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 Unaudited Condensed Consolidated Financial Statements of the Corporation and related notes included elsewhere in this Quarterly Report on Form 10-Q and with the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2022. All dollar amounts presented are in millions, except per share data or where otherwise indicated. Amounts may not sum due to rounding. Statements that are not historical are forward-looking and involve risks and uncertainties. See "Forward-Looking Statements" at the end of this section 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 multi-faceted go-to 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.

Significant developments in the first quarter include the Corporation's planned acquisition of Kimball International, Inc., in a cash and stock transaction currently valued at approximately $455 million, with an estimated closing date in mid-2023. See "Note 3. Acquisitions and Divestitures" and "Note 7. Debt" in the Notes to Condensed Consolidated Financial Statements for more information on this pending transaction and planned financing.

Consolidated net sales for the first quarter of 2023 were $479.1 million, a decrease of 16.3 percent compared to net sales of $572.3 million in the prior-year quarter. The change was due to an 18.2 percent decrease in the residential building products segment, and a 15.1 percent decrease in the workplace furnishings segment. The sale of the Lamex business in the third quarter 2022 decreased year-over-year sales by $17.2 million, and the acquisition of a residential building products company in the second quarter 2022 contributed incremental year-over-year sales of $1.5 million. See "Note 3. Acquisitions and Divestitures" in the Notes to Condensed Consolidated Financial Statements for more information.

Net income attributable to the Corporation in the first quarter of 2023 was $1.6 million compared to $14.2 million in the first quarter of 2022. The decrease was driven by lower volume, increased investments, and transaction costs related to the planned acquisition of Kimball, partially offset by favorable price-cost, lower core selling and administrative expense ("SG&A"), and improved operational productivity.



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Results of Operations

The following table presents certain results of operations:



                                                               Three Months Ended
                                                     April 1,      April 2,
                                                       2023          2022             Change
Net sales                                           $ 479.1       $ 572.3        (16.3)    %
Cost of sales                                         304.8         375.4        (18.8)    %
Gross profit                                          174.3         196.9        (11.5)    %
Selling and administrative expenses                   167.9         176.5         (4.9)    %

Operating income                                        6.4          20.4        (68.6)    %
Interest expense, net                                   2.7           2.0         33.7     %
Income before income taxes                              3.8          18.5        (79.6)    %
Income taxes                                            2.2           4.3        (48.6)    %

Net loss attributable to non-controlling interest (0.0) (0.0) 0.0 % Net income attributable to HNI Corporation $ 1.6 $ 14.2 (89.0) %



As a Percentage of Net Sales:
Net sales                                             100.0  %      100.0  %
Gross profit                                           36.4          34.4          200   bps
Selling and administrative expenses                    35.0          30.8          420   bps

Operating income                                        1.3           3.6         -230   bps
Income taxes                                            0.5           0.7          -20   bps
Net income attributable to HNI Corporation              0.3           2.5         -220   bps

Net Sales

Consolidated net sales for the first quarter of 2023 decreased 16.3 percent compared to the same quarter last year. The change was driven by lower volume mainly due to continued softness in macroeconomic conditions, partially offset by price realization, in both the residential building products and workplace furnishings segments. Included in the sales results for the current quarter was a $17.2 million unfavorable impact from the divestiture of Lamex and an $1.5 million favorable impact from acquiring a residential building products company.

Gross Profit

Gross profit as a percentage of net sales increased 200 basis points in the first quarter of 2023 compared to the same quarter last year, driven by favorable price-cost and improved operational productivity, partially offset by lower volume. Favorable price-cost was attributable to the Corporation's ability to implement price increases over the past several quarters in response to inflationary pressures which have driven up the cost of labor, materials, and transportation.

Selling and Administrative Expenses

Selling and administrative expenses as a percentage of net sales increased 420 basis points in the first quarter of 2023 compared to the same quarter last year. The increase was driven by lower volume, higher freight expense, one-time costs associated with the planned acquisition of Kimball, and increased investment spend. These factors were partially offset by price realization and lower core SG&A.

Operating Income

In the first quarter of 2023, operating income as a percentage of net sales decreased 230 basis points compared to the same quarter last year. The decrease was driven by lower volume and transaction costs related to the planned acquisition of Kimball, partially offset by favorable price-cost, lower core SG&A, and improved operational productivity.



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Interest Expense, Net

Interest expense, net for the first quarter of 2023 was $2.7 million, compared to $2.0 million in the same quarter last year, driven by higher interest rates on the Corporation's variable-rate debt.

Income Taxes

The Corporation's income tax provision for the first quarter of 2023 was $2.2 million on income before taxes of $3.8 million, or an effective tax rate of 58.4 percent. For the first quarter of 2022, the Corporation's income tax provision was $4.3 million on pre-tax income of $18.5 million, or an effective tax rate of 23.2 percent. The higher rate in 2023 is due to lower income before income taxes impacted by non-deductible transaction costs related to the planned acquisition of Kimball, as well as tax decrements on equity-based compensation. Net Income Attributable to HNI Corporation

Net income attributable to the Corporation was $1.6 million, or $0.04 per diluted share in the first quarter of 2023, compared to $14.2 million, or $0.33 per diluted share in the first quarter of 2022.

Workplace Furnishings

The following table presents certain results of operations in the workplace furnishings segment:



                              Three Months Ended
                    April 1,      April 2,
                      2023          2022          Change
Net sales          $ 299.6       $ 353.1        (15.1)    %
Operating loss     $  (4.0)      $  (6.4)        37.9     %
Operating loss %      (1.3) %       (1.8) %        50   bps

First quarter 2023 net sales for the workplace furnishings segment decreased 15.1 percent compared to the same quarter last year. The impact of the sale of the Lamex business during the third quarter of 2022 decreased net sales by $17.2 million compared to the prior year quarter. Aside from this item, segment sales decreased 10.8 percent year-over-year, with lower volume across most customer segments partially offset by price realization. In addition to softer macroeconomic conditions which have negatively affected volume in the current quarter, in the first quarter of 2022 the workplace furnishings segment was in the midst of managing through an elevated sales order backlog as a result of supply chain issues and capacity constraints that arose in 2021. These challenges were largely resolved by the end of 2022, resulting in a more normal backlog heading into 2023 and thus lower relative volume in the current quarter, compared to the prior year quarter.

Operating loss as a percentage of net sales in the first quarter of 2023 improved 50 basis points compared to the same period in 2022. The increase was driven by favorable price-cost, lower core SG&A, and improved operational productivity, partially offset by lower volume.

Residential Building Products

The following table presents certain results of operations in the residential building products segment:



                                Three Months Ended
                      April 1,      April 2,
                        2023          2022          Change
Net sales            $ 179.4       $ 219.2        (18.2)    %
Operating profit     $  28.1       $  40.4        (30.5)    %
Operating profit %      15.6  %       18.4  %      -280   bps

First quarter 2023 net sales for the residential building products segment decreased 18.2 percent compared to the same quarter last year, driven by lower volume in both the new construction and existing home channels as a result of declining housing



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starts and reduced home remodeling activity which both have been negatively affected by higher interest rates and broader macroeconomic concerns. Lower volume was partially offset by price realization versus the prior year quarter. Included in the sales results for the current quarter was a $1.5 million favorable impact from acquiring a residential building products company in the second quarter of 2022.

Operating profit as a percentage of net sales decreased 280 basis points in the first quarter of 2023 compared to the same quarter last year, driven by lower volume, which was partially offset by favorable price-cost.

Liquidity and Capital Resources

Cash, cash equivalents, and short-term investments, coupled with cash flow from future operations, borrowing capacity under the existing credit agreements, 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. Based on current earnings before interest, taxes, depreciation, and amortization, the Corporation can access the full $400 million of borrowing capacity available under the revolving credit facility, which includes the $108 million currently outstanding, and maintain compliance with applicable covenants.

During March 2023, in preparation for the Corporation's plan to acquire Kimball, the Corporation amended its revolving credit facility with up to $160 million of its $400 million capacity now available to be used for consummation of the acquisition. The Corporation also obtained new committed financing which provides a $280 million loan facility to be used solely for consummation of the acquisition. See "Note 7. Debt" in the Notes to Condensed Consolidated Financial Statements for further information.

Cash Flow - Operating Activities Operating activities were a source of $17.3 million of cash in the first three months of 2023 compared to a use of $39.0 million of cash in the first three months of 2022. Lower working capital requirements were the primary driver of the variance from prior year, partially offset by lower net income.

Cash Flow - Investing Activities Capital Expenditures - Capital expenditures, including capitalized software, for the first three months of 2023 were $20.0 million compared to $18.2 million in the same period last year. 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. For the full year 2023, capital expenditures are expected to be approximately $70 to $75 million.

Acquisitions and Divestitures - The Corporation did not have significant cash flows in either the current or prior period from acquisitions or divestitures. See "Note 3. Acquisitions and Divestitures" in the Notes to the Condensed Consolidated Financial Statements for further information.

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 Condensed 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 common share were as
follows:

                                     Three Months Ended
                                   April 1,          April 2,
                                     2023              2022
Dividends per common share    $     0.32            $    0.31

During the first quarter, the Board declared the regular quarterly cash dividend on February 14, 2023. The dividend was paid on March 8, 2023, to shareholders of record as of February 27, 2023.

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



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based on excess cash generation and/or share price considerations. The Board most recently authorized an additional $200 million on May 17, 2022, for repurchases of the Corporation's common stock. As of April 1, 2023, $234.0 million remained of the Board's current repurchase authorizations. See "Note 10. Accumulated Other Comprehensive Income (Loss) and Shareholders' Equity" in the Notes to Condensed Consolidated Financial Statements for further information.

Sales of Stock - The Corporation records cash flows received from the sale of its common stock held in treasury, primarily in connection with stock option exercises and the HNI Corporation Members' Stock Purchase Plan. See "Note 10. Accumulated Other Comprehensive Income (Loss) and Shareholders' Equity" and "Note 12. Stock-Based Compensation" in the Notes to Condensed Consolidated Financial Statements for further information.

Cash Requirements

Various commitments and obligations associated with ongoing business and financing activities will result in cash payments in future periods. A summary of the amounts and estimated timing of these future cash payments was provided in the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2022. Except for the item described below, there were no material changes outside the ordinary course of business in the Corporation's contractual obligations or the estimated timing of the future cash payments during the first three months of 2023.

On March 7, 2023, the Corporation entered into an Agreement and Plan of Merger to acquire Kimball International, Inc. for cash and stock currently valued at approximately $455 million, of which around $330 million is expected to be in cash. Under the terms of the Merger Agreement, holders of Kimball's outstanding common stock will receive $9.00 in cash and 0.1301 shares of the Corporation's common stock for each share of Kimball's common stock, with the transaction expecting to close by mid-2023. See "Note 3. Acquisitions and Divestitures" in the Notes to the Condensed Consolidated Financial Statements for further information.

Commitments and Contingencies

See "Note 13. Guarantees, Commitments, and Contingencies" in the Notes to Condensed Consolidated Financial Statements for further information.

Critical Accounting Policies and Estimates

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 a variety of 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. A summary of the more significant accounting policies requiring the use of estimates and assumptions in preparing the financial statements is provided in the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Looking Ahead

The Corporation continues to navigate near-term uncertainty driven by macroeconomic conditions. However, 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.

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," "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.



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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 within Part II, Item 1A of this report and Item 1A of the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2022. The Corporation cautions readers not to place undue reliance on any forward-looking statement, which is based necessarily on assumptions made at the time the Corporation provides such statement, 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: risks relating to or arising from the Corporation's planned acquisition of Kimball, including, among others, the Corporation's ability to consummate the pending acquisition, the timing of the acquisition, and the Corporation's ultimate realization of the anticipated benefits of the acquisition; the duration and scope of the COVID-19 pandemic, including any emerging variants of the virus, and its effect on people and the economy; disruptions in the global supply chain; the effects of prolonged periods of inflation and rising interest rates; potential labor shortages; the levels of office furniture needs and housing starts; overall demand for the Corporation's products; general economic and market conditions in the United States and internationally; industry and competitive conditions; the consolidation and concentration of the Corporation's customers; the Corporation's reliance on its network of independent dealers; changes in trade policy; changes in raw material, component, or commodity pricing; market acceptance and demand for the Corporation's new products; changing legal, regulatory, environmental, and healthcare conditions; the risks associated with international operations; the potential impact of product defects; the various restrictions on the Corporation's financing activities; an inability to protect the Corporation's intellectual property; cybersecurity threats, including those posed by potential ransomware attacks; impacts of tax legislation; force majeure events outside the Corporation's control, including those that may result from the effects of climate change; and other risks as described in the Corporation's annual and quarterly reports filed with the Securities and Exchange Commission on Forms 10-K and 10-Q, 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, as well as those described within Item 1A of the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2022, 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 reports filed with or furnished to the SEC.

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