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Revenue from Contracts with Customers | 6 Months Ended
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Dec. 01, 2018
Revenue from Contract with Customer [Abstract] |
Revenue from Contract with Customer | Revenue from Contracts with Customers Impact of Adoption The Company adopted ASC 606 - Revenue from Contracts with Customers at the beginning of fiscal 2019. The Company completed its review of the impact of the new standard and identified certain key accounting policy changes that resulted from adopting the new standard. These included changes to the identification of performance obligations for commercial contracts in which the Company sells directly to end customers. Under previous accounting rules, which were codified under ASC 605, the Company generally delayed revenue recognition until the products were shipped and installed as the Company had concluded that contracts that contained both products and services represented a single, combined deliverable. However, under ASC 606, the Company has determined that products and services are distinct and as such, represent separate performance obligations. The Company also determined that under ASC 606, certain product pricing elements related to its direct customer sales should be recorded within Cost of sales rather than net within Net sales as had been historical practice under ASC 605. The Company adopted ASC 606 using the modified retrospective approach and applied the guidance therein to all applicable contracts that were not complete as of the date of adoption. As a result of these changes in accounting, the Company recorded a cumulative adjustment to retained earnings of $1.9 million on the date of adoption. With the change in performance obligations under ASC 606, product revenue recognition is accelerated on certain direct commercial customer sales. As a result, the cumulative adjustment recorded upon the adoption of ASC 606 had the impact of reducing inventory for sales transactions that would have been recognized in a prior period under ASC 606 and recording unbilled receivables for the amounts owed prior to invoicing. Additionally, the cumulative adjustment reflects the change in accrued expenses, including income taxes payable, related to these sales transactions. The cumulative impact to our Condensed Consolidated Balance Sheet as of June 3, 2018 was as follows:
| Balance at |  | Adjustments due |  | Balance at
(In millions) | June 2, 2018 |  | to ASC 606 |  | June 3, 2018
Balance Sheet |  |  |  |  |
Assets: |  |  |  |  |
Unbilled accounts receivable | $ | 1.9 |  |  | $ | 11.1 |  |  | $ | 13.0 |
Inventories, net | 162.4 |  |  | (7.1 | ) |  | 155.3 |
Liabilities: |  |  |  |  |
Accrued compensation and benefits | 86.3 |  |  | 0.2 |  |  | 86.5 |
Other accrued liabilities | 77.0 |  |  | 1.9 |  |  | 78.9 |
Equity: |  |  |  |  |
Retained earnings | 598.3 |  |  | 1.9 |  |  | 600.2 |
In accordance with the modified retrospective adoption rules per ASC 606, the Company has disclosed in the tables below the differences in our financial statements due to the adoption of the standard. The “As reported” column represents the financial statement values recorded in accordance with ASC 606, while the “Legacy GAAP” column represents what the financial statement values would have been under ASC 605, had the new standard not been adopted.
| Three Months Ended December 1, 2018
(In millions) | As reported |  | Performance Obligation Change |  | Gross vs. Net Change |  | Legacy GAAP
Statement of Comprehensive Income |  |  |  |  |  |  |
Net sales | $ | 652.6 |  |  | $ | (7.5 | ) |  | $ | (10.1 | ) |  | $ | 635.0 |
Cost of sales | 417.0 |  |  | (4.1 | ) |  | (10.1 | ) |  | 402.8 |
Gross margin | 235.6 |  |  | (3.4 | ) |  |  |  | 232.2 |
Total operating expenses | 182.5 |  |  | (0.1 | ) |  |  |  | 182.4 |
Operating earnings | 53.1 |  |  | (3.3 | ) |  |  |  | 49.8 |
Income tax expense | 11.2 |  |  | (0.6 | ) |  |  |  | 10.6 |
Net earnings | 39.3 |  |  | (2.7 | ) |  |  |  | 36.6 |
| Six Months Ended December 1, 2018
(In millions) | As reported |  | Performance Obligation Change |  | Gross vs. Net Change |  | Legacy GAAP
Statement of Comprehensive Income |  |  |  |  |  |  |
Net sales | $ | 1,277.3 |  |  | $ | (18.2 | ) |  | $ | (18.6 | ) |  | $ | 1,240.5 |
Cost of sales | 816.6 |  |  | (9.9 | ) |  | (18.6 | ) |  | 788.1 |
Gross margin | 460.7 |  |  | (8.3 | ) |  |  |  | 452.4 |
Total operating expenses | 361.6 |  |  | (0.2 | ) |  |  |  | 361.4 |
Operating earnings | 99.1 |  |  | (8.1 | ) |  |  |  | 91.0 |
Income tax expense | 20.0 |  |  | (1.7 | ) |  |  |  | 18.3 |
Net earnings | 75.2 |  |  | (6.4 | ) |  |  |  | 68.8 |
| As of December 1, 2018
(In millions) | As reported |  | Performance Obligation Change |  | Gross vs. Net Change |  | Legacy GAAP
Balance Sheet |  |  |  |  |  |  |
Assets: |  |  |  |  |  |  |
Unbilled accounts receivable | $ | 32.4 |  |  | $ | (29.3 | ) |  |  |  | $ | 3.1 |
Inventories, net | 178.5 |  |  | 16.5 |  |  |  |  | 195.0 |
Liabilities: |  |  |  |  |  |  |
Accrued compensation and benefits | 82.0 |  |  | (0.3 | ) |  |  |  | 81.7 |
Other accrued liabilities | 79.3 |  |  | (4.2 | ) |  |  |  | 75.1 |
Equity: |  |  |  |  |  |  |
Retained earnings | 650.6 |  |  | (8.3 | ) |  |  |  | 642.3 |
There was no impact on Net Cash Provided by Operating Activities within the Company's Condensed Consolidated Statement of Cash Flows as a result of adopting ASC 606. Accounting Policies The Company recognizes revenue as performance obligations based on the terms of contracts with customers are satisfied. This happens when control of goods and services based on the contract have been conveyed to the customer. Revenue for the sale of products is typically recognized at the point in time when control transfers, generally upon transfer of title and risk of loss to the customer. Revenue for services, including the installation of products by the Company's owned dealers, is recognized over time as the services are provided. The method of revenue recognition may vary, depending on the type of contract with the customer, as noted in the section Disaggregated Revenue further below. The Company's contracts with customers include master agreements and certain other forms of contracts, which do not reach the level of a performance obligation until a purchase order is received from a customer. At the point in time that a purchase order under a contract is received by the Company, the collective group of documents represent an enforceable contract between the Company and the customer. While certain customer contracts may have a duration of greater than a year, all purchase orders are less than a year in duration. As of December 1, 2018, all unfulfilled performance obligations are expected to be fulfilled in the next twelve months. Variable consideration exists within certain contracts that the Company has with customers. When variable consideration is present in a contract with a customer, the Company estimates the amount that should be included in the transaction price utilizing either the expected value method or the most likely amount method, depending on the nature of the variable consideration. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Adjustments to Net sales from changes in variable consideration related to performance obligations completed in previous periods are not material to the Company's financial statements. Also, the Company has no contracts with significant financing components. The Company adopted the following accounting policies as a result of adopting the new standard on revenue recognition:
– | Shipping and Handling Activities - the Company accounts for shipping and handling activities as fulfillment activities and these costs are accrued within Cost of sales at the same time revenue is recognized.
– | Sales Taxes - the Company does not record revenue for sales tax, value added tax or other taxes that are collected on behalf of government entities. The Company’s revenue is recorded net of these taxes as they are passed through to the relevant government entities.
– | Incremental Costs of Obtaining a Contract - the Company has recognized incremental costs to obtain a contract as an expense when incurred as the amortization period is less than one year.
– | Significant Financing Component - the Company has not adjusted the amount of consideration to be received for any significant financing components as the Company’s contracts have a duration of one year or less.
Disaggregated Revenue The Company’s revenue is comprised primarily of sales of products and installation services. Depending on the type of contract, the method of accounting and timing of revenue recognition may differ. Below, descriptions have been provided that summarize the Company’s different types of contracts and how revenue is recognized for each.
– | Single Performance Obligation - these contracts are transacted with customers and include only the product performance obligation. Most commonly, these contracts represent master agreements with independent third-party dealers in which a purchase order represents the customer contract, point of sale transactions through the Consumer reportable segment, as well as customer purchase orders for the Maharam subsidiary within the Specialty reportable segment. For contracts that include a single performance obligation, the Company records revenue at the point in time when title and risk of loss has transferred to the customer.
– | Multiple Performance Obligations - these contracts are transacted with customers and include more than one performance obligation; products, which are shipped to the customer by the Company and installation and other services, which are primarily fulfilled by independent third-party dealers. For contracts that include multiple performance obligations, the Company records revenue for the product performance obligation at the point in time when control transfers, generally upon transfer of title and risk of loss to the customer. In most cases, the Company has concluded that it is the agent for the installation services performance obligation and as such, the revenue and costs of these services are recorded net within “Net sales” in the Company’s Condensed Consolidated Statements of Comprehensive Income.
In certain instances, entities owned by the Company, rather than independent third-party dealers, perform installation and other services. In these cases, Service revenue is generated by the Company’s entities that provide installation services, which include owned dealers, and is recognized by the Company over time as the services are provided. For c ontracts with multiple performance obligations, the Company allocates the transaction price to each performance obligation based on relative standalone selling prices.
– | Other - these contracts are comprised mainly of alliance fee arrangements, whereby the Company earns revenue for allowing other furniture sellers access to its dealer distribution channel, as well as other miscellaneous selling arrangements. Revenue from alliance contracts are recorded at the point in time in which the sale is made by other furniture sellers through the Company’s sales channel.
Revenue disaggregated by contract type has been provided in the table below:
| Three Months Ended |  | Six Months Ended
(In millions) | December 1, 2018 |  | December 1, 2018
Net Sales: |  |  |
Single performance obligation |  |  |
Product revenue | $ | 539.4 |  |  | $ | 1,074.6 |
Multiple performance obligations |  |  |
Product revenue | 107.9 |  |  | 192.7 |
Service revenue | 3.2 |  |  | 5.9 |
Other | 2.1 |  |  | 4.1 |
Total | $ | 652.6 |  |  | $ | 1,277.3 |
Revenue disaggregated by product type and reportable segment has been provided in the table below:
| Three Months Ended |  | Six Months Ended
(In millions) | December 1, 2018 |  | December 1, 2018
North American Furniture Solutions: |  |  |
Systems | $ | 143.5 |  |  | $ | 288.1 |
Seating | 100.0 |  |  | 196.6 |
Freestanding and storage | 78.5 |  |  | 153.2 |
Other | 31.2 |  |  | 59.0 |
Total North American Furniture Solutions | $ | 353.2 |  |  | $ | 696.9 |
ELA Furniture Solutions: |  |  |
Systems | $ | 28.4 |  |  | $ | 51.1 |
Seating | 62.1 |  |  | 130.8 |
Freestanding and storage | 13.9 |  |  | 24.3 |
Other | 14.1 |  |  | 27.8 |
Total ELA Furniture Solutions | $ | 118.5 |  |  | $ | 234.0 |
Specialty: |  |  |
Systems | $ | 1.8 |  |  | $ | 3.3 |
Seating | 26.9 |  |  | 55.9 |
Freestanding and storage | 19.5 |  |  | 32.3 |
Textiles | 4.0 |  |  | 9.0 |
Other | 29.4 |  |  | 58.4 |
Total Specialty | $ | 81.6 |  |  | $ | 158.9 |
Consumer: |  |  |
Systems | $ | 0.1 |  |  | $ | 0.1 |
Seating | 58.1 |  |  | 111.8 |
Freestanding and storage | 16.8 |  |  | 34.0 |
Other | 24.3 |  |  | 41.6 |
Total Consumer | $ | 99.3 |  |  | $ | 187.5 |
Total | $ | 652.6 |  |  | $ | 1,277.3 |
Refer to Note 16 of the Condensed Consolidated Financial Statements for further information related to our reportable segments. Contract Assets and Contract Liabilities The Company records contract assets and contract liabilities related to its revenue generating activities. Contract assets include certain receivables from customers that are unconditional as all performance obligations with respect to the contract with the customer have been completed. These amounts represent trade receivables and they are recorded within the caption “Accounts and notes receivable, net” in the Condensed Consolidated Balance Sheets. The payment terms for the Company's customers differs depending on the type of customer. For third party dealers and commercial contract customers, standard credit terms apply. Sales transacted through the Company's direct to consumer channels are generally paid for by the customer at point of sale. Contract assets also include amounts that are conditional because certain performance obligations in the contract with the customer are incomplete as of the balance sheet date. These contract assets generally arise due to contracts with the customer that include multiple performance obligations, both the product that is shipped to the customer by the Company, as well as installation services provided by independent third-party dealers. For these contracts, the Company recognizes revenue upon satisfaction of the product performance obligation. However, the asset is conditional and the customer is not invoiced by the Company until the installation performance obligation is completed. These contract assets are included in the caption "Unbilled accounts receivable" in the Condensed Consolidated Balance Sheets until all performance obligations in the contract with the customer have been satisfied. Contract liabilities represent deposits made by customers before the satisfaction of performance obligation(s) are complete and revenue is recognized. Upon completion of the performance obligation(s) that the Company has with the customer based on the terms of the contract, the liability for the customer deposit is relieved and revenue is recognized. These customer deposits are included within the caption “Customer deposits” in the Condensed Consolidated Balance Sheets. During the three and six month periods ended December 1, 2018, the Company recognized Net sales of $17.8 million and $23.1 million, respectively, related to customer deposits there were included in the balance sheet as of September 1, 2018 and June 2, 2018.

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- Definition The entire disclosure of revenue from contract with customer to transfer good or service and to transfer nonfinancial asset. Includes, but is not limited to, disaggregation of revenue, credit loss recognized from contract with customer, judgment and change in judgment related to contract with customer, and asset recognized from cost incurred to obtain or fulfill contract with customer. Excludes insurance and lease contracts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 606 -URI http://asc.fasb.org/topic&trid=49130388 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -URI http://asc.fasb.org/topic&trid=2122369 + Details
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