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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-3279
| | |
| KIMBALL INTERNATIONAL, INC. |
| (Exact name of registrant as specified in its charter) |
| | | | | | | | |
| Indiana | | 35-0514506 |
| (State or other jurisdiction of | | (I.R.S. Employer Identification No.) |
| incorporation or organization) | | |
1600 Royal Street, Jasper, Indiana | | 47546-2256 |
| (Address of principal executive offices) | | (Zip Code) |
| | |
(812) 482-1600 |
| Registrant’s telephone number, including area code |
| Not Applicable |
| Former name, former address and former fiscal year, if changed since last report |
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | |
| Title of each Class | Trading Symbol(s) | Name of each exchange on which registered |
| Class B Common Stock, par value $0.05 per share | KBAL | The NASDAQ Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer x
Non-accelerated filer o Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No x
The number of shares outstanding of the Registrant’s common stock as of May 1, 2023 was:
Class A Common Stock - 166,789 shares
Class B Common Stock - 36,250,961 shares
KIMBALL INTERNATIONAL, INC.
FORM 10-Q
INDEX
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| PART I FINANCIAL INFORMATION | |
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| PART II OTHER INFORMATION | |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
KIMBALL INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except for Share and Per Share Data) | | | | | | | | | | | |
| (Unaudited) | | |
| March 31,
2023 | | June 30,
2022 |
| ASSETS | | | |
| Current Assets: | | | |
| Cash and cash equivalents | $ | 18,768 | | | $ | 10,934 | |
| | | |
Receivables, net of allowances of $911 and $1,041, respectively | 49,543 | | | 79,301 | |
| Inventories | 89,633 | | | 97,969 | |
| Prepaid expenses and other current assets | 15,706 | | | 30,937 | |
| | | |
| Total current assets | 173,650 | | | 219,141 | |
Property and equipment, net of accumulated depreciation of $192,129 and $188,530, respectively | 96,740 | | | 96,970 | |
| Right-of-use operating lease assets | 17,338 | | | 12,839 | |
| Goodwill | 11,160 | | | 47,844 | |
Other intangible assets, net of accumulated amortization of $53,552 and $54,553, respectively | 51,250 | | | 54,767 | |
| Deferred tax assets | 18,219 | | | 14,472 | |
| Other assets | 14,442 | | | 15,245 | |
| Total Assets | $ | 382,799 | | | $ | 461,278 | |
| | | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
| Current Liabilities: | | | |
| | | |
| Current maturities of long-term debt | $ | — | | | $ | 33 | |
| Accounts payable | 46,755 | | | 70,936 | |
| Customer deposits | 27,011 | | | 29,706 | |
| Current portion of operating lease liability | 5,768 | | | 6,096 | |
| Dividends payable | 3,786 | | | 3,623 | |
| | | |
| Accrued expenses | 39,525 | | | 41,088 | |
| Total current liabilities | 122,845 | | | 151,482 | |
| Long-Term Liabilities: | | | |
| Long-term debt, less current maturities | 50,000 | | | 68,046 | |
| | | |
| Long-term operating lease liability | 16,285 | | | 12,150 | |
| Other long-term liabilities | 14,163 | | | 16,064 | |
| Total long-term liabilities | 80,448 | | | 96,260 | |
| Shareholders’ Equity: | | | |
Common stock-par value $0.05 per share: | | | |
Class A - Shares authorized: 50,000,000 Shares issued: 167,000 for both periods | 8 | | | 8 | |
Class B - Shares authorized: 100,000,000 Shares issued: 42,856,000 for both periods | 2,143 | | | 2,143 | |
| Additional paid-in capital | 8,889 | | | 6,304 | |
| Retained earnings | 235,891 | | | 269,833 | |
| Accumulated other comprehensive income | 3,883 | | | 3,766 | |
Less: Treasury stock, at cost, 6,615,000 shares and 6,179,000 shares, respectively | (71,308) | | | (68,518) | |
| Total Shareholders’ Equity | 179,506 | | | 213,536 | |
| Total Liabilities and Shareholders’ Equity | $ | 382,799 | | | $ | 461,278 | |
KIMBALL INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except for Per Share Data)
| | | | | | | | | | | | | | | | | | | | | | | |
| (Unaudited) | | (Unaudited) |
| Three Months Ended | | Nine Months Ended |
| March 31 | | March 31 |
| 2023 | | 2022 | | 2023 | | 2022 |
| Net Sales | $ | 166,184 | | | $ | 180,918 | | | $ | 526,942 | | | $ | 488,931 | |
| Cost of Sales | 103,705 | | | 125,782 | | | 338,712 | | | 338,254 | |
| Gross Profit | 62,479 | | | 55,136 | | | 188,230 | | | 150,677 | |
| Selling and Administrative Expenses | 57,508 | | | 48,783 | | | 167,710 | | | 150,863 | |
| Other General (Income) Expense | — | | | (4,523) | | | — | | | (4,523) | |
| Contingent Earn-out (Gain) Loss | — | | | 2,150 | | | (3,160) | | | (15,750) | |
| Restructuring Expense | 793 | | | 1,730 | | | 2,842 | | | 4,195 | |
| Goodwill Impairment | — | | | — | | | 36,684 | | | 34,118 | |
| Operating Income (Loss) | 4,178 | | | 6,996 | | | (15,846) | | | (18,226) | |
| Other Income (Expense): | | | | | | | |
| Interest income | 165 | | | 25 | | | 354 | | | 77 | |
| Interest expense | (668) | | | (390) | | | (2,045) | | | (922) | |
| | | | | | | |
| Non-operating income (expense), net | 625 | | | (870) | | | 805 | | | (347) | |
| Other income (expense), net | 122 | | | (1,235) | | | (886) | | | (1,192) | |
| Income (Loss) Before Taxes on Income | 4,300 | | | 5,761 | | | (16,732) | | | (19,418) | |
| Provision (Benefit) for Income Taxes | (1,391) | | | (534) | | | 7,084 | | | 650 | |
| Net Income (Loss) | $ | 5,691 | | | $ | 6,295 | | | $ | (23,816) | | | $ | (20,068) | |
| | | | | | | |
| Earnings (Loss) Per Share of Common Stock: | | | | | | | |
| Basic Earnings (Loss) Per Share | $ | 0.16 | | | $ | 0.17 | | | $ | (0.65) | | | $ | (0.55) | |
| Diluted Earnings (Loss) Per Share | $ | 0.15 | | | $ | 0.17 | | | $ | (0.65) | | | $ | (0.55) | |
| | | | | | | |
| Class A and B Common Stock: | | | | | | | |
| Average Number of Shares Outstanding - Basic | 36,404 | | | 36,795 | | | 36,566 | | | 36,788 | |
| Average Number of Shares Outstanding - Diluted | 36,912 | | | 37,061 | | | 36,566 | | | 36,788 | |
KIMBALL INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Amounts in Thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Unaudited) | | (Unaudited) |
| Three Months Ended | | Three Months Ended |
| March 31, 2023 | | March 31, 2022 |
| (Unaudited) | Pre-tax | | Tax | | Net of Tax | | Pre-tax | | Tax | | Net of Tax |
| Net income (loss) | | | | | $ | 5,691 | | | | | | | $ | 6,295 | |
| Other comprehensive income (loss): | | | | | | | | | | | |
| | | | | | | | | | | |
| Postemployment severance actuarial change | 156 | | | (40) | | | 116 | | | 251 | | | (66) | | | 185 | |
| Unrealized gain (loss) on interest rate swap | (145) | | | 37 | | | (108) | | | 1,345 | | | (347) | | | 998 | |
| Reclassification to (earnings) loss: | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Amortization of actuarial change | (161) | | | 42 | | | (119) | | | (129) | | | 34 | | | (95) | |
| Interest rate swap | (381) | | | 98 | | | (283) | | | 62 | | | (16) | | | 46 | |
| Other comprehensive income (loss) | $ | (531) | | | $ | 137 | | | $ | (394) | | | $ | 1,529 | | | $ | (395) | | | $ | 1,134 | |
| Total comprehensive income (loss) | | | | | $ | 5,297 | | | | | | | $ | 7,429 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| (Unaudited) | | (Unaudited) |
| | Nine Months Ended | | Nine Months Ended |
| March 31, 2023 | | March 31, 2022 |
| (Unaudited) | Pre-tax | | Tax | | Net of Tax | | Pre-tax | | Tax | | Net of Tax |
| Net income (loss) | | | | | $ | (23,816) | | | | | | | $ | (20,068) | |
| Other comprehensive income (loss): | | | | | | | | | | | |
| | | | | | | | | | | |
| Postemployment severance actuarial change | 529 | | | (136) | | | 393 | | | 814 | | | (211) | | | 603 | |
| Unrealized gain (loss) on interest rate swap | 920 | | | (237) | | | 683 | | | 1,446 | | | (373) | | | 1,073 | |
| Reclassification to (earnings) loss: | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Amortization of actuarial change | (493) | | | 127 | | | (366) | | | (399) | | | 103 | | | (296) | |
| Interest rate swap | (798) | | | 205 | | | (593) | | | 195 | | | (50) | | | 145 | |
| Other comprehensive income (loss) | $ | 158 | | | $ | (41) | | | $ | 117 | | | $ | 2,056 | | | $ | (531) | | | $ | 1,525 | |
| Total comprehensive income (loss) | | | | | $ | (23,699) | | | | | | | $ | (18,543) | |
KIMBALL INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
| | | | | | | | | | | |
| | (Unaudited) |
| Nine Months Ended |
| March 31 |
| 2023 | | 2022 |
| Cash Flows From Operating Activities: | | | |
| Net loss | $ | (23,816) | | | $ | (20,068) | |
| Adjustments to reconcile net loss to net cash (used for) provided by operating activities: | | |
| Depreciation | 11,160 | | | 10,820 | |
| Amortization | 6,682 | | | 7,212 | |
| Loss on sales of assets | (13) | | | (4,537) | |
| | | |
| Restructuring and asset impairment charges | 1,661 | | | 1,527 | |
| Deferred income tax and other deferred charges | (3,787) | | | 95 | |
| Goodwill impairment | 36,684 | | | 34,118 | |
| Stock-based compensation | 3,703 | | | 3,708 | |
| Change in earn-out liability | (3,160) | | | (15,750) | |
| Other, net | (35) | | | (2,528) | |
| Change in operating assets and liabilities: | | | |
| Receivables | 29,731 | | | (12,847) | |
| Inventories | 8,021 | | | (29,254) | |
| Prepaid expenses and other current assets | 14,418 | | | (7,928) | |
| Accounts payable | (21,191) | | | 27,600 | |
| Customer deposits | (2,695) | | | 3,157 | |
| Accrued expenses | (1,397) | | | (1,927) | |
| Net cash provided by (used for) operating activities | 55,966 | | | (6,602) | |
| Cash Flows From Investing Activities: | | | |
| Capital expenditures | (13,658) | | | (12,869) | |
| Proceeds from sales of assets | 354 | | | 5,498 | |
| | | |
| Purchases of capitalized software | (3,423) | | | (2,925) | |
| | | |
| | | |
| Other, net | 128 | | | (50) | |
| Net cash used for investing activities | (16,599) | | | (10,346) | |
| Cash Flows From Financing Activities: | | | |
| Proceeds from revolving credit facility | 106,000 | | | 45,000 | |
| Payments on revolving credit facility | (124,000) | | | (27,000) | |
| Repayments of long-term debt | (79) | | | (30) | |
| | | |
| Dividends paid to shareholders | (9,903) | | | (9,925) | |
| Repurchases of Common Stock | (3,900) | | | (2,447) | |
| Repurchase of employee shares for tax withholding | (223) | | | (590) | |
| Net cash (used for) provided by financing activities | (32,105) | | | 5,008 | |
| | | |
Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash (1) | 7,262 | | | (11,940) | |
Cash, Cash Equivalents, and Restricted Cash at Beginning of Period (1) | 11,996 | | | 25,727 | |
Cash, Cash Equivalents, and Restricted Cash at End of Period (1) | $ | 19,258 | | | $ | 13,787 | |
| Supplemental Disclosure of Cash Flow Information | | | |
| | | |
| | | |
| Cash paid (refunded) during the period for: | | | |
| Income taxes | $ | 4,439 | | | $ | (99) | |
| Interest expense | $ | 2,002 | | | $ | 862 | |
(1) The following table reconciles cash and cash equivalents in the balance sheets to cash, cash equivalents, and restricted cash per the statements of cash flows. The restricted cash included in other assets on the balance sheet represents customer deposits held due to a foreign entity being classified as a restricted entity by a government agency subsequent to our receipt of the deposit. In addition, the restricted cash balance for periods June 30, 2022 and prior included cash held in escrow for repayment of the Payment Protection Program loan that Poppin, Inc. obtained prior to its acquisition and amounts pledged as collateral for a long-term financing arrangement as contractually required by a lender and the restriction lapsed when the related debt was paid. | | | | | | | | | | | | | | | | | | | | | | | |
| (Amounts in Thousands) | March 31,
2023 | | June 30,
2022 | | March 31,
2022 | | June 30,
2021 |
| Cash and Cash Equivalents | $ | 18,768 | | | $ | 10,934 | | | $ | 12,726 | | | $ | 24,336 | |
| Restricted cash included in Other Assets | 490 | | | 1,062 | | | 1,061 | | | 1,391 | |
| Total Cash, Cash Equivalents, and Restricted Cash at end of period | $ | 19,258 | | | $ | 11,996 | | | $ | 13,787 | | | $ | 25,727 | |
KIMBALL INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Amounts in Thousands, Except for Share and Per Share Data) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Treasury Stock | | Total Shareholders’ Equity |
Three months ended March 31, 2023 (Unaudited) | Class A | | Class B | |
Amounts at December 31, 2022 | $ | 8 | | | $ | 2,143 | | | $ | 7,805 | | | $ | 233,556 | | | $ | 4,277 | | | $ | (70,588) | | | $ | 177,201 | |
| Net income (loss) | | | | | | | 5,691 | | | | | | | 5,691 | |
| Other comprehensive income (loss) | | | | | | | | | (394) | | | | | (394) | |
Issuance of non-restricted stock (18,000 shares) | | | | | (110) | | | | | | | 110 | | | — | |
| | | | | | | | | | | | | |
| Compensation expense related to stock compensation plans | | | | | 1,194 | | | | | | | | | 1,194 | |
| | | | | | | | | | | | | |
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| | | | | | | | | | | | | |
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Repurchase of Common Stock (116,000 shares) | | | | | | | | | | | (830) | | | (830) | |
Dividends declared ($0.09 per share) | | | | | | | (3,356) | | | | | | | (3,356) | |
Amounts at March 31, 2023 | $ | 8 | | | $ | 2,143 | | | $ | 8,889 | | | $ | 235,891 | | | $ | 3,883 | | | $ | (71,308) | | | $ | 179,506 | |
| | | | | | | | | | | | | |
Three months ended March 31, 2022 (Unaudited) | | | | | | | | | | | | | |
Amounts at December 31, 2021 | $ | 9 | | | $ | 2,142 | | | $ | 6,015 | | | $ | 265,924 | | | $ | 2,371 | | | $ | (69,797) | | | $ | 206,664 | |
| Net income (loss) | | | | | | | 6,295 | | | | | | | 6,295 | |
| Other comprehensive income (loss) | | | | | | | | | 1,134 | | | | | 1,134 | |
Issuance of non-restricted stock (12,000 shares) | | | | | 7 | | | | | | | 158 | | | 165 | |
| | | | | | | | | | | | | |
| Compensation expense related to stock compensation plans | | | | | 1,153 | | | | | | | | | 1,153 | |
| | | | | | | | | | | | | |
Restricted stock units issuance (9,000 shares) | | | | | (150) | | | | | | | 122 | | | (28) | |
| | | | | | | | | | | | | |
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Dividends declared ($0.09 per share) | | | | | | | (3,383) | | | | | | | (3,383) | |
Amounts at March 31, 2022 | $ | 9 | | | $ | 2,142 | | | $ | 7,025 | | | $ | 268,836 | | | $ | 3,505 | | | $ | (69,517) | | | $ | 212,000 | |
| | | | | | | | | | | | | |
Nine months ended March 31, 2023 (Unaudited) | | | | | | | | | | | | | |
Amounts at June 30, 2022 | $ | 8 | | | $ | 2,143 | | | $ | 6,304 | | | $ | 269,833 | | | $ | 3,766 | | | $ | (68,518) | | | $ | 213,536 | |
| Net income (loss) | | | | | | | (23,816) | | | | | | | (23,816) | |
| Other comprehensive income (loss) | | | | | | | | | 117 | | | | | 117 | |
Issuance of non-restricted shares (57,000 shares) | | | | | (484) | | | | | | | 525 | | | 41 | |
Conversion of Class A to Class B common stock (1,000 shares) | — | | | — | | | | | | | | | | | — | |
| Compensation expense related to stock incentive plans | | | | | 3,703 | | | | | | | | | 3,703 | |
| | | | | | | | | | | | | |
Restricted stock units issuance (50,000 shares) | | | | | (634) | | | | | | | 472 | | | (162) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Repurchase of Common Stock (543,000 shares) | | | | | | | | | | | (3,787) | | | (3,787) | |
Dividends declared ($0.27 per share) | | | | | | | (10,126) | | | | | | | (10,126) | |
Amounts at March 31, 2023 | $ | 8 | | | $ | 2,143 | | | $ | 8,889 | | | $ | 235,891 | | | $ | 3,883 | | | $ | (71,308) | | | $ | 179,506 | |
| | | | | | | | | | | | | |
Nine months ended March 31, 2022 (Unaudited) | | | | | | | | | | | | | |
Amounts at June 30, 2021 | $ | 9 | | | $ | 2,142 | | | $ | 5,298 | | | $ | 299,034 | | | $ | 1,980 | | | $ | (68,793) | | | $ | 239,670 | |
| Net income (loss) | | | | | | | (20,068) | | | | | | | (20,068) | |
| Other comprehensive income (loss) | | | | | | | | | 1,525 | | | | | 1,525 | |
Issuance of non-restricted shares (30,000 shares) | | | | | (235) | | | | | | | 397 | | | 162 | |
Conversion of Class A to Class B common stock (7,000 shares) | — | | | — | | | | | | | | | | | — | |
| Compensation expense related to stock incentive plans | | | | | 3,708 | | | | | | | | | 3,708 | |
| | | | | | | | | | | | | |
Restricted stock units issuance (87,000 shares) | | | | | (1,642) | | | | | | | 1,136 | | | (506) | |
Relative total shareholder return performance units issuance (5,000 shares) | | | | | (104) | | | | | | | 72 | | | (32) | |
| | | | | | | | | | | | | |
Repurchase of Common Stock (196,000 shares) | | | | | | | | | | | (2,329) | | | (2,329) | |
Dividends declared ($0.27 per share) | | | | | | | (10,130) | | | | | | | (10,130) | |
Amounts at March 31, 2022 | $ | 9 | | | $ | 2,142 | | | $ | 7,025 | | | $ | 268,836 | | | $ | 3,505 | | | $ | (69,517) | | | $ | 212,000 | |
KIMBALL INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements of Kimball International, Inc. (the “Company,” “Kimball International,” “we,” “us,” or “our”) have been prepared in accordance with the instructions to Form 10-Q. As such, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted, although we believe that the disclosures are adequate to make the information presented not misleading. Intercompany transactions and balances have been eliminated. Management believes the financial statements include all adjustments (consisting only of normal recurring adjustments) considered necessary to present fairly the financial statements for the interim periods. The results of operations for the interim periods shown in this report are not necessarily indicative of results for any future interim period or for the entire fiscal year. It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto included in our latest annual report on Form 10-K.
Prior Period Reclassification:
We combined the Long-term earn-out liability line with the Other long-term liabilities line on our June 30, 2022 balance sheet as the balance no longer requires separate presentation.
Note 2. Recent Accounting Pronouncements and Supplemental Information
Recently Issued Accounting Pronouncements Not Yet Adopted:
In October 2021, the Financial Accounting Standards Board 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.
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 and the preparation of our financial statements, we assessed goodwill at the reporting unit level for impairment during our second quarter of fiscal year 2023 and based on our analysis our Poppin
reporting unit had a carrying amount that exceeded its fair value. Lower revenue and earnings growth projections in the Poppin reporting unit drove the decline in the fair value of the reporting unit. As a result, we recorded a goodwill impairment loss of $36.7 million during the second quarter of fiscal year 2023, as further discussed in Note 12 - Fair Value of Notes to Condensed Consolidated Statements of Operations. | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| The changes in the carrying amount of goodwill are summarized as follows: |
| (Amounts in Thousands) | | Gross Goodwill | | Accumulated Impairment | | Net Carrying Amount |
| June 30, 2021 | | $ | 83,695 | | | $ | (1,733) | | | $ | 81,962 | |
| Additions / (Impairments) | | — | | | (34,118) | | | (34,118) | |
| June 30, 2022 | | 83,695 | | | (35,851) | | | 47,844 | |
| Additions / (Impairment) | | — | | | (36,684) | | | (36,684) | |
| March 31, 2023 | | $ | 83,695 | | | $ | (72,535) | | | $ | 11,160 | |
Other Intangible Assets reported on the Condensed Consolidated Balance Sheets consist of capitalized software, customer relationships, trade names, acquired technology, patents and trademarks, and non-compete agreements. 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. As a result of the downward revision in the forecasted operations of Poppin, management identified that a triggering event had occurred, indicating that certain long-lived assets may not be recoverable. The intangible assets of the Poppin reporting unit were assessed for recoverability during the second quarter of fiscal year 2023, and the recoverability assessment indicated no impairment.
A summary of intangible assets subject to amortization is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | June 30, 2022 |
| (Amounts in Thousands) | Cost | | Accumulated
Amortization | | Net Value | | Cost | | Accumulated
Amortization | | Net Value |
| Capitalized Software | $ | 48,778 | | | $ | 36,766 | | | $ | 12,012 | | | $ | 46,246 | | | $ | 35,521 | | | $ | 10,725 | |
| Customer Relationships | 12,000 | | | 4,746 | | | 7,254 | | | 19,050 | | | 10,518 | | | 8,532 | |
| Trade Names | 36,570 | | | 9,554 | | | 27,016 | | | 36,570 | | | 6,811 | | | 29,759 | |
| Acquired Technology | 7,000 | | | 2,316 | | | 4,684 | | | 7,000 | | | 1,563 | | | 5,437 | |
| Patents and Trademarks | 354 | | | 70 | | | 284 | | | 354 | | | 47 | | | 307 | |
| Non-Compete Agreements | 100 | | | 100 | | | — | | | 100 | | | 93 | | | 7 | |
| Other Intangible Assets | $ | 104,802 | | | $ | 53,552 | | | $ | 51,250 | | | $ | 109,320 | | | $ | 54,553 | | | $ | 54,767 | |
A summary of the useful lives of intangible assets subject to amortization is as follows: | | | | | | | | |
| | Years |
| Capitalized Software | | 2 to 13 |
| Customer Relationships | | 10 |
| Trade Names | | 10 |
| Acquired Technology | | 7 |
| Patents | | 14 |
| Trademarks | | 15 |
| Non-Compete Agreements | | 5 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortization expense incurred and future expected expenses related to intangible assets were: |
| Three months ended | | Nine Months Ended | | | | | | | | | | | | | |
| March 31 | | March 31 | | Remainder | | Future Fiscal Years |
| (Amounts in Thousands) | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter |
| Amortization Expense | $ | 2,268 | | | $ | 2,358 | | | $ | 6,682 | | | $ | 7,212 | | | | $ | 2,911 | | | $ | 9,857 | | | $ | 9,638 | | | $ | 9,043 | | | $ | 6,299 | | | $ | 13,502 | |
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.
Other General (Income) Expense:
Other General (Income) Expense for the three and nine months ended March 31, 2022, includes a gain of $4.5 million related to the sale of a warehouse.
Non-operating Income (Expense), net:
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.
Components of the Non-operating income, net line, were:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | March 31 | | March 31 |
| (Amounts in Thousands) | 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | |
| Gain (Loss) on SERP Investments | $ | 613 | | | $ | (887) | | | $ | 773 | | | $ | (300) | |
| | | | | | | |
| | | | | | | |
| Other | 12 | | | 17 | | | 32 | | | (47) | |
| Non-operating income, net | $ | 625 | | | $ | (870) | | | $ | 805 | | | $ | (347) | |
Note 3. Restructuring
We recognized pre-tax restructuring expense of $0.8 million and $2.8 million in the three and nine months ended March 31, 2023, and recognized $1.7 million and $4.2 million for the three and nine months ended March 31, 2022.
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 Condensed Consolidated Statements of Operations.
Transformation Restructuring Plan:
Current actions under our transformation restructuring plan are focused on activities such as the streamlining of manufacturing facilities, the consolidation of showrooms, and the closure of our manufacturing facility in Tijuana, Mexico which was completed during the year-to-date period of fiscal year 2023. This phase of the transformation restructuring plan began in the first quarter of our fiscal year 2021, and we expect a substantial majority of the restructuring actions to be completed by the end of fiscal year 2023.
This phase of the transformation restructuring plan is expected to generate annualized pre-tax savings of approximately $20.0 million when it is fully implemented. We currently estimate this phase of the transformation restructuring plan will incur total pre-tax restructuring charges of approximately $22.7 million, with approximately $0.5 million expected to be recorded in remainder of fiscal year 2023. The restructuring charges are expected to consist of approximately $7.8 million for severance and other employee-related costs, approximately $5.8 million for facility costs, and approximately $9.1 million for lease and other asset impairment. Approximately 60% of the total cost estimate is expected to be cash expense.
A summary of the charges recorded in connection with the second phase of the transformation restructuring plan is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | | Charges Incurred to Date |
| March 31 | | March 31 | |
| (Amounts in Thousands) | 2023 | | 2022 | | 2023 | | 2022 | |
| Cash-related restructuring charges: | | | | | | | | | |
| Severance and other employee related costs | $ | 183 | | | $ | 539 | | | $ | 657 | | | $ | 772 | | | $ | 7,492 | |
| Facility exit costs and other cash charges | 295 | | | 1,006 | | | 1,591 | | | 1,896 | | | 5,539 | |
| Total cash-related restructuring charges | $ | 478 | | | $ | 1,545 | | | $ | 2,248 | | | $ | 2,668 | | | $ | 13,031 | |
| Non-cash charges: | | | | | | | | | |
| Impairment of assets and accelerated depreciation | 315 | | | 185 | | | 594 | | | 1,527 | | | 9,125 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Total charges | $ | 793 | | | $ | 1,730 | | | $ | 2,842 | | | $ | 4,195 | | | $ | 22,156 | |
A summary of the current period activity in accrued restructuring related to the second phase of the transformation restructuring plan is as follows:
| | | | | | | | | | | |
| (Amounts in Thousands) | Severance and other employee related costs | | | | | | |
Balance at June 30, 2022 | $ | 974 | | | | | | | |
| Additions charged to expense | 634 | | | | | | | |
| Cash payments charged against reserve | (1,561) | | | | | | | |
| Non-cash adjustments | (47) | | | | | | | |
Balance at March 31, 2023 | $ | — | | | | | | | |
Note 4. Revenue
Disaggregation of Revenue
The following table provides information about revenue by operating segment:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| March 31 | | March 31 |
| (Amounts in Millions) | 2023 | | 2022 | | 2023 | | 2022 |
| Workplace & Health | $ | 124.3 | | | $ | 129.1 | | | $ | 408.3 | | | $ | 366.4 | |
| Hospitality | 28.9 | | | 34.5 | | | 76.3 | | | 76.4 | |
| eBusiness | 12.9 | | | 17.3 | | | 42.3 | | | 46.1 | |
| Total Net Sales | $ | 166.1 | | | $ | 180.9 | | | $ | 526.9 | | | $ | 488.9 | |
For the three and nine months ended March 31, 2022, the Workplace and Health categories have been combined based on our reassessment of disaggregation of revenue based on our current method of evaluating our business.
Contract Balances
Receivables in the Condensed 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.
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 Condensed Consolidated Balance Sheets. Customer deposits are typically utilized within a year of the receipt of the deposit. The amount of revenue recognized during the nine months ended March 31, 2023 that was included in the June 30, 2022 customer deposit balance was $28.8 million.
Note 5. Leases
Our operating lease portfolio is primarily comprised of showrooms, which expire at various dates through fiscal year 2033. We have no financing leases. Certain operating lease agreements include rental payments adjusted periodically for inflationary indices. 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 Condensed 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.
The components of our lease expenses are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| March 31 | | March 31 |
| (Amounts in Millions) | 2023 | | 2022 | | 2023 | | 2022 |
| Operating lease expense | $ | 1.4 | | | $ | 1.2 | | | $ | 3.9 | | | $ | 3.6 | |
| | | | | | | |
| Variable lease expense | 1.7 | | | 1.1 | | | |
