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Section 1: 10-Q (10-Q)

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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
September 28, 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
September 28, 2019
42,823,501
 




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 per share data)
(Unaudited)
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
 
 
 
 
Net sales
$
625,386

 
$
611,120

 
$
1,630,868

 
$
1,659,803

Cost of sales
387,715

 
377,789

 
1,030,993

 
1,048,683

Gross profit
237,671

 
233,331

 
599,875

 
611,120

Selling and administrative expenses
176,731

 
179,577

 
511,080

 
524,445

Restructuring and impairment charges
284

 
128

 
1,214

 
2,303

Operating income
60,656

 
53,626

 
87,581

 
84,372

Interest expense, net
2,205

 
2,522

 
6,795

 
7,375

Income before income taxes
58,451

 
51,104

 
80,786

 
76,997

Income taxes
12,375

 
11,197

 
17,878

 
16,033

Net income
46,076

 
39,907

 
62,908

 
60,964

Less: Net loss attributable to non-controlling interest
(2
)
 
0

 
(2
)
 
(50
)
Net income attributable to HNI Corporation
$
46,078

 
$
39,907

 
$
62,910

 
$
61,014

 
 
 
 
 
 
 
 
Average number of common shares outstanding – basic
42,899

 
43,823

 
43,217

 
43,616

Net income attributable to HNI Corporation per common share – basic
$
1.07

 
$
0.91

 
$
1.46

 
$
1.40

Average number of common shares outstanding – diluted
43,186

 
44,679

 
43,620

 
44,349

Net income attributable to HNI Corporation per common share – diluted
$
1.07

 
$
0.89

 
$
1.44

 
$
1.38

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
$
(1,035
)
 
$
(817
)
 
$
(406
)
 
$
(1,944
)
Change in unrealized gains (losses) on marketable securities, net of tax
36

 
(6
)
 
252

 
(99
)
Change in pension and post-retirement liability, net of tax

 

 
(1,185
)
 

Change in derivative financial instruments, net of tax
(477
)
 
106

 
(2,112
)
 
1,459

Other comprehensive loss, net of tax
(1,476
)
 
(717
)
 
(3,451
)
 
(584
)
Comprehensive income
44,600

 
39,190

 
59,457

 
60,380

Less: Comprehensive loss attributable to non-controlling interest
(2
)
 
0

 
(2
)
 
(50
)
Comprehensive income attributable to HNI Corporation
$
44,602

 
$
39,190

 
$
59,459

 
$
60,430


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


3




HNI Corporation and Subsidiaries
Condensed Consolidated Balance Sheets

(In thousands)
(Unaudited)
 
 
 
 
 
September 28,
2019
 
December 29,
2018
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
53,013

 
$
76,819

Short-term investments
848

 
1,327

Receivables
271,960

 
255,207

Inventories
181,922

 
157,178

Prepaid expenses and other current assets
36,824

 
41,352

Total Current Assets
544,567

 
531,883

 
 
 
 
Property, Plant, and Equipment:
 
 
 

Land and land improvements
29,306

 
28,377

Buildings
292,902

 
290,263

Machinery and equipment
574,130

 
565,884

Construction in progress
22,046

 
28,443

 
918,384

 
912,967

Less accumulated depreciation
538,303

 
528,034

Net Property, Plant, and Equipment
380,081

 
384,933

 
 
 
 
Right-of-use Operating / Finance Leases
74,244

 

 
 
 
 
Goodwill and Other Intangible Assets
449,288

 
463,290

 
 
 
 
Deferred Income Taxes
286

 
1,569

 
 
 
 
Other Assets
22,010

 
20,169

 
 
 
 
Total Assets
$
1,470,476

 
$
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)
 
 
 
 
 
September 28,
2019
 
December 29,
2018
Liabilities and Equity
 
 
 
Current Liabilities:
 
 
 
Accounts payable and accrued expenses
$
435,103

 
$
428,865

Current maturities of long-term debt
1,440

 
679

Current maturities of other long-term obligations
1,876

 
4,764

Current lease obligations - operating / finance
21,007

 

Total Current Liabilities
459,426

 
434,308

 
 
 
 
Long-Term Debt
239,418

 
249,355

 
 
 
 
Long-Term Lease Obligations - Operating / Finance
61,143

 

 
 
 
 
Other Long-Term Liabilities
64,356

 
72,767

 
 
 
 
Deferred Income Taxes
85,788

 
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:
 
 
 
September 28, 2019 – 42,824 shares; December 29, 2018 – 43,582 shares
42,824

 
43,582

 
 
 
 
Additional paid-in capital
18,534

 
18,041

Retained earnings
505,714

 
504,909

Accumulated other comprehensive income (loss)
(7,050
)
 
(3,599
)
Total HNI Corporation shareholders' equity
560,022

 
562,933

 
 
 
 
Non-controlling interest
323

 
326

 
 
 
 
Total Equity
560,345

 
563,259

 
 
 
 
Total Liabilities and Equity
$
1,470,476

 
$
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 - September 28, 2019
 
Common Stock

 
Additional Paid-in Capital

 
Retained Earnings

 
Accumulated Other Comprehensive Income (Loss)

 
Non-controlling Interest

 
Total Shareholders’ Equity

Balance, June 29, 2019
$
42,875

 
$
17,364

 
$
474,519

 
$
(5,574
)
 
$
325

 
$
529,509

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)

 

 
46,078

 

 
(2
)
 
46,076

Other comprehensive income (loss), net of tax

 

 

 
(1,476
)
 

 
(1,476
)
Cash dividends; $0.305 per share

 

 
(13,088
)
 

 

 
(13,088
)
Common shares – treasury:
 
 
 
 
 
 
 
 
 
 
 
Shares purchased
(221
)
 
(5,175
)
 
(1,795
)
 

 

 
(7,191
)
Shares issued under Members' Stock Purchase Plan and stock awards, net of tax
170

 
6,345

 

 

 

 
6,515

Balance, September 28, 2019
$
42,824

 
$
18,534

 
$
505,714

 
$
(7,050
)
 
$
323

 
$
560,345

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended - September 28, 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)

 

 
62,910

 

 
(2
)
 
62,908

Other comprehensive income (loss), net of tax

 

 

 
(2,712
)
 

 
(2,712
)
Reclassification of Stranded Tax Effects (ASU 2018-02)

 

 
739

 
(739
)
 

 

Impact of Implementation of Lease Guidance

 

 
2,999

 

 

 
2,999

Cash dividends; $0.905 per share

 

 
(39,164
)
 

 

 
(39,164
)
Common shares – treasury:
 
 
 
 
 
 
 
 
 
 
 
Shares purchased
(1,797
)
 
(36,401
)
 
(26,679
)
 

 

 
(64,877
)
Shares issued under Members' Stock Purchase Plan and stock awards, net of tax
1,039

 
36,893

 

 

 

 
37,932

Balance, September 28, 2019
$
42,824

 
$
18,534

 
$
505,714

 
$
(7,050
)
 
$
323

 
$
560,345



6




HNI Corporation and Subsidiaries
Condensed Consolidated Statements of Equity
(In thousands, except per share data)
(Unaudited)
 
 
 
Three Months Ended - September 29, 2018
 
Common Stock

 
Additional Paid-in Capital

 
Retained Earnings

 
Accumulated Other Comprehensive Income (Loss)

 
Non-controlling Interest

 
Total Shareholders’ Equity

Balance, June 30, 2018
$
43,736

 
$
26,077

 
$
458,458

 
$
(3,477
)
 
$
500

 
$
525,294

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)

 

 
39,907

 

 
0

 
39,907

Other comprehensive income (loss), net of tax

 

 

 
(717
)
 

 
(717
)
Cash dividends; $0.295 per share

 

 
(12,933
)
 

 

 
(12,933
)
Common shares – treasury:
 
 
 
 
 
 
 
 
 
 
 
Shares purchased
(163
)
 
(6,758
)
 

 

 

 
(6,921
)
Shares issued under Members' Stock Purchase Plan and stock awards, net of tax
247

 
8,198

 

 

 

 
8,445

Balance, September 29, 2018
$
43,820

 
$
27,517

 
$
485,432

 
$
(4,195
)
 
$
500

 
$
553,074

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended - September 29, 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)

 

 
61,014

 

 
(50
)
 
60,964

Other comprehensive income (loss), net of tax

 

 

 
(584
)
 

 
(584
)
Change in ownership of non-controlling interest

 

 
(41
)
 

 
41

 

Cash dividends; $0.875 per share

 

 
(38,201
)
 

 

 
(38,201
)
Common shares – treasury:
 
 
 
 
 
 
 
 
 
 
 
Shares purchased
(369
)
 
(9,879
)
 
(4,636
)
 

 

 
(14,884
)
Shares issued under Members' Stock Purchase Plan and stock awards, net of tax
835

 
30,367

 

 

 

 
31,202

Balance, September 29, 2018
$
43,820

 
$
27,517

 
$
485,432

 
$
(4,195
)
 
$
500

 
$
553,074


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


7




HNI Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
 
 
Nine Months Ended
 
September 28,
2019
 
September 29,
2018
Net Cash Flows From (To) Operating Activities:
 
 
 
Net income
$
62,908

 
$
60,964

Non-cash items included in net income:
 
 
 
Depreciation and amortization
57,838

 
55,887

Other post-retirement and post-employment benefits
1,106

 
1,325

Stock-based compensation
5,408

 
6,215

Operating / finance lease interest and amortization
17,252

 

Deferred income taxes
4,798

 
2,733

Loss on sale and retirement of long-lived assets, net
1,609

 
1,283

Other – net
2,864

 
2,314

Net decrease in operating assets and liabilities, net of divestitures
(28,359
)
 
(16,533
)
Increase (decrease) in other liabilities
(9,802
)
 
849

Net cash flows from (to) operating activities
115,622

 
115,037

 
 
 
 
Net Cash Flows From (To) Investing Activities:
 

 
 

Capital expenditures
(46,093
)
 
(39,887
)
Proceeds from sale of property, plant, and equipment
247

 
22,686

Capitalized software
(4,098
)
 
(7,092
)
Acquisition spending, net of cash acquired

 
(2,850
)
Purchase of investments
(6,140
)
 
(2,471
)
Sales or maturities of investments
3,889

 
2,375

Other – net
2,327

 
1,135

Net cash flows from (to) investing activities
(49,868
)
 
(26,104
)
 
 
 
 
Net Cash Flows From (To) Financing Activities:
 

 
 

Payments of long-term debt
(125,039
)
 
(352,795
)
Proceeds from long-term debt
115,775

 
322,755

Dividends paid
(39,164
)
 
(38,201
)
Purchase of HNI Corporation common stock
(65,106
)
 
(16,043
)
Proceeds from sales of HNI Corporation common stock
22,338

 
15,896

Other – net
1,636

 
(155
)
Net cash flows from (to) financing activities
(89,560
)
 
(68,543
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
(23,806
)
 
20,390

Cash and cash equivalents at beginning of period
76,819

 
23,348

Cash and cash equivalents at end of period
$
53,013

 
$
43,738



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




8




HNI Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)
September 28, 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 nine-month period ended September 28, 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
 
Nine Months Ended
 
Segment
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
Supplies-driven channel
Office furniture
$
260,359

 
$
265,971

 
$
649,380

 
$
680,656

Contract channel
Office furniture
224,396

 
205,716

 
598,398

 
595,824

Hearth
Hearth products
140,631

 
139,433

 
383,090

 
383,323

Net sales
 
$
625,386

 
$
611,120

 
$
1,630,868

 
$
1,659,803



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. 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):
 
September 28,
2019
 
December 29,
2018
Trade receivables (1)
$
275,738

 
$
259,075

Other contract assets (current) (2)
$
837

 
$
529

Other contract assets (long-term) (3)
$
2,865

 
$
2,188

Contract liabilities (4)
$
44,463

 
$
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 other contract asset and contract liability balances during the nine months ended September 28, 2019 were as follows (in thousands):
 
Contract assets increase (decrease)
 
Contract liabilities (increase) decrease
Contract assets recognized
$
1,313

 
$

Reclassification of contract assets to contra revenue
(328
)
 

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

 
(110,789
)
Contract liabilities paid

 
109,592

Cash received in advance and not recognized as revenue

 
(49,962
)
Reclassification of cash received in advance to revenue as a result of performance obligations satisfied

 
51,554

Net change
$
985

 
$
395



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 nine months ended September 28, 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 September 28, 2019. The backlog is typically fulfilled within a quarter.

Significant Judgments
The amount of consideration the Corporation receives and revenue recognized varies with changes in rebate and marketing program incentives, as well as early pay discounts, offered to customers. The Corporation uses significant judgment throughout the year in estimating the reduction in net sales driven by variable consideration for rebate and marketing programs. Judgments made include expected sales levels and utilization of funds. However, this judgment factor is significantly reduced at the end of each year when sales volumes and the impact to rebate and marketing programs are known and recorded as the programs typically end near the Corporation's fiscal year end.











10





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
 
Nine Months Ended
 
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
Restructuring and impairment charges
$
284

 
$
128

 
$
1,214

 
$
2,303



Restructuring costs in 2019 related to a structural realignment in the office furniture segment and were primarily comprised of severance costs. 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
899

 
315

 
1,214

Cash payments
(640
)
 
(99
)
 
(739
)
Restructuring allowance as of September 28, 2019
$
395

 
$
366

 
$
761



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 73 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):
 
September 28,
2019
 
December 29,
2018
 
Finished products
$
138,767

 
$
97,398

Materials and work in process
77,269

 
94,161

LIFO allowance
(34,114
)
 
(34,381
)
Total inventories
$
181,922

 
$
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.

11





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 the rates implicit in its leases cannot be readily determined, 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.

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
September 28,
2019
Assets
 
   Right-of-use operating leases
$
72,087

   Right-of-use finance leases
2,157

      Total Right-of-use operating / finance leases
$
74,244

 
 
Liabilities
 
   Current lease obligations - operating
$
20,506

   Current lease obligations - finance
501

      Total Current lease obligations - operating / finance
21,007

 
 
   Long-term lease obligations - operating
59,474

   Long-term lease obligations - finance
1,669

      Total Long-term lease obligations - operating / finance
61,143

 
 
         Total lease obligations - operating / finance
$
82,150



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
 
Nine Months Ended
 
Classification
September 28,
2019
 
September 28,
2019
Operating lease costs
 
 
 
 
Fixed
Cost of sales
$
438

 
$
1,366

 
Selling and administrative expenses
5,913

 
18,212

Short-term / variable
Cost of sales
317

 
635

 
Selling and administrative expenses
385

 
807

Finance lease costs
 
 
 
 
Amortization
Cost of sales, selling and administrative, and interest expense
154

 
307

Less: Sublease income
 
48

 
133

Total lease costs
 
$
7,159

 
$
21,194



Maturity of lease liabilities as of September 28, 2019 is as follows (in thousands):
 
Operating Leases (a)
 
Finance Leases (a)
 
Total
2019 (remaining portion of year)
$
6,590

 
$
143

 
$
6,733

2020
23,521

 
593

 
24,114

2021
16,792

 
564

 
17,356

2022
11,332

 
488

 
11,820

2023
9,388

 
436

 
9,824

Thereafter
22,531

 
112

 
22,643

Total lease payments
90,154

 
2,336

 
92,490

Less: Interest
10,177

 
163

 
10,340

Present value of lease liabilities
$
79,977

 
$
2,173

 
$
82,150


(a)
At this time there are no operating or finance lease options to extend lease terms that are reasonably certain of being exercised, nor are there any legally binding minimum lease payments for operating or finance leases signed, but not yet commenced.

The following table summarizes the weighted-average discount rates and weighted-average remaining lease terms for operating and finance leases as of September 28, 2019:
 
Weighted-Average Discount Rate (percent)
 
Weighted-Average Remaining Lease Term
 (years)
Operating leases
4.2
%
 
5.5
Finance leases
3.6
%
 
4.3








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):
 
Nine Months Ended
 
September 28,
2019
Cash paid for amounts included in the measurements of lease liabilities:
 
Operating cash flows from operating / finance leases
$
20,072

Financing cash flows from finance leases
$
262

Leased assets obtained in exchange for new operating / finance lease liabilities
$
18,387



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):
 
September 28,
2019
 
December 29,
2018
Goodwill
$
270,781

 
$
270,788

Definite-lived intangible assets
149,732

 
163,714

Indefinite-lived intangible assets
28,775

 
28,788

Total goodwill and other intangible assets
$
449,288

 
$
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
(7
)
 

 
(7
)
 
 
 
 
 
 
Balance as of September 28, 2019
 

 
 

 
 
Goodwill
128,638

 
186,662

 
315,300

Accumulated impairment losses
(44,376
)
 
(143
)
 
(44,519
)
Net goodwill balance as of September 28, 2019
$
84,262

 
$
186,519

 
$
270,781



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):
 
September 28, 2019
 
December 29, 2018
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
Patents
$
40

 
$
40

 
$

 
$
40

 
$