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, including those discussed under Item 1A Risk Factors and elsewhere in this report.

Overview

The Corporation has two reportable segments: office furniture and hearth products. The Corporation is the second largest office furniture manufacturer in the world and the nation's leading manufacturer and marketer of gas and wood burning fireplaces. The Corporation utilizes its split and focus, decentralized business model to deliver value to its customers with various brands and selling models. The Corporation is focused on growing its existing businesses while seeking out and developing new opportunities for growth.

The Corporation delivered profitable growth in 2012 despite challenging market conditions, decrease in federal government sales and economic uncertainty. Growth in the supplies-driven channel was strong despite the heavy weight of economic and political uncertainty on small business confidence. Growth in the contract channel of the office furniture segment was modest as many large corporations delayed or postponed major projects in reaction to economic uncertainty. The Corporation's hearth products segment leveraged its leading market position to increase sales and drive significant profit improvement as the housing market began to recover. The Corporation remained committed to long-term profitable growth across its core businesses and increased the amount of focused investments in selling, marketing, manufacturing and product initiatives. The Corporation completed the acquisition of BP Ergo Limited, a manufacturer and marketer of office furniture in India, during 2012.

Net sales during 2012 were $2.0 billion, an increase of 9.3 percent, compared to net sales of $1.8 billion in 2011. The sales increase was driven by increased volume in both the supplies-driven and contract channels of the office furniture segment, acquisitions in the office furniture segment, and increased volume in the new construction channel of the hearth products segment.

Management is optimistic about the office furniture and hearth markets. The Corporation will continue to invest in selling, marketing and product initiatives and remain focused on improving operations and reducing cost.

Results of Operations

The following table sets forth the percentage of consolidated net sales represented by certain items reflected in the Corporation's Consolidated Statements of Income for the periods indicated.

Fiscal                                            2012           2011           2010
Net Sales                                         100.0  %       100.0  %       100.0  %
Cost of products sold                              65.6           65.1           65.3
Gross profit                                       34.4           34.9           34.7
Selling and administrative expenses                29.9           30.2           30.7
Restructuring related charges                       0.1            0.2            0.6
Operating income                                    4.4            4.4            3.4
Interest income (expense) net                      (0.5 )         (0.6 )         (0.7 )
Income (loss) from continuing operations
before income taxes                                 3.9            3.8            2.8
Income taxes                                        1.5            1.3            1.0
Net income attributable to the noncontrolling
interest                                              -              -              -
Income (loss) from continuing operations
attributable to HNI Corporation                     2.4  %         2.5  %         1.7  %

Net Sales

Net sales during 2012 were $2.0 billion, an increase of 9.3 percent, compared to net sales of $1.8 billion in 2011. Both the office furniture segment and the hearth products segment experienced increased volume and better price realization. Acquisitions contributed $93.0 million or 5.1 percent sales growth in 2012. Net sales during 2011 were $1.8 billion, an increase of 8.7 percent, compared to net sales of $1.7 billion in 2010. Both the office furniture segment and the hearth products segment experienced increased volume and better price realization. Acquisitions contributed $8.2 million or 0.5 percent sales growth in 2011.

Gross Profit

Gross profit as a percent of net sales decreased 0.5 percentage points in 2012 as compared to 2011 due to unfavorable mix, investments to improve operations, new product ramp-up and impact of acquisitions offset partially by higher volume, better price realization and lower material costs. Gross profit as a percent of net sales increased 0.2 percentage points in 2011 as compared to 2010 due to higher volume, better price realization and lower restructuring and transition costs offset partially by increased material costs.

Selling and Administrative Expenses

Selling and administrative expenses increased 8.2 percent in 2012 and 7.0 percent in 2011. The increase in 2012 was due to volume related expenses, investments in selling and growth initiatives, higher incentive-based compensation and costs associated with acquisitions. The increase in 2011 was due to volume related expenses, higher fuel costs, increased distribution costs due to mix of customers, investments in selling and growth initiatives, higher incentive-based compensation and costs associated with an acquisition. These were offset partially by cost control initiatives and lower amortization of intangibles.

Selling and administrative expenses include freight expense for shipments to customers, product development costs and amortization expense of intangible assets. Refer to Summary of Significant Accounting Policies and Goodwill and Other Intangible Assets in the Notes to Consolidated Financial Statements for further information regarding the comparative expense levels for these items.

Restructuring and Impairment Charges

During 2011, the Corporation made the decision to transition out of its Lithia Springs, Georgia office furniture distribution center and the transition was completed in the fourth quarter of 2012. The distribution center was operated by a third-party logistics provider. The Corporation added distribution capacity to its Cedartown, Georgia office furniture manufacturing facility and distribution center to make up for the loss of the Lithia Springs distribution center. To make room for the additional distribution capacity, the Corporation consolidated some office furniture manufacturing production from the Cedartown facility into exisiting

office furniture manufacturing facilities in Muscatine, Iowa. In addition, during 2011, the Corporation made the decision to consolidate some office furniture manufacturing production from its Hickory, North Carolina facility into its Wayland, New York facility. In connection with the closure, consolidations and realignment, the Corporation recorded $2.0 million of pre-tax charges which included $0.2 million of accelerated depreciation of machinery and equipment recorded in cost of sales and $1.8 million of severance and facility exit costs recorded as restructuring costs in 2011. During 2012, the Corporation recorded current period charges which included $0.3 million of accelerated depreciation of machinery and equipment recorded in cost of sales and $1.5 million of severance and facility exit costs recorded as restructuring costs. These included impairment of leasehold improvements of $0.2 million which was a non-cash transaction.

The Corporation made the decision to close certain hearth products retail and distribution locations during the first quarter of 2011. A pre-tax charge of $0.4 million was recorded for severance and facility exit costs.

During 2010, the Corporation made the decision to close an office furniture facility in Salisbury, North Carolina and consolidate production into existing office furniture manufacturing facilities. In connection with the closure of this facility, the Corporation recorded $4.2 million of pre-tax charges which included $2.3 million of accelerated depreciation of buildings, machinery and equipment recorded in cost of sales and $1.9 million of severance and facility exit costs recorded as restructuring costs in 2010. During 2011, the Corporation incurred $0.6 million of current period charges recorded as restructuring costs.

During 2010, the Corporation completed the shutdown of three office furniture facilities in South Gate, California; Louisburg, North Carolina and Owensboro, Kentucky and consolidated production into existing office furniture manufacturing facilities. The Corporation announced and started these activities during 2009. During 2010, the Corporation incurred $2.0 million of current period charges which included $0.3 million of accelerated depreciation of machinery and equipment recorded in cost of sales and $1.6 million of other costs recorded as restructuring costs. During 2011 and 2012, the Corporation incurred $0.5 million and $0.4 million of current period charges due to ongoing costs related to a vacant building recorded as restructuring costs, respectively.

During 2010, the Corporation made the decision to close certain hearth products retail and distribution locations. A pre-tax charge of $0.2 million was recorded for severance and facility exit costs in 2010.

During 2010, the Corporation completed the consolidation of significant production from its hearth products Mount Pleasant, Iowa plant to other existing hearth products manufacturing facilities. Additionally the Corporation completed the closure of hearth products distribution centers in Alsip, Illinois and Lake City, Minnesota and transferred operations to its Mount Pleasant facility. During 2010, the Corporation incurred $0.1 million of current period charges recorded as restructuring costs.

The Corporation made the decision to sell certain hearth products distribution locations during the fourth quarter of 2010. The assets to be sold were moved to held for sale, and the Corporation recorded an impairment charge of $5.0 million to reduce the value of the business unit to fair market value. The Corporation also recorded $0.5 million of impairment charges in 2010 related to adjusting excess land held for sale to fair market value.

Operating Income

Operating income increased $6.1 million to $87.6 million in 2012, compared to $81.5 million in 2011. The increase was due to higher volume, better price realization and lower material costs. These were offset partially by investments in operations, selling, marketing and product initiatives, and higher incentive-based compensation. Operating income increased $23.6 million to $81.5 million in 2011, compared to $57.9 million in 2010. The increase was due to higher volume, better price realization and lower restructuring, transition and impairment charges. These were offset partially by higher input costs, investments in selling, marketing and product initiatives and impact of new acquisitions.

Income Taxes

The provision for income taxes for continuing operations reflect an effective tax rate of 37.7 percent, 34.8 percent and 36.1 percent for 2012, 2011 and 2010, respectively. The current year increase in the effective tax rate was primarily driven by the Corporation's inability to claim a federal research and development credit along with other items. On January 2, 2013 the American Tax Relief Act of 2012 was enacted into law, which included an extension of the federal research and development tax credit and other tax credits through December 31, 2013. As a result the Corporation expects its income tax provision for the first quarter of fiscal 2013 will include $0.9 million of discrete tax benefit.

Income From Continuing Operations

Income from continuing operations in 2012, which excludes the Corporation's discontinued business (see Discontinued Operations in the Notes to Consolidated Financial Statements) was $48.3 million compared to $45.7 million in 2011, a 5.6 percent increase. Income from continuing operations in 2011 was $45.7 million compared to $29.7 million in 2010, a 54.1 percent increase. Income from continuing operations per diluted share increased by 5.9 percent to $1.07 in 2012 compared to $1.01 in 2011 and $0.65 in 2010.

Discontinued Operations

During 2010, the Corporation completed the sale of a non-core business in the office furniture segment and a small non-core component of its hearth products segment. Revenues and expenses associated with these components are presented as discontinued operations for all periods presented. Refer to Discontinued Operations in the Notes to Consolidated Financial Statements for further information.

Net Income Attributable to HNI Corporation

Net income attributable to HNI Corporation increased 6.5 percent to $49.0 million in 2012 compared to $46.0 million in 2011 and $26.9 million in 2010. Net income per diluted share increased 5.9 percent to $1.07 in 2012 compared to $1.01 in 2011 and $0.59 in 2010.

Office Furniture

Office furniture comprised 84 percent, 83 percent and 83 percent of consolidated net sales for 2012, 2011 and 2010, respectively. Net sales for office furniture increased $159 million or 10.4 percent in 2012 to $1.7 billion compared to $1.5 billion in 2011. Acquisitions contributed $93 million of sales in 2012. Organic sales increased $66 million or 4.3 percent including increased price realization of $41 million. The Corporation experienced growth in both the supplies-driven and contract channels partially offset by a large decline in sales to the federal government. Net sales for office furniture increased 8.8 percent in 2011 to $1.5 billion compared to $1.4 billion in 2010. Acquisitions contributed $8 million of sales in 2011. Organic sales increased $115 million or 8.2 percent including increased price realization of $21 million. The Corporation experienced growth in both the supplies-driven and contract channels as the economy continued to stabilize. BIFMA reported 2012 shipments down 1 percent from 2011 levels which were up 13 percent from 2010 levels.

Operating profit as a percent of net sales was 5.4 percent in 2012, 6.5 percent in 2011 and 6.2 percent in 2010. The decrease in operating margins in 2012 was due to unfavorable mix, investments to improve operations, new product ramp-up, investments in growth initiatives and impact of acquisitions. These were partially offset by increased volume, better price realization and lower restructuring costs. The increase in operating margins in 2011 was due to higher volume, better price realization and lower restructuring costs. These were partially offset by higher input costs, higher mix of lower margin products and investments in strategic growth and selling initiatives.

Hearth Products

Hearth products sales increased $11 million or 3.7 percent in 2012 to $317 million compared to $305 million in 2011 including increased price realization of $5 million. The sales increase was due to an increase in the new construction channel offset partially by a decrease in the remodel/retrofit channel. Hearth products sales increased 8.4 percent in 2011 to $305 million compared to $282 million in 2010 including increased price realization of $8 million. The sales increase was due to an increase in the remodel/retrofit channel driven by alternative energy products offset partially by a decrease in the new construction channel.

Operating profit as a percent of sales in 2012 was 8.4 percent compared to 4.8 percent in 2011 and 1.0 percent in 2010. The increase in operating margins in 2012 was due to higher volume and better price realization. These were partially offset by investments in selling and marketing initiatives. The increase in operating margins in 2011 was due to lower restructuring and impairment charges of $5 million compared to 2010 as well as higher volume and better price realization. These were partially offset by higher input costs, investments in selling and marketing initiatives and higher incentive-based compensation.

Liquidity and Capital Resources

Cash Flow - Operating Activities

Cash generated from operating activities in 2012 totaled $144.8 million compared to $134.3 million generated in 2011. Changes in working capital balances resulted in a $33.0 million source of cash in 2012 compared to $12.9 million in the prior year.

The source of cash related to working capital balances in 2012 was primarily driven from lower inventory of $9.5 million and increased current liabilities of $32.3 million. The increase in current liabilities is comprised of a $25.4 million increase in trade accounts payable, a $2.2 million increase in other accruals, namely compensation and marketing expense accruals and a $4.7 million increase in tax-related accruals. These sources of cash were offset partially by a $7.0 million increase in trade receivables due to increased sales during the fourth quarter.

The source of cash related to working capital balances in 2011 was primarily driven from increased current liabilities of $35.4 million. The increase in current liabilities is comprised of a $29.5 million increase in trade accounts payable, a $10.3 million increase in other accruals, namely compensation and marketing expense accruals, offset by a $4.4 million decrease in tax-related accruals. These sources of cash were offset partially by a $6.9 million increase in trade receivables and higher inventory of $11.3 million due to increased sales during the fourth quarter.

The Corporation places special emphasis on management and control of working capital with a particular focus on trade receivables and inventory levels. The success achieved in managing receivables is in large part a result of doing business with quality customers and maintaining close communication with them. Management believes recorded trade receivable valuation allowances at the end of 2012 are adequate to cover the risk of potential bad debts. Allowances for non-collectible trade receivables, as a percent of gross trade receivables, totaled 2.4 percent, 2.3 percent and 2.8 percent at the end of fiscal years 2012, 2011 and 2010, respectively. The Corporation's inventory turns were 14, 16 and 16, for 2012, 2011 and 2010, respectively.

Cash Flow - Investing Activities

Capital expenditures, including capitalized software, were $60.3 million in 2012, $31.1 million in 2011 and $26.7 million in 2010. These expenditures continue to focus on machinery and equipment and tooling required to support new products, continuous improvements in our manufacturing processes and cost savings initiatives as well as the implementation of new integrated software systems to support business process transformation. The Corporation anticipates capital expenditures for 2013 to total $70 to $75 million, primarily related to new products, operational process improvements and the business systems transformation project referred to above.

In 2012, the investing activities reflected a net cash outflow of $25.5 million related to the acquisition of BP Ergo and $1.5 million related to the acquisition of a pellet stove business. The addition of BP Ergo provides the Corporation a presence in the India office furniture market. In 2011, investing activities reflected a net cash outflow of $55 million related to the acquisition of Sagus. The addition of Sagus increased the Corporation's presence in the educational furniture market. Refer to the Business Combination note in the Notes to Consolidated Financial Statements for additional information.

In 2011, the Corporation completed the sale of a facility located in Owensboro, Kentucky, a facility located in Salisbury, North Carolina and excess land located in Meadville, Pennsylvania. In 2010, the Corporation completed the sale of a facility located in Louisburg, North Carolina. The proceeds from these sales of $3 million and $1 million are reflected in the Consolidated Statement of Cash Flows as "Proceeds from sale of property, plant and equipment" for 2011 and 2010, respectively.

In 2010, the Corporation completed the sale of a small, non-core business in the office furniture segment and a small non-core component of its hearth products segment. The combined proceeds from these sales of $4 million are reflected in the Consolidated Statement of Cash Flows in investing activities.

Cash Flow - Financing Activities

On September 28, 2011, the Corporation amended and restated its existing revolving credit facility dated June 11, 2010. The Corporation increased its borrowing capacity from $150 million to $250 million and has the option to increase its borrowing capacity by an additional $100 million. The Corporation also extended the term to the earlier of (i) September 28, 2016 or (ii) the date 90 days prior to the maturity date of the Corporation's senior notes (April 6, 2016), subject to certain exceptions. The Corporation effectively decreased interest costs. Amounts borrowed under the credit agreement may be borrowed, repaid and reborrowed from time to time. The Corporation paid approximately $1.2 million of debt issuance costs that are being amortized

straight-line over the term of the credit agreement. During 2012 net borrowings under the revolving credit facility peaked at $80 million. As of December 29, 2012, there were no amounts outstanding under the revolving credit facility.

In 2006, the Corporation refinanced $150 million of borrowings outstanding under its prior revolving credit facility with 5.54 percent, ten-year unsecured Senior Notes due in 2016 issued through the private placement debt market. Interest payments are due semi-annually on April 1 and October 1 of each year and the principal is due in a lump sum in 2016.

Additional borrowing capacity of $250 million, less amounts used for designated letters of credit, is available through the revolving credit facility in the event cash generated from operations should be inadequate to meet future needs. The Corporation does not currently expect access to future capital to be a constraint on planned growth. Long-term debt, including capital lease obligations, was 26% of total capitalization as of December 29, 2012, 26% as of December 31, 2011 and 27% as of January 1, 2011.

The credit agreement governing the revolving credit facility and the note purchase agreement pertaining to the Senior Notes contain covenants that, among other things, restrict, subject to certain exceptions, our ability to:
• incur additional indebtedness and lease obligations and make guarantees;

• create liens on assets;

• engage in any material line of business substantially different from existing lines of business;

• sell assets;

• make investments, loans and advances, including acquisitions;

• engage in sale-leaseback transactions in excess of $50 million in the aggregate;

• repay the Senior Notes or enter into certain amendments thereof; and

• engage in certain transactions with affiliates.

The credit agreement governing the revolving credit facility contains a number of covenants, including covenants requiring maintenance of the following financial ratios as of the end of any fiscal quarter:
• a consolidated interest coverage ratio of not less than 4.0 to 1.0, based upon the ratio of (a) consolidated EBITDA (as defined in the credit agreement) for the last four fiscal quarters to (b) the sum of consolidated interest charges; and

• a consolidated leverage ratio of not greater than 3.0 to 1.0, based upon the ratio of (a) the quarter-end consolidated funded indebtedness (as defined in the credit agreement) to (b) consolidated EBITDA for the last four fiscal quarters; or

• a consolidated leverage ratio of not greater than 3.5 to 1.0, based upon the ratio of (a) the quarter-end consolidated funded indebtedness to (b) consolidated EBITDA for the last four fiscal quarters following any qualifying debt financed acquisition.

The note purchase agreement governing the Senior Notes also contains a number of covenants, including a covenant requiring maintenance of consolidated debt to consolidated EBITDA (as defined in the note purchase agreement) of not greater than 3.5 to 1.0, based upon the ratio of (a) the quarter-end consolidated funded indebtedness (as defined in the note purchase agreement) to (b) consolidated EBITDA for the last four fiscal quarters.

The revolving credit facility and Senior Notes are the primary sources of committed funding from which the Corporation finances its planned capital expenditures, strategic initiatives such as repurchases of common stock and certain working capital needs. Non-compliance with the various financial covenant ratios could prevent the Corporation from being able to access further borrowings under the revolving credit facility, require immediate repayment of all amounts outstanding with respect to the revolving credit facility and Senior Notes and increase the cost of borrowing.

The most restrictive of the financial covenants is the consolidated leverage ratio requirement of 3.0 to 1.0 included in the credit agreement governing the revolving credit facility. Under the credit agreement, adjusted EBITDA is defined as consolidated net income before interest expense, income taxes and depreciation and amortization of intangibles, as well as non-cash nonrecurring charges and all non-cash items increasing net income. At December 29, 2012, the Corporation was well below this ratio and was in compliance with all of the covenants and other restrictions in the credit agreement and note purchase agreement. The Corporation currently expects to remain in compliance over the next twelve months.

In 2008, the Corporation entered into an interest rate swap agreement with one of its relationship banks, designated as a cash flow hedge, for purposes of managing its benchmark interest rate fluctuation risk. The fair value of the swap arrangement changes based on fluctuations in market interest rates. Changes in fair value are recorded as a component of accumulated other comprehensive income in the equity section of the Corporation's consolidated balance sheet. This interest rate swap had the effect of increasing total interest expense by $0.9 million in 2011. The interest rate swap agreement matured on May 27, 2011.

During 2012, the Corporation repurchased 800,000 shares of its common stock at a cost of approximately $21.0 million, or an average price of $26.28. The Board authorized $200 million on August 8, 2006, and an additional $200 million on November 9, 2007, for repurchases of the Corporation's common stock. As of December 29, 2012 approximately $114.8 million of this authorized amount remained unspent. During 2011, the Corporation repurchased 323,965 shares of its common stock at a cost of approximately $10.0 million, or an average price of $30.87. During 2010, the Corporation repurchased 655,032 shares of its common stock at a cost of approximately $17.8 million, or an average price of $27.20.

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