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
|
|
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.
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
|
|
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
|
|
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.
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
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
|
%
|
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"
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.
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.
Note 11. Earnings Per Share
The following table reconciles the numerators and denominators used in the calculation of basic and diluted earnings per share ("EPS") (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 28,
2020
|
|
March 30,
2019
|
Numerator:
|
|
|
|
Numerator for both basic and diluted EPS attributable to HNI Corporation net income
|
$
|
(23,895
|
)
|
|
$
|
1,022
|
|
Denominators:
|
|
|
|
Denominator for basic EPS weighted-average common shares outstanding
|
42,628
|
|
|
43,534
|
|
Potentially dilutive shares from stock-based compensation plans
|
—
|
|
|
555
|
|
Denominator for diluted EPS
|
42,628
|
|
|
44,089
|
|
Earnings per share – basic
|
$
|
(0.56
|
)
|
|
$
|
0.02
|
|
Earnings per share – diluted
|
$
|
(0.56
|
)
|
|
$
|
0.02
|
|
The weighted-average common stock equivalents presented above do not include the effect of the common stock equivalents in the table below because their inclusion would be anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 28,
2020
|
|
March 30,
2019
|
Common stock equivalents excluded because their inclusion would be anti-dilutive
|
2,841
|
|
|
1,937
|
|
Note 12. Stock-Based Compensation
The Corporation measures stock-based compensation expense at grant date, based on the fair value of the award. Forms of awards issued under shareholder approved plans include stock options, restricted stock units based on a service condition ("restricted stock units"), restricted stock units based on both performance and service conditions ("performance stock units"), and shares issued under member stock purchase plans. Stock-based compensation expense related to stock options, restricted stock units, and performance stock units is recognized over the employees' requisite service periods. However, expense related to performance stock units is adjusted for the probability that the Corporation will perform within an established target range of cumulative profitability over a multi-year period. The Corporation has not accrued compensation expense for performance stock units granted to date, based on the current determination that it is not probable that the minimum cumulative profitability target will be achieved.
The following table summarizes expense associated with these plans (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 28,
2020
|
|
March 30,
2019
|
Compensation cost
|
$
|
4,358
|
|
|
$
|
2,451
|
|
The options and units granted by the Corporation had fair values as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 28,
2020
|
|
March 30,
2019
|
Stock options
|
$
|
—
|
|
|
$
|
6,211
|
|
Restricted stock units
|
$
|
5,777
|
|
|
$
|
361
|
|
Performance stock units
|
$
|
5,777
|
|
|
$
|
—
|
|
The following table summarizes unrecognized compensation expense and the weighted-average remaining service period for non-vested stock options and restricted stock units as of March 28, 2020:
|
|
|
|
|
|
|
|
Unrecognized Compensation Expense
(in thousands)
|
|
Weighted-Average Remaining
Service Period (years)
|
Non-vested stock options
|
$
|
2,173
|
|
|
1.2
|
Non-vested restricted stock units
|
$
|
2,632
|
|
|
0.9
|
Note 13. Post-Retirement Health Care
The following table sets forth the components of net periodic benefit costs included in the Condensed Consolidated Statements of Comprehensive Income (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 28,
2020
|
|
March 30,
2019
|
Service cost
|
$
|
195
|
|
|
$
|
170
|
|
Interest cost
|
169
|
|
|
199
|
|
Net periodic post-retirement benefit cost
|
$
|
364
|
|
|
$
|
369
|
|
Note 14. Recently Adopted Accounting Standards
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments and also issued subsequent amendments to the initial guidance: ASU 2018-19, ASU 2019-04, and ASU 2019-05 (collectively, Topic 326). Topic 326 replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses by requiring consideration of a broader range of reasonable and supportable information and is intended to provide financial statement users with more useful information about expected credit losses on financial instruments.
The Corporation adopted Topic 326 in the first quarter of fiscal 2020 using a modified retrospective transition approach. The adoption resulted in a cumulative effect decrease to retained earnings of $0.1 million to reflect a change in the allowance for doubtful accounts. Additionally, Topic 326 requires the allowance for doubtful accounts balance (contra-asset) to be presented separately in the Condensed Consolidated Balance Sheets. No other financial statement line items were materially impacted by the adoption.
The Corporation's allowance for doubtful accounts is developed based on several factors, including overall customer credit quality, historical write-off experience, and specific account analyses projecting the ultimate collectability of the account. The adoption of Topic 326 did not significantly impact the Corporation's accounting policies or estimation methods related to the allowance for doubtful accounts.
Topic 326 also introduced new accounting and reporting requirements related to available-for-sale debt securities, including consideration of whether an allowance for credit losses should be established. The Corporation has determined that such an allowance is not required with respect to its available-for-sale debt security portfolio. See "Note 9. Fair Value Measurements" for fair value information of the Corporation's available-for-sale debt securities and where such are recorded in the Condensed Consolidated Balance Sheets. The amortized cost of this portfolio was $13.0 million and $12.5 million as of March 28, 2020 and December 28, 2019, respectively. Immaterial amounts of accrued interest receivable related to the Corporation's portfolio are recorded in "Prepaid expenses and other current assets" and "Other assets".
Note 15. Guarantees, Commitments, and Contingencies
The Corporation utilizes letters of credit and surety bonds in the amount of approximately $24 million to back certain insurance policies and payment obligations. The Corporation utilizes trade letters of credit and banker's acceptances in the amount of approximately $1 million to guarantee certain payments to overseas suppliers. The letters of credit, bonds, and banker's acceptances reflect fair value as a condition of their underlying purpose and are subject to competitively determined fees.
The Corporation has contingent liabilities which have arisen in the ordinary course of its business, including liabilities relating to pending litigation, environmental remediation, taxes, and other claims. It is the Corporation's opinion, after consultation with legal counsel, that liabilities, if any, resulting from these matters are not expected to have a material adverse effect on the Corporation's financial condition, cash flows, or on the Corporation's quarterly or annual operating results when resolved in a future period.
Note 16. Reportable Segment Information
Management views the Corporation as being in two reportable segments based on industries: office furniture and hearth products, with the former being the principal segment.
The aggregated office furniture segment manufactures and markets a broad line of commercial and home office furniture which includes panel-based and freestanding furniture systems, seating, storage, tables, and architectural products. The hearth products segment manufactures and markets a full array of gas, wood, electric, and pellet fueled fireplaces, inserts, stoves, facings, and accessories.
For purposes of segment reporting, intercompany sales between segments are not material, and operating profit is income before income taxes exclusive of certain unallocated general corporate expenses. These unallocated general corporate expenses include the net costs of the Corporation's corporate operations. Management views interest income and expense as corporate financing costs and not as a reportable segment cost. In addition, management applies an effective income tax rate to its consolidated income before income taxes so income taxes are not reported or viewed internally on a segment basis. Identifiable assets by segment are those assets applicable to the respective industry segments. Corporate assets consist principally of cash and cash equivalents, short-term investments, long-term investments, IT infrastructure, and corporate office real estate and related equipment.
No geographic information for revenues from external customers or for long-lived assets is disclosed since the Corporation's primary market and capital investments are concentrated in the United States.
Reportable segment data reconciled to the Corporation's condensed consolidated financial statements was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 28,
2020
|
|
March 30,
2019
|
Net Sales:
|
|
|
|
Office furniture
|
$
|
338,386
|
|
|
$
|
353,511
|
|
Hearth products
|
130,318
|
|
|
125,945
|
|
Total
|
$
|
468,704
|
|
|
$
|
479,456
|
|
|
|
|
|
Income (Loss) Before Income Taxes:
|
|
|
|
Office furniture
|
$
|
(33,231
|
)
|
|
$
|
(1,731
|
)
|
Hearth products
|
20,671
|
|
|
17,609
|
|
General corporate
|
(11,168
|
)
|
|
(12,201
|
)
|
Operating income (loss)
|
(23,728
|
)
|
|
3,677
|
|
Interest expense, net
|
1,811
|
|
|
2,111
|
|
Total
|
$
|
(25,539
|
)
|
|
$
|
1,566
|
|
|
|
|
|
Depreciation and Amortization Expense:
|
|
|
|
Office furniture
|
$
|
11,332
|
|
|
$
|
11,060
|
|
Hearth products
|
2,306
|
|
|
2,056
|
|
General corporate
|
5,849
|
|
|
5,924
|
|
Total
|
$
|
19,487
|
|
|
$
|
19,040
|
|
|
|
|
|
Capital Expenditures (including capitalized software):
|
|
|
|
Office furniture
|
$
|
7,101
|
|
|
$
|
10,319
|
|
Hearth products
|
2,973
|
|
|
4,998
|
|
General corporate
|
3,085
|
|
|
3,779
|
|
Total
|
$
|
13,159
|
|
|
$
|
19,096
|
|
|
|
|
|
|
As of
March 28,
2020
|
|
As of
December 28, 2019
|
Identifiable Assets:
|
|
|
|
Office furniture
|
$
|
785,063
|
|
|
$
|
874,913
|
|
Hearth products
|
376,862
|
|
|
364,653
|
|
General corporate
|
207,974
|
|
|
212,946
|
|
Total
|
$
|
1,369,899
|
|
|
$
|
1,452,512
|
|