intrinsic worth.
>As detailed in an earlier brief, HNI reported adjusted 2Q10 EPS of $0.15, well above our $0.10 estimate and the $0.11 consensus. Total sales increased 6.3% year-over-year to $398.2 million, also better than our $390.2 million estimate. Notably, this marks the company’s first consolidated year-over-year revenue increase since 4Q06. Office Furniture sales increased 7.8% year-over-year (Supplies driven channel +4.7%; all other +11.5%) to $342.7 million, above our $331.1 million estimate. Hearth Products sales fell 2.3%, driven by a 22.3% decline in the Remodel/Retrofit channel, offset partially by a 24.2% increase in the New Construction channel (fueled by spiking demand ahead of the homebuyer tax credit expiration)
>Management guided 3Q10 revenue growth to the range of 7% to 9%, implying total sales of $476 million to $488 million after adjusting for $8 million of divestitures. Our previous 3Q10 revenue estimate had been $464 million; consensus is $477 million. Office Furniture sales are expected to increase 7% to 10%, driven by improvement in both the supplies driven channel (up 5% to 7%) and the contract business (up 10% to 14%). Hearth Products sales are expected to increase 5% to 7% driven by growth in the remodel/retrofit business.
>Additionally, management anticipates gross margin (excluding restructuring) of 36.0% to 36.1% (down 120 to 130 basis year-over-year); SG&A ratio (excluding restructuring) of 28.0% to 28.6%; interest expense of $3.2 million; and an effective tax rate of 38%. By our pencil, this implies normalized operating margin of approximately 7.5% to 8.0% and adjusted EPS of $0.44 to $0.49- above our prior $0.43 estimate, yet below the $0.52 consensus.
>The midpoint of guidance implies operating income of approximately $37 million (7.8% of sales), a $2.8 million year-over-year decline despite a $36.1 million increase in sales. Given HNI’s “normal” EBIT contribution margin of ~30%, we would have estimated 3Q10 operating income of just over $50 million. The delta is due to an anticipated $6.5 million drag from higher commodity prices (net of pricing increases and productivity gains), an incremental $5 million of growth investments, continued negative mix in Office, and some other timing issues. We are increasing our 3Q10 EPS estimate from $0.43 to $0.49. FY10 and FY11 are now $0.97 and $1.58, up from $0.81 and $1.45, previously.
Comment | Categories: Business/Finance, Mfg. & Distr.
