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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
March 28, 2020
 
 
 
 
 
 
 
 
 
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
March 28, 2020
42,647,398
 




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
 
March 28,
2020
 
March 30,
2019
 
 
Net sales
$
468,704

 
$
479,456

Cost of sales
292,686

 
309,842

Gross profit
176,018

 
169,614

Selling and administrative expenses
167,085

 
165,937

Impairment charges
32,661

 

Operating income (loss)
(23,728
)
 
3,677

Interest expense, net
1,811

 
2,111

Income (loss) before income taxes
(25,539
)
 
1,566

Income taxes
(1,643
)
 
546

Net income (loss)
(23,896
)
 
1,020

Less: Net income (loss) attributable to non-controlling interest
(1
)
 
(2
)
Net income (loss) attributable to HNI Corporation
$
(23,895
)
 
$
1,022

 
 
 
 
Average number of common shares outstanding – basic
42,628

 
43,534

Net income (loss) attributable to HNI Corporation per common share – basic
$
(0.56
)
 
$
0.02

Average number of common shares outstanding – diluted
42,628

 
44,089

Net income (loss) attributable to HNI Corporation per common share – diluted
$
(0.56
)
 
$
0.02

 
 
 
 
 
 
 
 
Foreign currency translation adjustments
$
(600
)
 
$
963

Change in unrealized gains (losses) on marketable securities, net of tax
59

 
90

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

 
(1,185
)
Change in derivative financial instruments, net of tax
(2,216
)
 
(309
)
Other comprehensive income (loss), net of tax
(2,757
)
 
(441
)
Comprehensive income (loss)
(26,653
)
 
579

Less: Comprehensive loss attributable to non-controlling interest
(1
)
 
(2
)
Comprehensive income (loss) attributable to HNI Corporation
$
(26,652
)
 
$
581


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


3




HNI Corporation and Subsidiaries
Condensed Consolidated Balance Sheets

(In thousands)
(Unaudited)
 
 
 
 
 
March 28,
2020
 
December 28,
2019
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
35,413

 
$
52,073

Short-term investments
835

 
1,096

Receivables
235,617

 
278,124

Allowance for doubtful accounts
(5,170
)
 
(3,559
)
Inventories
170,522

 
163,465

Prepaid expenses and other current assets
44,170

 
37,635

Total Current Assets
481,387

 
528,834

 
 
 
 
Property, Plant, and Equipment:
 
 
 

Land and land improvements
29,776

 
29,394

Buildings
294,903

 
295,517

Machinery and equipment
579,958

 
581,225

Construction in progress
21,284

 
20,881

 
925,921

 
927,017

Less accumulated depreciation
551,335

 
545,510

Net Property, Plant, and Equipment
374,586

 
381,507

 
 
 
 
Right-of-use Finance Leases
2,032

 
2,129

 
 
 
 
Right-of-use Operating Leases
71,625

 
72,883

 
 
 
 
Goodwill and Other Intangible Assets
418,770

 
445,709

 
 
 
 
Other Assets
21,499

 
21,450

 
 
 
 
Total Assets
$
1,369,899

 
$
1,452,512


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


4




HNI Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except par value)
(Unaudited)
 
 
 
 
 
March 28,
2020
 
December 28,
2019
Liabilities and Equity
 
 
 
Current Liabilities:
 
 
 
Accounts payable and accrued expenses
$
338,954

 
$
453,202

Current maturities of long-term debt
1,830

 
790

Current maturities of other long-term obligations
2,975

 
1,931

Current lease obligations - finance
577

 
564

Current lease obligations - operating
21,279

 
22,218

Total Current Liabilities
365,615

 
478,705

 
 
 
 
Long-Term Debt
228,460

 
174,439

 
 
 
 
Long-Term Lease Obligations - Finance
1,479

 
1,581

 
 
 
 
Long-Term Lease Obligations - Operating
57,585

 
58,233

 
 
 
 
Other Long-Term Liabilities
66,397

 
67,990

 
 
 
 
Deferred Income Taxes
98,708

 
87,196

 
 
 
 
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:
 
 
 
March 28, 2020 – 42,647 shares; December 28, 2019 – 42,595 shares
42,647

 
42,595

 
 
 
 
Additional paid-in capital
28,086

 
19,799

Retained earnings
491,429

 
529,723

Accumulated other comprehensive income (loss)
(10,830
)
 
(8,073
)
Total HNI Corporation shareholders' equity
551,332

 
584,044

 
 
 
 
Non-controlling interest
323

 
324

 
 
 
 
Total Equity
551,655

 
584,368

 
 
 
 
Total Liabilities and Equity
$
1,369,899

 
$
1,452,512


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 - March 28, 2020
 
Common Stock

 
Additional Paid-in Capital

 
Retained Earnings

 
Accumulated Other Comprehensive Income (Loss)

 
Non-controlling Interest

 
Total Shareholders’ Equity

Balance, December 28, 2019
$
42,595

 
$
19,799

 
$
529,723

 
$
(8,073
)
 
$
324

 
$
584,368

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)

 

 
(23,895
)
 

 
(1
)
 
(23,896
)
Other comprehensive income (loss), net of tax

 

 

 
(2,757
)
 

 
(2,757
)
Impact of new accounting standard related to credit losses

 

 
(131
)
 

 

 
(131
)
Dividends payable

 

 
(46
)
 

 

 
(46
)
Cash dividends; $0.305 per share

 

 
(13,033
)
 

 

 
(13,033
)
Common shares – treasury:
 
 
 
 
 
 
 
 
 
 
 
Shares purchased
(187
)
 
(4,365
)
 
(1,189
)
 

 

 
(5,741
)
Shares issued under Members' Stock Purchase Plan and stock awards, net of tax
239

 
12,652

 

 

 

 
12,891

Balance, March 28, 2020
$
42,647

 
$
28,086

 
$
491,429

 
$
(10,830
)
 
$
323

 
$
551,655


 
Three Months Ended - March 30, 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)

 

 
1,022

 

 
(2
)
 
1,020

Other comprehensive income (loss), net of tax

 

 

 
298

 

 
298

Reclassification of Stranded Tax Effects (ASU 2018-02)

 

 
739

 
(739
)
 

 

Impact of Implementation of Lease Guidance

 

 
2,999

 

 

 
2,999

Cash dividends; $0.295 per share

 

 
(12,872
)
 

 

 
(12,872
)
Common shares – treasury:
 
 
 
 
 
 
 
 
 
 
 
Shares purchased
(647
)
 
(16,948
)
 
(7,090
)
 

 

 
(24,685
)
Shares issued under Members' Stock Purchase Plan and stock awards, net of tax
404

 
14,828

 

 

 

 
15,232

Balance, March 30, 2019
$
43,339

 
$
15,921

 
$
489,707

 
$
(4,040
)
 
$
324

 
$
545,251


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


6




HNI Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
 
 
Three Months Ended
 
March 28,
2020
 
March 30,
2019
Net Cash Flows From (To) Operating Activities:
 
 
 
Net income
$
(23,896
)
 
$
1,020

Non-cash items included in net income:
 
 
 
Depreciation and amortization
19,487

 
19,040

Other post-retirement and post-employment benefits
364

 
369

Stock-based compensation
4,358

 
2,451

Reduction in carrying amount of right-of-use assets
5,599

 
5,559

Deferred income taxes
12,258

 
1,119

Impairment of goodwill and intangible assets
32,661

 

Other – net
(2,252
)
 
2,038

Net increase (decrease) in operating assets and liabilities, net of divestitures
(81,573
)
 
(55,038
)
Increase (decrease) in other liabilities
(312
)
 
(4,832
)
Net cash flows from (to) operating activities
(33,306
)
 
(28,274
)
 
 
 
 
Net Cash Flows From (To) Investing Activities:
 

 
 

Capital expenditures
(8,488
)
 
(17,575
)
Proceeds from sale of property, plant, and equipment
49

 
68

Capitalized software
(4,671
)
 
(1,521
)
Acquisition spending, net of cash acquired
(9,321
)
 

Purchase of investments
(1,456
)
 

Sales or maturities of investments
996

 
450

Net cash flows from (to) investing activities
(22,891
)
 
(18,578
)
 
 
 
 
Net Cash Flows From (To) Financing Activities:
 

 
 

Payments of long-term debt
(15,000
)
 
(606
)
Proceeds from long-term debt
70,129

 
46,897

Dividends paid
(13,033
)
 
(12,872
)
Purchase of HNI Corporation common stock
(5,839
)
 
(23,869
)
Proceeds from sales of HNI Corporation common stock
722

 
5,413

Other – net
2,558

 
2,942

Net cash flows from (to) financing activities
39,537

 
17,905

 
 
 
 
Net increase (decrease) in cash and cash equivalents
(16,660
)
 
(28,947
)
Cash and cash equivalents at beginning of period
52,073

 
76,819

Cash and cash equivalents at end of period
$
35,413

 
$
47,872



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


7




HNI Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)
March 28, 2020

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 28, 2019 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 three-month period ended March 28, 2020 are not necessarily indicative of the results expected for the fiscal year ending January 2, 2021.  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 28, 2019. 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
 
Segment
March 28,
2020
 
March 30,
2019
Supplies-driven channel
Office furniture
$
175,925

 
$
176,693

Contract channel
Office furniture
162,461

 
176,818

Hearth
Hearth products
130,318

 
125,945

Net sales
 
$
468,704

 
$
479,456



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 16. 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):
 
March 28,
2020
 
December 28,
2019
Trade receivables (1)
$
235,617

 
$
278,124

Contract assets (current) (2)
$
872

 
$
857

Contract assets (long-term) (3)
$
2,521

 
$
2,700

Contract liabilities (4)
$
38,028

 
$
54,972






8




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 three months ended March 28, 2020 were as follows (in thousands):
 
Contract assets increase (decrease)
 
Contract liabilities (increase) decrease
Reclassification of contract assets to contra-revenue
$
(164
)
 
$

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

 
(24,610
)
Contract liabilities paid

 
39,064

Cash received in advance and not recognized as revenue

 
(19,220
)
Reclassification of cash received in advance to revenue as a result of performance obligations satisfied

 
21,710

Net change
$
(164
)
 
$
16,944



Changes in contract asset and contract liability balances during the three months ended March 30, 2019 were as follows (in thousands):
 
Contract assets increase (decrease)
 
Contract liabilities (increase) decrease
Reclassification of contract assets to contra-revenue
$
(82
)
 
$

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

 
(28,567
)
Contract liabilities paid

 
41,368

Cash received in advance and not recognized as revenue

 
(24,185
)
Reclassification of cash received in advance to revenue as a result of performance obligations satisfied

 
25,113

Net change
$
(82
)
 
$
13,729



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 months ended March 28, 2020 that was included in the December 28, 2019 contract liabilities balance was $8.6 million.

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 period end. The backlog is typically fulfilled within a quarter.





9




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.

Note 3. Acquisitions and Divestitures

During the first quarter, the Corporation acquired two small hearth companies, in January 2020 and March 2020. Both transactions were asset acquisitions and were consummated entirely in cash. The aggregate purchase price was approximately $10 million, and the preliminary allocation includes $8.9 million of goodwill, which is tax deductible. The remaining assets and liabilities acquired are not material. The Corporation will finalize the allocation of the purchase price during 2020 based on the final purchase price and any adjustments required over the remaining measurement period.

Note 4.  Inventories

The Corporation values its inventory at the lower of cost or net realizable value. Inventories included in the Condensed Consolidated Balance Sheets consisted of the following (in thousands):
 
March 28,
2020
 
December 28,
2019
 
Finished products
$
128,584

 
$
118,633

Materials and work in process
72,632

 
75,526

Last-in, first-out ("LIFO") allowance
(30,694
)
 
(30,694
)
Total inventories
$
170,522

 
$
163,465

 
 
 
 
 
 
 
 
Inventory valued by the LIFO costing method
72
%
 
65
%


Note 5. Goodwill and Other Intangible Assets

Goodwill and other intangible assets included in the Condensed Consolidated Balance Sheets consisted of the following (in thousands):
 
March 28,
2020
 
December 28,
2019
Goodwill
$
258,174

 
$
270,820

Definite-lived intangible assets
133,996

 
146,040

Indefinite-lived intangible assets
26,600

 
28,849

Total goodwill and other intangible assets
$
418,770

 
$
445,709

















10




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 28, 2019
 
 
 
 
 
Goodwill
$
128,677

 
$
186,662

 
$
315,339

Accumulated impairment losses
(44,376
)
 
(143
)
 
(44,519
)
Net goodwill balance as of December 28, 2019
84,301

 
186,519

 
270,820

 
 
 
 
 
 
Goodwill acquired

 
8,935

 
8,935

Impairment losses
(21,607
)
 

 
(21,607
)
Foreign currency translation adjustment
26

 

 
26

 
 
 
 
 
 
Balance as of March 28, 2020
 

 
 

 
 
Goodwill
128,703

 
195,597

 
324,300

Accumulated impairment losses
(65,983
)
 
(143
)
 
(66,126
)
Net goodwill balance as of March 28, 2020
$
62,720

 
$
195,454

 
$
258,174



See "Note 3. Acquisitions and Divestitures" for additional information regarding goodwill acquired in the current period; see Impairment Analysis section below for additional information regarding goodwill impairment recorded in the current period.

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):
 
March 28, 2020
 
December 28, 2019
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
Patents
$
40

 
$
40

 
$

 
$
40

 
$
40

 
$

Software
179,560

 
72,046

 
107,514

 
176,836

 
67,541

 
109,295

Trademarks and trade names
6,564

 
3,134

 
3,430

 
7,564

 
3,381

 
4,183

Customer lists and other
90,239

 
67,187

 
23,052

 
104,004

 
71,442

 
32,562

Net definite-lived intangible assets
$
276,403

 
$
142,407

 
$
133,996

 
$
288,444

 
$
142,404

 
$
146,040



At the end of the first quarter of 2020, the Corporation recorded impairment charges of $0.6 million and $8.2 million related to definite-lived tradenames and customer lists, respectively, in the office furniture segment. See Impairment Analysis section below for additional information.

Amortization expense is reflected in "Selling and administrative expenses" in the Condensed Consolidated Statements of Comprehensive Income and was as follows (in thousands):
 
Three Months Ended
 
March 28,
2020
 
March 30,
2019
Capitalized software
$
4,550

 
$
4,595

Other definite-lived intangibles
$
1,523

 
$
1,574





11




The occurrence of events such as acquisitions, dispositions, or impairments may impact future amortization expense. Based on the current amount of intangible assets subject to amortization, the estimated amortization expense for each of the following five fiscal years is as follows (in millions):
 
 
2020
 
2021
 
2022
 
2023
 
2024
Amortization expense
 
$
23.3

 
$
22.1

 
$
19.0

 
$
16.4

 
$
15.1



Indefinite-lived intangible assets
The Corporation also owns certain intangible assets, which are deemed to have indefinite useful lives because they are expected to generate cash flows indefinitely. These indefinite-lived intangible assets are reflected in "Goodwill and Other Intangible Assets" in the Condensed Consolidated Balance Sheets (in thousands):
 
March 28,
2020
 
December 28,
2019
Trademarks and trade names
$
26,600

 
$
28,849



At the end of the first quarter of 2020, the Corporation recorded an impairment charge of $2.3 million related to an indefinite-lived tradename in the office furniture segment. See Impairment Analysis section below for additional information. The remaining immaterial change in the indefinite-lived intangible assets balances shown above is related to foreign currency translation impacts.

Impairment Analysis
The Corporation evaluates its goodwill and indefinite-lived intangible assets for impairment on an annual basis during the fourth quarter, or whenever indicators of impairment exist. The Corporation also evaluates long-lived assets (which include definite-lived intangible assets) for impairment if indicators exist. At the end of the first quarter of 2020, the Corporation determined that a triggering event occurred, resulting in quantitative impairment tests performed over the goodwill, indefinite-lived intangible assets, and long-lived asset groups related to three reporting units in the office furniture segment. This determination was made considering the reduced sales and profitability projections for these reporting units, driven by the COVID-19 pandemic and related economic disruption. Management also considered the relative difference between the fair values and carrying values of the respective reporting units and indefinite-lived intangible assets in the most recent annual test performed during the fourth quarter of 2019. For the Corporation's remaining reporting units, management determined that the likelihood of the current fair value being less than the current carrying value was remote, and thus no quantitative impairment testing was performed.

As a result of the long-lived asset impairment testing, it was determined the carrying value of one long-lived asset group was not recoverable based on an analysis of the undiscounted estimated future cash flows of the group. Consequently, the Corporation recorded charges of $0.6 million and $8.2 million to fully impair the carrying values of a definite-lived tradename and customer list, respectively, within this asset group.

As a result of the indefinite-lived intangible asset impairment testing, it was determined the carrying value of one of the Corporation's indefinite-lived tradenames exceeded the estimated fair value. Therefore, a $2.3 million impairment charge was recorded to reduce the carrying value to estimated fair value of $5.3 million. The fair value of this tradename is considered a Level 3 measurement which utilizes a relief-from-royalty discounted cash flows approach. Key inputs and assumptions involved include the estimated near-term revenue growth (ranging from -28 percent to +12 percent), long-term growth rate (3 percent), royalty rate (2 percent), and discount rate (16 percent).

For the goodwill impairment testing, management utilized a combination of both a discounted cash flows approach and market approach. Projections used in the impairment models reflected management's assumptions regarding revenue growth rates, economic and market trends including deterioration from the current COVID-19 pandemic, cost structure, investments required for product enhancements, and other expectations about the anticipated short-term and long-term operating results of the reporting units. As a result of the impairment testing, two reporting units were determined to have carrying values in excess of their fair values, resulting in goodwill impairment charges of $14.1 million and $7.5 million, respectively. These two reporting units have no remaining goodwill. The third reporting unit, which has goodwill of $6.9 million, was determined to have a fair value that exceeded carrying value by approximately 21 percent. For this reporting unit, the Corporation assumed a discount rate of 15.5 percent, near-term growth rates ranging from -24 percent to +17 percent, and a terminal growth rate of 4 percent. Holding other assumptions constant, a 100 basis point increase in the discount rate would result in a $3.7 million decrease in the estimated fair value of the reporting unit. Holding other assumptions constant, a 100 basis point decrease in the long-term growth rate would result in a $1.9 million decrease in the estimated fair value of the reporting unit. Both of these scenarios individually would result in the estimated fair value exceeding the carrying value.


12




All impairment charges described above are reflected in "Impairment charges" in the Condensed Consolidated Statements of Comprehensive Income.

Note 6.  Product Warranties

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

A warranty allowance is determined by recording a specific allowance for known warranty issues and an additional allowance for unknown claims expected to be incurred based on historical claims experience.  Actual costs incurred could differ from the original estimates, requiring adjustments to the allowance.  Activity associated with warranty obligations was as follows (in thousands):
 
Three Months Ended
 
March 28,
2020
 
March 30,
2019
Balance at beginning of period
$
15,865

 
$
15,450

Accruals for warranties issued during period
4,778

 
5,718

Adjustments related to pre-existing warranties
514

 
89

Settlements made during the period
(4,936
)
 
(5,746
)
Balance at end of period
$
16,221

 
$
15,511



The current and long-term portions of the allowance for estimated settlements are included within "Accounts payable and accrued expenses" and "Other Long-Term Liabilities", respectively, in the Condensed Consolidated Balance Sheets. The following table summarizes when these estimated settlements are expected to be paid (in thousands):
 
March 28,
2020
 
December 28,
2019
Current - in the next twelve months
$
8,280

 
$
7,940

Long-term - beyond one year
7,941

 
7,925

Total
$
16,221

 
$
15,865



Note 7.  Long-Term Debt

Long-term debt is as follows (in thousands):
 
March 28,
2020
 
December 28,
2019
Revolving credit facility with interest at a variable rate
(March 28, 2020 - 2.0%; December 28, 2019 - 2.8%)
$
129,000

 
$
75,000

Fixed rate notes due in 2025 with an interest rate of 4.22%
50,000

 
50,000

Fixed rate notes due in 2028 with an interest rate of 4.40%
50,000

 
50,000

Other amounts
1,830

 
790

Deferred debt issuance costs
(540
)
 
(561
)
Total debt
230,290

 
175,229

Less: Current maturities of long-term debt
1,830

 
790

Long-term debt
$
228,460

 
$
174,439



The carrying value of the Corporation's outstanding variable-rate, long-term debt obligations at March 28, 2020 was $129 million, which approximated fair value. The fair value of the fixed rate notes was estimated based on a discounted cash flow method (Level 2) to be $125 million at March 28, 2020.

As of March 28, 2020, the Corporation’s revolving credit facility borrowings were under the credit agreement entered into on April 20, 2018 with a scheduled maturity of April 20, 2023. The Corporation deferred the debt issuance costs related to the credit

13




agreement, which are classified as assets, and is amortizing them over the term of the credit agreement. The current portion of debt issuance costs of $0.4 million is the amount to be amortized over the next twelve months based on the current credit agreement and is reflected in "Prepaid expenses and other current assets" in the Condensed Consolidated Balance Sheets. The long-term portion of debt issuance costs of $0.9 million is reflected in "Other Assets" in the Condensed Consolidated Balance Sheets.

As of March 28, 2020, there was $129 million outstanding under the $450 million revolving credit facility. The entire amount drawn under the revolving credit facility is considered long-term as the Corporation assumes no obligation to repay any of the amounts borrowed in the next twelve months. Based on current earnings before interest, taxes, depreciation and amortization, the Corporation can access the full remaining $321 million of borrowing capacity available under the revolving credit facility and maintain compliance with applicable covenants.

In addition to cash flows from operations, the revolving credit facility under the credit agreement is the primary source of daily operating capital for the Corporation and provides additional financial capacity for capital expenditures, repurchases of common stock, and strategic initiatives, such as acquisitions.

In addition to the revolving credit facility, the Corporation also has $100 million of borrowings outstanding under private placement note agreements entered into on May 31, 2018. Under the agreements, the Corporation issued $50 million of seven-year fixed rate notes with an interest rate of 4.22 percent, due May 31, 2025, and $50 million of ten-year fixed rate notes with an interest rate of 4.40 percent, due May 31, 2028. The Corporation deferred the debt issuance costs related to the private placement note agreements, which are classified as a reduction of long-term debt in accordance with ASU No. 2015-03, and is amortizing them over the terms of the private placement note agreements. The deferred debt issuance costs do not reduce the amount owed by the Corporation under the terms of the private placement note agreements. As of March 28, 2020, the debt issuance costs balance of $0.5 million related to the private placement note agreements is reflected in "Long-Term Debt" in the Condensed Consolidated Balance Sheets.

The credit agreement and private placement notes both contain financial and non-financial covenants. The covenants under both are substantially the same. Non-compliance with covenants under the agreements could prevent the Corporation from being able to access further borrowings, require immediate repayment of all amounts outstanding, and/or increase the cost of borrowing.

Covenants require maintenance of financial ratios as of the end of any fiscal quarter, including:

a consolidated interest coverage ratio (as defined in the credit agreement) of not less than 4.0 to 1.0, based upon the ratio of (a) consolidated EBITDA for the last four fiscal quarters to (b) the sum of consolidated interest charges; and
a consolidated leverage ratio (as defined in the credit agreement) 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.

The most restrictive of the financial covenants is the consolidated leverage ratio requirement of 3.5 to 1.0.  Under the credit agreement, consolidated EBITDA is defined as consolidated net income before interest expense, income taxes, and depreciation and amortization of intangibles, as well as non-cash items that increase or decrease net income.  As of March 28, 2020, the Corporation was below the maximum allowable ratio and was in compliance with all of the covenants and other restrictions in the credit agreement.  The Corporation expects to remain in compliance with all of the covenants and other restrictions in the credit agreement over the next twelve months.

Note 8.  Income Taxes

The Corporation's tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items. The following table summarizes the Corporation's income tax provision (dollars in thousands):
 
Three Months Ended
 
March 28,
2020
 
March 30,
2019
Income (loss) before income taxes
$
(25,539
)
 
$
1,566

Income taxes
$
(1,643
)
 
$
546

Effective tax rate
6.4
%
 
34.8
%



14




The Corporation's effective tax rate was lower in the three months ended March 28, 2020 compared to the same period last year primarily due to lower current quarter income and lower expected income due to the COVID-19 pandemic, resulting in a greater benefit from tax credits.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was enacted in response to the COVID-19 pandemic crisis. The CARES Act contains provisions relating to refundable payroll tax credits, deferment of certain social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The Corporation is currently evaluating the impact of this legislation on its consolidated financial position, results of operations, and cash flows and does not estimate a material impact; however, future evaluation and planning may result in a material benefit.

Note 9.  Fair Value Measurements of Financial Instruments

For recognition purposes, on a recurring basis, the Corporation is required to measure at fair value its marketable securities, derivative financial instruments, and deferred stock-based compensation.  The marketable securities are comprised of money market funds, government securities, and corporate bonds. When available, the Corporation uses quoted market prices to determine fair value and classifies such measurements within Level 1.  Where market prices are not available, the Corporation makes use of observable market-based inputs (prices or quotes from published exchanges and indexes) to calculate fair value using the market approach, in which case the measurements are classified within Level 2.

Financial instruments measured at fair value were as follows (in thousands):
 
Fair value as of measurement date
 
Quoted prices in active markets for identical assets
(Level 1)
 
Significant other observable inputs
(Level 2)
 
Significant unobservable inputs
(Level 3)
Balance as of March 28, 2020
 
 
 
 
 
 
 
Cash and cash equivalents (including money market funds) (1)
$
35,413

 
$
35,413

 
$

 
$

Government securities (2)
$
6,797

 
$

 
$
6,797

 
$

Corporate bonds (2)
$
6,395

 
$

 
$
6,395

 
$

Derivative financial instruments - liability (4)
$
2,504

 
$

 
$
2,504

 
$

Deferred stock-based compensation (5)
$
5,065

 
$

 
$
5,065

 
$

 
 
 
 
 
 
 
 
Balance as of December 28, 2019
 
 
 
 
 
 
 
Cash and cash equivalents (including money market funds) (1)
$
52,073

 
$
52,073

 
$

 
$

Government securities (2)
$
6,339

 
$

 
$
6,339

 
$

Corporate bonds (2)
$
6,323

 
$

 
$
6,323

 
$

Derivative financial instruments - asset (3)
$
276

 
$

 
$
276

 
$

Deferred stock-based compensation (5)
$
7,503

 
$

 
$
7,503

 
$


The index below indicates the line item in the Condensed Consolidated Balance Sheets where the financial instruments are reported:

(1)     "Cash and cash equivalents"
(2)     Current portion - "Short-term investments"; Long-term portion - "Other Assets"
(3)     Current portion - "Prepaid expenses and other current assets"; Long-term portion - "Other Assets"
(4) "Other Long-Term Liabilities"
(5)     Current portion - "Current maturities of other long-term obligations"; Long-term portion - "Other Long-Term Liabilities"







15




Note 10.  Accumulated Other Comprehensive Income (Loss) and Shareholders' Equity

The following tables summarize the components of accumulated other comprehensive income (loss) and the changes in accumulated other comprehensive income (loss), net of tax, as applicable (in thousands):
 
 
Foreign Currency Translation Adjustment
 
Unrealized Gains (Losses) on Debt Securities
 
Pension and Post-retirement Liabilities
 
Derivative Financial Instruments
 
Accumulated Other Comprehensive Income (Loss)
Balance as of December 28, 2019
 
$
(2,912
)
 
$
95

 
$
(5,762
)
 
$
506

 
$
(8,073
)
Other comprehensive income (loss) before reclassifications
 
(600
)
 
75

 

 
(2,756
)
 
(3,281
)
Tax (expense) or benefit
 

 
(16
)
 

 
648

 
632

Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 

 

 

 
(108
)
 
(108
)
Balance as of March 28, 2020
 
$
(3,512
)
 
$
154

 
$
(5,762
)
 
$
(1,710
)
 
$
(10,830
)
Amounts in parentheses indicate reductions to equity.

 
 
Foreign Currency Translation Adjustment
 
Unrealized Gains (Losses) on Debt Securities
 
Pension and Post-retirement Liabilities
 
Derivative Financial Instruments
 
Accumulated Other Comprehensive Income (Loss)
Balance as of December 29, 2018
 
$
(2,973
)
 
$
(156
)
 
$
(2,929
)
 
$
2,459

 
$
(3,599
)
Other comprehensive income (loss) before reclassifications
 
963

 
114

 

 
(527
)
 
550

Tax (expense) or benefit
 

 
(24
)
 

 
124

 
100

Reclassification of stranded tax impact
 

 

 
(1,185
)
 
446

 
(739
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 

 

 

 
(352
)
 
(352
)
Balance as of March 30, 2019
 
$
(2,010
)
 
$
(66
)
 
$
(4,114
)
 
$
2,150

 
$
(4,040
)
Amounts in parentheses indicate reductions to equity.

Interest Rate Swap
In March 2016, the Corporation entered into an interest rate swap transaction to hedge $150 million of outstanding variable rate revolver borrowings against future interest rate volatility. Under the terms of the interest rate swap, the Corporation paid a fixed rate of 1.29 percent and received one month LIBOR on a $150 million notional value. In August 2019, the agreement governing this interest rate swap was terminated, and the Corporation received cash proceeds of $0.5 million, the fair value of the interest rate swap on the termination date. The proceeds were recorded as cash provided by operating activities in the Condensed Consolidated Statement of Cash Flows. The $0.5 million gain from the termination of this interest rate swap agreement was recorded to "Accumulated other comprehensive income (loss)" and will be amortized to interest expense through January 2021, the remaining term of the original interest rate swap agreement.

In August 2019, concurrent with the termination of the previous interest rate swap, the Corporation entered into a new interest rate swap transaction to hedge $75 million of outstanding variable rate revolver borrowings against future interest rate volatility.  Under the terms of this interest rate swap, the Corporation pays a fixed rate of 1.42 percent and receives one month LIBOR on a $75 million notional value expiring August 2023.  As of March 28, 2020, the fair value of the Corporation's interest rate swap liability was $2.5 million. The unrecognized change in value of the interest rate swap, which includes the unamortized gain on the termination of the 2016 interest rate swap, is reported net of tax as $(1.7) million in "Accumulated other comprehensive income (loss)" in the Condensed Consolidated Balance Sheets.








16




The following table details the reclassifications from accumulated other comprehensive income (loss) (in thousands):
 
 
Three Months Ended
Details about Accumulated Other Comprehensive Income (Loss) Components
Affected Line Item in the Statement Where Net Income is Presented
March 28,
2020
 
March 30,
2019
Derivative financial instruments
 
 
 
Interest rate swap
Interest expense, net
$
114

 
$
460

 
Income tax expense
(6
)
 
(108
)
 
Net of tax
$
108

 
$
352


Amounts in parentheses indicate reductions to profit.

Dividend
The Corporation declared and paid cash dividends per common share as follows (in dollars):
 
Three Months Ended
 
March 28,
2020
 
March 30,
2019
Dividends per common share
$
0.305

 
$
0.295



Stock Repurchase
The following table summarizes shares repurchased and settled by the Corporation (in thousands, except share and per share data):
 
Three Months Ended
 
March 28,
2020
 
March 30,
2019
Shares repurchased
186,700

 
647,290

Average price per share
$
30.75

 
$
38.14

 
 
 
 
Cash purchase price
$
(5,741
)
 
$
(24,685
)
Purchases unsettled as of quarter end
276

 
1,170

Prior year purchases settled in current year
(374
)
 
(354
)
Shares repurchased per cash flow
$
(5,839
)
 
$
(23,869
)


As of March 28, 2020, approximately $158.9 million of the Corporation's Board of Directors' ("Board") current repurchase authorization remained unspent. In its COVID-19 response update on April 6th, the Corporation announced plans to temporarily suspend share repurchase activity to support free cash flow.