HNI Corporation Annual Report 2005

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FY2005 Annual Report · HNI Corporation

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

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Our story hasn’t changed.

HNI Corporation 2005 Annual Report

I N V E S T O R I N F O R M AT I O N

Fiscal 2006 Quarter-End Dates
1st Quarter: Saturday, April 1
2nd Quarter: Saturday, July 1
3rd Quarter: Saturday, September 30
4th Quarter: Saturday, December 30

Annual Meeting
The Corporation’s annual shareholders’ meeting will be held
at 10:30 a.m. on Tuesday, May 2, 2006, 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: 563.272.7400
Fax: 563.272.7655
E-mail: investorrelations@hnicorp.com

Corporate Headquarters
HNI Corporation
414 East Third Street
P.O. Box 1109
Muscatine, IA 52761-0071
Telephone: 563.272.7400
Fax: 563.272.7217
Website: www.hnicorp.com

Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP
One North Wacker Drive
Chicago, IL 60606

Common Stock
HNI Corporation common stock trades on the New York Stock Exchange
(NYSE) under the symbol: HNI. Stock price quotations can be found in major
daily newspapers and The Wall Street 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

Management Certifications
On June 1, 2005, the Corporation submitted to the NYSE, the Annual CEO
Certification required by Section 303A.12(a) of the NYSE Listed Company
Manual. The Corporation also filed with the Securities and Exchange
Commission the CEO/CFO Certification required under Section 302 of the
Sarbanes-Oxley Act of 2002 as Exhibits 31.1 and 31.2 to the Corporation’s
annual report on Form 10-K for the fiscal year ended December 31, 2005.

It’s the

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same culture.

Our culture hasn’t changed. Culture is a major part of what differentiates us from the

competition. But besides making us different, why is our culture relevant? Because it

drives our behaviors, which in turn drive our results. Virtually everyone who works here

owns stock and has a stake in the proﬁts. That creates an ownership mentality across the

entire company—a sense of shared risk and shared reward, and a belief among members

that they can make a difference in HNI’s performance. This culture of ours is a constant.

It will continue to be a guiding and unifying force as we expand our capabilities and

pursue growth.

HNI CORPORATION 2005 ANNUAL REPORT

The same mindset.

HNI CORPORATION 2005 ANNUAL REPORT

Constructive discontent. That’s our mindset, and it

hasn’t changed. Constructive discontent drives a constant

focus on the customer and end user, on how we can provide

them more, better, faster and for less—in short, on how

we can deliver performance that’s always improving. Our

mindset is supported and formalized across nearly every

aspect of our operations, from manufacturing to marketing,

in Rapid Continuous Improvement (RCI) processes.

That will continue.

HNI CORPORATION 2005 ANNUAL REPORT

The same business model.

HNI CORPORATION 2005 ANNUAL REPORT

Our split-and-focus business model hasn’t changed. HNI’s

decentralized structure enables operating businesses to stay closely

connected to the customer, maintain maximum marketplace

awareness and quickly respond to emerging opportunities. At the

same time, communication and collaboration between the business

units create leverage in core functions like purchasing, IT and

logistics. HNI businesses also routinely share best practices, from lean

manufacturing to product development and marketing techniques.

HNI CORPORATION 2005 ANNUAL REPORT

Moving continuously forward.

HNI CORPORATION 2005 ANNUAL REPORT

It’s the same strategy. It hasn’t changed. We’re pushing

constantly ahead, leveraging our unique culture, mindset

and business model toward the overriding goal of aggressive,

proﬁtable growth. Key to achieving this goal is building

our market power, continuing to hone our best-cost, lean

enterprise, and enhancing our culture and capabilities.

Our strategy has a dual focus: working continuously to

extract new growth from our core markets while we

identify and develop new, adjacent potential areas of

growth. We call this strategy Core Plus.

HNI CORPORATION 2005 ANNUAL REPORT

Core.

HNI CORPORATION 2005 ANNUAL REPORT

At the core of our approach is HNI’s

decentralized split-and-focus business

model: a group of separate business

units, operating in the ofﬁce furniture

In the “Core” portion of our

and hearth products markets, centered

Core Plus growth strategy, we are

on speciﬁc segments of end users.

extracting new growth from each

The HON Company’s core emphasis

existing business by deepening our

is on the ofﬁce furniture needs of small

understanding of end users, using new

businesses and individuals. Allsteel Inc.

insights gained to refine branding,

focuses primarily on larger organizations

selling and marketing and developing

and designers/architects who serve

new products to serve them better.

them. The Gunlocke Company L.L.C.

We’re continually improving operations

and Paoli Inc. concentrate on those

while increasingly applying lean

who want the elegance of wood in

principles to the customer-facing end

their private ofﬁces. Hearth & Home

of our businesses. And we are always

Technologies Inc. helps builders,

alert to potential acquisitions that

designers and homeowners enhance

expand the core customer base.

the warmth and beauty of the home.

All our other businesses share this sharp

focus on speciﬁc end-user groups, each

of which has unique wants, needs and

buying processes.

HNI CORPORATION 2005 ANNUAL REPORT

The “Plus” side of our growth strategy

is the application of our split-and-focus

model to new buyer segments. That is,

we identify an opportunity, then we

distribution model, which both Allsteel

leverage our strengths and tailor the

and our Hearth & Home business are

business to pursue it. The highly agile,

developing. A “Plus” opportunity also

ﬂexible nature of our business structure

can be a new business entirely, such as

enables us to adjust the moving parts—

Omni Workspace Company’s furniture

the selling model, the product/business

services, or new geographic markets,

model or a combination of both—to

which HNI International is exploring.

create winning buying experiences and

We often support “Plus” strategies

new sources of growth.

with highly specialized “Segment

A “Plus” opportunity is deﬁned

Selling Experts.” These are professionals

by any potential growth driver outside

who intimately know the end users of

but related to our core business. That

a given segment—how they talk, how

could be a vertical market like schools,

they work, what they need and how

government ofﬁces, healthcare providers

they buy—and help us tune the selling

or entrepreneurs, which are segments

process to ﬁt.

being pursued by a number of our

business units. Or, it could be a new

10 HNI CORPORATION 2005 ANNUAL REPORT

Plus.

HNI CORPORATION 2005 ANNUAL REPORT 11

FINANCIAL HIGHLIGHTS

Amounts in thousands, except for per share data

2005

2004

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

$2,450,572
887,918

$2,093,447
751,304

36.2%
668,910
3,462
215,546
137,420

5.6%
21.8%

$÷÷÷÷«2.51
2.50
11.46
0.62

$÷«486,598
1,140,271
358,174
1.36
÷$÷«103,869
19.5%
$÷«593,944
631,554
128,424

$÷÷«38,912
201,009
54,649,199
22
6,702
12,504

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

Net Sales
(in millions)

Net Income
(in millions)

1
5
4
2

3
9
0
2

2
9
7
1

6
5
7
1

2
9
6
1

7
3
1

3
9
0
4
1
2
1

8
9

1
9

4
7

Return on Average
Shareholders’ Equity
(percent)

8
1
2

3
9
0
2

5
6
1

7
4
1

5
4
1

8
2
1

17.1 %
18.2 %

–
16.9 %
290.7 %
20.8 %
21.0 %

–
–

26.1 %
26.9 %
(5.3) %
10.7 %

29.9 %
11.7 %
34.5 %
–

2,749.6 %

–
(11.2) %
(8.4) %
18.5 %

20.0 %
3.5 %
(4.3) %
–
3.7 %
18.1 %

Diluted Earnings
per Share
(dollars)

0
5
2

3
9
0
2

7
9
1

8
6
1

5
5
1

6
2
1

1
0
0
2

2
0
0
2

3
0
0
2

4
0
0
2

5
0
0
2

1
0
0
2

2
0
0
2

3
0
0
2

4
0
0
2

5
0
0
2

1
0
0
2

2
0
0
2

3
0
0
2

4
0
0
2

5
0
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2

1
0
0
2

2
0
0
2

3
0
0
2

4
0
0
2

5
0
0
2

12 HNI CORPORATION 2005 ANNUAL REPORT

3
9
0
2

LE T TER TO SHAREHOLDERS

Dear shareholders:

Our story has not changed. We’re still leveraging our

unique culture, mindset and business model to grow.

We’re still committed to the same set of values and beliefs.

We’re still focused on continuously enhancing our processes

and products to improve performance.

The story hasn’t changed because we’re in the midst

of executing our strategy to deliver aggressive, proﬁtable

growth. If our 2005 results are any indication, the strategy

is working well. But this is no time to rest.

Because, even though we posted excellent results in

the year just past, investors rightfully want to know how

we plan to sustain our performance going forward.

Our answer is Core Plus.

HNI CORPORATION 2005 ANNUAL REPORT 13

S TA N A . ASK REN

CH A IRM A N, PRE SIDEN T A ND CHIE F E X ECU T I V E OF F ICER

A POWERFUL PLATFORM: OUR SPLIT-AND-FOCUS BUSINESS MODEL

Along with our culture and our lean operations, our

decentralized business model is absolutely key to our

growth plans.

As we said in last year’s annual report: “We

believe strongly that smaller, focused groups of skilled,

dedicated people, empowered and energized in the right

business models, are very effective competitors to larger,

more centralized organizations. We believe this split-and-

focus approach, where leaders in each operating company

have responsibility for a distinct P&L, a specialist’s

knowledge of the target market and the ability to operate

with minimal corporate interference, is a much more

effective way to deliver value to customers and, ultimately, shareholders.”

Believers in centralization speak of economies of scale. Scale certainly has its benefits in

terms of managing costs—we achieve these without structural centralization though our business

units working together on such functions as procurement, IT, logistics and legal—but we believe

operating as a large, centralized business can be a disadvantage in a dynamic and highly com-

petitive marketplace. It can be more difficult to tailor processes for market segments, tougher to

respond quickly to opportunities and more of a challenge to maintain focus. We call this the

“dis-economies of scale.”

Split and focus is a very effective model from which to identify and develop new avenues

of growth. It’s designed to separate a target segment, then tune and tailor a business model to go

after it, efﬁciently and effectively. Allsteel is an excellent example of the power of this approach.

14 HNI CORPORATION 2005 ANNUAL REPORT

“Along with our culture and our lean operations,
the HNI split-and-focus business model is what
makes our Core Plus growth strategy so viable.”

Several years ago, we split and focused the Allsteel business, creating a separate management

team and business model. Today, Allsteel is a vital and growing part of our core business.

CORE PLUS: CONVERTING OUR MODEL INTO PROFITABLE LONG-TERM GROWTH

Core Plus is about ﬁnding ways of growing the existing businesses (the “Core”) while seeking

out and developing new frontiers for growth (the “Plus”), which we call domain extensions.

If a domain extension thrives, it becomes a part of the core; if it does not meet our expectations,

we end it and move on.

At any given time, we have numerous domain extensions in progress. A good example is

The HON Company’s development of the K–12 classroom segment. This is a natural extension

for HON, already a strong brand among those who buy furniture for school administrative

ofﬁces. HON for LearningTM represents a whole new product line and selling model designed

for the classroom furniture segment, which is different in its needs and processes from purchasers

of school ofﬁce furnishings. The basyx brand represents a new brand and product line for The HON

Company focused on entrepreneurs and start-ups, a segment reachable largely through its

existing selling model.

Allsteel Inc., The HON Company and Paoli Inc. are pursuing domain extensions with

the government segment, a strong market for existing product lines that requires a highly tailored

selling and fulﬁllment model. Allsteel Inc. and Hearth & Home Technologies Inc. are developing

a unique, more competitive distribution model that includes the strategic acquisition of key dealers.

In this promising “Plus” strategy, we invest together with the dealer to more aggressively, efﬁciently

and effectively develop markets. These are just a few of the domain extensions currently in

development that we believe will drive proﬁtable growth in both the short and long term for HNI.

HNI CORPORATION 2005 ANNUAL REPORT 15

CULTURE: THE POWER BEHIND THE STRATEGY

You’ve heard us say this many times before: Culture matters because it drives behaviors. And,

at all levels of any organization, behaviors drive results. That’s why enhancing culture and

capabilities is an important element of aggressive, proﬁtable growth. Our model, our culture

and our values also are beneﬁting us by increasingly attracting people to HNI who seek, rather

than avoid, accountability; who are motivated rather than intimidated by risk and reward;

who are excited to have an opportunity to have an impact on the success of the business. Our

culture is the power that really makes split and focus and Core Plus work. It is something we

will continue to nurture as we grow.

THANKS

It has been a very gratifying year. We met or exceeded our objectives. We made signiﬁcant

progress in our strategies. We owe a debt of gratitude to all who have contributed to our performance

thus far. First and foremost, this group includes our members, whose dedication and performance

are a source of collective pride for us all. Thanks also are due our customers and suppliers for

the critical part they play in our success.

It’s an exciting time to be associated with HNI—with our business model, our strategy

and our people, I see powerful potential and possibilities. We intend to stay humble, stay focused

and work hard to achieve great things for our company, our customers and our investors.

STAN A. ASKREN

Chairman, President and Chief Executive Ofﬁcer

16 HNI CORPORATION 2005 ANNUAL REPORT

HNI at a glance

HNI CORPORATION 2005 ANNUAL REPORT 17

HNI AT A GL ANCE

HNI Corporation is a strong group

of performers in the ofﬁ ce furniture

and hearth products businesses.

Our unique business model enables

a high degree of focus and agility

in distinct markets.

™™

™

™™

™

18 HNI CORPORATION 2005 ANNUAL REPORT

HNI CORPORATION 2005 ANNUAL REPORT 19

HNI AT A GL ANCE CON T INUED

Allsteel Inc. delivers the highest level of functionality, durability, service, design and style
to large corporate and institutional clients. By focusing on these five elements of quality,
Allsteel helps clients achieve more productive facilities, more satisifed workers and unique,
inspiring workspaces. Allsteel prides itself on being easy to work with, responsive and
responsible. This is Allsteel: Designed to work. Built to last.

20 HNI CORPORATION 2005 ANNUAL REPORT

The HON Company is North America’s brand of choice for small and medium-sized
businesses. From file cabinets to executive chairs, desks to panel systems, The HON
Company offers a full line of affordable and stylish products that look great for years to
come. The HON Company’s nationwide distribution network provides industry-leading
access to top-selling products. As businesses expand, HON designs allow new products
to easily integrate with existing solutions. The HON Company: Smart now. . .smarter later.

HNI CORPORATION 2005 ANNUAL REPORT 21

HNI AT A GL ANCE CON T INUED

The Gunlocke Company L.L.C. is recognized as an industry leader in the design, manufacture
and marketing of premium wood ofﬁ ce furniture: casegoods, seating and tables. As it focuses
on developing fresh, responsive new solutions for the private ofﬁ ce, the company carries
forward a tradition of quality craftsmanship, technical expertise and conscientious customer
service. The choice of leading decision makers in a range of industries as well as of eight U.S.
Presidents, the Gunlocke name is synonymous with design integrity, manufacturing excellence
and enduring value.

22 HNI CORPORATION 2005 ANNUAL REPORT

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.

HNI CORPORATION 2005 ANNUAL REPORT 23

Maxon Furniture Inc. provides panel system
solutions for small to mid-sized businesses
seeking to remodel or expand their ofﬁ ces.
Reaching potential end users with Internet-
based marketing and interactive online tools,
Maxon Furniture Inc. creates uncontested
leads for its distribution partners. Its simpliﬁ ed
buying process for target customers provides
innovative tools that satisfy their unique
needs. Maxon Furniture Inc. provides proven
products and services at outstanding value
and industry-leading speed. In short, MAXON
gets customers working fast.

HNI AT A GL ANCE CON T INUED

™

basyx™ answers the small business owner’s
need to furnish an office by providing
professional office furniture at an exceptional
price without sacrificing design and quality.
The basyx brand has a simple yet complete
line of desking, seating, storage and table
options that offers clear solutions for open
office, private office, reception area,
conference room and training room layouts.
For easy availability, basyx product is offered
through a nationwide network of dealers.
Although running a business comes with
risks, basyx ensures that purchasing office
furniture will not be one of them.
basyx: Simple, clear, easy.

24 HNI CORPORATION 2005 ANNUAL REPORT

™™

Omni Workspace Company comprises two
divisions, Omni Service Group and IntraSpec
Solutions, that serve small, medium-sized
and large businesses. Omni Service Group
executes facility 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. IntraSpec Solutions
asset management and trade-in programs help
customers with standardized systems get the
most value from their existing furniture assets.

HNI CORPORATION 2005 ANNUAL REPORT 25

®
® and Paoli
® and Paoli

®
®, Gunlocke
®, Gunlocke

HNI International Inc. markets and distributes
HON®, Allsteel
®
® brands
® brands
®
®, Allsteel
worldwide, outside of the United States and
Canada. It offers one of the largest selections
of office furniture and related services in the
world, providing a “house of brands” that
allows it to tailor solutions to every need,
budget and location. HNI International Inc.
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 Inc. can provide complete
project management virtually anywhere
in the world.

Fireside Hearth & Home™, the leading brand
in providing hearth products and services,
helps consumers achieve the feeling they want
in their home by supporting the entire buying
process – from purchase to installation and
after-sale service. The Fireside Hearth & Home
business operates through a network of
independent and company-owned, stand-alone
or gallery design centers, as well as installation
centers, catering to both consumers and builders.

HNI AT A GL ANCE CON T INUED

Heatilator® has become the most recognized
and preferred fireplace brand among home-
builders since its first air-circulating fireplace
was patented in 1927. As testament to its
long-standing reputation for quality, leading
builders choose Heatilator because they
know that the brand assures their customers
continuous comfort and reliability.

26 HNI CORPORATION 2005 ANNUAL REPORT

Heat & Glo™, winner of the most industry awards
for technology and innovation, owns the premium
position in the marketplace by consistently
developing hearth products that push techno-
logical and design boundaries. The Heat & Glo
brand is focused sharply on consumer desires to
create products that promote balance, style,
comfort and sophistication in the home. As a
result, the Heat & Glo brand represents some
of the most distinctive and realistic gas, wood
and electric fireplaces, stoves and fireplace
inserts, surrounds and accessories in the market.

HNI CORPORATION 2005 ANNUAL REPORT 27

Quadra-Fire®, the leader in highly efficient,
durable and powerful hearth products, offers
the widest selection of high-performance
fireplaces, stoves and fireplace inserts in
the wood, gas and pellet fuel categories.
Quadra-Fire products boast high efficiency
and a rugged exterior. The products use
heavy-gauge steel and cast iron along with
details to improve performance and enhance
appearance.

MANAGEMENT ’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPER ATIONS

The following discussion of the Corporation’s historical results of
operations and of its liquidity and capital resources should be read
in conjunction with the Consolidated Financial Statements of the
Corporation and related notes.

Overview

The Corporation has two reportable core operating segments: ofﬁce
furniture and hearth products. The Corporation is the second largest
ofﬁce furniture manufacturer in the world and the nation’s leading
manufacturer and marketer of gas- and wood-burning ﬁreplaces.
The Corporation utilizes its split and focus, decentralized business
model to deliver value to its customers with its various brands and
selling models. The Corporation is focused on growing its existing
businesses while seeking out and developing new opportunities
for growth.

During 2005 and 2004, the ofﬁce furniture industry experienced a
rebound from the unprecedented three-year decline it faced from
2000 to 2003 that positively impacted the Corporation’s ofﬁce
furniture segment. The housing market remained strong during
2005, which positively impacted the Corporation’s hearth segment.
During this rebound in the ofﬁce furniture industry and strong
housing market, the Corporation continued its focus on business
simpliﬁcation and cost reduction as well as investing in growth
initiatives to provide long-term shareholder value.

In 2005, the Corporation experienced strong growth across its
multiple brands and product lines. Sales beneﬁted from price
increases that were implemented in 2004 and early 2005 as well
as acquisitions completed over the past two years. While steel
prices moderated slightly during 2005, they remained at high levels.
The Corporation also experienced increases in other material costs
as well as increased freight costs as a result of fuel surcharges.
The Corporation completed a number of small acquisitions during
2005 to support speciﬁc company strategies in both segments of
its business. The Corporation began the shutdown of two ofﬁce
furniture facilities in 2005 and recorded charges of $4.1 million
for restructuring costs and accelerated depreciation.

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 management 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 Corporation follows a 52/53-week ﬁscal year
which ends on the Saturday nearest December 31. Fiscal year 2005
ended on December 31, 2005; 2004 ended on January 1, 2005; and
2003 ended on January 3, 2004. The ﬁnancial statements for ﬁscal
year 2003 are based on a 53-week period, and ﬁscal years 2005 and
2004 are on a 52-week basis. A 53-week year occurs approximately
every sixth year.

Revenue recognition – The Corporation normally recognizes revenue
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 sale 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 consideration 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 projects the ultimate collectibility of
the account. As such, these factors may change over time causing
the Corporation to adjust the reserve level accordingly.

When the Corporation determines 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 the
Corporation is certain the customer cannot pay, the receivable
is written off by removing the accounts receivable amount and
reducing the allowance for doubtful accounts accordingly.

28 HNI CORPORATION AND SUBSIDIARIES 2005 ANNUAL REPORT

MANAGEMENT ’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPER ATIONS

As of December 31, 2005, there was approximately $290 million
in outstanding accounts receivable and $12 million recorded in the
allowance for doubtful accounts to cover potential future customer
non-payments. However, if economic conditions deteriorate
signiﬁcantly or one of the Corporation’s large customers declares
bankruptcy, a larger allowance for doubtful accounts might be
necessary. The allowance for doubtful accounts was approximately
$11 million at year end 2004 and 2003.

Inventory valuation – The Corporation valued 90% of its inventory
by the last-in, ﬁrst-out (LIFO) method at December 31, 2005.
Additionally, the Corporation 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 Corporation to adjust the reserve
level accordingly. The Corporation’s reserves for excess and
obsolete inventory were $8 million, $8 million, and $6 million
at year-end 2005, 2004, and 2003, respectively.

Long-lived assets – The Corporation reviews long-lived assets for
impairment as events or changes in circumstances occur indicating
that the amount of the asset reﬂected in the Corporation’s balance
sheet may not be recoverable. The Corporation compares an
estimate of undiscounted cash ﬂows produced by the asset, or
the appropriate group of assets, to the carrying value to determine
whether impairment exists. The estimates of future cash ﬂows
involve considerable management judgment and are based upon
the Corporation’s 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 Corporation’s restructuring activities are discussed in the
Restructuring Related Charges note to the Consolidated Financial
Statements of the Corporation.

The Corporation’s continuous focus on improving the manufacturing
process tends to increase the likelihood of assets being replaced;
therefore, the Corporation is constantly evaluating the expected
useful lives of its equipment, which can result in accelerated
depreciation.

Goodwill and other intangibles – In accordance with the Statement
of Financial Accounting Standards (“SFAS”) No. 142, the Corporation
evaluates its goodwill for impairment on an annual basis based on
values at the end of third quarter or whenever indicators of
impairment exist. The Corporation has evaluated its goodwill for
impairment and has determined that the fair value of the reporting
units exceeded their carrying value, so no impairment of goodwill
was recognized for the period ending December 31, 2005. Goodwill
of approximately $242 million is shown on the consolidated balance
sheet as of the end of ﬁscal 2005.

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. The Corporation
believes that its assumptions used in discounting future cash ﬂows
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 Corporation also determines the fair value of indeﬁnite lived
trademarks on an annual basis or whenever indication of impairment
exist. The Corporation has evaluated its trademarks for impairment
and recorded an impairment charge of $0.5 million in 2005 related
to two trademarks where the carrying value exceeded the current
fair market value. The carrying value of the trademarks was
approximately $30 million at the end of ﬁscal 2005.

Self-insured reserves – The Corporation 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 via a wholly-
owned insurance captive; the related liabilities are included in the
accompanying ﬁnancial statements. The Corporation’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 magnitude of change in actual experience development
could cause these estimates to change in the near term.

Stock-based compensation – The Corporation 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.

In December 2004, the Financial Accounting Standards Board
issued SFAS No. FAS123(R), “Share-Based Payment,” effective as
of the beginning of the ﬁrst annual reporting period that begins
after June 15, 2005. The Corporation plans to adopt FAS123(R) on
January 1, 2006, the beginning of its ﬁscal year. 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 Corporation has been disclosing in the notes in
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, the Corporation’s net
income for 2005, 2004, and 2003 would have been reduced by
approximately $2 million, $5 million, and $3 million, respectively,
and earnings per share would have been reduced approximately
$0.03, $0.08, and $0.06 per diluted share, respectively.

HNI CORPORATION AND SUBSIDIARIES 2005 ANNUAL REPORT 29

MANAGEMENT ’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPER ATIONS

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 Corporation’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 and

minority interest

Income taxes

Minority interest in earnings of

subsidiary

Net income

2005

100.0%

63.8

36.2

27.3

0.1

8.8

0.0

8.8

3.2

0.0

5.6%

2004

100.0%

64.1

35.9

27.3

0.1

8.5

0.0

8.5

3.1

0.0

5.4%

2003

100.0%

63.6

36.4

27.4

0.5

8.5

0.1

8.6

3.0

0.0

5.6%

N E T SALES
Net sales during 2005 were $2.5 billion, an increase of 17.1 percent,
compared to net sales of $2.0 billion in 2004. The increase in
2005 was due to $92 million of incremental sales from acquisitions,
$112 million from price increases implemented in 2004 and early
2005, and strong volume across all brands in both the ofﬁce furniture
and hearth products segments. Net sales during 2004 were
$2.0 billion, an increase of 19.2 percent, compared to net sales of
$1.8 billion in 2003. The increase in 2004 was due to $136 million
of sales from the Corporation’s 2004 acquisitions, $36 million from
price increases, and increased volume in both segments.

G ROS S PRO F I T
Gross proﬁt as a percent of net sales increased 0.3 percentage
points in 2005 as compared to ﬁscal 2004 but is still 0.2 percentage
points below 2003 levels due to ongoing cost reduction initiatives
in addition to the beneﬁt of price realization partially offsetting the
signiﬁcant steel and other material price increases experienced over
the past two years. The Corporation’s gross margins decreased
0.5 percentage points in 2004 compared to ﬁscal 2003 due to
increased steel and other 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 16.9 percent and 19.0 percent in 2005 and
2004, respectively. The increase in 2005 was due to $26 million
of additional costs from acquisitions; increased freight and
distribution costs of $34 million due to volume, rate increases
and fuel surcharges; investments in selling and marketing initiatives
and product launches; and increased proﬁt-sharing and incentive
compensation expense due to strong results. The increase in
2004 was due to $39 million of additional costs from acquisitions;
$26 million of increased freight and distribution costs due to volume,
rate increases, and fuel surcharges; and investments in brand
building and selling initiatives.

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 2005, the Corporation began the shutdown of two ofﬁce
furniture facilities and is consolidating production into other
U.S. manufacturing locations to increase efﬁciencies, streamline
processes, and reduce overhead costs. The two facilities are
located in Kent, Washington, and Van Nuys, California. In connection
with these closures, the Corporation recorded $4.1 million of
pre-tax charges or $0.04 per diluted share. These charges included
$0.6 million of accelerated depreciation of machinery and equipment
recorded in cost of sales, $1.2 million of severance, $0.4 million of
pension related expenses, and $1.9 million of facility exit, production
relocation, and other costs which were recorded as restructuring
costs. The closures and consolidation will be completed during
the ﬁrst quarter of 2006.

During 2003, the Corporation closed two ofﬁce furniture facilities
and consolidated production into other U.S. manufacturing locations.
The two facilities were located in Hazleton, Pennsylvania, and Milan,
Tennessee. In connection with these closures, the Corporation
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
Corporation incurred $1.2 million of current period charges during
2004. The Corporation 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
Corporation was able to exit a lease with the lessor on more favorable
terms than previously estimated. These closures were completed
in 2004.

30 HNI CORPORATION AND SUBSIDIARIES 2005 ANNUAL REPORT

MANAGEMENT ’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPER ATIONS

O PE R AT I N G I N C O M E
Operating income was $216 million in 2005, an increase of
20.8 percent compared to $178 million in 2004. The increase in
2005 was due to increased sales volume in both segments, and
price increases, offset by increased material costs, investments
in selling and marketing initiatives and product launches, increased
freight costs, and restructuring costs due to plant closures and
consolidations. Operating income increased 19.0 percent to
$178 million in 2004 compared to $150 million in 2003. 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.

N E T I N C O M E
Net income increased 21.0 percent to $137 million in 2005 compared
to $114 million in 2004. Net income in 2005 was favorably impacted
by a decrease in the effective tax rate to 36.0 percent in 2005
from 36.5 percent in 2004 due to beneﬁts resulting from the
implementation of the American Jobs Creation Act of 2004. Net
income in 2005 was negatively impacted by increased interest
expense due to a planned increase in debt. Net income increased
15.8 percent to $114 million in 2004 compared to $98 million in
2003. Net income in 2004 was unfavorably impacted by an increase
in the effective tax rate to 36.5 percent from 35 percent in 2003 due
to increased state taxes and a reduced beneﬁt from federal and state
tax credits. Net income per diluted share increased by 26.9 percent to
$2.50 in 2005 and by 17.3 percent to $1.97 in 2004. Net income per
share was positively impacted $0.11 per share in 2005 and $0.03 per
share in 2004 by the Corporation’s share repurchase program.

O FF I C E FU R N I TU R E
Ofﬁce furniture comprised 76 percent, 75 percent, and 74 percent
of consolidated net sales for 2005, 2004, and 2003, respectively.
Net sales for ofﬁce furniture increased 18 percent in 2005 to
$1.9 billion compared to $1.6 billion in 2004. The increase in 2005
was due to approximately $66 million of incremental sales from the
Corporation’s acquisitions and organic growth of $219 million or
13.9 percent, including increased price realization of $91 million.
Net sales increased 20 percent in 2004 to $1.6 billion compared to
$1.3 billion in 2003. The increase in 2004 was due to approximately
$117 million of sales from the Corporation’s 2004 acquisitions,
$22 million of price increases, and increased market share gain.
The Business and Institutional Furniture Manufacturer’s Association
(“BIFMA”) reported 2005 shipments up 13 percent and 2004
shipments up more than 5 percent. The Corporation believes it was
once again 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 9.5 percent in 2005,
9.9 percent in 2004, and 10.0 percent in 2003. Included in 2005
were $4.1 million of net pre-tax charges related to the closure of
two ofﬁce furniture facilities, which impacted operating margins by
0.2 percentage points. In addition the Corporation continued to

make investments in the areas of selling, product launches, and
strategic distribution acquisitions that had an expected negative
impact on proﬁtability. The decrease in operating margins in 2004
was 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
programs, and increased price realization. Included in 2003 were
$15.2 million of restructuring charges, which impacted operating
margins by 1.1 percentage points.

H E A R T H PRO DUC TS
Hearth products sales increased 14 percent in 2005 to $594 million
compared to $523 million in 2004, and 16 percent in 2004
compared to $452 million in 2003. The growth in 2005 and 2004
was attributable to strong housing starts, focused new product
introductions, contributions from new acquisitions as well as price
increases. Acquisitions accounted for $26 million, or 5 percentage
points, of the increase in 2005, and $18 million, or 4 percentage
points, of the increase in 2004.

Operating proﬁt as a percent of sales in 2005 was 12.6 percent
compared to 11.9 percent and 12.1 percent in 2004 and 2003,
respectively. The increase in operating margins in 2005 was due
to volume and increased price realization as well as continued
focus on cost improvements. The decrease in operating margins
in 2004 was mainly due to increased steel and freight costs.

Liquidity and Capital Resources

During 2005, cash ﬂow from operations was $201.0 million, which
along with available cash and short-term investments, funds from
stock option exercises under employee stock plans, and proceeds
from the Corporation’s revolving credit agreement, provided the
funds necessary to meet working capital needs, pay for strategic
acquisitions, invest in capital improvements, repurchase common
stock, and pay increased dividends.

Cash, cash equivalents, and short-term investments totaled
$84.7 million at the end of 2005 compared to $36.5 million at
the end of 2004 and $204.2 million at the end of 2003. These
remaining 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 Corporation 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 Corporation 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 2005 increased from the prior year due to
the Corporation’s new acquisitions and increased sales volume.

HNI CORPORATION AND SUBSIDIARIES 2005 ANNUAL REPORT 31

MANAGEMENT ’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPER ATIONS

Trade receivables days outstanding have averaged approximately
36 to 38 days over the past three years. The Corporation’s inventory
turns were 19, 21, and 23, for 2005, 2004, and 2003, respectively.
The Corporation is increasing its foreign sourced raw materials and
ﬁnished goods, which while reducing inventory turns does have
a favorable impact on the overall total cost.

I N V EST M E N TS
Management classiﬁes investments in marketable securities at
the time of purchase and re-evaluates 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. In 2004 the Corporation made an
investment, which was 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 was recorded at
cost. The weighted average cost method was used to determine
realized gains and losses on the trade date. In 2005 the Corporation
liquidated this investment and subsequently invested in an investment
fund that is also excluded from the scope of SFAS No. 115; however,
the Corporation’s ownership in this investment fund is such that the
underlying investments are recorded at fair market value. A table
of holdings as of year-end 2005, 2004, and 2003 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 $38.9 million in 2005, $32.4 million in
2004, and $34.8 million in 2003, respectively. These expenditures
have consistently focused on machinery and equipment and tooling
required to support new products, continuous improvements
in our manufacturing processes, 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 Corporation anticipates capital expenditures for 2006 to be
approximately 30 to 40 percent higher than previous years due to
increased focus on new products and process improvement, and
increased investment in distribution.

AC QU I S I T I O N S
During 2005, the Corporation completed the acquisition of four small
ofﬁce furniture services companies, three ofﬁce furniture dealers, and
three small hearth distributors for a total combined purchase price of
approximately $35 million. During 2004, the Corporation completed
three ofﬁce furniture business acquisitions and the acquisitions of two
hearth products distributors, as well as the acquisitions 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.

LO N G -TE R M DE BT
Long-term debt, including capital lease obligations, was 15% of total
capitalization as of December 31, 2005, 1% as of January 1, 2005,
and 1% as of January 3, 2004. The increase in long-term debt was
due to the Corporation utilizing its revolving credit facility to fund
acquisitions and share repurchases in accordance with its strategy
of operating with a more efﬁcient capital structure. The reduction in
long-term debt during 2004 was due to the payment of convertible
debentures related to a previous hearth acquisition. The reduction
in 2003 was due to the retirement of Industrial Revenue Bonds. On
January 28, 2005, the Corporation replaced a $136 million revolving
credit facility entered into on May 10, 2002 with a new revolving
credit facility that provided for a maximum borrowing of $150 million
subject to increase (to a maximum amount of $300 million) or
reduction from time to time according to the terms of the agreement.
On December 22, 2005, the Corporation increased the facility to the
maximum amount of $300 million. Additional borrowing capacity of
$160 million, less amounts used for designated letters of credit, is
available through this revolving bank credit agreement in the event
cash generated from operations should be inadequate to meet future
needs. The Corporation does not expect future capital resources to
be a constraint on planned growth. Certain of the Corporation’s credit
agreements include covenants that limit the assumption of additional
debt and lease obligations. The Corporation 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 Corporation’s obligations and
commitments to make future payments under contracts:

(In thousands)

Long-term debt,

Payments Due by Period

Total

Less than
1 year

1–3 years

4–5 years

After
5 years

including
estimated interest (1) $177,914

$÷6,893

$14,197

$13,411 $143,413

Capital lease
obligations

Operating leases

Transportation service

contract

Purchase obligations (2)
Other long-term
obligations (3)

1,300

284

426

422

168

71,479

18,231

25,329

16,480

11,439

4,276

51,846

–

38,972

7,246

6,576

414

24,736

Total

$345,787

$88,776

$46,528

$30,727 $179,756

(1) The $140 million in borrowings outstanding under the revolving credit facility at December 31,
2005 are due in 2011; however, $40 million is included in current liabilities in the consolidated
ﬁnancial statements based on management’s intent to repay the $40 million during ﬁscal 2006.
Assuming the amount is repaid in 2006, interest obligation amounts included in this table
would be reduced by approximately $3.8 million in the 1-3 year and 4-5 year categories and
$0.1 million in the after 5 year category. Interest has been included for all debt at either the
ﬁxed rate or variable rate in effect as of December 31, 2005, as applicable.

(2) Purchase obligations include agreements to purchase goods or services that are enforceable,
legally binding, and specify all signiﬁcant terms, including the quantity to be purchased, the
price to be paid, and the timing of the purchase.

(3) Other long-term liabilities represent payments due to members who are participants in the
Corporation’s salary deferral and long-term incentive plan programs, mandatory purchases
of the remaining interest in Omni Workspace Company and two of the 2005 ofﬁce furniture
dealer acquisitions, and contribution and beneﬁt payments expected to be made for our post-
retirement beneﬁt plans. It should be noted that our obligations related to post-retirement
beneﬁt plans are not contractual and the plans could be amended at the discretion of the
Corporation. We limited our disclosure of contributions and beneﬁt payments to 10 years,
as information beyond this time period was not available.

32 HNI CORPORATION AND SUBSIDIARIES 2005 ANNUAL REPORT

MANAGEMENT ’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPER ATIONS

Looking Ahead

Global Insight, BIFMA’s forecasting consultant, is estimating U.S.
ofﬁce furniture shipments to increase 7 percent in 2006 compared
to 13 percent in 2005. The housing market, a key indicator for the
hearth industry, is expected to soften from its record levels but
remain at healthy levels.

Management anticipates 2006 will be another good year. The
Corporation will continue to execute its strategy for aggressive
proﬁtable growth, continuously investing in core markets and
strategic acquisitions, which will generate returns to enhance
shareholder value. Management expects to continue to outperform
the industry.

The Corporation anticipates that its tax rate will increase to
36.5 percent in 2006; however, if the credit for increasing research
activities is renewed, the Corporation anticipates that the effective
tax rate would remain at 36 percent.

On January 12, 2006, the Corporation signed an agreement
to purchase Lamex, a privately held Chinese manufacturer and
marketer of ofﬁce furniture. Lamex operates primarily in China
and Hong Kong, where as a market leader, it generates sales in
excess of $70 million annually. The acquisition is expected to
close in early 2006, subject to satisfactory completion of closing
conditions. The Corporation intends to make the purchase with cash
and debt. The acquisition is expected to initially have minimal impact
on earnings. Lamex’ strong brand, signiﬁcant customer base, and
manufacturing capability offers the Corporation the opportunity to
drive aggressive growth in China, one of the largest and fastest
growing ofﬁce furniture markets in the world.

The Corporation 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 long-standing rapid
continuous improvement programs to build best total cost and a
lean enterprise.

CAS H D I V I DE N DS
Cash dividends were $0.62 per common share for 2005, $0.56
for 2004, and $0.52 for 2003. Further, the Board of Directors
announced a 16.1 percent increase in the quarterly dividend from
$0.155 to $0.18 per common share effective with the March 1, 2006
dividend payment for shareholders of record at the close of business
February 24, 2006. The previous quarterly dividend increase was
from $0.14 to $0.155, effective with the March 1, 2005 dividend
payment for shareholders of record at the close of business on
February 25, 2005. A cash 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 32 percent of prior year earnings.

C O M M O N S H A R E R E PU R C H ASES
During 2005, the Corporation repurchased 4,059,068 shares of its
common stock at a cost of approximately $202.2 million, or an average
price of $49.82. The Board of Directors authorized $100 million on
May 4, 2004, an additional $150 million on November 12, 2004,
and an additional $200 million on November 11, 2005 for repurchases
of the Corporation’s common stock. As of December 31, 2005,
approximately $143.5 million of this authorized amount remained
unspent. During 2004, the Corporation repurchased 3,641,400
shares of its common stock at a cost of approximately $145.6 million,
or an average price of $39.99. During 2003, the Corporation
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.

L I T I G AT I O N AN D UN C E R TA I N T I ES
The Corporation is involved in various kinds of disputes and legal
proceedings that have arisen in the course of its business,
including pending litigation, preferential payment claims in customer
bankruptcies, environmental remediation, taxes, and other claims.
It is the Corporation’s 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 the Corporation’s
ﬁnancial condition, although such matters could have a material
effect on the Corporation’s quarterly or annual operating results
and cash ﬂows when resolved in a future period.

On December 9, 2005, the Corporation settled a lawsuit which sought
approximately $7.6 million and arose out of the 2001 bankruptcy of a
customer, US Ofﬁce Products Company. The lawsuit alleged that the
Corporation received preferential payments from the customer during
the ninety days before the customer ﬁled for bankruptcy protection.
The Corporation was named a critical vendor by the bankruptcy court
and, accordingly, was paid in full for all outstanding receivables.
The lawsuit was brought in February 2003 by USOP Liquidating LLC
in the United States Bankruptcy Court for the District of Delaware.
The Corporation settled all claims arising out of this lawsuit for a
cash payment in the amount of $585,000. As a consequence of
the settlement, the lawsuit was dismissed with prejudice on
December 14, 2005.

HNI CORPORATION AND SUBSIDIARIES 2005 ANNUAL REPORT 33

CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except for per share data)

For the Years

2005

2004

2003

Net sales

Cost of products sold

Gross proﬁt
Selling and administrative expenses

Restructuring related charges

Operating income

Interest income
Interest expense

Earnings before income taxes and minority interest
Income taxes

Earnings before minority interest
Minority interest in earnings of subsidiary

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.

$2,450,572

1,562,654

$2,093,447

1,342,143

$1,755,728

1,116,513

887,918

668,910

3,462

215,546

1,518

2,355

214,709

77,295

137,414

(6)

$÷«137,420

$÷÷÷÷«2.51

54,649,199

$÷÷÷÷«2.50

55,033,741

751,304

572,006

886

178,412

1,343

886

178,869

65,287

113,582

–

639,215

480,744

8,510

149,961

3,940

2,970

150,931

52,826

98,105

–

$÷«113,582

$÷÷«98,105

$÷÷÷÷«1.99

$÷÷÷÷«1.69

57,127,110

58,178,739

$÷÷÷÷«1.97

$÷÷÷÷«1.68

57,577,630

58,545,353

34 HNI CORPORATION AND SUBSIDIARIES 2005 ANNUAL REPORT

CONSOLIDATED BAL ANCE SHEE TS

(Amounts in thousands of dollars and shares except par value)

As of Year-End

2005

2004

2003

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

Minority interest in subsidiary

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 2005 – 51,849; 2004 – 55,303; 2003 – 58,239

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

$÷÷«75,707

$÷÷«29,676

$÷«138,982

9,035

278,515

91,110

15,831

16,400

486,598

294,660

242,244

116,769

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

$1,140,271

$1,021,657

$1,021,826

$÷«307,952

$÷«253,958

$÷«211,236

1,270

40,350

8,602

358,174

103,050

819

48,671

35,473

140

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

–

51,849

55,303

58,239

941

540,822
332

593,944

6,879

606,632

349

669,163

10,324

641,732

(406)

709,889

$1,140,271

$1,021,657

$1,021,826

HNI CORPORATION AND SUBSIDIARIES 2005 ANNUAL REPORT 35

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUIT Y

(Amounts in thousands)

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
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 31, 2005

Common Stock

Additional
Paid-in Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Income

Total
Shareholders’
Equity

$«58,374

$÷÷÷549

$«587,731

$«239

$«646,893

98,105

(30,299)

(645)

(6,945)

(13,805)

98,105

(645)

97,460

(30,299)

(21,512)

17,347

(762)

627

58,239

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

137,420

(33,841)

(17)

(4,059)

(28,769)

(169,389)

605

22,831

137,420

(17)

137,403

(33,841)

(202,217)

23,436

$«51,849

$÷÷÷941

$«540,822

$«332

$«593,944

The accompanying notes are an integral part of the consolidated ﬁnancial statements.

36 HNI CORPORATION AND SUBSIDIARIES 2005 ANNUAL REPORT

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

For the Years

2005

2004

2003

$«137,420

$«113,582

$÷98,105

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 and other ﬁnancing

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

Cash and cash equivalents at end of year

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.

65,514

2,002

(8,933)

1,029

6,199

1,664

(25,654)

(10,488)

(4,207)

36,809

(5,534)

5,188

201,009

(38,912)

317

(2,890)

(33,804)

–

2,400

(34,495)

32,505

(68)

(74,947)

(202,217)

199,000

(57,970)

14,997

(33,841)

(80,031)

46,031

29,676

66,703

1,874

708

1,394

5,990

1,947

(26,960)

(9,409)

(145)

25,990

846

11,736

72,772

2,166

(3,314)

5,415

4,678

391

1,006

(3,004)

1,508

(35,288)

2,218

(5,379)

194,256

141,274

(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

(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

$÷«75,707

$÷«29,676

$÷÷«1,961
$÷«88,133

$÷÷÷÷883

$÷«59,938

$÷÷3,408

$÷53,855

HNI CORPORATION AND SUBSIDIARIES 2005 ANNUAL REPORT 37

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Nature of Operations

HNI Corporation (formerly HON INDUSTRIES Inc.) with its
subsidiaries (the “Corporation”), is a provider of ofﬁce furniture and
hearth products. Both industries are reportable segments; however,
the Corporation’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, 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 wood- and gas-burning factory-built ﬁreplaces,
pellet and electric hearth appliances, ﬁreplace inserts, stoves, gas
logs, and accessories. These products are sold through a national
system of dealers, wholesalers, large regional contractors, as well as
Corporation-owned distribution and retail outlets. The Corporation’s
products are marketed predominantly in the United States and
Canada. The Corporation 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 Corporation and its subsidiaries. Intercompany
accounts and transactions have been eliminated in consolidation.

The Corporation follows a 52/53 week ﬁscal year which ends
on the Saturday nearest December 31. Fiscal year 2005 ended on
December 31, 2005; 2004 ended on January 1, 2005; and 2003
ended on January 3, 2004. The ﬁnancial statements for ﬁscal year
2003 are based on a 53-week period, and ﬁscal years 2005 and
2004 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 maturity
dates not exceeding three months from date of purchase. The
Corporation 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 Corporation
sold all of its available-for-sale securities to fund acquisitions and to
move its investments to a Master Fund. The Corporation realized

38 HNI CORPORATION AND SUBSIDIARIES 2005 ANNUAL REPORT

losses of approximately $0.8 million. This investment was 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 was not readily available. Therefore,
this investment was recorded at cost. The weighted average cost
method was used to determine realized gains and losses on the
trade date. During 2005, the Corporation liquidated this Master Fund
investment and subsequently invested in an investment fund that is
also excluded from the scope of SFAS No. 115; however, the
Corporation’s ownership in this investment fund is such that the
underlying investments are recorded at fair market value.

At December 31, 2005, January 1, 2005, and January 3, 2004, cash,
cash equivalents, and investments consisted of the following (cost
approximates market value):

Year-End 2005

(In thousands)

Held-to-maturity securities

Certiﬁcates of deposit

Cash and Cash
Equivalents

Short-term
Investments

Long-term
Investments

$÷÷÷÷«–

$÷÷÷«–

$÷÷«400

Investment in Master Fund

–

9,035

19,085

Cash and money market accounts

75,707

–

Total

$75,707

$9,035

$19,485

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

R EC E I VAB LES
Accounts receivable are presented net of an allowance for doubtful
accounts of $12.0 million, $11.4 million, and $10.9 million, for 2005,
2004, and 2003, 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 Corporation valued 90%, 80%, and 96% of its inventory by
the last-in, ﬁrst-out (LIFO) method at December 31, 2005, January 1,
2005, and January 3, 2004, respectively. Additionally, the Corporation
evaluates its inventory reserves in terms of excess and obsolete
exposures. 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 $8.2 million, $7.7 million, and $5.7 million, at year-
end 2005, 2004, and 2003, 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 Corporation’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 Corporation’s restructuring activities are discussed in the
Restructuring Related Charges note. These assets included real
estate, manufacturing equipment, and certain other ﬁxed assets.
The Corporation’s continuous focus on improving the manufacturing
process tends to increase the likelihood of assets being replaced;
therefore, the Corporation is constantly evaluating the expected lives
of its equipment and accelerating depreciation where appropriate.

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, “Goodwill and Other Intangible
Assets” (“SFAS No. 142”), the Corporation evaluates its goodwill
for impairment on an annual basis based on values at the end of third
quarter or whenever indicators of impairment exist. The Corporation
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 reporting units requires signiﬁcant
judgment, and actual cash ﬂows in the future may differ signiﬁcantly
from those forecasted today.

The Corporation also determines the fair value of indeﬁnite lived
trade names on an annual basis or whenever indications of impairment
exist. The Corporation has evaluated its trade names for impairment
and recognized an impairment charge of $0.5 million in 2005 related
to two trademarks where the carrying value exceeded the fair
market value.

PRO DUC T WA R R AN T I ES
The Corporation 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 adjustments to the
reserve. Activity associated with warranty obligations was as follows:

(In thousands)

2005

2004

2003

Balance at the beginning of the period

$10,794

$÷«8,926

$«8,405

Accrual assumed from acquisition

–

688

–

Accruals for warranties issued during

the period

9,809

10,486

7,907

Accrual related to pre-existing

warranties

Settlements made during the period

1,449

(11,895)

1,054

(10,360)

629

(8,015)

Balance at the end of the period

$10,157

$«10,794

$«8,926

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
$27.3 million in 2005, $27.4 million in 2004, and $24.0 million in 2003.

STO C K- BASE D C O M PE N SAT I O N
The Corporation 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

HNI CORPORATION AND SUBSIDIARIES 2005 ANNUAL REPORT 39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 Corporation 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)

2005

2004

Net income, as reported

$137.4

$113.6

Deduct: Total stock-based employee
compensation expense determined
under fair value-based method for
all awards, net of related tax effects

(1.8)

(5.0)

Pro forma net income

$135.6

$108.6

Earnings per share:

Basic – as reported

Basic – pro forma

Diluted – as reported

Diluted – pro forma

$÷2.51

$÷2.48

$÷2.50

$÷2.47

$÷1.99

$÷1.90

$÷1.97

$÷1.89

2003

$98.1

(3.0)

$95.1

$1.69

$1.64

$1.68

$1.62

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 Corporation 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 Corporation’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 GS 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 management
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 Corporation 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 Corporation’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 magnitude
of change in actual experience development could cause these
estimates to change in the near term.

F O R E I G N C U R R E N CY T R AN S L AT I O N S
Foreign currency ﬁnancial statements of foreign operations where
the local currency is the functional currency are translated using
exchange rates in effect at period end for assets and liabilities and
average exchange rates during the period for results of operations.
Related translation adjustments are reported as a component
of Shareholders’ Equity. Gains and losses on foreign currency
transactions are included in the “Selling and administrative
expenses” caption of the Consolidated Statements of Income.

R EC L AS S I F I CAT I O N S
Certain reclassiﬁcations have been made within the footnotes
to conform to current year presentation. There have been no
reclassiﬁcations on the primary ﬁnancial statements.

R EC E N T AC C OUN T I N G PRO N OUN C E M E N T S
In March 2005, the FASB issued Interpretation No. 47, “Accounting
for Conditional Asset Retirement Obligations, an Interpretation of
FASB Statement No. 142” (“FIN 47”). Under FIN 47, an entity is
required to recognize a liability for the fair value of a conditional
asset retirement obligation if the fair value of the liability can be
reasonably estimated. Any uncertainty about the amount and/or
timing of future settlement should be factored into the measurement
of the liability when sufﬁcient information exists. FIN 47 also clariﬁes
when an entity would have sufﬁcient information to reasonably
estimate the fair value. The Corporation adopted FIN 47 during the
fourth quarter of 2005, and it did not have an impact on the
Corporation’s ﬁnancial statements.

In December 2004, the Financial Accounting Standards Board issued
SFAS No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”).
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 date of adoption,

4 0 HNI CORPORATION AND SUBSIDIARIES 2005 ANNUAL REPORT

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 beginning with the ﬁrst annual
ﬁscal period after June 15, 2005. The Corporation plans to adopt
SFAS No. 123(R) on January 1, 2006, the beginning of its ﬁscal year
and to use the modiﬁed prospective method. Based on adopting
SFAS No. 123(R) on January 1, 2006, and using the modiﬁed
prospective method, the Corporation estimates that total stock-
based compensation expense will be approximately $3.5 million
for the year-ending December 30, 2006.

In November 2004, the Financial Accounting Standards Board
issued SFAS No. 151, “Inventory Costs.” SFAS No. 151 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. 151 is effective for ﬁscal years
beginning after June 15, 2005. The Corporation intends to adopt
SFAS No. 151 on January 1, 2006, the beginning of its 2006 ﬁscal
year. The adoption of SFAS No. 151 is not expected to have a
material impact on the Corporation’s ﬁnancial statements.

Restructuring Related Charges

As a result of the Corporation’s ongoing business simpliﬁcation and
cost reduction strategies the Corporation began the shutdown of
two ofﬁce furniture facilities in third quarter 2005. The Corporation
will close plants in Kent, Washington, and Van Nuys, California, and
consolidate production into other U.S. manufacturing locations. In
connection with the shutdowns, the Corporation recorded $4.1 million
of pre-tax charges during 2005. These charges included $0.6 million
of accelerated depreciation of machinery and equipment recorded in
cost of sales, $1.2 million of severance, $0.4 million of pension related
expenses, and $1.9 million of factory exit, production relocation, and
other costs which were recorded as restructuring costs. The closures
and consolidation will be completed during the ﬁrst quarter of 2006.

During 2003, the Corporation 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 which was recorded in cost of sales, $3.4 million of
severance, and $5.6 million of facility exit, production relocation, and
other costs which 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 Corporation
incurred $1.2 million of current period charges during 2004. The
Corporation 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 Corporation
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 Corporation recorded a pretax 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 was taken back into income relating to
this charge. This was due to the fact that the Corporation was able
to exit a lease with the lessor at more favorable terms than
previously estimated.

The following table summarizes the restructuring accrual activity
since the beginning of ﬁscal 2003. This summary does not include
the effect of the Corporation’s employee retirement plans in 2005,
as this item was not accounted for through the restructuring accrual
on the Consolidated Balance Sheets but is included as a component
of “Restructuring Related Charges” in the Consolidated Statements
of Operations.

(In thousands)

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

Restructuring charges

Cash payments

Restructuring reserve at
December 31, 2005

Facility
Termination
and
Other Costs

Total

$«2,187

5,622

(550)

(6,159)

9,060

(550)

(9,263)

Severance
Costs

$÷÷÷÷–

3,438

–

(3,104)

$÷÷334

$«1,100

$«1,434

(31)

(345)

1,147

(272)

(1,975)

1,189

(303)

(2,320)

$÷÷÷÷–

1,142

(325)

1,876

(632)

3,018

(957)

$÷÷817

$«1,244

$«2,061

Business Combinations

The Corporation completed the acquisition of four small ofﬁce
furniture services companies, three ofﬁce furniture dealers, and three
small hearth distributors during 2005. The combined purchase price
of these acquisitions totaled $35.4 million, of which $33.4 million
was paid in cash and the remaining is due to the sellers over the
next several years. The Corporation acquired controlling interests in
the three ofﬁce furniture dealers and the ability to call the remaining
interests on or after ﬁscal year-end 2008 and 2010. The Corporation

HNI CORPORATION AND SUBSIDIARIES 2005 ANNUAL REPORT 41

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

must exercise its calls on or before the end of ﬁscal 2014 and 2015.
SFAS No. 150, “Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity” (“SFAS No. 150”), 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 Corporation has recorded a liability for the
remaining interest at fair value at the acquisition date.

The Corporation has ﬁnalized the allocation of the purchase price
for all acquisitions other than those completed in the ﬁnal quarter of
the year. Any modiﬁcation is not expected to be signiﬁcant. There
are approximately $14.1 million of intangibles associated with these
acquisitions. Of these acquired intangible assets, $1.5 million was
assigned to indeﬁnite-lived trade names that are not subject to
amortization. The remaining $12.6 million have estimated useful lives
ranging from two to ﬁfteen years with amortization recorded based
on the projected cash ﬂow associated with the respective intangible
assets’ existing relationships. There is approximately $17.0 million of
goodwill associated with these acquisitions, of which $11.8 million
was assigned to the furniture segment and $5.2 million was
assigned to the hearth products segment. Approximately $1.8 million
of the goodwill assigned to the furniture segment is not deductible
for tax purposes.

On January 5, 2004, the Corporation acquired certain assets of
Paoli Inc., a subsidiary of Klaussner Furniture Industries, Inc. for
$81.1 million. Paoli Inc. is a leading provider of wood case goods
and seating with well-known brands, broad product offering, and
strong independent representatives sales and dealer networks
located in Orleans, Indiana.

The Corporation acquired $26.3 million of intangible assets from the
Paoli acquisition, of which $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 $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 Corporation’s 2003 ﬁscal year, instead
of the actual date reported above, the Corporation’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.

On July 6, 2004, the Corporation acquired a controlling interest in
Omni Workspace Company (formerly Omni Remanufacturing, Inc.).
Omni Workspace Company is comprised of two divisions – IntraSpec

Solutions, a panel systems re-manufacturer, and Omni Service
Group (formerly A&M Business Interior Services), an ofﬁce furniture
services company. The Corporation acquired 80 percent of the
common stock of Omni Workspace Company and the ability to call
the remaining 20 percent of the shares on or after the ﬁscal year end
2009. The Corporation must exercise its call on or before the end of
ﬁscal year end 2014. SFAS No. 150 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 Corporation has recorded a liability at the acquisition
date for the remaining 20 percent of the shares at fair value. The
Corporation continues to monitor and adjust the recorded amount to
accrete the obligation to the estimated redemption amount in 2014
through a charge to earnings as required.

The Corporation acquired $12.7 million of intangible assets from the
Omni acquisition, of which $2.8 million was assigned to registered
trademarks that are not subject to amortization. The Corporation did
recognize an impairment charge of $0.5 million in 2005 on two of
the trademarks due to the carrying value exceeding the current fair
market value. 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
$12.0 million of goodwill was assigned to the ofﬁce furniture segment
and is not deductible for income tax purposes.

On July 19, 2004, the Corporation acquired 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 for $27.7 million.

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 $9.6 million of goodwill was assigned to the hearth
products segment and is deductible for income tax purposes.

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 Corporation 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.

42 HNI CORPORATION AND SUBSIDIARIES 2005 ANNUAL REPORT

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Inventories

(In thousands)

Finished products

Materials and work in process

LIFO reserve

2005

2004

2003

$«61,027

$«52,796

$«31,407

46,398

(16,315)

40,712

(15,918)

28,287

(9,864)

$«91,110

$«77,590

$«49,830

Property, Plant, and Equipment

(In thousands)

2005

2004

2003

Land and land improvements

$÷26,361

$÷26,042

$÷23,065

Buildings

Machinery and equipment

Construction and equipment

installation in progress

Less: allowances for depreciation

240,174

523,240

234,421

512,544

211,005

495,901

23,976

13,686

9,865

813,751

519,091

786,693

475,349

739,836

427,468

The changes in the carrying amount of goodwill since
December 28, 2002 are as follows by reporting segment:

(In thousands)

Ofﬁce
Furniture

Hearth
Products

Total

Balance as of December 28, 2002

$43,611

$148,784

$192,395

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

Goodwill increase during period

12,128

5,562

17,690

Balance as of December 31, 2005

$77,659

$164,585

$242,244

The decrease in goodwill in 2003 is due to an adjustment relating to
a prior acquisition. The goodwill increases in 2004 and 2005 relate
to acquisitions completed. See Business Combinations note.

$294,660

$311,344

$312,368

Accounts Payable and Accrued Expenses

Goodwill and Other Intangible Assets

Pursuant to Statement of Financial Accounting Standards (SFAS)
No. 142, the Corporation evaluates its goodwill for impairment on an
annual basis based on values at the end of third quarter or whenever
indicators of impairment exist. The Corporation 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.

The Corporation also owns trademarks having a net value of
$30.2 million as of December 31, 2005, $29.2 million as of
January 1, 2005, and $8.1 million as of January 3, 2004. The
trademarks are deemed to have an indeﬁnite useful life because they
are expected to generate cash ﬂow indeﬁnitely. The Corporation
recorded an impairment charge of $0.5 million in 2005 related to two
ofﬁce furniture trademarks where the carrying amount exceeded the
current fair market value. The charge was included in selling and
administrative expenses on the Consolidated Statements of Income.

The table below summarizes amortizable deﬁnite-lived intangible
assets, which are reﬂected in Other Assets in the Corporation’s
consolidated balance sheets:

(In thousands)

2005

2004

2003

Trade accounts payable

$÷86,945

$÷64,319

$÷42,048

Compensation

Proﬁt sharing and retirement expense

Vacation pay

Marketing expenses

Other accrued expenses

34,272

32,461

14,230

54,797

85,247

25,722

30,516

13,095

50,939

69,367

22,803

30,365

13,745

44,795

57,480

$307,952

$253,958

$211,236

Long-Term Debt

(In thousands)

2005

2004

2003

Note payable to bank, revolving
credit agreement with interest
at a variable rate

Industrial development revenue
bonds, various issues, payable
through 2018 with interest at
1.40–3.62% per annum

Convertible debentures payable
to individuals, with interest at
5.5% per annum

Other notes and amounts

Total debt

$140,000

$÷÷÷«–

2,300

–

900

143,200

40,150

–

560

2,860

233

26,130

503

28,933

26,243

(In thousands)

Patents

Customer lists and other

Less: accumulated amortization

2005

2004

2003

Less: current portion

$18,480

67,211

28,758

$18,820

$16,450

54,702

21,785

26,076

16,671

Long-term debt

$103,050

$2,627

$÷2,690

Aggregate maturities of long-term debt are as follows:

Net intangible assets

$56,933

$51,737

$25,855

Amortization expense for deﬁnite-lived intangibles for 2005,
2004, and 2003, was $7.3 million, $5.1 million, and $2.7 million,
respectively. Amortization expense is estimated to range between
$4.5 and $7.5 million per year over the next ﬁve years.

(In thousands)

2006

2007

2008

2009

2010

Thereafter

$÷40,150

500

250

–

$102,300

HNI CORPORATION AND SUBSIDIARIES 2005 ANNUAL REPORT 4 3

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On January 28, 2005, the Corporation replaced a $136 million
revolving credit facility entered into on May 10, 2002 with a new
revolving credit facility that provided for a maximum borrowing
of $150 million subject to increase (to a maximum amount of
$300 million) or reduction from time to time according to the
terms of the agreement. On December 22, 2005, the Corporation
increased the facility to the maximum amount of $300 million.
Amounts borrowed under the Credit Agreement may be borrowed,
repaid, and reborrowed from time to time until January 28, 2011.

The convertible debentures were payable to the former owners
of businesses that were acquired by the Corporation. Following
the acquisition some of these individuals continued as members of
the Corporation. The convertible debentures were convertible into
cash. The debentures contained certain conversion features that
are recorded as earned. During 2003, the Corporation recorded
approximately $3 million of appreciation on these debentures.

Certain of the above borrowing arrangements include covenants
which limit the assumption of additional debt and lease obligations.
The Corporation has been and currently is in compliance with the
covenants related to these debt agreements. The fair value of the
Corporation’s outstanding long-term debt obligations at year-end
2005 approximates the recorded aggregate amount.

Selling and Administrative Expenses

(In thousands)

2005

2004

2003

Freight expense for shipments

to customers

Amortization of intangible and

other assets

Product development costs

Other selling and administrative

expenses

$159,189

$132,866

$105,933

10,642

27,338

8,521

27,401

4,625

24,021

471,741

403,218

346,165

$668,910

$572,006

$480,744

A reconciliation of the statutory federal income tax rate to the
Corporation’s effective income tax rate is as follows:

Federal statutory tax rate

State taxes, net of federal tax effect

Deduction related to domestic

production activities

Credit for increasing research activities

Extraterritorial income exclusion

Other – net

Effective tax rate

2005

35.0«%

2.4«

(0.9)«

(0.4)«

(0.3)«

0.2«

36.0«%

2004

35.0«%

2.2«

–«

(0.6)«

(0.3)«

0.2«

2003

35.0«%

1.8«

–«

(2.0)«

(0.5)«

0.7«

36.5«%

35.0«%

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 Corporation’s deferred
tax liabilities and assets are as follows:

(In thousands)

2005

2004

2003

Net long-term deferred tax liabilities:

Tax over book depreciation

$(16,458)

$(25,549)

$(28,103)

Compensation

Goodwill

Other – net

Total net long-term deferred

tax liabilities

Net current deferred tax assets:

Allowance for doubtful accounts

Vacation accrual

Inventory differences

Deferred income

Warranty accruals

Other – net

5,907

(30,499)

5,577

5,697

(24,362)

(1,660)

4,912

(18,044)

3,502

(35,473)

(42,554)

(37,733)

3,858

4,924

5,720

(6,596)

3,847

4,078

3,512

4,588

4,304

(6,238)

3,504

4,969

1,913

4,754

4,343

(5,462)

2,886

5,895

Total net current deferred tax assets

15,831

14,639

14,329

Net deferred tax (liabilities) assets

$(19,642)

$(27,915)

$(23,404)

Income Taxes

Signiﬁcant components of the provision for income taxes excluding
tax allocated to minority interest are as follows:

(In thousands)

Current:

Federal

State

2005

2004

2003

$77,474

8,954

$60,425

$49,721

5,976

4,159

Shareholders’ Equity and Earnings Per Share

Common Stock, $1 Par Value

Authorized

Issued and outstanding

Preferred Stock, $1 Par Value

2005

2004

2003

200,000,000 200,000,000 200,000,000
58,238,519
55,303,323

51,848,591

Authorized

2,000,000

Current provision

86,428

66,401

53,880

Issued and outstanding

–

Deferred:

Federal

State

Deferred provision

(8,048)

(1,081)

(9,129)

(1,008)

(106)

(1,114)

(973)

(81)

(1,054)

$77,299

$65,287

$52,826

The Corporation purchased 4,059,068; 3,641,400; and 762,300
shares of its common stock during 2005, 2004, and 2003,
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.

4 4 HNI CORPORATION AND SUBSIDIARIES 2005 ANNUAL REPORT

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table reconciles the numerators and denominators
used in the calculation of basic and diluted earnings per share (EPS):

2005

2004

2003

Cash dividends declared and paid per share for each year are:

(In dollars)

Common shares

2005

$.62

2004

$.56

2003

$.52

Numerators:

Numerators for both basic

and diluted EPS net
income

Denominators:

Denominator for basic EPS

weighted-average common
shares outstanding

Potentially dilutive shares
from stock option plans

$137,420,000 $113,582,000

$98,105,000

54,649,199

57,127,110

58,178,739

384,542

450,520

366,614

Denominator for diluted EPS

55,033,741

57,577,630

58,545,353

Earnings per share – basic

Earnings per share – diluted

$«÷÷÷÷÷÷2.51 $«÷÷÷÷÷÷1.99
$«÷÷÷÷÷÷2.50 $«÷÷÷÷÷÷1.97

$«÷÷÷÷÷1.69

$«÷÷÷÷÷1.68

Certain exercisable and non-exercisable stock options were not
included in the computation of diluted EPS for ﬁscal year 2005, 2004,
and 2003, because the option prices were greater that the average
market prices for the applicable periods. The number of stock options
outstanding, which met this criterion for 2005 was 2,500 with a per
share exercise price of $52.91; for 2004 was 25,000 with a range of
per share exercise prices of $42.15 to $42.98; and for 2003 was
20,000 with a range of per share exercise prices of $42.49 to $42.98.

Components of other comprehensive income (loss) consist of
the following:

(In thousands)

2005

2004

2003

Foreign currency translation
adjustments – net of tax

Change in unrealized gains (losses) on
marketable securities – net of tax

Change in minimum pension

liability – net of tax

Other comprehensive income (loss)

$«293

$348

$÷«45

–

(310)

$÷(17)

407

–

(463)

(227)

$755

$(645)

In May 1997, the Corporation registered 400,000 shares of its
common stock under its 1997 Equity Plan for Non-Employee Directors.
This plan permits the Corporation to issue to its non-employee
directors options to purchase shares of Corporation common stock,
restricted stock of the Corporation, and awards of Corporation
common 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 Corporation common stock.
During 2005, 2004, and 2003, 13,621; 10,738; and 10,922 shares of
Corporation common stock were issued under the plan, respectively.

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
applicable purchase date. No member may purchase stock under
the plan in an amount which exceeds the lesser of 20% of his/her
gross earnings or a maximum fair value of $25,000 in any calendar
year. During 2005, 77,410 shares of common stock were issued
under the plan at an average price of $45.48. 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. An additional
522,013 shares were available for issuance under the plan at
December 31, 2005.

The Corporation has a shareholders’ rights plan which will expire
August 20, 2008. The plan becomes operative if certain events
occur involving the acquisition of 20% or more of the Corporation’s
common stock by any person or group in a transaction not approved
by the Corporation’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 Corporation 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 Corporation. The Corporation has reserved preferred
shares necessary for issuance should the rights be exercised.

The Corporation 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 Corporation’s common stock or when more than one-third of
the Corporation’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 Corporation, and all his or
her beneﬁts are vested under the Corporation plans. If, at any time
within two years of the change in control, his or her position, salary,
bonus, place of work, or Corporation-provided beneﬁts are modiﬁed,
or employment is terminated by the Corporation 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.

HNI CORPORATION AND SUBSIDIARIES 2005 ANNUAL REPORT 45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock-Based Compensation

Under the Corporation’s 1995 Stock-Based Compensation Plan, as
amended and restated effective November 10, 2000, the Corporation
may award options to purchase shares of the Corporation’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 Corporation’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 2005,
2004, and 2003, estimated on the date of grant using the Black-
Scholes option-pricing model, was $15.74, $17.70, and $10.74,
respectively. The fair value of 2005, 2004, and 2003, options granted
is estimated on the date of grant using the following assumptions:
dividend yield of 1.2% to 2.0%, expected volatility of 31.8% to
35.1%, risk-free interest rate of 4.2% to 4.8%, and an expected
life of 7 to 10 years.

The status of the Corporation’s stock option plans is summarized
below:

Number of Shares

Weighted-Average
Exercise Price

Outstanding at December 28, 2002

Granted

Exercised

Forfeited

Outstanding at January 3, 2004

Granted

Exercised

Forfeited

Outstanding at January 1, 2005

Granted

Exercised

Forfeited

Outstanding at December 31, 2005

Options exercisable at:

December 31, 2005

January 1, 2005

January 3, 2004

1,403,250

446,500

(362,000)

(18,500)

1,469,250

340,900

(448,500)

(53,200)

1,308,450

175,800

(331,500)

(24,100)

1,128,650

433,250

604,750

202,250

$23.03

26.78

23.10

23.57

$24.15

39.59

22.33

27.61

$28.65

42.81

25.14

30.95

$31.84

$23.00

27.56

25.47

The following table summarizes information about ﬁxed stock
options outstanding at December 31, 2005:

Options Outstanding

Options Exercisable

Range of
Exercise Prices

Number
Outstanding

Weighted-
Average
Remaining
Contractual Life

Weighted-
Average
Exercise
Price

Number
Exercisable at
December 31,
2005

$24.50

$32.22

$23.47

$18.31–$26.69

$23.32

$25.75–$25.77

$25.50–$42.98

$37.57–$42.15

$42.66–$52.91

7,000

3,000

49,750

132,500

69,500

139,000

227,500

328,500

171,900

1.4 years

2.1 years

3.1 years

4.6 years

5.1 years

6.1 years

7.2 years

8.2 years

9.2 years

$24.50

$32.22

$23.47

$19.89

$23.32

$25.77

$27.70

$39.58

$42.81

7,000

3,000

49,750

132,500

69,500

11,000

7,000

153,500

–

Retirement Beneﬁts

The Corporation has deﬁned contribution proﬁt-sharing plans covering
substantially all employees who are not participants in certain deﬁned
beneﬁt plans. The Corporation’s annual contribution to the deﬁned
contribution plans is based on employee eligible earnings and results
of operations and amounted to $27.4 million, $27.3 million, and
$26.5 million, in 2005, 2004, and 2003, respectively.

The Corporation sponsors deﬁned beneﬁt plans which include
a limited number of salaried and hourly employees at certain
subsidiaries. The Corporation’s funding policy is generally to contribute
annually the minimum actuarially computed amount. Net pension
costs relating to these plans were $653,000, $0, and $176,000 in
2005, 2004, and 2003, respectively. The increase in 2005 is due to
a plan curtailment resulting from the shutdown of an ofﬁce furniture
facility in Van Nuys, California. The actuarial present value of
obligations, less related plan assets at fair value, is not signiﬁcant.

The Corporation also participates in a multi-employer plan, which
provides deﬁned beneﬁts to certain of the Corporation’s union
employees. Pension expense for this plan amounted to $353,000,
$322,000, and $309,000, in 2005, 2004, and 2003, respectively.

4 6 HNI CORPORATION AND SUBSIDIARIES 2005 ANNUAL REPORT

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 Corporation’s balance sheet at:

(In thousands)

2005

2004

2003

Change in beneﬁt obligation

Beneﬁt obligation at
beginning of year

Service cost

Interest cost

Beneﬁts paid

Actuarial (gain) or loss

$«18,958

$«18,331

$17,617

303

1,057

(1,503)

923

284

1,066

(1,780)

1,057

249

1,105

(1,206)

566

Beneﬁt obligation at end of year

$«19,738

$18,958

$18,331

Change in plan assets

Fair value at beginning of year

$÷«8,777

$«10,250

$÷÷÷÷«–

Actual return on assets

Employer contributions

Beneﬁts paid

300

112

195

(1,503)

(1,780)

–

11,456

(1,206)

Fair value at end of year

$÷«7,582

$÷«8,777

$10,250

Reconciliation of funded status

Funded status

$(12,156)

$(10,181)

$«(8,081)

Unrecognized actuarial (gain) or loss

3,132

2,340

1,105

The Corporation invests these funds in high-grade money market
instruments. Prior to 2003 the plan was not funded.

The discount rates at ﬁscal year-end 2005, 2004, and 2003 were 5.5%,
5.75%, and 6.0%, respectively. The Corporation payment for these
beneﬁts has reached the maximum amounts per the plan; therefore,
healthcare trend rates have no impact on the Corporation’s cost.

In December 2003, the United States enacted into law the
Medicare Prescription Drug, Improvement and Modernization Act
of 2003 (the “Modernization Act”). The Modernization 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 Corporation adopted FSP 106-2 on July 4, 2004.
The Corporation has determined that the beneﬁts provided by the
plan are not actuarially equivalent to the Medicare Part D beneﬁt
under the Modernization Act based on the percentage of the cost
of the plan that the Corporation provides. Therefore, the adoption
of FSP 106-2 did not have an impact on the Corporation’s ﬁnancial
statements during 2004. The Corporation will continue to monitor
the effect as regulations evolve regarding actuarial equivalency.

Unrecognized transition obligation

or (asset)

Unrecognized prior service cost

4,199

661

4,780

892

5,361

1,122

Leases

Net amount recognized at year-end

$÷(4,164)

$÷(2,169)

$÷÷(493)

Amounts recognized in the statement

of ﬁnancial position consist of:

Accrued beneﬁt liability

$÷(4,164)

$÷(2,169)

$÷÷(493)

Net amount recognized at year-end,

included in other liabilities

$÷(4,164)

$÷(2,169)

$÷÷(493)

Estimated future beneﬁt payments (in thousands)

Fiscal 2006

Fiscal 2007

Fiscal 2008

Fiscal 2009

Fiscal 2010

Fiscal 2011–2015

$÷1,199

1,236

1,278

1,301

1,310

7,077

The Corporation leases certain warehouse, plant facilities, and
equipment. Commitments for minimum rentals under non-cancelable
leases at the end of 2005 are as follows:

(In thousands)

2006

2007

2008

2009

2010

Thereafter

Capitalized
Leases

Operating
Leases

$÷«284

$18,231

215

211

168

13,957

11,372

9,235

7,245

11,439

Total minimum lease payments

$1,300

$71,479

Less: amount representing interest

Expected contributions during ﬁscal 2006

Total

Present value of net minimum lease payments,

$÷÷÷÷÷0

including current maturities of $200

281

$1,019

Plan Assets – Percentage of Fair Value by Category

2005

2004

Property, plant, and equipment at year-end include the following
amounts for capitalized leases:

Equity

Debt

Other

Total

100%

(In thousands)

Buildings

Machinery and equipment

Ofﬁce equipment

Less: allowances for depreciation

2005

2004

2003

$3,299

761

4,098

3,564

196

761

4,256

3,307

196

761

4,256

2,879

$÷«534

$÷«949

$1,377

HNI CORPORATION AND SUBSIDIARIES 2005 ANNUAL REPORT 47

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Rent expense for the years 2005, 2004, and 2003 amounted
to approximately $19.5 million, $16.1 million, and $13.6 million,
respectively. The Corporation has an operating lease for a production
facility with annual rentals totaling approximately $362,000 with a
corporation in which the minority owner of one of the Corporation’s
consolidated subsidiaries is an investor. Contingent rent expense under
both capitalized and operating leases (generally based on mileage
of transportation equipment) amounted to $169,000, $241,000, and
$313,000, for the years 2005, 2004, and 2003, respectively.

Guarantees, Commitments and Contingencies

During the second quarter ended June 28, 2003, the Corporation
entered into a one-year ﬁnancial agreement for the beneﬁt of one
of its distribution chain partners which was extended through
August 31, 2005. During the third quarter of 2005 the Corporation
paid $1.2 million associated with this guarantee. The Corporation
expects to recover this amount through liquidations of secured
collateral and settlements. As of December 31, 2005, the Corporation
has recovered $0.9 million.

The Corporation utilizes letters of credit in the amount of $23 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 Corporation is contingently liable for future minimum payments
totaling $4.3 million under a transportation service contract. The
transportation agreement was for a three-year period ending
May 1, 2005, with an automatic renewal provision for periods of one
year. This contract was renewed. Either party may terminate the
agreement upon 90 days’ written notice.

The Corporation has contingent liabilities, which have arisen in
the course of its business, including pending litigation, preferential
payment claims in customer bankruptcies, environmental remediation,
taxes, and other claims. On December 9, 2005, the Corporation
settled a lawsuit, which sought approximately $7.6 million and arose
out of the 2001 bankruptcy of a customer. The lawsuit alleged that
the Corporation received preferential payments from the customer
during the ninety days before the customer ﬁled for bankruptcy
protection. The Corporation was named a critical vendor by the
bankruptcy court and, accordingly, was paid in full for all outstanding
receivables. The lawsuit was brought in February 2003 in the United
States Bankruptcy Court for the District of Delaware. The Corporation
settled all claims arising out of this lawsuit for a cash payment in
the amount of $585,000. As a consequence of the settlement, the
lawsuit was dismissed with prejudice on December 14, 2005.

Signiﬁcant Customer

One ofﬁce furniture customer accounted for approximately 12%,
13%, and 13% of consolidated net sales in 2005, 2004, and 2003,
respectively.

Operating Segment Information

In accordance with SFAS No. 131, “Disclosures about Segments
of an Enterprise and Related Information,” management views the
Corporation 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,
bookcases, 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 Corporation’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 2005, 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 Corporation’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 Corporation’s primary
market and capital investments are concentrated in the United States.

4 8 HNI CORPORATION AND SUBSIDIARIES 2005 ANNUAL REPORT

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Reportable segment data reconciled to the consolidated ﬁnancial
statements for the years ended 2005, 2004, and 2003, is as follows:

(In thousands)

Net sales:

Ofﬁce furniture

Hearth products

Operating proﬁt:
Ofﬁce furniture(a)
Hearth products

Total operating proﬁt

Unallocated corporate expenses

2005

2004

2003

$1,855,642

$1,570,777

$1,304,054

594,930

522,670

451,674

$2,450,572

$2,093,447

$1,755,728

$÷«176,321

$÷«154,896

$÷«130,080

74,822

62,158

54,433

251,143

(36,424)

217,054

(38,185)

184,513

(33,582)

Income before income taxes

$÷«214,719

$÷«178,869

$÷«150,931

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

$÷÷«43,967

$÷÷«45,737

$÷÷«54,121

15,275

6,272

15,061

5,905

13,599

5,052

$÷÷«65,514

$÷÷«66,703

$÷÷«72,772

$÷÷«27,760

$÷÷«18,635

$÷÷«17,619

8,498

5,544

13,878

3,287

12,577

7,312

$÷÷«41,802

$÷÷«35,800

$÷÷«37,508

$÷«617,591

$÷«570,294

$÷«452,350

361,568

161,112

338,602

112,761

303,811

265,665

$1,140,271

$1,021,657

$1,021,826

(a) Included in operating proﬁt for the ofﬁce furniture segment are pretax charges of $3.5 million,
$0.9 million, and $8.5 million, for closing of facilities and impairment charges in 2005, 2004,
and 2003, respectively.

Subsequent Event

On January 13, 2006, the Corporation signed an agreement to
purchase Lamex, a privately held Chinese manufacturer and marketer
of ofﬁce furniture. Lamex operates primarily in China and Hong Kong,
where as a market leader, it generates sales in excess of $70 million
annually. The acquisition is expected to close in early 2006. The
Corporation intends to make the purchase with cash and debt.
Further details of the transaction will be included in the Corporation’s
SEC Quarterly Report on Form 10-Q for the ﬁrst quarter ended
April 1, 2006.

HNI CORPORATION AND SUBSIDIARIES 2005 ANNUAL REPORT 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 Corporation’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 2005

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

Minority interest in earnings of subsidiary

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 2004

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

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 CORPORATION AND SUBSIDIARIES 2005 ANNUAL REPORT

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

$562,261

366,416

195,845

155,400

–

40,445

40,500

14,378

–

$594,168

379,880

214,288

160,146

–

54,142

54,240

19,255

–

$632,280

396,042

236,238

171,802

1,071

63,365

(498)

62,867

22,317

(11)

$661,863

420,316

241,547

181,562

2,391

57,594

(492)

57,102

21,345

$÷26,122

$÷34,985

$÷40,561

$÷35,752

$÷÷÷÷.47

55,176

$÷÷÷÷.47

55,551

$÷÷÷÷.63

55,131

$÷÷÷÷.63

55,513

$÷÷÷÷.74

55,012

$÷÷÷÷.73

55,447

$÷÷÷÷.67

53,278

$÷÷÷÷.67

53,693

100.0%

34.8

27.6

–

7.2

2.6

4.6

$464,037

294,275

169,762

134,580

520

34,662

355

35,017

12,606

100.0%

36.1

27.0

–

9.1

3.2

5.9

$508,605

324,984

183,621

142,579

215

40,827

120

40,947

15,121

100.0%

37.4

27.2

0.2

10.0

3.5

6.4

$573,457

367,835

205,622

147,594

135

57,893

(29)

57,864

21,120

100.0%

36.5

27.4

0.4

8.7

3.2

5.4

$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

100.0%

36.1

28.0

–

8.0

3.0

5.1

100.0%

35.9

25.7

–

10.1

3.7

6.4

100.0%

35.1

26.9

–

8.2

3.0

5.2

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

Year-End 2003

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

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

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 )

QUA R TE R LY 20 0 5 –20 0 4

2005 by Quarter

1st

2nd

3rd

4th

Total Dividends Paid

2004 by Quarter

1st

2nd

3rd

4th

Total Dividends Paid

High

Low

$45.70

$38.80

54.23

60.23

62.41

44.65

50.92

46.94

High

Low

$45.71

$35.25

42.42

42.13

43.65

36.56

36.97

38.52

Dividends
per Share

$.155

.155

$÷.62

Dividends
per Share

$.14

.14

$.56

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

$391,971

252,841

139,130

114,426

–

24,704

(265)

24,439

8,554

$406,793

260,367

146,426

112,979

2,265

31,182

(149)

31,033

10,861

$500,091

316,412

183,679

127,472

3,881

52,326

617

52,943

18,530

$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

Common Stock Market Price and Price/Earnings Ratio
(Unaudited)

F I SCAL YE A R S 2 0 0 5 –19 9 5

Market Price *

High

Low

Diluted
Earnings
per Share *

Price/Earnings Ratio

High

Low

Year

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

Eleven-year average

* Adjusted for the effect of stock splits

$62.41

$38.80

$2.50

45.71

44.12

30.85

28.85

27.88

29.88

37.19

32.13

21.38

15.63

35.25

24.65

22.88

19.96

15.56

18.75

20.00

15.88

9.25

11.50

1.97

1.68

1.55

1.26

1.77

1.44

1.72

1.45

1.13

.67

HNI CORPORATION AND SUBSIDIARIES 2005 ANNUAL REPORT 51

SELEC TED FINANCIAL DATA – FIVE-YE AR SUMMARY

Per Common Share Data (Basic and Dilutive)

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

Effective tax rate

Net income

Net income as a % of net sales

2005

2004

2003

2002(a)

2001

$÷÷÷÷«2.51

$÷÷÷÷«1.99

$÷÷÷÷«1.69

$÷÷÷÷«1.55

$÷÷÷÷«1.26

2.50

.62

11.46

2.48

1.97

.56

12.10

1.96

1.68

.52

12.19

3.71

1.55

.50

11.08

1.82

1.26

.48

10.10

1.52

$2,450,572

1,562,654

887,918

2,355

214,709

8.76%

36.0%

$2,093,447

$1,755,728

$1,692,622

$1,792,438

1,342,143

1,116,513

1,092,743

1,181,140

751,304

886

178,869

8.54%

36.5%

639,215

2,970

150,931

8.60%

35.0%

599,879

4,714

140,554

8.30%

35.0%

611,298

8,548

116,261

6.49%

36.0%

$÷«137,420

$÷«113,582

$÷÷«98,105

$÷÷«91,360

$÷÷«74,407

5.61%

5.43%

5.59%

5.40%

4.15%

Cash dividends and share purchase rights redeemed

$÷÷«33,841

$÷÷«32,023

$÷÷«30,299

$÷÷«29,386

$÷÷«28,373

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

(65,810)

137,420

21.76%

(35,100)

113,582

16.47%

54,001

98,105

14.46%

55,176

91,360

14.74%

36,759

74,407

12.76%

$÷÷«65,514

$÷÷«66,703

$÷÷«72,772

$÷÷«68,755

$÷÷«82,385

24.63%

75.37%

28.19%

71.81%

30.88%

69.12%

32.17%

67.84%

38.13%

61.87%

$÷«486,598

$÷«374,579

$÷«462,122

$÷«405,054

$÷«319,657

358,174

128,424

294,660

266,250

108,329

311,344

245,816

216,306

312,368

298,680

106,374

353,270

1,140,271

1,021,657

1,021,826

1,020,552

21.10%

17.46%

14.69%

14.83%

230,443

89,214

204,971

961,891

12.04%

$÷«103,869

$÷÷÷«3,645

$÷÷÷«4,126

$÷÷÷«9,837

$÷÷«80,830

593,944

540,822

1.36

669,163

606,632

1.41

709,889

641,732

1.88

646,893

587,731

1.36

592,680

532,555

1.39

Number of shares outstanding at year-end
Weighted-average shares outstanding during year – basic

Weighted-average shares outstanding during year – diluted

Number of shareholders of record at year-end

51,848,591
54,649,199
55,033,741
6,702

55,303,323

58,238,519

58,373,607

58,672,933

57,127,110

58,178,739

58,789,851

59,087,963

57,577,630

58,545,353

59,021,071

59,210,049

6,465

6,416

6,777

6,694

Other Operational Data

Capital expenditures (thousands of dollars)
Members (employees) at year-end

$÷÷«38,912

$÷÷«32,417

$÷÷«34,842

$÷÷«25,885

$÷÷«36,851

12,504(b)

10,589(b)

8,926

8,828

9,029(b)

(a) Per SFAS No. 142, “Goodwill and Other Intangible Assets,” the Corporation has ceased recording of goodwill and indeﬁnite-lived intangible amortization.
(b) Includes acquisitions completed during the ﬁscal year.

52 HNI CORPORATION AND SUBSIDIARIES 2005 ANNUAL REPORT

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. Words such as “anticipate,” “believe,” “could,” “conﬁdent,”
“estimate,” “expect,” “forecast,” “intend,” “likely,” “may,” “plan,”
“possible,” “potential,” “predict,” “project,” “should,” and variations
of such words and similar expressions identify forward-looking
statements. Forward-looking statements involve known and
unknown risks, which may cause the Corporation’s actual results
in the future to differ materially from expected results.

Because of the following risks, as well as other variables affecting
the Corporation’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 Corporation’s largest raw material category;

• higher than expected costs for energy and fuel;

• uncertainty related to disruptions of business by terrorism, military

action, epidemic, acts of God, or other force majeure events;

• the ability of the Corporation to realize ﬁnancial beneﬁts through

price realization from its price increases;

• increases in the cost of health care beneﬁts provided by the

Corporation;

• reduced demand for the Corporation’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 Corporation that it received preferential payments;

• changes in demand and order patterns from the Corporation’s

customers, particularly its top 10 customers, which represented
approximately 36% of net sales in 2005;

• issues associated with acquisitions and integration of acquisitions;

• the ability of the Corporation to realize cost savings and

productivity improvements from its cost containment and
business simpliﬁcation initiatives;

• the ability of the Corporation to realize ﬁnancial beneﬁts from

investments in new products;

• the ability of the Corporation’s distributors and dealers to
successfully market and sell the Corporation’s products;

• currency ﬂuctuations;

• the availability and cost of capital to ﬁnance planned growth; and

• other risks, uncertainties, and factors described from time to time

in the Corporation’s ﬁlings with the Securities and Exchange
Commission.

The factors identiﬁed above are believed to be important factors
(but not necessarily all of the important factors) that could cause
actual results to differ materially from those expressed in any forward-
looking statement. Unpredictable or unknown factors could also
have material adverse effects on the Corporation. All forward-looking
statements included in this report are expressly qualiﬁed in their
entirety by the foregoing cautionary statements. The Corporation
does not assume any obligation to update any forward-looking
statement, whether as a result of new information, future events
or otherwise, except as required by applicable law.

HNI CORPORATION AND SUBSIDIARIES 2005 ANNUAL REPORT 5 3

REPOR T OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of HNI Corporation:

We have completed integrated audits of HNI Corporation’s ﬁscal year 2005 and ﬁscal year 2004 consolidated ﬁnancial statements and of
its internal control over ﬁnancial reporting as of December 31, 2005, and an audit of its January 3, 2004 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.

C O N SO L I DATE D F I N AN C I AL STAT E M E N T S
In our opinion, the accompanying consolidated balance sheets and related statements of income, shareholders’ equity and cash ﬂows,
present fairly, in all material respects, the ﬁnancial position of HNI Corporation and its subsidiaries (the “Corporation”) at December 31, 2005,
January 1, 2005, and January 3, 2004, and the results of their operations and their cash ﬂows for each of the three years in the period ended
December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. These ﬁnancial statements
are the responsibility of the Corporation’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.

I N TE R N AL C O N T RO L OVE R F I N AN C I AL R E P O R T I N G
Also, in our opinion, management’s assessment, included in the Management Report on Internal Control Over Financial Reporting
that the Corporation maintained effective internal control over ﬁnancial reporting as of December 31, 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 Corporation maintained, in all material respects,
effective internal control over ﬁnancial reporting as of December 31, 2005, based on criteria established in Internal Control – Integrated
Framework issued by the COSO. The Corporation’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 Corporation’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 maintained 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 27, 2006

5 4 HNI CORPORATION AND SUBSIDIARIES 2005 ANNUAL REPORT

MANAGEMENT REPOR T ON INTERNAL CONTROL OVER FINANCIAL REPOR TING

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 Corporation’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.

Management assessed the effectiveness of HNI Corporation’s internal control over ﬁnancial reporting as of December 31, 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 Corporation’s internal control over ﬁnancial reporting and testing of the operational effectiveness of the Corporation’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 December 31, 2005, HNI Corporation maintained effective internal control
over ﬁnancial reporting.

Management’s assessment of the effectiveness of the Corporation’s internal control over ﬁnancial reporting as of December 31, 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 22, 2006

HNI CORPORATION AND SUBSIDIARIES 2005 ANNUAL REPORT 55

A MESSAGE FROM THE BOARD OF DIREC TORS

Dear shareholders:

We, the members of the HNI Corporation Board of Directors, believe that integrity is central

to good corporate governance. That belief is reflected in the HNI Corporation Vision Statement,

which appears on page 58 of this annual report, adopted many years ago. Our Vision Statement

represents much more than a traditional “mission,” and it goes much deeper than company policy.

The beliefs and values represented in that document are the very foundation of our corporate

culture and guide the attitude and actions of every member, every day.

From its beginnings, HNI Corporation has sought to implement its vision through

sound policies and practices, and by maintaining a strong Board composed predominantly of

outside Directors. We are fully committed to executing our responsibilities, and we will continue

to maintain the company’s long-standing tradition of an independent, well-informed, active

and engaged Board of Directors.

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.

It is an honor to serve as Directors of HNI Corporation. Rest assured that we will

continue to work 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

James R. Jenkins

Dennis J. Martin

Larry B. Porcellato

Joseph Scalzo

Abbie J. Smith

Brian E. Stern

Ronald V. Waters, III

56 HNI CORPORATION 2005 ANNUAL REPORT

BOARD OF DIREC TORS AND OFFICERS

Board of Directors

Stan A. Askren
Chairman, President and
Chief Executive Officer,
HNI Corporation

Miguel M. Calado
Former Executive Vice
President and President,
International,
Dean Foods Company

Gary M. Christensen
Lead Director,
HNI Corporation
Advisor, Wind Point Partners
Retired President and
Chief Executive Officer,
Pella Corporation

Cheryl A. Francis
Advisor/Consultant,
Vice Chairman,
Corporate Leadership Center

John A. Halbrook
Chairman,
Woodward Governor
Company

James R. Jenkins
Senior Vice President
and General Counsel,
Deere & Company

Dennis J. Martin
Independent Consultant,
Retired Chairman, President
and Chief Executive Officer,
General Binding Corporation

Larry B. Porcellato
Chief Executive Officer,
ICI Paints North America

Joseph Scalzo
President and
Chief Executive Officer,
WhiteWave Foods Company

Abbie J. Smith
Chaired Professor,
The University of Chicago
Graduate School of Business

Brian E. Stern
Senior Vice President,
Xerox,
Fuji Xerox Operations,
Xerox Corporation

Ronald V. Waters, III
Chief Operating Officer,
Wm. Wrigley Jr. Company

Director Emeritus

Richard H. Stanley
Chairman,
SC Companies, Inc.
Chairman,
Stanley Consultants, Inc.

Committees of the Board

Audit
Ronald V. Waters, III,
Chairperson

Miguel M. Calado
James R. Jenkins
Joseph Scalzo

Human Resources
and Compensation
Abbie J. Smith,
Chairperson

Gary M. Christensen
John A. Halbrook
Larry B. Porcellato

Public Policy and
Corporate Governance
Brian E. Stern,
Chairperson

Cheryl A. Francis
Dennis J. Martin

HNI Corporation Officers

Operating Companies

Stan A. Askren
Chairman, President and
Chief Executive Officer

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

Robert D. Hayes
Vice President,
Business Analysis and
General Auditor

Douglas L. Jones
Vice President and Chief
Information Officer

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

Timothy J. Anderson
President,
Omni Workspace Company

David C. Burdakin
Executive Vice President,
HNI Corporation
President,
The HON Company

Bradley D. Determan
Executive Vice President,
HNI Corporation
President,
Hearth & Home Technologies Inc.

Eric K. Jungbluth
Executive Vice President,
HNI Corporation
President,
Allsteel Inc.

Russell S. Minick
President,
The Gunlocke Company L.L.C.

Marco V. Molinari
Executive Vice President,
HNI Corporation
President,
HNI International Inc.

Jean M. Reynolds
President,
Maxon Furniture Inc.

Thomas A. Tolone
President,
Paoli Inc.

HNI CORPORATION 2005 ANNUAL REPORT 57

OUR VISION

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 involvement,

proﬁt can the other elements of this Vision be realized.

ongoing learning and contributions of each member; that

seeks out and values diversity; and that attracts and retains

We will create long-term value for shareholders.

the most capable people who work safely, are motivated and

We create long-term value for shareholders by earning

are devoted to making our company and our members successful.

ﬁnancial returns signiﬁcantly greater than our cost of

capital and pursuing proﬁtable growth opportunities.

We will be a responsible corporate citizen.

We will safeguard our shareholders’ equity by maintaining

We conduct our business in a way that sustains the well-being

a strong balance sheet to allow ﬂexibility in responding to

of society, our environment and the economy in which we live

a continuously changing market and business environment.

and work. We follow ethical and legal business practices. Our

company supports our volunteer efforts and provides charitable

We will pursue proﬁtable growth.

contributions so that we can actively participate in the civic,

We pursue proﬁtable growth on a global basis in order to

cultural, educational, environmental and governmental affairs

provide continued job opportunities for members and

of our society.

ﬁnancial success for all stakeholders.

To our stakeholders:

We will be a supplier of quality products and services.

When our company is appreciated by its members, favored

We provide reliable products and services of high quality

by its customers, supported by its suppliers, respected by the

and brand value to our end-users. Our products and services

public and admired by its shareholders, this Vision is fulﬁlled.

exceed our customers’ expectations and enable our distributors

and our company to make a fair proﬁt.

58 HNI CORPORATION 2005 ANNUAL REPORT

I N V E S T O R I N F O R M AT I O N

Fiscal 2006 Quarter-End Dates
1st Quarter: Saturday, April 1
2nd Quarter: Saturday, July 1
3rd Quarter: Saturday, September 30
4th Quarter: Saturday, December 30

Investor Relations
Send inquiries to:
Investor Relations
HNI Corporation
414 East Third Street
Muscatine, IA 52761
Telephone: 563.272.7400
Fax: 563.272.7655
E-mail: investorrelations@hnicorp.com

Corporate Headquarters
HNI Corporation
414 East Third Street
P.O. Box 1109
Muscatine, IA 52761-0071
Telephone: 563.272.7400
Fax: 563.272.7217
Website: www.hnicorp.com

Independent Registered Public Accounting Firm
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 2005 Annual Report