Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts and transactions of the Corporation and its subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.

Cash, Cash Equivalents, and Investments

Cash and cash equivalents generally consist of cash and money market accounts. The fair value approximates the carrying value due to the short duration of the securities. These securities have original maturity dates not exceeding three months. The Corporation has short-term investments with maturities of less than one year and investments with maturities greater than one year included in "Other Assets" in the Consolidated Balance Sheets. Management classifies investments in marketable securities at the time of purchase and reevaluates such classification at each balance sheet date. Debt securities, including government and corporate bonds, are classified as available-for-sale and stated at current market value with unrealized gains and losses included as a separate component of equity, net of any related tax effect. The specific identification method is used to determine realized gains and losses on the trade date.

Cash, cash equivalents, and investments consisted of the following (in thousands):



	December 30, 2017						December 31, 2016
	Cash and cash equivalents		Short-term investments		Long-term investments		Cash and cash equivalents		Short-term investments		Long-term investments
Available-for-sale securities:
Debt securities	—		2,015		10,479		—		2,252		10,033
Cash and money market accounts	23,348		—		—		36,312		—		—
Total	$	23,348	$	2,015	$	10,479	$	36,312	$	2,252	$	10,033

The following table summarizes the amortized cost basis of the debt securities (in thousands):



	December 30, 2017		December 31, 2016
Amortized cost basis of debt securities	$	12,660	$	12,445

Immaterial unrealized gains and losses are recorded in "Accumulated other comprehensive income (loss)" in the Consolidated Balance Sheets for these debt securities.

Receivables

The allowance for doubtful accounts is developed based on several factors including overall customer credit quality, historical write-off experience, and specific account analyses projecting the ultimate collectability of the account. As such, these factors may change over time causing the allowance level to adjust accordingly. The following table summarizes the change in the allowance for doubtful accounts (in thousands):



	Balance at beginning of period		Adjustments to Allowance			Amounts written off, net of recoveries and other adjustments		Divestitures		Balance at end of period
Year ended December 30, 2017	$	2,140	$	846		$	1,082	$	—	$	1,904
Year ended December 31, 2016	$	4,287	$	(357	)	$	1,598	$	192	$	2,140
Year ended January 2, 2016	$	5,096	$	1,394		$	2,203	$	—	$	4,287

Inventories

The Corporation values its inventory at the lower of cost or net realizable value with approximately 83 percent and 79 percent valued by the last-in, first-out ("LIFO") costing method as of December 30, 2017 and December 31, 2016, respectively.



(In thousands)	December 30, 2017			December 31, 2016
Finished products	$	101,715		$	71,223
Materials and work in process	81,202			71,375
LIFO allowance	(27,234		)	(24,160		)
	$	155,683		$	118,438

During 2016, inventory quantities were reduced at certain reporting units. This reduction resulted in a liquidation of LIFO inventory quantities carried at higher or lower costs prevailing in prior years as compared with the cost of current year purchases, the effect of which increased cost of goods sold by approximately $0.05 million in 2016. There was no similar LIFO decrement in 2017 and 2015. If the FIFO method had been in use, inventories would have been $27.2 million and $24.2 million higher than reported as of December 30, 2017 and December 31, 2016, respectively.

The increase in finished products inventory is primarily due to investments in direct fulfillment capabilities and production leveling related to higher volume.

Property, Plant, and Equipment

Property, plant, and equipment are carried at cost. Expenditures for repairs and maintenance are expensed as incurred. Major improvements that materially extend the useful lives of the assets are capitalized. Depreciation has been computed using the straight-line method over estimated useful lives: land improvements, 10 – 20 years; buildings, 10 – 40 years; and machinery and equipment, 3 – 12 years. Total depreciation expense was as follows (in thousands):



	2017		2016		2015
Depreciation expense	$	56,494	$	57,171	$	46,512

Long-Lived Assets

The Corporation evaluates long-lived assets for indicators of impairment as events or changes in circumstances occur indicating that an impairment risk may be present. The judgments regarding the existence of impairment are based on business and market conditions, operational performance, and estimated future cash flows. If the carrying value of a long-lived asset is considered impaired, an impairment charge is recorded to adjust the asset to its estimated fair value. Asset impairment charges associated with the Corporation’s long-lived assets are discussed in "Note 3. Restructuring and Impairment Charges" in the Notes to Consolidated Financial Statements.

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.

Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses are reflected in the Consolidated Balance Sheets and were as follows (in thousands):



	December 30, 2017		December 31, 2016
Trade accounts payable	$	235,577	$	201,810
Compensation	32,582		47,280
Profit sharing and retirement expense	30,884		32,335
Marketing expenses	41,751		41,963
Freight	13,121		14,251
Other accrued expenses	96,213		87,407
	$	450,128	$	425,046

Product Warranties

The Corporation issues certain warranty policies on its furniture and hearth products that provide for repair or replacement of any covered product or component that fails during normal use because of a defect in design, materials, or workmanship. Allowances have been established for the anticipated future costs associated with the Corporation's warranty programs.

A warranty allowance is determined by recording a specific allowance for known warranty issues and an additional allowance for unknown claims expected to be incurred based on historical claims experience. Actual claims incurred could differ from the original estimates, requiring adjustments to the allowance. Activity associated with warranty obligations was as follows (in thousands):



	2017			2016			2015
Balance at beginning of period	$	15,250		$	16,227		$	16,719
Accruals settled from divestiture	—			(538		)	—
Accruals for warranties issued during period	20,075			20,055			19,995
Adjustments related to pre-existing warranties	194			604			(334		)
Settlements made during the period	(20,131		)	(21,098		)	(20,153		)
Balance at end of period	$	15,388		$	15,250		$	16,227

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):



	December 30, 2017		December 31, 2016
Current - in the next twelve months	$	9,524	$	6,959
Long-term - beyond one year	5,864		8,291
	$	15,388	$	15,250

Revenue Recognition

Sales of office furniture and hearth products are generally recognized when title transfers and the risks and rewards of ownership have passed to customers. Typically, title and risk of ownership transfer when the product is shipped. In certain circumstances, title and risk of ownership do not transfer until the goods are received by the customer or upon installation and customer acceptance. Revenue includes freight charged to customers; related costs are recorded in selling and administrative expense. Rebates, discounts, and other marketing program expenses directly related to the sale are recorded as a reduction to net sales. Marketing program accruals require the use of management estimates and the consideration of contractual arrangements subject to interpretation. Customer sales that achieve or do not achieve certain award levels can affect the amount of such estimates and actual results could differ from these estimates.

Product Development Costs

Product development costs relating to development of new products and processes, including significant improvements and refinements to existing products, are expensed as incurred. These costs include salaries, contractor fees, building costs, utilities, 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):



	2017		2016		2015
Product development costs	$	31,846	$	28,089	$	31,103

Freight Expense

Freight expense on shipments to customers were recorded in "Selling and administrative expenses" on the Consolidated Statements of Comprehensive Income as follows (in thousands):



	2017		2016		2015
Freight expense	$	119,096	$	115,157	$	133,384

Stock-Based Compensation

The Corporation measures the cost of employee services in exchange for an award of equity instruments based on the grant-date fair value of the award and recognizes cost over the requisite service period. See "Note 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.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the "Act") was signed into law, making significant changes to the Internal Revenue Code. In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income ("GILTI") provisions of the Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance indicates that either accounting for deferred taxes related to GILTI inclusions or treating any taxes on GILTI inclusions as a period cost are both acceptable methods subject to an accounting policy election. Effective in the first quarter of fiscal 2018, the Corporation will elect to treat any potential GILTI inclusions as a period cost, as no material impact is projected from GILTI inclusions and any deferred taxes related to any inclusion would not be material. Also under the Act, a corporation’s foreign earnings accumulated under legacy tax laws are deemed repatriated. The Corporation will continue to evaluate its ability to assert indefinite reinvestment to determine recognition of a deferred tax liability for other items such as Section 986(c) currency gain/loss, foreign withholding, and state taxes. There were approximately $33.6 million of accumulated earnings considered permanently reinvested in China, Hong Kong, Singapore, and Canada as of December 30, 2017. The Corporation believes the tax costs on accumulated unremitted foreign earnings would be approximately $0.2 million if the amounts were not considered permanently reinvested.

See "Note 8. Income Taxes" in the Notes to Consolidated Financial Statements for further information.

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):



	2017		2016		2015
Numerator:
Numerator for both basic and diluted EPS attributable to HNI Corporation net income	$	89,795	$	85,577	$	105,436
Denominators:
Denominator for basic EPS weighted- average common shares outstanding	43,839		44,414		44,285
Potentially dilutive shares from stock-based compensation plans	1,001		1,088		1,156
Denominator for diluted EPS	44,840		45,502		45,441
Earnings per share – basic	$	2.05	$	1.93	$	2.38
Earnings per share – diluted	$	2.00	$	1.88	$	2.32

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.



	2017	2016	2015
Common stock equivalents excluded because their inclusion would be anti-dilutive	809,420	416,142	493,202

The Corporation implemented ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, in the first quarter of fiscal 2017, which had an immaterial impact on the number of potentially dilutive shares from stock-based compensation plans for the year ended December 30, 2017. See "Recently Adopted Accounting Standards" below for more information regarding the implementation of ASU No. 2016-09.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The critical areas requiring use of management estimates relate to goodwill and intangibles, accruals for self-insured medical claims, workers’ compensation, legal contingencies, general liability and auto insurance claims, valuation of long-lived assets, and estimates of income taxes. Other significant areas requiring use of management estimates relate to allowance for doubtful accounts, inventory allowances, marketing program accruals, warranty accruals, and useful lives for depreciation and amortization. Actual results could differ from those estimates.

Self-Insurance

The Corporation is primarily self-insured for general, auto, and product liability, workers’ compensation, and certain employee health benefits. 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):



	December 30, 2017		December 31, 2016
General, auto, product, and workers' compensation liabilities	$	27,591	$	26,526

The Corporation’s policy is to accrue amounts in accordance with the actuarially determined liabilities. The actuarial valuations are based on historical information along with certain assumptions about future events. Changes in assumptions for such matters as legal actions, medical cost inflation, and magnitude of change in actual experience development could cause these estimates to change in the future.

Foreign Currency Translations

Foreign currency financial statements of foreign operations, where the local currency is the functional currency, are translated using exchange rates in effect at period end for assets and liabilities and average exchange rates during the period for results of operations. Related translation adjustments are reported as a component of Shareholders’ Equity. Gains and losses on foreign currency transactions are included in "Selling and administrative expenses" in the Consolidated Statements of Comprehensive Income.

Reclassifications

Certain reclassifications have been made within the financial statements to conform to the current year presentation.

Recently Adopted Accounting Standards

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. The new standard is intended to simplify accounting for share-based employment awards to employees. Changes include: all excess tax benefits/deficiencies should be recognized as income tax expense/benefit; entities can make elections on how to account for forfeitures; and cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity on the cash flow statement. The Corporation implemented the new standard in the first quarter of fiscal 2017. The primary impact of implementation was the recognition of excess tax benefits in the Corporation's provision for income taxes rather than paid-in capital beginning with the first quarter of fiscal 2017. Excess tax benefits will be recorded in the operating section of the Consolidated Statements of Cash Flows on a prospective basis. Prior to fiscal 2017, the tax benefits or shortfalls were recorded in financing cash flows. The presentation requirements for cash flows related to employee taxes paid for withheld shares in the financing section had no impact to any of the periods presented in the Corporation's Consolidated Statements of Cash Flows since such cash flows have historically been presented as a financing activity. The ongoing impact of the new standard resulted in the recognition of excess tax benefits in the Corporation's provision for income taxes of $1.5 million as a net tax benefit for the year ended December 30, 2017. Prior to the adoption of this standard, those amounts would have been recognized as an adjustment to "Additional paid-in capital" in the Consolidated Balance Sheets. See "Note 8. Income Taxes" in the Notes to Consolidated Financial Statements for further information.

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory. The new standard is intended to simplify the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost or net realizable value rather than the previous guidance of measuring inventory at the lower of cost or market. The Corporation implemented the new standard in the first quarter of fiscal 2017. As the Corporation previously calculated net realizable value when measuring inventory at the lower of cost or market, this standard did not have a material effect on the consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350). The new standard is to simplify the test for goodwill impairment by eliminating the step 2 requirement. Instead, an entity will perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The standard is effective for fiscal 2020, but the Corporation has early adopted the standard in 2017. The Corporation performed its annual test for goodwill impairment during the fourth quarter of fiscal 2017 under the guidance of this standard. See "Note 6. Goodwill and Other Intangible Assets" in the Notes to Consolidated Financial Statements for further information.