HNI Corporation Annual Report 2004

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FY2004 Annual Report · HNI Corporation

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414 East Third Street
Muscatine, Iowa 52761
www.hnicorp.com

Behind the Numbers.

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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

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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

Purchase obligations

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

(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

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

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

(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)

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

$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

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

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

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

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

100%

2003

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

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

45,030

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

$.56

Dividends
per Share

$.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

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

.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

.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

.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

.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

.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

.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

.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

.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

.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

.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

.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

.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

.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

.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

.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

.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

.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

.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

• 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

• 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.

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

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

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Muscatine, Iowa 52761
www.hnicorp.com

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HNI Corporation

2004 Annual Report