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Section 1: 10-K (10-K)

Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
FORM 10-K
 
 
x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the fiscal year ended December 30, 2017
 
 
OR
 
 
o   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 x NO o
 
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 o NO x
 
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 x NO o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
YES x NO o
 
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. o
 



 
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 x Accelerated filer o Non-accelerated filer o Smaller reporting company o  Emerging growth company o

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. o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
YES o NO x
 
The aggregate market value of the voting stock held by non-affiliates of the Registrant as of July 1, 2017 was $1,434,431,574 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 2, 2018, was 43,246,359.

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 8, 2018 are incorporated by reference into Part III.



Table of Contents

HNI Corporation and Subsidiaries
Annual Report on Form 10-K
 
Table of Contents
 
 
 
PART I
 
 
Page
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
 
PART II
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
PART III
 
 
 
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
PART IV
 
 
 
Item 15.
Item 16.


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PART I

Item 1.  Business
General

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 2017, the Corporation had net sales of $2.2 billion, of which $1.7 billion or 76 percent was attributable to office furniture products and $0.5 billion or 24 percent was attributable to hearth products.  See "Note 16. 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, China, Hong Kong, India, Taiwan, Mexico, and Dubai.  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") - formerly BP Ergo Limited

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 shorter average 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. Member's 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 4. Acquisitions and Divestitures", and "Note 16. Reportable Segment Information".


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Industry

According to the Business and Institutional Furniture Manufacturer's Association ("BIFMA"), North American 2017 sales of office and institutional furniture grew 2 percent from 2016 levels. North American 2016 sales of office and institutional furniture grew 2 percent from 2015 levels.

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 30, 2017, the Corporation employed approximately 9,600 persons, 9,100 of whom were full-time and 500 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 relocatable architectural walls. 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.


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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® 
basyx® by HON
Lamex® 
HNI India® 

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 StoveTM 
Vermont Castings® 
PelProTM 

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®, and Monessen® are brand leaders in the two largest segments of the home fireplace market: gas and wood fireplaces.  The Corporation is the 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 the market leader in wood and pellet-burning stoves with its Quadra-Fire®, Harman StoveTM, Vermont Castings®, and PelProTM 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.


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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):
 
2017
 
2016
 
2015
Product development investments
$
31,846

 
$
28,089

 
$
31,103


Intellectual Property

As of December 30, 2017, the Corporation owned 181 U.S. and 187 foreign patents with expiration dates through 2040 and had applications pending for 20 U.S. and 59 foreign patents.  In addition, the Corporation holds 169 U.S. and 446 foreign trademark registrations and has applications pending for 28 U.S. and 15 foreign trademarks.

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 and office furniture systems 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.


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The Corporation also makes export sales through HNI Export 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 2017, the Corporation's five largest customers represented approximately 24 percent of its consolidated net sales. No single customer accounted for 10 percent or more of the Corporation’s consolidated net sales in fiscal 2017.  The substantial purchasing power exercised by large customers may adversely affect the prices at which the Corporation can successfully offer its products.

The Corporation has an order backlog, which will be filled in the ordinary course of business. Order backlog in dollars and in terms of percentage of net sales was as follows (in thousands):
 
December 30, 2017
 
December 31, 2016
Net sales
$
2,175,882

 
$
2,203,489

Order backlog
$
202,255

 
$
175,732

Percent of net sales
9.3
%
 
8.0
%

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.

For further discussion of the Corporation's competitive situation, refer to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II of this report.


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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 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 and ensures its commitment to being a sustainable enterprise 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 2018 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 30, 2017, December 31, 2016, and January 2, 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 from the SEC’s Public Reference room at 100 F Street, N.E., Washington, D.C. 20549, or 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,"

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"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 our products; general economic and market conditions in the United States and internationally; industry and competitive conditions; the consolidation and concentration of our customers; our reliance on our network of independent dealers; changes in raw material, component, or commodity pricing; market acceptance and demand for our new products; our ability to successfully execute our business software system implementation; our ability to achieve desired results from closures and structural cost reduction initiatives; our ability to achieve the anticipated benefits from integrating our acquired businesses and alliances; changing legal, regulatory, environmental, and healthcare conditions; the risks associated with international operations; the potential impact of product defects; the various restrictions on our financing activities; an inability to protect our intellectual property; the impact of recent 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 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, our business, operating results, cash flows, or financial condition could be materially adversely affected.

Unfavorable economic and industry factors could adversely affect our 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 recovery in the homebuilding industry and the hearth products market could decrease demand for our hearth products and have additional adverse effects on our operating results. Additionally, the decline in oil and other fuel prices has negatively impacted demand for pellet stoves and we expect demand to remain soft in the pellet business while oil and other fuel prices remain low.

Economic growth remains solid in our key international markets, including China and India. A deterioration of economic conditions in those markets could have adverse effects on our international office furniture sales and operating results.

Deteriorating economic conditions could affect our business significantly, including: reduced demand for products; insolvency of our independent dealers resulting in increased provisions for credit losses; insolvency of our key suppliers resulting in product delays; inability of customers to obtain credit to finance purchases of our products; and decreased customer demand, including order delays or cancellations.


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The office furniture and hearth products industries are highly competitive and, as a result, we may not be successful in winning new business.

Both the office furniture and hearth products industries are highly competitive. Many of our 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 our top competitors have an installed base of products that can be a source of significant future sales through repeat and expansion orders.  Our main competitors manufacture products with strong acceptance in the marketplace and are capable of developing products that have a competitive advantage over our products, which could make it difficult for us to win new business.

In both the office furniture and hearth products industries, we face price competition from our competitors and from new market entrants who primarily manufacture and source products from lower cost countries.  Price competition impacts our ability to implement price increases or, in some cases, even maintain prices, which could lower our profit margins and adversely affect our future financial performance.

Changes in industry dynamics, including demand and order patterns from our customers, distribution changes, or the loss of a significant number of dealers, could adversely affect our business, operating results, or financial condition.

We sell our products through multiple distribution channels, which primarily includes independent dealers, national dealers, and wholesalers.  Within these distribution channels, there has been, and may continue to be, consolidation. We rely on distribution partners to provide a variety of important specification, installation, and after-market services to our customers.  Some of our distribution partners may terminate their relationships with us at any time and for any reason.  We have experienced demand shift to direct fulfillment, reducing two-step distribution that was previously provided by wholesale partners. Our ability to provide increased direct fulfillment and/or the loss or termination of a significant number of reseller relationships could cause difficulties for us in marketing and distributing our products, resulting in a decline in our sales, which may adversely affect our business, operating results, or financial condition.

Our 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 our costs of sales, profitability, and our ability to meet customers' demand.  We source commodities, raw materials, and components from domestic and international suppliers for both our 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 increases or supply interruptions in the future.  Our profit margins could be adversely affected if commodity, raw material, and component costs remain high or escalate further, and we are 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 our customers.

We rely primarily on third-party freight and transportation providers to deliver our products to customers. Increasing demand for freight providers and a shortage of qualified drivers may cause delays in our shipments and increase the cost to ship our products, which may adversely affect our profitability. Additionally, we import and export 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 our 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 our sales and profitability.


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Our efforts to introduce new products to meet customer and workplace demands may not be successful, which could limit our sales growth or cause our sales to decline.

To meet the changing needs of our customers and keep pace with market trends, we regularly introduce 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 factors beyond our control.  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.  We may face difficulties if we cannot successfully align ourselves 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 we originally anticipated, limiting our sales growth or causing our sales to decline.

Our implementation and use of a new business software system, and accompanying transformation of our business processes, could result in problems that could negatively impact our business and results of operations.

We are engaged in a multi-year, broad-based program, which we refer to as business systems transformation ("BST"). The BST initiative includes the introduction of a new software system along with process changes and new ways to work, which simplify and streamline our business processes. In 2016 and 2017, we implemented BST across several of our smaller operating companies. The remaining in-scope domestic office furniture operations switched over to the new system on February 1, 2018. At this early stage of implementation, there can be no assurance issues relating to BST will not occur, including compatibility issues, integration challenges and further delays, and higher than expected implementation costs. While not experienced to date, BST may not function properly or deliver the projected benefits, which could significantly disrupt our business, including our ability to provide quotes, process orders, ship products, invoice customers, process payments, generate management and financial reports, and otherwise run our business.

Our continuing activities to reduce structural costs may result in customer disruption, may distract management from other activities, and may not achieve the desired results.

As part of our commitment to taking structural cost out of our business, we regularly close, reconfigure, or transform manufacturing and distribution facilities. Over the past several years, we have closed a number of facilities in the United States and internationally. We have implemented, and will continue to implement, restructuring actions to transform our business and reduce our manufacturing footprint. These actions may take longer than anticipated, prove costlier than expected, and may distract management from other activities. If we do not fully realize the expected benefits of our restructuring activities, our financial condition and ability to meet customer needs could be negatively affected.

We may not be able to successfully integrate and manage our acquired businesses and alliances.

One of our growth strategies is to supplement our organic growth through acquisitions and strategic alliances. The benefits of acquisitions or alliances may take more time than expected to develop or integrate into our operations. In addition, acquisitions and alliances involve a number of risks, including:

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 our leverage and debt service requirements to pay the acquisition purchase prices, which could in turn restrict our ability to access additional capital when needed or to pursue other important elements of our 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 our financial results.

Our ability to grow through future acquisitions will depend, in part, on the availability of suitable acquisition candidates at an acceptable price, our 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 our business, operating results, or financial condition.


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We may need to take additional impairment charges related to goodwill and indefinite-lived intangible assets, which would adversely affect our 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 our business where we have goodwill or intangible assets, or declines in the market value of our equity, may result in impairment charges, which would adversely affect our results of operations.

We are subject to extensive environmental regulation and have exposure to potential environmental liabilities.

Through our past and present operation and ownership by us of manufacturing facilities and real property, we are 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 our capital expenditures, earnings, or competitive position to date; however, compliance with current laws or more stringent laws or regulations which may be imposed on us in the future, stricter interpretation of existing laws or discoveries of contamination at our real property sites which occurred prior to our ownership, or the advent of environmental regulation may require us to incur additional expenditures in the future, some of which may be material.

Increasing healthcare costs could adversely affect our business, operating results, and financial condition.
 
We provide healthcare benefits to the majority of our members and are self-insured.  Healthcare costs have continued to rise over time, which increases our annual spending on healthcare and could adversely affect our business, operating results, and financial condition.

Our international operations expose us to risks related to conducting business in multiple jurisdictions outside the United States.

We manufacture, market, and sell our products in international markets, including China and India. We plan to continue to grow internationally. We primarily sell our products and report our financial results in U.S. dollars; however, our increased business in countries outside the United States exposes us to fluctuations in foreign currency exchange rates.  Paying our 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 our profits.  In the future, any foreign currency appreciation relative to the U.S. dollar would increase our expenses that are denominated in that currency.  Additionally, as we report currency in the U.S. dollar, our 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 into certain countries. If we are unable to provide financial support to our international operations in a timely manner, our business, operating results, and financial condition could be adversely affected.

We periodically review our foreign currency exposure and evaluate whether we should enter into hedging transactions.

Our international sales and operations are subject to a number of additional risks, including:

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 our 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 our 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.

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Restrictions imposed by the terms of our credit facility may limit our operating and financial flexibility.

Our credit facility and other financing arrangements may limit our ability to finance operations, service debt, or engage in other business activities that may be in our interests.  Specifically, our credit facility may restrict our ability to incur additional indebtedness, create or incur certain liens with respect to any of our properties or assets, engage in lines of business substantially different than those currently conducted by us, sell, lease, license, or dispose of any of our assets, enter into certain transactions with affiliates, make certain restricted payments or take certain restricted actions, and enter into certain sale-leaseback arrangements.  Our credit facility also requires us to maintain certain financial covenants.

Our failure to comply with the obligations under our credit facility may result in an event of default, which, if not cured or waived, may cause accelerated repayment of the indebtedness under the credit facility.  We cannot be certain we will have sufficient funds available to pay any accelerated repayments or we will have the ability to refinance accelerated repayments on terms favorable to us or at all.

Costs related to product defects could adversely affect our profitability.

We incur 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.  We use chemicals and materials in our products and include components in our products from external suppliers, which we believe are safe and appropriate for their designated use; however, harmful effects may become known, which could subject us 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.  We also purchase insurance coverage and maintain a reserve for our self-insured losses based upon estimates and actuarial assumptions, but we cannot be certain insurance would cover all losses related to product claims. Incorrect estimates or any significant increase in the rate of our product defect expenses could have a material adverse effect on operations.

We may require additional capital in the future, which may not be available or may be available only on unfavorable terms.

Our capital requirements depend on many factors, including our need for capital improvements, tooling, new product development, and acquisitions.  To the extent our existing capital is insufficient to meet these requirements and cover any losses, we may need to raise additional funds through financings or curtail our growth and reduce our assets.  Future borrowings or financings may not be available to us under our credit facility or otherwise in an amount sufficient to enable us to pay our debt or meet our liquidity needs.

Any equity or debt financing, if available, could have terms unfavorable to us.  In addition, financings could result in dilution to our shareholders or the securities may have rights, preferences, and privileges senior to those of our common stock.  If our need for capital arises because of significant losses, the occurrence of these losses may make it more difficult for us to raise the necessary capital.

Our 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.

We derive a portion of our revenue from sales to various U.S. federal, state, and local government agencies and departments.  Our 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.  Our 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.

Our 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 with us either for their convenience or if we default by failing to perform under the terms of the applicable contract.  A termination arising out of our default could expose us to liability and impede our 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 we were found to not be a responsible supplier or to have committed fraud or certain criminal offenses, we could be suspended or debarred from all further federal, state, or local government contracting.


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We rely on information technology systems to manage numerous aspects of our business and a disruption or failure of these systems could adversely affect our business.

We rely upon information technology networks and systems to process, transmit, and store electronic information, as well as to manage numerous aspects of our 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 our business operations and strategy. These networks and systems, despite security and precautionary measures, are vulnerable to natural events and malicious activity. Though we attempt to detect and prevent these incidents, we may not be successful.  Any disruption of our information technology networks or systems, or access to or disclosure of information stored in or transmitted by our systems, could result in legal claims and damages and loss of intellectual property or other proprietary information.

Our results of operations and earnings may not meet guidance or expectations.
We provide public guidance on our 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 our other public filings and public statements, and is based necessarily on assumptions we make at the time we provide such guidance. Our guidance may not always be accurate. If, in the future, our results of operations for a particular period do not meet our guidance or the expectations of investment analysts or if we reduce our guidance for future periods, the market price of our common stock could decline significantly.

Iowa law and provisions in our charter documents may have the effect of preventing or hindering a change in control and adversely affecting the market price of our common stock.
Our Articles of Incorporation give our 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 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 our common stock, thereby having a potentially adverse effect on the market price of our common stock.
Our Board of Directors is divided into three classes. Our classified Board, along with other provisions of our Articles of Incorporation and Bylaws and Iowa corporate law, could make it more difficult for a third party to acquire us or remove our directors by means of a proxy contest, even if doing so would be beneficial to our shareholders. Additionally, we 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 our shareholders.
An inability to protect our intellectual property could have a significant impact on our business.
We attempt to protect our 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, our 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, we have limited protections, if any, for our 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 our pending or contemplated applications. In addition, not all of our products are covered by patents or similar intellectual property protections. It is also possible that our patents, copyrights, trademarks, and service marks may be challenged, invalidated, canceled, narrowed, or circumvented.
In the past, certain of our products have been copied and sold by others. We try to enforce our intellectual property rights, but we have to make choices about where and how we pursue enforcement and where we seek and maintain intellectual property protection. In many cases, the cost of enforcing our rights is substantial, and we may determine that the costs of enforcement outweigh the potential benefits.

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If third parties claim that we infringe upon their intellectual property rights, we may incur liabilities and costs and may have to redesign or discontinue an infringing product.
We face the risk of claims that we have infringed upon third parties’ intellectual property rights. Companies operating in our industry routinely seek patent protection for their product designs, and many of our principal competitors have large patent portfolios. Prior to launching major new products in our key markets, we normally evaluate existing intellectual property rights. However, our competitors and suppliers may have filed for patent protection which is not, at the time of our evaluation, a matter of public knowledge. Our 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 us to cease making, licensing, or using products that incorporate the challenged intellectual property; require us to redesign, re-engineer, or re-brand our products or packaging, if feasible; or require us 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 our products. Several of our 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 our 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 our operations and business conditions. Members are an integral part of our 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 our computer system could adversely affect our 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. We maintain insurance to help protect us from costs relating to some of these events, but it may not be sufficient or paid in a timely manner in the event we suffer such an event.

Item 1B.  Unresolved Staff Comments

None.


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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, and Taiwan, which house manufacturing, distribution, and retail operations and offices, totaling an aggregate of approximately 10.0 million square feet.  Of this total, approximately 2.9 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
 
Approximate Square Feet
 
Owned or Leased
 
Description of Use
Cedartown, Georgia
 
550,000
 
Owned
 
Manufacturing office furniture (1)
Dongguan, China
 
1,007,716
 
Owned
 
Manufacturing office furniture (1)
Hickory, North Carolina
 
206,316
 
Owned
 
Manufacturing office furniture
Lake City, Minnesota
 
241,500
 
Owned
 
Manufacturing fireplaces
Mechanicsburg, Pennsylvania
 
400,000
 
Leased
 
Warehousing office furniture
Mt. Pleasant, Iowa
 
288,006
 
Owned
 
Manufacturing fireplaces (1)
Mt. Pleasant, Iowa
 
250,000
 
Owned
 
Manufacturing fireplaces (1)
Muscatine, Iowa
 
272,900
 
Owned
 
Manufacturing office furniture
Muscatine, Iowa
 
578,284
 
Owned
 
Manufacturing office furniture (1)
Muscatine, Iowa
 
810,000
 
Owned
 
Manufacturing office furniture (1)
Muscatine, Iowa
 
237,800
 
Owned
 
Manufacturing office furniture
Nagpur, India
 
355,135
 
Owned
 
Manufacturing office furniture
Wayland, New York
 
716,484
 
Owned
 
Manufacturing office furniture (1)

(1)
Also includes a regional warehouse/distribution center

Other facilities total approximately 3.8 million square feet, of which approximately 2.5 million square feet are leased. Approximately 2.2 million square feet are used for the selling, manufacturing, and distribution of office furniture, approximately 1.4 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.

Item 4. Mine Safety Disclosures

Not applicable.


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Table I

Executive Officers of the Registrant
Name
 
Age
 
Family Relationship
 
Position
 
Position Held Since
 
Other Business Experience During Past Five Years
Julie M. Abramowski
 
42
 
None
 
Vice President, Corporate Controller
 
2015
 
Director, Financial Reporting (2014-2015);
Director, Financial Planning and Analysis, Leveraged Furniture Operations (2013-2014);
Corporate Controller, The HON Company (2007-2013)
Stan A. Askren
 
57
 
None
 
Chairman of the Board
Chief Executive Officer
President
Director
President, The HON Company
 
2004
2004
2003
2003
2017
 
 
Vincent P. Berger
 
45
 
None
 
Executive Vice President, HNI Corporation
President, Hearth & Home Technologies
 
2018

2016
 
Senior Vice President, Sales and Operations, Hearth & Home Technologies (2014-2016);
Senior Vice President, Operations, Hearth & Home Technologies (2011-2014)
Steven M. Bradford
 
60
 
None
 
Senior Vice President, General Counsel and Secretary
 
2015
 
Vice President, General Counsel and Secretary (2008-2015)
Marshall H. Bridges
 
48
 
None
 
Senior Vice President and Chief Financial Officer
 
2018
 
Vice President and Chief Financial Officer (2017-2018);
Vice President, Finance, HNI Contract Furniture Group (2014-2017);
Vice President, Finance, Allsteel Inc. (2010-2014)
Jeffrey D. Lorenger
 
52
 
None
 
President, Office Furniture, HNI Corporation
 
2017

 
Executive Vice President, HNI Corporation (2014-2017);
President, HNI Contract Furniture Group (2014-2017);
President, Allsteel Inc. (2008-2014)
Donna D. Meade
 
52
 
None
 
Vice President, Member and Community Relations
 
2014
 
Vice President, Member and Community Relations, Allsteel Inc. (2009-2014)
Kurt A. Tjaden
 
54
 
None
 
President, HNI International
Senior Vice President, HNI Corporation
 
2017

2015

 
Senior Vice President and Chief Financial Officer (2015-2017);
Vice President and Chief Financial Officer (2008-2015)


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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 2017, the Corporation had 6,220 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.

Information regarding historical sale prices of and dividends paid on the Corporation's common stock is presented in the Investor Information section, which follows the Notes to Consolidated Financial Statements, filed as part of this report and is incorporated herein by reference.

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 57 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 2017:
Period
 
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
10/01/17 - 10/28/17
 

 
$

 

 
$
84,045,144

10/29/17 - 11/25/17
 

 
$

 

 
$
84,045,144

11/26/17 - 12/30/17
 
162,000

 
$
37.26

 
162,000

 
$
78,008,673

Total
 
162,000

 
 
 
162,000

 
 
(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:
Corporation's share purchase program ("Program") announced November 9, 2007, providing share repurchase authorization of $200,000,000 with no specific expiration date, with an increase announced November 7, 2014, providing additional share repurchase authorization of $200,000,000 with no specific expiration date.
No repurchase plans expired or were terminated during the fourth quarter of fiscal 2017, 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.


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Item 6.  Selected Financial Data - Five Year Summary
(In thousands, except share and per share data)
2017
 
2016
 
2015
 
2014
 
2013
Operating Results
 

 
 

 
 

 
 

 
 

Net Sales
$
2,175,882

 
$
2,203,489

 
$
2,304,419

 
$
2,222,695

 
$
2,059,964

Gross Profit as a Percentage of Net Sales
36.0
%
 
37.9
%
 
36.8
%
 
35.3
%
 
34.7
%
Net Income Attributable to HNI Corporation
$
89,795

 
$
85,577

 
$
105,436

 
$
61,471

 
$
63,683

Net Income Attributable to HNI Corporation as a Percentage of Net Sales
4.1
%
 
3.9
%
 
4.6
%
 
2.8
%
 
3.1
%
 
 
 
 
 
 
 
 
 
 
Share and Per Share Data (Basic and Dilutive)
 
 
 
 
 
 
 
 
 
Net Income Attributable to HNI Corporation – basic
$
2.05

 
$
1.93

 
$
2.38

 
$
1.37

 
$
1.41

Net Income Attributable to HNI Corporation – diluted
$
2.00

 
$
1.88

 
$
2.32

 
$
1.35

 
$
1.39

Cash Dividends
$
1.13

 
$
1.09

 
$
1.045

 
$
0.99

 
$
0.96

Average Number of Common Shares Outstanding – basic
43,839,004

 
44,413,941

 
44,285,298

 
44,759,716

 
45,250,665

Average Number of Common Shares Outstanding – diluted
44,839,813

 
45,502,219

 
45,440,653

 
45,578,872

 
45,956,280

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Position
 

 
 

 
 

 
 

 
 

Current Assets
$
488,880

 
$
433,041

 
$
438,370

 
$
455,559

 
$
433,228

Current Liabilities
$
489,703

 
$
463,473

 
$
435,900

 
$
457,333

 
$
411,584

Working Capital
$
(823
)
 
$
(30,432
)
 
$
2,470

 
$
(1,774
)
 
$
21,644

Total Assets
$
1,391,550

 
$
1,330,234

 
$
1,263,925

 
$
1,239,334

 
$
1,134,705

Percent Return on Beginning Assets Employed
5.8
%
 
10.6
%
 
13.2
%
 
9.9
%
 
9.8
%
Long-Term Debt and Capital Lease Obligations
$
240,000

 
$
180,000

 
$
185,000

 
$
197,736

 
$
150,197

Shareholders’ Equity
$
514,068

 
$
500,603

 
$
476,954

 
$
414,587

 
$
436,328

Percent Return on Average Shareholders’ Equity
17.7
%
 
17.5
%
 
23.7
%
 
14.4
%
 
14.9
%

2014 reflects a 53-week year.

Reflects VCG acquisition beginning in Q4 2014, OFM acquisition in Q1 2016, and Artcobell divestiture on December 31, 2016.


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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 the leading manufacturer and marketer of hearth products.  The Corporation utilizes a split and focus, 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.

2017 was a year of transition.  The Corporation dealt with rapid and significant market changes while taking on large-scale transformations of the operational network, fulfillment models, and the business portfolio.  The Corporation believes the investments have positioned the business to drive new levels of productivity and take advantage of improving market demand.  The Corporation’s most significant investment, the Business Systems Transformation ("BST") initiative, is a key enabler for long-term value creation. Final implementation stages of BST began in February 2018.  Other initiatives around operational transformations progressed well and are delivering a more stable network while lowering costs.  The Corporation remains committed to driving long-term profitable growth through productivity improvements and strong financial returns on investments.
 
Net sales for 2017 were $2,176 million, a decrease of 1.3 percent, compared to net sales of $2,203 million in 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. The acquisitions and divestitures of small office furniture companies resulted in a net decrease in sales of $92.2 million compared to 2016.

Net income attributable to the Corporation in 2017 was $89.8 million, an increase of 4.9 percent, compared to net income of $85.6 million in 2016. The increase was primarily driven by the one-time tax benefit of $44.8 million related to new tax legislation, lower incentive based compensation, and the impact of stock price change on deferred compensation. These factors were partially offset by strategic investments, input cost inflation, unfavorable product mix, higher restructuring and transition costs, $20.9 million of goodwill and intangible impairment charges primarily due to the closure of the Paoli office furniture brand, and a $10.3 million valuation allowance of a long-term note receivable.

Results of Operations

The following table presents certain key highlights from the results of operations (in thousands):
 
2017
 
% Change from 2016
 
2016
 
% Change from 2015
 
2015
Net sales
$
2,175,882

 
(1.3
)%
 
$
2,203,489

 
(4.4
)%
 
$
2,304,419

Cost of sales
1,391,894

 
1.7
 %
 
1,368,476

 
(6.1
)%
 
1,457,021

Gross profit
783,988

 
(6.1
)%
 
835,013

 
(1.5
)%
 
847,398

Selling and administrative expenses
671,831

 
0.6
 %
 
667,744

 
(0.7
)%
 
672,125

(Gain) loss on sale, disposal, and license of assets
(1,949
)
 
(108.6
)%
 
22,572

 
(11,675.4
)%
 
(195
)
Restructuring and impairment charges
37,416

 
240.0
 %
 
11,005

 
(6.7
)%
 
11,792

Operating income
76,690

 
(42.6
)%
 
133,692

 
(18.3
)%
 
163,676

Interest expense, net
(6,078
)
 
27.1
 %
 
(4,781
)
 
(26.5
)%
 
(6,506
)
Income before income taxes
70,612

 
(45.2
)%
 
128,911

 
(18.0
)%
 
157,170

Income tax expense (benefit)
(19,286
)
 
(144.6
)%
 
43,273

 
(16.4
)%
 
51,764

Net income (loss) attributable to the non-controlling interest
103

 
68.9
 %
 
61

 
(303.3
)%
 
(30
)
Net income attributable to HNI Corporation
$
89,795

 
4.9
 %
 
$
85,577

 
(18.8
)%
 
$
105,436



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Table of Contents

Net Sales

For 2017, consolidated net sales decreased 1.3 percent or $27.6 million to $2,175.9 million compared to $2,203.5 million in 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. This decrease in office furniture was partially offset by an increase in the North American contract business. The hearth products segment saw an increase in the new construction business due to growth in single family housing and an increase in the retail business due to growth in pellet appliance demand.

For 2016, consolidated net sales decreased 4.4 percent or $100.9 million to $2,203.5 million compared to $2,304.4 million in 2015.  The change was driven by a decrease in sales across both the office furniture and hearth products segments. Office furniture segment sales were down due to strategic portfolio moves and a challenging market environment, partially offset by a $27.2 million positive net impact of acquisitions and divestitures of small office furniture companies. The hearth products segment saw mixed results as solid growth in new construction was more than offset by declines in the retail business due to comparatively low energy prices and unseasonably warm weather.

Gross Profit Margin

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. Gross profit as a percentage of net sales increased 110 basis points in 2016 compared to 2015 primarily driven by strong operational performance, favorable material cost and productivity, and price realization, partially offset by lower volume.

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.

Cost of sales in 2015 included $0.8 million of restructuring costs and $4.7 million of transition costs related to previously announced closures and structural realignments in the office furniture segment and acquisition integration and the decision to exit a small line of business within the hearth products segment. Specific items incurred include accelerated depreciation and production move costs.

Selling and Administrative Expenses

Selling and administrative expenses increased 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 increased in 2016 compared to 2015 due to strategic investments and higher incentive based compensation.

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 6. 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.


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Table of Contents

Restructuring and Impairment Charges

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 as part of selling and administrative expenses due to the previously announced closures of the Paris, Kentucky hearth manufacturing facility and Orleans, Indiana office furniture manufacturing facility.

In 2015, the Corporation recorded $0.5 million of restructuring costs as part of selling and administrative expenses related primarily to previously announced closures.

The Corporation recorded $20.9 million, $5.8 million, and $11.2 million of goodwill and intangible asset impairments in 2017, 2016, and 2015, 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 includes the impact of closing the Paoli office furniture brand. See "Note 6. 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. See "Note 4. Acquisitions and Divestitures" in the Notes to Consolidated Financial Statements for more information.

Operating Income

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.

For 2016, operating income decreased 18.3 percent or $30.0 million to $133.7 million compared to $163.7 million in 2015. The change was primarily driven by the non-cash loss on the sale of Artcobell and lower volume, partially offset by strong operational performance and cost reductions.

Income Taxes

The provision for income taxes reflected an effective tax rate as follows:
 
2017
 
2016
 
2015
Effective tax rate
(27.3
)%
 
33.6
%
 
32.9
%

The decrease in the current year effective tax rate is primarily driven by the enactment of the Tax Cuts and Jobs Act (the "Act"). The effective tax rate of the Corporation without the Act would have been 36.2 percent for the year. The increased rate for the year without the Act is primarily driven by the establishment of valuation allowances on certain deferred tax assets 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. The effective tax rate was higher in 2016 than 2015 primarily due to the one-time release of tax contingency reserves for personal goodwill in 2015. See Recently Adopted Accounting Standards in "Note 2. Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements for further information about ASU No. 2016-09. See "Note 8. 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 $89.8 million or $2.00 per diluted share in 2017 compared to $85.6 million or $1.88 per diluted share in 2016 and $105.4 million or $2.32 per diluted share in 2015.


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Table of Contents

Office Furniture

The following table presents certain key highlights from the results of operations in the office furniture segment (in thousands):
 
2017
 
% Change from 2016
 
2016
 
% Change from 2015
 
2015
Net sales
$
1,660,723

 
(2.5
)%
 
$
1,703,885

 
(4.2
)%
 
$
1,777,804

Operating profit
$
50,176

 
(57.3
)%
 
$
117,397

 
(14.1
)%
 
$
136,593


Net sales in 2017 for the office furniture segment decreased 2.5 percent or $43.2 million to $1,660.7 million compared to $1,703.9 million in 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 was a net decrease in sales of $92.2 million. This decrease was partially offset by an increase in the North American contract business.

Net sales in 2016 for the office furniture segment decreased 4.2 percent or $73.9 million to $1,703.9 million compared to $1,777.8 million in 2015. The Corporation experienced a decline in the contract business while the supplies-driven business remained flat due to strategic portfolio moves and a soft market. This decrease was partially offset by the net impact of acquisitions and divestitures of small office furniture companies, which was a net increase in sales of $27.2 million.

Operating profit as a percentage of net sales was 3.0 percent in 2017, 6.9 percent in 2016, and 7.7 percent in 2015.  The decrease in operating margin for 2017 compared to 2016 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. The decrease in operating margin for 2016 compared to 2015 was primarily driven by lower volume, strategic investments, and the impacts of the sale of Artcobell, previously announced closures, and impairments of goodwill and other intangibles. These factors were partially offset by strong operational performance, favorable material costs and productivity, and cost reductions.

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.

In 2015, the office furniture segment recorded $0.4 million of restructuring costs and $3.3 million of transition costs related to previously announced closures and structural realignments. Of these charges, $3.3 million was included in cost of sales. The office furniture segment also recorded $11.2 million of goodwill and intangible impairments related to a reporting unit in the office furniture segment.


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Table of Contents

Hearth Products

The following table presents certain key highlights from the results of operations in the hearth products segment (in thousands):
 
2017
 
% Change from 2016
 
2016
 
% Change from 2015
 
2015
Net sales
$
515,159

 
3.1
%
 
$
499,604

 
(5.1
)%
 
$
526,615

Operating profit
$
83,649

 
19.6
%
 
$
69,960

 
(10.5
)%
 
$
78,162


Net sales in 2017 for the hearth products segment increased 3.1 percent or $15.6 million to $515.2 million compared to $499.6 million in 2016. The change was driven by an increase in the new construction business due to growth in single family housing and an increase in the retail business due to an increase in pellet appliance demand.

Net sales in 2016 for the hearth products segment decreased 5.1 percent or $27.0 million to $499.6 million compared to $526.6 million in 2015. Sales in new construction grew as the housing market continued to recover but were offset by declines in the retail business due to unseasonably warm weather and comparatively low energy prices.

Operating profit as a percentage of sales was 16.2 percent in 2017, 14.0 percent in 2016, and 14.8 percent in 2015.  The increase in operating margin in 2017 compared to 2016 was primarily driven by structural cost reductions, higher volume, and nonrecurring gains. These factors were partially offset by higher restructuring and transition costs. The decrease in operating margin in 2016 compared to 2015 was primarily driven by restructuring and transition costs related to the previously announced closure of the hearth manufacturing facility in Paris, Kentucky, lower volume, and higher freight costs. These factors were partially offset by price realization, strong operational performance, favorable material cost and productivity, and cost reductions.

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.

In 2015, the hearth products segment recorded $0.9 million of restructuring costs and $1.4 million of transition costs related to acquisition integration and the decision to exit a small line of business. Of these charges, $2.2 million was included in cost of sales.

Liquidity and Capital Resources

Cash Flow – Operating Activities
Cash generated from operating activities in 2017 totaled $133.1 million compared to $223.4 million generated in 2016.  The decrease was driven by lower operating profits and working capital changes. Changes in working capital balances resulted in a $29.4 million use of cash in 2017 compared to a $17.4 million source of cash in the prior year. Cash generated from operating activities in 2015 totaled $173.4 million and changes in working capital balances resulted in a $28.1 million use of cash.

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 source of cash related to working capital changes in 2016 was primarily driven from lower accounts receivable of $11.2 million due to sales timing and higher accounts payable and accrued expense balances of $11.1 million due to timing of payments. This was partially offset by uses of cash for strategic investments in inventory.

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 2017 are adequate to cover the risk of potential bad debts.  Allowances for non-collectible trade receivables, as a percent of gross trade receivables, totaled 0.7 percent, 0.9 percent, and 1.7 percent at the end of fiscal years 2017, 2016, and 2015, respectively. The Corporation’s inventory turns were 8.9, 11.6, and 11.6, for fiscal years 2017, 2016, and 2015, respectively.


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Table of Contents

Cash Flow – Investing Activities
Capital expenditures, including capitalized software, were $127.4 million in 2017, $119.6 million in 2016, and $115.0 million in 2015.  These expenditures continue to focus on machinery, equipment, and tooling required to support new products, continuous improvements, and cost savings initiatives in manufacturing processes, as well as the implementation of new integrated information systems to support business systems transformation.  The Corporation anticipates capital expenditures for 2018 to total $75 million to $85 million, primarily related to new products and operational process improvements driven by rapid continuous improvement.

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. Refer to "Note 4. Acquisitions and Divestitures" in the Notes to Consolidated Financial Statements for additional information.

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. See "Note 7. Long-Term Debt" in the Notes to Consolidated Financial Statements for further information.

Dividend - The Corporation is committed to maintaining and/or modestly growing the quarterly dividend. Cash dividends declared and paid per share are as follows (in dollars):
 
2017
 
2016
 
2015
Common shares
$
1.130

 
$
1.090

 
$
1.045


The last quarterly dividend increase was from $0.275 to $0.285 per common share effective with the June 1, 2017 dividend payment for shareholders of record at the close of business on May 19, 2017.  The average dividend payout percentage for the most recent three-year period has been 57 percent of prior year earnings or 26 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. During 2017, the Corporation repurchased 1,462,936 shares of its common stock at a cost of approximately $58.9 million, or an average price of $40.25 per share. As of December 30, 2017, there was a payable of $1.4 million reflected in "Accounts payable and accrued expenses" in the Consolidated Balance Sheets relating to shares repurchased but not yet settled. The Board authorized $200 million on November 9, 2007 and an additional $200 million on November 7, 2014 for repurchases of the Corporation’s common stock.  As of December 30, 2017, approximately $78.0 million of this authorized amount remained unspent.  During 2016, the Corporation repurchased 1,082,938 shares of its common stock at a cost of approximately $55.8 million, or an average price of $51.55 per share. During 2015, the Corporation repurchased 550,000 shares of its common stock at a cost of approximately $26.7 million, or an average price of $48.47 per share.

Cash, cash equivalents, and short-term investments totaled $25.4 million at the end of 2017 compared to $38.6 million at the end of 2016 and $32.8 million at the end of 2015.  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 cash flow needs for at least the next twelve months.  As of the end of 2017, $6.1 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.


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Table of Contents

Contractual Obligations

The following table discloses the Corporation's obligations and commitments to make future payments, by period, under contracts (in thousands):
 
Less than
1 Year
 
1 – 3
Years
 
3 – 5
Years
 
More than
5 Years
 
Total
Long-term debt obligations, including estimated interest (1)
$
43,737

 
$
12,408

 
$
240,517

 
$

 
$
296,662

Operating lease obligations
29,135

 
41,967

 
23,135

 
19,481

 
113,718

Purchase obligations (2)
55,180

 

 

 

 
55,180

Other long-term obligations (3)
2,927

 
7,726

 
4,682

 
25,122

 
40,457

Total
$
130,979

 
$
62,101

 
$
268,334

 
$
44,603

 
$
506,017


(1)
Interest has been included for all debt at the fixed or variable rate in effect as of December 30, 2017, as applicable. See "Note 7. Long-Term Debt" in the Notes to Consolidated Financial Statements for further information. The Corporation has classified $36.6 million of long-term debt as current because the Corporation expects, but is not required, to repay this portion of debt in 2018.
(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 $32.9 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 15. Guarantees, Commitments, and Contingencies" in the Notes to Consolidated Financial Statements for further information.

Looking Ahead

Management remains optimistic about the office furniture and hearth markets and the Corporation's long-term prospects.

The Corporation remains focused on creating long-term shareholder value by growing its business through investment in building brands, product solutions, and selling models, enhancing its strong member-owner culture, and remaining focused on its long-standing rapid continuous improvement programs to build best total cost and a lean enterprise.

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.


27

Table of Contents

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 6. 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.

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.

Additionally, the Corporation compares the estimated aggregate fair value of its reporting units to its overall market capitalization.

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.


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Table of Contents

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.

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 margins, 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 3. 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.  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.

Income Taxes
The Corporation uses an asset and liability method to account for income taxes. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying values of existing assets and liabilities and their respective tax bases. Deferred tax assets are also recorded with respect to net operating losses and other tax attribute carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the years in which temporary differences are expected to be recovered or settled. Valuation allowances are established when, based on currently available information, it is more likely than not that all or a portion of a deferred tax asset will not be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the income of the period that includes the enactment date.

The ultimate recovery of deferred tax assets is dependent upon the amount and timing of future taxable income and other factors, such as the taxing jurisdiction in which the asset is to be recovered. Significant judgment is applied to determine if, and the extent to which, valuation allowances should be recorded against deferred tax assets. Although the Corporation believes the approach to estimates and judgments as described herein is reasonable, actual results could differ and they may be exposed to increases or decreases in income taxes that could be material.

The Corporation recognizes the tax benefit from an uncertain tax position claimed or expected to be claimed on a tax return only if it is more likely than not that the tax position will be sustained on examination by taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. Interest and penalties related to unrecognized tax benefits are reported as interest expense and operating expense, respectively.

The Corporation applies the intra-period tax allocation rules to allocate income taxes among continuing operations, discontinued operations, other comprehensive income (loss), and additional paid-in capital when they meet the criteria as prescribed in the guidance.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 was signed into law, making significant changes to the Internal Revenue Code. 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. The Corporation currently provides for taxes that

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may be payable if undistributed earnings of overseas subsidiaries were to be remitted to the United States, except for earnings it considers to be permanently reinvested. See "Note 8. Income Taxes" in the Notes to Consolidated Financial Statements for further information.

Recently Issued Accounting Standards Not Yet Adopted

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The new standard will replace 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 recently 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 new standard becomes effective for the Corporation in fiscal 2018, and allows for both retrospective and modified-retrospective methods of adoption. The Corporation will adopt the standard in fiscal 2018 using the modified-retrospective method, which requires 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 will 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.

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 and compliance with financial covenants. The new standard becomes effective for the Corporation in fiscal 2019, but may be adopted at any time, and requires a modified-retrospective transition. The Corporation is currently evaluating the effect the standard will have on consolidated financial statements and related disclosures.

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 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 new standard becomes effective for the Corporation in fiscal 2018. The Corporation anticipates the standard will not have a material effect on consolidated statements of cash flows.

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 postretirement 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 new standard is to be applied retrospectively to each period presented and becomes effective for the Corporation in fiscal 2018. The Corporation anticipates the standard will not have a material effect on consolidated statements of comprehensive income.


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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 30, 2017, the Corporation had $267.5 million of debt outstanding under the Corporation's $400 million revolving credit facility, which bore variable interest based on one month LIBOR. As of December 30, 2017, 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. The Corporation's interest rate risk not covered by the interest rate swap agreement was $117.5 million of variable rate debt outstanding as of December 30, 2017.

The Corporation monitors market interest rate risk exposures using a sensitivity analysis. The Corporation's sensitivity analysis estimates the exposure to market interest rate risk sensitive instruments assuming a hypothetical 1 percent change in interest rates on $117.5 million unhedged variable rate debt. If interest rates were to increase or decrease by 1 percent, the corresponding increase or decrease, as applicable, in interest expense on variable rate debt would increase or decrease, as applicable, future earnings and cash flows by approximately $1.2 million per year.

This analysis does not consider the effect of any change in overall economic activity that could impact interest rates. Further, in the event of an increase in interest rates of significant magnitude, the Corporation may take actions to further mitigate exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, this analysis assumes no changes in the financial structure.

For information related to the Corporation’s long-term debt, refer to "Note 7. Long-Term Debt" in the Notes to Consolidated Financial Statements.  For information related to the Corporation's interest rate swap, refer to "Note 10. 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 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 an outlook 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.


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Item 9A.  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 SEC’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 disclosures.

Under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer of the Corporation, the Corporation's management has evaluated the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures as defined in Rules 13a – 15(e) and 15d – 15(e) under the Exchange Act as of the end of the period covered by this Annual Report on Form 10-K.  As of December 30, 2017, and, based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded these controls and procedures are effective.  There have not been any changes in the Corporation’s internal control over financial reporting that occurred during the fiscal quarter ended December 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Corporation’s 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

As previously reported on the Current Report on Form 8-K filed by the Corporation on January 9, 2018, Jerald K. Dittmer, Senior Vice President of Strategic Development, HNI Corporation, notified the Corporation of his intent to retire effective February 16, 2018. The Corporation entered into an agreement with Mr. Dittmer (the "Agreement") on February 16, 2018, which will become effective February 23, 2018, if not revoked before then.
 
The Agreement provides Mr. Dittmer is entitled to receive a lump payment equal to 39 weeks of base salary, less applicable withholdings and deductions, as consideration for commitments including (a) an agreement not to compete with the Corporation or solicit business contacts or employees of the Corporation for one year following his retirement, and (b) a release of claims relating to his employment with or separation from the Corporation.
Any interests held by Mr. Dittmer in any compensation or benefit plan in which Mr. Dittmer participates will be distributed to him in accordance with the terms of those plans and applicable law.

The foregoing description of the Agreement is only a summary and is qualified in its entirety by reference to the Agreement itself, a copy of which is attached as an exhibit to this Form 10-K as Exhibit 10.25 and is incorporated by reference herein.


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PART III

Item 10.  Directors, Executive Officers, and Corporate Governance

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 8, 2018 (the "2018 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 2018 Proxy Statement and is incorporated herein by reference.

Code of Ethics

The information under the caption "Code of Business Conduct and Ethics" of the 2018 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 2018 Proxy Statement is incorporated herein by reference.

Item 11.  Executive Compensation

The information under the captions "Executive Compensation" and "Director Compensation" of the 2018 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 2018 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 2018 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 2018 Proxy Statement is incorporated herein by reference.


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PART IV
 
Item 15.  Exhibits, Financial Statement Schedules

(a)(1) Financial Statements

The following consolidated financial statements of the Corporation and its subsidiaries included in the Corporation's 2017 Annual Report on Form 10-K are filed as a part of this Report pursuant to Item 8:
 
Page

(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)
(10.9)
(10.10)

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(10.11)
(10.12)
(10.13)
(10.14)
(10.15)
(10.16)
(10.17)
(10.18)
(10.19)
(10.20)
(10.21)
(10.22)
(10.23)
(10.24)
(10.25)

(21)
(23.1)
(31.1)
(31.2)
(32.1)
101
The following materials from HNI Corporation's Annual Report on Form 10-K for the fiscal year ended December 30, 2017 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 (iv) Notes to Consolidated Financial Statements

 

*    Indicates management contract or compensatory plan.
+    Filed or furnished herewith.

Item 16. Form 10-K Summary

None.


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Signatures

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.

 
HNI Corporation
 
 
 
 
 
Date: February 23, 2018
By:
/s/ Stan A. Askren
 
 
 
Stan A. Askren
 
 
 
Chairman, President and CEO
 

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 Stan A. Askren 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/ Stan A. Askren
 
Chairman, President and CEO, Principal Executive Officer, and Director
 
February 23, 2018
Stan A. Askren
 
 
 
 
 
 
 
 
 
/s/ Marshall H. Bridges
 
Senior Vice President and Chief Financial Officer, Principal Financial Officer, and Principal Accounting Officer
 
February 23, 2018
Marshall H. Bridges
 
 
 
 
 
 
 
 
 
/s/ Mary A. Bell
 
Director
 
February 23, 2018
Mary A. Bell
 
 
 
 
 
 
 
 
 
/s/ Miguel M. Calado
 
Director
 
February 23, 2018
Miguel M. Calado
 
 
 
 
 
 
 
 
 
/s/ Cheryl A. Francis
 
Director
 
February 23, 2018
Cheryl A. Francis
 
 
 
 
 
 
 
 
 
/s/ Mary K. W. Jones
 
Director
 
February 23, 2018
Mary K. W. Jones
 
 
 
 
 
 
 
 
 
/s/ John R. Hartnett
 
Director
 
February 23, 2018
John R. Hartnett
 
 
 
 
 
 
 
 
 
/s/ Larry B. Porcellato
 
Lead Director
 
February 23, 2018
Larry B. Porcellato
 
 
 
 
 
 
 
 
 
/s/ Abbie J. Smith
 
Director
 
February 23, 2018
Abbie J. Smith
 
 
 
 
 
 
 
 
 
/s/ Brian E. Stern
 
Director
 
February 23, 2018
Brian E. Stern
 
 
 
 
 
 
 
 
 
/s/ Ronald V. Waters, III
 
Director
 
February 23, 2018
Ronald V. Waters, III
 
 
 
 


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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 30, 2017.  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 30, 2017, HNI Corporation maintained effective internal control over financial reporting.

The effectiveness of HNI Corporation’s internal control over financial reporting as of December 30, 2017 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in its report which appears herein.

February 23, 2018


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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 30, 2017 and December 31, 2016, the related consolidated statements of comprehensive income, equity, and cash flows for each of the years in the three-year period ended December 30, 2017, and the related notes (collectively, the "consolidated financial statements"). We also have audited the Company’s internal control over financial reporting as of December 30, 2017, 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 30, 2017 and December 31, 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended December 30, 2017, 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 30, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Basis for Opinion
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 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.

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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 23, 2018

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Financial Statements

HNI Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(In thousands, except share and per share data)
 
 
Year Ended
 
2017
 
2016
 
2015
Net sales
$
2,175,882

 
$
2,203,489

 
$
2,304,419

Cost of sales
1,391,894

 
1,368,476

 
1,457,021

Gross profit
783,988

 
835,013

 
847,398

Selling and administrative expenses
671,831

 
667,744

 
672,125

(Gain) loss on sale, disposal, and license of assets
(1,949
)
 
22,572

 
(195
)
Restructuring and impairment charges
37,416

 
11,005

 
11,792

Operating income
76,690

 
133,692

 
163,676

Interest income
297

 
305

 
395

Interest expense
6,375

 
5,086

 
6,901

Income before income taxes
70,612

 
128,911

 
157,170

Income tax expense (benefit)
(19,286
)
 
43,273

 
51,764

Net income
89,898

 
85,638

 
105,406

Less: Net income (loss) attributable to the non-controlling interest
103

 
61

 
(30
)
Net income attributable to HNI Corporation
$
89,795

 
$
85,577

 
$
105,436

 
 
 
 
 
 
 
 
 
 
 
 
Average number of common shares outstanding – basic
43,839,004

 
44,413,941

 
44,285,298

Net income attributable to HNI Corporation per common share – basic
$
2.05

 
$
1.93

 
$
2.38

Average number of common shares outstanding – diluted
44,839,813

 
45,502,219

 
45,440,653

Net income attributable to HNI Corporation per common share – diluted
$
2.00

 
$
1.88

 
$
2.32

 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
$
1,219

 
$
(1,510
)
 
$
(1,901
)
Change in unrealized gains (losses) on marketable securities, net of tax
(27
)
 
(103
)
 
(39
)
Change in pension and post-retirement liability, net of tax
(463
)
 
339

 
1,256

Change in derivative financial instruments, net of tax
660

 
1,460

 
873

Other comprehensive income (loss), net of tax
1,389

 
186

 
189

Comprehensive income
91,287

 
85,824

 
105,595

Less: Comprehensive income (loss) attributable to non-controlling interest
103

 
61

 
(30
)
Comprehensive income attributable to HNI Corporation
$
91,184

 
$
85,763

 
$
105,625


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


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Table of Contents

HNI Corporation and Subsidiaries
Consolidated Balance Sheets
(In thousands)
 
 
 
 
 
December 30, 2017
 
December 31, 2016
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
23,348

 
$
36,312

Short-term investments
2,015

 
2,252

Receivables
258,551

 
229,436

Inventories
155,683

 
118,438

Prepaid expenses and other current assets
49,283

 
46,603

Total Current Assets
488,880

 
433,041

 
 
 
 
Property, Plant, and Equipment:
 
 
 
Land and land improvements
28,593

 
27,403

Buildings
306,137

 
283,930

Machinery and equipment
556,571

 
528,099

Construction in progress
39,788

 
51,343

 
931,089

 
890,775

Less accumulated depreciation
540,768

 
534,330

Net Property, Plant, and Equipment
390,321

 
356,445

 
 
 
 
Goodwill and Other Intangible Assets
490,892

 
511,419

 
 
 
 
Deferred Income Taxes
193

 
719

 
 
 
 
Other Assets
21,264

 
28,610

 
 
 
 
Total Assets
$
1,391,550

 
$
1,330,234


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


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HNI Corporation and Subsidiaries
Consolidated Balance Sheets
(In thousands, except par value)
 
 
 
 
 
December 30, 2017
 
December 31, 2016
Liabilities and Equity
 

 
 

Current Liabilities:
 
 
 
Accounts payable and accrued expenses
$
450,128

 
$
425,046

Current maturities of long-term debt
36,648

 
34,017

Current maturities of other long-term obligations
2,927

 
4,410

Total Current Liabilities
489,703

 
463,473

 
 
 
 
Long-Term Debt
240,000

 
180,000

 
 
 
 
Other Long-Term Liabilities
70,409

 
75,044

 
 
 
 
Deferred Income Taxes
76,861

 
110,708

 
 
 
 
Equity:
 
 
 
HNI Corporation shareholders' equity:
 
 
 
 Capital Stock:
 
 
 
Preferred stock - $1 par value, authorized 2,000 shares, no shares outstanding

 

 
 
 
 
Common stock - $1 par value, authorized 200,000 shares, outstanding:
 
 
 
  December 30, 2017 - 43,354 shares;
 
 
 

  December 31, 2016 - 44,079 shares
43,354

 
44,079

 
 
 
 
Additional paid-in capital
7,029

 

Retained earnings
467,296

 
461,524

Accumulated other comprehensive income (loss)
(3,611
)
 
(5,000
)
Total HNI Corporation shareholders’ equity
514,068

 
500,603

 
 
 
 
Non-controlling interest
509

 
406

 
 
 
 
Total Equity
514,577

 
501,009

 
 
 
 
Total Liabilities and Equity
$
1,391,550

 
$
1,330,234


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


42

Table of Contents

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

Balance, January 3, 2015
$
44,166

 
$
867

 
$
374,929

 
$
(5,375
)
 
$
(86
)
 
$
414,501

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 

Net income (loss)

 

 
105,436

 

 
(30
)
 
105,406

Other comprehensive income (loss), net of tax

 

 

 
189

 

 
189

Change in ownership of non-controlling interest

 

 
(461
)
 

 
461

 

Cash dividends; $1.045 per share

 

 
(46,329
)
 

 

 
(46,329
)
Common shares – treasury:
 
 
 
 
 
 
 
 
 
 
 

Shares purchased
(550
)
 
(26,107
)
 

 


 


 
(26,657
)
Shares issued under Members’ Stock Purchase Plan and stock awards, net of tax
542

 
29,647

 

 

 

 
30,189

Balance, January 2, 2016
$
44,158

 
$
4,407

 
$
433,575

 
$
(5,186
)
 
$
345

 
$
477,299

Comprehensive income:
 

 
 

 
 

 
 

 
 

 
 

Net income (loss)

 

 
85,577

 

 
61

 
85,638

Other comprehensive income (loss), net of tax

 

 

 
186

 

 
186

Change in ownership of non-controlling interest

 

 
(89
)
 

 

 
(89
)
Cash dividends; $1.090 per share

 

 
(48,495
)
 

 

 
(48,495
)
Common shares – treasury:
 

 
 

 
 

 
 

 
 

 
 

Shares purchased
(1,082
)
 
(45,699
)
 
(9,044
)
 

 

 
(55,825
)
Shares issued under Members’ Stock Purchase Plan and stock awards, net of tax
1,003

 
41,292

 

 

 

 
42,295

Balance, December 31, 2016
$
44,079

 
$

 
$
461,524

 
$
(5,000
)
 
$
406

 
$
501,009

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)

 

 
89,795

 

 
103

 
89,898

Other comprehensive income (loss), net of tax

 

 

 
1,389

 

 
1,389

Change in ownership of non-controlling interest

 

 

 

 

 

Cash dividends; $1.130 per share

 

 
(49,557
)
 

 

 
(49,557
)
Common shares – treasury:
 
 
 
 
 
 
 
 
 
 
 
Shares purchased
(1,463
)
 
(22,958
)
 
(34,466
)
 

 

 
(58,887
)
Shares issued under Members’ Stock Purchase Plan and stock awards, net of tax
738

 
29,987

 

 

 

 
30,725

Balance, December 30, 2017
$
43,354

 
$
7,029

 
$
467,296

 
$
(3,611
)
 
$
509

 
$
514,577


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


43

Table of Contents

HNI Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
 
 
2017

 
2016

 
2015

Net Cash Flows From (To) Operating Activities:
 
 
 
 
 
Net income
$
89,898

 
$
85,638

 
$
105,406

Non-cash items included in net income:
 
 
 

 
 

Depreciation and amortization
72,872

 
68,947

 
57,564

Other post-retirement and post-employment benefits
1,592

 
1,643

 
1,856

Stock-based compensation
7,750

 
8,141

 
9,097

Excess tax benefits from stock-based compensation

 
(2,713
)
 
(1,581
)
Deferred income taxes
(33,606
)
 
20,495

 
15,257

(Gain) loss on sale, retirement, license, and impairment of long-lived assets and intangibles, net
30,892

 
28,868

 
12,463

Other – net
(1,949
)
 
4,523

 
(1,216
)
Net increase (decrease) in operating assets and liabilities, net of acquisitions and divestitures
(29,409
)
 
17,430

 
(28,075
)
Increase (decrease) in other liabilities
(4,891
)
 
(9,610
)
 
2,581

Net cash flows from (to) operating activities
133,149

 
223,362

 
173,352

 
 
 
 
 
 
Net Cash Flows From (To) Investing Activities:
 

 
 

 
 

Capital expenditures
(109,243
)
 
(93,425
)
 
(82,610
)
Proceeds from sale and license of property, plant, equipment, and intangibles
9,009

 
1,055

 
2,201

Capitalized software
(18,148
)
 
(26,159
)
 
(32,356
)
Acquisition spending, net of cash acquired
(898
)
 
(34,302
)
 

Purchase of investments
(3,451
)
 
(8,724
)
 
(3,660
)
Sales or maturities of investments
3,197

 
8,619

 
3,550

Other – net
1,510

 
(90
)
 

Net cash flows from (to) investing activities
(118,024
)
 
(153,026
)
 
(112,875
)
 
 
 
 
 
 
Net Cash Flows From (To) Financing Activities:
 

 
 

 
 

Payments of note and long-term debt and other financing
(274,343
)
 
(594,547
)
 
(455,222
)
Proceeds from long-term debt
339,337

 
611,986

 
448,449

Dividends paid
(49,557
)
 
(48,495
)
 
(46,329
)
Purchase of HNI Corporation common stock
(57,505
)
 
(55,825
)
 
(26,657
)
Proceeds from sales of HNI Corporation common stock
14,224

 
21,596

 
12,276

Withholding related to net share settlements of equity based awards
(245
)
 

 
(171
)
Excess tax benefits from stock-based compensation

 
2,713

 
1,581

Net cash flows from (to) financing activities
(28,089
)
 
(62,572
)
 
(66,073
)