Research from Water Tower Research, Water Tower Research

Water Tower Research

Water Tower Research is a leading equity research firm that provides research on micro, small and mid cap companies.

Water Tower Research was founded by Wall Street veterans after witnessing a fundamental shift in the investment research industry with the result being a declining knowledge base among investors, a lack of awareness and a shrinking pool of fundamental research being conducted on companies across the small-cap and micro-cap spectrum. The same issues are now increasingly occurring in the mid-cap space. This sea change within the investment community is impacting not only the companies themselves but also current shareholders and potential investors. With significantly less active sell-side sponsorship by Wall Street, a substantial information gap has developed between companies and various constituents in the financial community. The net result is fewer channels for insight and information to flow between companies and investors.

Research from Water Tower Research

Equity Research Firm

Equity Bottom-Up

<h2>KEY POINTS</h2>
<ul>
<li>HNI Corp. reported 1Q22 results and provided management guidance on Thursday, April 28, 2022.</li>
<li>Consolidated 1Q22 sales were $553.2 million, up 18.2% versus $484.3 million in 1Q21. 1Q22 sales beat our estimate by $19.1 million and were in-line with the revenue growth guidance given by the company.</li>
<li>Incoming order growth was strong. In Residential Building Products (RBP), 1Q22 orders were up 25%; and in Workplace Furnishings (WF), 1Q22 orders advanced more than 10%. In WF, order growth was driven mainly by price realization with small to mid-sized companies, while in RBP, remodel-retrofit and new construction order rates led the way.</li>
<li>1Q22 diluted EPS was $0.33 versus $0.34 in 1Q21, beating our $0.22 estimate by $0.11. The EPS beat was driven by positive price-cost even with the headwind of record inflation.</li>
<li>Operating income was $20.4 million, down $2.2 million Y/Y, but above our $14.0 million estimate by $6.4 million. An improvement in OpEx was offset by lower gross margin, leading to a GAAP operating margin of 3.57% for 1Q22, versus 4.67% in 1Q21.</li>
<li>Total debt increased by ~$67 million, offset by a decrease in payables and accrued expenses of ~39million. Net debt to EBITDA remains strong at 1.33x, while interest coverage stands at 11.3x.</li>
<li>Guidance: For 2Q22, management expects profitability to be in line with 1Q22, on the heels of WF volume growth, offset by seasonal weakness in RBP. For FY22, management is guiding for revenue growth between the high teens and low 20s in WF, and in the high teens for RBP.</li>
<li>The company expects earnings seasonality to increase in FY22 compared to previous years, noting that approximately 70% of profits have come in the second half recently.</li>
</ul>
<h2>COMPANY OVERVIEW</h2>
<div></div>
<p>With its headquarters in Muscatine, Iowa, HNI Corporation manufactures and markets workplace furnishings and residential building products. HNI operates in two distinct yet unrelated businesses: commercial / contract office furniture and fireplaces and related products. HNI was founded in the mid-1940s on the idea of treating its employees fairly and serving customers with products that they value.</p>
<p>HNI’s office furniture includes systems, seating, storage, tables, and architectural products; HNI reports results of its office furniture business in its Workplace Furnishings (WF) segment. Residential Building Products (RBP) is HNI’s official segment name for its fireplace business that was previously called “Hearth Products.” Its products include a broad offering of gas, wood, electric, and pellet-fueled fireplaces, fireplace inserts, stoves, facings, and accessories.</p>
<h2>VARIANCE ANALYSES</h2>
<ul>
<li>Our variance analyses compare key metrics of the 1Q22 report to 1Q21 and our estimates. Also, we provide a segment variance analysis and an organic sales growth analysis for 1Q22.</li>
<li>Management will host its earnings conference call on Thursday, April 28, 2022 at 10:00 am ET. This note provides our initial analysis of earnings and outlook versus last year and versus our estimates. Our refreshed earnings estimates will be provided in a separate note, after management’s call.</li>
</ul>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/271/102/original/image_196411265111651189539164.png?1651189542" class="editor-image img-responsive" data-smartkarma-image-id="271102"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/271/104/original/image_26889035121651189555837.png?1651189558" class="editor-image img-responsive" data-smartkarma-image-id="271104"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/271/105/original/image_300842699131651189579617.png?1651189582" class="editor-image img-responsive" data-smartkarma-image-id="271105"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/271/106/original/image_776205247141651189591576.png?1651189593" class="editor-image img-responsive" data-smartkarma-image-id="271106"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/271/107/original/image_912697956151651189605515.png?1651189607" class="editor-image img-responsive" data-smartkarma-image-id="271107"></figure>
<h2>DISCLOSURES</h2>
<div></div>
<p>Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.<br><br>WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.<br><br>Budd Bugatch, who is the writer of this report, covers the Consumer sector for WTR. Mr. Bugatch and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.<br><br>Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.<br><br>WTR is being compensated for its research by the company which is the subject of this report. WTR receives no more than a maximum of $10,500 per month from a given client and is required to have at least a 6-month commitment. None of the earned fees are contingent on, and WTR’s client agreements are not cancellable for the content of its reports. WTR does not accept any compensation in the form of warrants or stock options or other equity instruments that could increase in value based on positive coverage in its reports.<br><br>WTR or an affiliate may seek to receive compensation for non-research services to covered companies, such as charges for presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services that WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly-written compliance guidelines.<br><br>The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors, agents or affiliate shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.<br><br>All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.</p>

KEY POINTS

HNI Corp. reported 1Q22 results and provided management guidance on Thursday, April 28, 2022.
Consolidated 1Q22 sales were $553.2 million, up 18.2% versus $484.3 million in 1Q21. 1Q22 sales beat our estimate by $19.1 million and were in-line with the revenue growth guidance given by the company.
Incoming order growth was strong. In Residential Building Products (RBP), 1Q22 orders were up 25%; and in Workplace Furnishings (WF), 1Q22 orders advanced more than 10%. In WF, order growth was driven mainly by price realization with small to mid-sized companies, while in RBP, remodel-retrofit and new construction order rates led the way.
1Q22 diluted EPS was $0.33 versus $0.34 in 1Q21, beating our $0.22 estimate by $0.11. The EPS beat was driven by positive price-cost even with the headwind of record inflation.
Operating income was $20.4 million, down $2.2 million Y/Y, but above our $14.0 million estimate by $6.4 million. An improvement in OpEx was offset by lower gross margin, leading to a GAAP operating margin of 3.57% for 1Q22, versus 4.67% in 1Q21.
Total debt increased by ~$67 million, offset by a decrease in payables and accrued expenses of ~39million. Net debt to EBITDA remains strong at 1.33x, while interest coverage stands at 11.3x.
Guidance: For 2Q22, management expects profitability to be in line with 1Q22, on the heels of WF volume growth, offset by seasonal weakness in RBP. For FY22, management is guiding for revenue growth between the high teens and low 20s in WF, and in the high teens for RBP.
The company expects earnings seasonality to increase in FY22 compared to previous years, noting that approximately 70% of profits have come in the second half recently.

COMPANY OVERVIEW

With its headquarters in Muscatine, Iowa, HNI Corporation manufactures and markets workplace furnishings and residential building products. HNI operates in two distinct yet unrelated businesses: commercial / contract office furniture and fireplaces and related products. HNI was founded in the mid-1940s on the idea of treating its employees fairly and serving customers with products that they value.
HNI’s office furniture includes systems, seating, storage, tables, and architectural products; HNI reports results of its office furniture business in its Workplace Furnishings (WF) segment. Residential Building Products (RBP) is HNI’s official segment name for its fireplace business that was previously called “Hearth Products.” Its products include a broad offering of gas, wood, electric, and pellet-fueled fireplaces, fireplace inserts, stoves, facings, and accessories.
VARIANCE ANALYSES

Our variance analyses compare key metrics of the 1Q22 report to 1Q21 and our estimates. Also, we provide a segment variance analysis and an organic sales growth analysis for 1Q22.
Management will host its earnings conference call on Thursday, April 28, 2022 at 10:00 am ET. This note provides our initial analysis of earnings and outlook versus last year and versus our estimates. Our refreshed earnings estimates will be provided in a separate note, after management’s call.






DISCLOSURES

Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.  WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.  Budd Bugatch, who is the writer of this report, covers the Consumer sector for WTR. Mr. Bugatch and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.  Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.  WTR is being compensated for its research by the company which is the subject of this report. WTR receives no more than a maximum of $10,500 per month from a given client and is required to have at least a 6-month commitment. None of the earned fees are contingent on, and WTR’s client agreements are not cancellable for the content of its reports. WTR does not accept any compensation in the form of warrants or stock options or other equity instruments that could increase in value based on positive coverage in its reports.  WTR or an affiliate may seek to receive compensation for non-research services to covered companies, such as charges for presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services that WTR or an affiliate might offer to clients.  The manner of WTR’s research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly-written compliance guidelines.  The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors, agents or affiliate shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.  All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.

1Q22 Sales and Earnings Beat Estimates; 2Q22 Profitability Expected to Be in Line With 1Q22; Profit Improvement Expected 2H22