HNI Corporation
2018 Annual Report
Values We Believe
Our values distinguish us in the way we look at things and the way we work.
Driving our success is a set of unique and strongly aligned principles and
processes enthusiastically shared by our members. They define our distinctive
personality, and stand at the center of our corporate Vision.
Our success depends on rapid continuous improvement, member engagement,
individual and collective integrity, and innovation in everything we do.
We relentlessly pursue the following longstanding commitments:
Our Social
Responsibility
WE WILL
- Be a preferred provider
of products and services.
- Create long-term value
for shareholders.
- Be a great place to work.
- Be a responsible global citizen.
- Grow profitably.
HNI members are deeply committed to
positive change through a simple, clear
purpose of making things better every day.
We will conduct our business to improve
the well-being of our society,
environment, and community.
2 | 2018 Annual Report
Our Path Forward
Strategic Objectives
Lead through operational excellence
and best total cost
Provide a convenient buying experience
that is effortless for our customers
Deliver unparalleled value in our products
and services
Execution Priorities
Drive growth in our core markets
Enhance brand equity and extend
distribution capability
Increase profits through market expansion,
both domestically and internationally
Capital Allocation
Invest capital in the business to drive
incremental returns
Pursue value enhancing acquisitions
Return capital to shareholders
- Maintain and grow quarterly dividend
- Repurchase shares to offset dilution
- Additional opportunistic share
repurchase
HNI Corporation
| 1
Letter to Shareholders
Dear Shareholders: Our team of dedicated
members accomplished a significant amount
during 2018. The results of our efforts continue
to build the long-term value of your investment.
The opportunities in front of us remain plentiful
and we are optimistic about our capabilities to
grow profits and sales in the coming years.
During the year, we successfully launched our new enterprise resource
planning system as part of our Business Systems Transformation
initiative. BST is a critical enabler to our future—providing a foundation
to more effortlessly serve our customers, adapt to changing market
needs, and enable greater operational efficiency. We finalized large-
scale transformations of our operational network—a multi-year effort
which reduced our structural cost and improved our best total cost
position. We also made strong progress adapting our supplies-driven
office furniture business to new market dynamics. All of these actions
will enable us to drive greater long-term value.
While improving our long-term foundation, we also delivered solid
sales and profit growth despite significant inflationary headwinds.
Demand for office furniture improved this year, and our leading brands
and products allowed us to take advantage of a stronger market. Our
supplies-driven and contract furniture businesses performed well with
solid organic growth. Our hearth business delivered another year of
record profit with solid sales growth in both new construction and
remodel/retrofit.
During the year, I was honored to be appointed by the HNI Board of Directors to lead our
team into the future. At the end of 2018, and after 26 years with the company, including
the last 14 as Chairman, President and CEO, Stan Askren elected to retire. I feel fortunate
to have had the benefit of Stan’s mentorship during my 20 years with the company. During
that time, I have worked assignments across multiple disciplines including strategy, sales,
marketing, and product development, including my most recent assignment as President
of our Office Furniture segment. In these roles I have been intimately involved in setting
our strategy and priorities. While our corporate strategy will continue to evolve over time,
you should not expect my appointment to cause any large shifts in our strategy or culture.
2 | 2018 Annual Report
Strategic priorities
Our strategic priorities are centered around two key pillars. First, we will strengthen our
focus on operational excellence and delivering best total cost to our customers. Second,
we will continue to adapt our business to offer products that meet our customers’ evolving
needs, including the need to be the most convenient customer experience for office
furniture or hearth products.
We remain an organization driven by the tenets of lean manufacturing. We live every
day through Rapid Continuous Improvement and view all problems as opportunities. This
mindset of constructive discontent permeates our culture and is the fuel that drives us to
improve daily. When paired with our recent investments in support systems, technology,
and manufacturing capability, we are left with a powerful vehicle that drives unparalleled
value to our customers.
We are focused on transforming the end-to-end customer experience, making the buying
process effortless for our customers. The research and specification processes can be
challenging and complex. We are continuing to make investments in areas such as digital
marketing, data analytics, and fulfillment. We will continue to simplify a complicated
process, making the customers’ experience faster, easier, and more cost effective.
Execute our vision
We remain excited about the growth prospects in our core markets. As we proceed on our
journey of simplifying the customer buying experience, our value proposition will resonate
deeper in the marketplace. This will continue building brand equity with our distributors,
dealers and end consumers. Finally, we will continue to expand our addressable markets
by growing internationally, expanding the hearth market and building out some exciting
domestic opportunities in e-commerce.
Shareholder capital
Our views on managing shareholder capital remain unchanged. We will invest on an
on-going basis where we can increase shareholder value. We are committed to our
dividend. HNI has paid a quarterly dividend for more than 60 years, never missed and
never cut. We will continue this important tradition and grow our dividend over time.
We will repurchase shares as an additional way to return capital with the goal to at least
offset dilution from new share issuance. Finally, we will continuously invest in the
business, both in our current operations, and through acquisition.
Looking forward
I am excited by the opportunities ahead. Our member owner culture is powerful and we
will continue to nurture and enhance a culture focused on continuous improvement,
customer responsiveness, and overall value creation for all stakeholders. We have strong
market positions in good markets. Our members are talented and highly engaged. I would
like to thank our members for their dedication and hard work throughout 2018. To our
shareholders, I thank you for the trust you have placed in us at HNI. We remain committed
to driving long-term value and look forward to delivering on the opportunities in front of us.
Sincerely,
Jeffrey Lorenger
President and Chief Executive Officer
HNI Corporation
| 3
Office Furniture
HNI is a leading global office furniture company. Our brands are among the strongest,
most widely known and respected in our industry. The depth and breadth of our products
and services, the scale and capability of our manufacturing and the strength of our
distribution enables us to provide the best office furniture solutions to meet the needs
of every customer—from the largest multinational organizations to the local entrepreneur.
4 | 2018 Annual Report
Hearth Products
Wherever there is warmth and the welcome glow from a fireplace or heating stove,
chances are it’s an HNI brand. We are the world’s leader in hearth products. Our
hearth brands are the strongest, most respected in the industry and include a full
array of gas, electric, wood and biomass burning fireplaces, inserts, stoves, facings
and accessories.
HNI Corporation
| 5
Financial Summary
Amounts in millions, except for per share
Income Statement Data
Net sales
Non-GAAP gross profit*
Non-GAAP gross margin*
Selling and administrative expenses
Non-GAAP net income attributable to HNI Corporation*
2018
2017
CHANGE
2,257.9
$ 2,175.9
3.8%
837.3
$
811.3
37.1%
691.1
106.7
$
$
37.3%
671.8
88.1
21.1%
$
$
$
$
$2,258m
Net Sales
Non-GAAP net income as a % of net sales*
4.7%
4.1%
Per common share:
Non-GAAP net income attributable to HNI Corporation—diluted*
Cash dividends
Balance Sheet Data
Total assets
Long-term debt
Debt/capitalization ratio
HNI Corporation’s shareholders’ equity
Working capital (excluding cash)
Other Data
Capital expenditures (including capitalized software)
Cash flow from operations
Weighted-average shares outstanding—diluted
*See GAAP to non-GAAP reconciliation below
2.41
1.17
1.97
22.3%
1.13
$203m
EBITDA
$ 1,401.8
$ 1,391.6
$
249.4
$
240.0
$
$
$
$
30.7%
35.0%
562.9
$
514.1
21.4
12.5
63.7
186.4
44,328
$
$
127.4
133.1
44,840
$147m
Free Cash Flow
$51mCash Dividends
GAAP amount
% of net sales
Adjustments
Restructuring charges
Impairment charges
Transition costs
Valuation allowance of long-term note receivable
Loss on sale, disposal, and license of assets
Tax Legislation
Non-GAAP amount
% of Net Sales
2018
2017
GROSS
PROFIT
NET
INCOME
EARNINGS
PER SHARE
GROSS
PROFIT
NET
INCOME
EARNINGS
PER SHARE
$
835.0 $
93.4 $ 2.11
$
784.0 $
89.9 $ 2.00
37.0%
4.1%
36.0%
4.1%
$
$
$
$
$
$
$
— $
1.7 $ 0.04
— $
9.9 $ .022
2.3 $
1.7 $ 0.04
— $
— $ —
— $
— $
—
— $
— $ —
837.3 $ 106.7 $ 2.41
$
$
$
$
$
$
$
10.3 $
10.9 $ 0.25
— $
13.9 $ 0.31
17.0 $
11.2 $ 0.25
— $
9.8 $ 0.22
— $
(2.7) $ (0.06)
— $
(44.8) $ (1.00)
811.3 $
88.1 $ 1.97
37.1%
4.7%
37.3%
4.1%
6 | 2018 Annual Report
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 29, 2018
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-14225
HNI Corporation
Iowa
(State of Incorporation)
42-0617510
(I.R.S. Employer No.)
600 East Second Street
P. O. Box 1109
Muscatine, Iowa 52761-0071
(563) 272-7400
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $1 Par Value
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES
NO
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES
NO
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
YES
NO
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
YES
NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting
company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
YES
NO
The aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 30, 2018 was $1,159,656,498 based on
the New York Stock Exchange closing price for such shares on that date, assuming for purposes of this calculation that all 10 percent
holders and all directors and executive officers of the Registrant are affiliates.
The number of shares outstanding of the Registrant's common stock, as of February 1, 2019, was 43,492,622.
Documents Incorporated by Reference
Portions of the Registrant's Definitive Proxy Statement on Schedule 14A for the Annual Meeting of Shareholders to be held on May 7,
2019 are incorporated by reference into Part III.
HNI Corporation and Subsidiaries
Annual Report on Form 10-K
Table of Contents
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Table I - Executive Officers of the Registrant
PART II
Item 5.
Item 6.
Item 7.
Market for Registrant's Common Equity, Related Shareholder Matters, and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
Signatures
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers, and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
PART IV
Exhibits, Financial Statement Schedules
Form 10-K Summary
Management Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Financial Statements
Notes to Consolidated Financial Statements
3
Page
4
10
16
16
16
17
18
19
20
21
32
32
32
33
33
34
34
34
34
34
35
36
37
38
39
41
46
Item 1. Business
General
PART I
HNI Corporation (the ''Corporation'', ''we'', ''us'', or ''our'') is an Iowa corporation incorporated in 1944. The Corporation is a provider
of office furniture and hearth products. Office furniture products include panel-based and freestanding furniture systems, seating,
storage, and tables. These products are sold primarily through a national system of independent dealers, wholesalers, and office
product distributors but also directly to end-user customers and federal, state, and local governments. Hearth products include a full
array of gas, wood, and pellet burning fireplaces, inserts, stoves, facings, and accessories. These products are sold through a national
system of independent dealers and distributors, as well as Corporation-owned distribution and retail outlets. In fiscal 2018, the
Corporation had net sales of $2.3 billion, of which $1.7 billion or 76 percent was attributable to office furniture products and $0.6
billion or 24 percent was attributable to hearth products. See "Note 17. Reportable Segment Information" in the Notes to Consolidated
Financial Statements for further information about operating segments.
The Corporation is organized into a corporate headquarters and operating units with offices, manufacturing plants, distribution
centers, and sales showrooms in the United States, Canada, China, Hong Kong, India, Mexico, Dubai, Taiwan, and Singapore. See
"Item 2. Properties" for additional related discussion.
Eight operating units, marketed under various brand names, participate in the office furniture industry. These operating units include:
The HON Company LLC ("HON")
Allsteel Inc. ("Allsteel")
Maxon Furniture Inc. ("Maxon")
The Gunlocke Company LLC ("Gunlocke")
Hickory Business Furniture, LLC (''HBF'')
OFM LLC ("OFM")
HNI Hong Kong Limited (''Lamex'')
HNI Office India Limited ("HNI India")
Each of these operating units provides products, which are sold through various channels of distribution and segments of the industry.
The operating unit Hearth & Home Technologies LLC (''Hearth & Home'') participates in the hearth products industry. The retail
and distribution brand for this operating unit is Fireside Hearth & Home.
The Corporation has been committed to systematically eliminating waste through its process improvement approach known as Rapid
Continuous Improvement (''RCI''), which focuses on streamlining design, manufacturing, and administrative processes. The
Corporation's RCI program has contributed to increased productivity, lower costs, improved product quality, enhanced workplace
safety, and improved lead times.
The Corporation's product development efforts are focused on developing and providing relevant and differentiated solutions,
delivering quality, aesthetics, and style.
An important element of the Corporation's success has been its member-owner culture, which has enabled it to attract, develop,
retain, and motivate skilled, experienced, and efficient members (i.e., employees). Each of the Corporation's eligible members has
the opportunity to own stock in the Corporation through a number of stock-based plans, including a member stock purchase plan
and a profit-sharing retirement plan. These ownership opportunities drive a unique level of commitment to the Corporation’s success
throughout the workforce. Members own approximately 6 percent of the Corporation's stock.
For further financial-related information with respect to acquisitions, divestitures, operating segment information, restructuring, and
the Corporation’s operations in general, refer to "Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations" in Part II of this report and the following sections in the Notes to Consolidated Financial Statements: "Note 1. Nature
of Operations", "Note 5. Acquisitions and Divestitures", and "Note 17. Reportable Segment Information".
Industry
According to the Business and Institutional Furniture Manufacturer's Association ("BIFMA"), North American 2018 sales of office
and institutional furniture grew 5 percent from 2017 levels. North American 2017 sales of office and institutional furniture grew 2
percent from 2016 levels.
4
The U.S. office furniture market consists of two primary channels — the contract channel and the supplies-driven channel. The
contract channel has traditionally been characterized by sales of office furniture and services to large corporations, primarily for new
office facilities, relocations, or office redesigns. Sales to the contract channel are frequently customized to meet specific client and
designer preferences. Contract furniture is generally purchased through independent office furniture dealers who prepare a custom-
designed office layout emphasizing image and design. The selling process is complex, lengthy, and generally has several
manufacturers competing for the same projects.
The supplies-driven channel, in which the Corporation is a leader, primarily represents smaller orders of office furniture purchased
by small/medium businesses. Sales in this channel are driven on the basis of price, quality, selection, speed, and reliability of
delivery. Office products dealers, wholesalers, and national office product distributors are the primary distribution channels in this
market.
The Corporation also competes in the hearth products industry, where it is a market leader. Hearth products are typically purchased
by builders during the construction of new homes and homeowners during the renovation of existing homes. Both types of purchases
involve seasonality with remodel/retrofit activity being concentrated in the September to December time-frame. Distribution is
primarily through independent dealers, who may buy direct from the manufacturer or from an intermediate distributor.
Strategy
The Corporation's strategy is to build on its position as a leading manufacturer of office furniture and hearth products in North
America and pursue select global markets where opportunities exist to create shareholder value. The components of this growth
strategy are to introduce new products, build brand equity, provide outstanding customer satisfaction, strengthen the distribution
network, pursue complementary strategic acquisitions, enter markets not currently served, and continually reduce costs.
The Corporation’s strategy has a dual focus: working continuously to extract new growth from its core markets while identifying
and developing new, adjacent potential areas of growth. The Corporation focuses on extracting new growth from each of its existing
businesses by deepening its understanding of end-users and using the insights gained to refine branding, selling, marketing, and
product development. The Corporation also pursues opportunities in potential growth drivers related to its core business, such as
vertical markets or new distribution models.
Employees/Members
As of December 29, 2018, the Corporation employed approximately 8,900 persons, 8,700 of whom were full-time and 200 of whom
were temporary personnel. The Corporation believes its labor relations are good.
Products and Solutions
Office Furniture
The Corporation designs, manufactures, and markets a broad range of office furniture systems and seating across a range of price
points. The Corporation's portfolio includes panel-based and freestanding furniture systems and complementary products such as
seating, storage, tables, and architectural products. The Corporation offers a complete line of office panel system products and
freestanding desks, bookshelves, and credenzas in order to meet the needs of a wide spectrum of organizations. The Corporation
offers a variety of storage options designed either to be integrated into the Corporation's office systems products or to function as
freestanding furniture in office applications. The Corporation's seating line includes chairs designed for all types of office work. The
chairs are available in a variety of frame colors, coverings, and a wide range of price points.
To meet the demands of various markets, the Corporation's products are sold primarily under the Corporation's brands:
HON®
Allsteel®
Maxon®
Gunlocke®
HBF®
OFM®
Lamex®
HNI India®
5
Hearth Products
The Corporation is North America’s largest manufacturer and marketer of prefabricated fireplaces, hearth stoves, and related products.
These products are primarily for the home and are sold under the following widely recognized brands:
Heatilator®
Heat & Glo®
Majestic®
Monessen®
Quadra-Fire®
Harman®
Vermont Castings®
PelPro®
Stellar HearthTM
The Corporation’s line of hearth products includes a full array of gas, wood, and pellet burning fireplaces, inserts, stoves, facings,
and accessories. Heatilator®, Heat & Glo®, Majestic®, Monessen®, and Stellar HearthTM are brand leaders in the two largest segments
of the home fireplace market: gas and wood fireplaces. The Corporation is a leader in "direct vent" fireplaces, which replaces the
chimney-venting system used in traditional fireplaces with a less expensive vent through the roof or an outer wall. In addition, the
Corporation is a market leader in wood and pellet-burning stoves with its Quadra-Fire®, Harman®, Vermont Castings®, and PelPro®
product lines, which provide home heating solutions using renewable fuels. See "Intellectual Property" below for additional details.
Manufacturing
The Corporation manufactures office furniture in Georgia, Iowa, New York, North Carolina, China, and India. The Corporation
manufactures hearth products in Iowa, Minnesota, Pennsylvania, and Vermont.
The Corporation purchases raw materials and components from a variety of suppliers and generally, most items are available from
multiple sources. Major raw materials and components include coil steel, aluminum, zinc, castings, lumber, veneer, particleboard,
fabric, paint, lacquer, hardware, glass, plastic products, and shipping cartons.
Since its inception, the Corporation has focused on making its manufacturing facilities and processes more flexible while reducing
cost, eliminating waste, and improving product quality. The Corporation applies the principles of RCI and a lean manufacturing
philosophy leveraging the creativity of its members to eliminate and reduce costs. To achieve flexibility and attain efficiency goals,
the Corporation has adopted a variety of production techniques, including cellular manufacturing, focused factories, just-in-time
inventory management, value engineering, business simplification, and 80/20 principles. The application of RCI has increased
productivity by reducing set-up, processing times, square footage, inventory levels, product costs, and delivery times, while improving
quality and enhancing member safety. The Corporation's RCI process involves members, customers, and suppliers. Manufacturing
also plays a key role in the Corporation's concurrent product development process in order to design new products for ease of
manufacturability.
Product Development
The Corporation's product development efforts are primarily focused on developing relevant and differentiated end-user solutions
focused on quality, aesthetics, style, sustainable design, and reduced manufacturing costs. The Corporation accomplishes this through
improving existing products, extending product lines, applying ergonomic research, improving manufacturing processes, leveraging
alternative materials, and providing engineering support to its operating units. The Corporation conducts its product development
efforts at both the corporate and operating unit levels. The Corporation invested in product development as follows (in thousands):
Product development investments
Intellectual Property
2018
2017
2016
$
33,420
$
31,846
$
28,089
As of December 29, 2018, the Corporation owned 164 U.S. and 152 foreign patents with expiration dates through 2042 and had
applications pending for 19 U.S. and 46 foreign patents. In addition, the Corporation holds 185 U.S. and 422 foreign trademark
registrations and has applications pending for 23 U.S. and 15 foreign trademarks.
6
The Corporation's principal office furniture products do not require frequent technical changes. The Corporation believes neither
any individual office furniture patent nor the Corporation's office furniture patents in the aggregate are material to the Corporation's
business as a whole.
The Corporation’s patents covering its hearth products protect various technical innovations. While the acquisition of patents reflects
Hearth & Home’s position in the market as an innovation leader, the Corporation believes neither any individual hearth product
patent nor the Corporation’s hearth product patents in the aggregate are material to the Corporation’s business as a whole.
The Corporation applies for patent protection when it believes the expense of doing so is justified and the duration of its registered
patents is adequate to protect these rights. The Corporation also pays royalties in certain instances for the use of patents on products
and processes owned by others.
The Corporation applies for trademark protection for brands and products when it believes the expense of doing so is justified. The
Corporation actively protects trademarks it believes have significant value. The Corporation believes neither the loss of any individual
trademark nor the loss of the Corporation's trademarks in the aggregate would materially or adversely affect the Corporation's business
as a whole, except for HON, Allsteel, Heat & Glo, and Heatilator.
Sales and Distribution: Customers
The Corporation sells its office furniture products through five principal distribution channels. The first channel, consisting of
independent, local office products dealers, specializes in the sale of office furniture to business, government, education, and health
care entities.
The second distribution channel is comprised of national office product distributors that sell furniture and office supplies through a
national network of dealerships and sales offices. These distributors also sell through on-line and retail office products stores.
The third distribution channel involves the Corporation having the lead selling relationship with the end-user.
The fourth distribution channel is comprised of wholesalers serving as distributors of the Corporation's products to independent
dealers and national office products distributors. Wholesalers maintain inventory of standard product lines for resale to the various
independent dealers and national office products distributors.
The fifth distribution channel is comprised of direct sales of the Corporation's products to federal, state, and local government offices.
The Corporation's office furniture sales force consists of regional sales managers, salespersons, and firms of independent
manufacturers' representatives who collectively provide national sales coverage. Sales managers and salespersons are compensated
by a combination of salary and variable performance compensation.
Independent office products dealers, national wholesalers, and national office product distributors market their products over the
internet and through catalogs periodically published and distributed to existing and potential customers.
The Corporation also makes export sales through HNI International to independent office furniture dealers and wholesale distributors
serving select foreign markets. Distributors are principally located in the Middle East, Mexico, Latin America, and the
Caribbean. Through Lamex and HNI India, the Corporation manufactures and distributes office furniture directly to end-users and
through independent dealers and distributors in Asia, primarily China and India.
Limited quantities of select finished goods inventories primarily built to order and awaiting shipment are at the Corporation's principal
manufacturing plants and at its various distribution centers. Additionally, the Corporation holds select finished goods inventories
to enable direct fulfillment capabilities.
Hearth & Home sells its fireplace and stove products through independent dealers, distributors, and Corporation-owned distribution
and retail outlets. The Corporation has a field sales organization of regional sales managers, salespersons, and firms of independent
manufacturers' representatives.
In fiscal 2018, the Corporation's five largest customers represented approximately 22 percent of its consolidated net sales. No single
customer accounted for 10 percent or more of the Corporation’s consolidated net sales in fiscal 2018. The substantial purchasing
power exercised by large customers may adversely affect the prices at which the Corporation can successfully offer its products.
7
The Corporation has an order backlog, which will be filled in the ordinary course of business. The order backlog includes orders
that might be cancelable for a period of time and almost all orders will be fulfilled within one year. Order backlog in dollars and in
terms of percentage of net sales was as follows (in thousands):
Net sales
Order backlog
Percent of net sales
December 29,
2018
December 30,
2017
$ 2,257,895
$ 2,175,882
$
181,522
$
202,255
8.0%
9.3%
The Corporation’s products are typically manufactured and shipped within a few weeks following receipt of order or later upon
customer request. Therefore, the dollar amount of the Corporation’s order backlog is not considered by management to be a leading
indicator of the Corporation’s expected sales in any particular fiscal period.
Competition
The Corporation is a leading global office furniture manufacturer and is North America's largest manufacturer and marketer of
fireplaces.
The office furniture industry is highly competitive, with a significant number of competitors offering similar products. The
Corporation competes by emphasizing its ability to deliver compelling value products, solutions, and a high level of tailored customer
service. The Corporation competes with large office furniture manufacturers, which cover a substantial portion of the North America
market share in the contract-oriented office furniture market, including manufacturers such as Steelcase Inc., Haworth, Inc., Herman
Miller, Inc., and Knoll, Inc. The Corporation also competes with a number of other office furniture manufacturers, including The
Global Group (a Canadian company), Kimball International, Inc., Krueger International Inc. (KI), and Teknion Corporation (a
Canadian company), as well as global importers. The Corporation faces significant price competition from its competitors and may
encounter competition from new market entrants.
Hearth products, consisting of prefabricated fireplaces and related products, are manufactured by a number of national and regional
competitors. The Corporation competes against a broad range of manufacturers, including Travis Industries Inc., Innovative Hearth
Products, Wolf Steel Ltd. (Napoleon), and FPI Fireplace Products International Ltd. (Regency).
Both office furniture and hearth products compete on the basis of performance, quality, price, customer service, and complete and
on-time delivery. The Corporation believes it competes principally by providing compelling value products designed to be among
the best in their price range for product quality, performance, superior customer service, and short lead-times. This is made possible,
in part, by the Corporation's on-going investment in brands, product development, low cost manufacturing operations, and extensive
distribution network.
Effects of Inflation
Certain business costs may, from time to time, increase at a rate exceeding the general rate of inflation. The Corporation’s objective
is to offset the effect of normal inflation primarily through productivity improvements combined with certain adjustments to the
selling price of its products as competitive market and general economic conditions permit.
Investments are routinely made in modernizing plants, equipment, information technology, and RCI programs. These investments
collectively focus on business simplification and increasing productivity, which help to offset the effect of rising material and labor
costs. The Corporation also routinely employs ongoing cost control disciplines. In addition, the last-in, first-out ("LIFO") valuation
method is used for most of the Corporation's inventories. The use of LIFO ensures changing material and labor costs are recognized
in reported income and pricing decisions.
Environmental
The Corporation is subject to a variety of environmental laws and regulations governing the use of materials and substances in
products, the management of wastes resulting from use of certain material, and the remediation of contamination associated with
releases of hazardous substances used in the past. Although the Corporation believes it is substantially compliant with all of the
various regulations applicable to its business, there can be no assurance requirements will not change in the future or the Corporation
will not incur material costs to comply with such regulations. The Corporation has trained staff responsible for monitoring compliance
8
with environmental, health, and safety requirements. The Corporation’s staff works with responsible personnel at each manufacturing
facility, the Corporation’s environmental legal counsel, and consultants on the management of environmental, health, and safety
issues. The Corporation’s environmental objective is to reduce and, when practical, eliminate the human and ecosystem impacts of
materials and manufacturing processes.
Over the past several years, the Corporation has expanded its environmental management system and established metrics to influence
product design and development, supplier and supply chain performance, energy and resource consumption, and the impacts of its
facilities. In addition, the Corporation is providing sustainability training to senior decision makers and has assigned resources to
documenting and communicating its progress to an increasingly knowledgeable market. Integrating sustainable objectives into core
business systems is consistent with the Corporation’s vision, ensures its commitment to being a sustainable enterprise, and remains
a priority for all members.
Compliance with federal, state, and local environmental regulations has not had a material effect on the capital expenditures, earnings,
or competitive position of the Corporation to date. The Corporation does not anticipate financially material capital expenditures will
be required during fiscal 2019 for environmental control facilities. In management’s judgment, compliance with current regulations
should not have a material effect on the Corporation’s financial condition or results of operations. However, there can be no assurance
new environmental legislation, material science, or technology in this area will not result in or require material capital expenditures.
Business Development
The development of the Corporation's business during the fiscal years ended December 29, 2018, December 30, 2017, and
December 31, 2016 is discussed in ''Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations"
in Part II of this report.
Available Information
Information regarding the Corporation’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-
K, and any amendments to these reports, will be made available, free of charge, on the Corporation’s website at www.hnicorp.com,
as soon as reasonably practicable after the Corporation electronically files such reports with or furnishes them to the Securities and
Exchange Commission (the ''SEC''). The information on the Corporation's website is not, and shall not be, deemed to be a part hereof
or incorporated into this or any of the Corporation's other filings with the SEC. The Corporation’s information is also available on
the SEC website at www.sec.gov.
Forward-Looking Statements
Statements in this report to the extent they are not statements of historical or present fact, including statements as to plans, outlook,
objectives, and future financial performance, are "forward-looking" statements, within the meaning of Section 21 of the Securities
Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Words such as "anticipate," "believe,"
"could," "confident," "estimate," "expect," "forecast," "hope," "intend," "likely," "may," "plan," "possible," "potential," "predict,"
"project," "should," "will," "would," and variations of such words and similar expressions identify forward-looking statements.
Forward-looking statements involve known and unknown risks and uncertainties, which may cause the Corporation’s actual results
in the future to differ materially from expected results. The most significant factors known to the Corporation that may adversely
affect the Corporation’s business, operations, industries, financial position, or future financial performance are described later in this
report under the heading "Item 1A. Risk Factors." The Corporation cautions readers not to place undue reliance on any forward-
looking statement, which speaks only as of the date made, and to recognize forward-looking statements are predictions of future
results, which may not occur as anticipated. Actual results could differ materially from those anticipated in the forward-looking
statements and from historical results due to the risks and uncertainties described elsewhere in this report, including but not limited
to: the levels of office furniture needs and housing starts; overall demand for the Corporation's products; general economic and
market conditions in the United States and internationally; industry and competitive conditions; the consolidation and concentration
of the Corporation's customers; the Corporation's reliance on its network of independent dealers; changes in trade policy; changes
in raw material, component, or commodity pricing; market acceptance and demand for the Corporation's new products; changing
legal, regulatory, environmental, and healthcare conditions; the risks associated with international operations; the potential impact
of product defects; the various restrictions on the Corporation's financing activities; an inability to protect the Corporation's intellectual
property; impacts of tax legislation; force majeure events outside the Corporation’s control; and other risks as described under the
heading "Item 1A. Risk Factors," as well as others that the Corporation may consider not material or does not anticipate at this
time. The risks and uncertainties described in this report, including those under the heading "Item 1A. Risk Factors," are not exclusive
9
and further information concerning the Corporation, including factors that potentially could have a material effect on the Corporation’s
financial results or condition, may emerge from time to time.
The Corporation assumes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new
information, future events, or otherwise, except as required by applicable law. The Corporation advises you, however, to consult
any further disclosures made on related subjects in future quarterly reports on Form 10-Q and current reports on Form 8-K filed with
or furnished to the SEC.
Item 1A. Risk Factors
The following risk factors and other information included in this report should be carefully considered. If any of the following risks
occur, the Corporation's business, operating results, cash flows, or financial condition could be materially adversely affected.
Unfavorable economic and industry factors could adversely affect the Corporation's business, operating results, or financial
condition.
Office furniture industry sales are impacted by a variety of macroeconomic factors including service-sector employment levels,
corporate profits, small business confidence, commercial construction, and office vacancy rates. Industry factors, including corporate
restructuring, technology changes, corporate relocations, health and safety concerns, including ergonomic considerations, and the
globalization of companies also influence office furniture industry revenues.
Hearth products industry sales are impacted by a variety of macroeconomic factors including housing starts, overall employment
levels, interest rates, consumer confidence, energy costs, disposable income, and changing demographics. Industry factors, such as
technology changes, health and safety concerns, and environmental regulation, including indoor air quality standards, also influence
hearth products industry revenues. Deterioration of economic conditions or a slowdown in the homebuilding industry and the hearth
products market could decrease demand for hearth products and have additional adverse effects on operating results.
A deterioration of economic conditions in the Corporation's key international markets, including China and India, could have adverse
effects on the Corporation's international office furniture sales and operating results.
Deteriorating economic conditions could affect the Corporation's business significantly, including: reduced demand for products;
insolvency of independent dealers resulting in increased provisions for credit losses; insolvency of key suppliers resulting in product
delays; inability of customers to obtain credit to finance purchases of products; and decreased customer demand, including order
delays or cancellations.
The office furniture and hearth products industries are highly competitive and, as a result, the Corporation may not be successful
in winning new business.
Both the office furniture and hearth products industries are highly competitive. Many of the Corporation's competitors in both
industries offer similar products. Competitive factors include price, delivery and service, product design, product quality, strength
of dealers and other distributors, and relationships with customers and key influencers, including architects, designers, home-builders,
and facility managers. In both industries, most of the top competitors have an installed base of products that can be a source of
significant future sales through repeat and expansion orders. The Corporation's main competitors manufacture products with strong
acceptance in the marketplace and are capable of developing products that have a competitive advantage, which could make it difficult
to win new business.
In both the office furniture and hearth products industries, the Corporation faces price competition from competitors and from new
market entrants who primarily manufacture and source products from lower cost countries. Price competition impacts the ability to
implement price increases or, in some cases, even maintain prices, which could lower profit margins and adversely affect future
financial performance.
Changes in industry dynamics, including demand and order patterns from customers, distribution changes, or the loss of a significant
number of dealers, could adversely affect the Corporation's business, operating results, or financial condition.
The Corporation sells products through multiple distribution channels, which primarily include independent dealers, national dealers,
and wholesalers. Within these distribution channels, there has been, and may continue to be, consolidation. The Corporation relies
on distribution partners to provide a variety of important specification, installation, and after-market services to customers. Some
distribution partners may terminate their relationship with the Corporation at any time and for any reason. The Corporation has
10
experienced demand shift to direct fulfillment, reducing two-step distribution by wholesale partners. The ability to provide increased
direct fulfillment and/or the loss or termination of a significant number of reseller relationships could cause difficulties in marketing
and distributing products, resulting in a decline in sales, which may adversely affect the business, operating results, or financial
condition.
Evolving trade policy between the United States and other countries may have an adverse effect on the Corporation's business and
results of operations.
The Corporation has a global supply chain for raw materials and components used in office furniture and hearth products. Recent
steps taken by the United States government to adopt a new approach to trade policy and in some cases to apply tariffs on certain
products and materials, such as steel, could potentially disrupt the existing supply chains and impose additional costs on the business,
including costs with respect to raw materials and components upon which the business depends. The increased costs could lower
profit margins as the Corporation may not be able to pass on the additional costs by increasing the prices of its products, and its
business and results of operations may be adversely affected.
In addition, certain foreign governments have imposed retaliatory tariffs on goods that their countries import from the United States.
Changes in U.S. trade policy could result in one or more foreign governments adopting responsive trade policies that make it more
difficult or costly for the Corporation to do business in or import products from those countries.
The Corporation cannot predict the extent to which the United States or other countries will impose quotas, duties, tariffs, taxes or
other similar restrictions upon the import or export of raw materials or products in the future, nor can we predict future trade policy
or the terms of any renegotiated trade agreements and their impact on the business. The adoption and expansion of trade restrictions,
the occurrence of a trade war, or other governmental action related to tariffs or trade agreements or policies has the potential to
adversely impact demand for products, costs, customers, suppliers, and the U.S. economy, which in turn could have a material adverse
effect on the business, operating results and financial condition.
The Corporation's profitability may be adversely affected by increases in raw material and commodity costs as well as transportation
and shipping challenges.
Fluctuations in the price, availability, and quality of the commodities, raw materials, and components used in manufacturing could
have an adverse effect on costs of sales, profitability, and ability to meet customers' demand. The Corporation sources commodities,
raw materials, and components from domestic and international suppliers for both the office furniture and hearth products. From
both domestic and international suppliers, the cost, quality, and availability of commodities, raw materials, and components, including
steel, have been significantly affected in recent years by, among other things, changes in global supply and demand, changes in laws
and regulations (including tariffs and duties), changes in exchange rates and worldwide price levels, natural disasters, labor disputes,
terrorism, and political unrest or instability. These factors could lead to further price volatility or supply interruptions in the
future. Profit margins could be adversely affected if commodity, raw material, and component costs remain high or escalate further,
and the Corporation is either unable to offset such costs through strategic sourcing initiatives and continuous improvement programs
or, as a result of competitive market dynamics, unable to pass along a portion of the higher costs to customers.
The Corporation relies primarily on third-party freight and transportation providers to deliver products to customers. Increasing
demand for freight providers and a shortage of qualified drivers may cause delays in shipments and increase the cost to ship its
products, which may adversely affect profitability. Additionally, the Corporation imports and exports products and components,
primarily using container ships, which load and unload through North American ports. Port-caused delays in the shipment or receipt
of products and components, including labor disputes, could cause delayed receipt of products and components. These delays could
cause manufacturing disruptions, increased expense resulting from alternate shipping methods, or the inability to meet customer
delivery expectations, which may adversely affect sales and profitability.
The Corporation's efforts to introduce new products to meet customer and workplace demands may not be successful, which could
limit sales growth or cause its sales to decline.
To meet the changing needs of customers and keep pace with market trends, the Corporation regularly introduces new office furniture
and hearth products. The introduction of new products requires the coordination of the design, manufacturing, and marketing of the
products, which may be affected by uncontrollable factors. The design and engineering of certain new products can take up to a
year or more, and further time may be required to achieve client acceptance. The Corporation may face difficulties if it cannot
successfully align itself with independent architects, home-builders, and designers who are able to design, in a timely manner, high
quality products consistent with our image and our customers' needs. Accordingly, the launch of a product may be later or less
successful than originally anticipated, limiting sales growth or causing sales to decline.
11
The Corporation may not be able to successfully integrate and manage its acquired businesses and alliances.
One of the Corporation's growth strategies is to supplement its organic growth through acquisitions and strategic alliances. The
benefits of acquisitions or alliances may take more time than expected to develop or integrate into operations. In addition, acquisitions
and alliances involve a number of risks, including:
•
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diversion of management’s attention;
difficulties in assimilating the operations and products of an acquired business or in realizing projected efficiencies, cost
savings and revenue synergies;
potential loss of key employees or customers of the acquired businesses or adverse effects on existing business relationships
with suppliers and customers;
reallocation of amounts of capital from other operating initiatives or an increase in leverage and debt service requirements
to pay the acquisition purchase prices, which could in turn restrict the ability to access additional capital when needed or
to pursue other important elements of the business strategy;
inaccurate assessment of undisclosed, contingent, or other liabilities or problems and unanticipated costs associated with
the acquisition; and
incorrect estimates made in accounting for acquisitions, incurrence of non-recurring charges, and write-off of significant
amounts of goodwill that could adversely affect the financial results.
The Corporation's ability to grow through future acquisitions will depend, in part, on the availability of suitable acquisition candidates
at an acceptable price, the ability to compete effectively for these acquisition candidates, and the availability of capital to complete
the acquisitions. Any potential acquisition may not be successful and could adversely affect the business, operating results, or
financial condition.
The Corporation may need to take additional impairment charges related to goodwill and indefinite-lived intangible assets, which
would adversely affect the financial results.
Goodwill and other acquired intangible assets with indefinite lives are not amortized but are tested for impairment annually and
when an event occurs or circumstances change making it reasonably possible an impairment may exist. Poor performance in portions
of the Corporation's business where goodwill or intangible assets, or declines in the market value of equity, may result in impairment
charges, which would adversely affect the results of operations.
The Corporation is subject to extensive environmental regulation and has exposure to potential environmental liabilities.
Through the past and present operation and ownership of manufacturing facilities and real property, the Corporation is subject to
extensive and changing federal, state, and local environmental laws and regulations, including those relating to discharges in air,
water, and land, the handling and disposal of solid and hazardous waste, and the remediation of contamination associated with releases
of hazardous substances. Compliance with environmental regulations has not had a material effect on capital expenditures, earnings,
or competitive position to date; however, compliance with current laws or more stringent laws or regulations which may be imposed
in the future, stricter interpretation of existing laws or discoveries of contamination at the Corporation's real property sites which
occurred prior to ownership, or the advent of environmental regulation may require additional expenditures in the future, some of
which may be material.
Increasing healthcare costs could adversely affect the Corporation's business, operating results, and financial condition.
The Corporation provides healthcare benefits to the majority of its members and is self-insured. Healthcare costs have continued to
rise over time, which increases the annual spending on healthcare and could adversely affect the business, operating results, and
financial condition.
The Corporation's international operations expose it to risks related to conducting business in multiple jurisdictions outside the
United States.
The Corporation manufactures, markets, and sells products in international markets, including China and India and plans to continue
to grow internationally. The Corporation primarily sells products and reports the financial results in U.S. dollars; however, increased
business in countries outside the United States creates exposure to fluctuations in foreign currency exchange rates. Paying expenses
in other currencies can result in a significant increase or decrease in the amount of those expenses in terms of U.S. dollars, which
may affect profits. In the future, any foreign currency appreciation relative to the U.S. dollar would increase expenses that are
12
denominated in that currency. Additionally, as the Corporation reports currency in the U.S. dollar, the financial position is affected
by the strength of the currencies in countries where we have operations relative to the strength of the U.S. dollar.
Further, certain countries have complex regulatory systems that impose administrative and legal requirements, which make managing
international operations more difficult, including approvals to transfer funds among certain countries. If the Corporation is unable
to provide financial support to the international operations in a timely manner, business, operating results, and financial condition
could be adversely affected.
The Corporation periodically reviews foreign currency exposure and evaluates whether it should enter into hedging transactions.
The Corporation's international sales and operations are subject to a number of additional risks, including:
•
•
•
•
•
•
•
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•
•
•
•
social and political turmoil, official corruption, and civil and labor unrest;
restrictive government actions, including the imposition of trade quotas and tariffs and restrictions on transfers of funds;
changes in labor laws and regulations affecting the ability to hire, retain, or dismiss employees;
the need to comply with multiple and potentially conflicting laws and regulations, including environmental and corporate
laws and regulations;
the failure of the Corporation's compliance programs and internal training to prevent violations of the U.S. Foreign Corrupt
Practices Act and similar anti-bribery laws;
preference for locally branded products and laws and business practices favoring local competition;
less effective protection of intellectual property and increased possibility of loss due to cyber-theft;
unfavorable business conditions or economic instability in any particular country or region;
infrastructure disruptions;
potentially conflicting cultural and business practices;
difficulty in obtaining distribution and support; and
changes to border taxes or other international tax reforms.
Restrictions imposed by the terms of the Corporation's debt agreements may limit operating and financial flexibility.
The Corporation's credit facility and other financing arrangements may limit the ability to finance operations, service debt, or engage
in other business activities that may be in its interests. Specifically, the debt agreements may restrict its ability to incur additional
indebtedness, create or incur certain liens with respect to any properties or assets, engage in lines of business substantially different
than those currently conducted by us, sell, lease, license, or dispose of any assets, enter into certain transactions with affiliates, make
certain restricted payments or take certain restricted actions, and enter into certain sale-leaseback arrangements. The debt agreements
also require the Corporation to maintain certain financial covenants.
The failure to comply with the obligations under the debt agreements may result in an event of default, which, if not cured or waived,
may cause accelerated repayment of the indebtedness under the agreements. The Corporation cannot be certain it will have sufficient
funds available to pay any accelerated repayments or will have the ability to refinance accelerated repayments on favorable terms
or at all.
Costs related to product defects could adversely affect the Corporation's profitability.
The Corporation incurs various expenses related to product defects, including product warranty costs, product recall and retrofit
costs, and product liability costs. These expenses relative to product sales vary and could increase. The Corporation uses chemicals
and materials in products and includes components in products from external suppliers, which are believed to be safe and appropriate
for their designated use; however, harmful effects may become known, which could subject the Corporation to litigation and significant
losses. We maintain reserves for product defect-related costs but cannot be certain these reserves will be adequate to cover actual
claims. Incorrect estimates or any significant increase in the rate of product defect expenses could have a material adverse effect on
operations.
The Corporation may require additional capital in the future, which may not be available or may be available only on unfavorable
terms.
The Corporation's capital requirements depend on many factors, including its need for capital improvements, tooling, new product
development, and acquisitions. To the extent existing capital is insufficient to meet these requirements and cover any losses, we
may need to raise additional funds through financings or curtail its growth and reduce its assets. Future borrowings or financings
13
may not be available under the credit facility or otherwise in an amount sufficient to enable the Corporation to pay its debt or meet
its liquidity needs.
Any equity or debt financing, if available, could have unfavorable terms. In addition, financings could result in dilution to shareholders
or the securities may have rights, preferences, and privileges senior to those of the Corporation's common stock. If the need for
capital arises because of significant losses, the occurrence of these losses may make it more difficult to raise the necessary capital.
The Corporation's sales to the U.S. federal, state, and local governments are subject to uncertain future funding levels and federal,
state, and local procurement laws and are governed by restrictive contract terms; any of these factors could limit current or future
business.
The Corporation derives a portion of its revenue from sales to various U.S. federal, state, and local government agencies and
departments. The ability to compete successfully for and retain business with the U.S. government, as well as with state and local
governments, is highly dependent on cost-effective performance. This government business is highly sensitive to changes in
procurement laws; national, international, state, and local public priorities; and budgets at all levels of government, which have
recently experienced downward pressure and, in the case of the federal budget, are subject to uncertainty.
The Corporation's contracts with government entities are subject to various statutes and regulations that apply to companies doing
business with the government. The U.S. government, as well as state and local governments, can typically terminate or modify their
contracts either for their convenience or if we default by failing to perform under the terms of the applicable contract. A termination
arising out of default could expose the Corporation to liability and impede its ability to compete in the future for contracts and orders
with agencies and departments at all levels of government. Moreover, we are subject to investigation and audit for compliance with
the requirements governing government contracts, including requirements related to procurement integrity, export controls,
employment practices, the accuracy of records, and reporting of costs. If the Corporation were found to not be a responsible supplier
or to have committed fraud or certain criminal offenses, it could be suspended or debarred from all further federal, state, or local
government contracting.
The Corporation relies on information technology systems to manage numerous aspects of the business and a disruption or failure
of these systems could adversely affect business, operating results, and financial condition.
The Corporation relies upon information technology networks and systems to process, transmit, and store electronic information, as
well as to manage numerous aspects of the business and provide information to management. Additionally, we collect and store
sensitive data of our customers, suppliers, and employees in data centers and on information technology networks. The secure
operation of these information technology networks and the processing and maintenance of this information is critical to business
operations and strategy. These networks and systems, despite security and precautionary measures, are vulnerable to natural events
and malicious activity. Though the Corporation attempts to detect and prevent these incidents, it may not be successful. In addition,
the Corporation is subject to data privacy and other similar laws in various jurisdictions. If the Corporation is the target of a
cybersecurity attack, computer virus, physical or electronic break-in or similar disruption resulting in unauthorized disclosure of
sensitive data of customers, suppliers, and employees, the Corporation may be required to undertake costly notification procedures.
The Corporation may also be required to expend significant additional resources to protect against the threat of security breaches or
to alleviate problems, including reputational harm and litigation, caused by any breaches. Any disruption of information technology
networks or systems, or access to or disclosure of information stored in or transmitted by systems, could result in legal claims and
damages and loss of intellectual property or other proprietary information.
The Corporation's results of operations and earnings may not meet guidance or expectations.
The Corporation provides public guidance on the expected results of operations for future periods. This guidance is comprised of
forward-looking statements subject to risks and uncertainties, including the risks and uncertainties described in this Annual Report
on Form 10-K and in other public filings and public statements, and is based necessarily on assumptions made at the time we provide
such guidance. The guidance may not always be accurate. If, in the future, the results of operations for a particular period do not
meet its guidance or the expectations of investment analysts or if the Corporation reduces its guidance for future periods, the market
price of common stock could decline significantly.
Iowa law and provisions in the Corporation's charter documents may have the effect of preventing or hindering a change in control
and adversely affecting the market price of its common stock.
The Corporation's Articles of Incorporation give the Board of Directors the authority to issue up to two million shares of preferred
stock and to determine the rights and preferences of the preferred stock without obtaining shareholder approval. The existence of
14
this preferred stock could make it more difficult or discourage an attempt to obtain control of the Corporation by means of a tender
offer, merger, proxy contest, or otherwise. Furthermore, this preferred stock could be issued with other rights, including economic
rights, senior to common stock, thereby having a potentially adverse effect on the market price of common stock.
The Corporation's Board of Directors is divided into three classes. The Corporation's classified Board, along with other provisions
of the Corporation's Articles of Incorporation and Bylaws and Iowa corporate law, could make it more difficult for a third party to
acquire the Corporation or remove the Corporation's directors by means of a proxy contest, even if doing so would be beneficial to
shareholders. Additionally, the Corporation may, in the future, adopt measures (such as a shareholder rights plan or "poison pill")
that could have the effect of delaying, deferring, or preventing an unsolicited takeover, even if such a change in control were at a
premium price or favored by a majority of unaffiliated shareholders. These measures may be adopted without any further vote or
action by the shareholders.
An inability to protect the Corporation's intellectual property could have a significant impact on the business.
The Corporation attempts to protect its intellectual property rights, both in the United States and in foreign countries, through a
combination of patent, trademark, copyright, and trade secret laws, as well as licensing agreements and third-party nondisclosure
and assignment agreements. Because of the differences in foreign trademark, copyright, patent, and other laws concerning proprietary
rights, intellectual property rights do not generally receive the same degree of protection in foreign countries as they do in the United
States. In some parts of the world, the Corporation has limited protections, if any, for its intellectual property. The degree of protection
offered by the claims of the various patents, copyrights, trademarks, and service marks may not be broad enough to provide significant
proprietary protection or competitive advantages to us, and patents, copyrights, trademarks, or service marks may not be issued on
pending or contemplated applications. In addition, not all of the Corporation's products are covered by patents or similar intellectual
property protections. It is also possible that patents, copyrights, trademarks, and service marks may be challenged, invalidated,
canceled, narrowed, or circumvented.
In the past, certain products have been copied and sold by others. The Corporation tries to enforce its intellectual property rights,
but has to make choices about where and how to pursue enforcement and where to seek and maintain intellectual property protection.
In many cases, the cost of enforcing rights is substantial, and the Corporation may determine that the costs of enforcement outweigh
the potential benefits.
If third parties claim that the Corporation infringes upon their intellectual property rights, the Corporation may incur liabilities and
costs and may have to redesign or discontinue an infringing product.
The Corporation faces the risk of claims that it has infringed upon third parties’ intellectual property rights. Companies operating
in our industry routinely seek patent protection for their product designs, and many of the principal competitors have large patent
portfolios. Prior to launching major new products in the key markets, we normally evaluate existing intellectual property rights.
However, competitors and suppliers may have filed for patent protection which is not, at the time of the evaluation, a matter of public
knowledge. The Corporation's efforts to identify and avoid infringing upon third parties’ intellectual property rights may not always
be successful. Any claims of patent or other intellectual property infringement, even those without merit, could be expensive and
time consuming to defend; cause the Corporation to cease making, licensing, or using products that incorporate the challenged
intellectual property; require the Corporation to redesign, re-engineer, or re-brand the products or packaging, if feasible; or require
the Corporation to enter into royalty or licensing agreements in order to obtain the right to use a third party’s intellectual property.
Natural disasters, acts of God, force majeure events, or other catastrophic events may impact the Corporation's production capacity
and, in turn, negatively impact profitability.
Natural disasters, acts of God, force majeure events, or other catastrophic events, including severe weather, military action, terrorist
attacks, power interruptions, and fires, could disrupt operations and likewise, the ability to produce or deliver products. Several of
the Corporation's production facilities, members, and key management are located within a small geographic area in eastern Iowa
and a natural disaster or catastrophe in the area could have a significant adverse effect on the results of operations and business
conditions. Further, several of our production facilities are single-site manufacturers of certain products, and an adverse event
affecting any of those facilities could significantly delay production of certain products and adversely affect the operations and
business conditions. Members are an integral part of the business and events including an epidemic could reduce the availability of
members reporting for work. In the event we experience a temporary or permanent interruption in our ability to produce or deliver
product, revenues could be reduced, and business could be materially adversely affected. In addition, any continuing disruption in
the Corporation's computer system could adversely affect the ability to receive and process customers' orders, manufacture products
and ship products on a timely basis, and could adversely affect relations with customers, potentially resulting in reduction in orders
from customers or loss of customers.
15
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The Corporation maintains its corporate headquarters in Muscatine, Iowa, and conducts operations at locations throughout the United
States, Canada, China, Hong Kong, India, Mexico, Dubai, Taiwan, and Singapore, which house manufacturing, distribution, and
retail operations and offices, totaling an aggregate of approximately 8.7 million square feet. Of this total, approximately 3.0 million
square feet are leased.
Although the plants are of varying ages, the Corporation believes they are well maintained, equipped with modern and efficient
equipment, in good operating condition, and suitable for the purposes for which they are being used. The Corporation has sufficient
capacity to increase output at most locations by increasing the use of overtime or the number of production shifts employed.
The Corporation's principal manufacturing and distribution facilities (200,000 square feet in size or larger) are as follows:
Location
Cedartown, Georgia
Dongguan, China
Garland, Texas
Hickory, North Carolina
Lake City, Minnesota
Mechanicsburg, Pennsylvania
Mt. Pleasant, Iowa
Muscatine, Iowa
Muscatine, Iowa
Muscatine, Iowa
Muscatine, Iowa
Nagpur, India
Wayland, New York
Approximate
Square Feet
550,000
Owned or
Leased
Owned
373,000
211,000
206,000
242,000
400,000
378,000
273,000
578,000
810,000
238,000
355,000
716,000
Leased
Leased
Owned
Owned
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Description of Use
Manufacturing office furniture (1)
Manufacturing office furniture (1)
Warehousing office furniture
Manufacturing office furniture
Manufacturing fireplaces
Warehousing office furniture
Manufacturing fireplaces (1)
Manufacturing office furniture
Manufacturing office furniture (1)
Manufacturing office furniture (1)
Manufacturing office furniture
Manufacturing office furniture
Manufacturing office furniture (1)
(1) Also includes a regional warehouse/distribution center
Other facilities total approximately 3.4 million square feet, of which approximately 2.0 million square feet are leased. Approximately
2.1 million square feet are used for the selling, manufacturing, and distribution of office furniture, approximately 1.1 million square
feet are used for the selling, manufacturing, and distribution of hearth products, and approximately 0.2 million square feet are used
for corporate administration.
There are no major encumbrances on Corporation-owned properties. Refer to the Property, Plant, and Equipment section in "Note
2. Summary of Significant Accounting Policies" for related cost, accumulated depreciation, and net book value data.
Item 3. Legal Proceedings
The Corporation is involved in various disputes and legal proceedings that have arisen in the ordinary course of its business, including
pending litigation, environmental remediation, taxes, and other claims. It is the Corporation’s opinion, after consultation with legal
counsel, that liabilities, if any, resulting from these matters are not expected to have a material adverse effect on the Corporation’s
financial condition, cash flows, or on the Corporation’s quarterly or annual operating results when resolved in a future period. For
more information regarding legal proceedings, see "Note 16. Guarantees, Commitments, and Contingencies" in the Notes to
Consolidated Financial Statements, which information is incorporated herein by reference.
16
Item 4. Mine Safety Disclosures
Not applicable.
17
Table I
Executive Officers of the Registrant
Name
Julie M. Abramowski
Age
43
Family
Relationship Position
None
Vice President, Corporate
Controller
Position
Held Since
2015
Vincent P. Berger
46
None
Executive Vice President,
HNI Corporation
President, Hearth &
Home Technologies
Steven M. Bradford
Marshall H. Bridges
61
49
None
None
Senior Vice President,
General Counsel and
Secretary
Senior Vice President and
Chief Financial Officer
Brandon B. Bullock
41
None
President, The HON
Company
2018
2016
2015
2018
2018
Jeffrey D. Lorenger
53
None
President and Chief
Executive Officer
2018
Donna D. Meade
Brandon T. Sieben
Kurt A. Tjaden
53
47
55
None
Vice President, Member
and Community Relations
2014
None
President, Allsteel, Inc.
2015
None
President, HNI
International
Senior Vice President,
HNI Corporation
2017
2015
Other Business Experience During
Past Five Years
Director, Financial Reporting
(2014-2015);
Director, Financial Planning and
Analysis, Leveraged Furniture
Operations (2013-2014);
Corporate Controller, The HON
Company (2007-2013)
Senior Vice President, Sales and
Operations, Hearth & Home
Technologies (2014-2016);
Senior Vice President, Operations,
Hearth & Home Technologies
(2011-2014)
Vice President, General Counsel and
Secretary (2008-2015)
Vice President and Chief Financial
Officer (2017-2018);
Vice President, Finance, HNI Contract
Furniture Group (2014-2017);
Vice President, Finance, Allsteel Inc.
(2010-2014)
Advanced Development and
Innovation Leader, Whirlpool
Corporation (2017-2018);
Global Platform Leader and General
Manager, Microwaves, Hong Kong,
Whirlpool Corporation (2016-2017);
General Manager, Air and Water
Platforms, Whirlpool Corporation
(2014-2016);
Director Sales, Kitchen Appliances,
Whirlpool Corporation (2013-2014)
President, Office Furniture, HNI
Corporation (2017 - 2018)
Executive Vice President, HNI
Corporation (2014-2017);
President, HNI Contract Furniture
Group (2014-2017);
President, Allsteel Inc. (2008-2014)
Vice President, Member and
Community Relations, Allsteel Inc.
(2009-2014)
Vice President of Sales, Allsteel, Inc.
(2014-2015); President, Paoli
(2009-2014)
Senior Vice President and Chief
Financial Officer (2015-2017);
Vice President and Chief Financial
Officer (2008-2015)
18
PART II
Item 5. Market for Registrant's Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities
The Corporation’s common stock is listed for trading on the New York Stock Exchange (NYSE) under the trading symbol HNI. As
of year-end 2018, the Corporation had 5,639 shareholders of record.
EQ Shareowner Services, St. Paul, Minnesota, serves as the Corporation’s transfer agent and registrar of its common
stock. Shareholders may report a change of address or make inquiries by writing or calling: EQ Shareowner Services, P.O. Box
64874, St. Paul, MN 55164-0854, or 800-468-9716.
The Corporation expects to continue its policy of paying regular quarterly cash dividends. Dividends have been paid each quarter
since the Corporation paid its first dividend in 1955. The average dividend payout percentage for the most recent three-year period
has been 53 percent of prior year earnings. Future dividends are dependent on future earnings, capital requirements, and the
Corporation’s financial condition, and are declared in the sole discretion of the Corporation’s Board of Directors.
Issuer Purchases of Equity Securities:
The following is a summary of share repurchase activity during the fourth quarter of fiscal 2018:
Total Number
of Shares (or
Units) Purchased
(1)
Average Price
Paid per Share
(or Unit)
Total Number of
Shares (or Units)
Purchased as Part
of Publicly
Announced Plans
or Programs
Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units)
that May Yet be
Purchased Under
the Plans or
Programs
$
$
$
100,000
95,000
191,399
386,399
40.42
38.51
35.74
$
$
$
100,000
95,000
191,399
386,399
59,082,846
55,424,766
48,584,890
Period
09/30/18 - 10/27/18
10/28/18 - 11/24/18
11/25/18 - 12/29/18
Total
(1) No shares were purchased outside of a publicly announced plan or program.
The Corporation repurchases shares under previously announced plans authorized by the Board as follows:
• The Corporation's share purchase program ("Program") announced November 9, 2007, providing share repurchase
authorization of $200,000,000 with no specific expiration date, with increases announced November 7, 2014 and February
13, 2019, providing additional share repurchase authorizations each of $200,000,000 with no specific expiration date.
• No repurchase plans expired or were terminated during the fourth quarter of fiscal 2018, nor do any plans exist under which
the Corporation does not intend to make further purchases. The Program does not obligate the Corporation to purchase any
shares and the authorization for the Program may be terminated, increased, or decreased by the Board at any time.
19
Item 6. Selected Financial Data - Five Year Summary
(In thousands, except share and per share data)
Operating Results
2018
2017
2016
2015
2014
Net Sales
$ 2,257,895
$ 2,175,882
$ 2,203,489
$ 2,304,419
$ 2,222,695
Gross Profit as a Percentage of Net Sales
37.0%
36.0%
37.9%
36.8%
35.3%
Net Income Attributable to HNI Corporation
Net Income Attributable to HNI Corporation as
a Percentage of Net Sales
$
93,377
$
89,795
$
85,577
$
105,436
$
61,471
4.1%
4.1%
3.9%
4.6%
2.8%
Share and Per Share Data (Basic and Dilutive)
Net Income Attributable to HNI Corporation –
basic
Net Income Attributable to HNI Corporation –
diluted
Cash Dividends
Average Number of Common Shares
Outstanding – basic
Average Number of Common Shares
Outstanding – diluted
$
$
$
2.14
2.11
1.17
$
$
$
2.05
2.00
1.13
$
$
$
1.93
1.88
1.09
$
$
$
2.38
2.32
1.045
$
$
$
1.37
1.35
0.99
43,639,003
43,839,004
44,413,941
44,285,298
44,759,716
44,327,602
44,839,813
45,502,219
45,440,653
45,578,872
Financial Position
Current Assets
Current Liabilities
Working Capital
Total Assets
531,883
$
488,880
$
433,041
$
$
$
434,308
97,575
$ 1,401,844
$
489,703
(823)
$ 1,391,550
$
$
463,473
(30,432)
$ 1,330,234
$
$
$
$
438,370
435,900
2,470
$
$
$
455,559
457,333
(1,774)
$ 1,263,925
$ 1,239,334
Percent Return on Beginning Assets Employed
9.2%
5.8%
10.6%
13.2%
9.9%
Long-Term Debt and Capital Lease Obligations $
249,355
$
562,933
$
$
240,000
514,068
$
$
180,000
500,603
$
$
185,000
476,954
$
$
197,736
414,587
17.3%
17.7%
17.5%
23.7%
14.4%
Shareholders’ Equity
Percent Return on Average Shareholders’
Equity
2014 reflects a 53-week year.
Reflects VCG acquisition beginning in Q4 2014, OFM acquisition in Q1 2016, Artcobell divestiture in Q4 2016, and Paoli closure
in Q1 2018.
20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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. Statements that are not historical
are forward-looking and involve risks and uncertainties. See "Item 1A. Risk Factors" and the Forward-Looking Statements section
within "Item 1. Business" for further information.
Overview
The Corporation has two reportable segments: office furniture and hearth products. The Corporation is a leading global office
furniture manufacturer and a leading manufacturer and marketer of hearth products. The Corporation utilizes a split and focus with
leverage, decentralized business model to deliver value to customers via various brands and selling models. The Corporation is
focused on growing its existing businesses while seeking out and developing new opportunities for growth.
Net sales for 2018 were $2,258 million, an increase of 3.8 percent, compared to net sales of $2,176 million in 2017. The change
was driven by an increase in sales in both the office furniture and hearth products segments. Office furniture segment sales increased
in both the supplies-driven and contract businesses which were partially offset by a $57.6 million negative net impact of closing and
divesting small office furniture companies.
Net income attributable to the Corporation in 2018 was $93.4 million compared to net income of $89.8 million in 2017. The change
was primarily driven by lower restructuring, transition, and impairment charges, improved price realization, productivity and cost
savings, and the impact of closing and divesting small office furniture companies. These factors were partially offset by input cost
inflation, the amortization and implementation costs from the Business System Transformation initiative, strategic investments, and
higher incentive based compensation.
21
Results of Operations
The following table presents certain key highlights from the results of operations (in thousands):
(Gain) loss on sale, disposal, and license of assets
—
(100.0 )%
Net sales
Cost of sales
Gross profit
Selling and administrative expenses
Restructuring and impairment charges
Operating income
Interest expense, net
Income before income taxes
Income tax expense (benefit)
Net income (loss) attributable to non-controlling
interest
Net income attributable to HNI Corporation
$
As a Percentage of Net Sales:
Net sales
Gross profit
Selling and administrative expenses
(Gain) loss on sale, disposal, and license of assets
Restructuring and impairment charges
Operating income
Income tax expense (benefit)
Net income attributable to HNI Corporation
Net Sales
2018
Change
2017
Change
2016
$ 2,257,895
3.8 % $ 2,175,882
(1.3 )% $ 2,203,489
1,422,857
835,038
691,140
2.2 %
6.5 %
2.9 %
15,725
128,173
9,448
118,725
(58.0 )%
67.1 %
55.4 %
68.1 %
25,399
(231.7 )%
1,391,894
783,988
671,831
(1,949)
37,416
76,690
6,078
70,612
(19,286)
1.7 %
(6.1 )%
0.6 %
(108.6 )%
240.0 %
(42.6 )%
27.1 %
(45.2 )%
(144.6 )%
1,368,476
835,013
667,744
22,572
11,005
133,692
4,781
128,911
43,273
(51)
93,377
(149.5 )%
4.0 % $
103
89,795
68.9 %
4.9 % $
61
85,577
100.0%
100.0%
100.0%
37.0
30.6
—
0.7
5.7
1.1
4.1
100 bps
-30 bps
10 bps
-100 bps
220 bps
200 bps
— bps
36.0
30.9
(0.1)
1.7
3.5
(0.9)
4.1
-190 bps
60 bps
-110 bps
120 bps
-260 bps
-290 bps
20 bps
37.9
30.3
1.0
0.5
6.1
2.0
3.9
Consolidated net sales for 2018 increased 3.8 percent or $82.0 million compared to the prior year. The change was driven by an
increase in both the office furniture and hearth products segments. Office furniture segment sales increased in both the supplies-
driven and contract businesses which were partially offset by a $57.6 million negative net impact of closing and divesting small
office furniture companies. The hearth products segment saw increases in both the new construction and retail businesses.
Consolidated net sales for 2017 decreased 1.3 percent or $27.6 million compared to 2016. The change was driven by a decrease in
sales in the office furniture segment, partially offset by an increase in sales in the hearth products segment. Office furniture segment
sales were down due to a decline in the supplies-driven business combined with a $92.2 million negative net impact of acquisitions
and divestitures of small office furniture companies. The decrease in office furniture sales was partially offset by an increase in the
contract business. The hearth products segment saw an increase in both the new construction and retail businesses.
Gross Profit
Gross profit as a percentage of net sales increased 100 basis points in 2018 compared to 2017 primarily driven by lower restructuring
and transition costs, improved price realization, productivity and cost savings, partially offset by input cost inflation.
Gross profit as a percentage of net sales decreased 190 basis points in 2017 compared to 2016 primarily driven by input cost inflation,
unfavorable product mix, and higher restructuring and transition costs, partially offset by higher sales volume and the impact of
divestitures.
22
Cost of sales in 2018 included $2.3 million of transition costs related to the previously announced closures of the hearth manufacturing
facilities in Paris, Kentucky and Colville, Washington, the office furniture manufacturing facility in Orleans, Indiana, and structural
realignments in China. Specific items incurred include production move costs.
Cost of sales in 2017 included $10.3 million of restructuring costs and $17.0 million of transition costs related to the previously
announced closures of the hearth manufacturing facilities in Paris, Kentucky and Colville, Washington and the office furniture
manufacturing facility in Orleans, Indiana and structural realignments in China and between office furniture facilities in Muscatine,
Iowa. Specific items incurred include accelerated depreciation and production move costs.
Cost of sales in 2016 included $5.3 million of restructuring costs and $9.3 million of transition costs related to the previously
announced closures of the hearth manufacturing facility in Paris, Kentucky and the office furniture manufacturing facility in Orleans,
Indiana and structural realignments in China and between office furniture facilities in Muscatine, Iowa. Specific items incurred
include accelerated depreciation and production move costs.
Selling and Administrative Expenses
Selling and administrative expenses as a percentage of net sales decreased 30 basis points in 2018 compared to 2017 primarily driven
by increased efficiency and the impact of closing and divesting small office furniture companies, partially offset by the amortization
and implementation costs from the Business System Transformation initiative, strategic investments, and higher incentive based
compensation.
Selling and administrative expenses as a percentage of net sales increased 60 basis points in 2017 compared to 2016 primarily driven
by strategic investments, partially offset by lower incentive based compensation, the impact of divestitures, and the impact of stock
price change on deferred compensation. In 2016, the Corporation also recorded a $2.0 million nonrecurring gain on a litigation
settlement and $4.4 million of accelerated depreciation in conjunction with the charitable donation of a building.
Selling and administrative expenses include freight expense for shipments to customers, product development costs, and amortization
expense of intangible assets. Refer to "Note 2. Summary of Significant Accounting Policies" and "Note 7. Goodwill and Other
Intangible Assets" in the Notes to Consolidated Financial Statements for further information regarding the comparative expense
levels for these items.
Gain/Loss on Sale, Disposal, and License of Assets
The Corporation recorded a net $1.9 million gain in 2017, which included a $6.0 million nonrecurring gain from the sale and license
of an intangible asset, a $0.8 million gain on the sale of a closed facility, and a $4.8 million loss on the disposal of a manufacturing
facility, in addition to other gains and losses incurred in the ordinary course of business. The Corporation realized a non-cash loss
of $22.6 million in 2016 related to the sale of Artcobell, a K-12 education furniture company, in addition to other gains and losses
incurred in the ordinary course of business.
Restructuring and Impairment Charges
Restructuring and impairment charges as a percentage of net sales decreased 100 basis points in 2018 compared to 2017 driven by
lower charges incurred in connection with previously announced closures.
In 2018, the Corporation recorded $2.3 million of restructuring charges and $0.4 million of impairment charges primarily due to the
previously announced closures of the hearth manufacturing facilities in Paris, Kentucky and Colville, Washington and the office
furniture manufacturing facility in Orleans, Indiana.
In 2017, the Corporation recorded $6.2 million of restructuring costs due to the previously announced closures of the hearth
manufacturing facilities in Paris, Kentucky and Colville, Washington and the office furniture manufacturing facility in Orleans,
Indiana.
In 2016, the Corporation recorded $5.2 million of restructuring costs due to the previously announced closures of the Paris, Kentucky
hearth manufacturing facility and Orleans, Indiana office furniture manufacturing facility.
The Corporation recorded $14.9 million, $20.9 million, and $5.8 million of goodwill, intangible and long-lived asset impairments
in 2018, 2017, and 2016, respectively, related to reporting units in the office furniture segment. These impairment charges are the
result of current and projected market conditions and product and operational transformation. The impairment charge in 2017 also
23
includes the impact of closing the Paoli office furniture brand. See "Note 7. Goodwill and Other Intangible Assets" in the Notes to
Consolidated Financial Statements for more information on goodwill and intangible asset impairments.
In 2017, the Corporation recorded a $10.3 million valuation allowance of a long-term note receivable. In 2018, the Corporation
recovered $1.8 million against this note receivable. See "Note 5. Acquisitions and Divestitures" in the Notes to Consolidated Financial
Statements for more information.
Operating Income
For 2018, operating income increased 67.1 percent or $51.5 million to $128.2 million compared to $76.7 million in 2017. The change
was primarily driven by lower restructuring, transition, and impairment charges, improved price realization, productivity and cost
savings, and the impact of closing and divesting small office furniture companies. These factors were partially offset by input cost
inflation, the amortization and implementation costs from the Business System Transformation initiative, strategic investments, and
higher incentive based compensation.
For 2017, operating income decreased 42.6 percent or $57.0 million to $76.7 million compared to $133.7 million in 2016. The
change was primarily driven by the impairment charges recorded in conjunction with the closure of the Paoli office furniture brand,
the valuation allowance recorded against a long-term note receivable, strategic investments, and input cost inflation, partially offset
by higher sales volume, lower incentive based compensation, and the impact of stock price change on deferred compensation.
Interest Expense
Interest expense increased $3.7 million in 2018 compared to 2017. Higher interest rates and increased amortization of debt costs
drove approximately $2.2 million of the increase. In 2017, the Corporation capitalized approximately $1.5 million of interest costs
related to the Business Systems Transformation initiative. Capitalization of interest ceased during the third quarter of 2017, driving
a relative increase in current year interest expense.
Income Taxes
The following table summarizes the Corporation's income tax provision (in thousands):
Income before income taxes
Income tax expense (benefit)
Effective tax rate
2018
118,725
25,399
2017
70,612
(19,286)
$
$
$
$
2016
128,911
43,273
$
$
21.4%
(27.3)%
33.6%
The increase in the current year effective tax rate was primarily driven by a prior year reduction to the Corporation's deferred income
taxes related to the Tax Cuts and Jobs Act enacted in December 2017 (the "Act"), which resulted in a re-measurement of the
Corporation's deferred tax assets and liabilities at the new federal statutory rate of 21 percent. Excluding the effects of the Act, the
Corporation's effective tax rate for 2017 would have been 36.2 percent. The decreased 2018 rate compared to the 2017 rate excluding
the effect of the Act was primarily driven by the federal statutory tax rate decreasing from 35 percent to 21 percent for 2018.
Additionally, the 2018 effective tax rate benefited from the release of valuation allowances on certain deferred tax assets. The
effective tax rate was lower for 2017 compared to 2016 primarily driven by the re-measurement of the Corporation's deferred tax
assets and liabilities as a result of the Act. The 2017 effective tax rate of 36.2 percent excluding the effect of the Act would have
been higher than the 33.6 percent effective tax rate for 2016 primarily because of the establishment of valuation allowances on certain
deferred tax assets in 2017, partially offset by the benefits of new treatment for equity based compensation under ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting, and a permanent deduction for a charitable contribution of property.
See "Note 9. Income Taxes" in the Notes to Consolidated Financial Statements for further information relating to income taxes.
Net Income Attributable to HNI Corporation
Net income attributable to the Corporation was $93.4 million or $2.11 per diluted share in 2018 compared to $89.8 million or $2.00
per diluted share in 2017 and $85.6 million or $1.88 per diluted share in 2016.
24
Office Furniture
The following table presents certain key highlights from the results of operations in the office furniture segment (in thousands):
Net sales
Operating profit
Operating profit %
2018
Change
2017
Change
2016
$ 1,706,092
$
79,323
2.7% $ 1,660,723
(2.5%)
$ 1,703,885
58.1% $
50,176
(57.3%)
$
117,397
4.6%
160 bps
3.0%
-390 bps
6.9%
Net sales in 2018 for the office furniture segment increased 2.7 percent or $45.4 million compared to 2017. Sales increased in both
the supplies-driven and contract businesses. The sales increase was partially offset by a decrease of $57.6 million from the impact
of closing and divesting small office furniture companies.
Net sales in 2017 for the office furniture segment decreased 2.5 percent or $43.2 million compared to 2016. Sales were down due
to a decline in the supplies-driven business combined with the net impact of acquisitions and divestitures of small office furniture
companies, which caused a net decrease in sales of $92.2 million. This decrease was partially offset by an increase in the contract
business.
Operating profit as a percentage of net sales increased 160 basis points in 2018 compared to 2017. The increase was primarily driven
by lower restructuring, impairment and transition charges, along with improved price realization, productivity and cost savings, and
the impact of closing and divesting small office furniture companies. These factors were partially offset by input cost inflation,
amortization and implementation costs from the Business Systems Transformation initiative, and strategic investments.
Operating profit as a percentage of net sales decreased 390 basis points in 2017 compared to 2016. The decrease was primarily
driven by unfavorable product and business mix, input cost inflation, strategic investments, and higher restructuring and transition
costs, including the impairment of goodwill and intangible assets primarily relating to the closure of the Paoli office furniture brand.
These factors were partially offset by higher sales volume, lower incentive based compensation, and the impact of divestitures.
In 2018, the office furniture segment recorded $1.5 million of restructuring costs and $1.6 million of transition costs primarily
associated with the previously announced closure of the office furniture manufacturing facility in Orleans, Indiana and structural
realignments in China. Specific items incurred include severance, production move costs, and final facility closing costs. Of these
charges, $1.6 million was included in cost of sales. The office furniture segment also recorded impairments of $14.9 million of
goodwill and long-lived assets related to reporting units in the segment.
In 2017, the office furniture segment recorded $11.6 million of restructuring costs and $13.7 million of transition costs associated
with the previously announced closure of the office furniture manufacturing facility in Orleans, Indiana and structural realignments
in China and between office furniture facilities in Muscatine, Iowa. Specific items incurred include severance, accelerated
depreciation, and production move costs. Of these charges, $21.5 million was included in cost of sales. The office furniture segment
also recorded a loss of $4.8 million related to the disposal of a manufacturing facility and $20.9 million of goodwill and intangible
asset impairments related to reporting units in the office furniture segment, of which $16.1 million of the goodwill and intangible
asset impairment charges related to the closure of the Paoli office furniture brand.
In 2016, the office furniture segment recorded $5.1 million of restructuring costs and $7.1 million of transition costs associated with
the previously announced closure of the office furniture manufacturing facility in Orleans, Indiana and structural realignments in
China and between office furniture facilities in Muscatine, Iowa. Specific items incurred include accelerated depreciation and
production move costs. Of these charges, $9.2 million was included in cost of sales. The office furniture segment also recorded a
non-cash loss of $22.6 million related to the sale of Artcobell, a K-12 education furniture company, and $5.8 million of goodwill
and intangible impairments related to a reporting unit in the office furniture segment.
25
Hearth Products
The following table presents certain key highlights from the results of operations in the hearth products segment (in thousands):
Net sales
Operating profit
Operating profit %
2018
551,803
91,367
$
$
Change
2017
Change
2016
7.1% $
515,159
3.1% $
499,604
9.2% $
83,649
19.6% $
69,960
16.6%
40 bps
16.2%
220 bps
14.0%
Net sales in 2018 for the hearth products segment increased 7.1 percent or $36.6 million compared to 2017. The change was driven
by an increase in both the new construction and retail businesses.
Net sales in 2017 for the hearth products segment increased 3.1 percent or $15.6 million compared to 2016. The change was driven
by an increase in both the new construction and retail businesses.
Operating profit as a percentage of net sales increased 40 basis points in 2018 compared to 2017. The increase in operating profit
was primarily driven by higher volume, productivity and cost savings, and improved price realization. These factors were partially
offset by input cost inflation and higher incentive based compensation.
Operating profit as a percentage of net sales increased 220 basis points in 2017 compared to 2016 primarily driven by structural cost
reductions, higher volume, and nonrecurring gains. These factors were partially offset by higher restructuring and transition costs.
In 2018, the hearth products segment recorded $0.8 million of restructuring and $0.4 million of impairment charges along with $0.6
million of transition costs associated with the previously announced closures of the hearth manufacturing facilities in Paris, Kentucky
and Colville, Washington. Specific items incurred include an impairment charge from the sales of the closed manufacturing facility
in Paris, Kentucky, severance, production move costs, and final facility closing costs. Of these charges, $0.6 million was included
in cost of sales.
In 2017, the hearth products segment recorded $4.9 million of restructuring costs and $3.3 million of transition costs associated with
the previously announced closures of the hearth manufacturing facilities in Paris, Kentucky and Colville, Washington. Specific items
incurred include severance, accelerated depreciation, and production move costs. Of these charges, $5.8 million was included in
cost of sales. The hearth products segment also recorded a $6.0 million nonrecurring gain from the sale and license of an intangible
asset and a $0.8 million gain on the sale of a closed facility.
In 2016, the hearth products segment recorded $5.5 million of restructuring costs and $2.2 million of transition costs associated with
the previously announced closure of the Paris, Kentucky hearth manufacturing facility. Specific items incurred include severance,
accelerated depreciation, and production move costs. Of these charges, $5.5 million was included in cost of sales.
Liquidity and Capital Resources
Cash Flow – Operating Activities
Operating activities were a source of $186.4 million of cash in 2018 compared to a source of $133.1 million cash in 2017. The higher
cash generation compared to the prior year was primarily due to improved earnings and changes in working capital timing, driven
by lower accounts receivable and higher accrued expenses. Changes in working capital balances resulted in a $10.7 million use of
cash in 2018 compared to a $29.4 million use of cash in the prior year. Cash generated from operating activities in 2016 totaled
$223.4 million and changes in working capital balances resulted in a $17.4 million source of cash.
The use of cash related to working capital changes in 2018 was primarily driven by timing of accounts payable balances at year end.
The use of cash related to working capital changes in 2017 was primarily driven by strategic investments in inventory and lower
incentive compensation accruals.
The Corporation places special emphasis on management and control of working capital, including accounts receivable and
inventory. Management believes recorded trade receivable valuation allowances at the end of 2018 are adequate to cover the risk
of potential bad debts. Allowances for non-collectible trade receivables, as a percent of gross trade receivables, totaled 1.5 percent,
0.7 percent, and 0.9 percent at the end of fiscal years 2018, 2017, and 2016, respectively. The Corporation’s inventory turns were
9.1, 8.9, and 11.6, for fiscal years 2018, 2017, and 2016, respectively.
26
Cash Flow – Investing Activities
Capital expenditures, including capitalized software, were $63.7 million in 2018, $127.4 million in 2017, and $119.6 million in
2016. These expenditures are primarily focused on machinery, equipment, and tooling required to support new products, continuous
improvements, and cost savings initiatives in manufacturing processes. The decline compared to the prior year is primarily due to
the completion of the Corporation's operational transformations and the launch of Business Systems Transformation initiative which
included an integrated information system. The Corporation anticipates capital expenditures for 2019 of $65 million to $75 million,
primarily related to new products and operational process improvements driven by rapid continuous improvement.
Real Estate Transaction – In the first quarter of 2018, the Corporation entered into a sale-leaseback transaction, selling a manufacturing
facility and subsequently leasing back a portion of the facility for a term of 10 years. The net proceeds from the sale of the facility
of $16.9 million are reflected in "Proceeds from sale and license of property, plant, equipment, and intangibles" in the Consolidated
Statements of Cash Flows. In accordance with ASC 840, Leases, the gain on sale of the facility is deferred and will be amortized
as a reduction to rent expense evenly over the term of the lease. See "Note 4. Restructuring and Impairment Charges" in the Notes
to Consolidated Financial Statements for further information.
In 2016, the investing activities reflected a net cash outflow of $34.3 million related to the acquisition of OFM, an office furniture
company, and also a small office furniture dealership that offered strategic value to the Corporation.
Cash Flow – Financing Activities
Long-Term Debt - The Corporation maintains a revolving credit facility as the primary source of committed funding from which the
Corporation finances its planned capital expenditures, strategic initiatives, and seasonal working capital needs. Cash flows included
in financing activities represent periodic borrowings and repayments under the revolving credit facility. During the second quarter
of 2018, the Corporation issued $100 million of private placement notes. The proceeds were used to repay outstanding borrowings
under the revolving credit facility. See "Note 8. Long-Term Debt" in the Notes to Consolidated Financial Statements for further
information.
Dividend - The Corporation is committed to maintaining or modestly growing the quarterly dividend. Cash dividends declared and
paid per share are as follows (in dollars):
Common shares
2018
2017
2016
$
1.17
$
1.13
$
1.09
The last quarterly dividend increase was from $0.285 to $0.295 per common share effective with the June 1, 2018 dividend payment
for shareholders of record at the close of business on May 18, 2018. The average dividend payout percentage for the most recent
three-year period has been 53 percent of prior year earnings or 28 percent of prior year cash flow from operating activities.
Stock Repurchase - The Corporation’s capital strategy related to stock repurchase is focused on offsetting the dilutive impact of
issuances for various compensation related matters. The Corporation may elect to opportunistically purchase additional shares based
on excess cash generation and/or share price considerations. The Board authorized $200 million on November 9, 2007 and an
additional $200 million each on November 7, 2014 and February 13, 2019 for repurchases of the Corporation’s common stock. As
of December 29, 2018, approximately $48.6 million of this authorized amount remained unspent. The following table summarizes
shares repurchased and settled by the Corporation (in thousands, except share and per share data):
Shares repurchased
Average price per share
Cash purchase price
Purchases unsettled as of quarter end
Prior year purchases settled in current year
Shares repurchased per cash flow
2018
2017
2016
755,221
1,462,936
1,082,938
38.96
$
40.25
51.55
(29,424) $
354
(1,382)
(30,452) $
(58,887) $
1,382
—
(57,505) $
(55,825)
—
—
(55,825)
$
$
$
Cash, cash equivalents, and short-term investments totaled $78.1 million at the end of 2018 compared to $25.4 million at the end of
2017 and $38.6 million at the end of 2016. These funds, coupled with cash flow from future operations, borrowing capacity under
the existing credit agreement, and the ability to access capital markets, are expected to be adequate to fund operations and satisfy
27
cash flow needs for at least the next twelve months. Additionally, based on current earnings before interest, taxes, depreciation and
amortization generation, the Corporation can access the full remaining $300 million of borrowing capacity available under the
revolving credit facility and maintain compliance with applicable covenants. As of the end of 2018, $9.3 million of cash was held
overseas and considered permanently reinvested. If such amounts were repatriated, it could result in additional foreign withholding
and state tax expense to the Corporation. The Corporation does not believe treating this cash as permanently reinvested will have
any impact on the ability of the Corporation to meet its obligations as they come due.
Contractual Obligations
The following table discloses the Corporation's obligations and commitments to make future payments, by period, under contracts
(in thousands):
Long-term debt obligations, including
estimated interest (1)
Operating lease obligations
Purchase obligations (2)
Other long-term obligations (3)
Less than
1 Year
1 – 3
Years
3 – 5
Years
More than
5 Years
Total
$
10,332
$
19,165
$
165,515
$
112,706
$
307,718
24,387
66,592
4,764
31,574
7,792
7,486
15,310
3,924
3,462
10,469
3,633
19,482
81,740
81,941
35,194
Total
$
106,075
$
66,017
$
188,211
$
146,290
$
506,593
(1) Interest has been included for all debt at the fixed or variable rate in effect as of December 29, 2018, as applicable. See
"Note 8. Long-Term Debt" in the Notes to Consolidated Financial Statements for further information.
(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 obligations represent payments due to members who are participants in the Corporation’s deferred and
long-term incentive compensation programs, liability for unrecognized tax liabilities, and contribution and benefit payments
expected to be made pursuant to the Corporation’s post-retirement benefit plans. It should be noted the obligations related
to post-retirement benefit plans are not contractual and the plans could be amended at the discretion of the Corporation. The
disclosure of contributions and benefit payments has been limited to 10 years, as information beyond this time period was
not available. Other long-term obligations of $42.3 million, primarily insurance allowances and long-term warranty, are
not included in the table above due to the Corporation's inability to predict their timing.
Litigation and Uncertainties
See "Note 16. Guarantees, Commitments, and Contingencies" in the Notes to Consolidated Financial Statements for further
information.
Looking Ahead
Management remains optimistic about the long-term prospects in the office furniture and hearth markets. Management believes the
Corporation continues to compete well and remains confident the investments made in the business will continue to generate strong
returns for shareholders.
Off-Balance Sheet Arrangements
The Corporation does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future
material effect on the Corporation's financial condition, revenues or expenses, results of operations, liquidity, capital expenditures,
or capital resources.
28
Critical Accounting Policies and Estimates
General
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon the Consolidated Financial
Statements, 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 the Board.
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
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.
Goodwill and Other Intangibles
The Corporation evaluates its goodwill for impairment on an annual basis during the fourth quarter or whenever indicators of
impairment exist. Asset impairment charges associated with the Corporation’s goodwill impairment testing are discussed in "Note
7. Goodwill and Other Intangible Assets" in the Notes to Consolidated Financial Statements.
The Corporation reviews goodwill at the reporting unit level within its office furniture and hearth products operating segments. These
reporting units constitute components for which discrete financial information is available and regularly reviewed by segment
management. The accounting standards for goodwill permit entities to first assess qualitative factors to determine whether it is more
likely than not the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to
perform a quantitative goodwill impairment test. If the quantitative test is required, the Corporation estimates the fair value of its
reporting units. In estimating the fair value, the Corporation relies on an average of the income approach and the market approach.
In the income approach, the estimate of fair value of each reporting unit is based on management’s projection of revenues, gross
margin, operating costs, and cash flows considering historical and estimated future results, general economic and market conditions,
as well as the impact of planned business and operational strategies. The valuations employ present value techniques to measure
fair value and consider market factors. In the market approach, the Corporation utilizes the guideline company method, which
involves calculating valuation multiples based on operating data from guideline publicly-traded companies. These multiples are
then applied to the operating data for the reporting units and adjusted for factors similar to those used in the discounted cash flow
analysis. Management believes the assumptions used for the impairment test are consistent with those utilized by a market participant
in performing similar valuations of its reporting units. Management bases its fair value estimates on assumptions they believe to be
reasonable at the time, but such assumptions are subject to inherent uncertainty. Actual results may differ from those estimates.
Additionally, the Corporation compares the estimated aggregate fair value of its reporting units to its overall market capitalization.
Assessing the fair value of goodwill includes, among other things, making key assumptions for estimating future cash flows and
appropriate market multiples. These assumptions are subject to a high degree of judgment and complexity. The Corporation makes
every effort to estimate future cash flows as accurately as possible with the information available at the time the forecast is developed.
However, changes in assumptions and estimates may affect the estimated fair value of the reporting unit, and could result in an
impairment charge in future periods. Factors that have the potential to create variances in the estimated fair value of the reporting
unit include, but are not limited to, economic conditions in the U.S. and other countries where the Corporation has a presence,
competitor behavior, the mix of product sales, commodity costs, wage rates, the level of manufacturing capacity, the pricing
environment, and currency exchange fluctuations. In addition, estimates of fair value are impacted by estimates of the market-
participant derived weighted average cost of capital.
The Corporation also evaluates the fair value of indefinite-lived trade names on an annual basis during the fourth quarter or whenever
an indication of impairment exists. The estimate of the fair value of the trade names is based on a discounted cash flow model using
inputs which include: projected revenues from management’s long-term plan, assumed royalty rates that could be payable if the trade
names were not owned, and a discount rate.
The Corporation has definite-lived intangibles that are amortized over their estimated useful lives. Impairment losses are recognized
if the carrying amount of an intangible, subject to amortization, is not recoverable from expected future cash flows and its carrying
amount exceeds its fair value.
29
The key to recoverability of goodwill, indefinite-lived intangibles, and long-lived assets is the forecast of economic conditions and
its impact on future revenues, operating profit, and cash flows. Management’s projection for the U.S. office furniture and domestic
hearth markets and global economic conditions is inherently subject to a number of uncertain factors, such as global economic
improvement, the U.S housing market, credit availability and borrowing rates, and overall consumer confidence. In the near term,
as management monitors the above factors, it is possible it may change the revenue and cash flow projections of certain reporting
units, which may require the recording of additional asset impairment charges.
Long-Lived Assets
The Corporation reviews long-lived assets for impairment as events or changes in circumstances occur indicating 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. Any asset impairment charges associated with the Corporation’s restructuring
activities are discussed in "Note 4. Restructuring and Impairment Charges" in the Notes to Consolidated Financial Statements.
Self-Insurance
The Corporation is primarily self-insured or carries high deductibles 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 and the related liabilities are included in the Consolidated Balance Sheets. Certain risk exposures are
mitigated through the use of independent third party stop loss insurance coverages. 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 the number or severity of claims, medical cost
inflation, and magnitude of change in actual experience development could cause these estimates to change in the near term.
Recently Issued Accounting Standards Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard requires lessees to recognize most leases, including
operating leases, on-balance sheet via a right of use asset and lease liability. Changes to the lessee accounting model may change
key balance sheet measures and ratios, potentially affecting analyst expectations. The new standard becomes effective for the
Corporation in fiscal 2019 and requires a modified-retrospective transition approach. The Corporation has selected a technology
tool to assist with the accounting and disclosure requirements of the new standard. The Corporation will adopt the standard in fiscal
2019 using the modified-retrospective transition approach. All necessary changes required by the new standard, including those to
the Corporation's accounting policies, business process, systems, controls, and disclosures, have been identified and are in process
of implementation as of the beginning of fiscal 2019. The Corporation expects to select practical expedients. The Corporation is in
process of completing a review of the impact of the new standard and estimates the right of use assets and lease liabilities to increase
the assets and liabilities on the Consolidated Balance Sheets. The impact of the new standard will also recognize the gain on the
sale leaseback directly to the cumulative effect. The net cumulative effect adjustment will be recorded upon adoption in 2019.
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. The new standard
replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses by
requiring consideration of a broader range of reasonable and supportable information and is intended to provide financial statement
users with more useful information about expected credit losses on financial instruments. The new standard becomes effective for
the Corporation in fiscal 2020 and requires a cumulative effect adjustment in retained earnings as of the beginning of the year of
adoption. The Corporation is currently evaluating the effect the standard will have on consolidated financial statements and related
disclosures.
In August 2017, the FASB issued ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities. The new standard
improves the financial reporting of hedging relationships to better portray the economic results of an entity's risk management
activities in its financial statements and make certain targeted improvements to simplify the application of the hedge accounting
guidance through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation
of hedge results. The new standard becomes effective for the Corporation in fiscal 2019. For cash flow and net investment hedges
existing at the date of adoption, entities will apply the new guidance using a modified retrospective approach by recording a cumulative
effect adjustment in retained earnings as of the beginning of the year of adoption. Presentation and disclosure requirements are
applied prospectively. The Corporation anticipates the standard will not have a material effect on consolidated financial statements
and related disclosures.
30
In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive
Income. The new standard allows entities to reclassify certain stranded tax effects from accumulated other comprehensive income
to retained earnings resulting from the Act. The standard also requires certain disclosures about stranded tax effects. The new
standard becomes effective for the Corporation in fiscal 2019. The standard should be applied either in the period of adoption or
retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Act
is recognized. The Corporation anticipates the standard will not have a material effect on consolidated financial statements and
related disclosures.
31
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
During the normal course of business, the Corporation is subjected to market risk associated with interest rate movements. Interest
rate risk arises from variable interest debt obligations. The interest rate swap derivative instrument is held and used by the Corporation
as a tool for managing interest rate risk. It is not used for trading or speculative purposes.
As of December 29, 2018, the Corporation had $150 million of debt outstanding under the Corporation's $450 million revolving
credit facility, which bore variable interest based on one month LIBOR. As of December 29, 2018, the Corporation had an interest
rate swap agreement in place to fix the interest rate on $150 million of the Corporation's revolving credit facility. As of December 29,
2018 the Corporation had no borrowings on the revolving credit facility in excess of the amount covered by the interest rate swap
agreement. The Corporation expects to utilize additional borrowings over the course of the year which will be subject to the variable
borrowings rate as defined.
The Corporation monitors market interest rate risk exposures. As the Corporation holds no borrowings subject to variable interest
rate exposure as of December 29, 2018 there is not current exposure given the current borrowings outstanding. The impacts of any
hypothetical changes in interest rates will be directly correlated to any necessary future borrowings above the current levels
outstanding.
For information related to the Corporation’s long-term debt, refer to "Note 8. Long-Term Debt" in the Notes to Consolidated Financial
Statements. For information related to the Corporation's interest rate swap, refer to "Note 11. Accumulated Other Comprehensive
Income (Loss) and Shareholders’ Equity" in the Notes to Consolidated Financial Statements.
The Corporation currently does not have any significant foreign currency exposure.
The Corporation is exposed to risks arising from price changes and/or tariffs for certain direct materials and assembly components
used in its operations. The most significant material purchases and cost for the Corporation are for steel, plastics, textiles, wood
particleboard, and cartoning. The market price of plastics and textiles, in particular, are sensitive to the cost of oil and natural gas. The
cost of wood particleboard has been impacted by continued industry downsizing of production capacity as well as increased volatility
in input and transportation costs. All of these materials are impacted increasingly by global market pressure. The Corporation works
to offset these increased costs through global sourcing initiatives, product re-engineering, and price increases on its products. Margins
have been negatively impacted in the past due to the lag between cost increases and the Corporation’s ability to increase its prices. The
Corporation believes future market price increases on its key direct materials and assembly components are likely. Consequently,
it views the prospect of such increases as a risk to the business.
Item 8. Financial Statements and Supplementary Data
The financial statements listed under Item 15(a)(1) and (2) are filed as part of this report and are incorporated herein by reference.
The Summary of Quarterly Results of Operations (Unaudited) follows the Notes to Consolidated Financial Statements filed as part
of this report and are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
32
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Corporation in the reports
it files or submits under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized, and reported
within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures
are also designed to ensure information is accumulated and communicated to management, including the Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer of the Corporation, the
Corporation's management carried out an evaluation of the Corporation’s disclosure controls and procedures pursuant to Exchange
Act Rules 13a – 15(e) and 15d – 15(e) as of the end of the period covered by this Annual Report on Form 10-K. As of December 29,
2018, based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded these disclosure controls
and procedures are effective.
Changes in Internal Controls
The Corporation has been engaged in a multi-year, broad-based program, which is referred to as business systems transformation
("BST"). The BST initiative includes the introduction of a new software system along with related process changes intended to
simplify and streamline the Corporation's business processes. In the first quarter of 2018, the Corporation implemented BST in the
majority of the domestic office furniture operations. The implementation resulted in business and operational changes in areas
including order management, production scheduling, pricing, shipping, purchasing, and general accounting. These changes required
some modifications to the Corporation's internal control over financial reporting during fiscal year 2018. Except for the BST
implementation, there have been no changes in the Corporation’s internal control over financial reporting during the fiscal year ended
December 29, 2018 that have materially affected, or are reasonably likely to materially affect, its internal control over financial
reporting.
Management's Report on Internal Control over Financial Reporting
Management’s annual report on internal control over financial reporting and the attestation report of the Corporation’s independent
registered public accounting firm are included in Item 15. Exhibits, Financial Statement Schedules of this report under the headings
"Management Report on Internal Control Over Financial Reporting" and "Report of Independent Registered Public Accounting
Firm," respectively, and management's annual report is incorporated herein by reference.
Item 9B. Other Information
None.
33
Item 10. Directors, Executive Officers, and Corporate Governance
PART III
The information under the caption "Proposal No. 1 - Election of Directors" of the Corporation's Definitive Proxy Statement on
Schedule 14A for the Annual Meeting of Shareholders to be held on May 7, 2019 (the "2019 Proxy Statement") is incorporated herein
by reference. For information with respect to executive officers of the Corporation, see "Table I - Executive Officers of the Registrant"
included in Part I of this report.
Information relating to the identification of the audit committee and audit committee financial expert of the Corporation is contained
under the caption "Board Committees" of the 2019 Proxy Statement and is incorporated herein by reference.
Code of Ethics
The information under the caption "Code of Business Conduct and Ethics" of the 2019 Proxy Statement is incorporated herein by
reference.
Compliance with Section 16(a) of the Exchange Act
The information under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" of the 2019 Proxy Statement is
incorporated herein by reference.
Item 11. Executive Compensation
The information under the captions "Executive Compensation" and "Director Compensation" of the 2019 Proxy Statement is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The information under the captions "Security Ownership" and "Equity Compensation Plan Information" of the 2019 Proxy Statement
is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information under the captions "Corporate Governance and Board Matters" and ''Policy for Review of Related Person
Transactions'' of the 2019 Proxy Statement is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information under the caption "Fees Incurred for KPMG LLP" of the 2019 Proxy Statement is incorporated herein by reference.
34
Item 15. Exhibits, Financial Statement Schedules
(a)(1) Financial Statements
PART IV
The following consolidated financial statements of the Corporation and its subsidiaries included in the Corporation's
2018 Annual Report on Form 10-K are filed as a part of this Report pursuant to Item 8:
Management Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Comprehensive Income for the Years Ended December 29, 2018, December
30, 2017, and December 31, 2016
Consolidated Balance Sheets - December 29, 2018 and December 30, 2017
Consolidated Statements of Equity for the Years Ended December 29, 2018, December 30, 2017, and
December 31, 2016
Consolidated Statements of Cash Flows for the Years Ended December 29, 2018, December 30, 2017,
and December 31, 2016
Notes to Consolidated Financial Statements
Summary of Quarterly Results of Operations (Unaudited)
Page
38
39
41
42
44
45
46
74
(2) Financial Statement Schedules
All other schedules for which provision is made in the applicable accounting regulation of the SEC are not required
under the related instructions or are inapplicable and, therefore, have been omitted.
(b) Exhibits
(3.1)
(3.2)
(10.1)
(10.2)
(10.3)
(10.4)
(10.5)
(10.6)
(10.7)
(10.8)
Amended and Restated Articles of Incorporation of HNI Corporation (incorporated by reference to Exhibit
3.1 to the Registrant's Annual Report on Form 10-K for the year ended January 2, 2010)
Second Amended and Restated By-laws of HNI Corporation (incorporated by reference to Exhibit 3.1 to
the Registrant's Current Report on Form 8-K filed August 7, 2018)
Third Amended and Restated Credit Agreement, dated April 20, 2018, among HNI Corporation, as borrower,
certain domestic subsidiaries of HNI Corporation, as guarantors, certain lenders and Wells Fargo Bank,
National Association, as administrative agent (incorporated by reference to Exhibit 10.1 to the Registrant's
Current Report on Form 8-K filed April 24, 2018)
Note Purchase Agreement, dated May 31, 2018, among HNI Corporation and the purchasers named therein
(incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed May 31,
2018)
Guaranty Agreement, dated May 31, 2018, made by each of the guarantors named therein (incorporated by
reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed May 31, 2018)
HNI Corporation 2007 Stock-Based Compensation Plan, as amended (incorporated by reference to
Appendix A to the Corporation's Definitive Proxy Statement filed with the SEC March 23, 2015)*
Amended Form of HNI Corporation 2007 Stock-Based Compensation Plan Stock Option Award Agreement
(incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed March 22,
2018)*
Form of HNI Corporation 2007 Stock-Based Compensation Plan Restricted Stock Unit Award Agreement
(incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended April 3, 2010)*
HNI Corporation 2017 Stock-Based Compensation Plan (incorporated by reference to Exhibit 4.3 to the
Corporation's Form S-8 filed May 9, 2017)*
Amended form of HNI Corporation 2017 Stock-Based Compensation Plan Stock Option Award Agreement
(incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed March 22,
2018)*
35
(10.9)
(10.10)
(10.11)
(10.12)
(10.13)
(10.14)
(10.15)
(10.16)
(10.17)
(10.18)
(10.19)
(10.20)
(10.21)
(21)
(23.1)
(31.1)
(31.2)
(32.1)
101
Form of HNI Corporation 2017 Stock-Based Compensation Plan Restricted Stock Unit Award Agreement
(incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2017)*
2017 Equity Plan for Non-Employee Directors of HNI Corporation (incorporated by reference to Exhibit
4.4 to the Registrant’s Form S-8 filed May 9, 2017)*
Form of 2017 Equity Plan for Non-Employee Directors of HNI Corporation Participation Agreement
(incorporated by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2017)*
Form of HNI Corporation Change In Control Employment Agreement (incorporated by reference to Exhibit
10.1 to the Registrant’s Current Report on Form 8-K filed June 29, 2018)*
Form of HNI Corporation Amended and Restated Indemnity Agreement (incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed November 14, 2007)*
HNI Corporation Supplemental Income Plan (f/k/a HNI Corporation ERISA Supplemental Retirement
Plan), as amended and restated (incorporated by reference to Exhibit 10.4 to the Registrant's Current Report
on Form 8-K filed February 22, 2010)*
HNI Annual Incentive Plan, as amended (incorporated by reference to Appendix B to the Corporation's
Definitive Proxy Statement filed with the SEC March 23, 2015)*
HNI Corporation Long-Term Performance Plan, as amended (incorporated by reference to Appendix C to
the Corporation’s Definitive Proxy Statement filed with the SEC March 23, 2015)*
HNI Corporation Executive Deferred Compensation Plan, as amended (incorporated by reference to Exhibit
10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 4, 2015)*
Form of HNI Corporation Executive Deferred Compensation Plan Deferral Election Agreement
(incorporated by reference to Exhibit 10.25 to the Registrant's Annual Report on Form 10-K for the year
ended January 2, 2010)*
HNI Corporation Directors Deferred Compensation Plan, as amended (incorporated by reference to Exhibit
10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 4, 2015)*
Form of HNI Corporation Directors Deferred Compensation Plan Deferral Election Agreement
(incorporated by reference to Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for the year
ended January 2, 2010)*
Consulting Agreement between HNI Corporation and Quiet Trail Investments, LLC, dated November 7,
2018 (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed
November 9, 2018)*
Subsidiaries of the Registrant+
Consent of Independent Registered Public Accounting Firm+
Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002+
Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002+
Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002+
The following materials from HNI Corporation's Annual Report on Form 10-K for the fiscal year ended
December 29, 2018 are formatted in XBRL (eXtensible Business Reporting Language) and filed
electronically herewith: (i) Consolidated Statements of Comprehensive Income; (ii) Consolidated Balance
Sheets; (iii) Consolidated Statements of Equity; (iv) Consolidated Statements of Cash Flows; and (v) Notes
to Consolidated Financial Statements
*
+
Indicates management contract or compensatory plan.
Filed or furnished herewith.
Item 16. Form 10-K Summary
None.
36
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual
Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
Signatures
Date: February 26, 2019
By:
/s/ Jeffrey D. Lorenger
HNI Corporation
Name: Jeffrey D. Lorenger
Title: President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated. Each Director whose signature appears below authorizes
and appoints Jeffrey D. Lorenger as his or her attorney-in-fact to sign and file on his or her behalf any and all amendments and post-
effective amendments to this report.
Signature
Title
Date
/s/ Jeffrey D. Lorenger
Jeffrey D. Lorenger
/s/ Marshall H. Bridges
Marshall H. Bridges
/s/ Mary A. Bell
Mary A. Bell
/s/ Miguel M. Calado
Miguel M. Calado
/s/ Cheryl A. Francis
Cheryl A. Francis
/s/ Mary K. W. Jones
Mary K. W. Jones
/s/ John R. Hartnett
John R. Hartnett
/s/ Larry B. Porcellato
Larry B. Porcellato
/s/ Abbie J. Smith
Abbie J. Smith
/s/ Brian E. Stern
Brian E. Stern
/s/ Ronald V. Waters, III
Ronald V. Waters, III
President and CEO, Principal Executive
Officer, and Director
February 26, 2019
Senior Vice President and Chief Financial
Officer, Principal Financial Officer, and
Principal Accounting Officer
Director
Director
Director
Director
Director
Chairman
Director
Director
Director
37
February 26, 2019
February 26, 2019
February 26, 2019
February 26, 2019
February 26, 2019
February 26, 2019
February 26, 2019
February 26, 2019
February 26, 2019
February 26, 2019
Management Report on Internal Control Over Financial Reporting
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. HNI 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.
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 controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of HNI Corporation’s internal control over financial reporting as of December 29,
2018. Management based this assessment on criteria for effective internal control over financial reporting described in Internal
Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Management’s assessment included an evaluation of the design of HNI Corporation’s internal control over financial
reporting and testing of operational effectiveness of HNI Corporation’s internal control over financial reporting. Management
reviewed the results of its assessment with the Audit Committee of the Board of Directors.
Based on this assessment, management determined, as of December 29, 2018, HNI Corporation maintained effective internal control
over financial reporting.
The effectiveness of HNI Corporation’s internal control over financial reporting as of December 29, 2018 has been audited by KPMG
LLP, an independent registered public accounting firm, as stated in its report which appears herein.
February 26, 2019
38
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
HNI Corporation:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of HNI Corporation and subsidiaries (the "Company") as of
December 29, 2018 and December 30, 2017, the related consolidated statements of income, comprehensive income, equity, and cash
flows for each of the years in the three-year period ended December 29, 2018, and the related notes (collectively, the "consolidated
financial statements"). We also have audited the Company’s internal control over financial reporting as of December 29, 2018, based
on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of the Company as of December 29, 2018 and December 30, 2017, and the results of its operations and its cash flows for each of the
years in the three-year period ended December 29, 2018, in conformity with U.S. generally accepted accounting principles. Also in
our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 29,
2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Change in Accounting Principle
As discussed in Note 2. to the consolidated financial statements, the Company has changed its method of accounting for revenue
recognition in 2018 due to the adoption of ASU No. 2014-09, "Revenue from Contracts with Customers".
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on
the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based
on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of
the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits
also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
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 (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) 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 (3) provide reasonable assurance
39
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.
/s/ KPMG LLP
We have served as the Company's auditor since 2015.
Chicago, Illinois
February 26, 2019
40
Financial Statements
HNI Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(In thousands, except share and per share data)
Year Ended
2018
2017
2016
$
2,257,895
$
2,175,882
$
2,203,489
1,422,857
1,391,894
1,368,476
835,038
691,140
—
15,725
128,173
579
10,027
118,725
25,399
93,326
(51)
93,377
783,988
671,831
(1,949)
37,416
76,690
297
6,375
70,612
(19,286)
89,898
103
835,013
667,744
22,572
11,005
133,692
305
5,086
128,911
43,273
85,638
61
$
89,795
$
85,577
43,639,003
43,839,004
44,413,941
2.14
$
2.05
$
1.93
44,327,602
44,839,813
45,502,219
2.11
$
2.00
$
$
1.88
(1,510)
(103)
339
1,460
186
85,824
61
1,219
(27)
(463)
660
1,389
91,287
103
$
91,184
$
85,763
(3,004) $
(24)
2,701
339
12
93,338
(51)
93,389
Net sales
Cost of sales
Gross profit
Selling and administrative expenses
(Gain) loss on sale, disposal, and license of assets
Restructuring and impairment charges
Operating income
Interest income
Interest expense
Income before income taxes
Income tax expense (benefit)
Net income
Less: Net income (loss) attributable to non-controlling interest
Net income attributable to HNI Corporation
Average number of common shares outstanding – basic
Net income attributable to HNI Corporation per common share – basic
Average number of common shares outstanding – diluted
Net income attributable to HNI Corporation per common share – diluted
Foreign currency translation adjustments
Change in unrealized gains (losses) on marketable securities, net of tax
Change in pension and post-retirement liability, net of tax
Change in derivative financial instruments, net of tax
Other comprehensive income (loss), net of tax
Comprehensive income
Less: Comprehensive income (loss) attributable to non-controlling interest
Comprehensive income attributable to HNI Corporation
$
$
$
$
$
The accompanying notes are an integral part of the consolidated financial statements.
41
HNI Corporation and Subsidiaries
Consolidated Balance Sheets
(In thousands)
Assets
Current Assets:
Cash and cash equivalents
Short-term investments
Receivables
Inventories
Prepaid expenses and other current assets
Total Current Assets
Property, Plant, and Equipment:
Land and land improvements
Buildings
Machinery and equipment
Construction in progress
Less accumulated depreciation
Net Property, Plant, and Equipment
Goodwill and Other Intangible Assets
Deferred Income Taxes
Other Assets
Total Assets
The accompanying notes are an integral part of the consolidated financial statements.
December 29,
2018
December 30,
2017
$
76,819
$
1,327
255,207
157,178
41,352
531,883
28,377
290,263
565,884
28,443
912,967
528,034
384,933
23,348
2,015
258,551
155,683
49,283
488,880
28,593
306,137
556,571
39,788
931,089
540,768
390,321
463,290
490,892
1,569
193
20,169
21,264
$
1,401,844
$
1,391,550
42
HNI Corporation and Subsidiaries
Consolidated Balance Sheets
(In thousands, except par value)
Liabilities and Equity
Current Liabilities:
Accounts payable and accrued expenses
Current maturities of long-term debt
Current maturities of other long-term obligations
Total Current Liabilities
Long-Term Debt
Other Long-Term Liabilities
Deferred Income Taxes
Equity:
HNI Corporation shareholders' equity:
Capital Stock:
December 29,
2018
December 30,
2017
$
428,865
$
450,128
679
4,764
434,308
36,648
2,927
489,703
249,355
240,000
72,767
70,409
82,155
76,861
Preferred stock - $1 par value, authorized 2,000 shares, no shares outstanding
—
—
Common stock - $1 par value, authorized 200,000 shares, outstanding:
December 29, 2018 - 43,582 shares
December 30, 2017 - 43,354 shares
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Total HNI Corporation shareholders' equity
Non-controlling interest
Total Equity
43,582
43,354
18,041
504,909
(3,599)
562,933
7,029
467,296
(3,611)
514,068
326
509
563,259
514,577
Total Liabilities and Equity
$
1,401,844
$
1,391,550
The accompanying notes are an integral part of the consolidated financial statements.
43
HNI Corporation and Subsidiaries
Consolidated Statements of Equity
(In thousands, except per share data)
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Non-
controlling
Interest
Total
Shareholders'
Equity
$
44,158
$
4,407
$ 433,575
$
(5,186) $
345
$
477,299
Balance, January 2, 2016
Comprehensive income:
Net income (loss)
Other comprehensive income (loss),
net of tax
Change in ownership of non-
controlling interest
Cash dividends; $1.090 per share
Common shares – treasury:
Shares purchased
Shares issued under Members'
Stock Purchase Plan and stock
awards, net of tax
—
—
—
—
—
—
—
—
85,577
—
(89)
(48,495)
(1,082)
(45,699)
(9,044)
1,003
41,292
—
Balance, December 31, 2016
$
44,079
$
— $ 461,524
$
Comprehensive income:
Net income (loss)
Other comprehensive income (loss),
net of tax
Change in ownership of non-
controlling interest
Cash dividends; $1.130 per share
Common shares – treasury:
Shares purchased
Shares issued under Members'
Stock Purchase Plan and stock
awards, net of tax
—
—
—
—
—
—
—
—
89,795
—
—
(49,557)
(1,463)
(22,958)
(34,466)
738
29,987
—
Balance, December 30, 2017
$
43,354
$
7,029
$ 467,296
$
Comprehensive income:
Net income (loss)
Other comprehensive income (loss),
net of tax
Change in ownership of non-
controlling interest
Cash dividends; $1.170 per share
Common shares – treasury:
Shares purchased
Shares issued under Members'
Stock Purchase Plan and stock
awards, net of tax
—
—
—
—
—
—
—
—
93,377
—
(43)
(51,085)
(755)
(24,033)
(4,636)
983
35,045
—
Balance, December 29, 2018
$
43,582
$
18,041
$ 504,909
$
The accompanying notes are an integral part of the consolidated financial statements.
44
—
186
—
—
—
—
(5,000) $
—
1,389
—
—
—
—
(3,611) $
—
12
—
—
—
—
(3,599) $
61
—
—
—
—
—
85,638
186
(89)
(48,495)
(55,825)
42,295
406
$
501,009
103
89,898
—
—
—
—
—
1,389
—
(49,557)
(58,887)
30,725
509
$
514,577
(51)
—
(132)
—
—
—
93,326
12
(175)
(51,085)
(29,424)
36,028
326
$
563,259
HNI Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Net Cash Flows From (To) Operating Activities:
Net income
Non-cash items included in net income:
Depreciation and amortization
Other post-retirement and post-employment benefits
Stock-based compensation
Excess tax benefits from stock-based compensation
Deferred income taxes
(Gain) loss on sale, retirement, license, and impairment of long-lived
assets and intangibles, net
Amortization of deferred gain on sale leaseback transaction
Other – net
Net increase (decrease) in operating assets and liabilities, net of
acquisitions and divestitures
Increase (decrease) in other liabilities
Net cash flows from (to) operating activities
Net Cash Flows From (To) Investing Activities:
Capital expenditures
Proceeds from sale and license of property, plant, equipment, and
intangibles
Capitalized software
Acquisition spending, net of cash acquired
Purchase of investments
Sales or maturities of investments
Other – net
Net cash flows from (to) investing activities
Net Cash Flows From (To) Financing Activities:
Payments of note and long-term debt and other financing
Proceeds from long-term debt
Dividends paid
Purchase of HNI Corporation common stock
Proceeds from sales of HNI Corporation common stock
Withholding related to net share settlements of equity based awards
Excess tax benefits from stock-based compensation
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
2018
2017
2016
$
93,326
$
89,898
$
85,638
74,788
1,767
7,317
—
3,197
16,264
(400)
(1,336)
(10,729)
2,236
186,430
72,872
1,592
7,750
—
(33,606)
30,892
—
(1,949)
(29,409)
(4,891)
133,149
68,947
1,643
8,141
(2,713)
20,495
28,868
—
4,523
17,430
(9,610)
223,362
(55,648)
(109,243)
(93,425)
23,767
(8,048)
(2,850)
(2,676)
3,100
1,135
(41,220)
(352,727)
323,075
(51,085)
(30,452)
19,606
(156)
—
(91,739)
53,471
23,348
9,009
(18,148)
(898)
(3,451)
3,197
1,510
(118,024)
(274,343)
339,337
(49,557)
(57,505)
14,224
(245)
—
(28,089)
(12,964)
36,312
$
76,819
$
23,348
$
1,055
(26,159)
(34,302)
(8,724)
8,619
(90)
(153,026)
(594,547)
611,986
(48,495)
(55,825)
21,596
—
2,713
(62,572)
7,764
28,548
36,312
The accompanying notes are an integral part of the consolidated financial statements.
45
HNI Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 29, 2018
Note 1. Nature of Operations
HNI Corporation 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 "Note 17.
Reportable Segment Information" in the Notes to Consolidated Financial Statements for further information. Office furniture products
include panel-based and freestanding furniture systems, seating, storage, and tables. These products are sold primarily through a
national system of independent dealers, wholesalers, and office product distributors but also directly to end-user customers and
federal, state, and local governments. Hearth products include a full array of gas, wood, and pellet burning fireplaces, inserts, stoves,
facings, and accessories. These products are sold through a national system of independent dealers and distributors, 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 through its export subsidiary to a limited number of markets outside North America,
principally the Middle East, Mexico, Latin America, and the Caribbean. The Corporation also manufactures and markets office
furniture in Asia, primarily China and India.
Fiscal year-end – The Corporation follows a 52/53-week fiscal year, which ends on the Saturday nearest December 31. Fiscal year
2018 ended on December 29, 2018, fiscal year 2017 ended on December 30, 2017, and fiscal year 2016 ended on December 31,
2016. The financial statements for fiscal years 2018, 2017, and 2016 are on a 52-week basis. A 53-week year occurs approximately
every sixth year.
Note 2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts and transactions of the Corporation and its subsidiaries. Intercompany
accounts and transactions have been eliminated in consolidation.
Cash, Cash Equivalents, and Investments
Cash and cash equivalents generally consist of cash and money market accounts. The fair value approximates the carrying value
due to the short duration of the securities. These securities have original maturity dates not exceeding three months. The Corporation
has short-term investments with maturities of less than one year and investments with maturities greater than one year included in
"Other Assets" in the Consolidated Balance Sheets. Management classifies investments in marketable securities at the time of
purchase and reevaluates such classification at each balance sheet date. Debt securities, including government and corporate bonds,
are classified as available-for-sale and stated at current market value with unrealized gains and losses included as a separate component
of equity, net of any related tax effect. The specific identification method is used to determine realized gains and losses on the trade
date.
Cash, cash equivalents, and investments consisted of the following (in thousands):
December 29, 2018
December 30, 2017
Cash and cash
equivalents
Short-term
investments
Long-term
investments
Cash and cash
equivalents
Short-term
investments
Long-term
investments
Available-for-sale
securities:
Debt securities
Cash and money market
accounts
Total
—
76,819
1,327
—
10,677
—
—
23,348
2,015
—
10,479
—
$
76,819
$
1,327
$
10,677
$
23,348
$
2,015
$
10,479
The following table summarizes the amortized cost basis of the debt securities (in thousands):
Amortized cost basis of debt securities
46
December 29,
2018
December 30,
2017
$
12,202
$
12,660
Immaterial unrealized gains and losses are recorded in "Accumulated other comprehensive income (loss)" in the Consolidated Balance
Sheets for these debt securities.
Receivables
The allowance for doubtful accounts is developed based on several factors including overall customer credit quality, historical write-
off experience, and specific account analyses projecting the ultimate collectability of the account. As such, these factors may change
over time causing the allowance level to adjust accordingly. The following table summarizes the change in the allowance for doubtful
accounts (in thousands):
Balance at
beginning of
period
Adjustments
to allowance
$
$
$
1,904
2,140
4,287
$
$
$
2,440
$
846
$
(357) $
Amounts
written off,
net of
recoveries
and other
adjustments
477
1,082
1,598
Divestitures
Balance at
end of period
$
$
$
— $
— $
192
$
3,867
1,904
2,140
Year ended December 29, 2018
Year ended December 30, 2017
Year ended December 31, 2016
Inventories
The Corporation values its inventory at the lower of cost or net realizable value. Inventories included in the Consolidated Balance
Sheets consisted of the following (in thousands):
Finished products
Materials and work in process
Last-in,first-out ("LIFO") allowance
Total inventories
December 29,
2018
December 30,
2017
$
$
97,398
$
101,715
94,161
(34,381)
157,178
81,202
(27,234)
$
155,683
Inventory valued by the LIFO costing method
81.40%
83.36%
During 2018, inventory quantities were reduced at certain reporting units. This reduction resulted in a liquidation of LIFO inventory
quantities carried at higher or lower costs prevailing in prior years as compared with the cost of current year purchases, the effect of
which decreased cost of goods sold by approximately $0.5 million in 2018. There was no LIFO decrement in 2017. If the FIFO
method had been in use, inventories would have been $34.4 million and $27.2 million higher than reported as of December 29, 2018
and December 30, 2017, respectively.
Property, Plant, and Equipment
Property, plant, and equipment are carried at cost. Expenditures for repairs and maintenance are expensed as incurred. Major
improvements that materially extend the useful lives of the assets are capitalized. 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. Total depreciation expense was as follows (in thousands):
Depreciation expense
2018
2017
$
51,063
$
56,494
$
2016
57,171
Long-Lived Assets
The Corporation evaluates long-lived assets for indicators of impairment as events or changes in circumstances occur indicating that
an impairment risk may be present. The judgments regarding the existence of impairment are based on business and market conditions,
operational performance, and estimated future cash flows. If the carrying value of a long-lived asset is considered impaired, an
impairment charge is recorded to adjust the asset to its estimated fair value. Asset impairment charges associated with the Corporation’s
long-lived assets are discussed in "Note 4. Restructuring and Impairment Charges" in the Notes to Consolidated Financial Statements.
47
Goodwill and Other Intangible Assets
The Corporation evaluates its goodwill for impairment on an annual basis during the fourth quarter or whenever indicators of
impairment exist. Asset impairment charges associated with the Corporation’s goodwill impairment testing are discussed in "Note
7. Goodwill and Other Intangible Assets" in the Notes to Consolidated Financial Statements.
The Corporation reviews goodwill at the reporting unit level within its office furniture and hearth products operating segments. These
reporting units constitute components for which discrete financial information is available and regularly reviewed by segment
management. The accounting standards for goodwill permit entities to first assess qualitative factors to determine whether it is more
likely than not the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to
perform a quantitative goodwill impairment test. If the quantitative test is required, the Corporation estimates the fair value of its
reporting units. In estimating the fair value, the Corporation relies on an average of the income approach and the market approach.
This estimated fair value is compared to the carrying value of the reporting unit and an impairment is recorded if the estimate is less
than the carrying value. In the income approach, the estimate of fair value of each reporting unit is based on management’s projection
of revenues, gross margin, operating costs, and cash flows considering historical and estimated future results, general economic and
market conditions, as well as the impact of planned business and operational strategies. The valuations employ present value
techniques to measure fair value and consider market factors. In the market approach, the Corporation utilizes the guideline company
method, which involves calculating valuation multiples based on operating data from guideline publicly-traded companies. These
multiples are then applied to the operating data for the reporting units and adjusted for factors similar to those used in the discounted
cash flow analysis. Management believes the assumptions used for the impairment test are consistent with those utilized by a market
participant in performing similar valuations of its reporting units. Management bases its fair value estimates on assumptions they
believe to be reasonable at the time, but such assumptions are subject to inherent uncertainty. Actual results may differ from those
estimates.
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses are reflected in the Consolidated Balance Sheets and were as follows (in thousands):
Trade accounts payable
Compensation
Profit sharing and retirement expense
Marketing expenses
Freight
Other accrued expenses
December 29,
2018
December 30,
2017
$
221,395
$
235,577
52,227
28,300
36,529
13,892
76,522
47,277
30,884
41,751
13,121
81,518
$
428,865
$
450,128
Product Warranties
The Corporation issues certain warranty policies on its office 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. Allowances
have been established for the anticipated future costs associated with the Corporation's warranty programs.
A warranty allowance is determined by recording a specific allowance for known warranty issues and an additional allowance for
unknown claims expected to be incurred based on historical claims experience. Actual claims incurred could differ from the original
estimates, requiring adjustments to the allowance. Activity associated with warranty obligations was as follows (in thousands):
Balance at beginning of period
Accruals settled from divestiture
Accruals for warranties issued during period
Adjustments related to pre-existing warranties
Settlements made during the period
Balance at end of period
2018
2017
$
15,388
$
15,250
$
—
22,697
233
(22,868)
15,450
$
—
20,075
194
(20,131)
15,388
$
$
2016
16,227
(538)
20,055
604
(21,098)
15,250
The current and long-term portions of the allowance for the estimated settlements are included within "Accounts payable and accrued
expenses" and "Other Long-Term Liabilities", respectively, in the Consolidated Balance Sheets.
48
The following table summarizes when these estimated settlements are expected to be paid (in thousands):
Current - in the next twelve months
Long-term - beyond one year
December 29,
2018
December 30,
2017
$
$
9,455
5,995
15,450
$
$
9,524
5,864
15,388
Revenue Recognition
The Corporation implemented ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), at the beginning of fiscal
2018 using the modified-retrospective method, which required the new guidance to be applied prospectively to revenue transactions
completed on or after the effective date. Given the nature of the Corporation's revenue transactions, the new guidance did not have
a material impact on the Corporation's results of operations or financial position. All necessary changes required by the new standard,
including those to the Corporation's accounting policies, controls, and disclosures, have been identified and implemented as of the
beginning of fiscal 2018. See "Note 3. Revenue from Contracts with Customers" in the Notes to Consolidated Financial Statements
for policy elections and further information.
Product Development Costs
Product development costs relating to 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, and
administrative fees. The amounts charged against income and recorded in "Selling and administrative expenses" on the Consolidated
Statements of Comprehensive Income were as follows (in thousands):
Product development costs
2018
2017
$
33,420
$
31,846
$
2016
28,089
Freight Expense
Freight expense on shipments to customers were recorded in "Selling and administrative expenses" on the Consolidated Statements
of Comprehensive Income as follows (in thousands):
Freight expense
2018
2017
2016
$
134,190
$
119,096
$
115,157
Stock-Based Compensation
The Corporation measures the cost of employee services in exchange for an award of equity instruments based on the grant-date fair
value of the award and recognizes cost over the requisite service period. See "Note 12. Stock-Based Compensation" in the Notes to
Consolidated Financial Statements for further information.
Income Taxes
The Corporation uses an asset and liability approach that takes into account guidance related to uncertain tax positions and 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 differences between the tax bases
of assets and liabilities and their reported amounts in the consolidated financial statements.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the "Act") was signed into law, making significant changes to the Internal
Revenue Code. In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income
("GILTI") provisions of the Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible
assets of foreign corporations. The guidance indicates that either accounting for deferred taxes related to GILTI inclusions or treating
any taxes on GILTI inclusions as a period cost are both acceptable methods subject to an accounting policy election. Effective in
the first quarter of fiscal 2018, the Corporation elected to treat any potential GILTI inclusions as a period cost, as no material impact
is projected from GILTI inclusions and any deferred taxes related to any inclusion would not be material. Also under the Act, a
corporation’s foreign earnings accumulated under legacy tax laws are deemed repatriated. The Corporation will continue to evaluate
its ability to assert indefinite reinvestment to determine recognition of a deferred tax liability for other items such as Section 986(c)
currency gain/loss, foreign withholding, and state taxes. There were approximately $34.5 million of accumulated earnings considered
permanently reinvested in China, Hong Kong, Singapore, and Canada as of December 29, 2018. The Corporation believes the tax
costs on accumulated unremitted foreign earnings would be approximately $0.02 million if the amounts were not considered
permanently reinvested. See "Note 9. Income Taxes" in the Notes to Consolidated Financial Statements for further information.
49
Earnings Per Share
Basic earnings per share are based on the weighted-average number of common shares outstanding during the year. Shares potentially
issuable under stock options, restricted stock units, and common stock equivalents under the Corporation's deferred compensation
plans have been considered outstanding for purposes of the diluted earnings per share calculation. The following table reconciles
the numerators and denominators used in the calculation of basic and diluted earnings per share ("EPS") (in thousands, except per
share data):
Numerator:
Numerator for both basic and diluted EPS attributable to HNI Corporation
net income
Denominators:
Denominator for basic EPS weighted-average common shares outstanding
Potentially dilutive shares from stock-based compensation plans
Denominator for diluted EPS
Earnings per share – basic
Earnings per share – diluted
2018
2017
2016
$
93,377
$
89,795
$
85,577
43,639
689
44,328
43,839
1,001
44,840
$
$
2.14
2.11
$
$
2.05
2.00
$
$
44,414
1,088
45,502
1.93
1.88
The weighted-average common stock equivalents presented above do not include the effect of the common stock equivalents in the
table below because their inclusion would be anti-dilutive.
Common stock equivalents excluded because their inclusion would be anti-
dilutive
1,507,870
809,420
416,142
2018
2017
2016
Use of Estimates
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 consolidated financial statements and
accompanying notes. The critical areas requiring use of management estimates relate to goodwill and intangibles, accruals for self-
insured medical claims, workers’ compensation, legal contingencies, general liability and auto insurance claims, valuation of long-
lived assets, and estimates of income taxes. Other significant areas requiring use of management estimates relate to allowance for
doubtful accounts, inventory allowances, marketing program accruals, warranty accruals, and useful lives for depreciation and
amortization. Actual results could differ from those estimates.
Self-Insurance
The Corporation is primarily self-insured for general, auto, and product liability, workers’ compensation, and certain employee health
benefits. Certain risk exposures are mitigated through the use of independent third party stop loss insurance coverages. The general,
auto, product, and workers’ compensation liabilities are managed using a wholly-owned insurance captive and the related liabilities
are included in the Consolidated Balance Sheets as follows (in thousands):
General, auto, product, and workers' compensation liabilities
December 29,
2018
December 30,
2017
$
30,227
$
27,591
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 future.
Foreign Currency Translations
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 "Selling and administrative expenses" in the Consolidated Statements of Comprehensive Income.
50
Reclassifications
Certain reclassifications have been made within the financial statements to conform to the current year presentation.
Recently Adopted Accounting Standards
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The new standard replaces
most existing revenue recognition guidance in U.S. GAAP. The core principle of the ASU requires companies to reevaluate when
revenue is recorded on a transaction based upon newly defined criteria, either at a point in time or over time as goods or services are
delivered. The ASU requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows
arising from customer contracts, including significant judgments and estimates, and changes in those estimates. The FASB has issued
ASU No. 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations, ASU No. 2016-10, Revenue
from Contracts with Customers: Identifying Performance Obligations and Licensing, and ASU No. 2016-12, Revenue from Contracts
with Customers: Narrow Scope Improvements and Practical Expedients to provide further clarification and guidance. The Corporation
implemented the new standard in the first quarter of fiscal 2018 using the modified-retrospective method, which required the new
guidance to be applied prospectively to revenue transactions completed on or after the effective date. Given the nature of the
Corporation's revenue transactions, the new guidance did not have a material impact on the Corporation's results of operations or
financial position. All necessary changes required by the new standard, including those to the Corporation's accounting policies,
controls, and disclosures, have been identified and implemented as of the beginning of fiscal 2018. See "Note 3. Revenue from
Contracts with Customers" in the Notes to Consolidated Financial Statements for further information.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash
Payments. The new standard provides classification guidance on eight cash flow issues including debt prepayment, settlement of
zero-coupon bonds, contingent consideration payments made after a business combination, proceeds from the settlements of insurance
claims, proceeds from the settlement of corporate-owned life insurance policies, and distributions received from equity method
investees. The Corporation implemented the new standard in the first quarter of fiscal 2018. This standard did not have a material
effect on the consolidated financial statements or related disclosures.
In October 2016, the FASB issued ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory. The new standard
requires an entity to recognize the income tax consequences of intra-entity transfers of assets other than inventory when the transfer
occurs. The Corporation implemented the new standard in the first quarter of fiscal 2018. This standard did not have a material
effect on the consolidated financial statements or related disclosures.
In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business. The new standard amends ASC 805,
Business Combinations. This ASU provides a new framework for determining whether transactions should be accounted for as
acquisitions (or disposals) of a group of assets or of a business. The Corporation implemented the new standard in the first quarter
of fiscal 2018 on a prospective basis. The standard did not have a material effect on the consolidated financial statements or related
disclosures.
In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic
Postretirement Benefit Cost. The new standard requires an entity with defined benefit and post-retirement benefit plans to present
the service cost component of the net periodic benefit cost in the same income statement line item or items as other compensation
costs arising from services rendered by employees during the period. All other components of net periodic benefit cost will be
presented outside of operating income, if a subtotal is presented. The Corporation implemented the new standard in the first quarter
of fiscal 2018 and it was applied retrospectively to each period presented. This standard did not have a material effect on the
consolidated financial statements or related disclosures.
Note 3. Revenue from Contracts with Customers
The Corporation implemented ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), at the beginning of fiscal
2018 using the modified-retrospective method, which required the new guidance to be applied prospectively to revenue transactions
completed on or after the effective date. Given the nature of the Corporation's revenue transactions, the new guidance did not have
a material impact on the Corporation's results of operations or financial position. All necessary changes required by the new standard,
including those to the Corporation's accounting policies, controls, and disclosures, have been identified and implemented as of the
beginning of fiscal 2018.
51
Disaggregation of Revenue
Revenue from contracts with customers disaggregated by sales channel and by segment is as follows (in thousands):
Supplies-driven channel
Contract channel
Hearth
Net sales
Segment
Office Furniture
Office Furniture
Hearth Products
December 29,
2018
December 30,
2017
$
904,292
$
801,800
551,803
836,733
823,990
515,159
$
2,257,895
$
2,175,882
The majority of revenue presented as "Net sales" in the Consolidated Statements of Comprehensive Income is the result of contracts
with customers. All other sources of revenue are not material to the Corporation's results of operations.
Sales by channel type are subject to similar economic factors and market conditions regardless of the channel under which the product
is sold. See “Note 17. Reportable Segment Information” in the Notes to Consolidated Financial Statements for further information
about operating segments.
Contract Assets and Contract Liabilities
In addition to trade receivables, the Corporation has contract assets consisting of funds paid to certain office furniture dealers in
exchange for their multi-year commitment to market and sell the Corporation’s product. These dealer investments are amortized
over the term of the contracts and recognized as a reduction of revenue. For contracts less than one year, the Corporation has elected
the practical expedient to recognize incremental costs to obtain a contract as an expense when incurred. The Corporation has contract
liabilities consisting of deferred revenue and rebate and marketing program liabilities.
Contract assets and liabilities were as follows (in thousands):
Trade receivables (1)
Contract assets (current) (2)
Contract assets (long-term) (3)
Contract liabilities (4)
December 29,
2018
December 30,
2017
$
$
$
$
259,075
529
2,188
44,858
$
$
$
$
260,455
300
2,350
54,527
The index below indicates the line item in the Consolidated Balance Sheets where contract assets and contract liabilities are reported:
(1) "Receivables"
(2) "Prepaid expenses and other current assets"
(3) "Other Assets"
(4) "Accounts payable and accrued expenses"
52
Changes in contract asset and contract liability balances during the year ended December 29, 2018 were as follows (in thousands):
Contract assets recognized
Reclassification of contract assets to contra revenue
Contract asset impairment
Contract liabilities recognized and recorded to contra revenue as a result of performance
obligations satisfied
Contract liabilities paid
Cash received in advance and not recognized as revenue
Reclassification of cash received in advance to revenue as a result of performance
obligations satisfied
Impact of business combination
Net change
Contract
assets
increase
(decrease)
Contract
liabilities
(increase)
decrease
$
2,100
(483)
(1,550)
—
—
—
—
—
—
—
—
67
$
(127,454)
132,909
(54,167)
58,304
77
9,669
$
$
Due to the short term nature of our contract liabilities, all contract liabilities as of December 30, 2017 were recognized as revenue
during the three months ended March 31, 2018. For the full year ended December 29, 2018, the Corporation recognized revenue of
$12.5 million in the Consolidated Statements of Comprehensive Income related to contract liabilities as of December 30, 2017.
Performance Obligations
The Corporation recognizes revenue for sales of office furniture and hearth products at a point in time following the transfer of
control of such products to the customer, which typically occurs upon shipment of the product. In certain circumstances, transfer of
control to the customer does not occur until the goods are received by the customer or upon installation and/or customer acceptance,
depending on the terms of the underlying contracts. Contracts typically have a duration of less than one year and normally do not
include a significant financing component. Generally, payment is due within 30 days of invoicing.
Significant Judgments
The Corporation uses significant judgment throughout the year in estimating the reduction in net sales driven by rebate and marketing
programs. Judgments made include expected sales levels and utilization of funds. However, this judgment factor is significantly
reduced at the end of each year when sales volumes and the impact to rebate and marketing programs are known and recorded as
the programs typically don't extend multiple years.
Accounting Policies and Practical Expedients Elected
The Corporation elected to use the modified-retrospective method of adopting the new standard on revenue recognition. The new
standard has been applied to all contracts not completed as of December 30, 2017, the end of the Corporation’s fiscal 2017. The
impact of the Corporation's transition adjustment for the new revenue recognition guidance was not material to the Corporation's
results of operations or financial position. The additional disclosures required as a result of adopting the new revenue recognition
guidance were material to the Corporation's financial statements.
The Corporation elected the following accounting policies as a result of adopting the new standard on revenue recognition:
Shipping and Handling Activities - The Corporation has elected to apply the accounting policy election permitted in ASC
606-10-25-18B, which allows an entity to account for shipping and handling activities that occur after control is transferred as
fulfillment activities. The Corporation accrues for shipping and handling costs at the same time revenue is recognized, which
is in accordance with the policy election. When shipping and handling activities occur prior to the customer obtaining control
of the good(s), they are considered fulfillment activities rather than a performance obligation and the costs are accrued for as
incurred.
Sales Taxes - The Corporation has elected to apply the accounting policy election permitted in ASC 606-10-32-2A, which allows
an entity to exclude from the measurement of the transaction price all taxes assessed by a governmental authority associated
with the transaction, including sales, use, excise, value-added, and franchise taxes (collectively referred to as sales taxes). This
allows the Corporation to present revenue net of these certain types of taxes.
These policies have been applied consistently to all revenue transactions.
53
The Corporation has elected the following practical expedients as a result of adopting the new standard on revenue recognition:
Incremental Costs of Obtaining a Contract - The Corporation has elected the practical expedient permitted in ASC 340-40-25-4,
which permits an entity to recognize incremental costs to obtain a contract as an expense when incurred if the amortization
period will be less than one year. The Corporation will apply this practical expedient when the requirements to apply it are met.
Significant Financing Component - The Corporation has elected the practical expedient permitted in ASC 606-10-32-18, which
allows an entity to not adjust the promised amount of consideration for the effects of a significant financing component if a
contract has a duration of one year or less. As the Corporation's contracts are typically less than one year in length, consideration
will not be adjusted.
Remaining Performance Obligation - The Corporation's backlog orders are typically cancelable for a period of time and almost
all of our contracts have an original duration of one year or less. As a result, we have elected the practical expedient not to
disclose our remaining performance obligation. The backlog disclosed is typically fulfilled within one or two quarters.
These accounting policies and practical expedients have been applied consistently to all revenue transactions.
Note 4. Restructuring and Impairment Charges
Restructuring costs, goodwill and long-lived asset impairments, and a valuation allowance recorded in the Consolidated Statements
of Comprehensive Income are as follows (in thousands):
Cost of sales - accelerated depreciation
Restructuring charges
Goodwill and long-lived asset impairments
Valuation allowance of long-term note receivable
Restructuring and impairment charges
$
$
$
2018
— $
2,325
$
15,200
(1,800)
15,725
$
$
2017
10,327
6,205
20,947
10,264
2016
5,302
5,229
5,776
—
$
37,416
$
11,005
Restructuring costs in 2018 were primarily incurred as part of the previously announced closures of the hearth manufacturing facilities
in Paris, Kentucky and Colville, Washington and the office furniture manufacturing facility in Orleans, Indiana. Impairment charges
include the impairment of goodwill and long-lived assets for office furniture companies and an impairment charge from the sale of
the closed manufacturing facility in Paris, Kentucky. The Corporation also recovered a portion of a long-term note receivable
previously impaired.
Restructuring costs in 2017, which include accelerated depreciation recorded in "Cost of sales" in the Consolidated Statements of
Comprehensive Income, were primarily incurred as part of the previously announced closures of the hearth manufacturing facilities
in Paris, Kentucky and Colville, Washington and the office furniture manufacturing facility in Orleans, Indiana. As of December 30,
2017, the estimated fair value of the Paris, Kentucky hearth manufacturing facility of $4.6 million was classified as held for sale and
is included in "Prepaid expenses and other current assets" in the Consolidated Balance Sheets.
Restructuring costs in 2016, which include accelerated depreciation recorded in "Cost of sales" in the Consolidated Statements of
Comprehensive Income, were primarily incurred as part of the previously announced closures of the Paris, Kentucky hearth
manufacturing facility and the Orleans, Indiana office furniture manufacturing facility.
See "Note 7. Goodwill and Other Intangible Assets" in the Notes to Consolidated Financial Statements for more information on
goodwill and long-lived asset impairments.
See "Note 5. Acquisitions and Divestitures" in the Notes to Consolidated Financial Statements for more information on the valuation
allowance of a long-term note receivable.
54
The accrued restructuring expenses are expected to be paid in the next twelve months and are included in "Accounts payable and
accrued expenses" in the Consolidated Balance Sheets. The following is a summary of changes in restructuring accruals (in thousands):
Severance
Costs
Facility Exit
Costs & Other
Total
Restructuring allowance as of January 2, 2016
$
206
$
15
$
Restructuring charges
Cash payments
Restructuring allowance as of December 31, 2016
Restructuring charges
Cash payments
Restructuring allowance as of December 30, 2017
Restructuring charges
Cash payments
Restructuring allowance as of December 29, 2018
$
3,883
(1,385)
2,704
1,436
(2,797)
1,343
355
(1,562)
136
$
1,346
(1,361)
—
4,769
(4,253)
516
1,970
(2,336)
150
$
221
5,229
(2,746)
2,704
6,205
(7,050)
1,859
2,325
(3,898)
286
Real Estate Transaction
As part of the Corporation's continued efforts to drive efficiency and simplification, the Corporation entered into a sale-leaseback
transaction in the first quarter of 2018, selling a manufacturing facility and subsequently leasing back a portion of the facility for a
term of 10 years. The net proceeds from the sale of the facility of $16.9 million are reflected in "Proceeds from sale and license of
property, plant, equipment, and intangibles" in the Consolidated Statements of Cash Flows. In accordance with ASC 840, Leases,
the $5.1 million gain on the sale of the facility was deferred and is being amortized as a reduction to rent expense evenly over the
term of the lease. As of December 29, 2018, the current portion of the deferred gain is $0.5 million and included within "Accounts
payable and accrued expenses" and the long-term portion of the deferred gain is $4.2 million and included within "Other Long-Term
Liabilities" in the Consolidated Balance Sheets. The transaction did not have a material impact to the Consolidated Statements of
Comprehensive Income.
Note 5. Acquisitions and Divestitures
In the third quarter of 2018, the Corporation acquired a small hearth products company resulting in a preliminary goodwill valuation
of $3.4 million. The remaining assets and liabilities recorded in the third quarter of 2018 were not material to the Corporation's
financial statements. The Corporation will finalize the allocation of the purchase price over the next few quarters based on the final
purchase price and fair value adjustments.
OFM
On January 29, 2016, the Corporation acquired OFM, an office furniture company, with annual sales of approximately $30 million
at a purchase price of $34.1 million, net of cash acquired, in an all cash transaction. The Corporation finalized the allocation of the
purchase price during fourth quarter 2016. There were $15 million of intangible assets other than goodwill associated with this
acquisition with estimated useful lives ranging from three to 10 years with amortization recorded on a straight-line basis based on
the projected cash flow associated with the respective intangible assets. There was $14 million of goodwill associated with this
acquisition. The goodwill is deductible for income tax purposes.
Office Furniture Dealerships
As part of the Corporation's ongoing business strategy, it continues to acquire and divest small office furniture dealerships, for which
impact is not material to the Corporation's financial statements.
Artcobell
The Corporation completed the sale of substantially all the assets of ArtcoBell Corporation ("Artcobell"), a K-12 education furniture
business, on December 31, 2016. A pre-tax non-cash charge of approximately $23 million and a $10 million long-term note receivable,
which was included in "Other Assets" in the Corporation's Consolidated Balance Sheets in Form 10-K for the fiscal year ended
December 31, 2016, were recorded in relation to the sale. Artcobell had been included as part of the Corporation's office furniture
segment. As of December 30, 2017, a valuation allowance was recorded against the long-term note receivable. The Corporation is
not required to make any payments and recorded an immaterial recovery in the fourth quarter of 2018.
55
Note 6. Supplemental Cash Flow Information
The Corporation's cash payments for interest, income taxes, and non-cash investing and financing activities are as follows (in
thousands):
Cash paid for:
Interest paid, net of capitalized interest
Income taxes paid
Changes in accrued expenses due to:
Purchases of property and equipment
Purchases of capitalized software
Note 7. Goodwill and Other Intangible Assets
2018
2017
2016
$
$
$
$
9,882
11,465
$
$
6,236
13,733
$
$
6,644
23,120
$
5,895
(2,497) $
(10,370) $
(237) $
3,599
603
Goodwill and other intangible assets included in the Consolidated Balance Sheets consisted of the following (in thousands):
Goodwill
Definite-lived intangible assets
Indefinite-lived intangible assets
Total goodwill and other intangible assets
December 29,
2018
December 30,
2017
$
$
270,788
$
163,714
28,788
279,505
182,186
29,201
463,290
$
490,892
56
Goodwill
The changes in the carrying amount of goodwill, by reporting segment, are as follows (in thousands):
Balance as of December 31, 2016
Goodwill
Accumulated impairment losses
Net goodwill balance as of December 31, 2016
Impairment losses
Foreign currency translation adjustment
Impairment loss due to closure of an office furniture brand
Balance as of December 30, 2017
Goodwill
Accumulated impairment losses
Net goodwill balance as of December 30, 2017
Goodwill acquired during the year
Impairment losses
Foreign currency translation adjustment
Balance as of December 29, 2018
Goodwill
Accumulated impairment losses
Net goodwill balance as of December 29, 2018
Office
Furniture
Hearth
Products
Total
$
$
137,889
(30,246)
107,643
183,199
(143)
183,056
$
321,088
(30,389)
290,699
(4,838)
(44)
(6,312)
128,657
(32,208)
96,449
—
(12,168)
(12)
—
—
—
183,199
(143)
183,056
3,463
—
—
(4,838)
(44)
(6,312)
311,856
(32,351)
279,505
3,463
(12,168)
(12)
128,645
(44,376)
84,269
$
186,662
(143)
186,519
$
315,307
(44,519)
$
270,788
The increases in goodwill relate to completed acquisitions. See "Note 5. Acquisitions and Divestitures" in the Notes to Consolidated
Financial Statements for further information. The decreases in goodwill in the office furniture segment were due to impairment
charges, which are described below.
Definite-lived intangible assets
The table below summarizes amortizable definite-lived intangible assets, which are reflected in "Goodwill and Other Intangible
Assets" in the Corporation’s Consolidated Balance Sheets (in thousands):
December 29, 2018
Gross
Accumulated
Amortization
Net
Gross
December 30, 2017
Accumulated
Amortization
Patents
$
40
$
34
$
6
$
40
$
26
$
Net
14
132,313
5,503
44,356
170,274
7,564
103,840
49,561
2,721
65,688
120,713
4,843
38,152
167,105
7,564
106,090
34,792
2,061
61,734
$
281,718
$
118,004
$
163,714
$
280,799
$
98,613
$
182,186
57
Software
Trademarks and trade
names
Customer lists and other
Net definite-lived
intangible assets
Amortization expense is reflected in "Selling and administrative expenses" in the Consolidated Statements of Comprehensive Income
and was as follows (in thousands):
Capitalized software
Other definite-lived intangibles
2018
17,109
6,615
$
$
$
$
2017
9,389
6,989
$
$
2016
4,722
7,055
The occurrence of events such as acquisitions, dispositions, or impairments may impact future amortization expense. Based on the
current amount of intangible assets subject to amortization, the estimated amortization expense for each of the following five fiscal
years is as follows (in millions):
Amortization expense
2019
23.8
$
2020
22.9
$
2021
21.6
$
2022
19.2
$
2023
16.9
$
Indefinite-lived intangible assets
The Corporation also owns certain intangible assets, which are deemed to have indefinite useful lives because they are expected to
generate cash flows indefinitely. These indefinite-lived intangible assets are reflected in "Goodwill and Other Intangible Assets" in
the Consolidated Balance Sheets (in thousands):
Trademarks and trade names
December 29,
2018
December 30,
2017
$
28,788
$
29,201
As a result of the required annual impairment assessment performed in the fourth quarter of 2018, the Corporation did not record
any impairment charges related to indefinite-lived intangible assets.
Sale and License of an Intangible Asset
In the third quarter of 2017, the Corporation recorded a $6.0 million nonrecurring gain from the sale and license of an intangible
asset, which had a zero carrying value. This nonrecurring gain is reflected in "(Gain) loss on sale, disposal, and license of assets"
in the Consolidated Statements of Comprehensive Income.
Impairment Analysis
As a result of the required annual impairment assessment performed in the fourth quarter of 2018, the Corporation determined the
fair value of a reporting unit within the office furniture segment was below its carrying value. This reporting unit had triggering
events in both the second and third quarters of 2018 due to lower projected operating results, and was tested with interim quantitative
impairment tests that resulted in no impairment either time. In the fourth quarter of 2018, a further decline in the estimated fair value
of this reporting unit was primarily driven by reduced long-term margin expectations and resulted in an impairment. The projections
used in the impairment model reflected management's assumptions regarding revenue growth rates, economic and market trends,
cost structure, investments required for product enhancements, and other expectations about the anticipated short-term and long-
term operating results of the reporting unit. The Corporation assumed a discount rate of 14 percent, near term growth rates ranging
from 1 percent to 6 percent, and a terminal growth rate of 3 percent. Based on the quantitative analysis, the Corporation recorded a
$12.2 million goodwill impairment charge in 2018, which is reflected in "Goodwill and Other Intangible Assets" in the Corporation's
Consolidated Balance Sheets. There was $7.5 million net goodwill remaining in the reporting unit as of December 29, 2018. Holding
other assumptions constant, a 100 basis point increase in the discount rate would result in a $2.3 million decrease in the estimated
fair value of the reporting unit. Holding other assumptions constant, a 50 basis point decrease in the long-term growth rate would
result in a $0.5 million decrease in the estimated fair value of the reporting unit.
Prior to the goodwill impairment assessment, the Corporation completed a qualitative review of long-lived assets for all asset groups
to determine if events or changes in circumstances indicated that the carrying amount of each asset group may not be recoverable
(if a "triggering event" existed). Based on this review, the Corporation tested the recoverability of the long-lived assets, other than
goodwill and indefinite-lived intangible assets, in a certain asset groups where a triggering events existed, and found no impairments.
Trigger events were noted in these certain asset groups in the second and third quarters of 2018 and no impairments were found.
Based on the results of the annual impairment test, the Corporation concluded that no other goodwill impairment existed apart from
the impairment charges discussed above. For all other reporting units included in the annual quantitative impairment test, the estimated
fair value is significantly in excess of the carrying value.
58
Note 8. Long-Term Debt
Long-term debt is as follows (in thousands):
Revolving credit facility with interest at a variable rate
(December 29, 2018 - 3.5%; December 30, 2017 - 2.7%)
Fixed rate notes due in 2025 with an interest rate of 4.22%
Fixed rate notes due in 2028 with an interest rate of 4.40%
Other amounts
Deferred debt issuance costs
Total debt
Less: Current maturities of long-term debt
Long-term debt
2018
2017
$
150,000
$
267,500
50,000
50,000
679
(645)
250,034
679
—
—
9,148
—
276,648
36,648
$
249,355
$
240,000
Aggregate maturities of long-term debt are as follows (in thousands):
Maturities of long-term
debt
$
679
$
— $
— $
— $
150,000
$
100,000
2019
2020
2021
2022
2023
Thereafter
As of December 29, 2018, the Corporation’s revolving credit facility borrowings were under the credit agreement entered into on
April 20, 2018 with a scheduled maturity of April 20, 2023. This Third Amended and Restated Credit Agreement replaces the
previously executed Second Amended and Restated Credit Agreement dated January 6, 2016. The Corporation deferred the debt
issuance costs related to the credit agreement, which are classified as assets, and is amortizing them over the term of the credit
agreement. The current portion of $0.4 million is the amount to be amortized over the next twelve months based on the current credit
agreement and is reflected in "Prepaid expenses and other current assets" in the Consolidated Balance Sheets. The long-term portion
of $1.5 million is reflected in "Other Assets" in the Consolidated Balance Sheets.
As of December 29, 2018, there was $150 million outstanding under the $450 million revolving credit facility. The entire amount
drawn under the revolving credit facility is considered long-term as the Corporation assumes no obligation to repay any of the amounts
borrowed in the next twelve months.
In addition to cash flows from operations, the revolving credit facility under the credit agreement is the primary source of daily
operating capital for the Corporation and provides additional financial capacity for capital expenditures and strategic initiatives, such
as acquisitions and repurchases of common stock.
In addition to the revolving credit facility, the Corporation also has $100 million of borrowings outstanding under private placement
note agreements entered into on May 31, 2018. Under the agreements, the Corporation issued $50 million of seven-year fixed rate
notes with an interest rate of 4.22 percent, due May 31, 2025, and $50 million of ten-year fixed rate notes with an interest rate of
4.40 percent, due May 31, 2028. The Corporation deferred the debt issuance costs related to the private placement note agreements,
which are classified as a reduction of long-term debt in accordance with ASU No. 2015-03, and is amortizing them over the terms
of the private placement note agreements. The deferred debt issuance costs do not reduce the amount owed by the Corporation under
the terms of the private placement note agreements. As of December 29, 2018 the debt issuance costs balance of $0.6 million is
reflected in "Long-Term Debt" in the Consolidated Balance Sheets.
The credit agreement and private placement notes both contain financial and non-financial covenants. The covenants under both
are substantially the same. Non-compliance with covenants under the agreements could prevent the Corporation from being able to
access further borrowings, require immediate repayment of all amounts outstanding, and/or increase the cost of borrowing.
Covenants require maintenance of financial ratios as of the end of any fiscal quarter, including:
•
•
a consolidated interest coverage ratio (as defined in the credit agreement) of not less than 4.0 to 1.0, based upon the ratio
of (a) consolidated EBITDA for the last four fiscal quarters to (b) the sum of consolidated interest charges; and
a consolidated leverage ratio (as defined in the credit agreement) of not greater than 3.5 to 1.0, based upon the ratio of (a)
the quarter-end consolidated funded indebtedness to (b) consolidated EBITDA for the last four fiscal quarters.
59
The most restrictive of the financial covenants is the consolidated leverage ratio requirement of 3.5 to 1.0. Under the credit agreement,
consolidated EBITDA is defined as consolidated net income before interest expense, income taxes, and depreciation and amortization
of intangibles, as well as non-cash items that increase or decrease net income. As of December 29, 2018, the Corporation was below
the maximum allowable ratio and was in compliance with all of the covenants and other restrictions in the credit agreement. The
Corporation expects to remain in compliance with all of the covenants and other restrictions in the credit agreement over the next
twelve months.
Note 9. Income Taxes
Significant components of the provision for income taxes, including those related to non-controlling interest, are as follows (in
thousands):
Current:
Federal
State
Foreign
Current provision
Deferred:
Federal
State
Foreign
Deferred provision
Total income tax expense
2018
2017
2016
$
15,663
$
9,501
$
18,963
4,877
936
21,476
4,002
1,320
(1,399)
3,923
$
25,399
$
3,408
789
13,698
(35,914)
2,552
378
(32,984)
(19,286) $
3,740
1,450
24,153
18,167
2,533
(1,580)
19,120
43,273
The differences between the actual tax expense and tax expense computed at the statutory U.S. federal tax rate are explained as
follows (in thousands):
Federal statutory tax expense
State taxes, net of federal tax effect
Credit for increasing research activities
Deduction related to domestic production activities
Valuation allowance
Federal rate adjustment to deferred taxes
Equity based compensation
Change in uncertain tax positions
Foreign income tax rate differential
Other – net
Total income tax expense
2018
2017
$
24,943
$
24,678
$
3,997
(3,950)
—
(1,141)
—
(666)
766
124
1,326
$
25,399
$
2,197
(3,407)
(1,537)
4,232
(45,386)
(1,544)
(163)
2,094
(450)
(19,286) $
2016
45,098
3,874
(3,808)
(2,243)
231
—
—
117
845
(841)
43,273
On December 22, 2017, the Act was signed into law, making significant changes to the Internal Revenue Code. Changes include,
but are not limited to, a corporate tax rate decrease from 35 percent to 21 percent effective for tax years beginning after December
31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition
tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017.
Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of U.S. GAAP in the reporting period that
includes December 22, 2017 in situations when a registrant does not have the necessary information available, prepared, or analyzed
(including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. In accordance
with SAB 118, the Corporation determined as of the end of fiscal 2017, the $45.4 million of the deferred tax benefit recorded in
connection with the remeasurement of certain deferred tax assets and liabilities and the $0.1 million of current tax expense recorded
in connection with the transition tax on the mandatory deemed repatriation of foreign earnings was a provisional amount and a
60
reasonable estimate as of December 30, 2017. Additional work was necessary to complete a more detailed analysis of historical
foreign earnings as well as potential correlative adjustments. Subsequent adjustments to these amounts, which were not material,
were recorded to current tax expense in the third quarter of 2018 when the analysis was completed.
During the third quarter of 2018, the 2017 federal income tax return was completed resulting in a $0.5 million detriment related to
the reversal of net deferred tax liabilities based on the rates at which they are expected to reverse in the future as a result of tax reform
rate changes. The Corporation finalized its calculation of the full impact of the Act on its 2017 federal income tax return during the
third quarter of 2018.
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):
2018
2017
Deferred Taxes
Allowance for doubtful accounts
Compensation
Inventory differences
Marketing accrual
Stock-based compensation
Accrued post-retirement benefit obligations
Vacation accrual
Warranty accrual
Net operating loss carryforward
Charitable contributions carryforward
Other – net
Total deferred tax assets
Deferred income
Goodwill and other intangible assets
Prepaids
Tax over book depreciation
Total deferred tax liabilities
Valuation allowance
Total net deferred tax liabilities
Long-term net deferred tax assets
Long-term net deferred tax liabilities
Total net deferred tax liabilities
$
897
$
6,419
2,498
1,260
8,456
5,500
2,783
3,761
4,790
712
12,702
$
49,778
(4,707)
(52,468)
(6,536)
(59,500)
(123,211) $
(7,153)
(80,586) $
2,679
5,618
2,541
1,653
8,224
6,896
2,577
3,737
6,534
2,839
6,372
49,670
(4,330)
(53,255)
(5,862)
(54,227)
(117,674)
(8,664)
(76,668)
1,569
(82,155)
(80,586) $
193
(76,861)
(76,668)
$
$
$
$
The valuation allowance for deferred tax assets is as follows (in thousands):
Year ended December 29, 2018
Year ended December 30, 2017
Year ended December 31, 2016
Balance at
beginning of
period
Charged to
expenses
Adjustments
to balance
sheet
Balance at
end of period
$
$
$
8,664
4,159
(839)
4,505
3,978
$
231
$
(672) $
— $
(50) $
7,153
8,664
4,159
The current year decrease in the valuation allowance of $1.5 million primarily relates to a partial release of valuation allowances
related to a foreign net operating loss utilization, an increase of other foreign tax net operating loss and a partial release of a previously
61
recorded domestic deferred tax asset recorded that would give rise to a capital loss. The adjustment to the balance sheet relates to
a change in foreign tax rate on certain foreign deferred tax assets.
As of December 29, 2018, the Corporation had approximately $0.5 million of U.S. state tax net operating losses and $2.2 million of
U.S. state tax credits, which expire over the next twenty years.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
Balance at beginning of period
Increases in positions taken in a prior period
Decreases in positions taken in a prior period
New positions taken in a current period
Decrease due to settlements
Decrease due to lapse of statute of limitations
Balance at end of period
2018
$
2,524
$
262
—
529
(9)
(369)
2,937
$
2017
3,043
—
(45)
569
(363)
(680)
$
2,524
The amount of unrecognized tax benefits, which would impact the Corporation's effective tax rate, if recognized, was $2.9 million
as of December 29, 2018 and $2.5 million as of December 30, 2017.
As of December 29, 2018, it is reasonably possible the amount of unrecognized tax benefits may increase or decrease within the
twelve months following the reporting date. These increases or decreases in the unrecognized tax benefits would be due to new
positions that may be taken on income tax returns, settlement of tax positions, and the closing of statutes of limitation. It is not
expected any of the changes will be material individually, or in total, to the results or financial position of the Corporation.
The Corporation recognized interest accrued related to unrecognized tax benefits in interest expense and penalties in operating
expenses consistent with the recognition of these items in prior reporting periods. Interest, penalties, and benefits recognized in the
Consolidated Statements of Comprehensive Income were as follows (in thousands):
Interest, penalties, and (benefits)
December 29,
2018
December 30,
2017
December 31,
2016
$
92
$
(25) $
70
The Corporation recorded a liability for interest and penalties related to unrecognized tax benefits in the Consolidated Statements
of Comprehensive Income as follows (in thousands):
Liability related to unrecognized tax benefits
December 29,
2018
December 30,
2017
$
275
$
183
Tax years 2015 through 2017 remain open for examination by the Internal Revenue Service ("IRS"). The Corporation is currently
under examination in various state jurisdictions, of which years 2014 through 2017 remain open to examination.
Deferred income taxes are provided to reflect differences between the tax basis of assets and liabilities and their reported amounts
in the financial statements. Under the Act, a corporation’s foreign earnings accumulated under legacy tax laws are deemed repatriated.
The tax on those deemed repatriated earnings is no longer indefinitely deferred but may be paid over eight years. This is a one-time
transition tax. There were approximately $34.5 million of accumulated earnings considered permanently reinvested in China, Hong
Kong, Singapore, and Canada as of December 29, 2018. The Corporation believes the tax costs on accumulated unremitted foreign
earnings would be approximately $0.02 million if the amounts were not considered permanently reinvested.
62
Note 10. Fair Value Measurements of Financial Instruments
For recognition purposes, on a recurring basis, the Corporation is required to measure at fair value its marketable securities, derivative
financial instruments, variable-rate and fixed-rate debt obligations, and deferred stock-based compensation. The marketable
securities are comprised of money market funds, government securities, and corporate bonds. When available, the Corporation uses
quoted market prices to determine fair value and classifies such measurements within Level 1. Where market prices are not available,
the Corporation makes use of observable market-based inputs (prices or quotes from published exchanges and indexes) to calculate
fair value using the market approach, in which case the measurements are classified within Level 2.
Financial instruments measured at fair value were as follows (in thousands):
Balance as of December 29, 2018
Cash and cash equivalents (including money market
funds) (1)
Government securities (2)
Corporate bonds (2)
Derivative financial instruments (3)
Variable-rate debt obligations (4)
Fixed-rate debt obligations (4)
Deferred stock-based compensation (5)
Balance as of December 30, 2017
Cash and cash equivalents (including money market
funds) (1)
Government securities (2)
Corporate bonds (2)
Derivative financial instruments (3)
Variable-rate debt obligations (4)
Deferred stock-based compensation (5)
Fair value as of
measurement
date
Quoted prices
in active
markets for
identical assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
$
$
$
$
$
$
$
$
$
$
$
$
$
76,819
7,384
4,620
3,797
150,000
100,000
7,857
23,348
6,345
6,149
3,354
267,500
8,885
$
$
$
$
$
$
$
$
$
$
$
$
$
76,819
$
— $
— $
— $
— $
— $
— $
— $
7,384
4,620
3,797
150,000
100,000
7,857
$
$
$
$
$
$
23,348
$
— $
— $
— $
— $
— $
— $
6,345
6,149
3,354
267,500
8,885
$
$
$
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
The index below indicates the line item in the Consolidated Balance Sheets where the financial instruments are reported:
(1) "Cash and cash equivalents"
(2) Current portion - "Short-term investments"; Long-term portion - "Other Assets"
(3) Current portion - "Prepaid expenses and other current assets"; Long-term portion - "Other Assets"
(4) Current portion - "Current maturities of long-term debt"; Long-term portion - "Long-Term Debt"
(5) Current portion - "Current maturities of other long-term obligations"; Long-term portion - "Other Long-Term Liabilities"
63
Note 11. Accumulated Other Comprehensive Income (Loss) and Shareholders’ Equity
The following table summarizes the components of accumulated other comprehensive income (loss) and the changes in accumulated
other comprehensive income (loss), net of tax, as applicable (in thousands):
Balance as of January 2, 2016
Other comprehensive income (loss) before
reclassifications
Tax (expense) or benefit
Amounts reclassified from accumulated other
comprehensive income (loss), net of tax
Foreign
Currency
Translation
Adjustment
$
322
(1,510)
—
—
Balance as of December 31, 2016
$
(1,188) $
Other comprehensive income (loss) before
reclassifications
Tax (expense) or benefit
Amounts reclassified from accumulated other
comprehensive income (loss), net of tax
Balance as of December 30, 2017
$
Other comprehensive income (loss) before
reclassifications
Tax (expense) or benefit
Amounts reclassified from accumulated other
comprehensive income (loss), net of tax
1,219
—
—
31
$
(3,004)
—
—
Balance as of December 29, 2018
$
(2,973) $
Amounts in parentheses indicate reductions to equity.
Unrealized
Gains
(Losses) on
Marketable
Securities
$
Pension and
Post-retirement
Liabilities
Derivative
Financial
Instruments
Accumulated
Other
Comprehensive
Income (Loss)
(2) $
(5,506) $
— $
(5,186)
(158)
55
—
(105) $
(6)
(21)
499
(160)
1,317
(485)
—
(5,167) $
628
1,460
$
(733)
270
—
(132) $
—
(5,630) $
(31)
7
3,531
(830)
—
(156) $
—
(2,929) $
(799)
2,459
$
714
(263)
209
2,120
$
1,488
(350)
148
(590)
628
(5,000)
1,194
(14)
209
(3,611)
1,984
(1,173)
(799)
(3,599)
Interest Rate Swap
In March 2016, the Corporation entered in to an interest rate swap transaction to hedge $150 million of outstanding variable rate
revolver borrowings against future interest rate volatility. Under the terms of the interest rate swap, the Corporation pays a fixed
rate of 1.29 percent and receives one month LIBOR on a $150 million notational value expiring January 2021. As of December 29,
2018, the fair value of the Corporation's interest rate swap was an asset of $3.8 million, which is reflected in "Other Assets" in the
Consolidated Balance Sheets. The unrecognized change in value of the interest rate swap is reported net of tax as $2.5 million in
"Accumulated other comprehensive income (loss)" in the Consolidated Balance Sheets.
The following table details the reclassifications from accumulated other comprehensive income (loss) (in thousands):
Details about Accumulated Other
Comprehensive Income (Loss)
Components
Derivative financial instruments
Interest rate swap
Affected Line Item in the Statement
Where Net Income is Presented
2018
2017
2016
Interest (expense) or income
Tax (expense) or benefit
Net of tax
$
$
1,045
(246)
799
$
$
(330) $
121
(209) $
(993)
365
(628)
Amounts in parentheses indicate reductions to profit.
In May 2017, the Corporation registered 300,000 shares of its common stock under its 2017 Equity Plan for Non-Employee Directors
of HNI Corporation (the "2017 Director Plan"). The 2017 Director Plan replaced the 2007 Equity Plan for Non-Employee Directors
of HNI Corporation (the "2007 Director Plan" and together with the 2017 Director Plan, the "Director Plans"). After approval of
the 2017 Director Plan, no awards were granted under the 2007 Director Plan. The 2017 Director Plan permits the Corporation to
issue to its non-employee directors options to purchase shares of Corporation common stock, restricted stock or restricted stock units
of the Corporation, and awards of Corporation common stock. The 2017 Director 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.
64
Common stock was issued under the Director Plans as follows:
Director Plan issued shares of common stock
2018
27,745
2017
27,196
2016
24,352
Dividend
Cash dividends declared and paid per share for each year were as follows (in dollars):
Common shares
2018
1.17
$
2017
1.13
$
2016
1.09
$
During 2017, shareholders approved the HNI Corporation Members' Stock Purchase Plan (the "2017 MSPP") to replace the expired
2007 Members' Stock Purchase Plan (the "2007 MSPP" and together with the 2017 MSPP, the "MSPPs"). Under the 2017 MSPP,
800,000 shares of common stock were registered for issuance to participating members. After approval of the 2017 MSPP, no awards
were granted under the 2007 MSPP. Under the 2017 MSPP, rights to purchase stock are granted on a quarterly basis to all participating
members who customarily work 20 hours or more per week and for five months or more in any calendar year. The price of the stock
purchased under the MSPP is 85 percent of the closing price on the exercise date. No member may purchase stock under the MSPP
in an amount which exceeds a maximum fair value of $25,000 in any calendar year. The following table provides the details of stock
under the MSPPs:
Shares of common stock issued
Average price per share
2018
74,020
2017
74,694
$
32.19
$
35.22
$
2016
75,098
37.77
An additional 673,013 shares were available for issuance under the 2017 MSPP as of December 29, 2018.
The Corporation has entered into change in control employment agreements with certain officers. According to the agreements, a
change in control occurs when a third person or entity becomes the beneficial owner of 20 percent or more of the Corporation’s
common stock, when more than one-third of the Board is composed of persons not recommended by at least three-fourths of the
incumbent Board, upon certain business combinations involving the Corporation, or upon approval by the Corporation’s shareholders
of a complete liquidation or dissolution. Upon a change in control, a key member is deemed to have a two-year employment agreement
with the Corporation, and all of his or her benefits vest under the Corporation’s compensation plans. If, at any time within two years
of the change in control, his or her employment is terminated by the Corporation for any reason other than cause or disability, or by
the key member for good reason, as such terms are defined in the agreement, then the key member is entitled to receive, among other
benefits, a severance payment equal to two times (three times for the Corporation’s President and CEO) annual salary and the average
of the prior two years’ bonuses.
Stock Repurchase
The par value method of accounting is used for common stock repurchases. The following table summarizes shares repurchased
and settled by the Corporation (in thousands, except share and per share data):
Shares repurchased
Average price per share
Cash purchase price
Purchases unsettled as of quarter end
Prior year purchases settled in current year
Shares repurchased per cash flow
2018
2017
2016
755,221
1,462,936
1,082,938
38.96
$
40.25
51.55
(29,424) $
354
(1,382)
(30,452) $
(58,887) $
1,382
—
(57,505) $
(55,825)
—
—
(55,825)
$
$
$
As of December 29, 2018, approximately $48.6 million of the Corporation's Board of Directors' current repurchase authorization
remained unspent.
65
Note 12. Stock-Based Compensation
Under the Corporation’s 2017 Stock-Based Compensation Plan (the "Plan"), effective May 9, 2017, 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. Upon shareholder approval of the Plan in May 2017, no future awards were granted under the Corporation’s 2007 Stock-
Based Compensation Plan, but all outstanding awards previously granted under that plan shall remain outstanding in accordance
with their terms. As of December 29, 2018, there were approximately 2.6 million shares available for future issuance under the
Plan. The Plan is administered by the Human Resources and Compensation Committee of the Board. Restricted stock units awarded
under the Plan are expensed ratably over the vesting period of the awards. Stock options awarded to members 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 Corporation measures stock-based compensation expense at grant date, based on the fair value of the award, and recognizes
expense over the employees' requisite service periods. Stock-based compensation expense is the cost of stock options and time-
based restricted stock units issued under the shareholder approved stock-based compensation plans and shares issued under the
shareholder approved member stock purchase plans.
Compensation cost charged against operations for the Plan and the 2017 MSPP described in "Note 11. Accumulated Other
Comprehensive Income (Loss) and Shareholders' Equity" in the Notes to Consolidated Financial Statements was as follows (in
thousands):
Compensation cost
December 29,
2018
December 30,
2017
December 31,
2016
$
7,317
$
7,750
$
8,141
The total income tax benefit recognized in the income statement for share-based compensation arrangements was as follows (in
thousands):
Income tax benefit
December 29,
2018
December 30,
2017
December 31,
2016
$
1,582
$
2,581
$
2,809
The stock-based compensation expense for the following year-end dates were estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions by grant year:
Expected term
Expected volatility (weighted-average)
Expected dividend yield (weighted-average)
Risk-free interest rate (weighted-average)
December 29,
2018
December 30,
2017
December 31,
2016
5 years
34.12%
2.97%
2.66%
6 years
38.07%
2.36%
2.17%
6 years
38.96%
3.30%
1.41%
Expected volatilities were based on historical volatility as the Corporation does not feel that future volatility over the expected term
of the options is likely to differ from the past. The Corporation used a calculation method based on the historical daily frequency
for a period of time equal to the expected term. The Corporation used the current dividend yield as there are no plans to substantially
increase or decrease its dividends. The Corporation used historical exercise experience to determine the expected term. The risk-
free interest rate was selected based on yields from treasury securities as published by the Federal Reserve equal to the expected
term of the options.
66
The following table summarizes the changes in outstanding stock options:
Outstanding as of January 2, 2016
Granted
Exercised
Forfeited or Expired
Outstanding as of December 31, 2016
Granted
Exercised
Forfeited or Expired
Outstanding as of December 30, 2017
Granted
Exercised
Forfeited or Expired
Outstanding as of December 29, 2018
Number of
Shares
3,358,323
877,277
(609,663)
(121,602)
3,504,335
537,795
(446,817)
(33,029)
3,562,284
788,301
(647,759)
(75,821)
3,627,005
Weighted
Average
Exercise Price
32.09
$
32.18
30.52
52.24
31.68
46.61
25.55
40.81
34.63
38.53
26.28
38.36
36.89
$
$
$
A summary of the Corporation’s non-vested stock options and changes during the year are presented below:
Non-vested as of December 30, 2017
Granted
Vested
Forfeited
Non-vested as of December 29, 2018
Number of
Shares
1,935,838
$
788,301
(646,900)
(75,821)
2,001,418
$
Weighted
Average
Grant-Date
Fair Value
12.05
9.72
11.14
11.19
11.46
As of December 29, 2018, there was $3.8 million of unrecognized compensation cost related to non-vested stock option awards,
which the Corporation expects to recognize over a weighted-average period of 1.1 years. Information about stock options expected
to vest or currently exercisable is as follows:
Expected to vest
Exercisable
December 29, 2018
Number of
Shares
Weighted-
Average
Exercise Price
1,864,724
1,625,587
$
$
39.92
33.21
Weighted-
Average
Remaining
Exercisable
Period
(years)
Aggregate
Intrinsic
Value
($000s)
8.0
4.4
$
$
1,779
5,893
67
Other information for the last three years is as follows (in thousands):
Total fair value of shares vested
Total intrinsic value of options exercised
Cash received from exercise of stock options
Tax benefit realized from exercise of stock options
Weighted-average grant-date fair value of options granted
December 29,
2018
December 30,
2017
December 31,
2016
$
$
$
$
$
7,204
8,917
17,021
1,928
9.72
$
$
$
$
$
8,057
7,270
11,418
2,423
14.41
$
$
$
$
$
7,206
11,985
18,609
4,142
8.80
The Corporation has occasionally issued restricted stock units ("RSUs") to executives, managers, and key personnel. The RSUs vest
at the end of three years after the grant date. No dividends are accrued on the RSUs. The share-based compensation expense
associated with the RSUs is based on the quoted market price of HNI Corporation shares on the date of grant less the discounted
present value of dividends not received on the shares and is amortized using the straight-line method from the grant date through
the vesting date.
The following table summarizes the changes in outstanding RSUs:
Outstanding as of January 2, 2016
Granted
Vested
Forfeited
Outstanding as of December 31, 2016
Granted
Vested
Forfeited
Outstanding as of December 30, 2017
Granted
Vested
Forfeited
Outstanding as of December 29, 2018
Number of
Shares
38,500
$
25,000
—
(3,000)
60,500
—
(18,500)
(5,000)
37,000
23,224
(12,000)
(2,500)
45,724
$
$
$
Weighted-
Average
Grant Date
Fair Value
43.77
32.06
—
51.54
38.54
—
35.36
51.54
38.38
40.44
51.54
28.90
36.49
As of December 29, 2018, there was $0.8 million of unrecognized compensation cost related to RSUs, which the Corporation expects
to recognize over a weighted-average period of 1.0 year. The total value of shares vested was as follows (in thousands):
Value of shares vested
2018
618
$
2017
654
$
2016
—
$
The following table details deferred compensation, which is a combination of cash and stock, and the affected line item in the
Consolidated Balance Sheets where deferred compensation is presented (in thousands):
Current maturities of other long-term obligations
Other long-term liabilities
Total deferred compensation
Total fair-market value of deferred compensation
68
December 29,
2018
December 30,
2017
$
$
$
2,356
8,729
11,085
7,857
$
$
$
719
11,581
12,300
8,885
Note 13. Retirement Benefits
The Corporation has a defined contribution retirement plan covering substantially all employees.
The Corporation's annual contribution to the plan is based on employee eligible earnings. A portion of the contribution is also based
on results of operations, and a portion is contributed in the form of common stock of the Corporation. The following table reconciles
the annual contribution (in thousands):
Stock contribution
Cash contribution
Total annual contribution
Note 14. Post-Retirement Health Care
2018
7,174
21,413
28,587
$
$
2017
7,327
23,834
31,161
$
$
2016
7,170
25,349
32,519
$
$
The Corporation offers a fixed subsidy to certain retirees who choose to participate in a third party insurance plan selected by the
Corporation. Guidance on employers’ accounting for other post-retirement plans requires recognition of the overfunded or
underfunded status on the balance sheet. Under this guidance, gains and losses, prior service costs and credits, and any remaining
transition amounts under previous guidance not yet recognized through net periodic benefit cost are recognized in accumulated other
comprehensive income (loss), net of tax effects, until they are amortized as a component of net periodic benefit cost. Also, the
measurement date – the date at which the benefit obligation and plan assets are measured – is required to be the Corporation’s fiscal
year-end.
69
The following table sets forth the activity and reporting location of the benefit obligation and plan assets (in thousands):
Change in benefit obligation
Benefit obligation at beginning of year
Service cost
Interest cost
Benefits paid
Actuarial (gain) loss
Benefit obligation at end of year
Change in plan assets
Fair value at beginning of year
Actual return on assets
Employer contribution
Transferred out
Benefits paid
Fair value at end of year
Funded Status of Plan
Amounts recognized in the Statement of Financial Position consist of:
Current liabilities
Non-current liabilities
Amounts recognized in Accumulated Other Comprehensive Income (before tax) consist
of:
Actuarial (gain) loss
Change in Accumulated Other Comprehensive Income (before tax):
Amount disclosed at beginning of year
Actuarial (gain) loss
Amortization of transition amount
Amount disclosed at end of year
Estimated future benefit payments are as follows (in thousands):
Fiscal 2019
Fiscal 2020
Fiscal 2021
Fiscal 2022
Fiscal 2023
Fiscal 2024 – 2028
Expected contributions are as follows (in thousands):
Fiscal 2019
70
2018
2017
$
22,933
$
21,153
$
$
$
$
$
$
$
$
$
853
789
(1,570)
(3,453)
19,552
$
— $
—
1,570
—
(1,570)
— $
(19,552) $
741
825
(1,003)
1,217
22,933
—
—
1,003
—
(1,003)
—
(22,933)
1,057
18,495
$
$
1,050
21,883
(14) $
3,565
$
3,565
(3,453)
(126)
(14) $
$
$
$
$
$
$
2,373
1,217
(25)
3,565
1,056
1,053
1,051
1,065
1,085
5,885
$
1,056
The discount rate is set at the measurement date to reflect the yield of a portfolio of high quality, fixed income debt instruments. The
discount rate used was as follows:
Discount rate
2018
4.2%
2017
3.5%
2016
4.0%
The Corporation's payment for these benefits is a fixed subsidy per the plan; therefore, healthcare trend rates have no impact on the
Corporation’s cost. There were no funds designated as plan assets. A discount rate of 4.2 percent was used to determine net periodic
benefit costs for 2019. The following table sets forth the components of net periodic benefit costs (in thousands):
Service cost
Interest cost
Amortization of net (gain) loss
Net periodic post-retirement benefit cost
Note 15. Leases
2019
680
795
—
1,475
$
$
The Corporation leases certain showrooms, office space, warehouse and plant facilities and equipment. Commitments for minimum
rentals under non-cancelable leases are as follows (in thousands):
2019
2020
2021
2022
2023
Thereafter
Total minimum lease payments
Operating
Leases
$
$
24,387
18,250
13,324
9,082
6,228
10,469
81,740
There are no capitalized leases as of December 29, 2018 and December 30, 2017.
Rent expense was as follows (in thousands):
Rent expense
2018
2017
$
31,027
$
32,158
$
2016
35,288
There was no contingent rent expense under operating leases for the years 2018, 2017, and 2016.
As part of the Corporation's continued efforts to drive efficiency and simplification, the Corporation entered into a sale-leaseback
transaction in the first quarter of 2018, selling a manufacturing facility and subsequently leasing back a portion of the facility for a
term of 10 years. The net proceeds from the sale of the facility of $16.9 million are reflected in "Proceeds from sale and license of
property, plant, equipment, and intangibles" in the Consolidated Statements of Cash Flows. In accordance with ASC 840, Leases,
the $5.1 million gain on the sale of the facility was deferred and is being amortized as a reduction to rent expense evenly over the
term of the lease. As of December 29, 2018, the current portion of the deferred gain is $0.5 million and included within "Accounts
payable and accrued expenses" and the long-term portion of the deferred gain is $4.2 million and included within "Other Long-Term
Liabilities" in the Consolidated Balance Sheets. The transaction did not have a material impact to the Consolidated Statements of
Comprehensive Income.
Note 16. Guarantees, Commitments, and Contingencies
The Corporation utilizes letters of credit and surety bonds in the amount of $24 million to back certain insurance policies and payment
obligations. The Corporation utilizes trade letters of credit and banker's acceptances in the amount of $2 million to guarantee certain
71
payments to overseas suppliers. The letters of credit, bonds, and banker's acceptances reflect fair value as a condition of their
underlying purpose and are subject to competitively determined fees.
The Corporation initiated litigation in Iowa on August 15, 2017 against the purchasers of Artcobell for amounts owed in connection
with the sale of Artcobell. Artcobell initiated litigation against the Corporation in Texas on June 14, 2017 regarding a dispute arising
after the sale of Artcobell. On October 9, 2018, the Corporation resolved all claims related to the disputes. The Corporation is not
required to make any payments and recorded an immaterial recovery in the fourth quarter of 2018.
The Corporation has contingent liabilities which have arisen in the ordinary course of its business, including liabilities relating to
pending litigation, environmental remediation, taxes, and other claims. It is the Corporation's opinion, after consultation with legal
counsel, that liabilities, if any, resulting from these matters are not expected to have a material adverse effect on the Corporation's
financial condition, cash flows, or on the Corporation's quarterly or annual operating results when resolved in a future period.
Note 17. Reportable Segment Information
Management views the Corporation as being in two reportable segments based on industries: office furniture and hearth products,
with the former being the principal segment.
The aggregated office furniture segment manufactures and markets a broad line of 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 gas, electric, wood, and biomass burning
fireplaces, inserts, stoves, facings, and accessories, principally for the home.
For purposes of segment reporting, intercompany sales between segments are not material, and operating profit is income before
income taxes exclusive of certain unallocated corporate expenses. These unallocated general corporate expenses include the net
costs of the Corporation’s corporate operations. Management views interest income and expense as corporate financing costs and
not as a reportable 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, long-term investments, IT infrastructure, 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.
72
Reportable segment data reconciled to the Corporation's consolidated financial statements was as follows (in thousands):
Net Sales:
Office furniture
Hearth products
Total
Income Before Income Taxes:
Office furniture (a)
Hearth products (b)
General corporate
Operating income
Interest expense, net
Total
Depreciation and Amortization Expense:
Office furniture
Hearth products
General corporate
Total
Capital Expenditures (including capitalized software):
Office furniture
Hearth products
General corporate
Total
Identifiable Assets:
Office furniture
Hearth products
General corporate
Total
$
$
$
$
$
$
$
$
$
2018
2017
2016
1,706,092
551,803
2,257,895
$
$
1,660,723
515,159
2,175,882
$
$
1,703,885
499,604
2,203,489
79,323
$
50,176
$
117,397
91,367
(42,517)
128,173
9,448
83,649
(57,135)
76,690
6,078
69,960
(53,665)
133,692
4,781
118,725
$
70,612
$
128,911
44,303
$
48,435
$
8,171
22,314
10,109
14,328
74,788
$
72,872
$
47,860
$
79,458
$
8,854
6,982
17,356
30,577
45,088
12,486
11,373
68,947
65,944
11,217
42,423
63,696
$
127,391
$
119,584
797,574
$
821,767
$
352,060
252,210
347,189
222,594
749,145
340,494
240,595
$
1,401,844
$
1,391,550
$
1,330,234
(a) Included in operating profit for the office furniture segment are pretax charges of $16.4 million, $32.5 million, and $10.9
million, for closing of facilities and impairment charges in 2018, 2017, and 2016, respectively.
(b) Included in operating profit for the hearth products segment are pretax charges of $1.2 million and $4.9 million for closing
facilities in 2018 and 2017, and $5.5 million related to exiting a line of business in 2016.
The Corporation's net sales by product category were as follows (in thousands):
Systems and storage
Seating
Other
Hearth products
2018
2017
2016
$
1,015,900
$
1,069,518
$
1,072,518
598,722
91,470
551,803
536,501
54,704
515,159
539,839
91,528
499,604
$
2,257,895
$
2,175,882
$
2,203,489
73
Summary of Quarterly Results of Operations (Unaudited)
In the opinion of the Corporation’s management, the following 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 state fairly the financial results set forth herein. Results of operations for any previous quarter are not necessarily
indicative of results for any future period.
The following tables present certain unaudited quarterly financial information for each of the past 8 quarters (in thousands, except
per share data):
Net sales
Cost of sales
Gross profit
Selling and administrative expenses
(Gain) loss on sale, disposal, and license of assets
Restructuring and impairment charges
Operating income (loss)
Interest income
Interest expense
Income (loss) before income taxes
Income tax expense (benefit)
Net income
Less: Net income (loss) attributable to non-controlling
interest
Net income attributable to HNI Corporation
Average number of common shares outstanding - basic
Net income attributable to HNI Corporation per common
share – basic
Average number of common shares outstanding - diluted
Net income attributable to HNI Corporation per common
share – diluted
As a Percentage of Net Sales:
Net sales
Gross profit
Selling and administrative expenses
(Gain) loss on sale, disposal, and license of assets
Restructuring and impairment charges
Operating income (loss)
Income tax expense (benefit)
Net income attributable to HNI Corporation
2018
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
505,069
$
543,614
$
611,120
$
598,092
328,150
176,919
171,895
—
1,338
3,686
113
2,337
1,462
(999)
2,461
(49)
2,510
43,359,971
0.06
44,134,142
0.06
$
$
$
$
$
$
342,744
200,870
172,973
—
837
27,060
89
2,718
24,431
5,835
18,596
(1)
18,597
377,789
233,331
179,577
—
128
53,626
80
2,602
51,104
11,197
39,907
—
374,174
223,918
166,695
—
13,422
43,801
297
2,370
41,728
9,366
32,362
(1)
$
39,907
$
32,363
43,665,411
43,822,757
43,707,873
0.43
44,289,662
0.42
$
$
0.91
44,678,824
0.89
$
$
0.74
44,310,574
0.73
100.0%
100.0%
100.0%
100.0%
35.0
34.0
—
0.3
0.7
(0.2)
0.5
37.0
31.8
—
0.2
5.0
1.1
3.4
38.2
29.4
—
—
8.8
1.8
6.5
37.4
27.9
—
2.2
7.3
1.6
5.4
74
Net sales
Cost of sales
Gross profit
Selling and administrative expenses
(Gain) loss on sale of assets
Restructuring and impairment charges
Operating income
Interest income
Interest expense
Income before income taxes
Income taxes
Net income
Less: Net income (loss) attributable to non-controlling
interest
Net income attributable to HNI Corporation
Average number of common shares outstanding - basic
Net income attributable to HNI Corporation per common
share – basic
Average number of common shares outstanding - diluted
Net income attributable to HNI Corporation per common
share – diluted
As a Percentage of Net Sales:
Net sales
Gross profit
Selling and administrative expenses
(Gain) loss on sale of assets
Restructuring and impairment charges
Operating income
Income taxes
Net income attributable to HNI Corporation
2017
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
477,667
$
514,485
$
599,455
$
584,275
303,944
173,723
163,666
—
2,123
7,934
71
1,046
6,959
2,178
4,781
(56)
4,837
44,050,040
0.11
45,452,664
0.11
$
$
$
329,733
184,752
162,684
—
419
21,649
325
1,347
20,627
6,771
13,856
8
13,848
44,178,287
0.31
45,305,547
0.31
$
$
$
378,211
221,244
169,547
(6,805)
783
57,719
71
1,835
55,955
18,624
37,331
60
37,271
43,682,805
0.85
44,479,117
0.84
$
$
$
380,006
204,269
175,934
4,856
34,091
(10,612)
(170)
2,147
(12,929)
(46,859)
33,930
91
33,839
43,444,885
0.78
44,153,300
0.77
$
$
$
100.0%
100.0%
100.0%
100.0%
36.4
34.3
—
0.4
1.7
0.5
1.0
35.9
31.6
—
0.1
4.2
1.3
2.7
36.9
28.3
(1.1)
0.1
9.6
3.1
6.2
35.0
30.1
0.8
5.8
(1.8)
(8.0)
5.8
75
250
225
200
175
150
125
100
75
50
25
250
225
200
175
150
125
100
$250
$225
$200
$175
$150
75
$125
50
$100
25
$75
$50
$25
2013
Performance Graph
2014
2015
2016
2017
2018
Comparison of Five-Year Cumulative Return
HNI Corporation
S&P 500
OFIG*
$250
$225
$200
$175
$150
$125
$100
$75
$50
$25
2013
2014
2015
Annual Return
HNI Corporation
S&P 500
OFIG*
2013
$100
$100
$100
2014
$132
$114
$107
2016
2015
$96
$116
$100
2017
2018
2016
$152
$126
$136
2017
$108
$158
$139
2018
$102
$150
$117
*The Office Furniture Industry Group (OFIG) is a composite peer index constructed by the Corporation weighted by market
capitalization and comprised of the following companies: Herman Miller, Inc.; Kimball International, Inc., Knoll, Inc. and
Steelcase Inc. It is weighted at the beginning of each year according to the market capitalization of its constituents on the last
trading day of the Corporation’s prior fiscal year.
Total returns for HNI Corporation, S&P 500 and OFIG are depicted at the end of Corporation’s fiscal years. The total return
assumes $100.00 invested in each of the Corporation’s common stock, the S&P 500 and OFIG stocks at the end of the
Corporation’s 2013 fiscal year, plus further reinvestment of dividends on the date of divident payment. S&P 500 returns assume
S&P 500 dividends are paid and reinvested on the last trading day of each of the Corporation’s fiscal quarters.
The comparative performance of the Corporation’s common stock against the indexes as depicted in this graph is dependent
on the price of stock at a particular measurement point in time. Since individual stocks are more volatile than broader stock
indexes, the perceived comparative performance of the Corporation’s common stock may vary based on the strength or
weakness of the stock price at the new measurement point used in each future performance graph. For this reason, the
Corporation does not believe this graph should be considered as the sole indicator of the Corporation’s performance.
HNI Corporation Officers
and Company Executives
Investor Information
Julie M. Abramowski
Vice President,
Corporate Controller
Vincent P. Berger
Executive Vice President, and
President, Hearth & Home
Technologies
Steven M. Bradford
Senior Vice President,
General Counsel and Secretary
Marshall H. Bridges
Senior Vice President and
Chief Financial Officer
B. Brandon Bullock, III
President, The HON Company
Jack D. Herring
Treasurer, Director of
Finance and Investor
Relations
Jeffrey D. Lorenger
President and
Chief Executive Officer
Donna D. Meade
Vice President,
Member and Community
Relations
Brandon T. Sieben
President, Allsteel
Kurt A. Tjaden
Senior Vice President,
and President,
HNI International
Fiscal 2019
Quarter-End Dates
1st Quarter: March 30
2nd Quarter: June 29
3rd Quarter: September 28
4th Quarter: December 28
Annual Meeting
The Corporation’s annual
shareholders’ meeting will
beheld at 10:30 a.m. on
Tuesday, May 7, 2019, at the
HNI Corporate Headquarters.
Form 10-K Report
Financial information can be
accessed on the Corporation’s
website at www.hnicorp.com.
Corporate Headquarters
and Investor Relations
HNI Corporation
600 East Second Street
Muscatine, IA 52761-0071
Telephone: 563.272.7400
Investor Relations Email:
investorrelations@hnicorp.com
Independent Registered
Public Accounting Firm
KPMG LLP
Suite 5500
200 East Randolph Street
Chicago, IL 60601
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:
EQ Shareowner Services
1110 Centre Point Curve
Suite 101
Mendota Heights, MN 55120
Telephone: 800.468.9716
www.shareowneronline.com
Board of Directors
Jeffrey D. Lorenger
President and
Chief Executive Officer,
HNI Corporation
Mary A. Bell
Retired Vice President,
Building Construction
Products Division,
Caterpillar Inc.
Miguel M. Calado
Chairman and President,
WY Group
Cheryl A. Francis
Co-Chairman, Corporate
Leadership Center
John R. Hartnett
Executive Vice President,
Illinois Tool Works Inc.
Mary K. W. Jones
Senior Vice President and General
Counsel, Deere & Company
Larry B. Porcellato
Chairman, HNI Corporation and
former Chief Executive Officer,
The Homax Group, Inc.
Abbie J. Smith
Chaired Professor,
University of Chicago
Booth School of Business
Brian E. Stern
Director,
Starboard Capital Partners, LLC
and former Senior Vice
President, Xerox Corporation
Ronald V. Waters, III
Former Director, President
and Chief Executive Officer,
LoJack Corporation
HNI Corporation
HNI Corporation
HNI Corporation
600 East Second Street
Muscatine, Iowa 52761
www.hnicorp.com