Investing in

Warren Liu, Jeffrey Chen, Adriel Jeffery, Neha Sarraf

Nov 11th, 2022

Executive Summary

Company Overview

The Business

HNI Corporation is one of the world's leading office furniture and hearth products manufacturers

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They own numerous brands including The HON Company, Lamex, Heatilator and Harman.

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The company was founded in 1944 in Iowa but has expanded to have offices in several US cities and parts of Asia.

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North America contributes to more than three fourths of total revenue.

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Revenues

Key Financial Information (NYSE: HNI)

HNI emphasizes customer satisfaction, diversity, sustainability, and waste reduction.

Two Main Segments

SMB Workplace Furniture demand slowing due to:

1. Risk of Recession
2. Slower Return-to-Office trends.

Result: Negative impact on expected margin improvement

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Residential Building Products outperformed expectations due to:

1. Elevated Backlog
2. Increased Construction

However, housing market indicators are weak, with a significant recent decline in single-family housing activity.

The Industry

Key Competitors

• High End Furniture
• LaZ Boy
• Ashley
• Contract Furniture
• Steelcase
• MillerKnoll
• Haworth.

Investment Investment

Strengths Weaknesses

• Good EV/EBITDA Multiple
• Sits at 7.06
• Below industry average of 8.08
• High YoY Growth in Revenue
• Sits at 11.8%
• Positive trends for past 3 years
• Forecasted to perform above industry average of 6.15 for the next 5 years
• High Unlevered Free Cash Flow
• Unlevered FCF currently sits at $111.6M and is projected to hit at $146.1M at the end of this year.
• Projections are for Unlevered FCF to continue to increase

• Low EBITDA Margin
• Sits at 6.8%
• Historically has never surpassed 10%
• High Purchasing Price
• Company Evaluation is at $1.8B
• Projected to pay around a 20% increase per share to buy off the stock market
• High Interest Payments
• At a rate of 4% interest YoY, interest payments alone will be at $35.2M
• High Amount of Equity Required
• For a manageable debt schedule, a commitment of 50% equity is required to pay off the company

Value Creation Plan

Strategically manage workforce resources

Reduce redundancies within the workforce.

Explore automation technologies to better scale production.

Explore further logistical advancements in HNI supply chain.

Continue cost cutting measures to support to support profitability

Research into cheaper alternatives to lower material overhead

Maintain flexibility in both sides of the business

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Redeploying workforce resources to fight supply chain bottlenecks

Pivot of resource allocation between Workplace Furnishing and Residential Products to improve efficiency

Synergize products in both spheres to have compatible components and resources

Redirect resources to more profitable sectors

Cut the overhead for workplace furnishings division.

Redirect capital towards home furnishings in anticipation of upcoming recession.

Sell off or freeze assets on workplace furnishing division

Reduce workplace furnishing investments

A

B

C

Timeline

HNI Corporation

Acquisition

Advanced projects

NOVACAP

Exit

Enact Plan C

Enact Plan A and B

Introduce Further Cost Cutting Measures during Inflationary Period

Synergy with NovaCap’s Portfolio

NovaCap works with complementary companies that have a scope for mutual benefit through economies of scale and synergies but do not directly compete.

Manufacturer of Hospitality and educational housing furniture.

Mutual expansion of customer base as some hospitality and office furniture overlap.

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Cost savings in materials as Foliot produces many of its own parts to meet any specification.

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Leading manufacturer of outdoor living and flooring products

Innovation synergies in lean operation processes and cost savings in research and development

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Enhance technological sharing and common production technologies to reduce costs

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E-commerce provider of ready to assemble furniture

Patent synergy by collaborating on a product line of ready to assemble office furniture.

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Distribution synergies to expand HNI’s ecommerce presence through eSolutions platforms.

Transaction Overview

LBO Breakdown

Equity: $878.8 million

Leveraged Capital: $878.8 million

Interest Premium: 4% YoY

Debt Cost: $146.6M YoY

Exit Timeline: 7 years (2030)

Exit Multiple: 12x

Acquisition details

Acquire HNI Corporation through LBO: $35.06/share, 50% Leverage.

Returns Analysis

HNI Unlevered FCF is planned to exceed FCF payments after 2024, with a steady increase in levered FCF YoY

Company value is plan to increase by almost a billion dollars to $2.7 billion.

IRR and MOIC are planned to be at 5.9% and 2.1 respectively

Unlevered FCF is planned to reach $195.2 million dollars by the end of 2030

Revenue is forecasted to eclipse $3.1 billion by 2030, growing by $700 million from acquisition to exit

EBITDA is projected to increase by $23 million, setting planned EV/EBITDA multiple at 12

Projected estimates for Revenue and Unlevered FCF will increase through committing to VCP. This will be done by Downscaling Corporate furniture and push resources to address fulfillment bottlenecks in Residential sector

Key Diligence Questions

How will volume growth in both new construction and existing home channels affect HNI’s business model?

• Remodeling expenditure was valued at approximately $400 billion in the U.S. in March 2022
• Office construction expenditure was valued at approximately $85billion in January 2022.

How will HNI maintain and grow its labourforce to meet the increase in demand?

• HNI increased their labour capacity by 4%in 2022 but it is uncertain whether they are equipped to deal with the expected increase in sales after the acquisition.
• Could potentially look at outsourcing and/or partnering with NovaCap’s other businesses.

Would HNI be able to reduce selling costs given the growing inflation?

• Cost of sales increased by almost $80million from Q2 2021 to Q2 2022.
• U.S. is currently facing an inflation at 7.75% with limited indication of reducing.

How does HNI plan to synergize and grow their acquisitions?

• Acquired Trinity Hearth & Home, an installing fireplace distributor in the Dallas/Fort Worth area, for approximately $30 million. This transaction aligns with the Corporation's vertical integration strategy in the residential building products market
• Acquired The Outdoor GreatRoom Company, a leading manufacturer and supplier of premium outdoor fire tables and fire pits, for approximately $15 million.This positions HNI to develop a leading position in the fast-growing outdoor living market

Risks & Mitigation

Current economics trends results in high risk in company acquisition

Emergence of suppliers from other countries due to shift in global markets

Our Team

Warren Liu

Jeffrey Chen

Pronouns: He/Him

Ethnicity: East Asian

From: Shenzhen, China

Program: Computer Science

Pronouns: He/Him

Ethnicity: East Asian

From: Mississauga, CA

Program: Economics & Statistics

Adriel Jeffery

Neha Sarraf

Pronouns: He/Him

Ethnicity: Mixed (White/East Asian)

From: NYC, USA

Program: Management & Marketing

Pronouns: She/Her

Ethnicity: South Asian

From: Mumbai, India

Program: Economics & Environmental Studies

We are proud of our differences, in gender, ethnicity, nationality, and program of study. Our diversity enables us to incorporate comprehensive perspectives, approaches and representations.

Appendix 1: Discounted Cash Flow

Appendix 2: Leveraged Buyout Model