NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Summary of Significant Accounting Policies
Principles of Consolidation: The consolidated financial statements include the accounts of all subsidiaries. All intercompany balances and transactions have been eliminated in the consolidation.
Operating Segments: Our operating segments are aligned with our four business units: Workplace, Health, Hospitality, and eBusiness. Our portfolio of furniture products and services are sold across all business units under our family of brands: Kimball, National, Etc., Interwoven, Kimball Hospitality, D’Style, and Poppin. Our four operating segments aggregate into one reportable segment as they have similar products and services in nature, use similar production and distribution processes, sell to similar types of customers, and share similar long-term economic characteristics.
Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts included in the consolidated financial statements and related note disclosures. While efforts are made to assure estimates used are reasonably accurate based on management’s knowledge of current events, actual results could differ from those estimates.
Revenue Recognition: Revenue is measured as the amount of consideration we expect to receive in exchange for transferring distinct goods or providing services to customers. Our revenue consists substantially of product sales, and is reported net of sales discounts, rebates, incentives, returns, and other allowances offered to customers. We recognize revenue when performance obligations under the terms of contracts with our customers are satisfied, which occurs when control passes to a customer to enable them to direct the use of and obtain benefit from the product. This typically occurs when a customer obtains legal title, obtains the risks and rewards of ownership, has received the goods according to the contractual shipping terms either at the shipping point or destination, and is obligated to pay for the product. Shipping and handling activities are recognized as fulfillment activities and are expensed at the time revenue is recognized. We recognize sales net of applicable sales taxes and similar revenue-based taxes. We use judgment in estimating the reduction in net sales driven by customer rebate and incentive programs. Judgments primarily include expected sales levels to be achieved and the corresponding rebate and incentive amounts expected to be earned by dealers and salespersons. We also use judgment in estimating a reserve for returns and allowances which is recorded at the time of the sale, based on estimated product returns and price concessions. The reserve for returns and allowances is recorded in Accrued Expenses on the Consolidated Balance Sheets, and the expense is recorded as a reduction of Net Sales in the Consolidated Statements of Operations. We perform ongoing credit evaluations of our customers and impair receivable balances by recording specific allowances for bad debts based on judgment using factors such as current trends, the length of time the receivables are past due, and historical collection experience. The allowance for accounts receivable balances that are determined likely to be uncollectible are a reduction in the Receivables line of the Consolidated Balance Sheets, and the expense is recorded in Selling and Administrative Expenses in the Consolidated Statements of Operations.
Cash and Cash Equivalents: Cash equivalents consist primarily of highly liquid investments with original maturities of three months or less at the time of acquisition. Cash and cash equivalents consist of bank accounts and money market funds. Bank accounts are stated at cost, which approximates fair value, and money market funds are stated at fair value.
Notes Receivable and Trade Accounts Receivable: Our notes receivable and trade accounts receivable are recorded per the terms of the agreement or sale, and accrued interest is recognized when earned. We determine on a case-by-case basis the cessation of accruing interest, the resumption of accruing interest, the method of recording payments received on nonaccrual receivables, and the delinquency status for our limited number of notes receivable.
Our policy for estimating the allowance for credit losses on trade accounts receivable and notes receivable considers several factors including historical write-off experience, overall customer credit quality in relation to general economic and market conditions, and specific customer account analyses to estimate the collectability of certain accounts. The specific customer account analyses considers such items as aging, credit worthiness, payment history, and historical bad debt experience. Trade accounts receivable and notes receivable are written off after exhaustive collection efforts occur and the receivable is deemed uncollectible. Our limited amount of notes receivable allows management to monitor the risks, credit quality indicators, collectability, and probability of impairment on an individual basis. Adjustments to the allowance for credit losses are recorded in selling and administrative expenses. Customary terms require payment within 30 days, with terms beyond 30 days being considered extended.
Inventories: Inventories are stated at the lower of cost or net realizable value. Cost includes material, labor, and applicable manufacturing overhead. Costs associated with underutilization of capacity are expensed as incurred. Inventory cost was determined using the last-in, first-out (“LIFO”) method for approximately 51% and 67% of consolidated inventories at June 30, 2022 and June 30, 2021, respectively. The remaining inventories were valued using the first-in, first-out (“FIFO”) method and average cost method.
The cost of inventory valued under the LIFO method is calculated using the inventory price index computation (“IPIC”) method, in which external indexes are used to calculate inflation for the purpose of valuing LIFO inventories. Under this method, inventory is grouped into LIFO pools consisting of inventory with similar productive activities, including methods of obtaining, processing, and selling inventory. A cumulative inflation index is computed for each LIFO pool, calculated as the weighted average inflation rate of the various inventory categories making up the pool. Our source of LIFO inflation indices is the producer price index (“PPI”) published by the U.S. Bureau of Labor Statistics. We assign PPI categories to similar types of inventory items in order to measure inflation for each type of inventory. The pools’ cumulative indexes are used to deflate the inventory current-year cost to base period prices, which is then compared to the prior year’s inventory valued at base period prices. If the current year’s inventory at base is greater than the previous year’s inventory at base, the increment is multiplied by the pool cumulative inflation index to price the LIFO layer. If the current year’s inventory at base is less than the previous year’s inventory at base, the decrement erodes a previous LIFO layer and is priced using the index originally used to price the layer. A LIFO reserve is calculated as the difference between the FIFO value and the total computed LIFO layers. The LIFO reserve reduces the value of FIFO inventory to LIFO cost. During periods of rising prices, the LIFO method generally results in higher current costs being charged against income while lower costs are retained in inventories. Conversely, during periods of decreasing prices, the LIFO method generally results in lower current costs being charged against income and higher stated inventories.
Inventories are adjusted for excess and obsolete inventory. Evaluation of excess inventory includes such factors as anticipated usage, inventory turnover, inventory levels, and product demand levels. Factors considered when evaluating obsolescence include the age of on-hand inventory and reduction in value due to damage, use as showroom samples, design changes, or cessation of product lines. For inventory valued using the LIFO method, excess and obsolete inventory is determined based upon FIFO inventory values, but the LIFO reserve is adjusted to prevent recognizing excessive inventory reserves in total.
Property, Equipment, and Depreciation: Property and equipment are stated at cost less accumulated depreciation. Depreciation is provided over the estimated useful life of the assets using the straight-line method for financial reporting purposes. Leasehold improvements are amortized on a straight-line basis over the shorter of the useful life of the improvement or the term of the lease. Major maintenance activities and improvements are capitalized; other maintenance, repairs, and minor renewals are expensed. Depreciation and expenses for maintenance, repairs and minor renewals are included in both the Cost of Sales line and the Selling and Administrative Expenses line of the Consolidated Statements of Operations.
Impairment of Long-Lived Assets: We perform reviews for impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Impairment is recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. When an impairment is identified, the carrying amount of the asset is reduced to its estimated fair value. Assets to be disposed of are recorded at the lower of net book value or fair market value less cost to sell at the date management commits to a plan of disposal. The impairments of long-lived assets were primarily related to our transformation restructuring plan and are described in Note 3. Restructuring of Notes to Consolidated Financial Statements. Business Combinations: The purchase price of an acquired company is allocated between tangible and intangible assets acquired and liabilities assumed from the acquired business based on their estimated fair values, with the residual of the purchase price recorded as goodwill. The results of operations of the acquired business are included in our operating results from the day of acquisition. Any contingent earn-out liability is assessed quarterly and is recorded at fair value as of the reporting date.
Goodwill and Other Intangible Assets: Goodwill represents the difference between the purchase price and the related underlying tangible and intangible net asset fair values resulting from business acquisitions. Goodwill is assigned to and the fair value is tested at the reporting unit level. Annually, or if conditions indicate an earlier review is necessary, we may assess qualitative factors to determine if it is more likely than not that the fair value is less than its carrying amount. We also have the option to bypass the qualitative assessment and proceed directly to performing the quantitative goodwill impairment test which compares the carrying value of the reporting unit to the reporting unit’s fair value to identify impairment. Under the quantitative assessment, if the fair value of the reporting unit is less than the carrying value, goodwill is written down to its fair value. The fair value is established primarily using a discounted cash flow analysis and secondarily a market approach utilizing current industry information. The calculation of the fair value of the reporting unit considers current market conditions existing at the assessment date and reporting unit specific scenarios weighted on probability of outcome.
Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, and determination of our weighted average cost of capital. The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results, market conditions, and other factors. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for each reporting unit. While we have historically performed goodwill impairment testing annually during the second fiscal quarter, changes in circumstances may require interim assessments of the carrying amounts of our reporting units relative to their fair values.
In connection with our annual goodwill impairment test, we assessed goodwill at the reporting unit level for impairment during our second quarter of fiscal year 2022 and based on our analysis our Poppin reporting unit had a carrying amount that exceeded its fair value. A forecast revision to delay future sales and earnings growth of the Poppin reporting unit drove the decline in the fair value of the reporting unit, which was primarily attributable to changes in demand due to the ongoing COVID-19 pandemic and supply chain constraints. As a result, we recorded goodwill impairment of $34.1 million during the second quarter of fiscal year 2022.
During fiscal year 2021, no goodwill impairment was recognized, and we recorded $70.8 million in goodwill from the acquisition of Poppin, Inc.
The changes in the carrying amount of goodwill are summarized as follows:
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| (Amounts in Thousands) | | Gross Goodwill | | Accumulated Impairment | | Net Carrying Amount |
| June 30, 2020 | | $ | 12,893 | | | $ | (1,733) | | | $ | 11,160 | |
| Additions / (Impairments) | | 70,802 | | | — | | | 70,802 | |
| June 30, 2021 | | 83,695 | | | (1,733) | | | 81,962 | |
| Additions / (Impairments) | | — | | | (34,118) | | | (34,118) | |
| June 30, 2022 | | $ | 83,695 | | | $ | (35,851) | | | $ | 47,844 | |
Other Intangible Assets reported on the Consolidated Balance Sheets consist of capitalized software, acquired technology, customer relationships, trade names, non-compete agreements and patents and trademarks. Intangible assets are reviewed for impairment when events or circumstances indicate that the carrying value may not be recoverable over the remaining lives of the assets. During fiscal year 2022 upon announcement of the planned closure of our manufacturing space in Tijuana, Mexico and warehouse in Chula Vista, California, we recognized a $3.8 million impairment of the D’Style customer relationship intangible asset because the carrying value exceeded projected cash flows. The impairment of the customer relationship intangible asset is included in the Restructuring Expense line of the Consolidated Statements of Operations. A summary of intangible assets subject to amortization is as follows:
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| | June 30, 2022 | | June 30, 2021 |
| (Amounts in Thousands) | Cost | | Accumulated Amortization | | Net Value | | Cost | | Accumulated Amortization | | Net Value |
| Capitalized Software | $ | 46,246 | | | $ | 35,521 | | | $ | 10,725 | | | $ | 43,200 | | | $ | 34,058 | | | $ | 9,142 | |
| Customer Relationships | 19,050 | | | 10,518 | | | 8,532 | | | 19,050 | | | 3,936 | | | 15,114 | |
| Trade Names | 36,570 | | | 6,811 | | | 29,759 | | | 36,570 | | | 3,154 | | | 33,416 | |
| Acquired Technology | 7,000 | | | 1,563 | | | 5,437 | | | 7,000 | | | 559 | | | 6,441 | |
| Patents and Trademarks | 354 | | | 47 | | | 307 | | | 354 | | | 16 | | | 338 | |
| Non-Compete Agreements | 100 | | | 93 | | | 7 | | | 100 | | | 73 | | | 27 | |
| Other Intangible Assets | $ | 109,320 | | | $ | 54,553 | | | $ | 54,767 | | | $ | 106,274 | | | $ | 41,796 | | | $ | 64,478 | |
During fiscal years 2022, 2021, and 2020, amortization expense of other intangible assets was, in thousands, $9,614, $6,683, and $2,402, respectively. Amortization expense in future periods is expected to be, in thousands, $9,163, $8,965, $8,767, $8,495, and $6,171 in the five years ending June 30, 2027, and $13,206 thereafter.
A summary of the useful lives of intangible assets subject to amortization is as follows:
| | | | | | | | |
| | Years |
| Capitalized Software | | 3 to 13 |
| Customer Relationships | | 10 |
| Trade Names | | 10 |
| Acquired Technology | | 7 |
| Patents | | 14 |
| Trademarks | | 15 |
| Non-Compete Agreements | | 5 |
Capitalized software is stated at cost less accumulated amortization and is amortized using the straight-line method. During the software application development stage, capitalized costs include external consulting costs, cost of software licenses, and internal payroll and payroll-related costs for employees who are directly associated with a software project. Upgrades and enhancements are capitalized if they result in added functionality which enable the software to perform tasks it was previously incapable of performing. Software maintenance, training, data conversion, and business process re-engineering costs are expensed in the period in which they are incurred.
Trade names, non-compete agreements, acquired technology, patents and trademarks are amortized on a straight-line basis over their estimated useful lives. Customer relationships are amortized based on estimated attrition rates of customers. We have no intangible assets with indefinite useful lives which are not subject to amortization.
Research and Development: The costs of research and development are expensed as incurred. Research and development costs were approximately, in millions, $11, $10, and $5 in fiscal years 2022, 2021, and 2020, respectively.
Advertising: Advertising costs are expensed as incurred. Advertising costs, included in selling and administrative expenses were, in millions, $8.3, $4.9, and $4.1, in fiscal years 2022, 2021, and 2020, respectively.
Insurance and Self-insurance: We are self-insured for certain employee health benefits including medical, short-term disability, and dental. Our self-insured reserves are estimated based upon a number of factors including known claims, estimated incurred but not reported claims, and other analyses, which are based on historical information along with certain assumptions about future events. We carry medical coverage for our eligible workforce not covered by self-insured plans. Insurance benefits are not provided to retired employees.
We also participate, along with other companies, in a group captive insurance company (“Captive”). The Captive insures losses related to worker's compensation, motor vehicle liability, product liability, and general liability. The Captive reinsures catastrophic losses for all participants, including Kimball International, in excess of predetermined amounts. We pay premiums to the Captive which accumulate as a prepaid deposit estimated for losses related to the above coverage. We also maintain a reserve for outstanding unpaid workers’ compensation claims, including an estimate of incurred but not reported claims.
Additionally, we purchase insurance coverage for property insurance, director and officer liability insurance, umbrella coverage, and other risks.
Income Taxes: Deferred income taxes are recognized for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. The deferred taxes are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse. We evaluate the recoverability of deferred tax assets each quarter by assessing the likelihood of future taxable income and available tax planning strategies that could be implemented to realize our deferred tax assets. If recovery is not likely, we provide a valuation allowance based on our best estimate of future taxable income in the various taxing jurisdictions and the amount of deferred taxes ultimately realizable. Future events could change management’s assessment. We classify net deferred tax assets and liabilities as non-current assets in our consolidated balance sheets.
We operate within multiple taxing jurisdictions and are subject to tax audits in these jurisdictions. These audits can involve complex uncertain tax positions, which may require an extended period of time to resolve. A tax benefit from an uncertain tax position may be recognized only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. We maintain a liability for uncertain income tax and other tax positions, including accrued interest and penalties on those positions. As tax positions are effectively settled, the tax liability is adjusted accordingly. We recognize interest and penalties related to unrecognized tax benefits in the Provision for Income Taxes line of the Consolidated Statements of Operations.
Off-Balance Sheet Risk: Our off-balance sheet arrangements are limited to standby letters of credit and performance bonds entered into in the normal course of business as described in Note 10 - Commitments and Contingent Liabilities of Notes to Consolidated Financial Statements. Other General (Income) Expense: Other General (Income) Expense includes a $4.5 million gain related to the sale of a warehouse during fiscal year 2022.
Non-operating Income and Expense: Non-operating income and expense include the impact of such items as fair value adjustments on Supplemental Employee Retirement Plan (“SERP”) investments, amortization of actuarial income, foreign currency rate movements, bank charges, and other miscellaneous non-operating income and expense items that are not directly related to operations. The gain or loss on SERP investments is offset by a change in the SERP liability that is recognized in selling and administrative expenses.
Foreign Currency Translation: Our foreign operations use the U.S. Dollar as their functional currency. Foreign currency assets and liabilities are remeasured into functional currencies at end-of-period exchange rates, except for nonmonetary assets and equity, which are remeasured at historical exchange rates. Revenue and expenses are remeasured at the weighted average exchange rate during the fiscal year, except for expenses related to nonmonetary assets, which are remeasured at historical exchange rates. Gains and losses from foreign currency remeasurement are reported in the Non-operating income or expense line item on the Consolidated Statements of Operations.
Derivative Instruments and Hedging Activities: Derivative financial instruments are recognized on the balance sheet as assets and liabilities and are measured at fair value. Changes in the fair value of derivatives are recorded each period in earnings or accumulated other comprehensive income, depending on whether a derivative is designated and effective as part of a hedge transaction, and if it is, the type of hedge transaction. Hedge accounting is utilized when a derivative is expected to be highly effective upon execution and continues to be highly effective over the duration of the hedge transaction. Hedge accounting permits gains and losses on derivative instruments to be deferred in accumulated other comprehensive income and subsequently included in earnings in the periods in which earnings are affected by the hedged item, or when the derivative is determined to be ineffective. We have used derivatives primarily for interest rate risk inherent in the variable rate of our revolving credit facility.
We also hold an investment in stock warrants which is accounted for as a derivative instrument and is included in the Other Assets line of the Consolidated Balance Sheets. See Note 15 - Derivative Instruments of Notes to Consolidated Financial Statements for more information on derivative instruments and hedging activities. Stock-Based Compensation: As described in Note 13 - Stock Compensation Plans of Notes to Consolidated Financial Statements, we maintain a stock-based compensation plan which allows for the issuance of stock unit awards, restricted stock awards, stock options, stock appreciation rights, and other stock-based awards, each of which may include performance-based conditions, to certain employees, non-employee directors, consultants, and advisors. We recognize the cost resulting from share-based payment transactions using a fair-value-based method. The estimated fair value of restricted stock units is based on the stock price at the date of the grant. The estimated fair value of outstanding relative total shareholder return performance units (“RTSR”) is based on the grant date fair value of RTSR awards using a Monte Carlo simulation which includes estimating the movement of stock prices and the effects of volatility, interest rates, and dividends. Stock-based compensation expense is recognized for the portion of the awards that are ultimately expected to vest. Forfeitures are recognized as they occur. Recently Issued Accounting Pronouncements Not Yet Adopted:
In October 2021, the Financial Accounting Standards Board (FASB) issued guidance on accounting for contract assets and contract liabilities, related to revenue contracts with customers, during a business combination by the acquiring business entity. The acquirer is to measure the contract asset and contract liability as of the acquisition date as if the acquirer had originated the contracts. This is a departure from the current practice under U.S. GAAP of recognizing contract assets and contract liabilities at fair value as of the acquisition date. The guidance will be effective in our first quarter of fiscal year 2024, though early adoption is permitted. Management is unable to predict whether the adoption of this guidance will have a material impact on our financial statements.
We evaluate all accounting pronouncements issued by the FASB for consideration of their applicability to our consolidated financial statements. We have assessed all recently issued accounting pronouncements that have not yet been adopted and concluded that those not disclosed are either not applicable to us or are not expected to have a material effect on our consolidated financial statements.
Note 2 Acquisition
On December 9, 2020, we acquired Poppin, Inc. (“Poppin”), a tech-enabled, market-leading B2B commercial furniture design company headquartered in New York City, New York. Poppin designs commercial-grade furniture that is made to mix, match, and scale in today’s modern office and work-from-home environments. The acquisition purchase price totaled $110.4 million in initial cash consideration plus $31.8 million in contingent earn-out consideration.
The contingent earn-out is payable on annual revenue and profitability milestones achieved through June 30, 2024. As of June 30, 2022 and June 30, 2021, the fair value of the contingent earn-out liability was $3.2 million and $20.2 million, respectively.
A summary of the final purchase price allocation is as follows:
| | | | | |
| Purchase Price Allocation | |
| (Amounts in Thousands) | |
| Cash | $ | 5,768 | |
| Receivables | 2,814 | |
| Inventories | 15,718 | |
| Other current assets | 700 | |
| Net property and equipment | 975 | |
| Other intangible assets | 52,394 | |
| Goodwill | 70,801 | |
| Right-of-use operating lease assets | 5,103 | |
| Other long-term assets | 4,161 | |
| Deferred tax assets | 5,836 | |
| Total Assets | $ | 164,270 | |
| |
| Current maturities of long-term debt | 1,252 | |
| Accounts payable | 7,715 | |
| Customer deposits | 2,045 | |
| Current portion of operating lease liability | 1,937 | |
| Accrued expenses | 5,260 | |
| Long-term debt, less current maturities | 1,252 | |
| Long-term operating lease liability | 2,565 | |
| Other long-term liabilities | 80 | |
| Total Liabilities | $ | 22,106 | |
| Net Assets | $ | 142,164 | |
| | | | | |
| Consideration | |
| (Amounts in Thousands) | |
| Cash | $ | 110,374 | |
| Contingent earn-out — fair value at acquisition date | 31,790 | |
| Fair value of total consideration | $ | 142,164 | |
| Less: Acquired cash | 5,768 | |
| Total consideration less acquired cash | $ | 136,396 | |
The operating results of this acquisition are included in our consolidated financial statements beginning on December 9, 2020. For the fiscal year ended June 30, 2022, net sales and net loss related to Poppin were $66.9 million and $13.0 million, respectively. For the fiscal year ended June 30, 2021, net sales and net loss related to Poppin were $24.1 million and $9.1 million, respectively. The aforementioned net losses include amortization on acquired intangibles and exclude earn-out adjustments related to operating performance and goodwill impairment after the acquisition date. There were no direct acquisition costs during the fiscal year ended June 30, 2022. Direct costs of the acquisition during the fiscal year ended June 30,
2021 were $3.6 million which were expensed as incurred and included on the Selling and Administrative Expenses line of our Consolidated Statements of Operations. The goodwill is not deductible for tax purposes. Goodwill is primarily attributable to the anticipated supply chain and revenue synergies including cross selling initiatives expected from the operations of the combined company. See Note 1 - Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements for more information on goodwill and other intangible assets, including the goodwill impairment charge recognized during fiscal year 2022. The purchase price allocation was final as of September 30, 2021. We utilized management estimates and consultation with an independent third-party valuation firm to assist in the valuation process. The following summarizes goodwill activity related to the acquisition:
| | | | | |
| Goodwill | |
| (Amounts in Thousands) | |
| Goodwill - June 30, 2020 | $ | — | |
| Goodwill - at acquisition date | 71,798 | |
| Adjustments to purchase price allocation | (997) | |
| Goodwill - June 30, 2021 | $ | 70,801 | |
| Impairment | (34,118) | |
| Goodwill - June 30, 2022 | $ | 36,683 | |
Pro Forma Information
The following unaudited pro forma financial information summarizes the combined results of operations for Kimball International, Inc. and Poppin, Inc. as if the companies were combined as of the beginning of fiscal year 2020:
| | | | | | | | | | | |
| (unaudited) |
| | Year Ended June 30 |
| (Amounts in Thousands, Except Per Share Data) | 2021 | | 2020 |
| Net Sales | $ | 589,157 | | | $ | 801,492 | |
| Net Income | $ | 4,210 | | | $ | 28,165 | |
| Diluted Earnings Per Share of Common Stock | $ | 0.12 | | | $ | 0.76 | |
This pro forma financial information is based on historical results of operations, adjusted for the allocation of the purchase price and other acquisition accounting adjustments. This pro forma information is not necessarily indicative of what our results would have been had we operated the businesses since the beginning of the periods presented. The pro forma adjustments reflect the income statement effects of amortization of intangibles related to the fair value adjustments of the assets acquired, acquisition-related costs, incremental interest expense, and the related tax effects.
Note 3 Restructuring
During fiscal years 2022, 2021, and 2020, we recognized $10.5 million, $10.7 million and $8.5 million, respectively of pre-tax restructuring expense.
We utilized available market prices and management estimates to determine the fair value of impaired assets. Restructuring is included in the Restructuring Expense line item on our Consolidated Statements of Operations.
Transformation Restructuring Plan Phase 1:
In June 2019, we announced a transformation restructuring plan to optimize resources for future growth, improve efficiency, and build capabilities across our organization. Restructuring activities included a reduction of our manufacturing facility footprint, closure of select showrooms and reorganization of selling resources, and centralization of administrative functions, We believe phase 1 of our transformation restructuring plan has established a more cost-efficient structure to better align our operations with our long-term strategic goals. Phase 1 of our transformation restructuring plan was substantially complete as of June 30, 2021.
A summary of the charges recorded in connection with phase 1 of the transformation restructuring plan is as follows:
| | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended June 30 | | Total Charges Incurred |
| (Amounts in Thousands) | | | | 2021 | | 2020 | |
| Cash-related restructuring charges: | | | | | | | | |
| Severance and other employee related costs | | | | $ | 62 | | | $ | 2,159 | | | $ | 2,884 | |
| Facility exit costs and other cash charges | | | | 998 | | | 1,837 | | | 3,038 | |
| Total cash-related restructuring charges | | | | $ | 1,060 | | | $ | 3,996 | | | $ | 5,922 | |
| Non-cash charges: | | | | | | | | |
| Transition stock compensation | | | | — | | | 654 | | | 725 | |
| Impairment of assets | | | | 770 | | | 3,690 | | | 4,460 | |
| Other non-cash charges | | | | 72 | | | 149 | | | 221 | |
| Total non-cash charges | | | | $ | 842 | | | $ | 4,493 | | | $ | 5,406 | |
| Total charges | | | | $ | 1,902 | | | $ | 8,489 | | | $ | 11,328 | |
A summary of the current period activity in accrued restructuring related to phase 1 of the transformation restructuring plan is as follows:
| | | | | | | | | | | | | | | | | | | |
| (Amounts in Thousands) | Severance and other employee related costs | | Other costs | | | | Total |
| Balance at June 30, 2020 | $ | 167 | | | $ | 65 | | | | | $ | 232 | |
| Additions charged to expense | 62 | | | — | | | | | 62 | |
| Cash payments charged against reserve | (229) | | | (60) | | | | | (289) | |
| Non-cash adjustments | — | | | (5) | | | | | (5) | |
| Balance at June 30, 2021 | $ | — | | | $ | — | | | | | $ | — | |
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Transformation Restructuring Plan Phase 2:
In August 2020, we announced a second phase of our transformation restructuring plan which includes alignment of our business units to a new market-centric orientation to yield additional cost savings aiding in effectively managing through the downturn caused by the COVID-19 pandemic. Phase 2 of the transformation restructuring plan builds on the initial strategy and the transformation restructuring plan announced in June 2019. The following is a summary of the Phase 2 activities:
•To consolidate manufacturing of all brands into one world-class global operations group, we are streamlining our manufacturing facilities by leveraging production capabilities across all facilities, establishing centers of excellence, and setting up processes to facilitate flexing of product between facilities in response to volume fluctuations. We are also reviewing our overall facility footprint to identify opportunities to reduce capacity and gain efficiencies, and consolidated our Baltimore, Maryland facility into other manufacturing facilities.
•We streamlined our workforce to align with the new organizational structure and the temporary lower volumes created by the COVID-19 pandemic, creating a more efficient organization to deliver on our Connect 2.0 strategy.
•In the third quarter of fiscal 2021, we offered two voluntary retirement incentive programs to eligible employees. Employees electing to participate were paid special termination benefits, including a severance benefit and cash payment that could be used to pay for a period of healthcare coverage or for any other purpose.
•Starting in fiscal year 2022, many of our showrooms now feature multiple brands thus eliminating the need for more than one showroom in the same city. Showroom locations are being reviewed and select leased showroom locations closed.
•During the fourth quarter of fiscal year 2022, we announced a plan to close our Tijuana, Mexico Hospitality manufacturing facility and Chula Vista, California warehouse during our first quarter of fiscal year 2023 as we plan to primarily outsource the D’Style product. During fiscal year 2022 we recognized impairment in the D’Style brand asset group, including a $3.8 million impairment of a D’Style customer relationship intangible because the carrying value exceeded projected cash flows.
Phase 2 of the transformation restructuring plan began in the first quarter of our fiscal year 2021, and we expect a substantial majority of the Phase 2 restructuring actions to be completed by the end of fiscal year 2023.
In addition to the savings already generated from phase 1 of the transformation restructuring plan, the efforts of the phase 2 transformation restructuring plan are expected to generate annualized pre-tax savings of approximately $19.0 million when it is fully implemented. We currently estimate the phase 2 transformation restructuring plan will incur total pre-tax restructuring charges of approximately $21.0 million to $22.0 million, with the majority recorded in fiscal 2021 and 2022 and approximately $2.7 million expected to be recorded in fiscal year 2023. The restructuring charges are expected to consist of approximately $6.7 million to $6.9 million for severance and other employee-related costs, $5.3 million to $5.6 million for facility costs, and $9.0 million to $9.5 million for lease and other asset impairment. Approximately 55% of the total cost estimate is expected to be cash expense.
A summary of the charges recorded in connection with phase 2 of the transformation restructuring plan is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended June 30 | | Charges Incurred to Date |
| (Amounts in Thousands) | | 2022 | | 2021 | |
| Cash-related restructuring charges: | | | | | | |
| Severance and other employee related costs | | $ | 1,753 | | | $ | 5,082 | | | $ | 6,835 | |
| Facility exit costs and other cash charges | | 2,361 | | | 1,587 | | | 3,948 | |
| Total cash-related restructuring charges | | $ | 4,114 | | | $ | 6,669 | | | $ | 10,783 | |
| Non-cash charges: | | | | | | |
| Impairment of assets and accelerated depreciation | | 6,375 | | | 2,156 | | | 8,531 | |
| | | | | | |
| | | | | | |
| | | | | | |
| Total charges | | $ | 10,489 | | | $ | 8,825 | | | $ | 19,314 | |
A summary of the current period activity in accrued restructuring related to phase 2 of the transformation restructuring plan is as follows:
| | | | | | | | | | | |
| (Amounts in Thousands) | Severance and other employee related costs | | | | | | |
| Balance at June 30, 2020 | $ | — | | | | | | | |
| Additions charged to expense | 5,716 | | | | | | | |
| Cash payments charged against reserve | (3,696) | | | | | | | |
| Non-cash adjustments | (634) | | | | | | | |
| Balance at June 30, 2021 | $ | 1,386 | | | | | | | |
| Additions charged to expense | 1,740 | | | | | | | |
| Cash payments charged against reserve | (2,128) | | | | | | | |
| Non-cash adjustments | (24) | | | | | | | |
| Balance at June 30, 2022 | $ | 974 | | | | | | | |
Note 4 Revenue
Performance Obligations
Revenue is measured as the amount of consideration we expect to receive in exchange for transferring distinct goods or providing services to customers. Our revenue consists substantially of product sales, and is reported net of sales discounts, rebates, incentives, returns, and other allowances offered to customers. We recognize revenue when performance obligations under the terms of contracts with our customers are satisfied, which occurs when control passes to a customer to enable them to direct the use of and obtain benefit from a product. This typically occurs when a customer obtains legal title, obtains the risks and rewards of ownership, has received the goods according to the contractual shipping terms either at the shipping point or destination, and is obligated to pay for the product. Customary terms require payment within 30 days, and for certain customers, deposits may be required in advance of shipment.
We sell products both to independent dealers and directly to end customers. Sales to independent dealers typically include products only, as the independent dealer provides additional value-added services to end customers. Direct sales to end customers include products and may include related services such as installation and design services. These services are distinct from the delivered products within the context of the contract, and therefore revenue is recognized for products, installation, and design on a discrete basis. The performance of services may be outsourced to independent dealers or other third parties, but we typically retain the primary responsibility for performance of the services when selling directly to end customers. For services, revenue is recognized when the service is performed and we have an enforceable right to payment. Service revenue does not represent a significant portion of our total sales.
We provide an assurance-type warranty that guarantees our product complies with agreed-upon specifications. This warranty is not sold separately and does not convey any additional services to the customer; therefore, our warranty is not considered a separate performance obligation. We estimate the costs that may be incurred under warranties and record a liability at the time product revenue is recognized. See Note 10 - Commitments and Contingent Liabilities of Notes to Consolidated Financial Statements for additional information on warranty obligations. Disaggregation of Revenue
The following table provides information about revenue by operating segment:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended June 30 |
| (Amounts in Millions) | | 2022 | | 2021 | | 2020 |
| Workplace | | $ | 396.8 | | | $ | 330.0 | | | $ | 435.4 | |
| Health | | 104.8 | | | 97.3 | | | 108.9 | |
| Hospitality | | 97.0 | | | 117.4 | | | 183.6 | |
| eBusiness | | 67.3 | | | 24.3 | | | — | |
| Total Net Sales | | $ | 665.9 | | | $ | 569.0 | | | $ | 727.9 | |
Contract Balances
Receivables in the Consolidated Balance Sheets represent the amount of consideration to which we are entitled in exchange for the goods or services sold to our customers, net of allowances for doubtful accounts. Receivables are recorded when the right to consideration from the customer becomes unconditional, which is generally upon billing or upon satisfaction of a performance obligation, whichever is earlier. For the years ended June 30, 2022, June 30, 2021, and June 30, 2020, impairment losses on doubtful accounts receivable were $0.0 million, $0.5 million, and $1.4 million, respectively.
We also receive deposits from certain customers before revenue is recognized, resulting in the recognition of a contract liability reported as Customer Deposits in the Consolidated Balance Sheets. Changes in the customer deposits during fiscal years 2022 and 2021 were as follows:
| | | | | | | | | | | |
| (Amounts in Millions) | 2022 | | 2021 |
| Balance at the beginning of the year | $ | 24.4 | | | $ | 19.6 | |
| Customer deposits acquired in Poppin acquisition | — | | | 2.0 | |
| Increases due to deposits received, net of other adjustments | 94.0 | | | 82.3 | |
| Revenue recognized | (88.7) | | | (79.5) | |
| Balance at the end of the year | $ | 29.7 | | | $ | 24.4 | |
Customer deposits are typically utilized within a year of the receipt of the deposit. The amount of revenue recognized during the year ended June 30, 2022 that was included in the June 30, 2021 customer deposit balance was $23.6 million. The amount of revenue recognized during the year ended June 30, 2021 that was included in the June 30, 2020 customer deposit balance was $18.9 million.
Significant Judgments
We use significant judgment in estimating the reduction in net sales driven by customer rebate and incentive programs. Judgments primarily include an estimate of the most likely sales levels to be achieved and the corresponding rebate and incentive amounts expected to be earned by dealers and salespersons. In the years ended June 30, 2022, 2021, and 2020, we had an immaterial amount of adjustments to estimates for cumulative growth rebates and incentives that related to the preceding fiscal years. We also use judgment in estimating a reserve for returns and allowances recorded at the time of the sale, resulting in a reduction of revenue, based on estimated product returns and price concessions.
Accounting Policies and Practical Expedients Elected
For shipping and handling activities, we are applying an accounting policy election which allows an entity to account for shipping and handling activities as fulfillment activities rather than a promised good or service when the activities are performed, even if those activities are performed after the control of the good has been transferred to the customer. Therefore, we expense shipping and handling costs at the time revenue is recognized. We classify shipping and handling expenses in Cost of Sales in the Consolidated Statements of Operations.
We are also applying an accounting policy election which allows an entity to exclude from revenue any amounts collected from customers on behalf of third parties, such as sales taxes and other similar taxes we collect concurrent with revenue-producing activities. Therefore, we present revenue net of sales taxes and similar revenue-based taxes.
Note 5 Leases
Our operating lease portfolio is primarily comprised of showrooms, which expire at various dates through 2030. We have no financing leases. Certain operating lease agreements include rental payments adjusted periodically for inflationary indexes. Additionally, some leases include options to renew or terminate the leases which can be exercised at our discretion. Lease terms include the noncancellable portion of the underlying leases along with any reasonably certain lease periods associated with available renewal periods. Certain leases have terms that are dependent upon the occurrence of events, activities, or circumstances in lease agreements and incur variable lease expense driven by warehouse square footage utilized, property taxes assessed, and other non-lease component charges. Variable lease expense is presented as operating expense in our Consolidated Statements of Operations in the same line item as expense arising from fixed lease payments for operating leases. For all classes of assets, we do not separate non-lease components of a contract from the lease components to which they relate. We do not recognize a right-of-use asset or lease liability for short-term leases that have a lease term of twelve months or less. Our leases do not contain residual value guarantees or material restrictive covenants. As the rate implicit in our lease contracts cannot be readily determined, we use an estimated incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. The estimated incremental borrowing rate represents the estimated rate of interest we would have to pay to borrow an amount equal to the lease payments for a similar period of time on a collateralized basis.
Lease liabilities are recognized at the lease commencement date based upon the present value of the remaining lease payments. Right-of-use assets are based on the lease liability adjusted for prepaid rent, deferred rent, and tenant allowances received. Lease liabilities are amortized based upon the effective interest method, while right-of-use assets are amortized based upon the straight-line expense less interest on the lease liability. Lease expense for lease payments is recognized on a straight-line basis over the lease term, except for impaired leases for which the lease expense is recognized on a declining basis over the remaining lease term.
The components of our lease expenses are as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended June 30 |
| (Amounts in Millions) | 2022 | | 2021 | | 2020 |
| Operating lease expense | $ | 5.0 | | | $ | 4.5 | | | $ | 3.4 | |
| | | | | |
| Variable lease expense | 4.4 | | | 3.5 | | | 2.5 | |
| Total lease expense | $ | 9.4 | | | $ | 8.0 | | | $ | 5.9 | |
Right-of-use assets for operating leases are tested for impairment in the same manner as long-lived assets used in operations as explained in Note 14 - Fair Value of Notes to Consolidated Financial Statements. During fiscal years 2022, 2021, and 2020 we recorded $1.4 million, $0.8 million, and $3.7 million, respectively, of right-of-use asset and associated leasehold improvement impairments. The fiscal year 2022 impairment was driven by the closure of our Baltimore manufacturing facility, the planned exit of our Tijuana, Mexico manufacturing facility and Chula Vista, California warehouse, and the exit of showrooms in support of our transition to multi-brand showrooms thus eliminating the need for more than one showroom in the same city. The fiscal year 2021 and 2020 impairments were primarily related to ceasing use of several showrooms and showroom sublease assumption modifications due to the degradation of the leasing environment driven by the COVID-19 pandemic. The impairment expenses are included in the Restructuring Expense line item on our Consolidated Statements of Operations.
Supplemental cash flow and other information related to leases are as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended June 30 |
| (Amounts in Millions) | 2022 | | 2021 | | 2020 |
| Cash flow information: | | | | | |
| Operating lease payments impacting lease liability | $ | 7.3 | | | $ | 5.9 | | | $ | 4.8 | |
| Non-cash impact of obtaining new right-of-use assets | $ | 6.3 | | | $ | 0.1 | | | $ | 2.6 | |
| | | | | |
| | | | | |
| As of June 30 | | |
| 2022 | | 2021 | | |
| Other information: | | | | | |
| Weighted-average remaining term (in years) | 4.6 | | 4.3 | | |
| Weighted-average discount rate | 4.4 | % | | 4.6 | % | | |
The following table summarizes the future minimum lease payments as of June 30, 2022:
| | | | | |
| (Amounts in Millions) | Year Ended June 30 (1) |
| 2023 | $ | 6.1 | |
| 2024 | 4.3 | |
| 2025 | 3.5 | |
| 2026 | 2.4 | |
| 2027 | 1.7 | |
| Thereafter | 2.1 | |
| Total lease payments | $ | 20.1 | |
| Less interest | 1.9 | |
| Present value of lease liabilities | $ | 18.2 | |
(1) Lease payments include options to extend lease terms that are reasonably certain of being exercised. The payments exclude legally binding minimum lease payments for leases signed but not yet commenced. At June 30, 2022, we have additional operating leases that have not yet commenced for which we will record both right-of-use assets and lease liabilities of $5.4 million. Two of the leases are expected to commence in our first quarter of fiscal year 2023 with lease terms of approximately 1 year at $0.2 million and 5 years at $1.3 million. A third lease is expected to commence in our fourth quarter of fiscal year 2023 with a lease term of approximately 12 years at $3.9 million.
In fiscal year 2021, we executed a contract to sell a warehouse which was accounted for as a failed sale leaseback as control did not pass to the buyer. During fiscal year 2022, we received payment and control passed to the buyer, and we recorded a pre-tax gain on sale of the warehouse of $4.5 million.
Note 6 Earnings Per Share
Basic earnings per share are based on the weighted average number of shares outstanding during the period. Diluted earnings per share are based on the weighted average number of shares outstanding plus the assumed issuance of common shares for all potentially dilutive securities.
| | | | | | | | | | | | | | | | | |
| Year Ended June 30 |
| (Amounts in Thousands, Except for Per Share Data) | 2022 | | 2021 | | 2020 |
| Net Income (Loss) | $ | (15,714) | | | $ | 7,416 | | | $ | 41,054 | |
| | | | | |
| Average Shares Outstanding for Basic EPS Calculation | 36,798 | | | 36,901 | | | 36,883 | |
| Dilutive Effect of Average Outstanding Compensation Awards | — | | | 471 | | | 154 | |
| Average Shares Outstanding for Diluted EPS Calculation | 36,798 | | | 37,372 | | | 37,037 | |
| | | | | |
| Basic Earnings (Loss) Per Share | $ | (0.43) | | | $ | 0.20 | | | $ | 1.11 | |
| Diluted Earnings (Loss) Per Share | $ | (0.43) | | | $ | 0.20 | | | $ | 1.11 | |
All stock compensation awards were antidilutive as a result of the net loss for fiscal year 2022, thus 723,000 average restricted stock units and average relative total shareholder return awards were excluded from the dilutive calculation.
Note 7 Income Taxes
Kimball International, or one of its wholly-owned subsidiaries, files U.S. federal income tax returns and income tax returns in various state and local jurisdictions. Our provision (benefit) for income taxes is composed of the following items:
| | | | | | | | | | | | | | | | | |
| Year Ended June 30 |
| (Amounts in Thousands) | 2022 | | 2021 | | 2020 |
| Currently Payable (Refundable): | | | | | |
| Federal | $ | (2,783) | | | $ | (269) | | | $ | 9,890 | |
| State | (200) | | | 510 | | | 4,019 | |
| Total current | $ | (2,983) | | | $ | 241 | | | $ | 13,909 | |
| Deferred Taxes: | | | | | |
| Federal | $ | 1,949 | | | $ | (1,293) | | | $ | 1,979 | |
| State | (672) | | | (1,754) | | | (812) | |
| Total deferred | $ | 1,277 | | | $ | (3,047) | | | $ | 1,167 | |
| | | | | |
| Total provision (benefit) for income taxes | $ | (1,706) | | | $ | (2,806) | | | $ | 15,076 | |
A reconciliation of the statutory U.S. income tax rate to Kimball International’s effective income tax rate follows:
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| Year Ended June 30 |
| 2022 | | 2021 | | 2020 |
| (Amounts in Thousands) | Amount | | % | | Amount | | % | | Amount | | % |
| Tax provision (benefit) computed at U.S. federal statutory rate | $ | (3,658) | | | 21.0 | % | | $ | 968 | | | 21.0 | % | | $ | 11,787 | | | 21.0 | % |
| State income taxes, net of federal income tax benefit | (1,714) | | | 9.8 | | | (433) | | | (9.4) | | | 2,533 | | | 4.5 | |
| | | | | | | | | | | |
| Goodwill impairment | 8,808 | | | (50.5) | | | — | | | — | | | — | | | — | |
| Change in fair value of contingent earn-out liability | (4,396) | | | 25.3 | | | (2,840) | | | (61.6) | | | — | | | — | |
| Research credit | (600) | | | 3.4 | | | (600) | | | (13.0) | | | (430) | | | (0.8) | |
| | | | | | | | | | | |
| Other - net | (146) | | | 0.8 | | | 99 | | | 2.1 | | | 1,186 | | | 2.2 | |
| Total provision (benefit) for income taxes | $ | (1,706) | | | 9.8 | % | | $ | (2,806) | | | (60.9 | %) | | $ | 15,076 | | | 26.9 | % |
Net cash payments (refunds) for income taxes were, in thousands, $(3,520), $7,187, and $11,114 in fiscal years 2022, 2021, and 2020, respectively.
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets associated with net operating losses of, in thousands, $3,628 can be carried forward indefinitely and, in thousands, $16,526 expire from fiscal year 2023 to 2042. Deferred tax assets associated with tax credit carryforwards of, in thousands, $5,139, expire from fiscal year 2025 to 2042. Valuation allowances were provided as of June 30, 2022 for deferred tax assets relating to state net operating losses of, in thousands, $3,453, and foreign tax credits of, in thousands, $802, that we currently believe are more likely than not to remain unrealized in the future. In all periods presented, the change in the valuation allowance is reported as a component of income tax expense.
During fiscal year 2021, we acquired U.S. federal net operating losses (“NOLs”) with a tax benefit of approximately $16.2 million in connection with the Poppin, Inc. acquisition, of which $14.6 million remains available to offset future taxable income during the carryforward periods based on limitations under Section 382 of the Internal Revenue Code of 1986, as amended. We also acquired state NOLs with a tax benefit of approximately $4.7 million in connection with the Poppin, Inc. acquisition, of which an estimated $3.2 million remains available to offset future taxable income during the carryforward periods. We provided a full valuation allowance against the available state NOLs, as we do not have sufficient positive evidence at this time to conclude that Poppin, Inc. will be able to utilize the NOL carryforwards in the states where the losses were generated, considering state limitations on the utilization of NOLs.
The components of the deferred tax assets and liabilities as of June 30, 2022 and 2021, were as follows:
| | | | | | | | | | | |
| (Amounts in Thousands) | 2022 | | 2021 |
| Deferred Tax Assets: | | | |
| Receivables | $ | 618 | | | $ | 665 | |
| Inventory | 2,475 | | | 3,242 | |
| Employee benefits | 158 | | | 246 | |
| Deferred compensation | 6,603 | | | 5,402 | |
| Other current liabilities | 266 | | | 459 | |
| Warranty reserve | 651 | | | 736 | |
| Tax credit carryforwards | 5,139 | | | 4,974 | |
| | | |
| Restructuring | 472 | | | 670 | |
| Net operating loss carryforward | 20,154 | | | 21,935 | |
| | | |
| Miscellaneous | 4,741 | | | 4,014 | |
| Valuation allowance | (4,255) | | | (3,295) | |
| Total asset | $ | 37,022 | | | $ | 39,048 | |
| Deferred Tax Liabilities: | | | |
| Property and equipment | $ | 8,604 | | | $ | 7,833 | |
| Intangible assets | 10,765 | | | 12,423 | |
| Goodwill | 689 | | | 493 | |
| Miscellaneous | 2,492 | | | 1,931 | |
| Total liability | $ | 22,550 | | | $ | 22,680 | |
| Net Deferred Tax Assets | $ | 14,472 | | | $ | 16,368 | |
Changes in the unrecognized tax benefit, excluding accrued interest and penalties, during fiscal years 2022, 2021, and 2020 were as follows:
| | | | | | | | | | | | | | | | | |
| (Amounts in Thousands) | 2022 | | 2021 | | 2020 |
| Beginning balance - July 1 | $ | 812 | | | $ | 798 | | | $ | 753 | |
| | | | | |
| Increases related to prior fiscal years | 9 | | | 24 | | | 74 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Decreases related to lapses in statute of limitations | (285) | | | (10) | | | (29) | |
| Ending balance - June 30 | $ | 536 | | | $ | 812 | | | $ | 798 | |
| Portion that, if recognized, would reduce tax expense and effective tax rate | $ | 423 | | | $ | 686 | | | $ | 676 | |
Amounts accrued for interest and penalties were as follows:
| | | | | | | | | | | | | | | | | |
| As of June 30 |
| (Amounts in Thousands) | 2022 | | 2021 | | 2020 |
| Accrued Interest and Penalties: | | | | | |
| Interest | $ | 121 | | | $ | 175 | | | $ | 156 | |
| Penalties | $ | 134 | | | $ | 143 | | | $ | 137 | |
Interest and penalties expense (income) recognized for fiscal years 2022, 2021, and 2020 were, in thousands, $(63), $25, and $102, respectively.
We are no longer subject to any significant U.S. federal tax examinations by tax authorities for years before fiscal year 2019, and to various state and local income tax examinations by tax authorities for years before 2018. We do not expect the change in the amount of unrecognized tax benefits in the next 12 months to have a significant impact on our results of operations or financial position.
We consider the earnings of certain non-U.S. subsidiaries to be indefinitely invested outside the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs. No provision was made for income taxes that may result from future remittances of the undistributed earnings of foreign subsidiaries that are determined to be indefinitely reinvested, which was $1.3 million on June 30, 2022. Future remittances of these undistributed earnings of foreign subsidiaries are not subject to U.S. income tax or foreign withholding taxes in the foreign country where the foreign subsidiaries operate.
Note 8 Inventories
Inventories are stated at the lower of cost or net realizable value. Inventories are valued using the last-in, first-out (“LIFO”) method for approximately 51% and 67% of consolidated inventories at June 30, 2022 and June 30, 2021, respectively. The percentage of inventory subject to LIFO at the end of fiscal year 2022 decreased as a result of higher Poppin inventory, which is accounted for using the average cost method. The remaining inventories are valued using the first-in, first-out (“FIFO”) method and average cost method.
Had non-LIFO methods been used for all inventories, pre-tax income would have been $5.5 million higher in fiscal year 2022, $2.1 million higher in fiscal year 2021, and $0.1 million lower in fiscal year 2020. Certain inventory quantity reductions caused liquidations of LIFO inventory values, which increased pre-tax income by $3.5 million in 2022, $1.3 million in 2021 and an immaterial amount in 2020.
Inventory components at June 30 were as follows:
| | | | | | | | | | | |
| (Amounts in Thousands) | 2022 | | 2021 |
| Finished products | $ | 66,890 | | | $ | 37,787 | |
| Work-in-process | 1,974 | | | 1,320 | |
| Raw materials | 52,878 | | | 33,428 | |
| Total FIFO inventory | $ | 121,742 | | | $ | 72,535 | |
| LIFO reserve | (23,773) | | | (18,244) | |
| Total inventory | $ | 97,969 | | | $ | 54,291 | |
Note 9 Property and Equipment
Major classes of property and equipment at June 30 consist of the following:
| | | | | | | | | | | |
| (Amounts in Thousands) | 2022 | | 2021 |
| Land | $ | 2,352 | | | $ | 2,483 | |
| Buildings and improvements | 116,439 | | | 120,135 | |
| Machinery and equipment | 149,449 | | | 153,388 | |
| Construction-in-progress | 17,260 | | | 6,374 | |
| Total | $ | 285,500 | | | $ | 282,380 | |
| Less: Accumulated depreciation | (188,530) | | | (191,757) | |
| Property and equipment, net | $ | 96,970 | | | $ | 90,623 | |
The useful lives used in computing depreciation are based on estimated service lives for classes of property, as follows:
| | | | | |
| | Years |
| Buildings and improvements | 5 to 40 |
| Machinery and equipment | 2 to 20 |
| Leasehold improvements | Lesser of Useful Life or Term of Lease |
Depreciation of property and equipment, including asset write-downs, totaled, in millions, $14.5 for both fiscal years 2022 and 2021, and $15.1 for fiscal year 2020.
Note 10 Commitments and Contingent Liabilities
Guarantees:
Standby letters of credit were issued to lessors and insurance institutions and can only be drawn upon in the event of our failure to pay our obligations to a beneficiary. We had a maximum financial exposure from unused standby letters of credit totaling $1.7 million as of both June 30, 2022 and June 30, 2021.
We are periodically required to provide performance bonds in order to conduct business with certain customers. The bonds are required to provide assurances to customers that the products and services they have purchased will be installed and/or provided properly and without damage to their facilities. We are ultimately liable for claims that may occur against the performance bonds. We had a maximum financial exposure from performance bonds totaling $0.9 million and $0.1 million as of June 30, 2022 and June 30, 2021, respectively.
We are not aware of circumstances that would require us to perform under these arrangements and believe that the resolution of any claims that might arise in the future, either individually or in the aggregate, would not materially affect our consolidated financial statements. Accordingly, no liability has been recorded as of June 30, 2022 and 2021 with respect to the standby letters of credit or performance bonds. We also enter into commercial letters of credit to facilitate payments to vendors and from customers.
Product Warranties:
We provide an assurance-type warranty that guarantees our product complies with agreed-upon specifications. This warranty is not sold separately and does not convey any additional services to the customer. We estimate product warranty liability at the time of sale based on historical repair or replacement cost trends in conjunction with the length of the warranty offered. Management refines the warranty liability periodically based on changes in historical cost trends and in certain cases where specific warranty issues become known. The product warranty liability is included on the Accrued Expenses and Other lines of our Consolidated Balance Sheets.
Changes in the product warranty accrual during fiscal years 2022, 2021, and 2020 were as follows:
| | | | | | | | | | | | | | | | | |
| (Amounts in Thousands) | 2022 | | 2021 | | 2020 |
| Product Warranty Liability at the beginning of the year | $ | 2,861 | | | $ | 3,190 | | | $ | 2,238 | |
Additions to warranty accrual (including changes in estimates) | 1,797 | | | 1,905 | | | 3,995 | |
| Settlements made (in cash or in kind) | (2,128) | | | (2,234) | | | (3,043) | |
| Product Warranty Liability at the end of the year | $ | 2,530 | | | $ | 2,861 | | | $ | 3,190 | |
Note 11 Long-Term Debt and Revolving Credit Facility
Short-term borrowings and long-term debt consisted of the following obligations:
| | | | | | | | | | | |
| As of June 30 |
| (Amounts in Thousands) | 2022 | | 2021 |
Long-term debt under revolving credit facility due October 2024; 3.34% variable interest rate at June 30, 2022 | $ | 68,000 | | | $ | 40,000 | |
Other debt maturing August 12, 2024; 9.25% fixed interest rate | 79 | | | 109 | |
| Total Debt | $ | 68,079 | | | $ | 40,109 | |
| | | |
| | | |
Aggregate maturities of long-term debt for the next three years through maturity are, in thousands, $33, $36, and $68,010, respectively.
As of June 30, 2022 we had a $125.0 million revolving credit facility with a maturity date of October 2024 that allowed for both issuances of letters of credit and cash borrowings. We also have an option to request an increase of the amount available for borrowing to $200.0 million, subject to participating banks’ consent. The revolving loans under the Credit Agreement could consist of, at our election, advances in U.S. dollars or advances in any other currency that was agreed to by the lenders. The proceeds of the loans are to be used for general corporate purposes including acquisitions. A portion of the revolving credit facility, not to exceed $10 million of the principal amount, was available for the issuance of letters of credit. At June 30, 2022, we had $1.7 million in letters of credit outstanding, which reduced our borrowing capacity on the revolving credit facility. Total availability to borrow under the revolving credit facility totaled $55.3 million at June 30, 2022. The commitment fee on the unused portion of principal amount of the revolving credit facility is payable at a rate that ranges from 20 to 30 basis points per annum as determined by our ratio of consolidated total indebtedness to adjusted consolidated EBITDA. The weighted average interest rate on borrowings outstanding at June 30, 2022 and June 30, 2021 was 3.35% and 1.40%, respectively. Interest expense incurred and paid on borrowings were, in thousands, $1,378, $382, and $15, in fiscal years 2022, 2021, and 2020, respectively.
The interest rate is dependent on the type of borrowings and will be one of the following two options:
•the adjusted London Interbank Offered Rate (“Adjusted LIBO Rate” as defined in the Credit Agreement) in effect two business days prior to the advance (adjusted upwards to reflect bank reserve costs) for such interest period, plus the Eurocurrency Loans margin which can range from 125.0 to 200.0 basis points based on the Company's ratio of consolidated total indebtedness to adjusted consolidated EBITDA; or
•the Alternate Base Rate (the “ABR”) which is defined as the highest of the fluctuating rate per annum equal to the higher of
a.prime rate as last quoted by The Wall Street Journal; or
b.1% per annum above the Adjusted LIBO rate; or
c.0.5% per annum above the Federal Reserve Bank of New York;
plus the ABR Loans spread which can range from 25.0 to 100.0 basis points based on the Company's ratio of consolidated total indebtedness to adjusted consolidated EBITDA.
We were in compliance with all debt covenants of the revolving credit facility during the twelve-month period ended June 30, 2022. The most significant financial covenants under the Credit Agreement require:
•an adjusted leverage ratio of (a) consolidated total indebtedness minus unencumbered U.S. cash equivalents in excess of $15,000,000 provided that the maximum subtraction shall not exceed $35,000,000 to (b) adjusted consolidated EBITDA, determined as of the end of each of its fiscal quarters for the then most recently ended four fiscal quarters, to not be greater than 3.00 to 1.00, and
•an interest coverage ratio, for any period, of (a) Consolidated EBITDA for such period to (b) cash interest expense for such period, calculated on a consolidated basis in accordance with GAAP for the trailing four quarter period then ending, to not be less than 3.00 to 1.00.
We have an interest rate swap agreement with a bank with a notional value of $40.0 million. The interest rate swap became effective in July 2021 and is accounted for using hedge accounting.
Note 12 Employee Benefit Plans
Retirement Plans:
We have a tax-qualified defined contribution retirement plan in effect for substantially all domestic employees meeting the eligibility requirements. Employer contributions to the plan have a five-year vesting schedule and are held for the sole benefit of participants. We also maintain a supplemental employee retirement plan (“SERP”) for executive employees which enables them to defer cash compensation on a pre-tax basis in excess of IRS limitations. The SERP is structured as a rabbi trust, and therefore assets in the SERP portfolio are subject to creditor claims in the event of bankruptcy.
The discretionary employer contribution for domestic employees is determined annually by the Compensation and Governance Committee of the Board of Directors. Total expense related to employer contributions to the domestic retirement plans was, in millions, $3.6, $0.0 and $4.9 for fiscal years 2022, 2021 and 2020, respectively.
Employees of certain foreign subsidiaries are covered by local pension or retirement plans, and employees of recently acquired companies receive an employer matching contribution. The expense related to employer contributions to these plans for fiscal years 2022, 2021, and 2020 was not material.
Severance Plans:
Our domestic employees participate in severance plans which provide severance benefits to eligible employees meeting the plans’ qualifications, primarily for involuntary termination without cause.
There are no statutory requirements for us to contribute to the plans, nor do employees contribute to the plans. The plans hold no assets. Benefits are paid using available cash on hand when eligible employees meet plan qualifications for payment. Benefits are based upon an employee’s years of service and accumulate up to certain limits specified in the plans and include both salary and an allowance for medical benefits. The components and changes in the Benefit Obligation, Accumulated Other Comprehensive Income (Loss), and Net Periodic Benefit Cost are as follows:
| | | | | | | | | | | |
| June 30 |
| (Amounts in Thousands) | 2022 | | 2021 |
| Changes and Components of Benefit Obligation: | | | |
| Benefit obligation at beginning of year | $ | 2,971 | | | $ | 2,739 | |
| Service cost | 512 | | | 496 | |
| Interest cost | 69 | | | 46 | |
| Actuarial (gain) loss for the period | (941) | | | (258) | |
| Benefits paid | (53) | | | (52) | |
| Benefit obligation at end of year | $ | 2,558 | | | $ | 2,971 | |
| Balance in current liabilities | $ | 496 | | | $ | 540 | |
| Balance in non-current liabilities | 2,062 | | | 2,431 | |
| Total benefit obligation recognized in the Consolidated Balance Sheets | $ | 2,558 | | | $ | 2,971 | |
| | | | | | | | | | | |
| June 30 |
| (Amounts in Thousands) | 2022 | | 2021 |
| Changes and Components in Accumulated Other Comprehensive Income (Loss) (before tax): | | |
| Accumulated Other Comprehensive Income (Loss) at beginning of year | $ | 2,663 | | | $ | 2,832 | |
| | | |
| Net change in unrecognized actuarial gain (loss) | 419 | | | (169) | |
| Accumulated Other Comprehensive Income (Loss) at end of year | $ | 3,082 | | | $ | 2,663 | |
| | | |
| | | |
| | | |
| | | | | | | | | | | | | | | | | |
| (Amounts in Thousands) | Year Ended June 30 |
| Components of Net Periodic Benefit Cost (before tax): | 2022 | | 2021 | | 2020 |
| Service cost | $ | 512 | | | $ | 496 | | | $ | 489 | |
| Interest cost | 69 | | | 46 | | | 66 | |
| Amortization of actuarial (gain) loss | (522) | | | (427) | | | (338) | |
| Net periodic benefit cost — Total cost | $ | 59 | | | $ | 115 | | | $ | 217 | |
The benefit cost in the above table includes only normal recurring levels of severance activity, as estimated using an actuarial method. Unusual or non-recurring severance actions, such as the restructuring employee transition pay described in Note 3 - Restructuring of Notes to Consolidated Financial Statements, are not estimable using actuarial methods and are therefore excluded from the preceding tables. The Plan recognized actuarial gains during fiscal years 2022, 2021 and 2020 as a result of lower benefit payments than were assumed in the benefit obligation. The actuarial gains are amortized on a straight-line basis over the average remaining service period of employees expected to receive benefits under the plans.
Assumptions used to determine fiscal year end benefit obligations are as follows:
| | | | | | | | | | | |
| | 2022 | | 2021 |
| Discount Rate | 4.3% | | 2.1% |
| Rate of Compensation Increase | 2.0% | | 2.0% |
Weighted average assumptions used to determine fiscal year net periodic benefit costs are as follows:
| | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| Discount Rate | 2.6% | | 1.7% | | 2.5% |
| Rate of Compensation Increase | 2.0% | | 2.0% | | 2.8% |
Note 13 Stock Compensation Plans
On October 31, 2017, the shareholders approved the 2017 Stock Incentive Plan (“the 2017 Plan”) which allows for the issuance of stock awards, restricted stock awards, stock options, stock appreciation rights, and other stock-based awards, each of which may include performance-based conditions, to certain employees, non-employee directors, consultants, and advisors. The 2017 Plan was amended on October 26, 2021, to increase the number of shares available for issuance under the 2017 Plan by 2,000,000 shares. The amended 2017 Plan authorizes the issuance of 4.1 million shares of our Class B Common Stock including unused shares from the former plan.
Stock-based compensation expense was $5.1 million, $5.7 million, and $5.6 million in fiscal years 2022, 2021 and 2020, respectively. The total income tax benefit for stock compensation arrangements was $0.9 million, $1.1 million, and $1.2 million in fiscal years 2022, 2021 and 2020, respectively. Included in the provision for income taxes for fiscal years 2022 and 2021, was a $0.4 million increase in taxes for both fiscal years and a $0.2 million increase in taxes in fiscal year 2020 for excess tax benefits from the vesting of stock awards. We generally use treasury shares for issuance of shares.
Relative Total Shareholder Return Performance Units:
We award relative total shareholder return performance units (“RTSR”) to key officers. Under these awards, a participant will earn from 0% to 200% of the target award depending upon how the compound annual growth rate of Kimball International common stock ranks within the peer group at the end of the performance period. RTSRs are vested at the end of the performance period and are issued as common shares shortly after the performance measurement period is complete. The
contractual life of the RTSRs is generally three years. If a participant is not employed on the date shares are vested, the RTSR award is forfeited, except in the case of death, retirement, total permanent disability, or certain other circumstances described in our employment policy. To the extent performance conditions are not fully attained, RTSRs are forfeited.
A summary of RTSR activity during fiscal year 2022 is presented below:
| | | | | | | | | | | |
| | Number of Shares(1) | | Weighted Average Grant Date Fair Value |
| RTSRs outstanding at July 1, 2021 | 242,952 | | | $13.96 |
| Granted | 126,220 | | | $15.54 |
| Vested | (6,090) | | | $12.42 |
| Forfeited | (90,364) | | | $18.12 |
| RTSRs outstanding at June 30, 2022 | 272,718 | | | $13.21 |
(1) The shares granted include the maximum number of shares that may vest under RTSR awards; however, the actual number of shares which vest is determined based on the satisfaction of performance conditions, and therefore may be significantly lower. The shares vested include the earned number of shares to be issued based on performance conditions, while shares forfeited include shares that will not be issued as a result of not fully attaining the maximum performance conditions.
As of June 30, 2022, there was approximately $0.9 million of unrecognized compensation cost related to RTSRs. That cost is expected to be recognized over the vesting periods ending June 2023 through June 2024, with a weighted average vesting period of approximately one year, five months. The grant date fair value of RTSR awards was calculated using a Monte Carlo simulation. This valuation technique includes estimating the movement of stock prices and the effects of volatility, interest rates, and dividends. The weighted average grant date fair value was $15.54, $11.43, and $20.78 for RTSR awards granted in fiscal years 2022, 2021, and 2020, respectively. During fiscal years 2022, 2021, and 2020, respectively, 6,090, 4,947, and 45,602 RTSRs vested at a fair value of $0.1 million, $0.1 million, and $0.5 million. The RTSR awards vested represent the total number of shares vested prior to the reduction of shares withheld to satisfy tax withholding obligations.
Restricted Stock Units:
Restricted Stock Units (“RSUs”) were granted to officers and employees. Upon vesting, the outstanding number of RSUs and, if applicable, the value of dividends accumulated over the vesting period are converted to shares of common stock. The contractual life of the RSUs is generally three years, however certain awards have shorter or longer contractual lives in order to transition from other types of compensation or to be used as a long-term retention tool. If the employment of a holder of an RSU terminates before the RSU has vested for any reason other than death, retirement, total permanent disability, or certain other circumstances described in our employment policy, the RSU and accumulated dividends will be forfeited.
A summary of RSU activity during fiscal year 2022 is presented below:
| | | | | | | | | | | |
| | Number of Shares | | Weighted Average Grant Date Fair Value |
| RSUs outstanding at July 1, 2021 | 643,336 | | | $12.61 |
| Granted | 316,137 | | | $11.85 |
| Vested | (249,564) | | | $13.45 |
| Forfeited | (105,678) | | | $12.53 |
| RSUs outstanding at June 30, 2022 | 604,231 | | | $11.88 |
As of June 30, 2022, there was approximately $3.8 million of unrecognized compensation cost related to non-vested RSU compensation arrangements. That cost is expected to be recognized over vesting periods ending December 2022 through June 2024, with a weighted average vesting period of one year, six months. The fair value of RSU awards is based on the stock price at the date of award. The weighted average grant date fair value was $11.85, $11.80, and $17.25 for RSU awards granted in fiscal years 2022, 2021, and 2020, respectively. During fiscal years 2022, 2021, and 2020, respectively, 249,564, 240,955, and 155,919 RSUs vested at a fair value of $3.4 million, $3.9 million, and $2.6 million. The fair value is equal to the closing price of shares of our Common Stock on the date of the grant. The RSU awards vested represent the total number of shares vested prior to the reduction of shares withheld to satisfy tax withholding obligations.
Unrestricted Share Grants:
Unrestricted shares may be granted to employees and non-employee members of the Board of Directors as consideration for service to Kimball International. Unrestricted share grants do not have vesting periods, holding periods, restrictions on sale, or other restrictions. The fair value of unrestricted shares is based on the stock price at the date of the award. During fiscal years 2022, 2021, and 2020, respectively, we granted a total of 45,105, 44,795, and 33,334 unrestricted shares of common stock at an average grant date fair value of $10.59, $11.75, and $15.93 for a total fair value, in thousands, of $478, $526, and $531. These shares are the total number of shares granted, prior to the reduction of shares withheld to satisfy tax withholding obligations. Unrestricted shares were awarded to key employees and non-employee members of the Board of Directors as compensation for director’s fees and as a result of directors’ elections to receive unrestricted shares in lieu of cash payment. Director’s fees are expensed over the period that directors earn the compensation.
Note 14 Fair Value
We categorize assets and liabilities measured at fair value into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas level 3 generally requires significant management judgment. The three levels are defined as follows:
•Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities.
•Level 2: Observable inputs other than those included in level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
•Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.
Our policy is to recognize transfers between these levels as of the end of each quarterly reporting period. There were no transfers between these levels during fiscal years 2022 and 2021.
In connection with the fiscal year 2021 acquisition of Poppin, remaining contingent earn-out payments up to $45 million may be paid based on revenue and profitability milestones achieved through June 30, 2024, with the expected payments to be in the range of $0 to $5 million. As of June 30, 2022, the fair value of the contingent earn-out liability was $3.2 million. The liability is carried at fair value and is classified in Level 3 of the fair value hierarchy. During the fiscal years ended June 30, 2022 and 2021, the recurring revaluation to fair value resulted in pre-tax income of $17.0 million and $11.6 million, respectively, primarily due to the impact of COVID-19 and supply chain disruptions on our sales growth model.
The recurring Level 3 fair value measurements of the contingent earn-out liability include the following significant unobservable inputs:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Contingent Consideration Liability | | Fair Value | | Valuation Technique | | Unobservable Inputs | | Range | | Selected |
| Revenue and EBITDA Based Payments | | $ | 3.2 | million | | Discounted Cash Flow | | Revenue Discount Rate | | 4.5% to 6.5% | | 5.8 | % |
| | | | | | EBITDA Volatility | | 25.0% to 42.5% | | 42.5 | % |
| | | | | | Revenue Volatility | | 6.5% to 10.5% | | 10.5 | % |
Financial Instruments Recognized at Fair Value:
The following methods and assumptions were used to measure fair value:
| | | | | | | | | | | | | | |
| Financial Instrument | | Level | | Valuation Technique/Inputs Used |
| Cash Equivalents: Money market funds | | 1 | | Market - Quoted market prices. |
| | | | |
| | | | |
| | | | |
| | | | |
| Trading securities: Mutual funds held in nonqualified SERP | | 1 | | Market - Quoted market prices. |
| Derivative Assets: Stock warrants | | 3 | | Market - The pricing of recent purchases or sales of the investment in the privately-held company are considered, if any, as well as positive and negative qualitative evidence, in the assessment of fair value. The value of the stock warrants fluctuates primarily in relation to the value of the privately-held company's underlying securities.
|
| Derivative Assets: Interest Rate Swap | | 2 | | Market - Based on observable market inputs using standard calculations, such as time value, forward interest rate yield curves, and current spot rates adjusted for Kimball International’s non-performance risk. |
| Contingent earn-out liability | | 3 | | Income - Based on a valuation model that measures the present value of the probable cash payments based upon the forecasted operating performance of the acquisition and a discount rate that captures the risk associated with the liability. |
Recurring Fair Value Measurements:
As of June 30, 2022 and June 30, 2021, the fair values of financial assets and liabilities that are measured at fair value on a recurring basis using the market or income approach are categorized as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| (Amounts in Thousands) | June 30, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Assets | | | | | | | |
| Cash equivalents: Money market funds | $ | 5,508 | | | $ | — | | | $ | — | | | $ | 5,508 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Derivatives: Interest rate swap | — | | | 1,986 | | | — | | | 1,986 | |
| Trading Securities: Mutual funds in nonqualified SERP | 10,517 | | | — | | | — | | | 10,517 | |
| Derivatives: Stock warrants | — | | | — | | | 1,500 | | | 1,500 | |
| Total assets at fair value | $ | 16,025 | | | $ | 1,986 | | | $ | 1,500 | | | $ | 19,511 | |
| Liabilities | | | | | | | |
| | | | | | | |
| Contingent earn-out liability | — | | | — | | | 3,160 | | | 3,160 | |
| Total liabilities at fair value | $ | — | | | $ | — | | | $ | 3,160 | | | $ | 3,160 | |
| | | | | | | |
| (Amounts in Thousands) | June 30, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Assets | | | | | | | |
| Cash equivalents: Money market funds | $ | 18,762 | | | $ | — | | | $ | — | | | $ | 18,762 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Trading Securities: Mutual funds in nonqualified SERP | 14,049 | | | — | | | — | | | 14,049 | |
| Derivatives: Stock warrants | — | | | — | | | 1,500 | | | 1,500 | |
| Total assets at fair value | $ | 32,811 | | | $ | — | | | $ | 1,500 | | | $ | 34,311 | |
| Liabilities | | | | | | | |
| | | | | | | |
| Contingent earn-out liability | — | | | — | | | 20,190 | | | 20,190 | |
| Total liabilities at fair value | $ | — | | | $ | — | | | $ | 20,190 | | | $ | 20,190 | |
Non-Recurring Fair Value Measurements:
Certain assets are measured at fair value on a non-recurring basis. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments when events or circumstances indicate a significant adverse effect on the fair value of the asset. Assets that are written down to fair value when impaired are not subsequently adjusted to fair value unless further impairment occurs.
| | | | | | | | | | | | | | |
| Non-recurring Fair Value Adjustment | | Level | | Valuation Technique/Inputs Used |
| Impairment of Right of Use Lease Assets and Related Assets Groups | | 3 | | Income - Based on a valuation model that measures the present value of remaining lease payments less estimated sublease income at a discount rate that captures the risk associated with the future cash flows. |
| Impairment of Customer Relationship Intangible | | 3 | | Income - Based on a valuation model that determines fair value based on estimated discounted future cash flows, requiring the use of significant estimates and assumptions, including revenue growth rates and EBITA margins and future market conditions. |
| Impairment of Goodwill | | 3 | | Income - Based on a valuation model that determines fair value based on estimated discounted future cash flows of each reporting unit, requiring the use of significant estimates and assumptions, including revenue growth rates and EBITDA margins, future market conditions and discount rates that capture the risk associated with future cash flows. |
During fiscal years 2022, 2021, and 2020, we recorded $1.4 million, $0.8 million, and $3.7 million, respectively, of right-of-use asset and associated leasehold improvement impairment. resulting from the planned exit of our D’Style operations, the closure of our leased Pennsylvania and Maryland facilities, and the closure of showrooms as part of our transformation restructuring plan. The impairment losses are included as a component of the Restructuring Expense line item on our Consolidated Statements of Operations. The asset groups used to calculate impairment included the right-of-use lease assets, leasehold improvements, and lease liabilities.
During fiscal year 2022 we recognized a $3.8 million impairment of a D’Style customer relationship intangible because the carrying value exceeded projected cash flows. The impairment is included as a component of the Restructuring Expense line item on our Consolidated Statements of Operations.
During fiscal year 2022, we recorded $34.1 million of goodwill impairment related to our Poppin business. Annual goodwill impairment testing determined the carrying value of the Poppin reporting unit exceeded its relative fair value, most notably driven by the impact of COVID-19 and supply chain disruptions on our sales growth model.
Financial Instruments Not Carried At Fair Value:
Financial instruments that are not reflected in the Consolidated Balance Sheets at fair value that have carrying amounts which approximate fair value include the following:
| | | | | | | | | | | | | | |
| Financial Instrument | | Level | | Valuation Technique/Inputs Used |
| Notes receivable | | 2 | | Market - Price approximated based on the assumed collection of receivables in the normal course of business, taking into account the customer’s non-performance risk. |
| Equity securities without readily determinable fair value | | 3 | | Costs minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Impairment is assessed qualitatively. |
The carrying value of our cash deposit accounts, trade accounts receivable, trade accounts payable, customer deposits, and dividends payable approximates fair value due to the relatively short maturity and immaterial non-performance risk. Based upon variable interest rates currently available to the Company, the fair value of our debt approximates the carrying value.
Note 15 Derivative Instruments
Interest Rate Swap:
We are subject to interest rate risk related to our revolving credit facility and have entered into an interest rate swap agreement that is based on LIBOR to manage this exposure. The interest rate swap agreement is designated as a cash flow hedge that qualifies for hedge accounting under the hypothetical derivative method. Fair value adjustments are recorded as a component of Accumulated Other Comprehensive Income, net of tax (“AOCI”) in the Consolidated Balance Sheets. Balances in AOCI are reclassified into earnings when transactions related to the underlying risk are settled. As of June 30, 2022 the interest rate swap had a notional value totaling $40.0 million and a weighted average LIBOR fixed rate of 0.834%. See Note 14 - Fair Value of Notes to Consolidated Financial Statements for information regarding the fair value of our interest rate swap. At June 30, 2022, our interest rate swap was recorded in current assets and non-current assets at $0.9 million and $1.1 million, respectively.
The pre-tax balance of interest rate swap gains in AOCI as of June 30, 2022 was $2.0 million. See Note 19 - Accumulated Other Comprehensive Income of Notes to Consolidated Financial Statements for information regarding activity recorded as a component of AOCI. Stock Warrants:
We hold a total investment of $2.0 million in a privately-held company, including $1.5 million in stock warrants purchased during fiscal year 2017. The investment in stock warrants is accounted for as a derivative instrument and is included in the Other Assets line of the Consolidated Balance Sheets. The stock warrants are convertible into equity shares of the privately-held company upon achieving certain milestones. The value of the stock warrants will fluctuate primarily in relation to the value of the privately-held company's underlying securities, either providing an appreciation in value or potentially expiring with no value. During the year ended June 30, 2022, the change in fair value of the stock warrants was not significant. See Note 14 - Fair Value of Notes to Consolidated Financial Statements for more information on the valuation of these securities. Information on the location and amounts of derivative fair values in the Consolidated Balance Sheets are presented below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Values of Derivative Instruments on the Consolidated Balance Sheets | | | | | | |
| | Asset Derivatives | | Liability Derivatives |
| | | | Fair Value As of | | | | Fair Value As of |
| (Amounts in Thousands) | | Balance Sheet
Location | | June 30, 2022 | | June 30, 2021 | | Balance Sheet Location | | June 30, 2022 | | June 30, 2021 |
| Derivatives designated as hedging instruments: | | | | | | | | | | | | |
| Interest Rate Swap | | Prepaid Expenses and Other Current Assets | | $ | 851 | | | $ | — | | | | | $ | — | | | $ | — | |
| Interest Rate Swap | | Other Assets | | 1,135 | | | — | | | | | — | | | — | |
| | | | $ | 1,986 | | | $ | — | | | | | $ | — | | | $ | — | |
| Derivatives not designated as hedging instruments: | | | | | | | | | | | | |
| Stock warrants | | Other Assets | | $ | 1,500 | | | $ | 1,500 | | | | | $ | — | | | $ | — | |
| Total derivatives | | $ | 3,486 | | | $ | 1,500 | | | | | $ | — | | | $ | — | |
Note 16 Investments
Supplemental Employee Retirement Plan Investments:
We maintain a self-directed supplemental employee retirement plan (“SERP”) in which executive employees are eligible to participate. The SERP utilizes a rabbi trust, and therefore assets in the SERP portfolio are subject to creditor claims in the event of bankruptcy. We recognize SERP investment assets on the Consolidated Balance Sheets at current fair value. The SERP assets consist primarily of equity funds, balanced funds, target date funds, a bond fund, and a money market fund. A SERP liability of the same amount is recorded on the Consolidated Balance Sheets representing an obligation to distribute SERP funds to participants. The SERP investment assets are classified as trading, and accordingly, realized and unrealized gains and losses are recognized in income in the Other Income (Expense) category. Adjustments made to revalue the SERP liability are also recognized in income as selling and administrative expenses and offset valuation adjustments on SERP investment assets. Net
unrealized holding gains (losses) for securities held at June 30, 2022, 2021, and 2020 were, in thousands, $(3,083), $2,725, and $41, respectively. SERP asset and liability balances were as follows:
| | | | | | | | | | | |
| | June 30 |
| (Amounts in Thousands) | 2022 | | 2021 |
| SERP investments - current asset | $ | 3,284 | | | $ | 3,905 | |
| SERP investments - other long-term asset | 7,233 | | | 10,144 | |
| Total SERP investments | $ | 10,517 | | | $ | 14,049 | |
| SERP obligation - current liability | $ | 3,284 | | | $ | 3,905 | |
| SERP obligation - other long-term liability | 7,233 | | | 10,144 | |
| Total SERP obligation | $ | 10,517 | | | $ | 14,049 | |
Equity securities without readily determinable fair value:
We hold a total investment of $2.0 million in a privately-held company, including $0.5 million in equity securities without readily determinable fair value purchased during fiscal year 2016. The investment in equity securities without readily determinable fair value is included in the Other Assets line of the Consolidated Balance Sheets. See Note 14 - Fair Value of Notes to Consolidated Financial Statements for more information on the valuation of these securities. We do not hold a majority voting interest and are not the variable interest primary beneficiary of the privately-held company, thus consolidation is not required. Note 17 Accrued Expenses
Accrued expenses consisted of:
| | | | | | | | | | | |
| | June 30 |
| (Amounts in Thousands) | 2022 | | 2021 |
| Compensation | $ | 19,025 | | | $ | 12,158 | |
| Selling | 4,213 | | | 4,812 | |
| Employer retirement contribution | 3,410 | | | — | |
| Taxes | 7,266 | | | 10,295 | |
| Insurance | 2,306 | | | 2,998 | |
| Restructuring | 974 | | | 1,386 | |
| | | |
| Other expenses | 3,894 | | | 7,466 | |
| Total accrued expenses | $ | 41,088 | | | $ | 39,115 | |
Note 18 Geographic Information
The following geographic area data includes net sales based on the location where title transfers.
| | | | | | | | | | | | | | | | | |
| | Year Ended June 30 |
| (Amounts in Thousands) | 2022 | | 2021 | | 2020 |
| Net Sales: | | | | | |
| United States | $ | 655,991 | | | $ | 565,044 | | | $ | 715,175 | |
| Foreign | 9,886 | | | 3,964 | | | 12,684 | |
| Total Net Sales | $ | 665,877 | | | $ | 569,008 | | | $ | 727,859 | |
Substantially all long-lived assets were located in the United States for each of the three fiscal years ended June 30, 2022. Long-lived assets include property and equipment and other long-term assets such as software.
Note 19 Accumulated Other Comprehensive Income
During fiscal years 2022 and 2021, the changes in the balances of each component of Accumulated Other Comprehensive Income, net of tax, were as follows:
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| (Amounts in Thousands) | Unrealized Investment Gain (Loss) | | Postemployment Benefits Net Actuarial Gain (Loss) | | Interest Rate Swap Gain (Loss) | | | Accumulated Other Comprehensive Income |
| Balance at June 30, 2020 | $ | 32 | | | $ | 2,105 | | | $ | — | | | | $ | 2,137 | |
| Other comprehensive income (loss) before reclassifications | (32) | | | 192 | | | — | | | | 160 | |
| Reclassification to (earnings) loss | — | | | (317) | | | — | | | | (317) | |
| Net current-period other comprehensive income (loss) | (32) | | | (125) | | | — | | | | (157) | |
| Balance at June 30, 2021 | $ | — | | | $ | 1,980 | | | $ | — | | | | $ | 1,980 | |
| | | | | | | | |
| Other comprehensive income (loss) before reclassifications | — | | | 699 | | | 1,331 | | | | 2,030 | |
| Reclassification to (earnings) loss | — | | | (388) | | | 144 | | | | (244) | |
| Net current-period other comprehensive income (loss) | — | | | 311 | | | 1,475 | | | | 1,786 | |
| Balance at June 30, 2022 | $ | — | | | $ | 2,291 | | | $ | 1,475 | | | | $ | 3,766 | |
The following reclassifications were made from Accumulated Other Comprehensive Income to the Consolidated Statements of Operations:
| | | | | | | | | | | | | | | | | | | | |
| Reclassifications from Accumulated Other Comprehensive Income | | | | Affected Line Item in the
Consolidated Statements of Operations |
| Year Ended June 30 | |
| (Amounts in Thousands) | | 2022 | | 2021 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Postemployment Benefits Amortization of Actuarial Gain (1) | | $ | 522 | | | $ | 427 | | | Non-operating income (expense), net |
| | (134) | | | (110) | | | Benefit (Provision) for Income Taxes |
| | $ | 388 | | | $ | 317 | | | Net Income (Loss) |
| | | | | | |
Interest Rate Swap Gain (Loss)(2) | | (194) | | | — | | | Interest expense |
| | 50 | | | — | | | Benefit (Provision) for Income Taxes |
| | $ | (144) | | | $ | — | | | Net Income (Loss) |
| | | | | | |
| Total Reclassifications for the Period | | $ | 244 | | | $ | 317 | | | Net Income (Loss) |
Amounts in parentheses indicate reductions to income.
Note 20 Variable Interest Entities
Our involvement with variable interest entities (“VIEs”) is limited to situations in which we are not the primary beneficiary as we lack the power to direct the activities that most significantly impact the VIE’s economic performance. Thus, consolidation is not required. Our involvement with VIEs consists of an investment in a privately-held company consisting of equity securities without readily determinable fair value and stock warrants, and notes receivable related to independent dealership financing.
The equity securities without readily determinable fair value and stock warrants were valued at $0.5 million and $1.5 million, respectively, at both June 30, 2022 and June 30, 2021 and were included in the Other Assets line of the Consolidated Balance Sheets. For more information related to our investment in the privately-held company, see Note 14 - Fair Value of Notes to Consolidated Financial Statements. The carrying value of the notes receivable for independent dealership financing were $0.4 million and $0.7 million as of June 30, 2022 and June 30, 2021, respectively, and were included on the Receivables and Other Assets lines of our Consolidated Balance Sheets.
We have no obligation to provide additional funding to the VIEs, and thus our exposure and risk of loss related to the VIEs is limited to the carrying value of the investment and notes receivable. Financial support provided by Kimball International to the VIEs was limited to the items discussed above during the fiscal year ended June 30, 2022.