HNI Annual Report 2004 | Quarterlytics

Plain-text annual report

414 East Third Street Muscatine, Iowa 52761 www.hnicorp.com Behind the Numbers. H N I C o r p o r a t i o n 2 0 0 4 A n n u a l R e p o r t HNI Corporation 2004 Annual Report What’s behind our performance I N V E S T O R I N F O R M AT I O N Forward-Looking Statements Statements in this report that are not strictly historical, including statements as to plans, objectives, and future financial performance, are “forward-looking” statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks, which may cause the Company’s actual results in the future to differ materially from expected results. Because of the following risks, as well as other variables affecting the Company’s operating results, past ﬁ nancial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods: • competition within the office furniture and fireplace industries, including competition from imported products and competitive pricing; • increases in the cost of raw materials, including steel, which is the Company’s largest raw material category; • the ability of the Company to realize financial benefits through price realization from its price increases; • increases in the cost of health care benefits provided by the Company; • reduced demand for the Company’s 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, customer insolvencies, and related bad debts and claims against the Company that it received preferential payments; • changes in demand and order patterns from the Company’s customers, particularly its top 10 customers, which represented approximately 36% of net sales in 2004; • issues associated with acquisitions and integration of acquisitions; • the ability of the Company to realize cost savings and productivity improvements from its cost containment and business simplification initiatives; • the ability of the Company to realize financial benefits from investments in new products; • the ability of the Company’s distributors and dealers to successfully market and sell the Company’s products; • the availability and cost of capital to finance planned growth; and • other risks, uncertainties, and factors described from time to time in the Company’s filings with the Securities and Exchange Commission. We caution the reader that the above list of factors may not be exhaustive. The Company does not assume any obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. Schedule of Quarterly Results The Company operates on a fiscal year ending on the Saturday nearest December 31. Quarterly results are typically announced within 25 days after the end of each quarter, and audited results are typically announced within 40 days after year-end. Fiscal 2005 Quarter-End Dates 1st Quarter: Saturday, April 2 2nd Quarter: Saturday, July 2 3rd Quarter: Saturday, October 1 4th Quarter: Saturday, December 31 Annual Meeting The Company’s annual shareholders’ meeting will be held at 10:30 a.m. on Tuesday, May 3, 2005, at the Holiday Inn, Highways 61 & 38 North, Muscatine, Iowa. Shareholders and other interested investors are encouraged to attend the meeting. Investor Relations Send inquiries to: Investor Relations HNI Corporation 414 East Third Street Muscatine, IA 52761 Telephone: 563.264.7400 Fax: 563.264.7655 E-mail: investorrelations@hnicorp.com Corporate Headquarters HNI Corporation 414 East Third Street P.O. Box 1109 Muscatine, IA 52761-0071 Telephone: 563.264.7400 Fax: 563.264.7217 Website: www.hnicorp.com Independent Public Accountants PricewaterhouseCoopers LLP One North Wacker Drive Chicago, IL 60606 Common Stock HNI Corporation common stock trades on the New York Stock Exchange under the symbol: HNI. Stock price quotations can be found in major daily newspapers and The Wall Street Journal Journal. Journal. Transfer Agent Shareholders may report a change of address or make inquiries by writing or calling: Computershare Investor Services, LLC 2 North LaSalle Street Chicago, IL 60602 Telephone: 312.588.4991 h p a r g o h t i L n o s r e d n A o e v n e C : g n i t n i r P f p e n h c S s e m a J : y h p a r g o t o h P e v i t u c e x E m o c . m m o c n c b . w w w / s n o i t a c i n u m m o C N C B : n g i s e D is what will take us forward. H N I C o r p o r a t i o n 2 0 0 4 A n n u a l R e p o r t 1 It’s solid. Sustainable. Differentiating. Difﬁcult for competitors to duplicate. 2 H N I C o r p o r a t i o n 2 0 0 4 A n n u a l R e p o r t It’s solid. Sustainable. Differentiating. Difﬁcult for competitors to duplicate. H N I C o r p o r a t i o n 2 0 0 4 A n n u a l R e p o r t 3 It’s our culture. 4 H N I C o r p o r a t i o n 2 0 0 4 A n n u a l R e p o r t We’re different. The way we look at things, the way we work, the way we’re structured—all express a strongly aligned set of beliefs and priorities that exist at our core and drive our results. This is no gimmick. It’s no slogan. Our culture is real. As real as every single person who works here. That’s what is behind our numbers. H N I C o r p o r a t i o n 2 0 0 4 A n n u a l R e p o r t 5 Culture matters. 6 H N I C o r p o r a t i o n 2 0 0 4 A n n u a l R e p o r t It’s simple logic: Culture drives behaviors. require no explanation: We believe in pride Behaviors drive results. Results matter to without pretense. We believe in constructive everyone. Therefore, culture matters. discontent, in always seeking a better way. We HNI was founded at the close of World War II by believe that leaders serve and are accountable three men who shared a vision. They wanted to to members (employees). We believe our success create a company that treated its workers with largely depends on providing customers what they respect, that shared the rewards of its success want, better than they expected, better than we through the entire organization, that valued the did yesterday and better than our competition. power of the individual in driving a group forward. We believe in shared responsibility and shared Thus, the unique HNI culture was born. rewards. We believe integrity is everything. What is culture, really? It’s a system of beliefs And we believe in making a difference, as a shared by a group of people. It’s those beliefs and company and as individuals, in our communities how strongly they are shared that determine the and our environment. strength and pervasiveness of a culture. By these Our culture and beliefs are real, shared across measures, HNI’s culture is very strong indeed. the entire organization to a degree that often HNI’s people share seven key values, beliefs surprises outsiders. Our culture matters because it that are so clear, simple and powerful that they is what makes us act, and perform, the way we do. H N I C o r p o r a t i o n 2 0 0 4 A n n u a l R e p o r t 7 It’s different here. 8 H N I C o r p o r a t i o n 2 0 0 4 A n n u a l R e p o r t We don’t call people who work here managers and other members interact. Whenever employees. We call them members. the CEO visits a plant ﬂoor, it’s as though he’s Everyone’s an owner, and acts like it. meeting with key shareholders. In fact, that’s If you have worked here for more than a year, exactly what he’s doing. He’s accountable to them you have the opportunity to own stock in the as much as they are to him, and everyone knows it. company. So the vast majority of HNI members It’s a friendly culture, but no one’s shy. “How’s it are HNI shareholders. They share in the proﬁts going?” gets an honest answer. Problems are and success of the company, which creates a pointed out and discussed, not hidden. This unique strong ownership culture. dynamic creates something powerful: The people HNI members have an owner’s agenda. who work here feel valued. They feel responsible. They ask different questions and worry about And they feel empowered. different things than a typical worker. They hold But it’s not easy here. If you don’t perform, themselves and others around them accountable you hear about it. Not just from management, but for results. As shareholders, our people know that also from your co-workers. People work in teams. when HNI does well, they do well. As members, They support each other. But it’s a relentlessly they also know the reverse is true: When they challenging and goals-driven place to work. It’s not do well, so does HNI. It’s a perfect alignment of for everyone—some people come here and thrive individual and company interests. while others struggle. We know our approach isn’t This ownership culture drives another thing the only way to do things. But it’s the HNI way. that’s profoundly different at HNI: how top And it works. H N I C o r p o r a t i o n 2 0 0 4 A n n u a l R e p o r t 9 Structured to perform. 1 0 H N I C o r p o r a t i o n 2 0 0 4 A n n u a l R e p o r t Our business model is a blend of independence knowledge of the target market and the ability and interdependence. It joins the beneﬁt of to operate with minimal corporate interference, laser-sharp market focus with the advantage is a much more effective way to deliver value of collective scale. We call it the HNI split-and- to customers and, ultimately, to shareholders. focus model. It’s a decentralized structure with a This isn’t to say that our operating companies great deal of communication, collaboration and don’t leverage HNI’s collective resources. They do. leveraging between operating companies. They leverage the procurement function, gaining Each operating company serves a distinct economies of scale in the purchase of raw materials market. To serve that market best, each has its own and services. They share and leverage core functions strategic plan, its own distinctive, tailored selling such as logistics and IT, as well as best practices— and fulﬁllment models, and its own ﬁnancial model. from lean manufacturing to product development to We believe strongly that smaller, focused groups of marketing techniques—across the entire enterprise, skilled, dedicated people, empowered and energized even between our ofﬁce furniture and hearth in the right business models, are very effective businesses. Operating company leaders regularly competitors to larger, more-centralized organizations. communicate with one another, treating HNI as a It makes us more agile. More targeted. More able sort of best-practice supermarket. Shopping the to identify and fulﬁll the unique needs of the market. shelves, seeing something that makes sense, taking We believe this split-and-focus approach, it and applying it. How does this work? Very well, where leaders in each operating company have because of shared beliefs and a shared goal: responsibility for a distinct P&L, a specialist’s the overall success of HNI. H N I C o r p o r a t i o n 2 0 0 4 A n n u a l R e p o r t 11 It’s our people. 1 2 H N I C o r p o r a t i o n 2 0 0 4 A n n u a l R e p o r t This is such a profound truth here that we expected by a customer. We don’t accept don’t care if it sounds cliché: HNI members this. In fact, we strive to deliver all three with are the difference. Our people are behind absolutely no compromise. Our products have our numbers. One key manifestation of a great style with quality that lasts, at the best company’s culture is in the collective attitude of total cost. Delivered faster and more dependably its people. People here thrive in an environment than anyone else in the industry, and with an of constant change, centered around Rapid attitude that tells customers that we care Continuous Improvement (“RCI”). RCI is a formal about what they need. process embraced in every corner of the business, Providing the best total experience to but it’s deeper than that. It’s a perspective shared customers is the way to win. The key to doing by everyone at HNI, an attitude of constructive that successfully is attitude. Which, of course, discontent that fuels a constant search for ties back to our greatest asset, people. Some see ways to improve everything we do. this as a cliché, but we don’t care. Because it’s People here delight in rejecting conventional true here at HNI. Skeptical? Look at us closely. wisdom. Long-held assumptions and business Study our ﬁnancials. Experience our products. practices can get in the way of progress. At Talk to a customer or two. Better yet, come and HNI, “That’s the way we’ve always done it” visit us. Look us in the eye. Get a ﬁrst-hand look is a red ﬂag. For example, a common saying in at who we are, how we go about making things business holds that of three things, quality, and how we go about making things better. price and speed, only two can reasonably be Then you’ll see what is behind our numbers. H N I C o r p o r a t i o n 2 0 0 4 A n n u a l R e p o r t 1 3 F I N A N C I A L H I G H L I G H T S Amounts in thousands, except for per share data 2004 2003 Change Income Statement Data Net sales Gross proﬁt Gross proﬁt as a % of: Net sales Selling and administrative expenses Restructuring related charges Operating income Net income Net income as a % of: Net sales Average shareholders’ equity Per common share: Net income – basic Net income – diluted Book value – basic Cash dividends Balance Sheet Data Current assets Total assets Current liabilities Current ratio Long-term debt and capital lease obligations Debt/capitalization ratio Shareholders’ equity Average shareholders’ equity Working capital Other Data Capital expenditures Cash ﬂow from operations Weighted-average shares outstanding during year – basic Price/earnings ratio at year-end Number of shareholders at year-end Members (employees) at year-end * Includes acquisitions completed during year Net Sales (in millions) Net Income (in millions) $2,093,447 751,304 $1,755,728 639,215 35.9% 572,006 886 178,412 113,582 5.4% 16.5% $÷÷÷÷«1.99 1.97 12.10 0.56 $÷«374,579 1,021,657 266,250 1.41 $÷÷÷«3,645 0.6% $÷«669,163 689,526 108,329 $÷÷«32,417 194,256 57,127,110 22 6,465 10,589* 36.4% 480,744 8,510 149,961 98,105 5.6% 14.5% $÷÷÷÷«1.69 1.68 12.19 0.52 $÷«462,122 1,021,826 245,816 1.88 $÷÷÷«4,126 4.2% $÷«709,889 678,391 216,306 $÷÷«34,842 141,274 58,178,739 26 6,416 8,926 Return on Average Shareholders’ Equity (percent) 19.2 % 17.5 % – 19.0 % (89.6) % 19.0 % 15.8 % – – 17.8 % 17.3 % (0.7) % 7.7 % (18.9) % (0.0) % 8.3 % – (11.7) % – (5.7) % 1.6 % (49.9) % (7.0) % 37.5 % (1.8) % – 0.8 % 18.6 % Diluted Earnings per Share (dollars) 7 9 1 . 6 4 0 2 , 2 9 7 1 , 6 5 7 1 , 2 9 6 1 , 3 9 0 2 , 6 0 1 8 9 1 9 4 7 4 1 1 . 8 9 1 . 5 6 1 . 7 4 1 . 5 4 1 . 8 2 1 7 7 1 . 6 2 1 . 8 6 5 1 5 1 . . 0 0 0 2 1 0 0 2 2 0 0 2 3 0 0 2 4 0 0 2 0 0 0 2 1 0 0 2 2 0 0 2 3 0 0 2 4 0 0 2 0 0 0 2 1 0 0 2 2 0 0 2 3 0 0 2 4 0 0 2 0 0 0 2 1 0 0 2 2 0 0 2 3 0 0 2 4 0 0 2 1 4 H N I C o r p o r a t i o n 2 0 0 4 A n n u a l R e p o r t L E T T E R T O S H A R E H O L D E R S Dear Shareholders: It was another good year. We improved by nearly every meaningful financial measurement. We strengthened ourselves through acquisition. We continued to outperform our peers. But as you read this letter, 2004 already is receding in the rear-view mirror. The question at hand is, can we continue to improve? I have no doubt the answer is yes. Why am I confident? Even though the business environment showed improvement in 2004, our marketplace remains as unpredictable as ever. New challenges emerge each year. Competition is unrelenting. Change is constant. I‘m confident because we know what we must do. In order to continue to thrive in times of change, we must ourselves be in a state of continuous change. To succeed in a dynamic environment, we must never stand still. To meet future challenges, we must challenge ourselves every day. To perform better in the future, we must never be satisfied with our performance today. We really believe HNI Corporation is different. We see our culture as a profound, sustainable competitive advantage and a powerful engine for meaningful long-term growth. A company with a strong culture knows who it is. In times of rapid change, this is an important foundation for decision-making, a constant that helps us stay on the right course. But as important as it is, obviously culture doesn’t do it alone. Continuous improvement gains little if you’re going in the wrong direction. We believe our 2004 results are a strong indication that our strategy is sound and our direction is the right one. H N I C o r p o r a t i o n 2 0 0 4 A n n u a l R e p o r t 1 5 L E T T E R T O S H A R E H O L D E R S Our objective: aggressive, profitable growth We seek to achieve long-term value for all our stakeholders by growing aggressively and profitably. How, specifically, does HNI plan to accomplish this? We will achieve the broader objective by focusing on several specific ones: Continue to build a market-driven, operationally excellent organization. Achieve leading positions in each of the markets we serve. Significantly increase our profit. Deliver and sustain above-average returns. Consistently achieve most-admired status among our corporate peers. Live the HNI vision statement outlined on the last page of this annual report. Our strategic framework Our strategies for converting these objectives into aggressive profitable growth fall under three critical areas of performance—accelerating our initiatives to further leverage our lean enterprise and achieve best total cost; building market power; and continuing to enhance our culture and capabilities. We sometimes look at our business as a bicycle, with the back wheel representing our operations and production, and the front wheel representing our sales and marketing. We have always been strongest in the “back wheel” of our business. We have had lean practices and Rapid Continuous Improvement (“RCI“) processes in place since the early nineties. Our drive now is to accelerate our improvement across the entire business and focus it to benefit the end-user. The concept of “best total cost” connects RCI to those who ultimately buy our products—extending our lean practices across the entire value stream, from manufacturing through sales, to deliver what we call efficient effectiveness. The front wheel is getting an equally intense focus across our business. We are building market power by working to understand—and then developing innovative ways to deliver—what end-users need and want. We have put considerable effort into clearly defining our brands; we now are implementing comprehensive strategies to increase the power of each in its respective market. We’re fine-tuning our selling processes to support our brand strategies and align with end-user needs. We’re developing industry- leading distribution models, and we’re continuing the strong emphasis on new product development that has so energized our showrooms over the past several years. 1 6 H N I C o r p o r a t i o n 2 0 0 4 A n n u a l R e p o r t L E T T E R T O S H A R E H O L D E R S If operations is the back wheel and marketing is the front wheel of the bicycle, then culture represents the human force that drives the pedals. We are committed to building our culture and collective intelligence through continuous development of our members and recruitment of new talent—supporting the ongoing search for new ideas, the constant pursuit of a better way, in everything we do. Equally important, we are working to ensure that member rewards and incentives continue to align with our strategic direction. And as we grow through acquisition, we’ll strike a balance between helping our new members assimilate our culture and values, and benefiting as a company from the new perspectives and practices they bring to us. Thank you We are pleased with the addition of John A. Halbrook, Larry B. Porcellato and Miguel M. Calado to our Board of Directors in 2004. We already have benefited from their considerable business experience and leadership. HNI’s Board of Directors is strong—I want to take this opportunity to thank them for their support and counsel. I am privileged to lead this company as it begins its next chapter of development. On behalf of my fellow members, I would like to extend our heartfelt gratitude to Jack Michaels, who retired as Chairman of the Board in November of 2004. The example Jack set as leader of this company for 14 years is both humbling and inspiring to me. To Jack, it is never about him. It’s about the company, first, foremost and always. He did an excellent job in achieving the HNI leader’s mandate: build upon the legacy of the founders, and help members take this company to a level never dreamed of when it all began in 1944. As Chairman, President and Chief Executive Officer, this is now my mandate and I am proud to accept it. With the solid foundation Jack left us, the support of our Board and the dedication of our members, I have no doubt that we can achieve great things together in 2005 and beyond. Stan A. Askren Chairman, President and Chief Executive Officer H N I C o r p o r a t i o n 2 0 0 4 A n n u a l R e p o r t 1 7 L E T T E R F R O M J A C K M I C H A E L S Dear Friends: Business is not complicated. It’s simple. It’s about people. During my time as one of the leaders of this company, I was asked numerous times: What does a CEO do? My answer was always the same. A CEO gets good people, helps create an environment where they can speak their minds, involves them in decision-making, then gets out of the way. Simple. The objective that has driven me over the past several years has been to put a great team in place, and help put the right processes in place, that will take this company further than I could ever take it. I am very proud of my role in getting that done with the appointment of Stan Askren. The challenge as I see it is to preserve and leverage the unique HNI values as we grow. But Stan knows we just have to do the same thing we always have tried to do. Make people feel important. Respect them and give them every chance to develop and contribute. Serve them. Our members may not see the big picture as clearly as top management, but they know what’s going on in their world better than we do. If we continue to give each member an opportunity to improve what he or she does, we will certainly grow stronger as our company grows larger. I have truly enjoyed my time with HNI Corporation. I am proud of our accomplishments together and couldn’t be more pleased with the leadership team we have put in place. I am looking forward to seeing how far this company will go in the coming years. Jack D. Michaels Retired Chairman 1 8 H N I C o r p o r a t i o n 2 0 0 4 A n n u a l R e p o r t This is HNI. Product excitement and performance in the ofﬁce; warmth and beauty in the home. H N I C o r p o r a t i o n 2 0 0 4 A n n u a l R e p o r t 1 9 ® Allsteel Inc. delivers the highest level of style, design, functionality, durability and service to the large corporate and designer/specifier markets. By focusing on these five elements of quality, we provide something more to customers: productive and inspired employees, a more functional environment and a space that makes a positive statement about who works there. We pride ourselves on being easy to work with, responsive and responsible. This is Allsteel: Designed to work. Built to last. 2 0 H N I C o r p o r a t i o n 2 0 0 4 A n n u a l R e p o r t ® The HON Company is North America’s brand of choice for small and medium-sized businesses. From file cabinets to executive chairs, desks to suites, The HON Company offers a full line of affordable and stylish products that look great for years to come. As businesses expand, HON designs allow new products to easily integrate with existing solutions. The HON Company’s nationwide distribution network provides industry-leading access to top-selling products. The HON Company: Practical and professional. H N I C o r p o r a t i o n 2 0 0 4 A n n u a l R e p o r t 2 1 ® The Gunlocke Company L.L.C. is one of America’s most established and respected producers of quality wood office furniture. The Gunlocke Company brings the elegance and beauty of wood to a wide range of products, including executive casegoods, seating, lounge furniture and confer- ence tables. Founded in 1902, The Gunlocke Company has been known for more than a century for crafting distinctive, tailored, image-driven solutions for business and government clients. The Gunlocke Company focuses primarily on the contract market and furniture specifying communities. The Gunlocke Company: Timely and tailored. 2 2 H N I C o r p o r a t i o n 2 0 0 4 A n n u a l R e p o r t ™ Paoli Inc. is one of the leading providers of high-aesthetic wood desks and seating at moderate prices for small to medium-sized companies and furniture specifiers who serve them. Paoli Inc. is known for its broad line of products and quick-ship program, close relationships and positive reputation with dealers, flexibility and responsiveness to customer needs, and experienced, dedicated management team. Paoli Inc. goes to market through the Paoli and Whitehall brands. This is the Paoli brand promise: Stylish furniture, affordable prices. H N I C o r p o r a t i o n 2 0 0 4 A n n u a l R e p o r t 2 3 ® Maxon Furniture Inc. is a leading provider of planned offices for small to mid-sized businesses. Maxon Furniture excels at providing information about office environments, flawless execution and the strong positive experiences that new, well- planned offices can bring. The Maxon edge is in reaching its customers directly and then delivering them to Maxon dealer- partners. The Maxon QuickShip program includes virtually its entire product line and is among the fastest and most extensive in the industry. To put it simply, Maxon gets you working fast. ®® Holga Inc. provides high-quality, high-density storage products through an extensive network of local dealers. Creating solutions that dramatically increase storage capacity and reduce floor space needed to house it, Holga constructs products to exacting standards and tailors its high-density systems to fit the unique needs of each individual customer. Delivering value every step of the way, from planning to budgeting through follow-up, Holga Inc. is committed to creating enduring relation- ships with end-users in businesses of all sizes. 2 4 H N I C o r p o r a t i o n 2 0 0 4 A n n u a l R e p o r t ™ Omni Remanufacturing Inc. comprises two divisions serving corporate America: A&M Business Interior Services and IntraSpec Solutions. A&M executes professional office furniture services for Fortune 1000 customers and contract furniture dealerships, simplifying the work order, management and reporting process. IntraSpec Solutions provides high-quality remanufactured brand- name office furniture systems for customers large and small. IntraSpec Solutions asset management and trade-in programs help customers with standardized systems get the most value for their existing furniture assets. H N I C o r p o r a t i o n 2 0 0 4 A n n u a l R e p o r t 2 5 HNI International Inc. delivers office furniture solutions outside of the United States and Canada. HNI International supports global corporate accounts as well as domestic and international dealers with sales, installation and service for industries all over the globe. With dealers, members and servicing partners in many countries, HNI International can provide complete project management virtually anywhere in the world. Fireside Hearth & Home ™ is the nation’s leading provider of hearth and home products and services. Fireside Hearth & Home design centers help consumers achieve the feeling they want in their homes by supporting the entire buying process—from purchase to installation and after-sale service. Fireside Hearth & Home works through a network of independent and company-owned stand-alone or gallery design centers, as well as installation centers, catering both to consumers and builders. ™ ® Heatilator® is the most recognized and preferred fireplace brand among homebuilders. Leading builders choose Heatilator because they know that the brand assures their customers continuous comfort and reliability. 2 6 H N I C o r p o r a t i o n 2 0 0 4 A n n u a l R e p o r t ™ Heat & Glo ™ is the hearth industry’s steadfast leader in design and innovation. Heat & Glo is known as the premium brand in the marketplace because it has consistently developed hearth products that push technological and design boundaries—creating a balance of style and sophistication in the home. ® Quadra-Fire® is the leader in highly efficient, durable and powerful hearth products. The Quadra-Fire brand offers specialty channel partners the widest selection of high- performance fireplaces, stoves and fireplace inserts in the wood, gas, pellet and electric fuel categories. Quadra-Fire products are designed with a mind toward efficiency and an eye toward beauty balanced with ruggedness. The products use heavy-gauge steel and cast iron along with design details for both performance and appearance. H N I C o r p o r a t i o n 2 0 0 4 A n n u a l R e p o r t 2 7 Management’s Discussion and Analysis The following discussion of the Company’s historical results of operations and of its liquidity and capital resources should be read in conjunction with the Consolidated Financial Statements of the Company and related notes. Overview The Company has two reportable core operating segments: ofﬁce fur- niture and hearth products. The Company is the second largest ofﬁce furniture manufacturer in the United States and the nation’s leading manufacturer and marketer of gas- and wood-burning ﬁreplaces. The Company changed its name, with the approval of its share- holders, from HON INDUSTRIES Inc. to HNI Corporation effective May 5, 2004. The Company believes that changing its name will allow it to accomplish three important goals as it moves forward with its strategy of managing multiple distinct and independent brands: 1) create a corporate identity that clearly represents who it is today – the parent company for many of the leading brand name companies in the ofﬁce furniture and hearth markets; 2) establish a corporate brand that better reﬂects the Company’s strategic growth program – product line extensions, market expansion, and strategic acquisitions; and 3) eliminate the confusion in the marketplace, resulting from the use of “HON” in both the corporate name and in the name of its largest operating company, and clarify the ownership of our other operating companies and their relationship with The HON Company. During 2004, the ofﬁce furniture industry experienced a slight rebound from its unprecedented three-year decline experienced from 2000 to 2003. In 2004, this positively impacted the Company’s ofﬁce furniture segment. The housing market remained strong during 2004, which positively impacted the Company’s hearth segment. The Company gained market share by providing strong brands, innovative products and services, and greater value to its end-users. During 2004, the Company experienced large material price increases, steel in particular, which negatively impacted its bottom line growth in both segments. Net sales were $2.1 billion in 2004 as compared to $1.8 billion in 2003, an increase of over 19 percent. Sales from the Company’s acquisitions during 2004 accounted for approximately $136 million of the sales increase, and approximately $36 million was due to price increases. Gross margins decreased to 35.9% in 2004 from 36.4% in 2003 due to increased steel and other material costs of approximately $73 million. The Company also continued to invest aggressively in brand building and selling initiatives in 2004. In 2003, the Company recorded restructuring charges and accelerated depreciation related to the shutdown and consolidation of ofﬁce furniture facilities totaling $15.2 million. During 2004, the Company recorded approximately $0.9 million of net current period charges related to those shutdowns. Net income was $113.6 million or $1.97 per diluted share in 2004 as compared to $98.1 million or $1.68 per diluted share in 2003. The Company completed three ofﬁce furniture business acquisitions during ﬁscal year 2004: Paoli, Inc. (January 5); Omni Remanufacturing, Inc. (July 6); and Architectural Installations Atlanta, Inc. (December 9). 28 HNI Corpo ration and Sub sid i ari e s 2 0 0 4 An n u al Re po rt The Company completed two hearth products business acquisitions during ﬁscal year 2004: Hearth and Home Distributors of Delaware, Inc. (January 5); and Edward George Company and its afﬁliate, Wisconsin Fireplace Systems (July 19). The Company also acquired certain assets of Fullness International Corporation, a strategic sourcing entity, on October 4, 2004. The consideration for each of these transactions was paid in cash. The Company generated $194.3 million in cash flow from operating activities during 2004, compared to $141.3 million in 2003. The Company paid dividends of $32.0 million and repurchased $145.6 million of its common stock, while investing $134.8 million in strategic acquisitions and $32.8 million in net capital expenditures and repaying $26.8 million of debt in 2004. Critical Accounting Policies and Estimates GE N E R AL Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon the Consolidated Financial Statements, which have been prepared in accordance with Generally Accepted Accounting Principles (“GAAP”). The preparation of these ﬁnancial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Senior manage- ment has discussed the development, selection, and disclosure of these estimates with the Audit Committee of our Board of Directors. Actual results may differ from these estimates under different assumptions or conditions. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the ﬁnancial statements. Management believes the following critical accounting policies reﬂect its more signiﬁcant estimates and assumptions used in the preparation of the Consolidated Financial Statements. Fiscal year-end – The Company follows a 52/53-week ﬁscal year that ends on the Saturday nearest December 31. Fiscal year 2004 ended on January 1, 2005; 2003 ended on January 3, 2004; and 2002 ended on December 28, 2002. The ﬁnancial statements for ﬁscal year 2003 are based on a 53-week period; ﬁscal years 2004 and 2002 are on a 52-week basis. A 53-week year occurs approxi- mately every sixth year. Revenue recognition – Revenue is normally recognized upon ship- ment of goods to customers. In certain circumstances revenue is not recognized until the goods are received by the customer or upon installation and customer acceptance based on the terms of the sale Management’s Discussion and Analysis agreement. Revenue includes freight charged to customers; related costs are included in selling and administrative expense. Rebates, discounts, and other marketing program expenses directly related to the sale are recorded as a reduction to net sales. Marketing program accruals require the use of management estimates and the consider- ation of contractual arrangements subject to interpretation. Customer sales that reach certain award levels can affect the amount of such estimates, and actual results could differ from these estimates. Future market conditions may require increased incentive offerings, possibly resulting in an incremental reduction in net sales at the time the incentive is offered. Allowance for doubtful accounts receivable – The allowance for doubtful accounts receivable is based on several factors including overall customer credit quality, historical write-off experience, and speciﬁc account analysis that project the ultimate collectibility of the account. As such, these factors may change over time causing the reserve level to adjust accordingly. When it is determined that a customer is unlikely to pay, a charge is recorded to bad debt expense in the income statement and the allowance for doubtful accounts is increased. When it becomes certain the customer cannot pay, the receivable is written off by removing the accounts receivable amount and reducing the allowance for doubtful accounts accordingly. As of January 1, 2005, there was approximately $246 million in outstanding accounts receivable and $11 million recorded in the allowance for doubtful accounts to cover potential future customer non-payments. However, if economic conditions deteriorate signiﬁcantly or one of our large customers were to declare bankruptcy, a larger allowance for doubtful accounts might be necessary. The allowance for doubtful accounts was approximately $11 million and $10 million at year-end 2003 and 2002, respectively. Inventory valuation – The Company values 80% of its inventory by the last-in, ﬁrst-out (LIFO) method. Additionally, the Company evaluates inventory reserves in terms of excess and obsolete exposure. This evaluation includes such factors as anticipated usage, inventory turnover, inventory levels, and ultimate product sales value. As such, these factors may change over time causing the reserve level to adjust accordingly. The reserves for excess and obsolete inventory were $7.7 million, $5.7 million, and $5.9 million at year-end 2004, 2003, and 2002, respectively. Long-lived assets – Long-lived assets are reviewed for impairment as events or changes in circumstances occur indicating that the amount of the asset reﬂected in the Company’s balance sheet may not be recoverable. An estimate of undiscounted cash ﬂows produced by the asset, or the appropriate group of assets, is compared to the carrying value to determine whether impairment exists. The estimates of future cash ﬂows involve considerable management judgment and are based upon assumptions about future operating performance. The actual cash ﬂows could differ from management’s estimates due to changes in business conditions, operating performance, and economic conditions. Asset impairment charges associated with the Company’s restructuring activities are discussed in the Restructuring Related Charges note to the Consolidated Financial Statements of the Company. The Company’s continuous focus on improving the manufacturing process tends to increase the likelihood of assets being replaced; therefore, the Company is constantly evaluating the expected useful lives of its equipment, which can result in accelerated depreciation. Additionally, the Company recorded losses on the disposal of assets in the amount of $1 million and $5 million in 2003 and 2002, respec- tively, as a result of its rapid continuous improvement initiatives. Goodwill and other intangibles – In accordance with the Statement of Financial Accounting Standards (“SFAS”) No. 142, the Company evaluates its goodwill for impairment on an annual basis based on values at the end of the third quarter or whenever indicators of impairment exist. The Company has evaluated its goodwill for impair- ment and has determined that the fair value of the reporting units exceeded their carrying value, so no impairment of goodwill was recognized. Goodwill of approximately $225 million is shown on the consolidated balance sheet as of the end of ﬁscal 2004. Management’s assumptions about future cash ﬂows for the reporting units require signiﬁcant judgment, and actual cash ﬂows in the future may differ signiﬁcantly from those forecasted today. We believe our assumptions used in discounting future cash ﬂows would have no impact on the reported carrying amount of goodwill. The estimated future cash ﬂow for any reporting unit could be reduced by 40% without decreasing the fair value to less than the carrying value. The Company also determines the fair value of indeﬁnite lived trademarks on an annual basis or whenever indication of impairment exist. The Company has evaluated its trademarks for impairment and has determined that the fair market value of the trademarks exceeds carrying value, so no impairment was recognized. The carrying value of the trademarks was approximately $29 million at the end of ﬁscal 2004. Self-insured reserves – The Company is partially self-insured for general, auto, and product liability, workers’ compensation, and certain employee health beneﬁts. The general, auto, product, and workers’ compensation liabilities are managed using a wholly owned insur- ance captive; the related liabilities are included in the accompanying ﬁnancial statements. The Company’s policy is to accrue amounts in accordance with the actuarially determined liabilities. The actuarial valuations are based on historical information along with certain assumptions about future events. Changes in assumptions for such matters as number of claims, medical cost inﬂation, and the magnitude of change in actual experience development could cause these estimates to change in the near term. Stock-based compensation – The Company accounts for its stock option plan using Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” which results in no charge to earnings when options are issued at fair market value. SFAS No. 123, “Accounting for Stock-Based Compensation,” issued subsequent to APB No. 25 and amended by SFAS No. 148, “Accounting for Stock Based Compensation – Transition and Disclosure,” deﬁnes a fair value based method of accounting for employee stock options but allows companies to continue to measure compensation cost for employee stock options using the intrinsic value based method described in APB No. 25. HNI Corporation and Subsidiaries 20 0 4 Annu al Re p or t 29 Management’s Discussion and Analysis In December 2004, the Financial Accounting Standards Board issued SFAS No. FAS123(R), “Share-Based Payment,” effective as of the beginning of the ﬁrst interim or annual reporting period that begins after June 15, 2005. The Company plans to adopt FAS123(R) beginning with its third ﬁscal quarter in 2005. FAS123(R) eliminates the alternative to use the intrinsic value method of accounting that was provided in FAS123 as originally issued. In accordance with SFAS No. 148, the Company has been disclosing in the notes to the Consolidated Financial Statements the impact on net income and earnings per share had the fair value based method been adopted. If the fair value method had been adopted, net income for 2004, 2003, and 2002 would have been $5 million, $3 million, and $2 million lower than reported and earnings per share would have been reduced approximately $0.08, $0.06, and $0.04 per diluted share, respectively. Recent Accounting Pronouncements See the notes to the Consolidated Financial Statements for a full description of recent accounting pronouncements including the respective expected dates of adoption and effects on results of operations and ﬁnancial conditions. Results of Operations The following table sets forth the percentage of consolidated net sales represented by certain items reﬂected in the Company’s statements of income for the periods indicated. Fiscal Net sales Cost of products sold Gross proﬁt Selling and administrative expenses Restructuring related charges Operating income Interest income (expense) – net Income before income taxes Income taxes Net income 2004 100.0% 64.1 35.9 27.3 0.1 8.5 0.0 8.5 3.1 5.4% 2003 100.0% 63.6 36.4 27.4 0.5 8.5 0.1 8.6 3.0 5.6% 2002 100.0% 64.6 35.4 26.8 0.2 8.4 (0.1) 8.3 2.9 5.4% N E T SALES Net sales increased 19.2% in 2004 and 3.7% in 2003. The increase in 2004 was due to $136 million of sales from the Company’s 2004 acquisitions, $36 million from price increases, and increased volume in both the ofﬁce furniture and hearth products segments. The increase in 2003 was due to the extra week in 2003 as a result of the Company’s 52/53-week ﬁscal year and strong performance in the hearth products segment. G ROS S PRO F I T Gross proﬁt as a percent of net sales decreased 0.5 percentage points in 2004 as compared to ﬁscal 2003 due to approximately $57 million of increased steel costs and $16 million of additional other material costs. The increased steel and other material costs, net of 30 HNI Corpo ration and Sub sid i ari e s 2 0 0 4 An n u al Re po rt price increases, reduced gross margins approximately 1.8 percentage points. Included in 2003 gross proﬁt was $6.7 million of accelerated depreciation, which reduced gross proﬁts 0.4 percentage points. The Company’s gross margins improved 1.0 percentage points in 2003 compared to ﬁscal 2002 due to the continued net beneﬁts of rapid continuous improvement, restructuring initiatives, business simpliﬁ- cation, new products, and improved price realization. The Company will be implementing additional price increases through April 1, 2005, along with its ongoing cost reduction initiatives, including alternative materials and suppliers and its rapid continuous improvement program, to mitigate the impact of higher material costs. SE LL I N G AN D AD M I N I ST R AT I V E E X PE N SES Selling and administrative expenses, excluding restructuring charges, increased 19.0% and 5.8% in 2004 and 2003, respectively. The increase in 2004 was due to additional investment of approximately $15 million in brand building and selling initiatives, increased freight and distribution costs of $26 million due to volume, rate increases, fuel surcharges, and $39 million of additional selling and administra- tive costs associated with the new acquisitions. The increase in 2003 was due to additional investment of approximately $14 million in brand building and selling initiatives, and increased freight costs of $7 million due to rate increases, fuel surcharges, and volume. Selling and administrative expenses include freight expense for shipments to customers, product development costs, and amortization expense of intangible assets. The Selling and Administrative Expenses note included in the Consolidated Financial Statements provides further information regarding the comparative expense levels for these major expense items. R EST RUC TU R I N G C H A RGES During 2003, the Company closed two ofﬁce furniture facilities and consolidated production into other U.S. manufacturing locations to increase efﬁciencies, streamline processes, and reduce overhead costs. The two facilities were located in Hazleton, Pennsylvania, and Milan, Tennessee. In connection with these closures, the Company recorded $15.7 million of pre-tax charges or $0.17 per diluted share. These charges included $6.7 million of accelerated depreciation of machinery and equipment that was recorded in cost of sales, $3.4 million of severance, and $5.6 million of facility exit, production relocation, and other costs that were recorded as restructuring costs. A total of 316 members were terminated and received severance due to these shutdowns. In connection with the shutdowns, the Company incurred $1.2 million of current period charges during 2004. The Company also reduced the restructuring charge recorded in 2003 by approximately $0.3 million related to its Milan, Tennessee, facility during 2004. The reduction was due to the fact that the Company was able to exit a lease with the lessor on more favorable terms than previously estimated. The closures are complete. During 2002, the Company recorded a pre-tax charge of approximately $5.4 million due to the shutdown of an ofﬁce furniture facility in Jackson, Tennessee. A total of 125 members were terminated and received severance due to this shutdown. During the second quarter of 2003, a restructuring credit of approximately $0.6 million or $0.01 per diluted share was taken back into income relating to this charge. This was due to the fact that the Company was able to exit a lease with the lessor at more favorable terms than previously estimated. Management’s Discussion and Analysis During the second quarter of 2001, the Company recorded a pre-tax charge of $24 million or $0.26 per diluted share for a restructuring plan that involved consolidating physical facilities, discontinuing low- volume product lines, and reductions of workforce. Included in the charge was the closedown of three of the Company’s ofﬁce furniture facilities located in Williamsport, Pennsylvania; Tupelo, Mississippi; and Santa Ana, California. Approximately 500 members were termi- nated and received severance due to the closedown of these facilities. During the second quarter of 2002, a restructuring credit of approxi- mately $2.4 million was taken back into income relating to this charge. This was mainly due to the fact that the Company was able to exit a lease with a lessor at more favorable terms than originally estimated and the Company’s ability to minimize the number of members terminated as compared to the original plan. O PE R AT I N G I N C O M E Operating income increased 19.0% in 2004 and 5.1% in 2003, respectively. The increase in 2004 was due to increased sales volume in both segments, price increases, contributions from new acquisitions, and a $15 million restructuring charge in 2003, offset by increased steel and other material costs, increased investment in brand building and selling initiatives, and increased freight costs. The increase in 2003 is due to the additional week, strong sales volume in the hearth segment, and improved gross margins in both segments, offset by increased restructuring charges due to addi- tional plant closures and consolidations, increased investment in brand building and selling initiatives, and increased freight costs. N E T I N C O M E Net income increased 15.8% in 2004 and 7.4% in 2003, respectively. Net income in 2004 was unfavorably impacted by an increase in the effective tax rate to 36.5% in 2004 from 35% in 2003 due to increased state taxes and a reduced beneﬁt from federal and state tax credits. Net income in 2003 was favorably impacted by increased interest income due to increased investments and decreased interest expense due to reduction in debt. The Company anticipates that its tax rate will decrease approximately one percentage point in 2005 due to beneﬁts resulting from the implementation of the American Jobs Creation Act of 2004 but is still in the process of evaluating the impact. Net income per diluted share increased by 17.3% to $1.97 and by 8.4% to $1.68 in 2004 and 2003, respectively. Net income per share was positively impacted $0.03 per share in 2004 by the Company’s share repurchase program. O FF I C E FU R N I TU R E Ofﬁce furniture comprised 75%, 74%, and 76% of consolidated net sales for 2004, 2003, and 2002, respectively. Net sales for ofﬁce furniture increased 20% in 2004 and 2% in 2003. The increase in 2004 was due to approximately $117 million of sales from the Company’s 2004 acquisitions, $22 million of price increases, and increased market share gain. The increase in 2003 is due to the increased week from the Company’s 52/53-week ﬁscal year. The Business and Institutional Furniture Manufacturer’s Association (“BIFMA”) reported 2004 shipments up more than 5% and 2003 shipments down more than 4%. The Company believes it was able to outperform the market by providing strong brands, innovative products and services, and greater value to end-users. Operating proﬁt as a percent of sales was 9.9% in 2004, 10.0% in 2003, and 10.2% in 2002. Included in 2003 were $15.2 million of net pre-tax charges related to the closure of two ofﬁce furniture facilities, which impacted operating margins by 1.1 percentage points. Included in 2002 were $3.0 million of restructuring charges, which impacted operating margins by 0.2 percentage points. The decrease in operating margins in 2004 is due to approximately $56 million of higher steel and other material costs, additional investments in brand building and selling initiatives, and increased freight expense partially offset by the beneﬁts of restructuring initiatives, rapid continuous improvement program, and increased price realization. H E A R T H PRO DUC TS Hearth products sales increased 16% in 2004 and 9% in 2003. The growth in 2004 and 2003 was attributable to strong housing starts, strengthening alliances with key distributors and dealers, as well as focused new product introductions. Contributions from new acquisitions of $18 million and price increases of $13 million also contributed to the increase in 2004. Operating proﬁt as a percent of sales in 2004 was 11.9% compared to 12.1% and 10.8% in 2003 and 2002, respectively. The decrease in operating margins in 2004 is mainly due to increased steel and freight costs. The improved proﬁtability in 2003 was the result of leveraging ﬁxed costs over a higher sales volume and increased sales through company-owned distribution offset by increased freight costs and higher labor costs from increased use of overtime and temporary labor to meet record level of demand. Liquidity and Capital Resources During 2004, cash ﬂow from operations was $194.3 million, which, along with available cash and short-term investments and funds from stock option exercises under employee stock plans, provided the funds necessary to meet working capital needs, pay for strategic acquisitions, invest in capital improvements, repay long-term debt, repurchase common stock, and pay increased dividends. Cash, cash equivalents, and short-term investments totaled $36.5 million at the end of 2004 compared to $204.2 million at the end of 2003 and $155.5 million at the end of 2002. These funds, coupled with cash from future operations and additional long-term debt, if needed, are expected to be adequate to ﬁnance operations, planned improvements, and internal growth. The Company is not aware of any known trends or demands, commitments, events, or uncertainties that are reasonably likely to result in its liquidity increasing or decreasing in any material way. The Company places special emphasis on the management and control of its working capital with a particular focus on trade receivables and inventory levels. The success achieved in managing receivables is in large part a result of doing business with quality customers and maintaining close communication with them. Trade receivables at year-end 2004 increased from the prior year due to the Company’s new acquisitions and increased sales volume. Trade receivable days outstanding have averaged approximately 36 to 38 days over the past three years. The Company’s inventory turns were 21, 23, and 23 for 2004, 2003, and 2002, respectively. The Company’s new acquisitions had a negative impact on inventory HNI Corporation and Subsidiaries 20 0 4 Annu al Re p or t 31 Management’s Discussion and Analysis turns that is expected to improve as the Company’s just-in-time philosophy is integrated into these acquisitions. The Company also is beginning to increase its imports of raw materials and ﬁnished goods, which, while reducing inventory turns, does have a favorable impact on the total cost. stone products, barbecues, and other building materials throughout Illinois, Indiana, and Kentucky, and its afﬁliate, Wisconsin Fireplace Systems, with locations in Wisconsin. On October 4, 2004, the Company also acquired certain assets of Fullness International Corporation, a strategic sourcing entity. I N V EST M E N TS The Company has investments in investment grade equity and debt securities. Management classiﬁes investments in marketable securities at the time of purchase and reevaluates such classiﬁcation at each balance sheet date. Equity securities are classiﬁed as available- for-sale and are stated at current market value with unrealized gains and losses included as a separate component of equity, net of any related tax effect. Debt securities are classiﬁed as held-to-maturity and are stated at amortized cost. The Company also made an invest- ment in 2004 that is excluded from the scope of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” due to the fact that the investment’s per unit value in a Master Fund is not readily available. Therefore, this investment is recorded at cost. The weighted-average cost method is used to determine realized gains and losses on the trade date. A table of holdings as of year-end 2004, 2003, and 2002 is included in the Cash, Cash Equivalents, and Investments note included in the Consolidated Financial Statements. CAPI TAL E XPE N D I TU R E I N VEST M E N T S Capital expenditures were $32.4 million in 2004, $34.8 million in 2003, and $25.9 million in 2002. Expenditures during 2004, 2003, and 2002 have been consistently focused on machinery and equipment needed to support new products, process improvements, and cost savings initiatives. Expenditures in 2003 also included the purchase from a related party of a previously leased hearth products plant for $3.6 million. The Company anticipates capital expenditures for 2005 to be approximately 25% higher than prior years. AC QU I S I T I O N S During 2004, the Company completed three ofﬁce furniture business acquisitions, two hearth products business acquisitions as well as the acquisition of a strategic sourcing entity for a combined purchase price of approximately $135 million. Each of the transactions was paid in cash, and the results of the acquired entities have been included in the Consolidated Financial Statements since the date of acquisition. On January 5, 2004, the Company acquired certain assets of Paoli, Inc., a subsidiary of Klaussner Furniture Industries, Inc. Paoli is a leading provider of wood case goods and seating with well-known brands, broad product offering, and strong independent represen- tative sales and dealer networks. On July 6, 2004, the Company acquired a controlling interest in Omni Remanufacturing, Inc. Omni is comprised of two divisions – IntraSpec Solutions, a panel systems remanufacturer, and A&M Business Interior Services, an ofﬁce furniture services company. On December 9, 2004, the Company acquired certain assets of Architectural Installations Atlanta, Inc., an ofﬁce furniture services company that operates as part of the Company’s subsidiary, Omni Remanufacturing, Inc. On January 5, 2004, the Company also completed the acquisition of Hearth and Home Distributors of Delaware, Inc. a small hearth distributor. On July 19, 2004, the Company completed the acquisition of Edward George Company, a distributor of ﬁreplaces, 32 HNI Corpo ration and Sub sid i ari e s 2 0 0 4 An n u al Re po rt LO N G -TE R M DE BT Long-term debt, including capital lease obligations, was 1% of total capitalization as of January 1, 2005, 1% at January 3, 2004, and 2% at December 28, 2002. The reduction in long-term debt during 2004 was due to the payment of convertible debentures related to a previous hearth acquisition. The reductions in long-term debt during 2003 and 2002 were due to the retirement of Industrial Revenue Bonds. The Company does not expect future capital resources to be a constraint on planned growth. Additional borrowing capacity of $150 million, less amounts used for designated letters of credit, is available through a revolving bank credit agreement in the event cash generated from operations should be inadequate to meet future needs. Certain of the Company’s credit agreements include covenants that limit the assumption of additional debt and lease obligations. The Company has been, and currently is, in compliance with the covenants related to the debt agreements. C O N T R AC TUAL O B L I G AT I O N S The following table discloses the Company’s obligations and commit- ments to make future payments under contracts: 379 9,373 – – (In thousands) Long-term debt Capital lease obligations Operating leases Payments Due by Period Total Less than 1 year 1–3 years 4–5 years After 5 years $÷÷2,860 $÷÷«233 $÷÷«205 $÷÷÷«86 $÷2,336 1,810 510 499 422 61,733 16,257 22,923 13,180 Transportation service contract 4,856 4,856 Purchase obligations 40,206 40,206 – – – – Other long-term obligations 13,562 1,054 1,794 412 10,302 Total $125,027 $63,116 $25,421 $14,100 $22,390 Other long-term obligations include $8,762,000 of payments included in long-term liabilities, due to members who are participants in the Company’s salary deferral program and $4,800,000 related to the mandatory purchase of the remaining 20 percent interest in Omni Remanufacturing, Inc. The amount of the remaining 20 percent pay- out is based on the value at the time of the purchase. The ultimate obligation under the agreement will vary, based on the agreed upon formula for such obligation upon mandatory redemption in 2014. CAS H D I V I DE N DS Cash dividends were $0.56 per common share for 2004, $0.52 for 2003, and $0.50 for 2002. Further, the Board of Directors announced a 10.7% increase in the quarterly dividend from $0.14 to $0.155 per common share effective with the March 1, 2005 dividend payment for shareholders of record at the close of business February 25, 2005. The previous quarterly dividend increase was from $0.13 to $0.14, effective with the March 1, 2004 dividend payment for shareholders of record at the close of business on February 20, 2004. A cash Management’s Discussion and Analysis dividend has been paid every quarter since April 15, 1955 and quarterly dividends are expected to continue. The average dividend payout percentage for the most recent three-year period has been 35% of prior year earnings. C O M M O N S H A R E R E PU R C H ASES During 2004, the Company repurchased 3,641,400 shares of its common stock at a cost of approximately $145.6 million, or an average price of $39.99. The Board of Directors authorized an additional $100 million on May 4, 2004 and an additional $150 million on November 12, 2004 for repurchases of the Company’s common stock. As of January 1, 2005, approximately $145.7 million of this authorized amount remained unspent. During 2003, the Company repurchased 762,300 shares of its common stock at a cost of approximately $21.5 million, or an average price of $28.22 per share. During 2002, the Company repurchased 614,580 shares of its common stock at a cost of approximately $15.7 million, or an average price of $25.60 per share. L I T I G AT I O N AN D UN C E R TA I N T I ES The Company has contingent liabilities that have arisen in the course of its business, including pending litigation, preferential payments claims in customer bankruptcies, environmental remediation, taxes, and other claims. The Company currently has a claim for approximately $7.6 million pending against it arising out of the bankruptcy of a customer ﬁled in 2001. The Company was named a critical vendor by the bankruptcy court and, accordingly, was paid in full for all out- standing receivables. The claim alleges that the Company received preferential payments from the customer during the ninety days before the customer ﬁled for bankruptcy protection. The claim was brought in February 2003. The Company has recorded an accrual with respect to this contingency, in an amount substantially less than the full amount of the claim, which represents the best estimate within the range of likely exposure and intends to vigorously defend against the claim. Given the nature of this claim, it is possible that the ultimate outcome could differ from the recorded amount. It is our opinion, after consultation with legal counsel, that additional liabilities, if any, resulting from these matters are not expected to have a material adverse effect on our ﬁnancial condition, although such matters could have a material effect on our quarterly or annual operating results and cash ﬂows when resolved in a future period. Looking Ahead The Company continues to see strong growth trends in the overall ofﬁce furniture and hearth products markets. The Company is optimis- tic that its volumes will reﬂect the positive trends in the market and believes it will continue to gain market share. Global Insight, BIFMA’s forecasting consultant, is estimating U.S. ofﬁce furniture shipments to increase 8.1% in 2005. The housing market, a key indicator for the hearth industry, is expected to experience a slight decline from its record levels but is expected to remain at healthy levels. The Company has announced additional price increases necessitated by higher material costs that will become effective through the ﬁrst half of 2005. The Company expects the rate of material cost increases to moderate as the year progresses but will continue to experience a gap between cost and price realization during the ﬁrst part of the year. The Company remains focused on creating long-term shareholder value by growing its business through investment in building brands, product solutions and selling models, enhancing its strong member-owner culture and remaining focused on its rapid continuous improvement program to continue to build best total cost and a lean enterprise. Statements in this report that are not strictly historical, including statements as to plans, objectives, and future ﬁnancial performance, are “forward-looking” statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks, which may cause the Company’s actual results in the future to differ materially from expected results. Because of the following risks, as well as other variables affecting the Company’s operating results, past ﬁnancial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods: • competition within the ofﬁce furniture and ﬁreplace industries, including competition from imported products and competitive pricing; • increases in the cost of raw materials, including steel, which is the Company’s largest raw material category; • the ability of the company to realize ﬁnancial beneﬁts through price realization from its price increases; • increases in the cost of health care beneﬁts provided by the Company; • reduced demand for the Company’s 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, customer insolvencies and related bad debts, and claims against the Company that it received preferential payments; • changes in demand and order patterns from the Company’s customers, particularly its top 10 customers, which represented approximately 36% of net sales in 2004; • issues associated with acquisitions and integration of acquisitions; • the ability of the Company to realize cost savings and productivity improvements from its cost containment and business simpliﬁca- tion initiatives; • the ability of the Company to realize ﬁnancial beneﬁts from invest- ments in new products; • the ability of the Company’s distributors and dealers to success- fully market and sell the Company’s products; • the availability and cost of capital to ﬁnance planned growth; and • other risks, uncertainties, and factors described from time to time in the Company’s ﬁlings with the Securities and Exchange Commission. We caution the reader that the above list of factors may not be exhaustive. The Company does not assume any obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. HNI Corporation and Subsidiaries 20 0 4 Annu al Re p or t 33 Consolidated Statements of Income (Amounts in thousands, except for per share data) For the Years 2004 2003 2002 Net sales Cost of products sold Gross proﬁt Selling and administrative expenses Restructuring related charges Operating income Interest income Interest expense Income before income taxes Income taxes Net income Net income per common share – basic Weighted average shares outstanding – basic Net income per common share – diluted Weighted average shares outstanding – diluted The accompanying notes are an integral part of the consolidated ﬁnancial statements. $2,093,447 1,342,143 $1,755,728 1,116,513 $1,692,622 1,092,743 751,304 572,006 886 178,412 1,343 886 178,869 65,287 $÷«113,582 $÷÷÷÷«1.99 57,127,110 $÷÷÷÷«1.97 57,577,630 639,215 480,744 8,510 149,961 3,940 2,970 150,931 52,826 599,879 454,189 3,000 142,690 2,578 4,714 140,554 49,194 $÷÷«98,105 $÷÷«91,360 $÷÷÷÷«1.69 $÷÷÷÷«1.55 58,178,739 58,789,851 $÷÷÷÷«1.68 $÷÷÷÷«1.55 58,545,353 59,021,071 34 HNI Corpo ration and Sub sid i ari e s 2 0 0 4 An n u al Re po rt Consolidated Balance Sheets (Amounts in thousands of dollars and shares except par value) As of Year-End 2004 2003 2002 Assets Current Assets Cash and cash equivalents Short-term investments Receivables Inventories Deferred income taxes Prepaid expenses and other current assets Total current assets Property, plant, and equipment Goodwill Other assets Total assets Liabilities and Shareholders’ Equity Current Liabilities Accounts payable and accrued expenses Income taxes Note payable and current maturities of long-term debt Current maturities of other long-term obligations Total current liabilities Long-term debt Capital lease obligations Other long-term liabilities Deferred income taxes Commitments and contingencies Shareholders’ Equity Preferred stock – $1 par value Authorized: 2,000 Issued: None Common stock – $1 par value Authorized: 200,000 Issued and outstanding 2004 – 55,303; 2003 – 58,239; 2002 – 58,374 Additional paid-in capital Retained earnings Accumulated other comprehensive income Total shareholders’ equity Total liabilities and shareholders’ equity The accompanying notes are an integral part of the consolidated ﬁnancial statements $÷÷«29,676 $÷«138,982 $÷«139,165 6,836 234,731 77,590 14,639 11,107 374,579 311,344 224,554 111,180 65,208 181,459 49,830 14,329 12,314 462,122 312,368 192,086 55,250 16,378 181,096 46,823 10,101 11,491 405,054 353,270 192,395 69,833 $1,021,657 $1,021,826 $1,020,552 $÷«253,958 $÷«211,236 $÷«252,145 6,804 646 4,842 266,250 2,627 1,018 40,045 42,554 5,958 26,658 1,964 245,816 2,690 1,436 24,262 37,733 3,740 41,298 1,497 298,680 8,553 1,284 28,028 37,114 55,303 58,239 58,374 6,879 606,632 349 669,163 10,324 641,732 (406) 709,889 549 587,731 239 646,893 $1,021,657 $1,021,826 $1,020,552 HNI Corporation and Subsidiaries 20 0 4 Annu al Re p or t 35 Consolidated Statements of Shareholders’ Equity (Amounts in thousands) Balance, December 29, 2001 Comprehensive income: Net income Other comprehensive income (loss) Comprehensive income Cash dividends Common shares – treasury: Shares purchased Shares issued under Members’ Stock Purchase Plan and stock awards Balance, December 28, 2002 Comprehensive income: Net income Other comprehensive income (loss) Comprehensive income Cash dividends Common shares – treasury: Shares purchased Shares issued under Members’ Stock Purchase Plan and stock awards Balance, January 3, 2004 Comprehensive income: Net income Other comprehensive income (loss) Comprehensive income Cash dividends Common shares – treasury: Shares purchased Shares issued under Members’ Stock Purchase Plan and stock awards Balance, January 1, 2005 Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income Total Shareholders’ Equity $58,673 $÷÷÷891 $«532,555 $«561 $«592,680 91,360 (29,386) (322) (8,324) (6,798) 587,731 239 646,893 98,105 (30,299) (645) (6,945) (13,805) 91,360 (322) 91,038 (29,386) (15,736) 8,297 98,105 (645) 97,460 (30,299) (21,512) 17,347 (614) 315 58,374 (762) 627 58,239 7,982 549 16,720 10,324 641,732 (406) 709,889 113,582 (32,023) 755 (3,642) (25,303) (116,659) 706 21,858 113,582 755 114,337 (32,023) (145,604) 22,564 $55,303 $÷«6,879 $«606,632 $«349 $«669,163 The accompanying notes are an integral part of the consolidated ﬁnancial statements. 36 HNI Corpo ration and Sub sid i ari e s 2 0 0 4 An n u al Re po rt Consolidated Statements of Cash Flows (Amounts in thousands) For the Years 2004 2003 2002 $«113,582 $÷98,105 $÷91,360 Net Cash Flows From (To) Operating Activities Net income Noncash items included in net income: Depreciation and amortization Other postretirement and post-employment beneﬁts Deferred income taxes Loss on sales, retirements and impairments of property, plant, and equipment Stock issued to retirement plan Other – net Changes in working capital, excluding acquisition and disposition: Receivables Inventories Prepaid expenses and other current assets Accounts payable and accrued expenses Income taxes Increase (decrease) in other liabilities Net cash ﬂows from (to) operating activities Net Cash Flows From (To) Investing Activities Capital expenditures Proceeds from sale of property, plant, and equipment Capitalized software Acquisition spending, net of cash acquired Additional purchase consideration Short-term investments – net Purchase of long-term investments Sales or maturities of long-term investments Other – net Net cash ﬂows from (to) investing activities Net Cash Flows From (To) Financing Activities Purchase of HNI Corporation common stock Proceeds from long-term debt Payments of note and long-term debt Proceeds from sale of HNI Corporation common stock Dividends paid Net cash ﬂows from (to) ﬁnancing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year 66,703 1,874 708 1,394 5,990 1,947 (26,960) (9,409) (145) 25,990 846 11,736 194,256 (32,417) 2,968 (3,383) (134,848) – 60,949 (24,496) 16,858 (350) (114,719) (145,604) – (26,795) 15,579 (32,023) (188,843) (109,306) 138,982 72,772 2,166 (3,314) 5,415 4,678 391 1,006 (3,004) 1,508 (35,288) 2,218 (5,379) 68,755 2,246 2,321 8,976 5,750 2,613 (19,414) 2,348 2,431 37,857 (2,370) (482) 141,274 202,391 (34,842) 1,808 (2,666) – (5,710) (49,326) (5,742) 15,000 – (81,478) (21,512) 761 (20,992) 12,063 (30,299) (59,979) (183) 139,165 $138,982 (25,885) – (65) – (16,377) (22,493) – 924 (63,896) (15,736) 825 (35,967) 2,096 (29,386) (78,168) 60,327 78,838 $139,165 Cash and cash equivalents at end of year $÷«29,676 Supplemental Disclosures of Cash Flow Information Cash paid during the year for: Interest Income taxes The accompanying notes are an integral part of the consolidated ﬁnancial statements. $÷÷÷÷883 $÷«59,938 $÷÷3,408 $÷53,855 $÷÷5,062 $÷48,598 HNI Corporation and Subsidiaries 20 0 4 Annu al Re p or t 37 Notes to Consolidated Financial Statements Nature of Operations HNI Corporation (formerly HON INDUSTRIES Inc.) with its subsidiaries (the “Company”) is a provider of ofﬁce furniture and hearth products. Both industries are reportable segments; however, the Company’s ofﬁce furniture business is its principal line of business. Refer to the Operating Segment Information note for further information. Ofﬁce furniture products are sold through a national system of dealers, wholesalers, warehouse clubs, retail superstores, and to end-user customers, and federal and state governments. Dealer, wholesaler, and retail superstores are the major channels based on sales. Hearth products include electric, wood-, pellet-, and gas-burning factory- built ﬁreplaces, ﬁreplace inserts, stoves, and gas logs. These products are sold through a national system of dealers, wholesalers, large regional contractors, and Company-owned retail outlets. The Company’s products are marketed predominantly in the United States and Canada. The Company exports select products to a limited number of markets outside North America, principally Latin America and the Caribbean, through its export subsidiary; however, based on sales, these activities are not signiﬁcant. Summary of Signiﬁcant Accounting Policies PR I N C I PLES O F C O N SO L I DAT I O N AN D F I SCAL Y E A R - E N D The consolidated ﬁnancial statements include the accounts and transactions of the Company and its subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. The Company follows a 52/53 week ﬁscal year that ends on the Saturday nearest December 31. Fiscal year 2004 ended on January 1, 2005; 2003 ended on January 3, 2004; and 2002 ended on December 28, 2002. The ﬁnancial statements for ﬁscal year 2003 are based on a 53-week period; ﬁscal years 2004 and 2002 are on a 52-week basis. CAS H, CAS H EQU I VALE N TS, AN D I N VEST M E N T S Cash and cash equivalents generally consist of cash, money market accounts, and debt securities. These securities have original matu- rity dates not exceeding three months from date of purchase. The Company has short-term investments with maturities of less than one year and also has investments with maturities greater than one year that are included in Other Assets on the Consolidated Balance Sheet. Management classiﬁes investments in marketable securities at the time of purchase and reevaluates such classiﬁcation at each balance sheet date. Equity securities are classiﬁed as available-for- sale and are stated at current market value with unrealized gains and losses included as a separate component of equity, net of any related tax effect. Debt securities are classiﬁed as held-to-maturity and are stated at amortized cost. The speciﬁc identiﬁcation method is used to determine realized gains and losses on the trade date. Short-term investments include municipal bonds, money market preferred stock, and U.S. treasury notes. Long-term investments include U.S. government securities, municipal bonds, certiﬁcates of deposit, and asset-and mortgage-backed securities. During 2004, the Company sold all of its available-for-sale securities to fund acquisitions 38 HNI Corpo ration and Sub sid i ari e s 2 0 0 4 An n u al Re po rt and to move its investments to a Master Fund. The Company realized losses of approximately $0.8 million. The Company has an investment that is excluded from the scope of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” due to the fact that the investment’s per unit value in a Master Fund is not readily available. Therefore, this investment is recorded at cost. The weighted-average cost method is used to determine realized gains and losses on the trade date. At January 1, 2005, January 3, 2004, and December 28, 2002, cash, cash equivalents, and investments consisted of the following (cost approximates market value): Year-End 2004 (In thousands) Held-to-maturity securities Municipal bonds Certiﬁcates of deposit Investment in Master Fund Cash and Cash Equivalents Short-term Investments Long-term Investments $÷÷÷÷÷«– $÷2,400 $÷÷«÷÷– – – – 400 4,436 20,187 Cash and money market accounts 29,676 – – Total $÷29,676 $÷6,836 $20,587 Year-End 2003 (In thousands) Held-to-maturity securities Municipal bonds U.S. government securities Certiﬁcates of deposit Available-for-sale securities U.S. treasury notes Asset and mortgage-backed securities Cash and Cash Equivalents Short-term Investments Long-term Investments $÷31,000 $÷÷«÷÷– $÷2,396 – – – – – – 4,259 – 400 – 60,949 12,835 Cash and money market accounts 107,982 – – Total $138,982 $65,208 $15,631 Year-End 2002 (In thousands) Held-to-maturity securities Municipal bonds U.S. government securities Certiﬁcates of deposit Available-for-sale securities U.S. treasury notes Money market preferred stock Asset and mortgage-backed securities Cash and Cash Equivalents Short-term Investments Long-term Investments $÷82,300 $÷1,900 – – – – – – – 3,478 11,000 – – $÷5,396 11,995 400 – – 7,098 – Cash and money market accounts 56,865 Total $139,165 $16,378 $24,889 Notes to Consolidated Financial Statements R EC E I VAB LES Accounts receivable are presented net of an allowance for doubtful accounts of $11,388,000, $10,859,000, and $9,570,000, for 2004, 2003, and 2002, respectively. The allowance is developed based on several factors including overall customer credit quality, historical write-off experience, and speciﬁc account analyses that project the ultimate collectibility of the account. As such, these factors may change over time causing the reserve level to adjust accordingly. I N VE N TO R I ES The Company values 80% of its inventory by the last-in, ﬁrst-out (LIFO) method. Additionally, the Company evaluates its inventory reserves in terms of excess and obsolete exposures. This evalua- tion includes such factors as anticipated usage, inventory turnover, inventory levels, and ultimate product sales value. As such, these factors may change over time causing the reserve level to adjust accordingly. The reserves for excess and obsolete inventory were $7.7 million, $5.7 million, and $5.9 million at year-end 2004, 2003, and 2002, respectively. PRO PE R T Y, PL AN T, AN D EQU I PM E N T Property, plant, and equipment are carried at cost. Depreciation has been computed using the straight-line method over estimated useful lives: land improvements, 10–20 years; buildings, 10–40 years; and machinery and equipment, 3–12 years. LO N G - L I VE D AS SE T S Long-lived assets are reviewed for impairment as events or changes in circumstances occur indicating that the amount of the asset reﬂected in the Company’s balance sheet may not be recoverable. An estimate of undiscounted cash ﬂows produced by the asset, or the appropriate group of assets, is compared to the carrying value to determine whether impairment exists. The estimates of future cash ﬂows involve considerable management judgment and are based upon assumptions about expected future operating performance. The actual cash ﬂows could differ from management’s estimates due to changes in business conditions, operating performance, and economic conditions. Asset impairment charges recorded in connection with the Company’s restructuring activities are discussed in the Restructuring Related Charges note. These assets included real estate, manufacturing equipment, and certain other ﬁxed assets. The Company’s continuous focus on improving the manufacturing process tends to increase the likelihood of assets being replaced; therefore, the Company is constantly evaluating the expected lives of its equipment and accelerating depreciation where appropriate. The Company recorded losses on the disposal of assets in the amount of approximately $1 million and $5 million during 2003 and 2002, respectively, as a result of its RCI initiatives. GOO DW I LL AN D OT H E R I N TAN G I B LE AS SE TS In accordance with SFAS No. 142, the Company evaluates its goodwill for impairment on an annual basis based on values at the end of the third quarter or whenever indicators of impairment exist. The Company has evaluated its goodwill for impairment and has determined that the fair value of reporting units exceeds their carrying value, so no impairment of goodwill was recognized. Management’s assumptions about future cash ﬂows for the report- ing units requires signiﬁcant judgment, and actual cash ﬂows in the future may differ signiﬁcantly from those forecasted today. The Company also determines the fair value of indeﬁnite lived trade- marks on an annual basis or whenever indications of impairment exist. The Company has evaluated its trademarks for impairment and has determined that the fair market value of the trademarks exceeds the carrying values, so no impairment was recognized. PRO DUC T WA R R AN T I ES The Company issues certain warranty policies on its furniture and hearth products that provide for repair or replacement of any covered product or component that fails during normal use because of a defect in design, materials, or workmanship. A warranty reserve is determined by recording a speciﬁc reserve for known warranty issues and an additional reserve for unknown claims that are expected to be incurred based on historical claims experience. Actual claims incurred could differ from the original estimates, requiring adjust- ments to the reserve. Activity associated with warranty obligations was as follows: (In thousands) 2004 2003 2002 Balance at the beginning of the period $«÷8,926 688 Accrual assumed from acquisition $«8,405 $«5,632 – – Accruals for warranties issued during the period Accrual related to pre-existing warranties Settlements made during the period 10,486 7,907 6,542 1,054 (10,360) 629 (8,015) 2,686 (6,455) Balance at the end of the period $«10,794 $«8,926 $«8,405 R E V E N UE R EC O G N I T I O N Revenue is normally recognized upon shipment of goods to customers. In certain circumstances revenue is not recognized until the goods are received by the customer or upon installation and customer acceptance based on the terms of the sales agreement. Revenue includes freight charged to customers; related costs are in selling and administrative expense. Rebates, discounts, and other marketing program expenses that are directly related to the sale are recorded as a reduction to net sales. Marketing program accruals require the use of management estimates and the consideration of contractual arrangements that are subject to interpretation. Customer sales that reach certain award levels can affect the amount of such estimates, and actual results could differ from these estimates. PRO DUC T DE VE LO PM E N T C OST S Product development costs relating to the development of new products and processes, including signiﬁcant improvements and reﬁnements to existing products, are expensed as incurred. These costs include salaries, contractor fees, building costs, utilities, and administrative fees. The amounts charged against income were $29,809,000 in 2004, $25,791,000 in 2003, and $25,849,000 in 2002. HNI Corporation and Subsidiaries 20 0 4 Annu al Re p ort 39 Notes to Consolidated Financial Statements STO C K- BASE D C O M PE N SAT I O N The Company accounts for its stock option plan using Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” whereby stock-based employee compensation is reﬂected in net income as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of the grant. SFAS No. 123, “Accounting for Stock-Based Compensation,” issued subsequent to APB No. 25 and amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” deﬁnes a fair value based method of accounting for employees stock options but allows companies to continue to measure compensation cost for employee stock options using the intrinsic value based method described in APB No. 25. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock- Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” to stock-based employee compensation. (In thousands, except for per share data) Net income, as reported Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects Pro forma net income Earnings per share: Basic – as reported Basic – pro forma Diluted – as reported Diluted – pro forma 2004 $113.6 (5.0) $108.6 $÷1.99 $÷1.90 $÷1.97 $÷1.89 2003 $98.1 (3.0) $95.1 $1.69 $1.64 $1.68 $1.62 2002 $91.4 (2.2) $89.2 $1.55 $1.52 $1.55 $1.51 Increase in expense in 2004 and 2003 is due to accelerated vesting upon the retirement of plan participants. I N C O M E TA XES The Company accounts for income taxes under SFAS No. 109, “Accounting for Income Taxes.” This Statement uses an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s ﬁnancial statements or tax returns. Deferred income taxes are provided to reﬂect the differences between the tax bases of assets and liabilities and their reported amounts in the ﬁnancial statements. E A R N I N G S PE R S H A R E Basic earnings per share are based on the weighted-average number of common shares outstanding during the year. Shares potentially issuable under options and deferred restricted stock have been considered outstanding for purposes of the diluted earnings per share calculation. USE O F EST I M ATES The preparation of ﬁnancial statements in conformity with accounting principles generally accepted in the United States requires manage- ment to make estimates and assumptions that affect the amounts reported in the ﬁnancial statements and accompanying notes. The more signiﬁcant areas requiring the use of management estimates relate to allowance for doubtful accounts, inventory reserves, marketing program accruals, warranty accruals, accruals for self-insured medical claims, workers’ compensation, legal contingencies, general liability, and auto insurance claims, and useful lives for depreciation and amortization. Actual results could differ from those estimates. SE LF - I N SU R AN C E The Company is partially self-insured for general, auto, and product liability, workers’ compensation, and certain employee health beneﬁts. The general, auto, product, and workers’ compensation liabilities are managed using a wholly owned insurance captive; the related liabilities are included in the accompanying consolidated ﬁnancial statements. The Company’s policy is to accrue amounts in accordance with the actuarially determined liabilities. The actuarial valuations are based on historical information along with certain assumptions about future events. Changes in assumptions for such matters as legal actions, medical cost inﬂation, and the magnitude of change in actual experience development could cause these estimates to change in the near term. R EC E N T AC C OUN T I N G PRO N OUN C E M E N T S In December 2004, the Financial Accounting Standards Board issued SFAS No. 123(R), “Share-Based Payment.” SFAS No. 123(R) replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123(R) requires compensation costs related to share-based payment transactions to be recognized in the ﬁnancial statements over the period that an employee provides service in exchange for the award. Public companies are required to adopt the new standard using a modiﬁed prospective method and may elect to restate prior periods using the modiﬁed retrospective method. Under the modiﬁed prospective method, companies are required to record compensation cost for new and modiﬁed awards over the related vesting period of such awards prospectively and record compensation cost prospectively for the unvested portion, at the 40 HNI Corpo ration and Sub sid i ari e s 2 0 0 4 An n u al Re po rt Notes to Consolidated Financial Statements date of adoption, of previously issued and outstanding awards over the remaining vesting period of such awards. No change to prior periods presented is permitted under the modiﬁed prospective method. Under the modiﬁed retrospective method, companies record compensation costs for prior periods retroactively through restatement of such periods using the exact pro forma amounts disclosed in the companies’ footnotes. Also, in the period of adoption and after, companies record compensation based on the modiﬁed prospective method. SFAS No. 123(R) is effective for periods begin- ning after June 15, 2005. The Company plans to adopt SFAS No. 123(R) on July 3, 2005, the beginning of its third ﬁscal quarter, and to use the modiﬁed prospective method. Based on adopting SFAS No. 123(R) on July 3, 2005 and using the modiﬁed prospective method, the Company estimates that total stock-based compensation expense, net of related tax effects, will be approximately $0.9 million for the year ending December 31, 2005. In November 2004, the Financial Accounting Standards Board issued SFAS No. 150, “Inventory Costs.” SFAS No. 150 amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. This Statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this Statement requires that allocation of ﬁxed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 150 is effective for ﬁscal years begin- ning after June 15, 2005. The Company intends to adopt SFAS No. 150 on January 1, 2006, the beginning of its 2006 ﬁscal year. The adoption of SFAS No. 150 is not expected to have a material impact on the Company’s ﬁnancial statements. In May 2004, the Financial Accounting Standards Board issued FASB Staff Position No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“FSP 106-2”). FSP 106-2 was effective for the ﬁrst interim or annual period beginning after June 15, 2004. The Company adopted FSP 106-2 on July 4, 2004. The Company has determined that the beneﬁts provided by the Company’s plan are not actuarially equivalent to the Medicare Part D beneﬁt under the Act based on percentage of the cost of the plan that the Company provides. Therefore, the adoption of FSP 106-2 did not have an impact on the Company’s ﬁnancial statements during 2004. The Company will continue to monitor the effect as regulations evolve regarding actuarial equivalency. In December 2003, the Financial Accounting Standards Board issued Interpretation 46R (“FIN 46R”), a revision to Interpretation 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” FIN 46R clariﬁes some of the provisions of FIN 46 and exempts certain entities from its requirements. FIN 46R was effective at the end of the ﬁrst interim period ending after March 15, 2004. The Company adopted FIN 46R on April 3, 2004, and it did not have an impact on the Company’s ﬁnancial statements. Restructuring Related Charges During 2003, as a result of the Company’s business simpliﬁcation and cost reduction strategies, the Company closed two ofﬁce furniture facilities located in Milan, Tennessee, and Hazleton, Pennsylvania, and consolidated production into other U.S. manufacturing locations. Charges for the closures during 2003 totaled $15.7 million, which consisted of $6.7 million of accelerated depreciation of machinery and equipment that was recorded in cost of sales and $3.4 million of severance and $5.6 million of facility exit, production relocation, and other costs that were recorded as restructuring costs. A total of 316 members were terminated and received severance due to these shutdowns. In connection with those shutdowns, the Company incurred $1.2 million of current period charges during 2004. The Company also reduced the restructuring charge recorded in 2003 by approximately $0.3 million related to its Milan, Tennessee, facility during 2004. The reduction was due to the fact that the Company was able to exit a lease with the lessor at more favorable terms than previously estimated. The closures and consolidation are complete. During 2002, the Company recorded a pre-tax charge of approxi- mately $5.4 million due to the shutdown of an ofﬁce furniture facility in Jackson, Tennessee. A total of 125 members were terminated and received severance due to this shutdown. During the second quarter of 2003, a restructuring credit of approximately $0.6 million was taken back into income relating to this charge. This was due to the fact that the Company was able to exit a lease with the lessor at more favorable terms than previously estimated. During the second quarter of 2001, the Company recorded a pre-tax charge of $24.0 million or $0.26 per diluted share for a restructuring plan that involved consolidating physical facilities, discontinuing low- volume product lines, and reductions of workforce. Included in the charge was the closedown of three of its ofﬁce furniture facilities located in Williamsport, Pennsylvania; Tupelo, Mississippi; and Santa Ana, California. Approximately 500 members were terminated and received severance due to the closedown of these facilities. During the second quarter of 2002, a restructuring credit of approxi- mately $2.4 million was taken back into income relating to this charge. This was mainly due to the fact that the Company was able to exit a lease with a lessor at more favorable terms than originally estimated and the Company’s ability to minimize the number of members terminated as compared to the original plan. HNI Corporation and Subsidiaries 20 0 4 Annu al Re p ort 41 Notes to Consolidated Financial Statements The following table details the change in restructuring reserve for the last three years: Facility Termination and Other Costs Asset Impairment Write-downs Severance Costs Total On July 19, 2004, the Company completed the acquisition of Edward George Company, a distributor of ﬁreplaces, stone products, barbecues, and other building materials throughout Illinois, Indiana, and Kentucky, and its afﬁliate, Wisconsin Fireplace Systems, with locations in Wisconsin. (In thousands) Restructuring reserve at December 29, 2001 Restructuring charge Restructuring credit Cash payments Charge against assets Restructuring reserve at December 28, 2002 Restructuring charges Restructuring credit Cash payments Restructuring reserve at January 3, 2004 Restructuring charges Restructuring credit Cash payments Restructuring reserve at January 1, 2005 $÷÷768 $«1,949 $÷÷÷÷– $«2,717 737 (852) (653) – 3,328 (1,513) (1,577) 1,300 – – – (1,300) 5,365 (2,365) (2,230) (1,300) The consideration for each of these transactions was paid in cash. The results of the acquired entities have been included in the Consolidated Financial Statements since the date of acquisition. The purchase price and allocation for each of these acquisitions is shown below. $÷÷÷÷– $«2,187 $÷÷÷÷– $«2,187 3,438 – (3,104) 5,622 (550) (6,159) – – – 9,060 (550) (9,263) (In thousands) Purchase price Preliminary Allocation of Purchase Price Current assets Property, plant, and equipment $÷÷334 $«1,100 $÷÷÷÷– $«1,434 Other assets 42 (31) (345) 1,147 (272) (1,975) – – – 1,189 (303) (2,320) $÷÷÷÷– $÷÷÷÷– $÷÷÷÷– $÷÷÷÷– Intangible assets Goodwill Total assets acquired Current liabilities Deferred tax liability Other liabilities Paoli Omni Edward George $81,130 $18,654 $27,705 $27,304 26,455 – 26,330 9,188 89,277 8,147 – – $÷5,414 1,649 8 12,680 11,831 31,582 4,492 3,636 4,800 $12,422 831 – 9,270 9,218 31,741 4,036 – – Business Combinations On January 5, 2004, the Company acquired certain assets of Paoli, Inc., a subsidiary of Klaussner Furniture Industries, Inc. Paoli Inc. is a leading provider of wood case goods and seating with well-known brands, broad product offering, and strong independent representa- tives sales and dealer networks located in Orleans, Indiana. On July 6, 2004, the Company acquired a controlling interest in Omni Remanufacturing, Inc. Omni Remanufacturing, Inc. is comprised of two divisions – IntraSpec Solutions, a panel systems re-manufacturer, and A&M Business Interior Services, an ofﬁce furniture services company. The Company acquired 80% of the common stock of Omni Remanufacturing, Inc. and the ability to call the remaining 20% of the shares on or after the ﬁscal year-end 2009. The Company must exercise its Call on or before the end of ﬁscal year-end 2014. SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” requires a mandatorily redeemable ﬁnancial instrument to be classiﬁed as a liability unless the redemption is required to occur only upon the liquidation or termination of the reporting entity. It also requires that mandatorily redeemable ﬁnancial instruments be measured at fair value. Therefore, the Company has recorded a liability for the remaining 20% of the shares at fair value. Net assets acquired $81,130 $18,654 $27,705 Of the $26.3 million of acquired intangible assets from the Paoli acquisition, $18.3 million was assigned to registered trademarks that are not subject to amortization. The remaining $8.0 million of acquired intangible assets have a weighted-average useful life of approximately 15 years with amortization recorded based on the projected cash ﬂow associated with the respective intangible assets existing relationships. The intangible assets that make up that amount include customer relationships of $5.4 million (19-year weighted-average useful life), patents and proprietary technology of $2.4 million (8-year weighted-average useful life), and other assets of $0.2 million (3-year weighted-average useful life). The $9.2 million of goodwill was assigned to the ofﬁce furniture segment and is deductible for income tax purposes. Assuming the acquisition of Paoli Inc. had occurred on December 29, 2002, the beginning of the Company’s 2003 ﬁscal year, instead of the actual date reported above, the Company’s unaudited pro forma consolidated net sales would have been approximately $1.9 billion. Unaudited pro forma consolidated net income would have been $103.8 million or $1.77 per diluted share. Pro forma results are not shown for the remaining acquisitions as they were deemed immaterial by management. 42 HNI Corpo ration and Sub sid i ari e s 2 0 0 4 An n u al Re po rt Notes to Consolidated Financial Statements Of the $12.7 million of acquired intangible assets from the Omni acquisition, $2.8 million was assigned to registered trademarks that are not subject to amortization. The remaining $9.9 million of acquired intangible assets have a weighted-average useful life of approximately 9 years with amortization recorded based on the projected cash ﬂow associated with the respective intangible assets existing relationships. The intangible assets that make up that amount include customer relationships of $6.9 million (10-year weighted-average useful life), computer software of $1.6 million (7-year weighted-average useful life), and other assets of $1.4 million (6-year weighted-average useful life). The $11.8 million of goodwill was assigned to the ofﬁce furniture segment and is not deductible for income tax purposes. The acquired intangible assets from the Edward George acquisition of $9.3 million have a weighted-average useful life of approximately 13 years with amortization recorded based on the projected cash ﬂow associated with the respective intangible assets existing relationships. The intangible assets that make up that amount include customer relationships of $8.8 million (14-year weighted-average useful life) and other assets of $0.5 million (2-year weighted-average useful life). The $9.2 million of goodwill was assigned to the hearth products segment and is deductible for income tax purposes. The Company also completed the acquisition of a small ofﬁce furniture services company, a small hearth distributor, and a strategic sourcing entity during 2004. The combined purchase price for these acquisitions totaled approximately $8.5 million. There is approximately $5.4 million of intangibles associated with these acquisitions with estimated useful lives ranging from one to ten years. There is approximately $2.2 million of goodwill associated with these acquisitions, of which $0.9 million was assigned to the ofﬁce furniture segment and $1.3 million was assigned to the hearth products segment. All goodwill is deductible for income tax purposes. Inventories (In thousands) Finished products Materials and work in process LIFO reserve 2004 2003 2002 $««52,796 $÷31,407 $««30,747 40,712 (15,918) 28,287 (9,864) 26,266 (10,190) $««77,590 $÷49,830 $««46,823 Property, Plant, and Equipment Goodwill and Other Intangible Assets The Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets,” on December 30, 2001, the beginning of its 2002 ﬁscal year. Pursuant to this standard, the Company evaluates its goodwill for impairment on an annual basis based on values at the end of the third quarter or whenever indicators of impairment exist. The Company has evaluated its goodwill for impairment and has determined that the fair value of its reporting units exceeds the carrying values, and therefore, no impairment of goodwill was recorded. Also pursuant to the standard, the Company has ceased recording of goodwill and indeﬁnite-lived intangibles amortization in 2002. The Company also owns trademarks having a net value of $29.2 mil- lion as of January 1, 2005, and $8.1 million as of January 3, 2004 and December 28, 2002. The fair value of the trademarks exceeds the carrying value of the trademarks, and thus, no impairment was recorded. The trademarks are deemed to have an indeﬁnite useful life because they are expected to generate cash ﬂow indeﬁnitely. The Company ceased amortizing the trademarks in 2002. The table below summarizes amortizable deﬁnite-lived intangible assets, which are reﬂected in Other Assets in the Company’s consolidated balance sheets: (In thousands) Patents Customer lists and other Less: accumulated amortization 2004 2003 2002 $18,820 54,702 21,785 $16,450 $16,450 26,076 16,671 26,076 13,980 Net intangible assets $51,737 $25,855 $28,546 Amortization expense for deﬁnite-lived intangibles for 2004, 2003, and 2002 was $5,114,500, $2,690,100, and $2,690,100, respectively. Amortization expense is estimated to range between $3.8 and $6.2 million per year over the next ﬁve years. The changes in the carrying amount of goodwill since December 29, 2001 are as follows by reporting segment: (In thousands) Balance as of December 29, 2001 Ofﬁce Furniture Hearth Products Total (after SFAS No. 142 reclassiﬁcation) $43,611 $143,083 $186,694 Goodwill increase during period Net goodwill disposed of during period – – 5,710 5,710 (9) (9) (In thousands) 2004 2003 2002 Balance as of December 28, 2002 $43,611 $148,784 $192,395 Land and land improvements $÷26,042 $÷23,065 $÷21,566 Buildings Machinery and equipment Construction and equipment installation in progress Less: allowances for depreciation 234,421 512,544 13,686 786,693 475,349 211,005 495,901 208,124 494,354 9,865 10,227 739,836 427,468 734,271 381,001 $311,344 $312,368 $353,270 Adjustment for a prior acquisition – (309) (309) Balance as of January 3, 2004 $43,611 $148,475 $192,086 Goodwill increase during period 21,920 10,548 32,468 Balance as of January 1, 2005 $65,531 $159,023 $224,554 HNI Corporation and Subsidiaries 20 0 4 Annu al Re p ort 43 Notes to Consolidated Financial Statements The goodwill increase in 2002 relates to additional purchase consid- eration associated with debentures issued in connection with a prior acquisition. The decrease in goodwill in 2003 is due to an adjustment relating to a prior acquisition. The goodwill increase in 2004 relates to acquisitions during the year. See Business Combinations note. Certain of the above borrowing arrangements include covenants that limit the assumption of additional debt and lease obligations. The Company has been and currently is in compliance with the covenants related to these debt agreements. The fair value of the Company’s outstanding long-term debt obligations at year-end 2004 approximates the recorded aggregate amount. Accounts Payable and Accrued Expenses (In thousands) 2004 2003 2002 Selling and Administrative Expenses Trade accounts payable Compensation Proﬁt sharing and retirement expense Vacation pay Marketing expenses Casualty self-insurance expense Other accrued expenses $÷75,884 $÷44,295 $÷66,204 (In thousands) 2004 2003 2002 25,722 30,516 13,095 50,939 6,802 51,000 22,803 30,365 13,745 44,795 9,385 45,848 20,686 26,788 14,095 59,224 10,973 54,175 Freight expense for shipments to customers Amortization of intangible and other assets Product development costs Other selling and administrative expenses $253,958 $211,236 $252,145 $132,866 $105,933 $÷98,876 8,521 29,809 4,625 25,791 4,317 25,849 400,810 344,395 325,147 $572,006 $480,744 $454,189 Long-Term Debt (In thousands) 2004 2003 2002 Income Taxes Signiﬁcant components of the provision for income taxes are as follows: Industrial development revenue bonds, various issues, payable through 2018 with interest at 1.49–5.40% per annum Convertible debentures payable to individuals, with interest at 5.5% per annum Other notes and amounts Total debt Less: current portion Long-term debt $2,300 $÷2,300 $÷7,938 (In thousands) Current: Federal – 560 2,860 233 26,130 503 28,933 26,243 40,443 State 736 49,117 40,564 Deferred $2,627 $÷2,690 $÷8,553 2004 2003 2002 $60,425 5,976 66,401 (1,114) $49,721 4,159 53,880 (1,054) $38,966 3,473 42,439 6,755 $65,287 $52,826 $49,194 Aggregate maturities of long-term debt are as follows: A reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate is as follows: (In thousands) 2005 2006 2007 2008 2009 Thereafter $÷«233 164 41 42 44 $2,336 Federal statutory tax rate State taxes, net of federal tax effect Credit for increasing research activities Extra-territorial income exclusion Other – net Effective tax rate 2004 35.0«% 2.2« (0.6)« (0.3)« 0.2« 36.5«% 2003 35.0«% 1.8« (2.0)« (0.5)« 0.7« 35.0«% 2002 35.0«% 1.6« (1.6)« (1.0)« 1.0« 35.0«% The convertible debentures were payable to the former owners of businesses that were acquired by the Company. Following the acquisition some of these individuals continued as members of the Company. The convertible debentures were convertible into cash. The debentures contained certain conversion features that are recorded as earned. During 2003, the Company recorded approxi- mately $3 million of appreciation on these debentures. 44 HNI Corpo ration and Sub sid i ari e s 2 0 0 4 An n u al Re po rt Notes to Consolidated Financial Statements Deferred income taxes reﬂect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for ﬁnancial reporting purposes and the amounts used for income tax purposes. Signiﬁcant components of the Company’s deferred tax liabilities and assets are as follows: Shareholders’ Equity and Earnings per Share 2004 2003 2002 Common Stock, $1 Par Value Authorized 200,000,000 200,000,000 200,000,000 Issued and outstanding 55,303,323 58,238,519 58,373,607 (In thousands) 2004 2003 2002 Preferred Stock, $1 Par Value Net long-term deferred tax liabilities: Tax over book depreciation $(25,549) $(28,103) $(34,398) Authorized 2,000,000 2,000,000 2,000,000 Issued and outstanding – – – OPEB obligations Compensation Goodwill Other — net Total net long-term deferred tax liabilities Net current deferred tax assets: Workers’ compensation, general, and product liability accruals Vacation accrual Inventory differences Plant closing accruals Deferred income Warranty accruals Other – net 1,770 5,697 (24,362) (110) 182 4,912 (18,044) 3,320 3,581 3,821 (14,173) 4,055 (42,554) (37,733) (37,114) 1,731 4,588 4,304 – (6,238) 3,504 6,750 298 4,754 4,343 528 (5,462) 2,886 6,982 1,517 4,617 5,101 821 (3,820) 2,369 (504) The Company purchased 3,641,400; 762,300; and 614,580 shares of its common stock during 2004, 2003, and 2002, respectively. The par value method of accounting is used for common stock repurchases. The excess of the cost of shares acquired over their par value is allocated to Additional Paid-In Capital with the excess charged to Retained Earnings. The following table reconciles the numerators and denominators used in the calculation of basic and diluted earnings per share (EPS): 2004 2003 2002 Numerators: Numerators for both basic and diluted EPS net income $113,582,000 $98,105,000 $91,360,000 Total net current deferred tax assets 14,639 14,329 10,101 Denominators: Net deferred tax (liabilities) assets $(27,915) $(23,404) $(27,013) On October 2, 2004, the President of the United States signed the American Jobs Creation Act of 2004 (the “Act”). The Act provides a deduction for income from qualiﬁed domestic production activities, which will be phased in from 2005 through 2010. In return, the Act also provides for a two-year phase out of the existing extra-territorial income exclusion (ETI) for foreign sales that was viewed to be inconsistent with international trade protocols by the European Union. The Company expects the net effect of the phase out of the ETI and the phase in of this new deduction to result in a decrease in the effective rate for ﬁscal years 2005 and 2006 of approximately one percentage point. Under the guidance in FASB Staff Position No. FAS 109-1, “Application of FASB Statement No. 109, ‘Accounting for Income Taxes,’ to the Tax Deduction on Qualiﬁed Production Activities Provided by the American Jobs Creation Act of 2004,” the deduction will be treated as a “special deduction” as described in FASB Statement No. 109. As such, the special deduction has no effect on deferred tax assets and liabilities existing at the enactment date. Rather, the impact of this deduction will be reported in the period in which the deduction is claimed on the tax return. Denominator for basic EPS weighted-average com- mon shares outstanding Potentially dilutive shares from stock option plans 57,127,110 58,178,739 58,789,851 450,520 366,614 231,220 Denominator for diluted EPS 57,577,630 58,545,353 59,021,071 Earnings per share – basic $÷÷÷÷÷÷«1.99 $÷÷÷÷÷«1.69 $÷÷÷÷÷«1.55 Earnings per share – diluted $÷÷÷÷÷÷«1.97 $÷÷÷÷÷«1.68 $÷÷÷÷÷«1.55 Certain exercisable and non-exercisable stock options were not included in the computation of diluted EPS for ﬁscal year 2004, 2003, and 2002 because the option prices were greater than the average market prices for the applicable periods. The number of stock options outstanding that met this criterion for 2004 was 25,000 with a range of per share exercise prices of $42.15–$42.98; for 2003 was 20,000 with a range of per share exercise prices of $42.49–$42.98; and for 2002 was 30,000 with a range of per share exercise prices of $28.25–$32.22. HNI Corporation and Subsidiaries 20 0 4 Annu al Re p ort 45 Notes to Consolidated Financial Statements Components of other comprehensive income (loss) consist of the following: (In thousands) 2004 2003 2002 Foreign currency translation adjust- ments – net of tax Change in unrealized gains (losses) on marketable securities – net of tax Other comprehensive income (loss) $348 407 $755 $÷«45 $÷÷«– (690) $(645) (322) $(322) by the Company’s Board of Directors. Upon the occurrence of such an event, each right entitles its holder to purchase an amount of common stock of the Company with a market value of $400 for $200, unless the Board authorizes the rights be redeemed. The rights may be redeemed for $0.01 per right at any time before the rights become exercisable. In certain instances, the right to purchase applies to the capital stock of the acquirer instead of the common stock of the Company. The Company has reserved preferred shares necessary for issuance should the rights be exercised. In May 1997, the Company registered 400,000 shares of its common stock under its 1997 Equity Plan for Non-Employee Directors. This plan permits the Company to issue to its non-employee directors options to purchase shares of Company common stock, restricted stock of the Company, and awards of Company stock. The plan also permits non-employee directors to elect to receive all or a portion of their annual retainers and other compensation in the form of shares of Company common stock. During 2004, 2003, and 2002, 10,738; 10,922; and 11,958 shares of Company common stock were issued under the plan, respectively. Cash dividends declared and paid per share for each year are: (In dollars) Common shares 2004 $.56 2003 $.52 2002 $.50 During 2002, shareholders approved the 2002 Members’ Stock Purchase Plan. Under the plan, 800,000 shares of common stock were registered for issuance to participating members. Beginning on June 30, 2002, rights to purchase stock are granted on a quarterly basis to all members who have one year of employment eligibility and work a minimum of 20 hours a week. The price of the stock purchased under the plan is 85% of the closing price on the appli- cable purchase date. No member may purchase stock under the plan in an amount that exceeds the lesser of 20% of his/her gross earnings or a maximum fair value of $25,000 in any calendar year. During 2004, 73,921 shares of common stock were issued under the plan at an average price of $34.96. During 2003, 79,237 shares of common stock were issued under the plan at an average price of $29.25. During 2002, 47,419 shares of common stock were issued under the plan at an average price of $22.58. An additional 599,423 shares were available for issuance under the plan at January 1, 2005. This plan replaced the 1994 Members’ Stock Purchase Plan. Under this plan, during 2002, 43,388 shares at an average price of $23.63 were issued. The Company has a shareholders’ rights plan that will expire August 20, 2008. The plan becomes operative if certain events occur involving the acquisition of 20% or more of the Company’s common stock by any person or group in a transaction not approved The Company has entered into change in control employment agreements with corporate ofﬁcers and certain other key employees. According to the agreements, a change in control occurs when a third person or entity becomes the beneﬁcial owner of 20% or more of the Company’s common stock or when more than one-third of the Company’s Board of Directors is composed of persons not recommended by at least three-fourths of the incumbent Board of Directors. Upon a change in control, a key employee is deemed to have a two-year employment with the Company, and all his or her beneﬁts are vested under Company plans. If, at any time within two years of the change in control, his or her position, salary, bonus, place of work, or Company-provided beneﬁts are modiﬁed, or employment is terminated by the Company for any reason other than cause or by the key employee for good reason, as such terms are deﬁned in the agreement, then the key employee is entitled to receive a severance payment equal to two times annual salary and the average of the prior two years’ bonuses. Stock-Based Compensation Under the Company’s 1995 Stock-Based Compensation Plan, as amended and restated effective November 10, 2000, the Company may award options to purchase shares of the Company’s common stock and grant other stock awards to executives, managers, and key personnel. The Plan is administered by the Human Resources and Compensation Committee of the Board of Directors. Restricted stock awarded under the plan is expensed ratably over the vesting period of the awards. Stock options awarded to employees under the Plan must be at exercise prices equal to or exceeding the fair market value of the Company’s common stock on the date of grant. Stock options are generally subject to four-year cliff vesting and must be exercised within 10 years from the date of grant. The weighted-average fair value of options granted during 2004, 2003, and 2002 estimated on the date of grant using the Black-Scholes option-pricing model was $17.70, $10.74, and $11.74, respectively. The fair value of 2004, 2003, and 2002 options granted is estimated on the date of grant using the following assumptions: dividend yield of 1.2% to 2.0%, expected volatility of 34.8% to 38.4%, risk-free interest rate of 4.2% to 5.3%, and an expected life of 10 years. 46 HNI Corpo ration and Sub sid i ari e s 2 0 0 4 An n u al Re po rt Notes to Consolidated Financial Statements The status of the Company’s stock option plans is summarized below: Number of Shares Weighted-Average Exercise Price Outstanding at December 29, 2001 Granted Exercised Forfeited Outstanding at December 28, 2002 Granted Exercised Forfeited Outstanding at January 3, 2004 Granted Exercised Forfeited Outstanding at January 1, 2005 Options exercisable at: January 1, 2005 January 3, 2004 December 28, 2002 1,130,250 290,000 – (17,000) 1,403,250 446,500 (362,000) (18,500) 1,469,250 340,900 (448,500) (53,200) 1,308,450 604,750 202,250 156,250 $22.32 25.77 – 21.69 $23.03 26.78 23.10 23.57 $24.15 39.59 22.33 27.61 $28.65 $27.56 25.47 25.02 The Company also participates in a multi-employer plan, which provides deﬁned beneﬁts to certain of the Company’s union employees. Pension expense for this plan amounted to $322,000, $309,000, and $309,000, in 2004, 2003, 2002, respectively. Postretirement Health Care In accordance with the guidelines of revised SFAS No.132, “Disclosures about Pensions and other Postretirement Beneﬁts,” the following table sets forth the funded status of the plan, reconciled to the accrued postretirement beneﬁts cost recognized in the Company’s balance sheet at: (In thousands) 2004 2003 2002 Change in beneﬁt obligation Beneﬁt obligation at beginning of year Service cost Interest cost Beneﬁts paid Actuarial (gain) or loss $«18,331 $17,617 $«17,351 284 1,066 (1,780) 1,057 249 1,105 (1,206) 566 398 1,091 (1,356) 133 The following table summarizes information about ﬁxed stock options outstanding at January 1, 2005: Beneﬁt obligation at end of year $«18,958 $18,331 $«17,617 Change in plan assets Fair value at beginning of year $«10,250 $÷÷÷÷«– $«÷÷÷÷«– Options Outstanding Options Exercisable Actual return on assets Employer contributions Weighted- Average Remaining Contractual Life Weighted- Average Exercise Price Number Exercisable at January 1, 2005 Number Outstanding Beneﬁts paid 112 195 (1,780) – 11,456 (1,206) – 1,356 (1,356) Range of Exercise Prices $24.50 $32.22 $23.47 $18.31– $26.69 $23.32 $25.75– $25.77 $25.50– $42.98 $37.57– $42.15 7,000 20,000 58,750 159,000 113,500 232,000 385,500 332,700 2.4 years 3.1 years 4.1 years 5.5 years 6.1 years 7.1 years 8.2 years 9.2 years $24.50 $32.22 $23.47 $19.63 $23.32 $25.77 $26.93 $39.58 7,000 20,000 58,750 134,000 85,000 150,000 150,000 Retirement Beneﬁts The Company has deﬁned contribution proﬁt-sharing plans covering substantially all employees who are not participants in certain deﬁned beneﬁt plans. The Company’s annual contribution to the deﬁned contribution plans is based on employee eligible earnings and results of operations and amounted to $27,256,000, $26,489,000, and $23,524,000 in 2004, 2003, and 2002, respectively. The Company sponsors deﬁned beneﬁt plans that include a limited number of salaried and hourly employees at certain subsidiaries. The Company’s funding policy is generally to contribute annually the minimum actuarially computed amount. Net pension costs relating to these plans were $0, $176,000, and $0 for 2004, 2003, and 2002, respectively. The actuarial present value of obligations, less related plan assets at fair value, is not signiﬁcant. Fair value at end of year $÷«8,777 $10,250 $«÷÷÷÷«– Reconciliation of funded status Funded status $(10,181) $«(8,081) $(17,617) Unrecognized actuarial (gain) or loss 2,340 Unrecognized transition obligation – or (asset) Unrecognized prior service cost 4,780 892 1,105 5,361 1,122 539 5,942 1,352 Net amount recognized at year-end $÷(2,169) $÷÷(493) $÷(9,784) Amounts recognized in the statement of ﬁnancial position consist of: Accrued beneﬁt liability $÷(2,169) $÷÷(493) $÷(9,784) Net amount recognized at year-end, included in other liabilities $÷(2,169) $÷÷(493) $÷(9,784) Estimated future beneﬁt payments (in thousands) Fiscal 2005 Fiscal 2006 Fiscal 2007 Fiscal 2008 Fiscal 2009 Fiscal 2010–2014 Expected contributions during ﬁscal 2005 Total $÷«1,166 1,174 1,201 1,251 1,271 6,918 $÷÷÷÷÷0 HNI Corporation and Subsidiaries 20 0 4 Annu al Re p ort 47 2004 2003 2002 $3,299 $3,299 $3,299 196 761 4,256 3,307 196 761 4,256 2,879 196 – 3,495 2,514 $÷«949 $1,377 $÷«981 Notes to Consolidated Financial Statements Plan Assets – Percentage of Fair Value by Category Equity Debt Other Total 2004 0% 0% 100% 100% 2003 0% 0% 100% 100% (In thousands) Buildings Machinery and equipment Ofﬁce equipment Property, plant, and equipment at year-end include the following amounts for capitalized leases: The Company invests these funds in high-grade money market instruments. Prior to 2003, the plan was not funded. Less: allowances for depreciation The discount rates at ﬁscal year-end 2004, 2003, and 2002 were 5.75%, 6.0%, and 6.5%, respectively. The Company payment for these beneﬁts has reached the maximum amounts per the plan; therefore, healthcare trend rates have no impact on Company cost. In December 2003, the United States enacted into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”). The Act established a prescription drug beneﬁt under Medicare, known as “Medicare Part D,” and a federal subsidy to sponsors of retiree health care beneﬁt plans that provide a beneﬁt that is at least actuarially equivalent to Medicare Part D. In May 2004, the FASB issued FASB Staff Position No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“FSP 106-2”). The Company adopted FSP 106-2 on July 4, 2004. The Company has determined that the beneﬁts provided by the plan are not actuarially equivalent to the Medicare Part D beneﬁt under the Act based on the percentage of the cost of the plan that the Company provides. Therefore, the adoption of FSP 106-2 did not have an impact on the Company’s ﬁnancial statements during 2004. The Company will continue to monitor the effect as regulations evolve regarding actuarial equivalency. Leases The Company leases certain warehouse, plant facilities, and equipment. Commitments for minimum rentals under non-cancelable leases at the end of 2004 are as follows: (In thousands) 2005 2006 2007 2008 2009 Thereafter Capitalized Leases $÷«510 284 215 211 211 379 Operating Leases $16,257 13,104 9,819 7,281 5,899 9,373 Total minimum lease payments $1,810 $61,733 Less: amount representing interest Present value of net minimum lease payments, including current maturities of $413 379 $1,431 Rent expense for the years 2004, 2003, and 2002 amounted to approximately $16,097,000, $13,592,000, and $13,683,000, respec- tively. The Company has an operating lease for a production facility with annual rentals totaling approximately $353,000 with a corporation in which the minority owner of one of the Company’s consolidated subsidiaries is an investor. Contingent rent expense under both capitalized and operating leases (generally based on mileage of transportation equipment) amounted to $241,000, $313,000, and $787,000 for the years 2004, 2003, and 2002, respectively. Guarantees, Commitments, and Contingencies During the second quarter ended June 28, 2003, the Company entered into a one-year ﬁnancial agreement for the beneﬁt of one of its distribution chain partners, which has been extended. The maximum ﬁnancial exposure assumed by the Company as a result of this arrangement is currently $2.3 million, which is 100% secured by collateral. In accordance with the provisions of FIN 45, the Company has recorded the fair value of this guarantee, which is estimated to be less than $0.1 million. The Company utilizes letters of credit in the amount of $20 million to back certain ﬁnancing instruments, insurance policies, and payment obligations. The letters of credit reﬂect fair value as a condition of their underlying purpose and are subject to fees competitively determined. The Company is contingently liable for future minimum payments totaling $4.9 million under a transportation service contract. The transportation agreement is for a three-year period and is automati- cally renewable for periods of one year unless either party gives sixty days written notice of its intent to terminate at the end of the original three-year term or any subsequent term. The minimum payment is $4.9 million in 2005. The Company has contingent liabilities, which have arisen in the course of its business, including pending litigation, preferential pay- ment claims in customer bankruptcies, environmental remediation, taxes, and other claims. The Company currently has a claim for approximately $7.6 million pending against it arising out of the 48 HNI Corpo ration and Sub sid i ari e s 2 0 0 4 An n u al Re po rt Notes to Consolidated Financial Statements bankruptcy of a customer ﬁled in 2001. The Company was named a critical vendor by the bankruptcy court and, accordingly, was paid in full for all outstanding receivables. The claim alleges that the Company received preferential payments from the customer during the ninety days before the customer ﬁled for bankruptcy protection. The claim was brought in February 2003. The Company has recorded an accrual with respect to this contingency, in an amount substantially less than the full amount of the claim, which represents the best estimate within the range of likely exposure and intends to vigorously defend against the claim. Given the nature of this claim, it is possible that the ultimate outcome could differ from the recorded amount. Signiﬁcant Customer One ofﬁce furniture customer accounted for approximately 13%, 13%, and 14% of consolidated net sales in 2004, 2003, and 2002, respectively. Operating Segment Information In accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” management views the Company as being in two operating segments: ofﬁce furniture and hearth products, with the former being the principal segment. The ofﬁce furniture segment manufactures and markets a broad line of metal and wood commercial and home ofﬁce furniture which includes storage products, desks, credenzas, chairs, tables, book- cases, freestanding ofﬁce partitions and panel systems, and other related products. The hearth products segment manufactures and markets a broad line of manufactured electric, gas-, pellet-, and wood-burning ﬁreplaces and stoves, ﬁreplace inserts, gas logs, and chimney systems principally for the home. The Company’s hearth products segment is somewhat seasonal with the third (July-September) and fourth (October-December) ﬁscal quarters historically having higher sales than the prior quarters. In ﬁscal 2004, 54% of consolidated net sales of hearth products were generated in the third and fourth quarters. For purposes of segment reporting, intercompany sales transfers between segments are not material, and operating proﬁt is income before income taxes exclusive of certain unallocated corporate expenses. These unallocated corporate expenses include the net costs of the Company’s corporate operations, interest income, and interest expense. Management views interest income and expense as corporate ﬁnancing costs and not as an operating segment cost. In addition, management applies an effective income tax rate to its consolidated income before income taxes, so income taxes are not reported or viewed internally on a segment basis. Identiﬁable assets by segment are those assets applicable to the respective industry segments. Corporate assets consist principally of cash and cash equivalents, short-term investments, and corporate ofﬁce real estate and related equipment. No geographic information for revenues from external customers or for long-lived assets is disclosed since the Company’s primary market and capital investments are concentrated in the United States. Reportable segment data reconciled to the consolidated ﬁnancial statements for the years ended 2004, 2003, and 2002 is as follows: (In thousands) Net sales: Ofﬁce furniture Hearth products Operating proﬁt: Ofﬁce furniture (a) Hearth products Total operating proﬁt Unallocated corporate expenses 2004 2003 2002 $1,570,777 $1,304,054 $1,279,059 522,670 451,674 413,563 $2,093,447 $1,755,728 $1,692,622 $÷«154,896 $÷«130,080 $÷«130,014 62,158 54,433 44,852 217,054 (38,185) 184,513 (33,582) 174,866 (34,312) Income before income taxes $÷«178,869 $÷«150,931 $÷«140,554 Depreciation and amortization expense: Ofﬁce furniture Hearth products General corporate Capital expenditures: Ofﬁce furniture Hearth products General corporate Identiﬁable assets: Ofﬁce furniture Hearth products General corporate $÷÷«45,737 $÷÷«54,121 $÷÷«48,546 15,061 5,905 13,599 5,052 13,993 6,216 $÷÷«66,703 $÷÷«72,772 $÷÷«68,755 $÷÷«18,635 $÷÷«17,619 $÷÷«17,183 13,878 3,287 12,577 7,312 6,132 2,570 $÷÷«35,800 $÷÷«37,508 $÷÷«25,885 $÷«570,294 $÷«452,350 $÷«494,559 338,602 112,761 303,811 265,665 305,326 220,667 $1,021,657 $1,021,826 $1,020,552 (a) Included in operating proﬁt for the ofﬁce furniture segment are pre-tax charges of $0.9 million, $8.5 million, and $3.0 million for closing of facilities and impairment charges in 2004, 2003, and 2002, respectively. HNI Corporation and Subsidiaries 20 0 4 Annu al Re p ort 49 Notes to Consolidated Financial Statements Summary of Quarterly Results of Operations (Unaudited) The following table presents certain unaudited quarterly ﬁnancial information for each of the past 12 quarters. In the opinion of the Company’s management, this information has been prepared on the same basis as the consolidated ﬁnancial statements appearing elsewhere in this report and includes all adjustments (consisting only of normal recurring accruals) necessary to present fairly the ﬁnancial results set forth herein. Results of operations for any previous quarter are not necessarily indicative of results for any future period. (In thousands, except per share data) Year-End 2004 Net sales Cost of products sold Gross proﬁt Selling and administrative expenses Restructuring related charges Operating income Interest income (expense) – net Income before income taxes Income taxes Net income Net income per common share – basic Weighted-average common shares outstanding – basic Net income per common share – diluted Weighted-average common shares outstanding – diluted As a Percentage of Net Sales Net sales Gross proﬁt Selling and administrative expenses Restructuring related charges Operating income Income taxes Net income Year-End 2003 Net sales Cost of products sold Gross proﬁt Selling and administrative expenses Restructuring related charges Operating income Interest income (expense) – net Income before income taxes Income taxes Net income Net income per common share – basic Weighted-average common shares outstanding – basic Net income per common share – diluted Weighted-average common shares outstanding – diluted As a Percentage of Net Sales Net sales Gross proﬁt Selling and administrative expenses Restructuring related charges Operating income Income taxes Net income 50 HNI Corpo ration and Sub sid i ari e s 2 0 0 4 An n u al Re po rt First Quarter Second Quarter Third Quarter Fourth Quarter $464,037 294,275 169,762 134,580 520 34,662 355 35,017 12,606 $508,605 324,984 183,621 142,579 215 40,827 120 40,947 15,121 $573,457 367,835 205,622 147,594 135 57,893 (29) 57,864 21,120 $547,348 355,049 192,299 147,253 16 45,030 11 45,041 16,440 $÷22,411 $÷25,826 $÷36,744 $÷28,601 $÷÷÷÷.38 58,240 $÷÷÷÷.38 58,690 $÷÷÷÷.45 57,943 $÷÷÷÷.44 58,378 $÷÷÷÷.65 56,192 $÷÷÷÷.65 56,635 $÷÷÷÷.52 55,511 $÷÷÷÷.51 55,897 100.0% 36.6 29.0 0.1 7.5 2.7 4.8 $391,971 252,841 139,130 114,426 – 24,704 (265) 24,439 8,554 100.0% 36.1 28.0 – 8.0 3.0 5.1 $406,793 260,367 146,426 112,979 2,265 31,182 (149) 31,033 10,861 100.0% 35.9 25.7 – 10.1 3.7 6.4 $500,091 316,412 183,679 127,472 3,881 52,326 617 52,943 18,530 100.0% 35.1 26.9 – 8.2 3.0 5.2 $456,873 286,893 169,980 125,867 2,364 41,749 767 42,516 14,881 $÷15,885 $÷20,172 $÷34,413 $÷27,635 $÷÷÷÷.27 58,317 $÷÷÷÷.27 58,582 $÷÷÷÷.35 58,143 $÷÷÷÷.35 58,468 $÷÷÷÷.59 58,043 $÷÷÷÷.59 58,448 $÷÷÷÷.47 58,222 $÷÷÷÷.47 58,731 100.0% 35.5 29.2 – 6.3 2.2 4.1 100.0% 36.0 27.8 0.6 7.7 2.7 5.0 100.0% 36.7 25.5 0.8 10.5 3.7 6.9 100.0% 37.2 27.5 0.5 9.1 3.3 6.0 Notes to Consolidated Financial Statements (In thousands, except per share data) Year-End 2002 Net sales Cost of products sold Gross proﬁt Selling and administrative expenses Restructuring related charges (income) Operating income Interest income (expense) – net Income before income taxes Income taxes Net income Net income per common share – basic and diluted Weighted-average common shares outstanding – basic As a Percentage of Net Sales Net sales Gross proﬁt Selling and administrative expenses Restructuring related charges Operating income Income taxes Net income Investor Information C O M M O N STO C K M A R K E T PR I C ES AN D D I V I DE N DS ( UN AU D I TE D ) First Quarter Second Quarter Third Quarter Fourth Quarter $399,139 259,398 139,741 110,425 3,900 25,416 (580) 24,836 8,941 $399,299 256,696 142,603 111,320 (900) 32,183 (710) 31,473 11,330 $446,274 285,996 160,278 117,274 – 43,004 (577) 42,427 15,274 $447,910 290,653 157,257 115,170 – 42,087 (269) 41,818 13,649 $÷15,895 $÷20,143 $÷27,153 $÷28,169 $÷÷÷÷.27 58,777 $÷÷÷÷.34 58,918 $÷÷÷÷.46 59,140 $÷÷÷÷.48 58,546 100.0% 35.0 27.7 1.0 6.4 2.2 4.0 100.0% 35.7 27.9 (0.2) 8.1 2.8 5.0 100.0% 35.9 26.3 – 9.6 3.4 6.1 100.0% 35.1 25.7 – 9.4 3.0 6.3 Common Stock Market Price and Price/Earnings Ratio (Unaudited) QUA R TE R LY 20 0 4 – 20 0 3 F I SCAL YE A R S 2 0 0 4 –19 9 4 2004 by Quarter 1st 2nd 3rd 4th Total dividends paid 2003 by Quarter 1st 2nd 3rd 4th Total dividends paid High Low $45.71 $35.25 42.42 42.13 43.65 36.56 36.97 38.52 High Low $29.38 $24.65 31.67 38.60 44.12 27.27 30.15 36.65 Dividends per Share $.14 .14 .14 .14 $.56 Dividends per Share $.13 .13 .13 .13 $.52 Year 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 Market Price * High Low Diluted Earnings per Share * Price/Earnings Ratio High Low $45.71 $35.25 $1.97 44.12 30.85 28.85 27.88 29.88 37.19 32.13 21.38 15.63 17.00 24.65 22.88 19.96 15.56 18.75 20.00 15.88 9.25 11.50 12.00 1.68 1.55 1.26 1.77 1.44 1.72 1.45 1.13 .67 .87 23 26 20 23 16 21 22 22 19 23 20 21 18 15 15 16 9 13 12 11 8 17 14 13 Eleven-year average * Adjusted for the effect of stock splits HNI Corporation and Subsidiaries 20 0 4 Annu al Re p ort 51 Selected Financial Data – Eleven-Year Summary Per Common Share Data (Basic and Dilutive) Income before cumulative effect of accounting changes – basic $÷÷÷÷«1.99 $«««««««««1.69 $«««««««««1.55 $«««««««««1.26 $«««««««««1.77 $«««««««««1.44 $÷÷«÷÷1.72 $«««««««««1.45 $««««««1.13 $««««««««.67 $««««««««.87 2004 2003 2002(a) 2001 2000 1999 1998 1997 1996 1995 1994 Net income – basic Net income – diluted Cash dividends Book value – basic Net working capital – basic Operating Results (Thousands of Dollars) Net sales Cost of products sold Gross proﬁt Interest expense Income before income taxes Income before income taxes as a % of net sales Federal and state income taxes Effective tax rate Income before cumulative effect of accounting changes Net income Net income as a % of net sales Cash dividends and share purchase rights redeemed Addition to (reduction of) retained earnings Net income applicable to common stock % return on average shareholders’ equity Depreciation and amortization Distribution of Net Income % paid to shareholders % reinvested in business Financial Position (Thousands of Dollars) Current assets Current liabilities Working capital Net property, plant, and equipment Total assets % return on beginning assets employed Long-term debt and capital lease obligations Shareholders’ equity Retained earnings Current ratio Current Share Data Number of shares outstanding at year-end Weighted-average shares outstanding during year – basic Number of shareholders of record at year-end Other Operational Data Capital expenditures (thousands of dollars) Members (employees) at year-end 1.99 1.97 .56 12.10 1.96 $2,093,447 1,342,143 751,304 886 178,869 8.54% $÷÷«65,287 36.5% $÷«113,582 113,582 5.43% $÷÷«32,023 (35,100) 113,582 16.47% 1.69 1.68 .52 12.19 3.71 $1,755,728 1,116,513 639,215 2,970 150,931 8.60% $«««««52,826 35.0% 1.55 1.55 .50 11.08 1.82 $1,692,622 1,092,743 599,879 4,714 140,554 8.30% $«««««49,194 35.0% 1.26 1.26 .48 10.10 1.52 $1,792,438 1,181,140 611,298 8,548 116,261 6.49% $«««««41,854 36.0% $«««««98,105 $«««««91,360 $«««««74,407 $«««106,217 $«««««87,360 $«««106,313 $«««««86,955 98,105 5.59% 91,360 5.40% 74,407 4.15% $«««««30,299 $«««««29,386 $«««««28,373 $«««««26,455 $«««««23,112 $«««««19,730 $«««««16,736 54,001 98,105 14.46% 55,176 91,360 14.74% 36,759 74,407 12.76% $÷÷«66,703 $«««««72,772 $«««««68,755 $«««««81,385 $«««««79,046 $«««««65,453 $«««««52,999 $«««««35,610 $««25,252 $««21,416 $««19,042 28.19% 71.81% 30.88% 69.12% 32.16% 67.84% 38.13% 61.87% 21.98% 78.02% 35.37% 64.63% 25.11% 74.89% $÷«374,579 $«««462,122 $«««405,054 $«««319,657 $«««330,141 $«««316,556 $«««290,329 $«««295,150 $205,527 $194,183 $188,810 266,250 108,329 311,344 1,021,657 17.46% $÷÷÷«3,645 669,163 606,632 1.41 55,303,323 57,127,110 6,465 245,816 216,306 312,368 1,021,826 14.69% $«««««÷4,126 709,889 641,732 1.88 58,238,519 58,178,739 6,416 298,680 106,374 353,270 1,020,552 14.83% $«««««««9,837 646,893 587,731 1.36 58,373,607 58,789,851 6,777 230,443 89,214 404,971 961,891 12.04% $«««««80,830 592,680 532,555 1.39 58,672,933 59,087,963 6,694 $2,046,286 1,380,404 $1,706,628 1,172,997 $1,362,713 $998,135 $«««««59,747 $«««««50,215 $«««««63,796 $«««««52,173 1.44 1.44 .38 8.33 1.52 $1,800,931 1,236,612 564,319 9,712 137,575 7.64% 36.5% 87,360 4.85% 64,248 87,360 18.14% 26.46% 73.54% 225,123 91,433 455,591 906,723 16.94% 501,271 416,034 1.41 1.77 1.77 .44 9.59 1.09 665,882 14,015 165,964 8.11% 36.0% 106,217 5.19% 79,762 106,217 19.77% 24.91% 75.09% 264,868 65,273 454,312 1,022,470 19.63% $«««128,285 573,342 495,796 1.25 59,796,891 60,140,302 6,563 1.72 1.72 .32 7.54 1.19 533,632 10,658 170,109 9.97% 37.50% 106,313 6.23% 86,583 106,313 25.20% 18.56% 81.44% 217,438 72,891 444,177 864,469 23.74% 462,022 351,786 1.34 1.45 1.45 .28 6.19 1.53 933,157 429,556 8,179 139,128 10.21% 37.50% 86,955 6.38% 37,838 86,955 27.43% 19.25% 80.75% 200,759 94,391 341,030 754,673 28.27% 381,662 265,203 1.47 1.13 1.13 .25 4.25 .89 679,496 318,639 4,173 105,267 10.55% $««37,173 35.31% $««68,094 68,094 6.82% $««14,970 33,860 68,094 29.06% 152,553 52,974 234,616 513,514 25.93% $««77,605 252,397 227,365 1.35 .67 .67 .24 3.56 1.07 $893,119 624,700 268,419 3,569 65,517 7.34% $««24,419 37.27% $««41,098 41,098 4.60% $««14,536 18,863 41,098 20.00% 128,915 65,268 210,033 409,518 17.91% $««42,581 216,235 193,505 1.51 .87 .87 .22 3.17 1.27 $845,998 573,392 272,606 3,248 86,338 10.21% $««31,945 37.00% $««54,393 54,156 6.43% $««13,601 13,563 54,156 28.95% 111,093 77,717 177,844 372,568 24.72% $««45,877 194,640 174,642 1.70 $«««124,173 $«««135,563 $«««134,511 60,171,753 60,854,579 6,737 61,289,618 61,649,531 5,877 61,659,316 59,779,508 5,399 59,426,530 60,228,590 5,319 60,788,674 60,991,284 5,479 61,349,206 62,435,450 5,556 $÷÷«32,417 10,589(b) $«««««34,842 8,926 $«««««25,885 8,828 $«««««36,851 9,029(b) $«««««59,840 11,543(b) $«««««71,474 10,095 $«««149,717 $«««««85,491 9,824(b) 9,390(b) $««44,684 6,502(b) $««53,879 5,933 $««35,005 6,131 (a) Per SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company has ceased recording of goodwill and indeﬁnite-lived intangible amortization. (b) Includes acquisitions completed during the ﬁscal year. 52 HNI Corpo ration and Sub sid i ari e s 2 0 0 4 An n u al Re po rt Per Common Share Data (Basic and Dilutive) Net income – basic Net income – diluted Cash dividends Book value – basic Net working capital – basic Net sales Cost of products sold Gross proﬁt Interest expense Operating Results (Thousands of Dollars) Income before income taxes Income before income taxes as a % of net sales Federal and state income taxes Effective tax rate Net income Net income as a % of net sales Addition to (reduction of) retained earnings Net income applicable to common stock % return on average shareholders’ equity Depreciation and amortization Distribution of Net Income % paid to shareholders % reinvested in business Financial Position (Thousands of Dollars) Current assets Current liabilities Working capital Total assets Net property, plant, and equipment % return on beginning assets employed Long-term debt and capital lease obligations Shareholders’ equity Retained earnings Current ratio Current Share Data Number of shares outstanding at year-end Weighted-average shares outstanding during year – basic Number of shareholders of record at year-end Other Operational Data Capital expenditures (thousands of dollars) Members (employees) at year-end 1.99 1.97 .56 12.10 1.96 $2,093,447 1,342,143 751,304 886 178,869 8.54% $÷÷«65,287 36.5% $÷«113,582 113,582 5.43% $÷÷«32,023 (35,100) 113,582 16.47% 28.19% 71.81% 266,250 108,329 311,344 1,021,657 17.46% $÷÷÷«3,645 669,163 606,632 1.41 55,303,323 57,127,110 6,465 $«««««52,826 $«««««49,194 $«««««41,854 1.69 1.68 .52 12.19 3.71 $1,755,728 1,116,513 639,215 2,970 150,931 8.60% 35.0% 98,105 5.59% 54,001 98,105 14.46% 30.88% 69.12% 245,816 216,306 312,368 1,021,826 14.69% $«««««÷4,126 709,889 641,732 1.88 58,238,519 58,178,739 6,416 1.55 1.55 .50 11.08 1.82 $1,692,622 1,092,743 599,879 4,714 140,554 8.30% 35.0% 91,360 5.40% 55,176 91,360 14.74% 32.16% 67.84% 298,680 106,374 353,270 1,020,552 14.83% $«««««««9,837 646,893 587,731 1.36 58,373,607 58,789,851 6,777 1.26 1.26 .48 10.10 1.52 $1,792,438 1,181,140 611,298 8,548 116,261 6.49% 36.0% 74,407 4.15% 36,759 74,407 12.76% 38.13% 61.87% 230,443 89,214 404,971 961,891 12.04% 592,680 532,555 1.39 $«««««80,830 58,672,933 59,087,963 6,694 Income before cumulative effect of accounting changes – basic $÷÷÷÷«1.99 $«««««««««1.69 $«««««««««1.55 $«««««««««1.26 $«««««««««1.77 $«««««««««1.44 $÷÷«÷÷1.72 $«««««««««1.45 $««««««1.13 $««««««««.67 $««««««««.87 2004 2003 2002(a) 2001 2000 1999 1998 1997 1996 1995 1994 1.77 1.77 .44 9.59 1.09 $2,046,286 1,380,404 665,882 14,015 165,964 8.11% $«««««59,747 36.0% 1.44 1.44 .38 8.33 1.52 $1,800,931 1,236,612 564,319 9,712 137,575 7.64% $«««««50,215 36.5% 1.72 1.72 .32 7.54 1.19 $1,706,628 1,172,997 533,632 10,658 170,109 9.97% $«««««63,796 37.50% 1.45 1.45 .28 6.19 1.53 $1,362,713 933,157 429,556 8,179 139,128 10.21% $«««««52,173 37.50% Income before cumulative effect of accounting changes $«««««98,105 $«««««91,360 $«««««74,407 $«««106,217 $«««««87,360 $«««106,313 $«««««86,955 106,217 5.19% 87,360 4.85% 106,313 6.23% 86,955 6.38% Cash dividends and share purchase rights redeemed $«««««30,299 $«««««29,386 $«««««28,373 $«««««26,455 $«««««23,112 $«««««19,730 $«««««16,736 79,762 106,217 19.77% 64,248 87,360 18.14% 86,583 106,313 25.20% 37,838 86,955 27.43% 1.13 1.13 .25 4.25 .89 $998,135 679,496 318,639 4,173 105,267 10.55% $««37,173 35.31% $««68,094 68,094 6.82% $««14,970 33,860 68,094 29.06% .67 .67 .24 3.56 1.07 $893,119 624,700 268,419 3,569 65,517 7.34% $««24,419 37.27% $««41,098 41,098 4.60% $««14,536 18,863 41,098 20.00% .87 .87 .22 3.17 1.27 $845,998 573,392 272,606 3,248 86,338 10.21% $««31,945 37.00% $««54,393 54,156 6.43% $««13,601 13,563 54,156 28.95% $÷÷«66,703 $«««««72,772 $«««««68,755 $«««««81,385 $«««««79,046 $«««««65,453 $«««««52,999 $«««««35,610 $««25,252 $««21,416 $««19,042 24.91% 75.09% 26.46% 73.54% 18.56% 81.44% 19.25% 80.75% 21.98% 78.02% 35.37% 64.63% 25.11% 74.89% $÷«374,579 $«««462,122 $«««405,054 $«««319,657 $«««330,141 $«««316,556 $«««290,329 $«««295,150 $205,527 $194,183 $188,810 264,868 65,273 454,312 1,022,470 19.63% $«««128,285 573,342 495,796 1.25 59,796,891 60,140,302 6,563 225,123 91,433 455,591 906,723 16.94% 217,438 72,891 444,177 864,469 23.74% 200,759 94,391 341,030 754,673 28.27% $«««124,173 $«««135,563 $«««134,511 501,271 416,034 1.41 60,171,753 60,854,579 6,737 462,022 351,786 1.34 61,289,618 61,649,531 5,877 381,662 265,203 1.47 61,659,316 59,779,508 5,399 152,553 52,974 234,616 513,514 25.93% $««77,605 252,397 227,365 1.35 128,915 65,268 210,033 409,518 17.91% $««42,581 216,235 193,505 1.51 111,093 77,717 177,844 372,568 24.72% $««45,877 194,640 174,642 1.70 59,426,530 60,228,590 5,319 60,788,674 60,991,284 5,479 61,349,206 62,435,450 5,556 (a) Per SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company has ceased recording of goodwill and indeﬁnite-lived intangible amortization. (b) Includes acquisitions completed during the ﬁscal year. $÷÷«32,417 10,589(b) $«««««34,842 $«««««25,885 $«««««36,851 8,926 8,828 9,029(b) $«««««59,840 11,543(b) $«««««71,474 10,095 $«««149,717 $«««««85,491 9,824(b) 9,390(b) $««44,684 6,502(b) $««53,879 5,933 $««35,005 6,131 HNI Corporation and Subsidiaries 20 0 4 Annu al Re p or t 53 R E P O R T O F I N D E P E N D E N T R E G I S T E R E D P U B L I C A C C O U N T I N G F I R M To the Board of Directors and Shareholders of HNI Corporation: We have completed an integrated audit of HNI Corporation’s (formerly HON INDUSTRIES Inc.) fiscal year 2004 consolidated financial statements and of its internal control over financial reporting as of January 1, 2005 and audits of its January 3, 2004 and December 28, 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below. Consolidated financial statements In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, shareholders’ equity and cash flows present fairly, in all material respects, the financial position of HNI Corporation and its subsidiaries (the “Company”) at January 1, 2005, January 3, 2004, and December 28, 2002 and the results of their operations and their cash flows for each of the three years in the period ended January 1, 2005 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. Internal control over financial reporting Also, in our opinion, management’s assessment, included in the accompanying Management Report on Internal Control Over Financial Reporting that the Company maintained effective internal control over financial reporting as of January 1, 2005 based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 1, 2005, based on criteria established in Internal Control – Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was main- tained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. PricewaterhouseCoopers LLP Chicago, Illinois February 23, 2005 5 4 H N I C o r p o r a t i o n 2 0 0 4 A n n u a l R e p o r t M A N A G E M E N T R E P O R T O N I N T E R N A L C O N T R O L O V E R F I N A N C I A L R E P O R T I N G Management of HNI Corporation is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a–15(f) and 15d–15(f) under the Securities Exchange Act of 1934. HNI Corporation’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes those written policies and procedures that: • Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of HNI Corporation; • Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of HNI Corporation are being made only in accordance with authorizations of management and directors of HNI Corporation; and • Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements. Internal control over financial reporting includes the controls themselves, monitoring (including internal auditing practices), and actions taken to correct deficiencies as identified. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of HNI Corporation’s internal control over financial reporting as of January 1, 2005. Management based this assessment on criteria for effective internal control over financial reporting described in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of the Company’s internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of our Board of Directors. Based on this assessment, management determined that, as of January 1, 2005, HNI Corporation maintained effective internal control over financial reporting. Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of January 1, 2005 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein. Stan A. Askren Chairman, President and Chief Executive Officer Jerald K. Dittmer Vice President and Chief Financial Officer February 18, 2005 H N I C o r p o r a t i o n 2 0 0 4 A n n u a l R e p o r t 5 5 A M E S S A G E F R O M T H E B O A R D O F D I R E C T O R S Dear Shareholders: In a market environment characterized by constant change, the HNI Corporation Board of Directors believes there is one thing in business that should never change: the paramount importance of integrity. Integrity is central to good corporate governance. As Board members, we are proud to uphold this and the other values expressed in HNI Corporation’s vision statement, which appears on the last page of this annual report. Those familiar with this company know that the HNI vision statement is a powerful expression of priorities for every member. It guides every major decision made across the organization, and it has for many years. Our responsibility on the Board is to fulfill our role in the implementation of the vision through sound policies and practices, through clear and open communication, and through a conservative and straightforward financial management philosophy. Equally important is to maintain a strong, committed, engaged and independent Board. To that end, our three committees of the Board (Audit; Human Resources and Compensation; and Public Policy and Corporate Governance) have long consisted entirely of outside directors. Succession planning also is a critical element of good governance. The Board was pleased to see the CEO succession process completed in 2004 with Stan Askren assuming the role of Chairman and Chief Executive Officer in addition to his duties as President. We are proud to serve on the HNI Board of Directors. As this company evolves and grows, rest assured that we will continue to work on our shareholders’ behalf to honor the values and priorities expressed in HNI’s vision statement. Sincerely, The HNI Corporation Board of Directors Stan A. Askren Miguel M. Calado Gary M. Christensen Cheryl A. Francis John A. Halbrook Dennis J. Martin Jack D. Michaels Larry B. Porcellato Joseph Scalzo Abbie J. Smith Richard H. Stanley Brian E. Stern Ronald V. Waters, III 5 6 H N I C o r p o r a t i o n 2 0 0 4 A n n u a l R e p o r t B O A R D O F D I R E C T O R S A N D O F F I C E R S Board of Directors HNI Corporation Officers Operating Companies Stan A. Askren Chairman, President and Chief Executive Officer, HNI Corporation Miguel M. Calado Executive Vice President and President, International, Dean Foods Company Gary M. Christensen Retired President and Chief Executive Officer, Pella Corporation Cheryl A. Francis Advisor/Consultant, Former Executive Vice President and Chief Financial Officer, RR Donnelley & Sons John A. Halbrook Chairman and Chief Executive Officer, Woodward Governor Company Dennis J. Martin Chairman, President and Chief Executive Officer, General Binding Corporation Jack D. Michaels Chairman, President and Chief Executive Officer, Snap-on Incorporated Retired Chairman, HNI Corporation Larry B. Porcellato Chief Executive Officer, ICI Paints North America Joseph Scalzo Group President, Personal Care and Global Value Chain, The Gillette Company Abbie J. Smith Chaired Professor, The University of Chicago Graduate School of Business Stan A. Askren Chairman, President and Chief Executive Officer Timothy J. Anderson President, Omni Remanufacturing, Inc. Richard H. Stanley Vice Chairman, HNI Corporation Chairman, SC Companies, Inc. Chairman, Stanley Consultants, Inc. Brian E. Stern Senior Vice President, Xerox, Fuji Xerox Operations, Xerox Corporation Jerald K. Dittmer Vice President and Chief Financial Officer Robert J. Driessnack Vice President, Controller Melinda C. Ellsworth Vice President, Treasurer and Investor Relations Tamara S. Feldman Vice President, Financial Reporting David C. Burdakin Executive Vice President, HNI Corporation President, The HON Company Bradley D. Determan President, Hearth & Home Technologies Inc. Thomas D. Head Vice President and General Manager, Holga Inc. Ronald V. Waters, III Chief Operating Officer, Wm. Wrigley Jr. Company Malcolm C. Fields Vice President and Chief Information Officer Eric K. Jungbluth President, Allsteel Inc. Robert D. Hayes Vice President, Business Analysis and General Auditor Jeffrey D. Lorenger Vice President, General Counsel and Secretary Donald T. Mead Vice President, Member and Community Relations Timothy R. Summers Vice President, Lean Enterprise Russell S. Minick President, The Gunlocke Company L.L.C. Marco V. Molinari President, International and Business Development Jean M. Reynolds President, Maxon Furniture Inc. Thomas A. Tolone President, Paoli Inc. Committees of the Board Audit Ronald V. Waters, III, Chairperson Miguel M. Calado Dennis J. Martin Abbie J. Smith Human Resources and Compensation Gary M. Christensen, Chairperson John A. Halbrook Larry B. Porcellato Richard H. Stanley Public Policy and Corporate Governance Brian E. Stern, Chairperson Cheryl A. Francis Joseph Scalzo H N I C o r p o r a t i o n 2 0 0 4 A n n u a l R e p o r t 5 7 O U R V I S I O N We, the members of HNI Corporation, are dedicated to creating long-term value for all of our stakeholders, to exceeding our customers’ expectations and to making our company a great place to work. We will always treat each other, as well as customers, suppliers, shareholders and our communities, with fairness and respect. Our success depends upon business simpliﬁcation, rapid continuous improvement and innovation in everything we do, individual and collective integrity, and the relentless pursuit of the following long-standing beliefs: We will be proﬁtable. We will be a great place to work. We pursue mutually proﬁtable relationships with customers We pursue a participative environment and support a culture and suppliers. Only when our company achieves an adequate that encourages and recognizes excellence, active involve- proﬁt can the other elements of this Vision be realized. ment, ongoing learning and contributions of each member; We will create long-term value for shareholders. retains the most capable people who work safely, are We create long-term value for shareholders by earning motivated and are devoted to making our company and our that seeks out and values diversity; and that attracts and ﬁnancial returns signiﬁcantly greater than our cost of members successful. capital and pursuing proﬁtable growth opportunities. We will safeguard our shareholders’ equity by maintaining We will be a responsible corporate citizen. a strong balance sheet to allow ﬂexibility in responding to We conduct our business in a way that sustains the well-being a continuously changing market and business environment. of society, our environment and the economy in which we live and work. We follow ethical and legal business practices. Our We will pursue proﬁtable growth. company supports our volunteer efforts and provides charitable We pursue proﬁtable growth on a global basis in order to contributions so that we can actively participate in the civic, provide continued job opportunities for members and cultural, educational, environmental and governmental affairs ﬁnancial success for all stakeholders. of our society. We will be a supplier of quality products and services. To our stakeholders: We provide reliable products and services of high quality When our company is appreciated by its members, favored and brand value to our end-users. Our products and services by its customers, supported by its suppliers, respected by the exceed our customers’ expectations and enable our distribu- public and admired by its shareholders, this Vision is fulﬁlled. tors and our company to make a fair proﬁt. 5 8 H N I C o r p o r a t i o n 2 0 0 4 A n n u a l R e p o r t What’s behind our performance I N V E S T O R I N F O R M AT I O N Forward-Looking Statements Statements in this report that are not strictly historical, including statements as to plans, objectives, and future financial performance, are “forward-looking” statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks, which may cause the Company’s actual results in the future to differ materially from expected results. Because of the following risks, as well as other variables affecting the Company’s operating results, past ﬁ nancial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods: • competition within the office furniture and fireplace industries, including competition from imported products and competitive pricing; • increases in the cost of raw materials, including steel, which is the Company’s largest raw material category; • the ability of the Company to realize financial benefits through price realization from its price increases; • increases in the cost of health care benefits provided by the Company; • reduced demand for the Company’s 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, customer insolvencies, and related bad debts and claims against the Company that it received preferential payments; • changes in demand and order patterns from the Company’s customers, particularly its top 10 customers, which represented approximately 36% of net sales in 2004; • issues associated with acquisitions and integration of acquisitions; • the ability of the Company to realize cost savings and productivity improvements from its cost containment and business simplification initiatives; • the ability of the Company to realize financial benefits from investments in new products; • the ability of the Company’s distributors and dealers to successfully market and sell the Company’s products; • the availability and cost of capital to finance planned growth; and • other risks, uncertainties, and factors described from time to time in the Company’s filings with the Securities and Exchange Commission. We caution the reader that the above list of factors may not be exhaustive. The Company does not assume any obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. Schedule of Quarterly Results The Company operates on a fiscal year ending on the Saturday nearest December 31. Quarterly results are typically announced within 25 days after the end of each quarter, and audited results are typically announced within 40 days after year-end. Fiscal 2005 Quarter-End Dates 1st Quarter: Saturday, April 2 2nd Quarter: Saturday, July 2 3rd Quarter: Saturday, October 1 4th Quarter: Saturday, December 31 Annual Meeting The Company’s annual shareholders’ meeting will be held at 10:30 a.m. on Tuesday, May 3, 2005, at the Holiday Inn, Highways 61 & 38 North, Muscatine, Iowa. Shareholders and other interested investors are encouraged to attend the meeting. Investor Relations Send inquiries to: Investor Relations HNI Corporation 414 East Third Street Muscatine, IA 52761 Telephone: 563.264.7400 Fax: 563.264.7655 E-mail: investorrelations@hnicorp.com Corporate Headquarters HNI Corporation 414 East Third Street P.O. Box 1109 Muscatine, IA 52761-0071 Telephone: 563.264.7400 Fax: 563.264.7217 Website: www.hnicorp.com Independent Public Accountants PricewaterhouseCoopers LLP One North Wacker Drive Chicago, IL 60606 Common Stock HNI Corporation common stock trades on the New York Stock Exchange under the symbol: HNI. Stock price quotations can be found in major daily newspapers and The Wall Street Journal Journal. Journal. Transfer Agent Shareholders may report a change of address or make inquiries by writing or calling: Computershare Investor Services, LLC 2 North LaSalle Street Chicago, IL 60602 Telephone: 312.588.4991 h p a r g o h t i L n o s r e d n A o e v n e C : g n i t n i r P f p e n h c S s e m a J : y h p a r g o t o h P e v i t u c e x E m o c . m m o c n c b . w w w / s n o i t a c i n u m m o C N C B : n g i s e D 414 East Third Street Muscatine, Iowa 52761 www.hnicorp.com Behind the Numbers. H N I C o r p o r a t i o n 2 0 0 4 A n n u a l R e p o r t HNI Corporation 2004 Annual Report

Continue reading text version or see original annual report in PDF format above