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Section 1: 10-Q (10-Q - Q2 2019)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FORM
10-Q
 
 
 
 
 
 
 
 
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
 
 
 
 
For the quarterly period ended
June 29, 2019
 
 
 
 
 
 
 
 
 
OR
 
 
 
 
 
 
 
 
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
 
 
 
 
Commission File Number:
1-14225
 
 
 
 
 
 
 
 
 
 
HNI Corporation
Iowa
 
 
 
 
 
 
42-0617510
(State of Incorporation)
 
 
 
 
 
 
(I.R.S. Employer No.)
 
 
600 East Second Street
 
 
 
P.O. Box 1109
 
 
Muscatine
,
Iowa
52761-0071
 
 
 
(
563
)
272-7400
 
 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
HNI
New York Stock Exchange
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.       
Yes
                            No     
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  
Yes
                            No     
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Smaller reporting company
Non-accelerated filer
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).                                      
Yes
No     
 
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date.
Common Stock, $1 Par Value
Outstanding as of
June 29, 2019
42,874,677
 




HNI Corporation and Subsidiaries
Quarterly Report on Form 10-Q
 
 
 
Table of Contents
 
 
 
PART I.  FINANCIAL INFORMATION
 
 
Page
Item 1.
Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II.  OTHER INFORMATION
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
Defaults Upon Senior Securities - None
-
 
 
 
Item 4.
Mine Safety Disclosures - Not Applicable
-
 
 
 
Item 5.
Other Information - None
-
 
 
 
Item 6.
 
 
 
 
  

2




PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements

HNI Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(In thousands, except share and per share data)
(Unaudited)
 
 
 
 
 
Three Months Ended
 
Six Months Ended
 
June 29,
2019
 
June 30,
2018
 
June 29,
2019
 
June 30,
2018
 
 
 
 
Net sales
$
526,026

 
$
543,614

 
$
1,005,482

 
$
1,048,683

Cost of sales
333,437

 
342,744

 
643,279

 
670,894

Gross profit
192,589

 
200,870

 
362,203

 
377,789

Selling and administrative expenses
168,411

 
172,973

 
334,348

 
344,868

Restructuring and impairment charges
930

 
837

 
930

 
2,175

Operating income
23,248

 
27,060

 
26,925

 
30,746

Interest income
282

 
89

 
638

 
202

Interest expense
2,762

 
2,718

 
5,229

 
5,055

Income before income taxes
20,768

 
24,431

 
22,334

 
25,893

Income taxes
4,957

 
5,835

 
5,503

 
4,836

Net income
15,811

 
18,596

 
16,831

 
21,057

Less: Net income (loss) attributable to non-controlling interest
1

 
(1
)
 
(1
)
 
(50
)
Net income attributable to HNI Corporation
$
15,810

 
$
18,597

 
$
16,832

 
$
21,107

 
 
 
 
 
 
 
 
Average number of common shares outstanding – basic
43,217,580

 
43,665,411

 
43,375,554

 
43,512,691

Net income attributable to HNI Corporation per common share – basic
$
0.37

 
$
0.43

 
$
0.39

 
$
0.49

Average number of common shares outstanding – diluted
43,633,949

 
44,289,662

 
43,860,013

 
44,201,285

Net income attributable to HNI Corporation per common share – diluted
$
0.36

 
$
0.42

 
$
0.38

 
$
0.48

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
$
(333
)
 
$
(1,128
)
 
$
630

 
$
(1,127
)
Change in unrealized gains (losses) on marketable securities, net of tax
126

 
(13
)
 
216

 
(92
)
Change in pension and post-retirement liability, net of tax

 

 
(1,185
)
 

Change in derivative financial instruments, net of tax
(1,327
)
 
326

 
(1,636
)
 
1,353

Other comprehensive income (loss), net of tax
(1,534
)
 
(815
)
 
(1,975
)
 
134

Comprehensive income
14,277

 
17,781

 
14,856

 
21,191

Less: Comprehensive income (loss) attributable to non-controlling interest
1

 
(1
)
 
(1
)
 
(50
)
Comprehensive income attributable to HNI Corporation
$
14,276

 
$
17,782

 
$
14,857

 
$
21,241


See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).


3




HNI Corporation and Subsidiaries
Condensed Consolidated Balance Sheets

(In thousands)
(Unaudited)
 
 
 
 
 
June 29,
2019
 
December 29,
2018
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
28,782

 
$
76,819

Short-term investments
1,668

 
1,327

Receivables
245,331

 
255,207

Inventories
193,952

 
157,178

Prepaid expenses and other current assets
41,318

 
41,352

Total Current Assets
511,051

 
531,883

 
 
 
 
Property, Plant, and Equipment:
 
 
 

Land and land improvements
29,133

 
28,377

Buildings
292,081

 
290,263

Machinery and equipment
574,982

 
565,884

Construction in progress
27,252

 
28,443

 
923,448

 
912,967

Less accumulated depreciation
537,368

 
528,034

Net Property, Plant, and Equipment
386,080

 
384,933

 
 
 
 
Right-of-use Operating / Finance Leases
70,241

 

 
 
 
 
Goodwill and Other Intangible Assets
453,356

 
463,290

 
 
 
 
Deferred Income Taxes
1,569

 
1,569

 
 
 
 
Other Assets
19,812

 
20,169

 
 
 
 
Total Assets
$
1,442,109

 
$
1,401,844


See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).


4




HNI Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except par value)
(Unaudited)
 
 
 
 
 
June 29,
2019
 
December 29,
2018
Liabilities and Equity
 
 
 
Current Liabilities:
 
 
 
Accounts payable and accrued expenses
$
396,301

 
$
428,865

Current maturities of long-term debt
1,101

 
679

Current maturities of other long-term obligations
3,582

 
4,764

Current lease obligations - operating / finance
22,194

 

Total Current Liabilities
423,178

 
434,308

 
 
 
 
Long-Term Debt
285,397

 
249,355

 
 
 
 
Long-Term Lease Obligations - Operating / Finance
56,307

 

 
 
 
 
Other Long-Term Liabilities
63,753

 
72,767

 
 
 
 
Deferred Income Taxes
83,965

 
82,155

 
 
 
 
Equity:
 

 
 

HNI Corporation shareholders' equity:
 

 
 

 Capital Stock:
 

 
 

     Preferred stock - $1 par value, authorized 2,000 shares, no shares outstanding

 

 
 
 
 
    Common stock - $1 par value, authorized 200,000 shares, outstanding:
 
 
 
June 29, 2019 – 42,875 shares
 
 
 
December 29, 2018 – 43,582 shares
42,875

 
43,582

 
 
 
 
Additional paid-in capital
17,364

 
18,041

Retained earnings
474,519

 
504,909

Accumulated other comprehensive income (loss)
(5,574
)
 
(3,599
)
Total HNI Corporation shareholders' equity
529,184

 
562,933

 
 
 
 
Non-controlling interest
325

 
326

 
 
 
 
Total Equity
529,509

 
563,259

 
 
 
 
Total Liabilities and Equity
$
1,442,109

 
$
1,401,844


See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).


5




HNI Corporation and Subsidiaries
Condensed Consolidated Statements of Equity
(In thousands, except per share data)
(Unaudited)
 
 
Three Months Ended - June 29, 2019
 
Common Stock

 
Additional Paid-in Capital

 
Retained Earnings

 
Accumulated Other Comprehensive Income (Loss)

 
Non-controlling Interest

 
Total Shareholders’ Equity

Balance, March 30, 2019
$
43,339

 
$
15,921

 
$
489,707

 
$
(4,040
)
 
$
324

 
$
545,251

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)

 

 
15,810

 

 
1

 
15,811

Other comprehensive income (loss), net of tax

 

 

 
(1,534
)
 

 
(1,534
)
Cash dividends; $0.305 per share

 

 
(13,203
)
 

 

 
(13,203
)
Common shares – treasury:
 
 
 
 
 
 
 
 
 
 
 
Shares purchased
(929
)
 
(14,274
)
 
(17,795
)
 

 

 
(32,998
)
Shares issued under Members' Stock Purchase Plan and stock awards, net of tax
465

 
15,717

 

 

 

 
16,182

Balance, June 29, 2019
$
42,875

 
$
17,364

 
$
474,519

 
$
(5,574
)
 
$
325

 
$
529,509

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended - June 29, 2019
 
Common Stock

 
Additional Paid-in Capital

 
Retained Earnings

 
Accumulated Other Comprehensive Income (Loss)

 
Non-controlling Interest

 
Total Shareholders’ Equity

Balance, December 29, 2018
$
43,582

 
$
18,041

 
$
504,909

 
$
(3,599
)
 
$
326

 
$
563,259

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)

 

 
16,832

 

 
(1
)
 
16,831

Other comprehensive income (loss), net of tax

 

 

 
(1,236
)
 

 
(1,236
)
Reclassification of Stranded Tax Effects (ASU 2018-02)

 

 
739

 
(739
)
 

 

Impact of Implementation of Lease Guidance

 

 
2,999

 

 

 
2,999

Cash dividends; $0.600 per share

 

 
(26,075
)
 

 

 
(26,075
)
Common shares – treasury:
 
 
 
 
 
 
 
 
 
 
 
Shares purchased
(1,577
)
 
(31,222
)
 
(24,885
)
 

 

 
(57,684
)
Shares issued under Members' Stock Purchase Plan and stock awards, net of tax
870

 
30,545

 

 

 

 
31,415

Balance, June 29, 2019
$
42,875

 
$
17,364

 
$
474,519

 
$
(5,574
)
 
$
325

 
$
529,509



6




HNI Corporation and Subsidiaries
Condensed Consolidated Statements of Equity
(In thousands, except per share data)
(Unaudited)
 
 
 
Three Months Ended - June 30, 2018
 
Common Stock

 
Additional Paid-in Capital

 
Retained Earnings

 
Accumulated Other Comprehensive Income (Loss)

 
Non-controlling Interest

 
Total Shareholders’ Equity

Balance, March 31, 2018
$
43,530

 
$
20,124

 
$
452,748

 
$
(2,662
)
 
$
501

 
$
514,241

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)

 

 
18,597

 

 
(1
)
 
18,596

Other comprehensive income (loss), net of tax

 

 

 
(815
)
 

 
(815
)
Cash dividends; $0.295 per share

 

 
(12,887
)
 

 

 
(12,887
)
Common shares – treasury:
 
 
 
 
 
 
 
 
 
 
 
Shares purchased
(53
)
 
(1,946
)
 

 

 

 
(1,999
)
Shares issued under Members' Stock Purchase Plan and stock awards, net of tax
259

 
7,899

 

 

 

 
8,158

Balance, June 30, 2018
$
43,736

 
$
26,077

 
$
458,458

 
$
(3,477
)
 
$
500

 
$
525,294

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended - June 30, 2018
 
Common Stock

 
Additional Paid-in Capital

 
Retained Earnings

 
Accumulated Other Comprehensive Income (Loss)

 
Non-controlling Interest

 
Total Shareholders’ Equity

Balance, December 30, 2017
$
43,354

 
$
7,029

 
$
467,296

 
$
(3,611
)
 
$
509

 
$
514,577

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)

 

 
21,107

 

 
(50
)
 
21,057

Other comprehensive income (loss), net of tax

 

 

 
134

 

 
134

Change in ownership of non-controlling interest

 

 
(41
)
 

 
41

 

Cash dividends; $0.580 per share

 

 
(25,268
)
 

 

 
(25,268
)
Common shares – treasury:
 
 
 
 
 
 
 
 
 
 
 
Shares purchased
(206
)
 
(3,121
)
 
(4,636
)
 

 

 
(7,963
)
Shares issued under Members' Stock Purchase Plan and stock awards, net of tax
588

 
22,169

 

 

 

 
22,757

Balance, June 30, 2018
$
43,736

 
$
26,077

 
$
458,458

 
$
(3,477
)
 
$
500

 
$
525,294


See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).


7




HNI Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
 
 
Six Months Ended
 
June 29,
2019
 
June 30,
2018
Net Cash Flows From (To) Operating Activities:
 
 
 
Net income
$
16,831

 
$
21,057

Non-cash items included in net income:
 
 
 
Depreciation and amortization
38,450

 
37,280

Other post-retirement and post-employment benefits
738

 
883

Stock-based compensation
4,072

 
4,908

Operating / finance lease interest and amortization
11,617

 

Deferred income taxes
1,360

 
762

(Gain) loss on sale and retirement of long-lived assets, net
1,046

 
1,488

Other – net
2,810

 
175

Net increase (decrease) in operating assets and liabilities, net of divestitures
(56,281
)
 
(37,008
)
Increase (decrease) in other liabilities
(7,876
)
 
(67
)
Net cash flows from (to) operating activities
12,767

 
29,478

 
 
 
 
Net Cash Flows From (To) Investing Activities:
 

 
 

Capital expenditures
(34,659
)
 
(26,687
)
Proceeds from sale of property, plant, and equipment
159

 
18,444

Capitalized software
(2,948
)
 
(5,637
)
Purchase of investments
(2,459
)
 
(1,329
)
Sales or maturities of investments
1,802

 
1,357

Other – net
2,025

 
1,136

Net cash flows from (to) investing activities
(36,080
)
 
(12,716
)
 
 
 
 
Net Cash Flows From (To) Financing Activities:
 

 
 

Payments of long-term debt
(40,272
)
 
(291,330
)
Proceeds from long-term debt
76,677

 
312,279

Dividends paid
(26,075
)
 
(25,268
)
Purchase of HNI Corporation common stock
(57,357
)
 
(9,120
)
Proceeds from sales of HNI Corporation common stock
18,906

 
8,755

Other – net
3,397

 
(4,361
)
Net cash flows from (to) financing activities
(24,724
)
 
(9,045
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
(48,037
)
 
7,717

Cash and cash equivalents at beginning of period
76,819

 
23,348

Cash and cash equivalents at end of period
$
28,782

 
$
31,065

 
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).


8




HNI Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)
June 29, 2019

Note 1.  Basis of Presentation

The accompanying unaudited, condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements.  The December 29, 2018 consolidated balance sheet included in this Form 10-Q was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included. Operating results for the six-month period ended June 29, 2019 are not necessarily indicative of the results expected for the fiscal year ending December 28, 2019.  For further information, refer to the consolidated financial statements and accompanying notes included in HNI Corporation's (the "Corporation") Annual Report on Form 10-K for the fiscal year ended December 29, 2018. Certain reclassifications have been made within the interim financial information to conform to the current presentation.

Note 2. Revenue from Contracts with Customers

Disaggregation of Revenue
Revenue from contracts with customers disaggregated by sales channel and by segment is as follows (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
Segment
June 29,
2019
 
June 30,
2018
 
June 29,
2019
 
June 30,
2018
Supplies-driven channel
Office Furniture
$
212,327

 
$
223,457

 
$
389,020

 
$
414,685

Contract channel
Office Furniture
197,185

 
200,421

 
374,003

 
390,108

Hearth
Hearth Products
116,514

 
119,736

 
242,459

 
243,890

Net sales
 
$
526,026

 
$
543,614

 
$
1,005,482

 
$
1,048,683



The majority of revenue presented as "Net sales" in the Condensed Consolidated Statements of Comprehensive Income is the result of contracts with customers. All other sources of revenue are not material to the Corporation's results of operations.

Sales by channel type are subject to similar economic factors and market conditions regardless of the channel under which the product is sold. See “Note 18. Reportable Segment Information” in the Notes to Condensed Consolidated Financial Statements for further information about operating segments.

Contract Assets and Contract Liabilities
In addition to trade receivables, the Corporation has contract assets consisting of funds paid to certain office furniture dealers in exchange for their multi-year commitment to market and sell the Corporation’s products. These contract assets are amortized over the term of the contracts and recognized as a reduction of revenue. For contracts less than one year, the Corporation has elected the practical expedient to recognize incremental costs to obtain a contract as an expense when incurred. The Corporation has contract liabilities consisting of customer deposits and rebate and marketing program liabilities.

Contract assets and contract liabilities were as follows (in thousands):
 
June 29,
2019
 
December 29,
2018
Trade receivables (1)
$
248,857

 
$
259,075

Contract assets (current) (2)
$
768

 
$
529

Contract assets (long-term) (3)
$
2,652

 
$
2,188

Contract liabilities (4)
$
40,592

 
$
44,858



9




The index below indicates the line item in the Condensed Consolidated Balance Sheets where contract assets and contract liabilities are reported:

(1)     "Receivables"
(2)     "Prepaid expenses and other current assets"
(3)     "Other Assets"
(4)     "Accounts payable and accrued expenses"

Changes in contract asset and contract liability balances during the six months ended June 29, 2019 were as follows (in thousands):
 
Contract assets increase (decrease)
 
Contract liabilities (increase) decrease
Contract assets recognized
$
888

 
$

Reclassification of contract assets to contra revenue
(185
)
 

Contract liabilities recognized and recorded to contra revenue as a result of performance obligations satisfied

 
(71,517
)
Contract liabilities paid

 
73,522

Cash received in advance and not recognized as revenue

 
(33,520
)
Reclassification of cash received in advance to revenue as a result of performance obligations satisfied

 
35,781

Net change
$
703

 
$
4,266



Contract liabilities for customer deposits paid to the Corporation prior to the satisfaction of performance obligations are recognized as revenue upon completion of the performance obligations. The amount of revenue recognized during the three and six months ended June 29, 2019 that was included in the December 29, 2018 contract liabilities balance was $0.0 million and $8.3 million, respectively.

Performance Obligations
The Corporation recognizes revenue for sales of office furniture and hearth 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.

The Corporation's backlog orders are typically cancelable for a period of time and almost all contracts have an original duration of one year or less. As a result, the Corporation has elected the practical expedient permitted in the revenue accounting standard not to disclose the unsatisfied performance obligation as of June 29, 2019. The backlog is typically fulfilled within one or two quarters.

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 fiscal year end.

Note 3.  Restructuring and Impairment Charges

Restructuring costs recorded in the Condensed Consolidated Statements of Comprehensive Income are as follows (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 29,
2019
 
June 30,
2018
 
June 29,
2019
 
June 30,
2018
Restructuring and impairment charges
$
930

 
$
837

 
$
930

 
$
2,175



10




Restructuring costs in 2019 were primarily comprised of severance costs related to a structural realignment in the office furniture segment. Restructuring and impairment costs in 2018 were primarily incurred as part of the previously announced closure of the hearth manufacturing facility in Paris, Kentucky and the office furniture manufacturing facility in Orleans, Indiana.

The accrued restructuring expenses are expected to be paid in the next twelve months and are reflected in "Accounts payable and accrued expenses" in the Condensed Consolidated Balance Sheets. The following is a summary of changes in restructuring accruals (in thousands):
 
Severance Costs
 
Facility Exit Costs & Other
 
Total
Restructuring allowance as of December 29, 2018
$
136

 
$
150

 
$
286

Restructuring charges
884

 
46

 
930

Cash payments
(313
)
 
(74
)
 
(387
)
Restructuring allowance as of June 29, 2019
$
707

 
$
122

 
$
829



Note 4. Acquisitions and Divestitures

As part of the Corporation's ongoing business strategy, it continues to acquire and divest small office furniture dealerships, for which the impact is not material to the Corporation's financial statements.

Note 5.  Inventories

The Corporation values its inventory at the lower of cost or net realizable value with approximately 79 percent valued by the last-in, first-out ("LIFO") costing method. Inventories included in the Condensed Consolidated Balance Sheets consisted of the following (in thousands):
 
June 29,
2019
 
December 29,
2018
 
Finished products
$
143,806

 
$
97,398

Materials and work in process
84,260

 
94,161

LIFO allowance
(34,114
)
 
(34,381
)
Total inventories
$
193,952

 
$
157,178



Note 6.  Leases

The Corporation implemented ASU No. 2016-02, Leases (Topic 842), at the beginning of fiscal 2019 using the modified-retrospective transition approach. The new standard requires lessees to recognize most leases, including operating leases, on-balance sheet via a right of use ("ROU") asset and lease liability. The Corporation selected a technology tool to assist with the accounting and disclosure requirements of the new standard. All necessary changes required by the new standard, including those to the Corporation's accounting policies, business process, systems, controls, and disclosures, were identified and implemented as of the first quarter 2019.

Implementation of ASU No. 2016-02 increased retained earnings by $3.0 million. This included an increase of $3.3 million driven by the recognition of the remaining deferred gain on a 2018 sale-leaseback directly into retained earnings. An offsetting decrease of $0.3 million was driven by the calculation of beginning ROU assets and lease liabilities. The Corporation recognized $73.8 million in ROU assets and $82.0 million in lease liabilities as a result of the implementation of this standard.

The Corporation leases certain showrooms, office space, manufacturing facilities, distribution centers, retail stores and equipment and determines if an arrangement is a lease at inception. ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Leases with an initial term of twelve months or less are not recorded on the Condensed Consolidated Balance Sheets; expense for these leases is recognized on a straight-line basis over the lease term.

As none of the leases provide an implicit rate, the Corporation uses a secured incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Corporation uses separate discount rates for its U.S. operations and overseas operations.

11





Certain real estate leases include one or more options to renew with renewal terms that can extend the lease term from one to ten years. The exercise of lease renewal options is at the Corporation's sole discretion. Certain real estate leases include an option to terminate the lease term earlier than the specified lease term for a fee. These options are not included as part of the lease term unless they are reasonably certain to be exercised.

Many of the Corporation's real estate lease agreements include periods of rent holidays and payments that escalate over the lease term by specified amounts. While not significant, certain equipment leases have variable lease payments based on machine hours and certain real estate leases have rate changes based on the Consumer Price Index. The Corporation's lease agreements do not contain any material residual value guarantees.

The Corporation has lease agreements with lease and non-lease components, which are generally accounted for as a single lease component.

On occasion, the Corporation rents or subleases certain real estate to third parties. This sublease portfolio consists mainly of operating leases for office furniture showrooms and is not significant.

Leases included in the Condensed Consolidated Balance Sheet consisted of the following (in thousands):
Classification
June 29,
2019
Assets
 
   Right-of-use operating leases
$
68,257

   Right-of-use finance leases
1,984

      Total Right-of-use operating / finance leases
$
70,241

 
 
Liabilities
 
   Current lease obligations - operating
$
21,759

   Current lease obligations - finance
435

      Total Current lease obligations - operating / finance
22,194

 
 
   Long-term lease obligations - operating
54,752

   Long-term lease obligations - finance
1,555

      Total Long-term lease obligations - operating / finance
56,307

 
 
         Total lease obligations - operating / finance
$
78,501



Approximately 85 percent of the value of the leased assets is for real estate. The remaining 15 percent of the value of the leased assets is for equipment.


12




Lease costs included in the Condensed Consolidated Statements of Comprehensive Income consisted of the following (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
Classification
June 29,
2019
 
June 29,
2019
Operating lease costs
 
 
 
 
Fixed
Cost of sales
$
410

 
$
928

 
Selling and administrative expenses
6,207

 
12,299

Short-term / variable
Cost of sales
235

 
318

 
Selling and administrative expenses
207

 
422

Finance lease costs
 
 
 
 
Amortization
Cost of sales, selling and administrative, and interest expense
149

 
153

Less: Sublease income (a)
 
47

 
85

Total lease costs
 
$
7,161

 
$
14,035


(a)
Excludes immaterial rental income from owned properties for the three and six months ended June 29, 2019, which is reflected in "Selling and administrative expenses" in the Condensed Consolidated Statements of Comprehensive Income.

Maturity of lease liabilities as of June 29, 2019 is as follows (in thousands):
 
Operating Leases (a)
 
Finance Leases (b)
 
Total
2019 (remaining portion of year)
$
12,979

 
$
250

 
$
13,229

2020
22,641

 
518

 
23,159

2021
15,854

 
492

 
16,346

2022
10,459

 
420

 
10,879

2023
8,410

 
374

 
8,784

Thereafter
15,142

 
98

 
15,240

Total lease payments
85,485

 
2,152

 
87,637

Less: Interest
8,974

 
162

 
9,136

Present value of lease liabilities
$
76,511

 
$
1,990

 
$
78,501


(a)
At this time there are no operating lease options to extend lease terms that are reasonably certain of being exercised. Currently the Corporation has $0.3 million of legally binding minimum lease payments for operating leases signed but not yet commenced, and which are excluded from operating lease liabilities.
(b)
At this time there are no finance lease options to extend lease terms that are reasonably certain of being exercised. Currently the Corporation has $0.2 million of legally binding minimum lease payments for finance leases signed but not yet commenced, and which are excluded from finance lease liabilities.

The following table summarizes the weighted-average remaining lease terms and weighted-average discount rates for operating and finance leases as of June 29, 2019:
 
Weighted-Average Discount Rate (percent)
 
Weighted-Average Remaining Lease Term
 (years)
Operating leases
4.40
%
 
4.5
Finance leases
3.62
%
 
4.9



13




The following table summarizes cash paid for amounts included in the measurements of lease liabilities and the leased assets obtained in exchange for new operating and finance lease liabilities (in thousands):
 
Six Months Ended
 
June 29,
2019
Cash paid for amounts included in the measurements of lease liabilities
 
Operating cash flows from operating / finance leases
$
13,326

Financing cash flows from finance leases
$
142

Leased assets obtained in exchange for new operating / finance lease liabilities
$
8,444



Accounting Policies and Practical Expedients Elected

The Corporation elected to use the modified-retrospective method of adopting ASU 2016-02. It has been applied to all leases active on or after December 30, 2018, the start of the Corporation's fiscal year.

The Corporation elected the following practical expedients as a result of adopting ASU 2016-02:

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 not to restate prior period financial statements for the effects of the new standard. Required ASC 840 disclosures for periods prior to 2019 have been provided.
The Corporation has elected not to use hindsight in determining the lease term and in assessing the likelihood that a lessee purchase option will be exercised.
The Corporation has elected for all asset classes to not recognize ROU assets and lease liabilities for leases that at the acquisition date have a remaining lease term of twelve months or less.

Presented below are the final disclosures utilizing ASC 840 treatment which was provided in the Corporation's Annual Report on Form 10-K for the fiscal year ended December 29, 2018:

Commitments for minimum rentals under non-cancelable leases were as follows (in thousands):
 
Operating Leases
2019
$
24,387

2020
18,250

2021
13,324

2022
9,082

2023
6,228

Thereafter
10,469

Total minimum lease payments
$
81,740



There were no capitalized leases as of December 29, 2018 and December 30, 2017.

Rent expense under ASC 840 was as follows (in thousands):
 
2018

 
2017

 
2016

Rent expense
$
31,027

 
$
32,158

 
$
35,288



There was no contingent rent expense under operating leases for the years 2018, 2017, and 2016.

As part of the Corporation's continued efforts to drive efficiency and simplification, the Corporation entered into a sale-leaseback transaction in the first quarter of 2018, selling a manufacturing facility and subsequently leasing back a portion of the facility for a term of 10 years. The net proceeds from the sale of the facility of $16.9 million were reflected in "Proceeds from sale and license

14




of property, plant, equipment, and intangibles" in the Consolidated Statements of Cash Flows in 2018. In accordance with ASC 840, the $5.1 million gain on the sale of the facility was deferred and was being amortized as a reduction to rent expense evenly over the term of the lease.

In accordance with the ASU No. 2016-02 adoption, the remaining unamortized deferred gain related to the sale-leaseback as of December 29, 2018 was recognized directly in "Retained earnings" in the Condensed Consolidated Balance Sheets in the first quarter of 2019 as a cumulative-effect adjustment as the Corporation transferred control of the asset.

Note 7. Goodwill and Other Intangible Assets

Goodwill and other intangible assets included in the Condensed Consolidated Balance Sheets consisted of the following (in thousands):
 
June 29,
2019
 
December 29,
2018
Goodwill
$
270,801

 
$
270,788

Definite-lived intangible assets
153,742

 
163,714

Indefinite-lived intangible assets
28,813

 
28,788

Total goodwill and other intangible assets
$
453,356

 
$
463,290



Goodwill
The changes in the carrying amount of goodwill, by reporting segment, are as follows (in thousands):
 
Office Furniture
 
Hearth Products
 
Total
Balance as of December 29, 2018
 
 
 
 
 
Goodwill
$
128,645

 
$
186,662

 
$
315,307

Accumulated impairment losses
(44,376
)
 
(143
)
 
(44,519
)
Net goodwill balance as of December 29, 2018
84,269

 
186,519

 
270,788

 
 
 
 
 
 
Foreign currency translation adjustment
13

 

 
13

 
 
 
 
 
 
Balance as of June 29, 2019
 

 
 

 
 
Goodwill
128,658

 
186,662

 
315,320

Accumulated impairment losses
(44,376
)
 
(143
)
 
(44,519
)
Net goodwill balance as of June 29, 2019
$
84,282

 
$
186,519

 
$
270,801



Definite-lived intangible assets
The table below summarizes amortizable definite-lived intangible assets, which are reflected in "Goodwill and Other Intangible Assets" in the Condensed Consolidated Balance Sheets (in thousands):
 
June 29, 2019
 
December 29, 2018
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
Patents
$
40

 
$
38