| Summary of Significant Accounting Policies | Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts and transactions of the Corporation and its subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. Cash, Cash Equivalents, and Investments Cash and cash equivalents generally consist of cash and money market accounts. The fair value approximates the carrying value due to the short duration of the securities. These securities have original maturity dates not exceeding three months. The Corporation has short-term investments with maturities of less than one year, as well as investments with maturities between one and five years. Management classifies investments in marketable securities at the time of purchase and reevaluates such classification at each balance sheet date. Debt securities, including government and corporate bonds, are classified as available-for-sale and stated at current market value with unrealized gains and losses included as a separate component of equity, net of any related tax effect. The specific identification method is used to determine realized gains and losses on the trade date. The Corporation's equity investments consist of investments in private entities and are carried at cost, as they do not have a readily determinable fair value. Cash, cash equivalents, and investments are reflected in the Consolidated Balance Sheets and were as follows (in thousands): January 1, 2022 January 2, 2021 Cash and cash equivalents Short-term investments Other Assets Cash and cash equivalents Short-term investments Other Assets Debt securities $ — $ 1,392 $ 11,913 $ — $ 1,687 $ 11,912 Equity investment — — 2,500 — — 1,500 Cash and money market accounts 52,270 — — 116,120 — — Total $ 52,270 $ 1,392 $ 14,413 $ 116,120 $ 1,687 $ 13,412 The following table summarizes the amortized cost basis of the debt securities (in thousands): January 1, 2022 January 2, 2021 Amortized cost basis of debt securities $ 13,231 $ 13,143 Immaterial unrealized gains and losses are recorded in "Accumulated other comprehensive income (loss)" in the Consolidated Balance Sheets for these debt securities. Immaterial amounts of accrued interest receivable related to the Corporation's portfolio are recorded in "Prepaid expenses and other current assets". Receivables Trade receivables are recorded at amortized cost, net of an allowance for doubtful accounts. The allowance is developed based on several factors including overall customer credit quality, historical write-off experience, and specific account analyses projecting the ultimate collectability of the account. The following table summarizes the change in the allowance for doubtful accounts (in thousands): Balance at beginning of period Current provision and adjustments Amounts written off Recoveries and other Balance at end of period Year ended January 1, 2022 $ 5,514 $ (879) $ (1,911) $ 89 $ 2,813 Year ended January 2, 2021 $ 3,559 $ 3,625 $ (1,685) $ 15 $ 5,514 Year ended December 28, 2019 $ 3,867 $ 508 $ (1,099) $ 283 $ 3,559 Inventories The Corporation's residential building products inventories, and a majority of its workplace furnishings inventories, are valued at cost, on the "last-in, first-out" (LIFO) basis. Remaining inventories are generally valued at the lower of cost, on the "first-in, first-out" (FIFO) basis, or net realizable value. Inventories included in the Consolidated Balance Sheets consisted of the following (in thousands): January 1, 2022 January 2, 2021 Finished products $ 137,187 $ 98,527 Materials and work in process 91,996 70,264 Last-in, first-out ("LIFO") allowance (47,592) (30,980) Total inventories, net $ 181,591 $ 137,811 Inventory valued by the LIFO costing method 84 % 75 % There were no material liquidations of previously established LIFO layers in 2021 or 2020. If only the FIFO method had been in use, inventories would have been $47.6 million and $31.0 million higher than reported as of January 1, 2022 and January 2, 2021, respectively. The increase in the LIFO allowance from prior year end was primarily attributed to an increase in current costs stemming from inflationary pressure, as well as an increase in units on hand driven by higher sales volumes and strategic sourcing decisions to help mitigate supply chain delays. The FIFO inventory allowance was $19.9 million and $12.0 million as of January 1, 2022, and January 2, 2021, respectively. The year-over-year increase was due to strategic restructuring activity of an eCommerce business in the workplace furnishings segment. Property, Plant, and Equipment Property, plant, and equipment are carried at cost less accumulated depreciation. Expenditures for repairs and maintenance are expensed as incurred. Major improvements that materially extend the useful lives of the assets are capitalized. Depreciation has been computed using the straight-line method over estimated useful lives: land improvements, 10 – 20 years; buildings, 10 – 40 years; and machinery and equipment, 3 – 12 years. Total depreciation expense was as follows (in thousands): 2021 2020 2019 Depreciation expense $ 52,990 $ 53,420 $ 53,022 Long-Lived Assets The Corporation evaluates long-lived assets for indicators of impairment as events or changes in circumstances occur indicating that an impairment risk may be present. The judgments regarding the existence of impairment are based on business and market conditions, operational performance, and estimated future cash flows. If the carrying value of a long-lived asset is considered impaired, an impairment charge is recorded to adjust the asset to its estimated fair value. Goodwill and Other Intangible Assets The Corporation evaluates its goodwill for impairment on an annual basis during the fourth quarter or whenever indicators of impairment exist. Asset impairment charges associated with the Corporation’s goodwill impairment testing are discussed in "Note 6. Goodwill and Other Intangible Assets" in the Notes to Consolidated Financial Statements. The Corporation reviews goodwill at the reporting unit level within its workplace furnishings and residential building 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 based on an average of the income approach and the market approach. This estimated fair value is compared to the carrying value of the reporting unit and an impairment is recorded if the estimate is less than the carrying value. In the income approach, the estimate of fair value of each reporting unit is based on management’s projection of revenues, gross margin, operating costs, and cash flows considering historical and estimated future results, general economic and market conditions, as well as the impact of planned business and operational strategies. The valuations employ present value techniques to measure fair value and consider market factors. In the market approach, the Corporation utilizes the guideline company method, which involves calculating valuation multiples based on operating data from guideline publicly-traded companies. These multiples are then applied to the operating data for the reporting units and adjusted for factors similar to those used in the discounted cash flow analysis. Management believes the assumptions used for the quantitative impairment test, if required, 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. 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. Consistent with goodwill impairment testing, a qualitative assessment may be performed to determine whether it is more likely than not the fair value of indefinite-lived trade names is less than the carrying amount. If it is determined necessary to perform a quantitative test, the estimate of the fair value of the trade names is based on a discounted cash flows model using inputs which include: projected revenues, assumed royalty rates that would be payable if the trade names were not owned, and discount rates. The Corporation has definite-lived intangible assets that are amortized over their estimated useful lives. Impairment losses are recognized if the carrying amount of an intangible asset subject to amortization is not recoverable from expected future cash flows and its carrying amount exceeds its fair value. Accounts Payable and Accrued Expenses Accounts payable and accrued expenses are reflected in the Consolidated Balance Sheets and were as follows (in thousands): January 1, 2022 January 2, 2021 Trade accounts payable $ 233,759 $ 190,527 Compensation 55,404 49,439 Profit sharing and retirement 22,861 26,414 Accrued marketing 31,498 31,969 Accrued freight 19,129 15,288 Customer deposits 27,218 21,101 Other accrued expenses 83,884 78,900 $ 473,753 $ 413,638 Product Warranties The Corporation issues certain warranty policies on its workplace furnishings and residential building products that provide for repair or replacement of any covered product or component that fails during normal use because of a defect in design, materials, or workmanship. The duration of warranty policies on the Corporation's products varies based on the type of product. Allowances have been established for the anticipated future costs associated with the Corporation's warranty programs. A warranty allowance is determined by recording a specific allowance for known warranty issues and an additional allowance for unknown claims expected to be incurred based on historical claims experience. Actual claims incurred could differ from the original estimates, requiring adjustments to the allowance. Activity associated with warranty obligations was as follows (in thousands): 2021 2020 2019 Balance at beginning of period $ 16,109 $ 15,865 $ 15,450 Accruals for warranties issued during period 7,723 9,380 11,035 Adjustments related to pre-existing warranties (189) 127 906 Settlements made during the period (7,602) (9,263) (11,526) Balance at end of period $ 16,041 $ 16,109 $ 15,865 The current and long-term portions of the allowance for the estimated settlements are included within "Accounts payable and accrued expenses" and "Other Long-Term Liabilities", respectively, in the Consolidated Balance Sheets. The following table summarizes when these estimated settlements are expected to be paid (in thousands): January 1, 2022 January 2, 2021 Current - in the next twelve months $ 5,442 $ 5,918 Long-term - beyond one year 10,599 10,191 $ 16,041 $ 16,109 Revenue Recognition Performance Obligations - The Corporation recognizes revenue for sales of workplace furnishings and residential building products at a point in time following the transfer of control of such products to the customer, which typically occurs upon shipment of the product. In certain circumstances, transfer of control to the customer does not occur until the goods are received by the customer or upon installation and/or customer acceptance, depending on the terms of the underlying contracts. Contracts typically have a duration of less than one year and normally do not include a significant financing component. Generally, payment is due within 30 days of invoicing. Significant Judgments - The amount of consideration the Corporation receives and revenue recognized varies with changes in rebate and marketing program incentives, as well as early pay discounts, offered to customers. The Corporation uses significant judgment throughout the year in estimating the reduction in net sales driven by variable consideration for rebate and marketing programs. Judgments made include expected sales levels and utilization of funds. However, this judgment factor is significantly reduced at the end of each year when sales volumes and the impact to rebate and marketing programs are known and recorded as the programs typically end near the Corporation's fiscal year end. Accounting Policies and Practical Expedients : • The Corporation applies the accounting policy election which allows an entity to account for shipping and handling activities that occur after control is transferred as fulfillment activities. The Corporation accrues for shipping and handling costs at the same time revenue is recognized, which is in accordance with the policy election. When shipping and handling activities occur prior to the customer obtaining control of the good(s), they are considered fulfillment activities rather than a performance obligation and the costs are accrued for as incurred. • The Corporation applies the accounting policy election which allows an entity to exclude from the measurement of the transaction price all taxes assessed by a governmental authority associated with the transaction, including sales, use, excise, value-added, and franchise taxes (collectively referred to as sales taxes). This allows the Corporation to present revenue net of these certain types of taxes. • The Corporation applies the practical expedient which permits an entity to recognize incremental costs to obtain a contract as an expense when incurred if the amortization period will be less than one year. • The Corporation applies the practical expedient which allows an entity to not adjust the promised amount of consideration for the effects of a significant financing component if a contract has a duration of one year or less. As the Corporation's contracts are typically less than one year in length, consideration will not be adjusted. • The Corporation's backlog orders are typically cancellable for a period of time and almost all contracts have an original duration of one year or less. As a result, the Corporation elected the practical expedient not to disclose the unsatisfied performance obligation as of period end. The backlog is typically fulfilled within a few months. Leases Accounting Policies and Practical Expedients : • The Corporation has made an accounting election by class of underlying assets to not separate non-lease components of a contract from the lease components to which they relate for all classes of assets except for embedded leases. • The Corporation has elected for all asset classes to not recognize right of use ("ROU") assets and lease liabilities for leases that at the acquisition date or business combination date have a remaining lease term of twelve months or less. Research and Development Costs Research and development costs relating to development of new products and processes, including significant improvements and refinements to existing products, are expensed as incurred. These costs include salaries, contractor fees, prototype costs, and administrative fees. The amounts charged against income and recorded in "Selling and administrative expenses" on the Consolidated Statements of Comprehensive Income were as follows (in thousands): 2021 2020 2019 Research and development costs $ 39,415 $ 35,318 $ 34,699 Freight Expense Freight expense on shipments to customers was recorded in "Selling and administrative expenses" on the Consolidated Statements of Comprehensive Income as follows (in thousands): 2021 2020 2019 Freight expense $ 118,196 $ 98,417 $ 123,667 Stock-Based Compensation The Corporation measures the cost of employee services in exchange for an award of equity instruments based on the grant-date fair value of the award and generally recognizes cost over the requisite service period. See "Note 11. Stock-Based Compensation" in the Notes to Consolidated Financial Statements for further information. Income Taxes The Corporation uses an asset and liability approach that takes into account guidance related to uncertain tax positions and requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Corporation’s financial statements or tax returns. Deferred income taxes are provided to reflect differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. Earnings Per Share Basic earnings per share are based on the weighted-average number of common shares outstanding during the year. Shares potentially issuable under stock options, restricted stock units, and common stock equivalents under the Corporation's deferred compensation plans have been considered outstanding for purposes of the diluted earnings per share calculation. The following table reconciles the numerators and denominators used in the calculation of basic and diluted earnings per share ("EPS") (in thousands, except per share data): 2021 2020 2019 Numerator: Numerator for both basic and diluted EPS attributable to HNI Corporation net income $ 59,814 $ 41,917 $ 110,505 Denominators: Denominator for basic EPS weighted-average common shares outstanding 43,438 42,689 43,101 Potentially dilutive shares from stock-based compensation plans 526 267 394 Denominator for diluted EPS 43,964 42,956 43,495 Earnings per share – basic $ 1.38 $ 0.98 $ 2.56 Earnings per share – diluted $ 1.36 $ 0.98 $ 2.54 The weighted-average common stock equivalents presented above do not include the effect of the common stock equivalents in the table below because their inclusion would be anti-dilutive (in thousands): 2021 2020 2019 Common stock equivalents excluded because their inclusion would be anti-dilutive 1,606 3,110 2,131 Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Areas requiring significant use of management estimates relate to goodwill and intangibles, accruals for self-insured medical claims, workers’ compensation, legal contingencies, general liability and auto insurance claims, valuation of long-lived assets, and estimates of income taxes. Other areas requiring use of management estimates relate to allowance for doubtful accounts, inventory allowances, marketing program accruals, warranty accruals, and useful lives for depreciation and amortization. Actual results could differ from those estimates. Self-Insurance The Corporation is primarily self-insured for general, auto, and product liability, workers’ compensation, and certain employee health benefits. Certain risk exposures are mitigated through the use of independent third party stop loss insurance coverages. The general, auto, product, and workers’ compensation liabilities are managed using a wholly-owned insurance captive and the related liabilities are included in the Consolidated Balance Sheets as follows (in thousands): January 1, 2022 January 2, 2021 General, auto, product, and workers' compensation liabilities $ 26,300 $ 25,666 The preceding table excludes self-insured member health benefits liabilities of $5.9 million and $6.0 million as of January 1, 2022 and January 2, 2021, respectively. The Corporation’s policy is to accrue amounts in accordance with the actuarial determined liabilities. The actuarial valuations are based on historical information along with certain assumptions about future events. Changes in assumptions for such matters as legal actions, medical cost inflation, and magnitude of change in actual experience development could cause these estimates to change in the future. Foreign Currency Translations Foreign currency financial statements of foreign operations, where the local currency is the functional currency, are translated using exchange rates in effect at period end for assets and liabilities and average exchange rates during the period for results of operations. Related translation adjustments are reported as a component of Shareholders' Equity. Immaterial gains and losses on foreign currency transactions are included in "Selling and administrative expenses" in the Consolidated Statements of Comprehensive Income. Recently Adopted Accounting Standards In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes . This update simplifies various aspects related to accounting for income taxes, removes certain exceptions to the general principles in ASC 740, and clarifies and amends existing guidance to improve consistent application. The Corporation adopted ASC 740 in the first quarter of fiscal 2021, with no material effect on the Consolidated Financial Statements and related footnote disclosures. Reclassifications Certain reclassifications have been made within the financial statements to conform to the current year presentation. |
