HNI CORP (HNI) FY 2022 MD&A

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: workplace furnishings and residential building products. The Corporation is a leading global designer and provider of commercial furnishings, and a leading manufacturer and marketer of hearth products.  The Corporation utilizes a 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.

Consolidated net sales for 2021 were $2.184 billion, an increase of 11.7 percent compared to net sales of $1.955 billion in the prior year.  The change was driven by a 27.3 percent increase in the residential building products segment, and 5.0 percent year-over-year sales growth in the workplace furnishings segment. The acquisitions of Design Public Group ("DPG") and multiple residential building products companies added incremental year-over-year sales of $34.9 million and $12.4 million, respectively.

Net income attributable to the Corporation in 2021 was $59.8 million compared to net income of $41.9 million in 2020. The increase was driven by lower restructuring and impairment charges, higher residential building products volume, improved net productivity, and lower core selling and administrative expenses ("SG&A"), partially offset by unfavorable price-cost, the return of costs related to temporary actions taken in 2020, and higher investment levels.

Overall, the Corporation has experienced positive order trends in both of its segments throughout much of 2021. However, ongoing pandemic-induced difficulties tied to labor availability, supply chain issues, and input cost inflation have persisted. These constraints, when combined with continued staffing shortages both internally and at the Corporation's suppliers, are limiting production capacity growth, and have negatively impacted revenue and profit levels in much of the second half of 2021. The Corporation has taken action to mitigate these constraints, including the implementation of price increases across its brands, opening of a new manufacturing facility in Mexico, increased insourcing and strengthened resourcing of critical parts, and accelerated efforts to drive productivity through process changes and automation to reduce labor requirements. The Corporation also has embarked on business simplification initiatives, including plans to exit a small workplace furnishings brand and restructure an eCommerce business in the workplace furnishing segment. Both actions are aimed at improving long-term profitability.

The Corporation also acquired two residential building products companies in the fourth quarter of 2021. The acquisition of Trinity Hearth & Home ("Trinity"), a leading installing distributor in the Dallas/Fort Worth area, builds on the Corporation's vertical integration strategy, and provides a hub for the segment to better serve its customers in the rapidly growing Southwest region. The Outdoor GreatRoom Company ("OGC"), a leading manufacturer and supplier of premium outdoor living products, primarily fire tables and fire pits, positions the Corporation to grow and develop a leading position in the fast-growing outdoor living market. See "Note 4. Acquisitions" in the Notes to the Consolidated Financial Statements for additional information.

22

Table of Contents

Results of Operations

The following table presents certain key highlights from the results of operations (in thousands):

Net Sales

Consolidated net sales for 2021 increased 11.7 percent compared to the prior year.  The change was driven by a significant increase in the residential building products segment, along with a moderate increase in the workplace furnishings segment. Included in the 2021 sales results was a $34.9 million favorable impact from acquiring DPG, and a $12.4 million favorable impact from acquiring residential building products businesses.

Gross Profit

Gross profit as a percentage of net sales decreased 220 basis points in 2021 compared to 2020, primarily driven by unfavorable price-cost, partially offset by higher residential building products volume and improved net productivity. Unfavorable price-cost was attributable to inflationary pressures in labor, materials, and transportation costs partially offset by increased price realization.

Selling and Administrative Expenses

Selling and administrative expenses as a percentage of net sales decreased 130 basis points in 2021 compared to 2020, driven by higher residential building products volume and lower core SG&A, partially offset by increased freight costs, the return of costs related to temporary actions taken in 2020, and higher investment spend. Included in current year and prior year SG&A was $1.4 million and $6.8 million, respectively, of one-time costs driven by conditions related to the COVID-19 pandemic.

Selling and administrative expenses include freight expense for shipments to customers, research and development costs, and amortization 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.

23

Table of Contents

Restructuring and Impairment Charges

In 2021, the Corporation recorded $8.2 million of restructuring costs, as well as a $5.8 million goodwill impairment charge, in connection with business simplification actions taken in the workplace furnishings segment. Of these charges, $7.6 million was included in "Cost of Sales" in the Consolidated Statements of Comprehensive Income. Refer to "Note 6. Goodwill and Other Intangible Assets" and "Note 17. Restructuring and Impairment Charges" in the Notes to Consolidated Financial Statements for further information regarding restructuring and impairment charges.

In 2020, the Corporation recorded net charges of $38.8 million related to the impairment of goodwill, intangibles, and other assets in the workplace furnishings segment as a result of the COVID-19 pandemic and related economic disruption.

Operating Income

For 2021, operating income increased 39.2 percent to $85.4 million compared to $61.4 million in 2020. The increase was driven by higher residential building products volume, improved net productivity, lower core SG&A, and lower restructuring and impairment charges, partially offset by unfavorable price-cost, higher investment levels, and the return of costs related to temporary actions taken in 2020.

Interest Expense, Net

Interest expense, net was $7.2 million and $7.0 million in 2021 and 2020, respectively.

Income Taxes

The following table summarizes the Corporation's income tax provision (in thousands):

The income tax provision reflects a higher rate in 2021 compared to 2020. The variance was primarily driven by higher income in the current year which diluted the rate benefit from tax credits when compared to the prior year. Additionally, the increased rate in the current year is the result of an increase in current year equity-based compensation offset by the benefit of increased foreign earnings over prior year. 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 $59.8 million or $1.36 per diluted share in 2021 compared to $41.9 million or $0.98 per diluted share in 2020.

Comparison of Fiscal Year Ended January 2, 2021 with the Fiscal Year Ended December 28, 2019

To review commentary for the consolidated and segment-level results of operations comparison of the fiscal year ended January 2, 2021 with the fiscal year ended December 28, 2019, please refer to Item 7 of the Corporation's Form 10-K filed March 2, 2021 with the Securities and Exchange Commission, or follow the link below:

https://www.sec.gov/ix?doc=/Archives/edgar/data/48287/000004828721000038/hni-20210102.htm

24

Table of Contents

Workplace Furnishings

The following table presents certain key highlights from the results of operations in the workplace furnishings segment (in thousands):

Net sales in 2021 for the workplace furnishings segment increased 5.0 percent compared to 2020. The results were driven by higher volumes in the small- and medium-sized business and international channels, both of which experienced a rebound in demand in 2021 relative to 2020, which was more adversely impacted by the COVID-19 pandemic. Volumes were lower in 2021 in the contract and eCommerce channels. The contract market has experienced a slower recovery in demand primarily due to inconsistency in return-to-office plans throughout the country. Demand moderated in the eCommerce channel in 2021, following strong sales growth in 2020 as a result of work-from-home trends driven by the onset of the pandemic. Price realization across most channels also contributed to the segment's sales growth. Furthermore, included in the 2021 sales results was a $34.9 million favorable impact from acquiring DPG.

Operating loss as a percentage of net sales was 40 basis points more favorable in 2021 compared to 2020, driven by lower restructuring, impairment, and one-time costs and improved net productivity, partially offset by unfavorable price-cost.

In the current year, the workplace furnishings segment recorded $7.9 million of restructuring costs and a $5.8 million goodwill impairment charge in connection with business simplification actions, as well as $1.4 million of one-time costs as a result of the COVID-19 pandemic.

In 2020, the workplace furnishings segment recorded net charges of $38.8 million related to the impairment of goodwill, intangibles, and other assets, as well as $5.2 million of one-time costs as a result of the COVID-19 pandemic.

Residential Building Products

The following table presents certain key highlights from the results of operations in the residential building products segment (in thousands):

Net sales in 2021 for the residential building products segment increased 27.3 percent compared to 2020, driven by strong volume growth in both the new construction and existing home channels. Included in the 2021 sales results was a $12.4 million favorable impact from acquiring residential building products companies.

Operating profit as a percentage of net sales increased 40 basis points in 2021 compared to 2020. The increase was driven by SG&A leverage from higher sales volume, partially offset by unfavorable price-cost.

Liquidity and Capital Resources

Cash, cash equivalents, and short-term investments totaled $53.7 million at the end of 2021, compared to $117.8 million at the end of 2020.  These funds, coupled with cash flow from future operations, borrowing capacity under the Corporation's 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.  Additionally, based on current earnings before interest, taxes, depreciation and amortization generation, the Corporation can access the full $450 million of borrowing capacity available under the revolving credit facility and maintain compliance with applicable covenants. As of the end of 2021, $9.2 million of cash was held overseas and considered permanently reinvested. If such amounts were repatriated, it could result in additional foreign withholding and

25

Table of Contents

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.

Cash Flow – Operating Activities

Operating activities were a source of $131.6 million of cash in 2021, compared to a source of $214.5 million cash in 2020.  The lower cash generation compared to the prior year was primarily due to changes in working capital. Changes in working capital balances resulted in a $59.6 million use of cash in 2021 compared to a $24.2 million source of cash in the prior year. Prior year end working capital balances were lower than normal due to a significant decline in sales volume in 2020 as a result of the COVID-19 pandemic and related economic disruption. As demand has rebounded in many markets in 2021, the Corporation's receivables, inventory, and accounts payable and accrued expenses have risen to more normal levels, resulting in a net use of cash.

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 2021 are adequate to cover the risk of potential bad debts.  Allowances for non-collectible trade receivables, as a percent of gross trade receivables, totaled 1.2 percent and 2.7 percent at the end of 2021 and 2020, respectively. The Corporation’s inventory turns were 8.9 and 8.2 for 2021 and 2020, respectively.

Cash Flow – Investing Activities

Capital expenditures, including capitalized software, were $66.5 million in 2021 and $41.8 million in 2020.  These expenditures are primarily focused on machinery, equipment, and tooling required to support new products, continuous improvements, and cost savings initiatives in manufacturing processes. Additionally, in support of the Corporation's long-term strategy to create effortless winning experiences for customers, the Corporation continues to invest in technology and digital assets. The Corporation anticipates capital expenditures for 2022 in an estimated range of $70 million to $80 million.

Cash Flow – Financing Activities

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. Debt" in the Notes to Consolidated Financial Statements for further information.

Dividend - The Corporation is committed to maintaining or modestly growing the quarterly dividend. Cash dividends declared and paid per share are as follows (in dollars):

The last quarterly dividend increase was from $0.305 to $0.310 per common share effective with the June 1, 2021 dividend payment for shareholders of record at the close of business on May 21, 2021.  The average dividend payout percentage for the most recent three-year period has been 64 percent of prior year earnings or 25 percent of prior year cash flow from operating activities.

Stock Repurchase - The Corporation’s capital strategy related to stock repurchase is focused on offsetting the dilutive impact of issuances for various compensation-related matters. The Corporation may elect to opportunistically purchase additional shares based on excess cash generation and/or share price considerations. The Board most recently authorized $200 million on February 13, 2019, for repurchases of the Corporation’s common stock. See "Note 10. Accumulated Other Comprehensive Income (Loss) and Shareholders' Equity" in the Notes to Consolidated Financial Statements for further information.

Cash Requirements

As of January 1, 2022, the Corporation, has the following obligations and commitments to make future payments:

Purchase Obligations - The Corporation’s 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. Estimated purchase obligations total $188 million during 2022 and $85 million thereafter.

26

Table of Contents

Debt - Debt principal obligations are approximately $3 million during 2022, and $175 million thereafter. Interest obligations from debt are estimated to be approximately $6 million during 2022 and $18 million thereafter. Refer to "Note 7. Debt" in the Notes to Consolidated Financial Statements for additional information.

Deferred Compensation - Deferred compensation obligations, which include both cash and Corporation stock, are expected to be approximately $1 million during 2022 and $9 million thereafter. Refer to “Note 11. Stock-Based Compensation” in the Notes to Consolidated Financial Statements for additional information.

Post-Retirement Benefit Plan - Post-retirement benefit plan payments are expected to be approximately $1 million during 2022 and $11 million in aggregate from 2023 through 2031. Refer to “Note 13. Post-Retirement Health Care" in the Notes to Consolidated Financial Statements for additional information.

Operating and Finance Leases - Operating and finance lease obligations are expected to be approximately $25 million during 2022 and $80 million thereafter. Refer to “Note 14. Leases" in the Notes to Consolidated Financial Statements for additional information.

Other Obligations - Other long-term obligations of approximately $13 million are primarily comprised of uncertain tax positions, acquisition-related holdbacks, and put option liabilities. Additionally, refer to “Note 2. Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements for the Corporation’s estimated future obligations related to product warranties and self-insured liabilities.

Litigation and Uncertainties

See "Note 15. Guarantees, Commitments, and Contingencies" in the Notes to Consolidated Financial Statements for further information.

Looking Ahead

The Corporation continues to navigate near-term uncertainty driven by the ongoing COVID-19 pandemic and recent dynamics around labor availability, supply chain capacity, and cost inflation. However, management believes the Corporation is well positioned to grow revenues, expand margins, and generate cash flows. Strength in residential building products is expected to continue, and conditions in workplace furnishings are expected to continue to improve.

Management remains optimistic about the long-term prospects in the workplace furnishings and residential building products

markets. Management believes the Corporation continues to compete well and remains confident the investments made in the business will continue to generate strong returns for shareholders.

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 policy reflects its more significant estimates and assumptions used in the preparation of the 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, with estimated liabilities of $26.3 million and $25.7 million as of January 1, 2022

27

Table of Contents

and January 2, 2021, respectively, included in the Consolidated Balance Sheets. Certain risk exposures are mitigated through the use of independent third party stop loss insurance coverages.

The Corporation’s policy is to accrue amounts in accordance with the actuarial determined liabilities. The actuarial valuations are based on historical and current factors such as cost experience, claim frequency, and demographic information, along with certain assumptions about future events including legal actions, medical cost inflation, the number or severity of claims, and the magnitude and change of actual experience development. No changes were made to the methodologies utilized to estimate self-insurance reserves in 2021. While the recorded amounts are sensitive to the assumptions and factors described herein, management believes that such assumptions and actuarial methods used to determine self-insurance reserves are reasonable and provide an appropriate basis for estimating the liabilities. However, inherent uncertainty due to variability in the facts and circumstances of individual claims, as well as the length of time from incurrence of claims to final settlement, may result in the Corporation's ultimate exposure differing significantly from what is currently estimated.

As of January 1, 2022, the Corporation's self-insurance reserve was accrued within an actuarial determined range, which accounts for the subjective nature of the estimate. The span of the current range is approximately $6 million.

Recently Issued Accounting Standards Not Yet Adopted

None