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HNI Corporation (NYSE:HNI)

Q4 2012 Earnings Call

February 6, 2013 11:00 AM ET

Executives

Derek Schmidt - Vice President, Corporate Finance.

Kurt Tjaden - Vice President and Chief Financial Officer.

Stan Askren - Chairman, President and Chief Executive Officer

Analysts

Budd Bugatch - Raymond James

Matt McCall - BB&T Capital

Josh Chan - Robert W. Baird

Josh Borstein - Longbow Research

Todd Schwartzman - Sidoti & Company

Operator

I would like to welcome everyone to the HNI Corporation fourth quarter and yearend fiscal 2012 results conference call. (Operator Instructions) Mr. Schmidt, you may begin your conference.

Derek Schmidt

Good morning, and thank you for joining us today for the HNI Corporation conference call to discuss fourth quarter and full year 2012 results, which were announced yesterday after the market closed. My name is Derek Schmidt, Vice President, Corporate Finance for HNI Corporation. If you have not received a copy of the financial news release, it is available on our website, www.hnicorp.com.

A presentation intended to accompany this call has also been posted to our website under the Investor Information section. We encourage you to review this presentation as it contains details of our financial performance, including the non-GAAP to GAAP reconciliations.

Joining me on the line today from HNI Corporation are Kurt Tjaden, Vice President and CFO; and Stan Askren, Chairman, President and CEO. Stan and Kurt will review the results and then open up the call for questions.

Before we begin, please be advised that statements made by the corporation during this call that are not strictly historical facts are forward-looking statements. Forward-looking statements are subject to known and unknown risks. Actual results could differ materially from expected results. Additional information concerning factors that could affect actual results can be found in the conference call presentation posted to the HNI Corporation website. The corporation assumes no obligation to update any forward-looking statements made during this call.

I now have the pleasure of turning the call over to Stan Askren. Stan?

Stan Askren

Thank you, Derek. Good morning, everyone. I'll share assessment for the year 2012 and then for the fourth quarter 2012, provide some thoughts on our outlook for first quarter and full year 2013. We'll then open the call up for questions.

So talking about the year, I'm pleased with the performance for the year 2012. We delivered strong topline growth in the majority of our markets, achieved solid profit improvement and outstanding cash generation, and we made good progress on our long-term strategies. All of these accomplishments were achieved in a challenging market, hampered by ongoing uncertainty in the economy and our federal government.

We continue to compete well in our office furniture market and delivered solid organic growth for the full year, despite the uncertainty. Organic growth in our office furniture businesses exceeded 4% even with a 27% decline in our federal government business. Excluding the federal government, our supplies-driven business grew 9% organically, and our other office furniture businesses achieved 7% organic growth.

As part of our Core Plus strategy on the plus side, we completed the strategic acquisitions of Sagus and BP Ergo in India, and are investing in these businesses to transform and build platform for long-term growth. In the near-term, these acquisitions are not additive to margins, but remain attractive long-term investments for growth in the future.

Our hearth business delivered exceptional performance in 2012. Operating profits improved to 80% on 4% sales growth. Growth in our new construction channel of 23% more than offset a 6% decline in our remodel/retrofit channel, where our biomass business was adversely impacted by lower energy cost and warmer weather conditions.

Sales and profit performance in the fourth quarter met our expectations even with softer market conditions created by the economic and political uncertainty. Our supplies business improved 7%, exceeding expectations, in spite of depressed levels of small business confidence. Sales growth benefited from additional customer orders quite ahead of our January price increase. Our market leadership position is strong, and we continue to leverage the powerful brands and business model to perform well in this challenging environment.

Our other office furniture businesses are competing well and delivered low-single digit growth in a flat-to-moderately declining market, which again was adversely impacted by the weak federal government spending. In particular, we saw a deacceleration in the business activity in October and November, economic uncertainty continued to dampen business sentiments and spending, resulting in project holds and delays.

And our point at the obvious, margins in our office furniture were down year-over-year. Mix did not go our way and we are continuing to invest for the future. We accelerate investments to retune our operations footprint and capabilities to the changing needs of the marketplace. We also have a strong lineup of new products and platforms to be introduced in 2013. And we incurred additional production ramp up and product development expenses in the quarter.

We're also making good progress in our business system transformation initiative, which also drove incremental investment over the prior year. We continue to invest in BP Ergo and Sagus to transform these businesses and build platform for long-term growth in attractive markets. I will say this, we expect to realize benefits from our core investments and deliver strong profit growth in 2013.

Continued strong profit growth in our hearth business was led by substantial growth in the new construction channel and very strong operational and overall business execution. Our new business construction was up 31%, as single-family housing starts continue to rapidly improve. Remodel/retrofit sales were relatively flat as marketed activity was adversely impacted by previously mentioned lower energy prices and relatively warm weather, which hampers demand in our biomass business.

I'll now turn the call over to Kurt, to review the specific financial data for the fourth quarter. Kurt?

Kurt Tjaden

Thank you, Stan. So for the fourth quarter 2012 consolidated net sales increased 5.5% to $528 million or 3.5% on an organic basis. Sales for the office furniture segment increased 5% to $422 million or 2.5% on an organic basis. And net sales for the hearth product segment increased 7.5% to $105 million.

Consolidated gross margins decreased to 35.2% compared to 35.6% in the prior-year quarter due to unfavorable mix, investments to improve operations, new product ramp up and the impact of acquisitions, which were offset partially by higher volume and lower material cost.

As a percent of sales, selling and administrative expenses, including restructuring and impairment charges were 29.5% or 0.1 percentage points lower than the prior-year quarter. Benefits from sales leverage were partially offset by investments and growth initiatives and the impact of acquisitions.

We ended the year with $42 million of cash. Operating activities generated $145 million of cash during 2012 compared to $134 million last year. Stan?

Stan Askren

Thank you, Kurt. Looking forward, we enter 2013 financially strong comparably well positioned and focused on delivering profitable growth. We expect growth in the first quarter of 2013 to be challenging, given continued economic uncertainty related to this ongoing debt ceiling and government spending concerns.

We do anticipate business spending will improve as the year progresses and we anticipate low-single digit growth for the full year. We expect to deliver double-digit profit improvement for the year in this low growth environment, as we realize the financial returns from our previous investments.

For the first quarter, growth in our supply-driven channel is expected to be relatively flat due to the impact of the 2012 yearend buy ahead. Market conditions are expected to remain challenging as fiscal and economic uncertainty dampens demand. Our business is performing well versus the market, due to our investments and branding, product developments, selling capabilities and the overall execution of our member owners in those businesses.

Year-over-year growth rate within the contract channel are expected to be down in the first quarter, as federal government spending continues to decline at business delay or projects on hold until the economic uncertainty improves. Our office furniture contract brands continue to compete well in their markets.

Our international business remains a key growth opportunity. Lamex, our leading brand in China continues to strengthen its market leadership position, as we expand distribution and aggressively invest in our sale capabilities and branding. Our recent acquisition of BP Ergo provides a very attractive platform for growth in the India in the out years.

In our hearth segment, we anticipate sales growth to be in the low-double digits for the first quarter. Topline growth momentum in the new construction channel is expected to continue into 2013, as the housing market recovery continues.

In the remodel/retrofit channel, demand growth is anticipated to be relatively modest, given the impact of stable fuel prices on the biomass business. With the hearth industry's strongest brands, best products, superior manufacturing, and distribution capabilities, we remain well positioned for continued strong profitable growth in this business.

Our Core Plus strategy remains unchanged. We're investing in our core North American businesses to capture new product, new growth opportunities, and aggressively pursuing attractive prospects and key vertical in fast-growing international markets.

We continue to build upon the success of our new product investments. We have a tremendous line of new products and platform initiatives in 2013 that are innovative and highly relevant to the changing needs of the marketplace.

Last year we expanded in the fast growing architectural wall segment with a highly differentiated attractive product. Market feedback has been very positive. And I'm excited by the opportunities for growth in this business. We are addressing our manufacturing capabilities to align with the changing needs of the marketplace, competitively position ourselves in high growth and profitable segments, and to deliver consistent flawless execution to our customers.

We are making good progress on our business system transformation initiative. We're leveraging our long-standing RCI culture to champion significant process improvements throughout the company, as a part of this effort. And then, finally, we're expanding the power of our unique explicit public business model through investments and selling capabilities, branding, and customer loyalty initiatives, each tailored to the needs of the company's specific markets.

Kurt will now provide the financial outlook for the first quarter and full year 2013. Kurt?

Kurt Tjaden

So for the first quarter 2013, we anticipate overall sales to be flat to down 5%. Office furniture sales are expected to be down 2% to 7%, while sales in the supplies-driven channel are expected to be down 3% to up 2%. Sales in the rest of our office furniture businesses are expected to be down 6% to 11%. And finally, hearth sales are expected to be up 9% to 13%.

Gross profit margin is expected to be consistent with first quarter 2012, when it was 33%, excluding restructuring and transition charges. SG&A as a percentage of sales, excluding restructuring and transition charges is expected to be higher than first quarter 2012, when it was 32.3%.

Net interest expense is projected to be $2.7 million, and the effective tax rate is projected to be approximately 54.5% during the first quarter due to the extension of the R&D tax credit in January. However, for the full year, we expect effective tax rate to be approximately 35%. For the year we are expecting capital expenditures to be $70 million to $75 million, and we project full year 2013 depreciation and amortization to be $46 million to $48 million.

Our estimated non-GAAP earnings per diluted share for the first quarter is in the range of a $0.01 loss to a $0.07 loss. And for the full year 2013, we are updating our estimate of non-GAAP earnings per diluted share in the rage of $1.25 to $1.45. This summarizes our outlook for the first quarter and full year 2013.

I'll now turn it back to Stan.

Stan Askren

And I'll close here by saying, I remain positive about our momentum and our ability to grow sales, and increase profits in 2013. We continue to aggressively invest for long-term profitable growth, and I remain confident that our investments are delivering shareholder value. Our businesses are strong, they're competitive, well positioned in the markets, and the prospects for our businesses are encouraging.

With those comments complete, we'll now open it up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Budd Bugatch with Raymond James.

Budd Bugatch - Raymond James

I guess my first question is, the previous guidance for 2013 was $1.30 to $1.50, I know that you've shaped it a nickel on each end of that. Maybe just tell us what's changed in the ensuing three months to occasion that?

Stan Askren

I think, Budd, that adjustment reflects the fourth quarter that we saw the significant deceleration in orders from all the stuff that you and I read about in the newspaper. And so I think that is really what's driving that. We expect that overhang continues through the first quarter of 2013, and then we expect it to sort of reaccelerate, which overall gets us to the guidance we gave you.

Budd Bugatch - Raymond James

So the deceleration happened pretty much in the specified channel, is that where you were seeing it?

Stan Askren

Well, the answer is, we saw it in the specified channel. We also saw the supply side. Now, the supply side had a bit of a distortion, I hope that's not misunderstood, from the price buy ahead as well. So if we boil it all down, the core of all that is everything kind of took a bit of a dip-down, just sorting through what's going to go on with the economy in this fiscal cliff. And then, I think overall the federal government spending decline, which had an impact on us as well.

Budd Bugatch - Raymond James

So the buy ahead, can you quantify what you think that added to the fourth quarter and then takes away from the first?

Stan Askren

$15 million type number.

Budd Bugatch - Raymond James

But you probably knew of that price increase, when you gave the guidance, so that would have been in your thinking. So truly something else than that right?

Stan Askren

That buy ahead was actually more than we anticipated, and there is some large customers making some adjustments. And as you know, some of our large customers there, the way they look at these things is differently and how they value inventory, et cetera. So it was more than we anticipated when we gave earnings guidance last time.

Budd Bugatch - Raymond James

And the price increase itself, what kind of percentage does that roll through, and is it just simply covering cost or is some of that going flow back down to improved gross margin?

Stan Askren

It's a 2% to 3% number and most of that is covering cost.

Budd Bugatch - Raymond James

So for the balance of year should we expect gross margins to expand or no?

Stan Askren

Well, the guidance we gave you is 2% roughly topline, and I don't know, 25% bottomline. So margins are going to have to expand.

Budd Bugatch - Raymond James

And my last question, Kurt, for you. The first quarter non-GAAP EPS loss of $0.01 to a loss of $0.07, using a 54.5% tax (technical difficulty) number, what would be the GAAP number, is it tax rate that you're assuming to get to GAAP 34% or 35% rate?

Kurt Tjaden

No. GAAP, non-GAAP, is about the same. But that rate, because of that R&D tax credit, fully recognized in 2012 in the first quarter and given how close we are. We're in a loss position. That's really the drivers of the 54.5%. But it's not a GAAP, non-GAAP, issue.

Budd Bugatch - Raymond James

So what would be the GAAP EPS in the first quarter in terms of that and just walk through the non-GAAP?

Kurt Tjaden

Pretty similar. I mean that range it would not be meaningfully different.

Budd Bugatch - Raymond James

So you really have no restructuring or other one-time cost?

Kurt Tjaden

Very, very minimal.

Operator

Your next question comes from Matt McCall with BB&T Capital.

Matt McCall - BB&T Capital

So I guess you gave some CapEx guidance and it looked like that's a little, maybe a step-up from what we saw this year. Yet it seems like, given what you've said about Q1 and then given what you've said about the full year, it seems like you are implying not only a return on some of the investments but maybe some reduced spending. I am just trying to make the higher CapEx and then maybe some lower implied spending jive in the thinking of this growth spending initiative that has been ongoing?

Kurt Tjaden

Two questions in there, right, Matt, one was CapEx and then that up slightly and what's driving that, was one I heard. And then I heard a question on investments and returns that we expect?

Matt McCall - BB&T Capital

What I wish to get to, Kurt, is how much of the implied margin improvement next year is within your control and not really dependent on the topline. So I try to understand how much of what you are forecasting is because you're pulling back spending versus getting returns on spending that already occurred.

Kurt Tjaden

So I'm going to come back to Stan's comment. I would posit that most of that earnings enhancement is driven by investments already made, because Stan talked about very modest topline growth, low-single digits and earnings improvement in that range that runs upwards of 20%.

So there is not much from a volume leverage perspective. And as you know, we've been investing in these businesses. Stan talked about a number of those continuing in the fourth quarter, that we would expect to see those benefits start to be realized more significantly in 2013.

Matt McCall - BB&T Capital

But you're not reducing incremental spending? You have talked about it in the past, you have quantified it in the past sometimes, but I think you haven't recently. But is there going to be incremental spending next year or are you going to kind of level off at these levels?

Kurt Tjaden

I think you hit it, it's kind of level, nothing of significance. We're looking to redeploy existing investment dollars where we have opportunities and other than BST IT, really that would be, that business system transformation, that is the only investment. What you'll see is in the first quarter in particular, we see the full year or that run rate effect of that BST hitting us in the first quarter and starts to normalize as we go through the year. But net, not significant from an incremental investment perspective year-on-year.

Matt McCall - BB&T Capital

Then the two areas that seem to be out performing, hearth seems to be doing very well; your supplies business seems to be doing at least better than the market or the indicators would indicate. Stan, can you talk about the competitive position there and how it may have improved? Obviously these investments are aimed at doing just that, but anything you can quantify for us, win rate, frequency rate? I don't know what to use but just trying to understand how your competitive position may have changed since the last cycle in those two parts of the business.

Stan Askren

It's tough to point to anything specifically, but I would clearly say, starting with the hearth, they clearly are performing at a very higher level. And that is the result of; a, first class group of very experienced, very focused, dedicated members and the leadership team there. Second that reflects the strategy that we undertook during the downturn, which was sort of simultaneously resetting structural cost, yet preserving capacity that we knew we would need on the upturn and also investing in selling brands, product development, et cetera.

During the downturn, one of our competitors filed bankruptcy and sold to private equity and another competitor sold and spun it off and sold it to private equity. And so we're there slogging through resetting cost but also investing for the long-term, we've grown share, and in almost all of the categories.

During the downturn we made a couple of very nice bolt on acquisitions that were well executed by that team, Harman was one of those, made another small, little channel acquisition. And so it's the coming together of a lot of longer-term perspective investments. And I would be remissive. It's a lot of what we're talking about here in office furniture's, running a similar play.

So as you had referenced the supplied side, it's a similar type of story. We have a tremendous presence in that channel. We're the largest office furniture player in that channel. We have several great brands. The predominant brand is HON. And we've invested wisely there in the branding, in the product, in the manufacturing, in the content. In the selling resources, we have a first-class management team running that business and the member owners there have done a beautiful job.

We have a lot more work to do in that channel and that the market continues to be very challenging. A small business sentiment is somewhat reserved or depressed or depending on what perspective you want to take on whatever date, but it feels great about our momentum. And it feels great about our topline growth, and as Kurt and I have said, we're confident that the bottomline growth and it's going to come as well.

So it's a little bit of a deferred gratification story through the downturn, but we believe strongly that we're making smart investments, not all of them, but I'm sure we're going to come to fruition but overall I think we're doing the right thing for shareholders long-term view on this business.

Matt McCall - BB&T Capital

And I want to speak one more in. You talked about low-single digit growth expected for the year. Can you give anymore detail on the expectations by some of the segments and sub-segments you talked about? Just wondering how bullish you are specifically about office construction sector and things like that?

Stan Askren

Well, I think we laid that out. If you go back and look at the notes, I think Kurt and I laid out probably as much guidance as when we give by segment. But you talked about starts. We expect single-family starts to continue to recover. I expect that remodel will recover modestly. I think the biofuel is a big category.

And then we expect the office furniture of federal government to be down again, but kind of everything else relatively flattish. I think it's probably the best way to say that. And stay tuned because the way this economy is going, as it will be different than we thought but we're continuing to be nimble and agile, yet also committed to our long-term strategy. Kurt, you want to say something.

Kurt Tjaden

Yes, I think. We talked about that low-single digit growth math. The one headwind and we've talked about it as have many of our competitors. There is federal government, we would expect to continue to be a headwind for us in 2013, albeit, at a lesser rate than 2012, but so that low-single digit growth does assume continued headwind in fed gov office spending.

Operator

Your next question comes from the line of Peter Lisnic with Robert W. Baird.

Josh Chan - Robert W. Baird

This is Josh Chan calling in for Pete. Could you talk about why exactly, was mix negative in terms of office furniture for the quarter? And then also whether you have any mix impact embedded in your guidance for 2013?

Stan Askren

Well, why it was negative is, is there are several factors, Josh, and some very complex equation we see, if I can boil it down. Mix is impacted by product mix, product-category mix, product-series mix, product-channel mix, day-to-day business versus project business and, so there is a lot of factors flowing through there.

And it's then kind of evolving up and down, depending on the quarter for many years. One of those had to do with, we've talked about this in the past, archival filing moving to other things, we have historically had a very strong position, very strong cost position, our archival filing, as that declines, we deal with it.

It's something that we're on, that we manage, that we're driving as well, that impact going forward we anticipate to be less, simply because we're through a lot of those transitions. In fourth quarter it just seemed that a bunch of those factors kind of came together and hit us in a negative way and so that's really what happened there. And as I say going forward, I think it would be less or still will be some of that, but be less. That's part of what we're here to manage is how do we deal with that mix and continue to drive profitable growth.

Josh Chan - Robert W. Baird

And then switching to the overall demand outlook, I guess, you're not alone in saying that the first Q would be challenging. But then it might get better through the course of the year. But what on your mind could get better that would impact the first quarter, but improves throughout the year? Is it based on conversations that you had with customers or rotations activities and things like that, that gives you that confidence?

Stan Askren

Part of what we're dealing with, Josh, in first quarter is the deceleration I talked about in fourth quarter. So you take orders in fourth quarter, you ship them in first quarter. So the down in first quarter is really reflecting a dampen environment from this budget or angle. And everybody is sort of stand on the sidelines, waiting to see what's happening. So that sort of led orders begin to decelerate in particular, October and November.

So what we believe is that now that we're through that, then orders begin to pick up in 2013, and we began to ship in second quarter, third quarter, fourth quarter and that's the improvement. And all of that is borrowing another Washington DC crisis that spins the economy into another vector, but that's what everybody deals with everyday. And as I say, I think we're nimble and agile and prepared to dealing with that as it comes.

Josh Chan - Robert W. Baird

Is it fair to say then that January orders perhaps improved a little bit from what you were seeing in December?

Stan Askren

I think that's fair to say.

Josh Chan - Robert W. Baird

And then my last question is on hearth profitability, obviously a very strong performance there. Have you laid out sort of longer-term margin targets for that business, for when housing starts gets to back to more normal level? And is it fair to say that you could get back to, if not past, the prior peak margins in that business?

Kurt Tjaden

That's clearly the objective, Josh, as we should be more profitable than we were at the last peak, just based on our restructuring our investments and that management team's focus and discipline.

Operator

Your next question comes from the line of Josh Borstein with Longbow Research.

Josh Borstein - Longbow Research

Just to get back on the ordering patterns so far here in 1Q just to get a feel for it. With respect to the sentiment in terms of the leading indicators that you look at, the bid activity, what your channel partners are saying, what are you seeing right now in terms of customer behavior and the sentiment out there overall?

Stan Askren

I apologize, we can barely hear you on this end, it might be our issue, so I think you're asking me what are we seeing around sort of customer behaviors and order activity, is what I heard, is that correct?

Josh Borstein - Longbow Research

Exactly. Yes.

Stan Askren

As I said it's improved since the deceleration in fourth quarter. And we cover all the channels, all the segments, so it's a very complex question. It's improved. We're seeing, I think a rebound in activity, but it's not through the roof. I think our guidance reflects low-single digit growth, part of that is the federal government is in drag, and then the rest, the non-federal government is boost. So I think our current activity reflects that outlook that we shared for the year.

Josh Borstein - Longbow Research

And then just the caution out there, because of all the things going on with the government, does that affect more your customers on the supply side or on the contract side?

Kurt Tjaden

It's kind of fix to one after the other, it impacts both.

Josh Borstein - Longbow Research

And the price increases that you initiated on the supply side, where there any price increases on the contract side as well?

Stan Askren

Not at the end of the year. We do know through the year, so it depends on which operating company. So we face those in, feather those in different periods of the year. The supply side was the only input one at the end of the year.

Josh Borstein - Longbow Research

Then just to transition over to the hearth, this winter so far not particularly harsh but certainly seems colder than last winter. Given those comparisons to the warmer winter last year, do you expect to see some improvement in the remodel hearth business compared to last year?

Stan Askren

Yes, the answer is on the non-biomass or the non-pellet stoves et cetera, I do anticipate that we're going to see, the dealers are going to see more activity, have seen more activity. The colder it is, the quarter yield is the longer it is, the more consistent it is, the better it is for the business.

So it is better than last year. It's still not as good as it has been historically. And part of answer is, and Iowa when we go from 60 degrees to 10 degrees, back to 45 degrees today I think, et cetera, and that doesn't help as much. But to answer your question specifically, yes I do think it's going to be better than it was last year but still not great as compared to historic levels.

Josh Borstein - Longbow Research

Then just last, that business, the hearth, the breakdown between new construction and remodel, is it still pretty much a one-third, two-third split?

Stan Askren

It's shifting more towards new construction. So it's more like 40% new construction now, and 50% other.

Operator

Your next question comes from Todd Schwartzman with Sidoti & Company.

Todd Schwartzman - Sidoti & Company

On the hearth side what was the combined market share of the competitors that have fallen on hard times?

Stan Askren

Todd, I don't have that at my fingertips. It basically takes the next three competitors, before just to match our market shares. So probably the combined there was probably 20% or something like that. That's a guess, Todd.

Todd Schwartzman - Sidoti & Company

So combined with the leverage that you are going to get and you are starting to get undoubtedly with housing coming back, new construction, what did these recent events do to your pricing power going forward?

Stan Askren

Well, pricing power is always challenged. So I would guess, we'll continue to put through modest price increases to offset our cost whatever we can. But I would not say we have great pricing power. The barriers-to-entry in that market are still relatively low and so we have to go out there and earn those that builder business every day. And those consumers come in, and they shop and there is lots of options. Lots of little competitors out there in that stove business. They don't really care whether we're Hearth & Home or HNI, they just care about what value, which is they are getting. And so we have to be sharp everyday in the new construction and in the sort of retail environment.

Todd Schwartzman - Sidoti & Company

I know you don't give quarterly sales guidance beyond Q1. But if you see normal seasonal trends materialize, would you expect to see the type of sequential gross margin, consolidated margin improvement from Q1 to Q2 that you have enjoyed in most of the recent years?

Stan Askren

If I understand the question right, Todd, the answer to it is, yes I would anticipate that.

Todd Schwartzman - Sidoti & Company

So something in the magnitude of 100 to 200-plus basis points?

Stan Askren

I don't have that in front of me, so I'll leave that up to you to make that determination.

Todd Schwartzman - Sidoti & Company

Lastly, on CapEx how should we think, I know you don't have 2014 on your minds necessarily, but does it moderate then? If not, when? And how should we look at it stair stepping?

Stan Askren

I think 2014 you should plan at a similar level. Not up, but not down significantly.

Operator

Our next question comes from the line of Budd Bugatch with Raymond James.

Budd Bugatch - Raymond James

Just and if you mentioned this I apologize. Government business as a part of both, I guess, office furniture had peaked at, what, about 15% and that was in 2010 or 2011? Is that about right?

Stan Askren

Total government, Budd?

Budd Bugatch - Raymond James

Well, federal and state, yes. What it would be, if you could parse it, Kurt that would be great?

Kurt Tjaden

So '09, '10 it would have been low-20s. So 22% to 23% and last year it was about 15%, that's total, state and local fed.

Budd Bugatch - Raymond James

In 2012 it was 15%.

Kurt Tjaden

Yes, it was 15%.

Budd Bugatch - Raymond James

And what do you think it will be in 2013?

Kurt Tjaden

A little less than that, as we continue to see that decline in shift away.

Budd Bugatch - Raymond James

But the mix between state and federal?

Kurt Tjaden

It runs more on state, less on federal. It used to be about 55, 45, probably 60, 40, state and local to fed.

Budd Bugatch - Raymond James

So 60% of that is state and local of the 14%?

Kurt Tjaden

Right.

Operator

There are no further questions in cue.

Stan Askren

Well thank you very much for your interest in HNI, and your attention. We look forward to talking to you in the future. Have a great day.

Operator

This concludes today's conference call. You may now disconnect.

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