HNI Corporation 2010 annual report Financial Highlights (Amounts in thousands, except for per share and member data) 2010 2009 Income Statement Data Net sales Gross profit Selling and administrative expenses Restructuring related and impairment charges Operating income Net income (loss) attributable to HNI Corporation Net income (loss) attributable to HNI Corporation as a % of: Net sales Average shareholders’ equity Per common share: Net income (loss) attributable to HNI Corporation – basic Net income (loss) attributable to HNI Corporation – diluted Cash dividends Balance Sheet Data Total assets Long-term debt and capital lease obligations Debt/capitalization ratio HNI Corporation’s shareholders’ equity Working capital Other Data Capital expenditures (including capitalized software) Cash flow from operations Weighted-average shares outstanding – basic Weighted-average shares outstanding – diluted Share repurchases Number of shareholders at year-end Members (employees) at year-end $1,686,728 $1,623,327 585,616 518,257 9,449 57,910 26,941 1.6% 6.5% 562,801 513,776 40,443 8,582 (6,442) (0.4) (1.5) $«««««««««0.60 $««««««««(0.14) 0.59 0.86 (0.14) 0.86 $÷«997,880 $ 994.326 150,111 200,000 26.9% 32.3% $«÷407,985 $÷«419,284 46,810 60,129 $«÷÷26,722 $÷÷«17,554 94,384 193,205 44,993,934 44,888,809 45,808,704 44,888,809 $÷÷ 17,817 $÷÷÷÷÷÷÷– 7,866 8,470 8,257 8,748 % % Dear Shareholders: Stan A. Askren Chairman, President and Chief Executive Officer The year 2010 was a good year for HNI Corporation. We began to see the payoff from our moves during the recession to significantly reduce structural costs and simultaneously invest for future growth. The economy began to heal; our office furniture businesses grew and our hearth business’s profits improved. Solid Recovery – Office Furniture Our corporate project-driven office furniture business experienced strong growth as larger corporations and the federal government began to spend in pursuit of lower lease rates, lower occupancy costs and growth. Our business in China experienced significant growth and won large projects with some of the leading and fastest-growing Chinese companies. Our international business is relatively small but growing rapidly. The supplies-driven portion of our business, driven by small businesses, grew as well, though more slowly than our project business. Small business confidence and spending was low throughout the year with the overhang of uncertainty about employment, retail spending, tax increases, new healthcare legislation and tight bank lending. We are a leader in this segment of the market with our HON brand and look forward to an accelerated recovery as the economy continues to improve. Hearth Business Profit Improvement Our hearth business continued to face a challenging climate as housing starts were stubborn to grow. Despite the challenges, we managed a $16 million profit improvement versus last year on 1 percent more sales. Our hearth market position is outstanding. We have the strongest brands, strongest distribution, best manufacturing and best product lineup. With our cost reset, and investments in products and selling and marketing capabilities, this business is spring loaded for profitable growth as housing recovers. We believe the worst in housing is over, though the pace of recovery remains uncertain. Profitable Growth HNI has done an effective job of simultaneously reducing costs and investing for the future. The net result in 2010 is profit growth of 34 percent on sales growth of 4 percent. The organization also did a good job of generating strong cash flow. This allowed us to strengthen our balance sheet and continue to pay a strong dividend, which is valued by shareholders and a key objective of the management team. We are the only major public office furniture company to maintain its dividend during the economic crisis, and we are pleased we were able to increase the dividend in February of this year. Split and Focus Strategy Is Working Our unique split and focus business model serves us well during dynamic times, when the race is won by companies most responsive to changing economic conditions and customer demand. Each of our companies focuses on a distinct market. Each has its own organization, strategy, selling and fulfillment models and financial model. at the same time, we leverage HNI’s collective scale around purchasing, information technologies and people development and HNI’s best practices around lean manufacturing and management. HNI Corporation 2010 annual repor t 1 as we look forward, we have no doubt the world and our markets will continue to be dynamic, uncertain and competitive. We will continue to leverage the combined strength of our members, culture and business model to excel, whatever the economic climate. Our member owners, and their respective companies, delivered very strong operational and customer service results. We again achieved record levels of reliable and responsive service and delivery. We continued to drive our rapid Continuous Improvement (rCI) processes to improve product flow and customer responsiveness and eliminate cost and waste. rCI remains at the heart of our culture and touches everything we do. We have a unique culture where members are engaged – thinking and behaving like owners. This, combined with our philosophy and culture of continuous improvement, makes a powerful and sustainable value creator for customers and shareholders alike. Accelerating Investments and Positioning for Profitable Growth We continue to focus on long-term shareholder value creation, at times foregoing short-term gains. During the economic recession, in the midst of painful cost resets, we accelerated our investments in business growth initiatives. We again introduced a record number of new product solutions across all our companies. We introduced new industry-leading sales, marketing and delivery programs. We achieved excellent success with our core focused market strategy and saw strong growth in our education, government and international markets. We added numerous new dealer and channel partner resources and programs to help our resellers compete more effectively and profitably in their markets. We have confidence in our market momentum and the returns our strategic investments are generating now and in the future. as we look forward, we have no doubt the world and our markets will continue to be dynamic, uncertain and competitive. We will continue to leverage the combined strength of our members, culture and business model to excel, whatever the economic climate. Words of Thanks Thank you to our customers for your business. Thank you to our members for your commitment. Thank you to our shareholders for your investment and faith in us. Stan a. askren Chairman, President and Chief Executive Officer HNI Corporation 2 HNI Corporation 2010 annual repor t Investing in the Future New Product Solutions We continue to invest in innovative products that exceed our customers’ expectations. In 2010, we launched a record number of new products, reflecting our focus on building HNI brands and gaining market share through innovation, quality and product leadership. e-Business Our strategy to invest in leading-edge technology allows us to reach more customers and makes it easier for our partners to do business with HNI. Selling Capabilities We are adding resources to extend the reach and capabilities of HNI selling organizations. We provide the training, tools and resources to enhance the efficiency and effectiveness of our selling processes. Expanding Markets We continue to expand our presence in key vertical markets and geographies. Strategic investments will further develop HNI platforms driving long-term growth of our businesses in new markets. Customer Loyalty We are investing in people, programs and processes to make HNI the preferred choice – first time, every time with end-users and our channel partners. HNI Corporation 2010 annual repor t 3 80 Allsteel Stride Bench HON Nucleus Gunlocke Converge ® Inspired by practicality, offering a full line of high-quality solutions serving the small and medium-size workplace. ® Allsteel designs, builds and delivers relevant innovation in workplace furniture. Paoli Mingle ® An industry leader in the design, manufacture and marketing of premium wood office furniture. ™ A leading provider of high-quality and well-priced wood office furniture. Lamex Tiper ® China’s leading manufacturer and marketer of a full range of office furniture solutions. Bringing our brands to life through innovation, style and value. Maxon Empower ® HBF Duna Chair Office furniture systems with planning and design technologies for small to medium-size office solutions. ® Award-winning design and superior crafts- manship in wood office furniture and fabrics created for demanding clients worldwide. Quadra-Fire Voyageur Wood Fireplace Insert ® Renowned for performance, durability and control in wood, pellet and gas-fueled hearth products. Heatilator Caliber nXt Direct Vent Gas Fireplace ® The number-one preferred fireplace brand among homebuilders since 1927. Heat & Glo Solaris Multi-Sided Direct Vent Gas Fireplace ® America’s largest network of hearth product and service outlets for consumers and homebuilders. Harman Oakleaf Wood Stove ® The innovation and design leader in gas hearth systems – the industry’s most award-winning brand. ™ The hearth industry’s foremost producer of precision quality-crafted wood and pellet stoves. Our Commitment to a Sustainable Future HNI Corporation has a long history of sustainable business practices. From our earliest days we focused on the fundamentals of true sustainability– people, planet and profits. People The company was founded to create jobs for Planet Efficient manufacturing and careful use of Profits True sustainability demands sufficient return veterans returning from World War II, and one resources is the core of who we are. as early on investment to reward shareholders for use of our first policies declared employees to be as 1947, the corporation was recycling scrap of their money, appropriately reward members “members” with collective responsibility and materials into new consumer products. HNI was and fund innovations and investments for shared rewards. Member development continues an early adopter of Lean and rapid Continuous long-term growth. HNI has a long track record to be a key priority of our long-term strategy. Improvement methodology to eliminate waste of delivering steady growth and creating long- Today, HNI has more than 8,000 members and drive the most efficient use of natural term shareholder value. We are committed to worldwide, most of whom are part owners of resources. Today, we have one of the industry’s rewarding our shareholders and investing in our HNI through our stock ownership programs. strongest and most comprehensive programs businesses for aggressive profitable growth. Our members are actively involved in numerous to conserve raw materials and reduce waste. initiatives to make a positive difference and We have proven “Lean leads to green.” improve the quality of life in the communities where they live. In addition, the HNI Charitable Foundation funds many civic, community, cultural and education activities. In 2010, we: • Established an executive Corporate Governance, Compliance and Social Responsibility Committee • Reduced our recordable injury rate for the sixth consecutive year to about 30% of the national average • Formalized a comprehensive energy management system • Earned Ethisphere™ Institute recognition for corporate ethics • Our growing commitment to sustainability has allowed HNI businesses to obtain level certification for the industry’s widest and most complete offering of products rated under the ANSI/BIFMA e3 Furniture Sustainability Standard • Established a corporate-wide wellness and health management system HNI Corporation 2010 annual repor t 7 Consolidated Statements of Income (Amounts in thousands, except for per share data) For the years 2010 2009 Net sales Cost of products sold Gross profit Selling and administrative expenses Restructuring related and impairment charges Operating income Interest income Interest expense Income (loss) from continuing operations before income taxes Income taxes Income (loss) from continuing operations, less applicable income taxes Discontinued operations, less applicable income taxes Net income (loss) Less: Net income attributable to the noncontrolling interest $««1,686,728 $««1,623,327 1,101,112 1,060,526 585,616 518,257 9,449 57,910 471 11,903 46,478 16,797 29,681 (2,558) 27,123 182 562,801 513,776 40,443 8,582 415 12,080 (3,083) (1,485) (1,598) (4,661) (6,259) 183 Net income (loss) attributable to HNI Corporation $÷««÷«26,941 $÷÷««÷(6,442) Income (loss) from continuing operations attributable to HNI Corporation per common share – basic Discontinued operations attributable to HNI Corporation per common share – basic Net income (loss) attributable to HNI Corporation per common share – basic Weighted average shares outstanding – basic Income (loss) from continuing operations attributable to HNI Corporation per common share – diluted Discontinued operations attributable to HNI Corporation per common share – diluted Net income (loss) attributable to HNI Corporation per common share – diluted Weighted average shares outstanding – diluted $÷÷÷÷«««0.66 $÷÷÷««««(0.04) $÷÷«««÷«(0.06) $÷÷«««÷«(0.10) «$÷÷÷«««÷0.60 $««««««««««(0.14) 44,993,934 44,888,809 $÷÷÷«««÷0.65 $÷÷÷««««(0.04) $««««««««««(0.06) $÷÷÷««««(0.10) $÷÷÷««÷«0.59 $÷÷÷««««(0.14) 45,808,704 44,888,809 8 HNI Corporation and Subsidiaries 2010 annual repor t Consolidated Balance Sheets (Amounts in thousands of dollars and shares except par value) As of year-end 2010 2009 Assets Current Assets Cash and cash equivalents Short-term investments Receivables, net 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 Note payable and current maturities of long-term debt and capital lease obligations Current maturities of other long-term obligations Total Current Liabilities Long-term debt Capital lease obligations Other long-term liabilities Deferred income taxes Commitments and contingencies Shareholders’ Equity Preferred stock – $1 par value Authorized: 2,000 Issued: None Common stock – $1 par value Authorized: 200,000 Issued and outstanding: 2010 – 44,841; 2009 – 45,093; 2008 – 44,324 Additional paid-in capital Retained earnings Accumulated other comprehensive income Total Parent Company Shareholders’ Equity Noncontrolling interest Total Equity Total Liabilities and Equity $÷÷«99,096 10,567 190,118 68,956 18,467 20,957 408,161 231,781 260,634 97,304 $÷÷«87,374 5,994 163,732 65,144 20,299 17,728 360,271 260,102 261,114 112,839 $«««997,880 $«««994,326 $«««311,066 $÷«299,718 «50,029 256 361,351 150,000 111 47,437 30,525 39 385 300,142 200,000 – 50,332 24,227 – – 44,841 45,093 18,011 343,474 1,659 407,985 471 408,456 19,695 355,270 (774) 419,284 341 419,625 $«««997,880 $«««994,326 HNI Corporation and Subsidiaries 2010 annual repor t 9 Consolidated Statements of Cash Flows (Amounts in thousands) For the years 2010 2009 Net Cash Flows From (To) Operating Activities: Net income (loss) Noncash items included in net income: Depreciation and amortization Other post-retirement and post-employment benefits Stock-based compensation Excess tax benefits from stock compensation Deferred income taxes Net loss on sales, retirements and impairments of long-lived assets and intangibles 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 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 Excess tax benefits from stock compensation 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 10 HNI Corporation and Subsidiaries 2010 annual repor t $÷÷27,123 $÷«(6,259) 58,630 1,691 6,601 (25) 7,196 8,951 5,400 2,025 (30,027) (4,391) (527) 14,412 529 (3,204) 94,384 (25,683) 2,289 (1,039) (149) (15,040) 10,624 3,945 (25,053) (17,817) 50,157 (54,241) 3,004 25 (38,737) (57,609) 11,722 87,374 74,867 1,849 3,830 (8) (5,844) 26,025 6,565 2,338 74,593 19,146 9,317 (14,313) 8,514 (7,415) 193,205 (16,017) 6,733 (1,537) (500) (9,710) 33,872 440 13,281 – 97,000 (219,884) 2,893 8 (38,667) (158,650) 47,836 39,538 $÷«99,096 $÷«87,374 $÷«12,062 $÷÷«7,079 $÷«12,316 $÷««(4,528) 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 pursue mutually profitable relationships with customers and suppliers. Only when our company achieves an adequate profit can the other elements of this Vision be realized. We will create long-term value for shareholders. We create long-term value for shareholders by earning financial returns significantly greater than our cost of capital and pursuing profitable growth opportunities. We will safeguard our shareholders’ equity by maintaining a strong balance sheet to allow flexibility in responding to a continuously changing market and business environment. We will pursue profitable growth. We pursue profitable growth on a global basis in order to provide continued job opportunities for members and financial success for all stakeholders. We will be a supplier of quality products and services. We provide reliable products and services of high quality and brand value to our end-users. Our products and services exceed our customers’ expectations and enable our distributors and our company to make a fair profit. We will be a great place to work. We pursue a participative environment and support a culture that encourages and recognizes excellence, active involvement, ongoing learning and contributions of each member; that seeks out and values diversity; and that attracts and retains the most capable people who work safely, are motivated and are devoted to making our company and our members successful. We will be a responsible corporate citizen. We conduct our business in a way that sustains the well-being of society, our environment and the economy in which we live and work. We follow ethical and legal business practices. Our company supports our volunteer efforts and provides charitable contributions so that we can actively participate in the civic, cultural, educational, environmental and governmental affairs of our society. To our stakeholders: When our company is appreciated by its members, favored by its customers, supported by its suppliers, respected by the public and admired by its shareholders, this Vision is fulfilled. HNI Corporation 2010 annual repor t 11 HNI Corporation 2010 annual repor t 11 A Message from the Board of Directors Dear Shareholders: During these difficult economic times, the principles of An informed, independent and involved Board is the HNI Vision (as shown on page 11) are as important essential to ensure integrity, transparency and long- as ever. These principles are creating long-term term success. Each of us strives for this standard. shareholder value, pursuing profitable growth, delivering quality in all we do, being a great place to work and being a responsible corporate citizen. We are proud to serve on your Board of Directors. We are committed to ensuring the highest standards of ethics and corporate governance in all we do. As members of the Board of Directors, our role is to Thank you for your continued support. do our utmost to realize the HNI Vision. We do this by supporting HNI’s sound business policies and practices, straightforward communications and conservative Sincerely, financial management. THE HNI CORPORATION BOARD OF DIRECTORS Brian E. Stern Lead Director, HNI Corporation Director, Starboard Capital Partners, LLC Ronald V. Waters, III Independent Business Consultant, Former Director, President and Chief Executive Officer, LoJack Corporation BOARD OF DIRECTORS Stan A. Askren Chairman, President and Chief Executive Officer, HNI Corporation Mary H. Bell Vice President, Building Construction Products Division, Caterpillar Inc. Miguel M. Calado Director and Chief Financial Officer, Hovione Sa Gary M. Christensen Executive advisor Partner, Wind Point Partners Cheryl A. Francis Co-Chairman, Corporate Leadership Center James R. Jenkins Senior Vice President and General Counsel, Deere & Company Dennis J. Martin President and Chief Executive Officer, Federal Signal Corporation Larry B. Porcellato Chief Executive Officer, The Homax Group, Inc. Abbie J. Smith Chaired Professor, University of Chicago Booth School of Business 12 HNI Corporation 2010 annual repor t COMMIT TEES OF THE BOARD Audit Miguel M. Calado, Chairperson Mary H. Bell James r. Jenkins Human Resources and Compensation abbie J. Smith, Chairperson Cheryl a. Francis Dennis J. Martin Brian E. Stern Public Policy and Corporate Governance Larry B. Porcellato, Chairperson Gary M. Christensen ronald V. Waters, III Investor Information Fiscal 2011 Quarter-End Dates 1st Quarter: Saturday, april 2 2nd Quarter: Saturday, July 2 3rd Quarter: Saturday, October 1 4th Quarter: Saturday, December 31 Annual Meeting The Corporation’s annual shareholders’ meeting will be held at 10:30 a.m. on Tuesday, May 10, 2011, at the Clarion Hotel, 2915 North Highway 61, Muscatine, Iowa. Shareholders and other interested investors are encouraged to attend the meeting. Form 10-K Report all financial information, including the Corporation’s annual report on Form 10-K, can be accessed on the Corporation’s website at 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. Transfer Agent Shareholders may report a change of address or make inquiries by writing or calling: Investor Relations HNI Corporation 408 East Second Street P.O. Box 1109 Muscatine, Ia 52761-0071 Telephone: 563.272.7400 Fax: 563.272.7655 Email: investorrelations@hnicorp.com Corporate Headquarters HNI Corporation 408 East Second Street P.O. Box 1109 Muscatine, Ia 52761-0071 Telephone: 563.272.7400 Fax: 563.272.7114 Wells Fargo Shareowner Services 161 North Concord Exchange South Saint Paul, MN 55075 Telephone: 800.468.9716 Management Certifications On May 28, 2010, the Corporation submitted to the NYSE, the annual CEO Certification required by Section 303a.12(a) of the NYSE Listed Company Manual certifying the Corporation’s CEO is not aware of any violation by the Corporation of NYSE corporate governance listing standards. The Corporation also filed with the Securities and Exchange Commission the CEO/CFO Certifications regarding the quality of the Corporation’s public disclosure required under Sections 302 and 906 of the Sarbanes-Oxley act of 2002 as Exhibits 31.1, 31.2, and 32.1 to the Corporation’s annual report on Form 10-K for the fiscal year ended January 1, 2011. HNI CORPORATION OFFICERS OPERATING COMPANIES Stan A. Askren Chairman, President and Chief Executive Officer Kelly J. McGriff Treasurer and Vice President, Investor relations Charles C. Bell President, Hickory Business Furniture Steven M. Bradford Vice President, General Counsel and Secretary Alan R. Moorhead Vice President, Internal audit Gary L. Carlson Vice President, Member and Community relations Kurt A. Tjaden Vice President and Chief Financial Officer Redus W. Brooks President, Maxon Furniture Peter C. M. Chu President, Lamex Tamara S. Feldman Vice President, Financial reporting Bradley D. Determan Executive Vice President, HNI Corporation President, Hearth & Home Technologies Jerald K. Dittmer Executive Vice President, HNI Corporation President, The HON Company Jeffery D. Lorenger Executive Vice President, HNI Corporation President, allsteel Donald T. Mead Executive Vice President, HNI Corporation President, The Gunlocke Company Marco V. Molinari Executive Vice President, HNI Corporation President, HNI International Brandon T. Sieben President, Paoli 408 East Second Street Muscatine, Iowa 52761 www.hnicorp.com