| HNI CORP entitled “Item 1A Risk Factors |
| ” The Corporation cautions readers not to place undue reliance on any forward-looking statement which speaks only as of the date made and to recognize that forward-looking statements are predictions of future results, which may not occur as anticipated |
| Actual results could differ materially from those anticipated in the forward-looking statements and from historical results, due to the risks and uncertainties described elsewhere in this report, including under the heading entitled “Item 1A Risk Factors,”as well as others that the Corporation may consider immaterial or does not anticipate at this time |
| The risks and uncertainties described in this report, including those under the heading entitled “Item 1A Risk Factors,” are not exclusive and further information concerning the Corporation, including factors that potentially could materially affect the Corporation’s financial results or condition, may emerge from time to time |
| The Corporation assumes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law |
| The Corporation does advise you, however, to consult any further disclosures made on related subjects in future quarterly reports on Form 10-Q and current reports on Form 8-K filed with or furnished to the Securities and Exchange Commission |
| ITEM 1A RISK FACTORS The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered |
| The risks and uncertainties described below are not the only ones we face |
| Additional risks and uncertainties not presently known to us or that we presently deem less significant may also adversely affect our business, operating results, cash flows, and financial condition |
| If any of the following risks actually occur, our business, operating results, cash flows and financial condition could be materially adversely affected |
| We operate in a highly competitive environment and, as a result, we may not always be successful |
| Both the office furniture and hearth products industries are highly competitive, with a significant number of competitors in both industries offering similar products |
| While competitive factors vary geographically and between differing sales situations, typical factors for both industries include: price; delivery and service; product design and features; product quality; strength of dealers and other distributors; and relationships with customers and key influencers, such as architects, designers, home-builders and facility managers |
| Our principal competitors in the office furniture industry include The Global Group (a Canadian company), Haworth, Inc, Kimball International, Inc, Steelcase Inc, Herman Miller, Inc, Teknion Corporation (a Canadian company), KI and Knoll, Inc |
| Our principal competitors in the hearth products industry include Lennox International Inc |
| and CFM Corporation (a Canadian compan y) |
| In both industries, most of our top competitors have an installed base of products that can be a source of significant future sales through repeat and expansion orders |
| These competitors manufacture products with strong acceptance in the marketplace and are capable of developing products that have a competitive advantage over our products |
| Our continued success will depend on many things, including our ability to continue to manufacture and market high quality, high performance products at competitive prices and our ability to adapt our business model to effectively compete in the highly competitive environments of both the office furniture and hearth products industries |
| Our success is also subject to our ability to sustain and grow our positive brand reputation and recognition among existing and potential customers and use our brands and trademarks effectively in entering new markets |
| In both the office furniture and hearth products industries, we also face significant price competition from our competitors and from new market entrants primarily from lower-cost countries |
| Such price competition impacts our ability to implement price increases or, in some cases, even maintain prices, which could lower our profit margins |
| In addition, we may not be able to maintain or raise the prices of our products in response to rising raw material prices and other inflationary pressures |
| Increased competition from low-cost Asian imports represents one of the most significant threats to our current market share in the office furniture industry |
| In the hearth products industry, big box retailers, such as Lowe’s and Home Depot, with whom we currently do not do business, are increasing their penetration into the market |
| If such market penetration continues, it could adversely affect our business, operatin g results, or financial condition |
| 11 ______________________________________________________________________ There can be no assurance that we will be able to compete successfully in our various markets in the future |
| The concentration of our customer base, changes in demand and order patterns from our customers, particularly the top ten customers, as well as the increased purchasing power of such customers, could adversely affect our business, operating results, or financial condition |
| We sell our products through multiple distribution channels |
| These distribution channels have been consolidating in the past several years and may continue to consolidate in the future |
| Such consolidation may result in a greater proportion of our sales being concentrated in fewer customers |
| In 2005, our ten largest customers represented approximately 36prca of consolidated net sales |
| The increased purchasing power exercised by larger customers may adversely affect the prices at which we can successfully offer our products |
| As a result of this consolidation, changes in the purchase patterns or the loss of a single customer may have a greater impact on our business, operating results, or financial condition than such events would have had prior to such consolidation |
| There can be no assurance that we will be able to maintain our relationships with customers if this consolidation continues |
| The growth in sales of private label products by some of our largest office furniture customers may reduce our revenue and adversely affect our business, operating results, or financial condition |
| Private label products are products sold under the name of the distributor or retailer, but manufactured by another party |
| Some of our largest customers have begun an aggressive private label initiative to increase sales of office furniture |
| If these initiatives are successful, they may reduce our revenue and inhibit our ability to raise prices and may, in some cases, even force us to lower prices, which could result in an adverse effect on our business, operating results, or financial condition |
| Increases in basic commodity and raw material costs as well as disruptions to the supply of such basic commodities and raw materials could adversely affect our profitability |
| Fluctuations in the price, availability, and quality of the raw materials used by us in manufacturing could have an adverse effect on our costs of sales and our ability to meet the demand of customers |
| The cost of steel, our largest raw material category, and other commodities have significantly increased in recent years due to, among other things, changes in global supply and demand, changes in laws and regulations (including tariffs and duties), changes in exchange rates and worldwide price levels, natural disasters, terrorism, and political unrest or instability |
| These factors could lead to further price increases or supply interruptions in the future |
| Our profit margins could be adversely affected if raw material and commodity costs remain high or escalate further, and we are either unable to offset such costs through strategic sourcing initiatives and continuous improvement programs or, as a result of competitive market dynamics, unable to pass along a portion of the higher costs to our customers |
| We are affected by the cost of energy, and increases in energy prices could adversely affect our gross margins and profitability |
| Our gross margins and the profitability of our business operations are sensitive to the cost of energy because the cost of energy is reflected in our transportation costs, the cost of petroleum-based materials, like plastics, and the cost of operating our manufacturing facilities |
| If the price of petroleum-based products, the cost of operating our manufacturing facilities and our transportation costs continue to increase it could adversely affect our gross margins and profitability |
| We may not be successful in implementing and managing the risks inherent in our growth strategy |
| As a part of our growth strategy, we seek to increase sales and market share by introducing new products, further enhancing our existing line of products, and continuing to pursue complementary acquisitions |
| This strategy depends on our ability to increase sales through our existing customer network, principally dealers, wholesalers and retailers |
| Furthermore, the ability to effectuate and manage profitable growth will depend on our ability to contain costs, including costs associated with increased manufacturing, sales and marketing efforts, freight utilization, warehouse capacity, product development, and acquisition efforts |
| Our efforts to introduce new products that meet customer and workplace/home requirements may not be successful, which could limit our sales growth or cause our sales to decline |
| To keep pace with market trends in both the office furniture and hearth products industries, such as changes in workplace and home design and increases in the use of technology, and with evolving regulatory and industry requirements, including environmental, health, safety and similar standards for the workplace and home and for product performance, we must periodically introduce new products |
| The introduction of new products in both 12 ______________________________________________________________________ industries requires the coordination of the design, manufacturing, and marketing of such products, which may be affected by factors beyond our control |
| The design and engineering of certain of our new products can take up to a year or more, and further time may be required to achieve client acceptance |
| In addition, we may face difficulties in introducing new products if we cannot successfully align ourselves with independent architects, home-builders and designers who are able to design, in a timely manner, high quality products consistent with our image |
| Accordingly, the launch of any particular product may be later or less successful than originally anticipated by us |
| Difficulties or delays in introducing new products or lack of customer acceptance of new products could limit our sales growth or cause our sales to decline, and may result in an adverse effect on our business, operating results, or financial co ndition |
| We intend to grow our business through additional acquisitions, alliances, and joint venture arrangements, which could adversely affect our business, operating results, or financial condition |
| One of our growth strategies is to supplement our internal growth through acquisitions, alliances, and joint venture arrangements of businesses with technologies or products that complement or augment our existing products or distribution or add new products or distribution to our business |
| In January 2006, we announced the signing of an agreement to purchase Lamex, a privately held Chinese manufacturer and marketer of office furniture |
| The benefits of an acquisition, alliance, or joint venture may take more time than expected to develop or integrate into our operations, and we cannot guarantee that our Lamex acquisition or any future acquisitions, alliances or joint ventures will in fact produce any benefits |
| In addition, acquisitions, alliances, and joint ventures involve a number of risks, including: • diversion of management’s attention; • difficulties in assimilating the operations and products of an acquired business or in realizing projected efficiencies, cost savings, and revenue synergies; • potential loss of key employees or customers of the acquired businesses or adverse effects on existing business relationships with suppliers and customers; • adverse impact on overall profitability if acquired businesses do not achieve the financial results projected in our valuation models; • reallocation of amounts of capital from other operating initiatives or an increase in our leverage and debt service requirements to pay the acquisition purchase prices, which could in turn restrict our ability to access additional capital when needed or to pursue other important elements of our business strategy; • inaccurate assessment of undisclosed, contingent, or other liabilities or problems and unanticipated costs associated with the acquisition; and • incorrect estimates made in the accounting for acquisitions, incurrence of non-recurring charges, and write-off of significant amounts of goodwill that could adversely affect our operating results |
| Our ability to grow through acquisitions will depend, in part, on the availability of suitable acquisition candidates at an acceptable price, our ability to compete effectively for these acquisition candidates, and the availability of capital to complete such acquisitions |
| These risks could be heightened if we complete several acquisitions within a relatively short period of time |
| In addition, there can be no assurance that we will be able to continue to identify attractive opportunities or enter into any such transactions with acceptable terms in the future |
| If an acquisition is completed, there can be no assurance that we will be able to successfully integrate the acquired entity into our operations or that we will achieve sales and profitability that justify our investment in such businesses |
| Any potential acquisition may not be successful and could adversely affect our business, operating results, or financial condition |
| We are subject to extensive environmental regulation and have exposure to potential environmental liabilities |
| The past and present operation and ownership by us of manufacturing facilities and real property are subject to extensive and changing federal, state and local environmental laws and regulations, including those relating to discharges in air, water and land, the handling and disposal of solid and hazardous waste and the remediation of contamination associated with releases of hazardous substances |
| Compliance with environmental regulations has not had a material affect on our capital expenditures, earnings, or competitive position to date; however, compliance with current laws or more stringent laws or regulations which may be imposed on us in the future, stricter interpretation of existing laws, or discoveries of contamination at our real property sites which occurred prior to our ownership or the advent of environmental regulation may require us to make additional expenditures in the future, some of which may be material |
| The existence of various unfavorable macroeconomic and industry factors for a prolonged period could adversely affect our business, operating results, or financial condition |
| 13 ______________________________________________________________________ Office furniture industry revenues are impacted by a variety of macroeconomic factors such as service-sector employment levels, corporate profits, non-residential fixed investment, and commercial construction |
| Industry factors, such as corporate restructuring, technology changes, corporate relocations, health and safety concerns, including ergonomic considerations, and the globalization of companies, also influence office furniture industry revenues |
| Hearth products industry revenues are impacted by a variety of macroeconomic factors as well, including housing starts, overall employment levels, interest rates, consumer confidence, disposable income, changing demographics, and hearth industry revenues |
| Industry factors, such as technology changes, health and safety concerns and environmental regulation, including indoor air quality standards, also influence hearth products industry revenues |
| There can be no assurance that current or future economic or industry trends will not adversely affect our business, operating results, or financial condition |
| Increasing healthcare costs could adversely affect our business, operating results, or financial condition |
| We provide healthcare benefits to the majority of our members |
| Healthcare costs have continued to rise over time and could adversely affect our business, operating results, or financial condition |
| Our inability to improve the quality/capability of our network of independent dealers or the loss of a significant number of such dealers could adversely affect our business, operating results, or financial condition |
| In both the officer furniture and hearth products industries, we rely in large part on a network of independent dealers to market our products to customers |
| We also rely upon these dealers to provide a variety of important specification, installation and after-market services to our customers |
| Our dealers may terminate their relationships with us at any time and for any reason |
| The loss or termination of a significant number of dealer relationships could cause difficulties for us in marketing and distributing our products, resulting in a decline in our sales, which may adversely affect our business, operating results, or financial condition |
| Our increasing international operations expose us to risks related to conducting business in multiple jurisdictions outside the United States |
| We primarily sell our products and report our financial results in US Dollars; however we have increasingly been conducting business in countries outside the United States, which exposes us to fluctuations in foreign currency exchange rates |
| Paying our expenses in other currencies can result in a significant increase or decrease in the amount of those expenses in terms of US Dollars, which may affect our profits |
| In the future, any foreign currency appreciation relative to the US Dollar would increase our expenses that are denominated in that currency |
| Additionally, as we report currency in the US Dollar, our financial position is affected by the strength of the currencies in countries where we have operations relative to the strength of the US Dollar |
| We review our foreign currency exposure and evaluate whether we should enter into hedging transactions |
| We may be vulnerable to the effects of currency exchange rate fluctuations |
| Our international sales and operations are subject to a number of additional risks, including, without limitation: • social and political turmoil, official corruption and civil unrest; • restrictive government actions, such as the imposition of trade quotas and tariffs and restrictions on transfers of funds; • changes in labor laws and regulations affecting our ability to hire, retain or dismiss employees; • the need to comply with multiple and potentially conflicting laws and regulations, including environmental laws and regulations; • preference for locally branded products and laws and business practices favoring local competition; • less effective protection of intellectual property; • unfavorable business conditions or economic instability in any particular country or region; and • difficulty in obtaining distribution and support |
| There can be no assurance that these and other factors will not have an adverse affect on our business, operating results, or financial condition |
| 14 ______________________________________________________________________ We may not be able to maintain our effective tax rate |
| We may not be able to maintain our effective tax rate because (1) income tax benefits may be offset by an increase in the valuation allowance due to the uncertainty regarding the ability to utilize the benefits in the future, (2) the losses incurred in certain jurisdictions may not offset the tax expense in profitable jurisdictions, (3) there are differences between foreign and US income tax rates, and (4) many tax years are subject to audit by different tax jurisdictions, which audits may result in additional taxes payable |
| Restrictions imposed by the terms of our existing credit facility may limit our operating and financial flexibility |
| Our existing credit facility limits our ability to finance operations, service debt or engage in other business activities that may be in our interest |
| Specifically, our credit facility restricts our ability to incur additional indebtedness, create or incur certain liens with respect to any of our properties or assets, engage in lines of business substantially different than those currently conducted by us, sell, lease, license or dispose of any of our assets, enter into certain transactions with affiliates, make certain restricted payments or take certain restricted actions, and enter into certain sale-leaseback arrangements |
| Our credit facility also requires us to maintain certain financial covenants |
| Our failure to comply with the obligations under our credit facility may result in an event of default, which, if not cured or waived, may permit acceleration of the indebtedness under the credit facility |
| We cannot be certain that we will have sufficient funds available to pay any accelerated indebtedness or that we will have the ability to refinance accelerated indebtedness on terms favorable to us or at all |
| We may require additional capital in the future, which may not be available or may be available only on unfavorable terms |
| Our capital requirements depend on many factors, including capital improvements, tooling, new product development, and acquisitions |
| To the extent that our existing capital is insufficient to meet these requirements and cover any losses, we may need to raise additional funds through financings or curtail our growth and reduce our assets |
| Our ability to generate cash depends on economic, financial, competitive, legislative, regulatory, and other factors that may be beyond our control |
| Future borrowings or financings may not be available to us under our credit facility or otherwise in an amount sufficient to enable us to pay our debt or meet our liquidity needs |
| Any equity or debt financing, if available at all, could have terms that are not favorable to us |
| In addition, financings could result in dilution to our shareholders or the securities may have rights, preferences and privileges that are senior to those of our common stock |
| If our need for capital arises because of significant losses, the occurrence of these losses may make it more difficult for us to raise the necessary capital |
| Our business is subject to a number of other miscellaneous risks that may adversely affect our business, operating results, or financial condition |
| Other miscellaneous risks include, among others: • uncertainty related to disruptions of business by accidents, third-party labor disputes, terrorism, military action, natural disasters, epidemic, acts of God, or other force majeure events; • reduced demand for our storage products caused by changes in office technology, including the change from paper record storage to electronic record storage; • the effects of economic conditions on demand for office furniture and hearth products, customer insolvencies, bankruptcies and related bad debts and claims against us that we received preferential payments; • our ability to realize cost savings and productivity improvements from our cost containment and business simplification initiatives; • our ability to realize financial benefits from our repurchases of common stock; • volatility in the market price and trading volume of equity securities may adversely affect the market price for our common stock; • our ability to protect our intellectual property; 15 ______________________________________________________________________ • potential claims by third-parties that we infringed upon their intellectual property rights; • our insurance may not adequately insulate us from expenses for product defects; and • our ability to retain our experienced management team and recruit other key personnel |