UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
☒☑ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year endedJune 30, 20162019
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 number0-5151
FLEXSTEEL INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Minnesota | 42-0442319 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
385 Bell Street, Dubuque, Iowa | 52001 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: | (563) 556-7730 |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock | FLXS | The |
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☒☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒☑ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”,filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act (check one).
Large accelerated filer ☐ Accelerated filer ☑ Non-accelerated filer ☐ 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 Act). Yes☐Yes ☐ No ☒☑
The aggregate market value of the voting stock held by non-affiliates, computed by reference to the last sales price on December 31, 20152018 (which was the last business day of the registrant’s most recently completed second quarter) was $267,782,977.$142,178,198.
Indicate the number of shares outstanding of each of the registrant’s classes of Common Stock, as of the latest practicable date. 7,701,1907,920,900 Common Shares ($1 par value) as of August 12, 2016.19, 2019.
DOCUMENTS INCORPORATED BY REFERENCE
In Part III, portions of the registrant’s 20162019 Proxy Statement to be filed with the Securities and Exchange Commission within 120 days of the Registrant’s fiscal year end.
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PART I
Cautionary Statement Relevant to Forward-Looking Information for the Purpose of “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995
The Company and its representatives may from time to time make written or oral forward-looking statements with respect to long-term goals or anticipated results of the Company, including statements contained in the Company’s filings with the Securities and Exchange Commission and in its reports to stockholders.
Statements, including those in this Annual Report on Form 10-K, which are not historical or current facts, are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. There are certain important factors that could cause ourthe Company’s results to differ materially from those anticipated by some of the statements made herein. Investors are cautioned that all forward-looking statements involve risk and uncertainty. Some of the factors that could affect results are the cyclical nature of the furniture industry, supply chain disruptions, litigation, the effectiveness of new product introductions and distribution channels, the product mix of sales, pricing pressures, the cost of raw materials and fuel, retention and recruitment of key employees, actions by governments including laws, regulations, taxes and tariffs, the amount of sales generated and the profit margins thereon, competition (both U.S. and foreign), credit exposure with customers, participation in multi-employer pension plans, timing to implement restructuring, and general economic conditions. For further information regarding these risks and uncertainties, see the “Risk Factors” section in Item 1A of this Annual Report on Form 10-K.
The Company specifically declines to undertake any obligation to publicly revise any forward-looking statements that have been made to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
Item 1. | Business |
General
Flexsteel Industries, Inc. and Subsidiaries (the “Company”) was incorporated in 1929 andcelebrated its 125th anniversary of the Company’s founding in 1893 during 2018. Flexsteel Industries, Inc. is one of the oldest and largest manufacturer, importermanufacturers, importers and marketermarketers of residential and commercialcontract upholstered and woodwooden furniture products in the United States. Product offerings includeOver the generations the Company has built a wide variety ofcommitted retail and consumer following based on its patented, guaranteed-for-life Blue Steel SpringTM – the all-riveted, high-carbon, steel-banded seating platform that gives upholstered and woodleather furniture such as sofas, loveseats, chairs, recliningthe strength and rocker-reclining chairs, swivel rockers, sofa beds, convertible bedding units, occasional tables, desks, dining tables and chairs and bedroom furniture. The Company’s products are intendedcomfort to last a lifetime. With offerings for use in home, office, hotel, healthcare, and other commercial applications. A featured component in most ofrecreational seating, the upholstered furniture is a unique steel drop-in seat spring from which our name “Flexsteel” is derived. The Company distributes its productsfurniture throughout the United States and Canada through the Company’s sales force and various independent representatives.
The Company operates in one reportable segment, furniture products. OurThe Company’s furniture products business involves the distribution of manufactured and imported products consisting of a broad line of upholstered and wooden furniture for residential and commercialcontract markets. Set forth below is information for the past three fiscal years showing the Company’s net sales attributable to each of the areas of application:
| (in thousands) | FOR THE YEARS ENDED JUNE 30, | |||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Residential | $ | 420,884 | $ | 393,143 | $ | 359,565 | ||||||
| Commercial | 79,222 | 73,761 | 78,978 | |||||||||
| $ | 500,106 | $ | 466,904 | $ | 438,543 | |||||||
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|
|
|
|
|
|
|
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(in thousands) |
| FOR THE YEARS ENDED JUNE 30, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Residential |
| $ | 374,473 |
|
| $ | 413,664 |
|
| $ | 396,099 |
|
Contract |
|
| 69,115 |
|
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| 75,516 |
|
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| 72,665 |
|
|
| $ | 443,588 |
|
| $ | 489,180 |
|
| $ | 468,764 |
|
Manufacturing and Offshore Sourcing
We operateThe Company operates manufacturing facilities that are located in Arkansas, California, Georgia, Iowa, Mississippi and Juarez, Mexico. These manufacturing operations are integral to ourthe Company’s product offerings and distribution strategy by offering smaller and more frequent product runs of a wider product selection. We identifyThe Company identifies and eliminateeliminates manufacturing inefficiencies and adjustadjusts manufacturing schedules on a daily basis to meet customer requirements. We haveThe Company has established relationships with key suppliers to ensure prompt delivery of quality component parts. OurThe Company’s production includes the use of selected offshore component parts sourced offshore to enhance our value in the marketplace.
We integrate ourThe Company integrates manufactured products with finished products acquired from offshore suppliers who can meet our quality specificationspecifications and scheduling requirements. WeThe Company will continue to pursue and refine this blended strategy, offering customers manufactured goods, products manufactured utilizing imported component parts, and ready-to-deliver imported products. This blended focus on products allows the Company to provide a wide range of price points, styles and product categories to satisfy customer requirements.
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Competition
The furniture industry is highly competitive and includes a large number of U.S. and foreign manufacturers and distributors, none of which dominates the market. The Company competes in markets in which we compete includewith a large number of relatively small manufacturers; however, certain competitors have substantially greater sales volumes than we have. Ourthe Company. The Company’s products compete based on style, quality, price, delivery, service and durability. We believe that our steel seat spring,The Company believes its patented, guaranteed-for-life Blue Steel Spring, manufacturing and sourcing capabilities, facility locations, commitment to customers, product quality, delivery, service, value and experienced production, sales, marketing and management teams, are some of ourits competitive advantages.
Seasonality
The Company’s business is not considered seasonal.
Foreign Operations
The Company makes minimal export sales. At June 30, 2016,2019, the Company had approximately 10090 employees located in Asia to ensure Flexsteel’s quality standards are met and to coordinate the delivery of purchased products. The Company leases and operates a 225,000 square foot production facility in Juarez, Mexico utilizing contracted labor. The Company also leases a 51,000 square foot bonded warehouse in Binh Duong, Vietnam to facilitate efficient consolidation and shipment to its U.S. warehouses and customers.
Customer Backlog
The approximate backlog of customer orders believed to be firm as of the end of the current fiscal year and the prior two fiscal years were as follows (in thousands):
| June 30, 2016 | June 30, 2015 | June 30, 2014 | ||
| $46,700 | $58,600 | $45,000 |
June 30, 2019 |
| June 30, 2018 |
| June 30, 2017 |
|
$47,400 |
| $53,700 |
| $55,000 |
|
Raw Materials
The Company utilizes various types of wood, fabric, leather, filling material, high carbon spring steel, bar and wire stock, polyurethane and other raw materials in manufacturing furniture. While the Company purchases these materials from numerous outside suppliers, both U.S. and foreign, it is not dependent upon any single source of supply. The costs of certain raw materials fluctuate, but all continue to be readily available.
Working Capital Practices
For a discussion of the Company’s working capital practices, see “Liquidity and Capital Resources” in Item 7 of this Annual Report on Form 10-K.
Industry Factors
The Company has exposure to actions by governments, including tariffs, see “Risk Factors” in Item 1A of this Annual Report on Form 10-K.
Government Regulations
The Company is subject to various local, state, and federal laws, regulations and agencies that affect businesses generally, see “Risk Factors” in Item 1A of this Annual Report on Form 10-K.
Environmental Matters
The Company is subject to environmental laws and regulations with respect to product content and industrial waste, see “Risk Factors” in Item 1A and “Legal Proceedings” in Item 3 of this Annual Report on Form 10-K.
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Trademarks and Patents
The Company owns the American and CanadianUnited States improvement patents to its Flexsteel seat spring,guaranteed-for-life Blue Steel Spring – the all-riveted, high-carbon, steel-banded seating platform that gives upholstered and leather furniture the strength and comfort to last a lifetime, as well as patents on convertible beds. The Company has patents and owns certain trademarks in connection with its furniture products which are due to expire on dates ranging from 2016-2034.2019-2036.
It is not common in the furniture industry to obtain a patent for a furniture design. If a particular design of a furniture manufacturer is well accepted in the marketplace, it is common for other manufacturers to imitate the same design without recourse by the furniture manufacturer who initially introduced the design. Furniture products are designed by the Company’s own design staff and through the services of third-party designers. New models and designs of furniture, as well as new fabrics, are introduced continuously. In the last three fiscal years, these design activities involved the following expenditures (in thousands):
| Fiscal Year Ended June 30, | Expenditures | |
| 2016 | $4,170 | |
| 2015 | $4,090 | |
| 2014 | $2,820 |
Employees
The Company had 1,4601,295 employees as of June 30, 2016,2019, including 200186 employees thatwho are covered by collective bargaining agreements. Management believes it has good relations with employees.
Website and Available Information
Our website is located at www.flexsteel.com. Information on the website does not constitute part of this Annual Report on Form 10-K.
A copyCopies of the Company’sour Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as filedamended, are available free of charge on our website (www.flexsteel.com) as soon as reasonably practicable after we electronically file the material with or furnish it to the U.S. Securities and Exchange Commission (“SEC”(SEC). Additionally, the SEC maintains an internet site (www.sec.gov), that contains reports, proxy and information statements, and other SEC reports filedinformation regarding issuers that file electronically with the SEC. Information on our website or furnished andlinked to ourGuidelines for Business Conduct are available, without charge, on the Company’s website at www.flexsteel.com oris not incorporated by writing to the Office of the Secretary, Flexsteel Industries, Inc., P. O. Box 877, Dubuque, IA 52004-0877.reference into this Annual Report.
The executive officers of the Company, their ages, positions (in each case as of August 12, 2016), and the year they were first elected or appointed an officer of the registrant, are as follows:
Our businessItem 1A. Risk Factors
The Company is subject to a variety of risks. You should carefully consider the risk factors detailed below in conjunction with the other information contained in this Annual Report on Form 10-K. Should any of these risks actually materialize, ourthe Company’s business, financial condition, and future prospects could be negatively impacted. There may be additional factors that are presently unknown to usthe Company or that wethe Company currently believebelieves to be immaterial that could affect ourits business.
Our businessBusiness information systems could be impacted by disruptions and security breaches.
We employThe Company employs information technology systems to support ourits global business. Security breaches and other disruptions to ourthe Company’s information technology infrastructure could interfere with our operations, compromise information belonging to usthe Company and ourits customers and suppliers and expose usthe Company to liability which could adversely impact ourthe Company’s business and reputation. In the ordinary course of business, we relythe Company relies on information technology networks and systems to process, transmit and store electronic information, and to manage or support a variety of business processes and activities. Additionally, we collectthe Company collects and storestores certain data, including proprietary business information, and may have access to confidential or personal information in certain areas of ourits businesses that is subject to privacy and security laws, regulations and customer-imposed controls. While security breaches and other disruptions to ourthe Company’s information technology networks and infrastructure could happen, none have occurred to date that have had a material impact to us. There may be other challenges and risks as we upgrade and standardize our business information systems.the Company. Any such events could result in legal claims or proceedings, liability or penalties under privacy laws, disruption in operations, and damage to ourthe Company’s reputation, which could adversely affect ourthe Company’s business.
The implementation of a new business information system could disrupt the business.
The Company deployed its new business information system in the fourth quarter of fiscal 2018, retiring one of the Company’s legacy systems. Management characterizes this deployment as a failed implementation which resulted in higher than expected disruption to customers, significant loss of share within the ecommerce space due to poor servicing of demand, higher service level penalties from key customers and higher promotional costs aimed at share recovery throughout the year as Management stabilized the system. During the third quarter of fiscal 2019, the Company announced an impairment of $18.7 million representing a significant portion of the new business information system asset. In the fourth quarter of fiscal 2019, the Company announced a further impairment of $2.6 million due to additional abandoned components being identified through the future ERP analysis and planning phase. Additionally, the Company announced a path forward that will enable both a simplification of the software configuration and approach for the remainder of the business as well as a reduction in on-going run rate costs.
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An ineffective implementation of the new business information system may result in the following:
● | Disruption of the Company’s domestic and international supply chain; |
● | Inability to fill customer orders accurately and on a timely basis; |
● | Inability to process payments to suppliers and vendors; |
● | Negative impact on financials; |
● | Inability to fulfill federal, state and local tax filing requirements in a timely and accurate matter; and |
● | Increased demands of management and associates to the detriment of other corporate initiatives. |
The execution of the Company’s comprehensive restructuring plan.
Our futureOn June 18, 2019, the Company announced it completed the analysis and planning process and set forth the comprehensive transformation program including previously announced activities, restructuring and related expenses, expected benefits both on-going and one time in nature to be executed over the next two years. The Company expects to incur pre-tax restructuring and related expenses of approximately $48.0 million to $53.0 million over this two-year timeframe of which approximately $36.0 million to $40.0 million will be cash including $9.0 million for environmental remediation and $12.0 million to $13.0 million non-cash. The Company has recorded a total of $10.0 million in restructuring costs during the year ended June 30, 2019. In addition, $7.7 million related to inventory impairment was recorded in our cost of goods sold.
Delayed or missed execution or implementation of the restructuring plan may result in the following:
● | Inability to fill customer orders on a timely basis resulting in lost sales; |
● | Increased one-time costs to implement; |
● | Sub-optimized business model resulting in higher on-going costs and lower profitability; |
● | Reduced savings opportunity achieved; |
● | Overall negative impact on financial performance including cash flow from operations; and |
● | Reduced liquidity to fund the daily operations of the business. |
Future success depends on ourthe Company’s ability to manage ourits global supply chain.
We acquireThe Company acquires raw materials, component parts and certain finished products from external suppliers, both U.S. and foreign. Many of these suppliers are dependent upon other suppliers in countries other than where they are located. This global interdependence within ourthe Company’s supply chain is subject to delays in delivery, availability, quality, and pricing (including tariffs) of products.pricing. Changes in international trade policies including tariffs could disrupt the supply chain, increase cost and reduce competitiveness. The delivery of goods from these suppliers may be delayed by customs, labor issues, changes in political, economic and social conditions, weather, laws and regulations. Unfavorable fluctuations in price, international trade policies, quality, delivery and availability of these products could negativelyadversely affect ourthe Company’s ability to meet demands of our customers and have acause negative impact on product margin.impacts to the Company’s cost structure, profitability and its cash flow.
Effective September 24, 2018, the current U.S. administration imposed a 10% tariff on goods imported into the United States from China, including all furniture and furniture components manufactured in China. Effective May 10, 2019, the tariff was increased to 25% on furniture imported on or after June 1, 2019. As trade negotiations between the United States and China continue, it is unclear as to whether or not the U.S. administration will take further tariff action or perhaps grant relief to actions already put in place. In fiscal 2019, approximately 42% of the Company’s sales were imported from China. Inability to reduce acquisition costs or pass through price increases may have an adverse impact on sales volume, earnings and liquidity. Similarly, increases in pricing may have an adverse impact on the competitiveness of the Company’s products relative to other furniture manufacturers with less exposure to the tariff and could also lead to adverse impacts on volume, earnings and liquidity.
Competition from U.S. and foreign finished product manufacturers may adversely affect ourthe business, operating results or financial condition.
The furniture industry is very competitive and fragmented. We competeThe Company competes with U.S. and foreign manufacturers and distributors. As a result, wethe Company may not be able to maintain or raise the prices of ourits products in response to competitive pressures or increasing costs. Also, due to the large number of competitors and their wide range of product offerings, wethe Company may not be able to significantly differentiate ourits products (through styling, finish and other construction techniques) from those of ourits competitors. As a result, we arethe Company is continually subject to the risk of losing market share, which may lower ourits sales and earnings.
Future costs of complying with various laws and regulations may adversely impact future operating results.
OurThe Company’s business is subject to various laws and regulations which could have a significant impact on our operations and the cost to comply with such laws and regulations could adversely impact ourthe Company’s financial position, results of operations and cash flows.
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In addition, failureinadvertently failing to comply with such laws and regulations even inadvertently, could produce negative consequences which could adversely impact ourthe Company’s operations.
Due to ourThe Company’s participation in multi-employer pension plans we may have exposures under those plans that could extend beyond what ourits obligations would be with respect to ourits employees.
We participateThe Company participates in, and makemakes periodic contributions to, three multi-employer pension plans that cover union employees. Multi-employer pension plans are managed by trustee boards comprised of participating employer and labor union representatives, and the employers participating in a multi-employer pension plan are jointly responsible for maintaining the plan’s funding requirements. Based on the most recent information available to us, we believe thatthe Company, the present value of actuarially accrued liabilities in one of the multi-employer pension plans substantially exceeds the value of the assets held in trust to pay benefits. As a result of ourthe Company’s participation, weit could experience greater volatility in ourthe overall pension funding obligations. OurThe Company’s obligations may be impacted by the funded status of the plans, the plans’ investment performance, changes in the participant demographics, financial stability of contributing employers and changes in actuarial assumptions. See Note 10 to the consolidated financial statements.
Our futureFuture results may be affected by various legal proceedings and compliance risk, including those involving product liability, environmental, or other matters.
We faceThe Company faces the business risk of exposure to product liability claims in the event that the use of any of ourits products results in personal injury or property damage. In the event any of ourthe Company’s products prove to be defective, weit may be required to recall or redesign such products. We areThe Company is also subject to various laws and regulations relating to environmental protection and the discharge of materials into the environment. WeThe Company could incur substantial costs, including legal expenses, as a result of the noncompliance with, or liability for cleanup or other costs or damages under, environmental laws. Given the inherent uncertainty of litigation, these various legal proceedings and compliance matters could have a material impact on ourthe business, operating results orand financial condition. See Note 12 to the consolidated financial statements.
OurThe Company’s success depends on ourits ability to recruit and retain key employees.employees and highly skilled workers in a competitive labor market.
If we arethe Company is not successful in recruiting and retaining key employees and highly skilled workers or experienceexperiences the unexpected loss of keythose employees, ourthe operations may be negatively impacted.
Our failureFailure to anticipate or respond to changes in consumer or designer tastes and fashions in a timely manner could adversely affect ourthe Company’s business and decrease our sales and earnings.
Furniture is a styled product and is subject to rapidly changing consumer and end-user trends and tastes and is highly fashion oriented, and if we areoriented. If the Company is not able to acquire sufficient fabric variety or if we arethe Company is unable to predict or respond to changes in fashion trends, weit may lose sales and have to sell excess inventory at reduced prices.
OurThe Company’s products are considered deferrable purchases for consumers during economic downturns. Prolonged negative economic conditions could impact ourthe business.
Economic downturns and prolonged negative economic conditions could affect consumer spending habits by decreasing the overall demand for home furnishings and commercialcontract products. These events could impact retailers, offices, hospitality, recreational vehicle seating and healthcare businesses resulting in an impact on ourthe Company’s business. A recovery in ourthe Company’s sales could lag significantly behind a general economic recovery due to the deferrable nature and relatively significant cost of home furnishings and commercialcontract products purchases.
Terms of collective bargaining agreements and labor disruptions could adversely impact our results of operations.
Terms of collective bargaining agreements that prevent usthe Company from competing effectively could adversely affect ourits financial condition, results of operations and cash flows. We areThe Company is committed to working with those groups to avert or resolve conflicts as they arise. However, there can be no assurance that these efforts will be successful.
Our operations may be impacted by various business interruptions.
Uncharacteristic or significant weather conditions, natural disasters, political or civil unrest in the countries in which we operate and source products from can cause property damage or interrupt our business operations. These events can lead to damaged property, lost sales or lost customers and could adversely affect our short-term results of operations.
If we are unable to obtain bank credit or generate cash flow from our operations, our financial position, liquidity and results of operations could suffer.
We are dependent on a stable, liquid and well-functioning financial system to fund our operations and capital investments. Our continued access to these markets depends on multiple factors including the condition of capital markets, our operating performance and maintaining a strong balance sheet. If we lose our ability to generate cash flow from operations or our availability to borrow with our financial institutions to meet capital and operational needs, our liquidity and results of operations could suffer.
Item 1B. Unresolved Staff Comments
None.
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| Item 2. | Properties |
The Company owns the following facilities as of June 30, 2016:2019:
Approximate | ||||
Location | Size (square feet) | Principal Operations | ||
Harrison, Arkansas | 221,000 | Manufacturing | ||
Riverside, California | 236,000 | Held for Sale | ||
Dublin, Georgia | 315,000 | Manufacturing | ||
Huntingburg, Indiana | 611,000 | Distribution | ||
Dubuque, Iowa (1) | 719,000 | Manufacturing (Vacated) | ||
Dubuque, Iowa (2) | 250,000 | Manufacturing | ||
Dubuque, Iowa | 40,000 | Corporate Office | ||
Edgerton, Kansas | 500,000 | Distribution | ||
Starkville, Mississippi | 349,000 | Manufacturing | ||
Lancaster, Pennsylvania | 216,000 | Distribution |
(1) | The Dubuque, Iowa manufacturing facility has been vacated as of October 2018. Previously, the Company planned to donate this property to a non-profit along with approximately $2.6 million in cash. Upon further analysis, donating the property and cash is no longer in the Company’s best interest. Therefore, the Company has initiated steps with the non-profit, the City of Dubuque, County of Dubuque and the State of Iowa to terminate the redevelopment agreement and subsequent donations associated with this property. |
(2) | The Company completed its construction of the new Dubuque manufacturing facility and relocated existing production capability during the fiscal second quarter. The relocation was completed late in the fiscal second quarter and became fully operational in the fiscal third quarter of 2019. |
The Company leases the following facilities as of June 30, 2016:2019:
Approximate | ||||
Location | Size (square feet) | Principal Operations | ||
Riverside, California | 211,000 | Distribution | ||
Louisville, Kentucky | 10,000 | Administrative Offices | ||
Juarez, Mexico | 225,000 | Manufacturing | ||
Binh Duong, Vietnam | 51,000 | Warehouse |
The Company’s operating plants are well suited for their manufacturing purposes and have been updated and expanded from time to time as conditions warrant.
The Company leases showrooms for displaying its products in the furniture markets in High Point, North Carolina and Las Vegas, Nevada.
As part of the Company’s network optimization and restructuring activity, it announced the closure of its Riverside, CA and Harrison, AR manufacturing operations and the downsizing of its Huntingburg, IN distribution facilities and continues to look at opportunities for further consolidation based on facility performance and capability.
| Item 3. | Legal Proceedings |
Indiana Civil LitigationEnvironmental Matters – In December 2013, the Company entered into a confidential agreement to settle the Indiana Civil Litigation. The Company paid $6.25 million to Plaintiffs to settle the matter without admission of wrongdoing. The Company received $2.3 million and $0.3 million during the fiscal years ended June 30, 2016 and 2015, respectively, for recovery of litigation settlement costs from insurers. The Company continues to believe that it did not cause or contribute to the contamination. These amounts are recorded as “litigation settlement reimbursements (costs)” in the consolidated statements of income.
The Company continues to pursue the recovery of defense and settlement costs from insurance carriers. Based on policy language and jurisdiction, insurance coverage is in question. The Iowa District Court dismissed litigation filed by the Company’s insurance carriers in Iowa after the Iowa Court of Appeals found that Indiana law applied to the insurance policies in question and the Iowa Supreme Court denied further review. The dismissal was then appealed by the insurance carriers to the Iowa Supreme Court, which referred the appeal to the Iowa Court of Appeals. On August 17, 2016, the Iowa Court of Appeals affirmed the Iowa District Court dismissal. The insurance carriers may appeal to the Iowa Supreme Court. Coverage litigation is proceeding against the insurance carriers in Indiana.
Other Proceedings –In March 2016, the Company received a General Notice Letter for the Lane Street Groundwater Superfund Site (the “Lane Street Site”) located in Elkhart, Indiana from the United StatesU.S. Environmental Protection Agency (EPA). The EPA has determined that the Company may be responsible under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). In April 2016, the EPA issued their proposed clean-up plan for groundwater pollution and request for public comment. The Company providedresponded to the request for public comment to the proposed plan in May 2016. AsThe EPA issued a Record Decision selecting a remedy in August 2016 and estimated total costs to remediate of $3.6 million. In July 2017, the EPA issued a Special Notice Letter to the Company demanding that the Company perform the remedy selected and pay for the remediation cost and past response costs of $5.5 million. On October 12, 2017, the Company, after consultation with its insurance carriers, offered an amount, fully reimbursable by insurance coverage, to the EPA to resolve this matter. On November 6, 2017, the settlement offer extended on October 12, 2017 was rejected.
In April 2018, the EPA issued a Unilateral Administrative Order for Remedial Design and Remedial Action (the “Order”) against the Company. The Order was issued under Section 106(a) of the Comprehensive Environmental Response, Compensation and Liability
7
Act (CERCLA), 42 U.S.C. §9606(a). The Order directs the Company to perform remedial design and remedial action for the Lane Street Site. The Order was to be effective May 29, 2018. To ensure completion of the remediation work, the EPA required the Company to secure financial assurance in the initial amount of $3.6 million, which as noted above, is the estimated cost of remedial work. The Company believes that financial assurance is not required because it meets the relevant financial test criteria as provided in the Order. In May 2018, the EPA agreed to suspend enforcement of the Order so that the Company could conduct environmental testing upgradient to its former manufacturing location pursuant to an Administrative Order on Consent (AOC). On July 5, 2018, the EPA proposed a draft AOC, to which the Company provided revisions. During the latter part of 2018, Flexsteel submitted to the EPA its proposed work plan for the upgradient testing to be conducted pursuant to the draft AOC. The EPA provided comments on that documentation on December 4, 2018. On January 23, 2019, Flexsteel submitted responses to the EPA’s comments and revised work plan documents. On April 24, 2019, the Company signed the finalized AOC with the EPA to conduct the upgradient investigation. The Company reflected a $3.6 million liability in the consolidated financial results for the fiscal year ended June 30, 2016, no2018. Despite the Company’s position that it did not cause nor contribute to the contamination, the Company continues to reflect this as a current liability was recorded in the Consolidated Balance Sheets because itconsolidated financials for the fiscal year ended June 30, 2019 in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 410-30 Asset Retirement and Environmental Obligations. The Company continues to evaluate the Order, its legal options and insurance coverages to assert its defense and recovery of current and future expenses related to this matter.
Employment Matters – The lawsuit entitled Juan Hernandez, et al. v. Flexsteel Industries, Inc. (“Hernandez I”), was filed on February 21, 2019 in the Superior Court for the County of Riverside by former employees Juan Hernandez and Richard Diaz (together, “Plaintiffs”). Flexsteel removed the action to the United States District Court for the Central District of California on March 25, 2019. Through their attorneys, Plaintiffs allege a series of wage-and-hour claims for: (1) failure to pay minimum wages; (2) failure to pay overtime; (3) failure to provide meal periods; (4) failure to authorize and permit rest periods; (5) failure to provide accurate wage statements; (6) failure to timely pay final wages; (7) failure to reimburse for all business expenses; and (8) unfair competition. Plaintiffs seek to bring these eight causes of action on behalf of a proposed class of all current and former employees who held a non-exempt, hourly position in California since March 25, 2015.
On April 29, 2019, Plaintiffs filed a second similarly titled lawsuit in the Superior Court for the County of Riverside (“Hernandez II”). Hernandez II is not possiblebrought by the same attorneys as Hernandez I and features a single cause of action for civil penalties under the Private Attorneys General Act (“PAGA”). Plaintiffs seek to reasonably estimatebring the amount, if any,PAGA cause of remediation cost due toaction on behalf of a proposed group of all current and former employees who held a non-exempt, hourly position in California since February 21, 2018.
The Hernandez I case is still in the early stages, with the parties agreeing to defer most activities, including the exchange of determininginitial rounds of written discovery, in an effort to explore a potential early resolution of this matter. Hernandez II was only recently filed, and Flexsteel has not yet filed its responsive pleading.
In connection with the extentclosure of environmental impact, allocationits manufacturing facility in Riverside, California, Flexsteel obtained individual releases of claims from approximately 53 persons who would otherwise be part of the class.
Flexsteel agreed with Plaintiffs to engage in a full-day mediation with a third-party mediator on August 14, 2019. Those mediation efforts were ultimately successful, with Flexsteel agreeing to resolve both Hernandez I and Hernandez II in principle and on a class-wide basis for $0.5 million. That settlement will serve to resolve the claims of the two Plaintiffs, as well as the approximately 270 remaining members of the class unless an individual class member asks to be excluded.
At present, the material terms of the settlement are captured in a Memorandum of Agreement, which will be supplemented in the next 30-to-90 days with a long-form Stipulation of Settlement. Flexsteel anticipates that obtaining final approval of the parties’ settlement from the court will take at least six months and potentially longer, such that any settlement payments will not be made until calendar year 2020. The settlement amount of $0.5 million, has been accrued during the fiscal year ended June 30, 2019.
Other Proceedings – From time to time, the Company is subject to various other legal proceedings, including lawsuits, which arise out of, and are incidental to, the potentially responsible parties and remediation alternatives.conduct of the Company’s business. The Company does not consider any of such other proceedings that are currently pending, individually or in the aggregate, to be material to its business or likely to result in a material effect on its consolidated operating results, financial condition, or cash flows.
| Item 4. | Mine Safety Disclosures |
None.
8
PART II
| Item 5. | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Share Investment Performance
The following graph shows changes over the past five-year period in the value of $100 invested in: (1) Flexsteel’s common stock (FLXS); (2) The NASDAQ Global Market; (3) a new industry peer group of the following: American Woodmark Corp, Bassett Furniture Ind., Culp Inc., Dixie Group Inc., Ethan Allen Interiors Inc., HNI Corp., Hooker Furniture Corp., Johnson Outdoors Inc., Kimball International, Knoll Inc., La-Z-Boy Inc., Lifetime Brands Inc., Lovesac Co., Patrick Industries Inc., Sleep Number Corp., and (3)Trex Company, Inc. and (4) an old industry peer group of the following: American Woodmark Corp, Bassett Furniture Ind., Culp Inc., Dixie Group Inc., Ethan Allen Interiors Inc., Hooker Furniture Corp., Johnson Outdoors Inc., Kimball International, Knoll Inc., La-Z-Boy Inc., Lifetime Brands Inc., Patrick Industries Inc., and Select Comfort Corp. During the fiscal year ended June 30, 2016, the Company completed a compensation study utilizing the peer group above. The Company chose to utilize the new peer group for the share investment performance graph. The only change in peer group is Culp Inc. was chosen as a more relevant peer company replacing iRobotSleep Number Corp.
| 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | ||||||||
| Flexsteel | 100.00 | 139.05 | 176.19 | 245.94 | 324.44 | 303.87 | |||||||
| Peer Group | 100.00 | 106.33 | 147.78 | 162.27 | 212.83 | 216.17 | |||||||
| NASDAQ | 100.00 | 96.93 | 126.16 | 169.50 | 196.46 | 141.68 |
| 2014 |
| 2015 |
| 2016 |
| 2017 |
| 2018 |
| 2019 |
Flexsteel | 100.00 |
| 131.92 |
| 123.56 |
| 171.33 |
| 129.00 |
| 57.30 |
NASDAQ | 100.00 |
| 115.91 |
| 83.59 |
| 107.15 |
| 139.74 |
| 148.14 |
New Peer Group | 100.00 |
| 135.51 |
| 133.77 |
| 166.14 |
| 181.27 |
| 181.87 |
Old Peer Group | 100.00 |
| 131.15 |
| 133.21 |
| 171.71 |
| 167.00 |
| 157.61 |
The Company’s common stock is traded on the NASDAQ Global Select Market isunder the market on which the Company’s common stock is traded.trading symbol FLXS.
| Sale Price of Common Stock | Cash Dividends | |||||||||||||||||||||||
| Fiscal 2016 | Fiscal 2015 | Per Share | ||||||||||||||||||||||
| High | Low | High | Low | Fiscal 2016 | Fiscal 2015 | |||||||||||||||||||
| First Quarter | $ | 44.95 | $ | 27.25 | $ | 38.43 | $ | 30.25 | $ | 0.18 | $ | 0.18 | ||||||||||||
| Second Quarter | 48.67 | 30.31 | 36.71 | 28.99 | 0.18 | 0.18 | ||||||||||||||||||
| Third Quarter | 45.79 | 37.98 | 33.79 | 28.56 | 0.18 | 0.18 | ||||||||||||||||||
| Fourth Quarter | 45.29 | 36.06 | 46.11 | 30.51 | 0.18 | 0.18 | ||||||||||||||||||
The Company estimates there were approximately 4,8004,600 holders of common stock of the Company as of June 30, 2016.2019. There were no repurchases of the Company’s common stock during the quarterfiscal year ended June 30, 2016.2019. The payment of future cash dividends is within the discretion of ourthe Company’s Board of Directors and will depend, among other factors, on ourits earnings, capital requirements and operating and financial condition.
Sales of Unregistered Securities
On December 28, 2018, the Company granted a stock option to its new President and Chief Executive Officer to purchase 55,000 shares of its common stock at an exercise price of $21.96 per share. This option was an inducement grant made outside of the Omnibus Stock Plan in accordance with Nasdaq Listing Rule 5635(c)(4) and Section 4(a)(2) of the Securities Act of 1933, as
9
amended. The option has a ten-year term and vests one third on each of July 1, 2019, July 1, 2020 and July 1, 2021. Vesting of the option is subject to such employee’s continued service with the Company through the applicable vesting dates. The Company intends to file a registration statement on a Form S-8 to register the shares of common stock underlying this option.
| Item 6. | Selected Financial Data |
The selected financial data presented below should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in Item 8 of this Annual Report on Form 10-K and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of this Annual Report on Form 10-K. The selected consolidated statements of income data of the Company isare derived from the Company’s consolidated financial statements.
Five-Year Review
| (Amounts in thousands, except certain ratios and per share data) | ||||||||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
| SUMMARY OF OPERATIONS | ||||||||||||||||||||
| Net sales | $ | 500,106 | $ | 466,904 | $ | 438,543 | $ | 386,189 | $ | 352,089 | ||||||||||
| Gross margin | 113,699 | 109,860 | 100,263 | 90,469 | 85,279 | |||||||||||||||
| Operating income | 38,068 | 34,422 | 22,286 | 20,271 | 20,246 | |||||||||||||||
| Income before income taxes | 37,927 | 35,559 | 23,800 | 20,881 | 20,668 | |||||||||||||||
| Income tax provision | 13,690 | 13,260 | 8,810 | 7,730 | 7,600 | |||||||||||||||
| Net income | 24,237 | 22,299 | 14,990 | 13,151 | 13,068 | |||||||||||||||
| Net income, as a percent of sales | 4.8 | % | 4.8 | % | 3.4 | % | 3.4 | % | 3.7 | % | ||||||||||
| Weighted average diluted shares outstanding | 7,765 | 7,708 | 7,511 | 7,326 | 7,008 | |||||||||||||||
| Diluted earnings per common share | $ | 3.12 | $ | 2.89 | $ | 2.00 | $ | 1.80 | $ | 1.86 | ||||||||||
| Cash dividends declared per common share | $ | 0.72 | $ | 0.72 | $ | 0.60 | $ | 0.60 | $ | 0.45 | ||||||||||
| SELECTED DATA AS OF JUNE 30 | ||||||||||||||||||||
| Total assets | $ | 246,896 | $ | 244,619 | $ | 210,213 | $ | 192,539 | $ | 181,672 | ||||||||||
| Shareholders’ equity | 209,650 | 186,748 | 166,735 | 151,237 | 139,442 | |||||||||||||||
| Trade receivables, net | 44,618 | 45,101 | 38,536 | 36,075 | 33,601 | |||||||||||||||
| Inventories | 85,904 | 113,842 | 97,940 | 92,417 | 82,689 | |||||||||||||||
| Property, plant and equipment, net | 64,124 | 64,770 | 31,900 | 32,145 | 29,867 | |||||||||||||||
| Capital expenditures | 7,382 | 37,424 | 4,187 | 6,225 | 10,939 | |||||||||||||||
| Depreciation expense | 7,556 | 4,945 | 4,197 | 3,803 | 2,835 | |||||||||||||||
| Working capital (current assets less current liabilities) | 143,086 | 115,682 | 128,644 | 113,699 | 103,744 | |||||||||||||||
| Current ratio | 5.3 to 1 | 3.3 to 1 | 4.5 to 1 | 4.2 to 1 | 4.3 to 1 | |||||||||||||||
| Return on ending shareholders’ equity | 11.6 | % | 11.9 | % | 9.0 | % | 8.7 | % | 9.4 | % | ||||||||||
| Average number of employees | 1,440 | 1,340 | 1,380 | 1,320 | 1,280 | |||||||||||||||
(Amounts in thousands, except certain ratios and per share data)
|
| 2019 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
| ||||||
SUMMARY OF OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net sales |
| $ | 443,588 |
|
| $ | 489,180 |
|
| $ | 468,764 |
|
| $ | 500,106 |
|
| $ | 466,904 |
| |
Gross margin |
|
| 69,940 |
|
|
| 98,219 |
|
|
| 108,651 |
|
|
| 113,699 |
|
|
| 109,860 |
| |
Environmental remediation |
|
| – |
|
|
| (3,600 | ) |
|
| – |
|
|
| – |
|
|
| – |
| |
ERP impairment |
|
| (21,273 | ) |
|
| – |
|
|
| – |
|
|
| – |
|
|
| – |
| |
Restructuring expense |
|
| (10,048 | ) |
|
| – |
|
|
| – |
|
|
| – |
|
|
| – |
| |
Litigation settlement reimbursements (costs) |
|
| (475 | ) |
|
| – |
|
|
| 1,175 |
|
|
| 2,280 |
|
|
| 250 |
| |
Operating income (loss) |
|
| (43,154 | ) |
|
| 24,505 |
|
|
| 37,264 |
|
|
| 38,068 |
|
|
| 34,422 |
| |
Income (loss) before income taxes |
|
| (42,608 | ) |
|
| 25,126 |
|
|
| 37,586 |
|
|
| 37,927 |
|
|
| 35,559 |
| |
Income tax (benefit) provision |
|
| (10,003 | ) |
|
| 7,460 |
|
|
| 13,800 |
|
|
| 13,690 |
|
|
| 13,260 |
| |
Net income (loss) |
|
| (32,605 | ) |
|
| 17,666 |
|
|
| 23,786 |
|
|
| 24,237 |
|
|
| 22,299 |
| |
Net income (loss), as a percent of sales |
|
| (7.4% | ) |
|
| 3.6 | % |
|
| 5.1 | % |
|
| 4.8 | % |
|
| 4.8 | % | |
Weighted average diluted shares outstanding |
|
| 7,889 |
|
|
| 7,919 |
|
|
| 7,886 |
|
|
| 7,765 |
|
|
| 7,708 |
| |
Diluted earnings per common share |
| $ | (4.13 | ) |
| $ | 2.23 |
|
| $ | 3.02 |
|
| $ | 3.12 |
|
| $ | 2.89 |
| |
Cash dividends declared per common share |
| $ | 0.88 |
|
| $ | 0.88 |
|
| $ | 0.80 |
|
| $ | 0.72 |
|
| $ | 0.72 |
| |
| |||||||||||||||||||||
SELECTED DATA AS OF JUNE 30 | |||||||||||||||||||||
Total assets |
| $ | 254,287 |
|
| $ | 284,293 |
|
| $ | 270,045 |
|
| $ | 246,896 |
|
| $ | 244,619 |
| |
Shareholders’ equity |
|
| 205,427 |
|
|
| 241,698 |
|
|
| 230,760 |
|
|
| 209,650 |
|
|
| 186,748 |
| |
Trade receivables, net |
|
| 38,157 |
|
|
| 41,253 |
|
|
| 42,362 |
|
|
| 44,618 |
|
|
| 45,101 |
| |
Inventories |
|
| 93,659 |
|
|
| 96,204 |
|
|
| 99,397 |
|
|
| 85,904 |
|
|
| 113,842 |
| |
Property, plant and equipment, net |
|
| 79,238 |
|
|
| 90,725 |
|
|
| 70,661 |
|
|
| 64,124 |
|
|
| 64,770 |
| |
Capital expenditures |
|
| 21,346 |
|
|
| 29,447 |
|
|
| 13,457 |
|
|
| 7,382 |
|
|
| 37,424 |
| |
Depreciation expense |
|
| 7,440 |
|
|
| 7,367 |
|
|
| 7,936 |
|
|
| 7,556 |
|
|
| 4,945 |
| |
Working capital (current assets less current liabilities) |
|
| 118,203 |
|
|
| 148,705 |
|
|
| 158,055 |
|
|
| 143,086 |
|
|
| 115,682 |
| |
Current ratio |
|
| 3.5 to 1 |
|
|
| 4.6 to 1 |
|
|
| 5.2 to 1 |
|
|
| 5.3 to 1 |
|
|
| 3.3 to 1 |
| |
Return on ending shareholders’ equity |
|
| (15.9% | ) |
|
| 7.3 | % |
|
| 10.3 | % |
|
| 11.6 | % |
|
| 11.9 | % | |
Average number of employees |
|
| 1,450 |
|
|
| 1,510 |
|
|
| 1,440 |
|
|
| 1,440 |
|
|
| 1,340 |
| |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
General
The following analysis of the results of operations and financial condition of the Company should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
Critical Accounting Policies
The discussion and analysis of the Company’s consolidated financial statements and results of operations are based on consolidated financial statements prepared in accordance with generally accepted accounting principles generally accepted(GAAP) in the United States of America. Preparation of these consolidated financial statements requires the use of estimates and judgments that affect the reported results. The Company uses estimates based on the best information available in recording transactions and balances resulting from business operations. Estimates are used for such items as collectability of trade accounts receivable and inventory valuation. Ultimate results may differ from these estimates under different assumptions or conditions.
10
Accounts receivable allowancesReceivable Allowances – the Company establishes accounts receivable allowances to reduce trade accounts receivable to an amount that reasonably approximates their net realizable value. The Company’s accounts receivable allowances consist of an allowance for doubtful accounts which is established through review of open accounts, historical collection, and historical write-off amounts and an allowance for estimated returns on sales of the Company’s products which is based on historical product returns, as well as existing product return authorizations. The Company records a provision against revenue for estimated returns on sales of ourits products in the same period that the related revenues are recognized. The amount ultimately realized from trade accounts receivable may differ from the amount estimated in the consolidated financial statements.
Inventories– the Company values inventory at the lower of cost or net realizable value. The Company’s inventory valuation reflects markdowns for the excess of the cost over the amount expected to be realized and considers obsolete and excess inventory. Markdowns establish a new cost basis for the Company’s inventory. Subsequent changes in facts or circumstances do not result in the reversal of previously recorded markdowns or an increase in that newly established cost basis.
Revenue recognitionValuation of Long–Lived Assets – the Company periodically reviews the carrying value of long-lived assets and estimated depreciable or amortizable lives for continued appropriateness. This review is when bothbased upon projections of anticipated future cash flows and is performed whenever events or changes in circumstances indicate that asset carrying values may not be recoverable or that the estimated depreciable or amortizable lives may have changed.
Flexsteel Industries Inc. began the implementation process to convert its operating and accounting systems to SAP during fiscal 2016. Flexsteel incurred various software, consulting and internal salaries costs that were capitalized. In fourth quarter of fiscal 2018, Flexsteel placed into service 20% of the capitalized costs related to SAP and began to depreciate those assets over useful lives of 36 months for software costs and 60 months for consulting and internal salary implementation costs. The 20% represented the two product ownershiplines that went live with the system in the fourth quarter of fiscal 2018: Home Styles and Commercial Office. After significant disruption during the initial implementation phase, and a subsequent analysis of root cause and corrective action activities, the Company stopped further implementation across the network and focused on stabilization of the new ERP system environment. Concurrently, the Company completed a thorough evaluation of the work completed to date, its usefulness in the context of future deployments and the riskpotential for revised project scope. Through this analysis the Company developed a plan for the future implementation of loss have transferredSAP. This plan, which focuses on simplifying our processes and use of the system, allowed more specific analysis regarding the usability of items contained in our construction in progress. As a result of this analysis, the Company recorded an impairment charge against capitalized costs of $21.3 million ($18.7 million in the quarter ended March 31, 2019, and $2.6 million in the quarter ended June 30, 2019).
No impairments of long-lived assets or changes in depreciable or amortizable lives were incurred during fiscal years 2018 and 2017.
Restructuring Costs – The Company groups exit or disposal cost obligations into three categories: Involuntary employee termination benefits, costs to terminate contracts, and other associated costs. Involuntary employee termination benefits must be a one-time benefit, and this element of restructuring cost is recognized as incurred upon communication of the plan to the customer, collectability is reasonably assured, andidentified employees. Costs to terminate contracts as a result of restructuring activities are recognized upon termination agreement with the Company has no remaining obligations. The Company’s ordering process creates persuasive evidence of the sale arrangement and the sales price is determined. The delivery of the goods to the customer completes the earnings process. Net sales consist of product sales and related delivery charge revenue, net of adjustments for returns and allowances. Shipping and handlingprovider. Other associated restructuring costs are included inexpensed as incurred. Any inventory impairment costs as a result of restructuring activities are accounted for as cost of goods sold.
Recently Issued Accounting Pronouncements
See Item 8. Note 1 to the Company’s consolidated financial statements.
Results of Operations
The following table has been prepared as an aid in understanding the Company’s results of operations on a comparative basis for the fiscal years ended June 30, 2016, 20152019, 2018 and 2014.2017. Amounts presented are percentages of the Company’s net sales.
| FOR THE YEARS ENDED JUNE 30, |
| FOR THE YEARS ENDED JUNE 30, |
| |||||||||||||||||||||
| 2016 | 2015 | 2014 |
| 2019 |
|
| 2018 |
|
| 2017 |
| |||||||||||||
| Net sales | 100.0 | % | 100.0 | % | 100.0 | % |
|
| 100 | % |
|
| 100 | % |
|
| 100.0 | % | ||||||
| Cost of goods sold | (77.3 | ) | (76.5 | ) | (77.1 | ) |
|
| (84.2 | ) |
|
| (79.9 | ) |
|
| (76.8 | ) | ||||||
| Gross margin | 22.7 | 23.5 | 22.9 |
|
| 15.8 |
|
|
| 20.1 |
|
|
| 23.2 |
| |||||||||
| Selling, general and administrative | (15.6 | ) | (16.2 | ) | (16.4 | ) |
|
| (18.3 | ) |
|
| (14.7 | ) |
|
| (15.5 | ) | ||||||
| Litigation settlement reimbursements (costs) | 0.4 | 0.1 | (1.4 | ) | ||||||||||||||||||||
| Operating income | 7.5 | 7.4 | 5.1 | |||||||||||||||||||||
Environmental remediation |
|
| – |
|
|
| (0.8 | ) |
|
| – |
| ||||||||||||
ERP impairment |
|
| (4.8 | ) |
|
| – |
|
|
| – |
| ||||||||||||
Restructuring expense |
|
| (2.3 | ) |
|
| – |
|
|
| – |
| ||||||||||||
Gain on sale of facility |
|
| – |
|
|
| 0.4 |
|
|
| – |
| ||||||||||||
Litigation settlement (costs) reimbursements |
|
| (0.1 | ) |
|
| – |
|
|
| 0.2 |
| ||||||||||||
Operating income (loss) |
|
| (9.7 | ) |
|
| 5.0 |
|
|
| 7.9 |
| ||||||||||||
| Interest and other income | 0.0 | 0.2 | 0.3 |
|
| 0.1 |
|
|
| 0.1 |
|
|
| 0.1 |
| |||||||||
| Interest expense | 0.0 | 0.0 | — |
|
| – |
|
|
| – |
|
|
| – |
| |||||||||
| Income before income taxes | 7.5 | 7.6 | 5.4 | |||||||||||||||||||||
| Income tax provision | (2.7 | ) | (2.8 | ) | (2.0 | ) | ||||||||||||||||||
| Net income | 4.8 | % | 4.8 | % | 3.4 | % | ||||||||||||||||||
Income (loss) before income taxes |
|
| (9.6 | ) |
|
| 5.1 |
|
|
| 8.0 |
| ||||||||||||
Income tax benefit (provision) |
|
| 2.2 |
|
|
| (1.5 | ) |
|
| (2.9 | ) | ||||||||||||
Net income (loss) |
|
| (7.4% | ) |
|
| 3.6 | % |
|
| 5.1 | % | ||||||||||||
11
Fiscal 20162019 Compared to Fiscal 20152018
Net sales for fiscal year 20162019 were $500.1$443.6 million compared to $466.9$489.2 million in the prior fiscal year, an increasea decrease of 7.1%9.3%. For the fiscal year ended June 30, 2016,2019, residential net sales were $420.9$374.5 million compared to $393.1$413.7 million for the year ended June 30, 2015,2018, a decrease of 9.5%. The implementation of the tariff on furniture imported from China at 10% followed by an increase to 25% drove approximately 45% of 7.1%. Thethe overall contraction in residential net sales. An additional 38% of decline in residential net sales increasewas driven by lost share on products sold through our ecommerce channel due to the significant disruption caused by the implementation of $27.8the ERP system in the beginning of fourth quarter of fiscal 2018. Over the past fiscal year, the Company continued work stabilizing the ERP system, improving service levels, inventory positions and promotions to regain share positions through the end of the second quarter of fiscal 2019. In addition, the Company has brought in new leadership over the Company’s ecommerce strategy and execution as well as a new Chief Information Officer to drive the information technology backbone including the ERP solution to facilitate success in the channel. The remaining reduction in residential net sales versus the prior fiscal year was attributed to general market softness as well as two strong comparative quarters in fiscal 2018.
Contract net sales were $69.1 million for the year ended June 30, 2016 was substantially due to increased sales volume in upholstered and ready-to-assemble products partially offset by discounting2019, a decrease of certain case goods and lower delivery charges associated with lower fuel costs. Commercial8.5% from net sales were $79.2of $75.5 million for the year ended June 30, 2016, an increase2018. Reductions in Commercial office products followed by Hospitality products drove a majority of 7.3% from net sales of $73.8 million for the year ended June 30, 2015.over year decline. In May 2019, the Company announced the exit of the commercial office and custom designed hospitality product lines. The increasedeclines in commercial net salesthese product lines was substantially due to volume.partially offset by 14% year on year growth in our Vehicle Seating product line.
Gross margin for the fiscal year ended June 30, 20162019 was 22.7%15.8% compared to 23.5%20.1% for the prior fiscal year.year period, a decline of 430 basis points (bps). The Company’s investment in its expanded distribution network, designed to meet current and future customer needs while improving operations became operationalkey drivers in the fourth quartermargin deterioration were one-time in nature, such as charges related to inventory impairment due to restructuring activity of fiscal$7.7 million (170 bps), a valuation allowance on foreign VAT of $2.6 million (60 bps), and relocation costs of the Dubuque manufacturing facility of $1.0 million (20 bps).
The remaining deterioration to last year 2015. This investment increasedwas driven primarily by improved pricing (80 bps) offset by higher material and input costs by $2.5 million during fiscal year 2016 or 0.5% of net sales.(180 bps) and higher inventory valuation allowances for excess and obsolescence as volume declined (50 bps).
Selling, general and administrative (SG&A) expenses for the fiscal yeartwelve months ended June 30, 20162019 were 15.6%18.3% of net sales compared to 16.2%14.7% of net sales in the prior fiscal year.year period. The improvementincrease in SG&A as a percentage of net sales reflects fixed cost leverage onwas primarily driven by lower volume, higher sales volume.IT costs associated with the implementation and stabilization of the new ERP system of $3.8 million, DMI Pension termination of $2.5 million, CEO transition costs of $2.0 million, and higher marketing and advertising costs of $1.5 million.
The twelve months ended June 30, 2018 included $3.6 million related to the April 25, 2018 United States Environmental Protection Agency’s (“EPA”) issuance of a Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) 106(a) order (the “Order”) for the Lane Street Groundwater Superfund Site located in Elkhart, Indiana reported in “Environmental remediation”. The after-tax basis reported in “Environmental remediation” is $2.5 million or $0.32 per share. The Company incurred approximately $0.6completed a $6.5 million sale of legal costs related to Indiana litigationa facility and recognized a pre-tax gain of $1.8 million during fiscal year 2016 which has been recorded2018. The after-tax basis reported in SG&A expense.“Gain on sale of facility” is $1.3 million or $0.16 per share.
The twelve months ended June 30, 2019 included $21.3 million reported in “ERP impairment” related to the impairment of the abandoned components and development work associated with unusable elements of the business information system. The after-tax basis reported in “ERP Impairment” is $16.3 million or $2.06 per share. Reported under “Restructuring expense” were $10.0 million associated with the restructuring plan the Company first announced on May 15, 2019. The Company received reimbursementsis in the process of legal costsexecuting the restructuring plan. The after-tax basis reported in “Restructuring expense” were $7.7 million or $0.97 per share. Reported under “Litigation settlement (costs) reimbursements” were $0.5 million associated with an employment matter as described in Item 3. Legal Proceedings. The after-tax basis reported in “Legal settlement (costs) reimbursements” were $0.4 million or $0.05 per share.
For the twelve months ended June 30, 2019, the effective tax rate was 23.5% compared to 29.7% in the prior year period. The current year results were favorably impacted by a full fiscal year impact of approximately $0.8the 2018 Tax Cuts and Jobs Act in addition to net operating losses within the fiscal year ended June 30, 2019.
The above factors resulted in a net loss of ($32.6) million from insurers which has been reflected as a reduction of legal expenses in SG&A expensesor ($4.13) per share for fiscal year 2016. The2019 compared to a net income of $17.7 million or $2.23 per share in the prior year period.
12
Fiscal 2018 Compared to Fiscal 2017
Net sales for fiscal year 2018 were $489.2 million compared to $468.8 million in the prior fiscal year, an increase of 4.4%. For the fiscal year ended June 30, 2018, residential net sales were $413.7 million compared to $396.1 million for the year ended June 30, 2017, an increase of 4.4%. Contract net sales were $75.5 million for the year ended June 30, 2018, an increase of 3.9% from net sales of $72.7 million for the year ended June 30, 2017. These results included $0.6 milliona 13% decline in legal costs which was offsetHome Styles™ product sales to e-commerce customers primarily driven by reimbursementsproduct placement disruption due to the new business information system transition in the fourth quarter of $0.2 million from insurers.fiscal 2018.
Litigation settlement reimbursements related to Indiana litigation were $2.3 millionGross margin for the fiscal year ended June 30, 20162018 was 20.1% compared to $0.3 million23.2% for the prior year period. Higher labor costs primarily drove the gross margin decline for fiscal year 2018 over the prior year. After rapid growth in certain core product categories, additional manufacturing associates were hired to support product delivery speeds customers have come to expect from the Company. The Company manufactures a majority of custom upholstered furniture in the United States with a highly skilled workforce and experienced higher average wage rates and turnover from the tightening labor market. To bolster the Company’s success attracting and retaining skilled workers in the highly competitive labor market, during the second and third quarters of fiscal 2018 the Company changed its compensation approach for the U.S.-based manufacturing workforce. As this modified compensation structure was implemented, the Company experienced declines in productivity. Additionally, the Company experienced higher than expected cost originating from its Juarez, Mexico facility driven by government mandated wage increases for the contracted labor.
Higher material costs primarily driven by the increased cost of polyfoam, plywood and to a lesser extent steel drove additional gross margin decline in fiscal year 2018 over fiscal year 2017. The Company mitigated the impact of higher material costs through higher pricing and improved product mix in the fiscal 2018.
During implementation of the Company’s first deployment of its new business information system in the fourth quarter of fiscal 2018, the Company experienced higher than expected disruption to customers which resulted in service level penalties and contributed to the overall margin decline of the Company during the fiscal year 2018.
Selling, general and administrative (SG&A) expenses for the twelve months ended June 30, 2018 were 14.7% of net sales compared to 15.5% of net sales in the prior year period inclusive of the $4.4 million year-to-date correction of expense from SG&A to net sales. This adjustment favorably impacted SG&A in fiscal year 2018. Offsetting the favorable impact of the correction was a $1.1 million increase in expense to support a strategic digital marketing investment aimed at directly influencing consumers as they dream and plan on-line for future furniture purchases.
The twelve months ended June 30, 2017 included $2.1 million offset to expense related to the Indiana litigation, with $0.9 million or 0.2% of net sales reported in “Selling, general & administrative,” and $1.2 million or $0.10 per share reported in “Litigation settlement reimbursements.” On April 25, 2018, the United States Environmental Protection Agency (“EPA”) issued a Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) 106(a) order (the “Order”) for the Lane Street Groundwater Superfund Site located in Elkhart, Indiana. The Company maintains its position that it did not cause nor contribute to the contamination. However, in accordance with FASB issued Asset Retirement and Environmental Obligations (ASC 410-30), the Company reflected a $3.6 million liability in its year ended June 30, 2018 consolidated financial statements. The after-tax basis reported in “Environmental remediation” is $2.5 million or $0.32 per share.
The Company completed a $6.5 million sale of a facility and recognized a pre-tax gain of $1.8 million during fiscal year 2018. The after-tax basis reported in “Gain on sale of facility” is $1.3 million or $0.16 per share.
For the twelve months ended June 30, 2018, the effective tax rate was 36.1% and 37.3% for fiscal years ended June 30, 2016 and 2015, respectively. The rate decrease is primarily related29.7% compared to changes36.7% in the measurementprior year period. The current fiscal year results were positively impacted by the passage of uncertain tax positions based on recent experiences with various state tax authorities.the Tax Cuts and Jobs Act (“Tax Reform”) resulting in a $0.22 per share increase in net income.
The above factors resulted in net income of $24.2$17.7 million or $3.12$2.23 per share for the fiscal year ended June 30, 20162018 compared to $22.3$23.8 million or $2.89$3.02 per share in the prior year period. All earnings per share amounts are on a diluted basis.
Fiscal 2015 Compared to Fiscal 2014
Net sales for fiscal year 2015 were $466.9 million compared to $438.5 million in fiscal year 2014, an increase of 6.5%. For the fiscal year ended June 30, 2015, residential net sales were $393.1 million compared to $359.5 million for the year ended June 30, 2014, an increase of 9.3%. The residential net sales increase of $33.6 million for the year ended June 30, 2015 was substantially due to the increased sales volume of upholstered and ready-to-assemble products. Commercial net sales were $73.8 million for the year ended June 30, 2015, a decrease of 6.6% from net sales of $79.0 million for the year ended June 30, 2014. The commercial net sales decrease was substantially related to decreased sales volume.
Gross margin for the fiscal year ended June 30, 2015 was 23.5% compared to 22.9% for the prior fiscal year. The improvement in gross margin for the fiscal year is primarily driven by declining inventory write downs.
Selling, general and administrative (SG&A) expenses for the fiscal year ended June 30, 2015 were 16.2% of net sales compared to 16.4% in the prior fiscal year. The Company incurred approximately $0.6 million of legal defense costs during fiscal year 2015 which have been recorded in SG&A expense. The Company received reimbursements of legal defense costs of approximately $0.2 million from insurers which have been reflected as a reduction of legal expenses in SG&A expenses for fiscal year 2015. The prior fiscal year included $2.1 million in legal defense costs which were offset by reimbursements of $2.8 million from insurers.
The effective tax rate was 37.3% and 37.0% for fiscal years ended June 30, 2015 and 2014.
The fiscal year 2015 net income increased $7.3 million to $22.3 million. The number of diluted shares increased during fiscal year 2015 due to additional shares outstanding and the impact of more dilutive stock options at June 30, 2015 based on the Company’s higher stock trading price, resulting in the Company reporting diluted earnings per share of $2.89 for fiscal year 2015 versus $2.00 for fiscal year 2014. All earnings per share amounts are on a diluted basis.
Liquidity and Capital Resources
Working capital (current assets less current liabilities) at June 30, 20162019 was $143.1$118.2 million compared to $115.7$148.7 million at June 30, 2015.2018. Significant changes in working capital during fiscal year 20162019 included increasesa reduction in cashCash, Cash Equivalents, and Investments of $35.5$21.5 million primarily driven by large capital expenditures attributed to the completion of the new Dubuque manufacturing facility, restructuring activities and reduced profitability. Working capital was further reduced by declines in trade receivables of $3.1 million and inventory of $2.5 million driven by business contraction offset by higher acquisition costs including the levy of the tariff. Increases in trade payables, accrued and other current assetsliabilities of $2.4$6.9 million and decreases in inventories of $27.9 million, accounts payable of $7.3 million and current borrowings of $11.9 million.were primarily driven by restructuring activities. Other current
13
assets increased $3.5 million primarily due to changes in tax-related items. Inventory decreased primarily due to improved supply chain efficiency. Accounts payable decreased primarily due to timing of payments.income tax refunds receivable. For the fiscal year ended June 30, 2016,2019, capital expenditures were $7.4$21.3 million including $1.1$16.4 million for distribution network expansion and $2.2 million for delivery equipment. Dividend payments totaled $5.5 million.the construction of the Dubuque, Iowa manufacturing facility.
The Company’s main sources of liquidity are cash and cash equivalents, investments, cash flows from operations and credit arrangements. As of June 30, 20162019, and 2015,2018, the Company had cash and cash equivalents totaling $36.8$22.2 million and $1.3$27.7 million, respectively. The Company entered into aninvested $0.0 million and $16.0 million in short-term investments as of June 30, 2019 and 2018, respectively. These investments consist of Treasury bills and U.S. Agencies with maturity dates within six months of purchase date. The Company renewed its unsecured credit agreement on June 30, 2016, that2019. This agreement provides short-term working capital financing up to $10.0 million with interest of LIBOR plus 1%, including up to $4.0 million of letters of credit. The Company reduced the borrowing availability from $30.0 million to $10.0 million to align with current business needs. Letters of credit outstanding at June 30, 20162019 totaled $2.3$1.3 million. Other than the aforementionedoutstanding letters of credit, the Company did not utilize borrowing availability under the credit facility, leaving borrowing availability of $7.7$8.7 million as of June 30, 2016.2019. The credit agreement expires June 30, 2017.2020. At June 30, 2016,2019, the Company was in compliance with all of the financial covenants contained in the credit agreement.
A director of the Company is a director at a bank where theThe Company maintains an additional unsecured $10.0 million line of credit, with interest at prime minus 2%, and where its routine banking transactions are processed.. No amount was outstanding on the line of credit at June 30, 2016.2019 or 2018. This line of credit matures December 31, 2016. In addition, the supplemental retirement plans assets, held in a Rabbi Trust, of $2.4 million are administered by this bank’s trust department. The Company receives no special services or pricing on the services performed by the bank due to the directorship of this director.2019.
Net cash provided by operating activities was $54.4$6.7 million and $3.3$27.3 million in fiscal years 20162019 and 2015,2018, respectively. The Company had a net loss of $32.6 million that included $35.1 million in non-cash charges, cash payments for restructuring of $3.8 million and cash provided by changes in operating assets and liabilities of $4.2 million in fiscal year 2019. Non-cash charges included depreciation of $7.4 million. In fiscal year 2018, the Company had net income of $24.2$17.7 million that included $9.6$8.2 million in non-cash charges in fiscal year 2016 and was offsetcash provided by cash utilized forchanges in operating assets and liabilities of $20.6$3.4 million. Non-cash charges included depreciation of $7.6 million. In fiscal year 2015, the Company had net income of $22.3 million that included $5.8 million in non-cash charges including depreciation of $4.9 million and was offset by cash utilized for operating assets and liabilities of $24.8$7.4 million.
Net cash used in investing activities was $4.7$5.2 million and $32.6$21.4 million in fiscal years 20162019 and 2015,2018, respectively. In fiscal year 2016,2019, the Company madehad capital expenditures of $7.4$21.3 million, partially offset by $2.8 million of proceeds from life insurance policies.the disposition of capital assets of $0.2 million and net proceeds of investments of $15.9 million. In fiscal year 2015,2018, the Company madehad capital expenditures of $37.4$29.4 million, partially offset by $5.1 million of proceeds from life insurance policies.the disposition of capital assets of $6.2 million and net proceeds of investments of $1.9 million.
Net cash used in financing activities was $14.2$7.0 million in fiscal year 20162019 which included repaymentsdividend payments of current notes payable of $11.9 million and dividends payment of $5.5 million. These amounts were offset by proceeds from issuance of common stock of $1.6 million and excess tax benefit from stock-based payment arrangements of $1.8$6.9 million. Net cash provided byused in financing activities was $8.4$7.1 million in fiscal year 20152018 which included proceeds from current notes payabledividend payments of $11.9 million, proceeds from issuance of common stock of $0.8 million and excess tax benefit from stock-based payment arrangements of $0.8$6.7 million. These amounts were offset by payment of dividends of $5.1 million.
Although Management believes that the Company currently has adequate cash, cash flows fromliquidity for normal operations with further strengthening expected through the sales of certain real estate assets, Management is considering several financing options to provide additional liquidity through the restructuring and credit arrangements to meet its operating and capital requirements for fiscal year 2017. In the opinion of management, the Company’s liquidity and credit resources provide it with the ability to react to opportunities as they arise, to pay quarterly dividends to its shareholders, and to purchase productive capital assets that enhance safety and improve operations.transformation process.
At June 30, 2016,2019, the Company had no long-term debt obligations and therefore, had no interest payments related to long-term debt. The following table summarizes the Company’s contractual obligations at June 30, 20162019 and the effect these obligations are expected to have on the Company’s liquidity and cash flow in the future (in thousands):
|
| Total |
|
| 1 Year |
|
| 2 - 3 |
|
| 4 - 5 |
|
| More than |
| |||||
Operating lease obligations |
| $ | 13,606 |
|
| $ | 4,880 |
|
| $ | 6,113 |
|
| $ | 2,613 |
|
| $ | – |
|
| Total | 1 Year | 2 - 3 Years | 4 - 5 Years | More than 5 Years | ||||||||||||||||
| Operating lease obligations | $ | 13,267 | $ | 3,785 | $ | 5,782 | $ | 3,700 | $ | — | ||||||||||
| Supplemental retirement plans | 2,392 | 1,497 | — | — | 895 | |||||||||||||||
| Total contractual obligations | $ | 15,659 | $ | 5,282 | $ | 5,782 | $ | 3,700 | $ | 895 | ||||||||||
The long-term portion of the contractual obligations associated with the Company’s supplemental retirement plans are included in the table above under more than five years as the Company cannot predict when the events that trigger payment will occur. At June 30, 2016,2019, the Company had no capital lease obligations, and no purchase obligations for raw materials or finished goods. The purchase price on all open purchase orders was fixed and denominated in U.S. dollars. Additionally, theThe Company has excluded the uncertain tax positions from the above table as the timing of payments, if any, cannot be reasonably estimated.
Financing Arrangements
See Note 67 to the consolidated financial statements of this Annual Report on Form 10-K.
Outlook
The Company believes that demand for furniture products in the United States continues to be modest due to political and economic uncertainty. The Company may experience lower residential net sales in the first half of fiscal 2017 versus the prior year, when backlog was shipped due to the clearing of the west coast port congestion. The Company expects commercial net sales growth to continue during fiscal 2017. The Company will focus on streamlining product commercialization to increase sales with customers and continue controlling discretionary spending.
During fiscal year 2017,2020, Management will be focused on executing the comprehensive restructuring plan announced on June 18, 2019. This plan combined with the transformational aspects and opportunities offered by the successful execution of the six workstreams over the next two years are expected to drive significant profitability improvement near historical record levels.
In order to achieve this goal, it is critically important for the Company expects to haveposition itself for growth at or above market and industry levels. The Company has experienced and continues to experience headwinds to growth including the following expenditures:failed ERP implementation and subsequent recovery activity, the international trade dynamics with China which puts strain on a large portion of the Company’s underlying business and general softness in retail demand for its products. Over the next year, Management will implement new
14
processes to ensure product development activities are more appropriately honed to consumer trends, desires and needs, open up new channels of distribution, and expand existing distribution through new partnerships.
During the next two fiscal years,2020, the Company plansanticipates spending $5.0 million to invest $25$6.0 million in North American manufacturing infrastructure to address aging facilities and improve efficiency.for capital expenditures. The Company believes it has adequate working capital and borrowing capabilities to meet these requirements.
The Company remains committed to its core strategies, which include providing a wide range of quality product offerings and price points to the residential and commercial markets, combined with a conservative approach to business. The Company will maintain its focus on a strong balance sheet through emphasis on cash flow and increasing profitability. The Company believes these core strategies are in the best interest of our shareholders.
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
General– Market risk represents the risk of changes in the value of a financial instrument, derivative or non-derivative, caused by fluctuations in interest rates, foreign exchange rates and equity prices. As discussed below, management of the Company does not believe that changes in these factors could cause material fluctuations in the Company’s results of operations or cash flows. The ability to import furniture products can be adversely affected by political issues in the countries where suppliers are located, as well as, disruptions associated with shipping distances and negotiations with port employees. Other risks related to furniture product importation include government imposition of regulations and/or quotas; duties, and taxes or tariffs on imports; and significant fluctuation in the value of the U.S. dollar against foreign currencies. Any of these factors could interrupt supply, increase costs and decrease earnings.
Foreign Currency Risk– During fiscal years 2016, 20152019, 2018, and 2014,2017, the Company did not have sales, but has purchases and other expenses denominated in foreign currencies. The Company is exposed to market risk from changes in the value of foreign currencies primarily related to the Company’s Mexico operations, as wagesassociated with currency exchange rates and other expenses are paid in Mexican pesos. Gains and losses resulting from changes in foreign currencies haveprices is not had a significant impact on the Company’s consolidated financial results.considered significant.
Interest Rate Risk –The Company’s primary market risk exposure with regard to financial instruments is changes in interest rates. At June 30, 2016,2019, the Company did not have any debt outstanding.
15
| Item 8. | Financial Statements and Supplementary Data |
16
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Flexsteel Industries, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Flexsteel Industries, Inc. and Subsidiaries (the “Company”) as of June 30, 20162019 and 2015, and2018, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended June 30, 2016. Our audits also included2019, the related notes to the consolidated financial statementstatements, and the schedule listed in the Index at Item 15. 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2019, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of June 30, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 13, 2019, expressed an unqualified opinion on the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements and financial statement schedule based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion,/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
September 13, 2019
We have served as the consolidatedCompany’s auditor since 1965.
17
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Flexsteel Industries, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial statements present fairly, in all material respects, the financial positionreporting of Flexsteel Industries, Inc. and Subsidiariessubsidiaries (the “Company”) as of June 30, 2016 and 2015, and2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the resultsCommittee of their operations and their cash flows for eachSponsoring Organizations of the three years in the period ended June 30, 2016, in conformity with accounting principles generally accepted in the United States of America. Also, inTreadway Commission (COSO). In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly,Company maintained, in all material respects, the information set forth therein.effective internal control over financial reporting as of June 30, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control overconsolidated financial reportingstatements and financial statement schedule as of and for the year ended June 30, 2016, based on the criteria established inInternal Control — Integrated Framework (2013)issued by the Committee of Sponsoring Organizations2019, of the Treadway CommissionCompany and our report dated August 24, 2016September 13, 2019, expressed an unqualified opinion on the Company’s internal control overthose financial reporting.statements.
/s/ DELOITTE & TOUCHE LLPBasis for Opinion
Minneapolis, Minnesota
August 24, 2016
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Flexsteel Industries, Inc.
We have audited the internal control over financial reporting of Flexsteel Industries, Inc. and Subsidiaries (the “Company”) as of June 30, 2016, based on criteria established inInternal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of theits inherent limitations, of internal control over financial reporting including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be preventedprevent or detected on a timely basis.detect misstatements. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2016, based on the criteria established inInternal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended June 30, 2016 of the Company and our report dated August 24, 2016 expressed an unqualified opinion on those consolidated financial statements and financial statement schedule.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
August 24, 2016September 13, 2019
18
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
(Amounts in thousands, except share and per share data)
| June 30, |
| June 30, |
| |||||||||||||
| 2016 | 2015 |
| 2019 |
|
| 2018 |
| |||||||||
|
|
|
|
|
|
|
| |||||||||
ASSETS |
|
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
| |||||||||
| CURRENT ASSETS: |
|
|
|
|
|
|
|
| ||||||||
| Cash | $ | 36,780 | $ | 1,282 | ||||||||||||
| Trade Receivables - less allowances: 2016, $1,300; 2015, $1,400 | 44,618 | 45,101 | ||||||||||||||
Cash and cash equivalents |
| $ | 22,247 |
|
| $ | 27,750 |
| ||||||||
Investments |
|
| – |
|
|
| 15,951 |
| ||||||||
Trade receivables - less allowances: 2019, $250; 2018, $1,100 |
|
| 38,157 |
|
|
| 41,253 |
| ||||||||
| Inventories | 85,904 | 113,842 |
|
| 93,659 |
|
|
| 96,204 |
| ||||||
| Other | 9,141 | 6,777 |
|
| 11,904 |
|
|
| 8,476 |
| ||||||
| Total current assets | 176,443 | 167,002 |
|
| 165,967 |
|
|
| 189,634 |
| ||||||
| NONCURRENT ASSETS: |
|
|
|
|
|
|
|
| ||||||||
| Property, plant and equipment, net | 64,124 | 64,770 |
|
| 79,238 |
|
|
| 90,725 |
| ||||||
| Deferred income taxes | 3,660 | 6,090 |
|
| 7,564 |
|
|
| 1,455 |
| ||||||
| Other assets | 2,669 | 6,757 |
|
| 1,518 |
|
|
| 2,479 |
| ||||||
| TOTAL | $ | 246,896 | $ | 244,619 |
| $ | 254,287 |
|
| $ | 284,293 |
| ||||
|
|
|
|
|
|
|
| |||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
| |||||||||
| CURRENT LIABILITIES: |
|
|
|
|
|
|
|
| ||||||||
| Accounts payable - trade | $ | 11,023 | $ | 18,329 |
| $ | 18,414 |
|
| $ | 17,228 |
| ||||
| Notes payable – current | — | 11,904 | ||||||||||||||
| Accrued liabilities: |
|
|
|
|
|
|
|
| ||||||||
| Payroll and related items | 6,986 | 7,931 |
|
| 4,428 |
|
|
| 5,459 |
| ||||||
| Insurance | 5,252 | 4,308 |
|
| 4,554 |
|
|
| 4,439 |
| ||||||
Restructuring costs |
|
| 6,203 |
|
|
| – |
| ||||||||
Advertising |
|
| 3,497 |
|
|
| 4,192 |
| ||||||||
Environmental remediation |
|
| 3,600 |
|
|
| 3,600 |
| ||||||||
| Other | 10,096 | 8,848 |
|
| 7,068 |
|
|
| 6,011 |
| ||||||
| Total current liabilities | 33,357 | 51,320 |
|
| 47,764 |
|
|
| 40,929 |
| ||||||
| LONG-TERM LIABILITIES: |
|
|
|
|
|
|
|
| ||||||||
| Supplemental retirement plans | 894 | 2,915 | ||||||||||||||
| Other liabilities | 2,995 | 3,637 |
|
| 1,096 |
|
|
| 1,666 |
| ||||||
| Total liabilities | 37,246 | 57,872 |
|
| 48,860 |
|
|
| 42,595 |
| ||||||
| COMMITMENTS AND CONTINGENCIES (Note 12) | ||||||||||||||||
COMMITMENTS AND CONTINGENCIES (Note 13) |
|
|
|
|
|
|
|
| ||||||||
| SHAREHOLDERS’ EQUITY: |
|
|
|
|
|
|
|
| ||||||||
| Cumulative preferred stock - $50 par value; authorized 60,000 shares; outstanding - none | ||||||||||||||||
| Undesignated (subordinated) stock - $1 par value; authorized 700,000 shares; outstanding - none | ||||||||||||||||
| Common stock - $1 par value; authorized 15,000,000 shares; outstanding 2016, 7,700,149 shares; 2015, 7,480,367 shares | 7,700 | 7,480 | ||||||||||||||
Common stock - $1 par value; authorized 15,000,000 shares; outstanding 2019, 7,902,708 shares; 2018, 7,868,298 shares |
|
| 7,903 |
|
|
| 7,868 |
| ||||||||
| Additional paid-in capital | 23,259 | 18,827 |
|
| 27,512 |
|
|
| 26,321 |
| ||||||
| Retained earnings | 180,919 | 162,176 |
|
| 170,004 |
|
|
| 209,553 |
| ||||||
| Accumulated other comprehensive loss | (2,228 | ) | (1,736 | ) | ||||||||||||
Accumulated other comprehensive income (loss) |
|
| 8 |
|
|
| (2,044 | ) | ||||||||
| Total shareholders’ equity | 209,650 | 186,747 |
|
| 205,427 |
|
|
| 241,698 |
| ||||||
| TOTAL | $ | 246,896 | $ | 244,619 |
| $ | 254,287 |
|
| $ | 284,293 |
| ||||
See accompanying Notes to Consolidated Financial Statements.
1519
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Amounts in thousands, except per share data)
| For the years ended June 30, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Net sales | $ | 500,106 | $ | 466,904 | $ | 438,543 | ||||||
| Cost of goods sold | (386,407 | ) | (357,044 | ) | (338,280 | ) | ||||||
| Gross margin | 113,699 | 109,860 | 100,263 | |||||||||
| Selling, general and administrative | (77,911 | ) | (75,688 | ) | (71,727 | ) | ||||||
| Litigation settlement reimbursements (costs) | 2,280 | 250 | (6,250 | ) | ||||||||
| Operating income | 38,068 | 34,422 | 22,286 | |||||||||
| Interest and other (expense) income | (72 | ) | 1,267 | 1,514 | ||||||||
| Interest expense | (69 | ) | (130 | ) | — | |||||||
| Income before income taxes | 37,927 | 35,559 | 23,800 | |||||||||
| Income tax provision | (13,690 | ) | (13,260 | ) | (8,810 | ) | ||||||
| Net income | $ | 24,237 | $ | 22,299 | $ | 14,990 | ||||||
| Weighted average number of common shares outstanding: | ||||||||||||
| Basic | 7,595 | 7,423 | 7,231 | |||||||||
| Diluted | 7,765 | 7,708 | 7,511 | |||||||||
| Earnings per share of common stock: | ||||||||||||
| Basic | $ | 3.19 | $ | 3.00 | $ | 2.07 | ||||||
| Diluted | $ | 3.12 | $ | 2.89 | $ | 2.00 | ||||||
| Cash dividends declared per common share | $ | 0.72 | $ | 0.72 | $ | 0.60 | ||||||
|
| For the years ended June 30, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Net sales |
| $ | 443,588 |
|
| $ | 489,180 |
|
| $ | 468,764 |
|
Cost of goods sold |
|
| (373,648 | ) |
|
| (390,961 | ) |
|
| (360,113 | ) |
Gross margin |
|
| 69,940 |
|
|
| 98,219 |
|
|
| 108,651 |
|
Selling, general and administrative |
|
| (81,298 | ) |
|
| (71,949 | ) |
|
| (72,562 | ) |
Environmental remediation |
|
| – |
|
|
| (3,600 | ) |
|
| – |
|
ERP impairment |
|
| (21,273 | ) |
|
| – |
|
|
| – |
|
Restructuring expense |
|
| (10,048 | ) |
|
| – |
|
|
| – |
|
Gain on sale of facility |
|
| – |
|
|
| 1,835 |
|
|
| – |
|
Litigation settlement (costs) reimbursements |
|
| (475 | ) |
|
| – |
|
|
| 1,175 |
|
Operating income (loss) |
|
| (43,154 | ) |
|
| 24,505 |
|
|
| 37,264 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
| 546 |
|
|
| 621 |
|
|
| 322 |
|
Interest expense |
|
| – |
|
|
| – |
|
|
| – |
|
Total |
|
| 546 |
|
|
| 621 |
|
|
| 322 |
|
Income (loss) before income taxes |
|
| (42,608 | ) |
|
| 25,126 |
|
|
| 37,586 |
|
Income tax benefit (provision) |
|
| 10,003 |
|
|
| (7,460 | ) |
|
| (13,800 | ) |
Net income (loss) |
| $ | (32,605 | ) |
| $ | 17,666 |
|
| $ | 23,786 |
|
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 7,889 |
|
|
| 7,848 |
|
|
| 7,782 |
|
Diluted |
|
| 7,889 |
|
|
| 7,919 |
|
|
| 7,886 |
|
Earnings per share of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | (4.13 | ) |
| $ | 2.25 |
|
| $ | 3.06 |
|
Diluted |
| $ | (4.13 | ) |
| $ | 2.23 |
|
| $ | 3.02 |
|
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
| For the years ended June 30, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Net income | $ | 24,237 | $ | 22,299 | $ | 14,990 | ||||||
| Other comprehensive income (loss): | ||||||||||||
| Unrealized gains on securities in supplemental retirement plans | 741 | 162 | 674 | |||||||||
| Reclassification of realized gain on supplemental retirement plans to other income | (535 | ) | (400 | ) | (1,316 | ) | ||||||
| Unrealized gains (losses) on securities in supplemental retirement plans before taxes(1) | 206 | (238 | ) | (642 | ) | |||||||
| Income tax (expense) benefit related to securities in supplemental retirement plans gains (losses) | (78 | ) | 91 | 244 | ||||||||
| Net unrealized gains (losses) on securities in supplemental retirement plans | 128 | (147 | ) | (398 | ) | |||||||
| Minimum pension liability | (999 | ) | (537 | ) | 376 | |||||||
| Income tax benefit (expense) related to minimum pension liability | 379 | 204 | (143 | ) | ||||||||
| Net minimum pension liability | (620 | ) | (333 | ) | 233 | |||||||
| Other comprehensive loss, net of tax | (492 | ) | (480 | ) | (165 | ) | ||||||
| Comprehensive income | $ | 23,745 | $ | 21,819 | $ | 14,825 | ||||||
See accompanying Notes to Consolidated Financial Statements.
16
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders’ Equity
(Amounts in thousands)
| Total Par | Accumulated | |||||||||||||||||||
| Value of | Additional | Other | ||||||||||||||||||
| Common | Paid-In | Retained | Comprehensive | |||||||||||||||||
| Shares ($1 Par) | Capital | Earnings | (Loss) Income | Total | ||||||||||||||||
| Balance at June 30, 2013 | $ | 7,107 | $ | 10,615 | $ | 134,606 | $ | (1,091 | ) | $ | 151,237 | |||||||||
| Issuance of common stock: | ||||||||||||||||||||
| Stock options exercised, net | 223 | 2,165 | — | — | 2,388 | |||||||||||||||
| Unrealized loss on available for sale investments, net of tax | — | — | — | (398 | ) | (398 | ) | |||||||||||||
| Long-term incentive compensation | 41 | 724 | — | — | 765 | |||||||||||||||
| Stock-based compensation | — | 525 | — | — | 525 | |||||||||||||||
| Excess tax benefit from stock-based payment arrangements | — | 1,357 | — | — | 1,357 | |||||||||||||||
| Minimum pension liability adjustment, net of tax | — | — | — | 233 | 233 | |||||||||||||||
| Cash dividends declared | — | — | (4,362 | ) | — | (4,362 | ) | |||||||||||||
| Net Income | — | — | 14,990 | — | 14,990 | |||||||||||||||
| Balance at June 30, 2014 | $ | 7,371 | $ | 15,386 | $ | 145,234 | $ | (1,256 | ) | $ | 166,735 | |||||||||
| Issuance of common stock: | ||||||||||||||||||||
| Stock options exercised, net | 83 | 707 | — | — | 790 | |||||||||||||||
| Unrealized loss on available for sale investments, net of tax | — | — | — | (147 | ) | (147 | ) | |||||||||||||
| Long-term incentive compensation | 26 | 1,310 | — | — | 1,336 | |||||||||||||||
| Stock-based compensation | — | 607 | — | — | 607 | |||||||||||||||
| Excess tax benefit from stock-based payment arrangements | — | 817 | — | — | 817 | |||||||||||||||
| Minimum pension liability adjustment, net of tax | — | — | — | (333 | ) | (333 | ) | |||||||||||||
| Cash dividends declared | — | — | (5,357 | ) | — | (5,357 | ) | |||||||||||||
| Net income | — | — | 22,299 | — | 22,299 | |||||||||||||||
| Balance at June 30, 2015 | $ | 7,480 | $ | 18,827 | $ | 162,176 | $ | (1,736 | ) | $ | 186,747 | |||||||||
| Issuance of common stock: | ||||||||||||||||||||
| Stock options exercised, net | 184 | 1,407 | — | — | 1,591 | |||||||||||||||
| Unrealized loss on available for sale investments, net of tax | — | — | — | 128 | 128 | |||||||||||||||
| Long-term incentive compensation | 27 | 858 | — | — | 885 | |||||||||||||||
| Stock-based compensation | 9 | 406 | — | — | 415 | |||||||||||||||
| Excess tax benefit from stock-based payment arrangements | — | 1,761 | — | — | 1,761 | |||||||||||||||
| Minimum pension liability adjustment, net of tax | — | — | — | (620 | ) | (620 | ) | |||||||||||||
| Cash dividends declared | — | — | (5,494 | ) | — | (5,494 | ) | |||||||||||||
| Net income | — | — | 24,237 | — | 24,237 | |||||||||||||||
| Balance at June 30, 2016 | $ | 7,700 | $ | 23,259 | $ | 180,919 | $ | (2,228 | ) | $ | 209,650 | |||||||||
|
| For the years ended June 30, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Net income (loss) |
| $ | (32,605 | ) |
| $ | 17,666 |
|
| $ | 23,786 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (losses) gains on securities |
|
| 368 |
|
|
| (197 | ) |
|
| (87 | ) |
Reclassification of realized gains (losses) on securities to other income |
|
| (321 | ) |
|
| 142 |
|
|
| 145 |
|
Unrealized (losses) gains on securities before taxes |
|
| 47 |
|
|
| (55 | ) |
|
| 58 |
|
Income tax benefit (expense) related to securities gains (losses) |
|
| (13 | ) |
|
| 17 |
|
|
| (22 | ) |
Net unrealized (losses) gains on securities |
|
| 34 |
|
|
| (38 | ) |
|
| 36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability |
|
| 2,727 |
|
|
| 56 |
|
|
| 771 |
|
Income tax (expense) related to minimum pension liability |
|
| (709 | ) |
|
| (15 | ) |
|
| (292 | ) |
Net minimum pension asset |
|
| 2,018 |
|
|
| 41 |
|
|
| 479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive gain, net of tax |
|
| 2,052 |
|
|
| 3 |
|
|
| 515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
| $ | (30,553 | ) |
| $ | 17,669 |
|
| $ | 24,301 |
|
See accompanying Notes to Consolidated Financial Statements.
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Amounts in thousands)
| FOR THE YEARS ENDED JUNE 30, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| OPERATING ACTIVITIES: | ||||||||||||
| Net income | $ | 24,237 | $ | 22,299 | $ | 14,990 | ||||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||||||
| Depreciation | 7,556 | 4,945 | 4,197 | |||||||||
| Deferred income taxes | 2,731 | 605 | (138 | ) | ||||||||
| Stock-based compensation expense | 1,470 | 1,943 | 1,290 | |||||||||
| Excess tax benefit from stock-based payment arrangements | (1,761 | ) | (817 | ) | (1,357 | ) | ||||||
| Changes in provision for losses on accounts receivable | (100 | ) | 30 | 6 | ||||||||
| Other non-cash, net | — | (28 | ) | 42 | ||||||||
| Gain on disposition of capital assets | (34 | ) | (119 | ) | (90 | ) | ||||||
| Gain on life insurance policies | (346 | ) | (745 | ) | — | |||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Trade receivables | 584 | (6,596 | ) | (2,467 | ) | |||||||
| Inventories | 27,938 | (15,902 | ) | (5,523 | ) | |||||||
| Other current assets | (1,962 | ) | (3,882 | ) | (278 | ) | ||||||
| Other assets | 59 | (1,024 | ) | (163 | ) | |||||||
| Accounts payable - trade | (6,877 | ) | 2,083 | 2,117 | ||||||||
| Accrued liabilities | 2,052 | 201 | 2,986 | |||||||||
| Other long-term liabilities | (1,640 | ) | (187 | ) | 265 | |||||||
| Supplemental retirement plans | 460 | 463 | 360 | |||||||||
| Net cash provided by operating activities | 54,367 | 3,269 | 16,237 | |||||||||
| INVESTING ACTIVITIES: | ||||||||||||
| Purchases of investments | (3,100 | ) | (1,955 | ) | (5,537 | ) | ||||||
| Proceeds from sales of investments | 2,900 | 1,611 | 5,209 | |||||||||
| Proceeds from sale of capital assets | 76 | 155 | 98 | |||||||||
| Proceeds from life insurance policies | 2,814 | 5,053 | — | |||||||||
| Capital expenditures | (7,382 | ) | (37,423 | ) | (4,187 | ) | ||||||
| Net cash used in investing activities | (4,692 | ) | (32,559 | ) | (4,417 | ) | ||||||
| FINANCING ACTIVITIES: | ||||||||||||
| Dividends paid | (5,455 | ) | (5,115 | ) | (4,323 | ) | ||||||
| Proceeds from issuance of common stock | 1,591 | 790 | 2,388 | |||||||||
| Shares withheld for employee tax obligations | (170 | ) | — | — | ||||||||
| Excess tax benefit from stock-based payment arrangements | 1,761 | 817 | 1,357 | |||||||||
| (Repayments of) proceeds from short-term notes payable | (11,904 | ) | 11,904 | — | ||||||||
| Net cash (used in) provided by financing activities | (14,177 | ) | 8,396 | (578 | ) | |||||||
| Increase (decrease) in cash | 35,498 | (20,894 | ) | 11,242 | ||||||||
| Cash at beginning of year | 1,282 | 22,176 | 10,934 | |||||||||
| Cash at end of year | $ | 36,780 | $ | 1,282 | $ | 22,176 | ||||||
| FOR THE YEARS ENDED JUNE 30, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| SUPPLEMENTAL INFORMATION | ||||||||||||
| Income taxes paid | $ | 10,140 | $ | 13,920 | $ | 6,880 | ||||||
| Capital expenditures in accounts payable | $ | 430 | $ | 130 | $ | 35 | ||||||
See accompanying Notes to Consolidated FinancialStatements.
20
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders’ Equity
(Amounts in thousands)
| Total Par |
|
| Additional |
|
| Retained |
|
| Accumulated |
|
| Total |
| ||||||
Balance at June 30, 2016 |
| $ | 7,700 |
|
| $ | 23,259 |
|
| $ | 180,919 |
|
| $ | (2,228 | ) |
| $ | 209,650 |
|
Issuance of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised, net |
|
| 79 |
|
|
| 999 |
|
|
| – |
|
|
| – |
|
|
| 1,078 |
|
Unrealized loss on available for sale investments, net of tax |
|
| – |
|
|
| – |
|
|
| – |
|
|
| 36 |
|
|
| 36 |
|
Long-term incentive compensation |
|
| 35 |
|
|
| (213 | ) |
|
| – |
|
|
| – |
|
|
| (178 | ) |
Stock-based compensation |
|
| 8 |
|
|
| 647 |
|
|
| – |
|
|
| – |
|
|
| 655 |
|
Excess tax benefit from stock-based payment arrangements |
|
| – |
|
|
| 1,494 |
|
|
| – |
|
|
| – |
|
|
| 1,494 |
|
Minimum pension liability adjustment, net of tax |
|
| – |
|
|
| – |
|
|
| – |
|
|
| 479 |
|
|
| 479 |
|
Cash dividends declared |
|
| – |
|
|
| – |
|
|
| (6,240 | ) |
|
| – |
|
|
| (6,240 | ) |
Net income |
|
| – |
|
|
| – |
|
|
| 23,786 |
|
|
| – |
|
|
| 23,786 |
|
Balance at June 30, 2017 |
| $ | 7,822 |
|
| $ | 26,186 |
|
| $ | 198,465 |
|
| $ | (1,713 | ) |
| $ | 230,760 |
|
Issuance of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised, net |
|
| 17 |
|
|
| 216 |
|
|
| – |
|
|
| – |
|
|
| 233 |
|
Unrealized loss on available for sale investments, net of tax |
|
| – |
|
|
| – |
|
|
| – |
|
|
| (38 | ) |
|
| (38 | ) |
Long-term incentive compensation |
|
| 20 |
|
|
| (858 | ) |
|
| – |
|
|
| – |
|
|
| (838 | ) |
Stock-based compensation |
|
| 9 |
|
|
| 777 |
|
|
| – |
|
|
| – |
|
|
| 786 |
|
Minimum pension liability adjustment, net of tax |
|
| – |
|
|
| – |
|
|
| – |
|
|
| 41 |
|
|
| 41 |
|
Cash dividends declared |
|
| – |
|
|
| – |
|
|
| (6,912 | ) |
|
| – |
|
|
| (6,912 | ) |
Net income |
|
| – |
|
|
| – |
|
|
| 17,666 |
|
|
| – |
|
|
| 17,666 |
|
Adoption of ASU 2018-02 |
|
| – |
|
|
| – |
|
|
| 334 |
|
|
| (334 | ) |
|
| – |
|
Balance at June 30, 2018 |
| $ | 7,868 |
|
|
| 26,321 |
|
|
| 209,553 |
|
|
| (2,044 | ) |
|
| 241,698 |
|
Issuance of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised, net |
|
| 5 |
|
|
| 76 |
|
|
| – |
|
|
| – |
|
|
| 81 |
|
Unrealized loss on available for sale investments, net of tax |
|
| – |
|
|
| – |
|
|
| – |
|
|
| 34 |
|
|
| 34 |
|
Long-term incentive compensation |
|
| 7 |
|
|
| (315 | ) |
|
| – |
|
|
| – |
|
|
| (308 | ) |
Stock-based compensation |
|
| 23 |
|
|
| 1,430 |
|
|
| – |
|
|
| – |
|
|
| 1,453 |
|
Minimum pension liability adjustment, net of tax |
|
| – |
|
|
| – |
|
|
| – |
|
|
| 2,018 |
|
|
| 2,018 |
|
Cash dividends declared |
|
| – |
|
|
| – |
|
|
| (6,944 | ) |
|
| – |
|
|
| (6,944 | ) |
Net income (loss) |
|
| – |
|
|
| – |
|
|
| (32,605 | ) |
|
| – |
|
|
| (32,605 | ) |
Balance at June 30, 2019 |
| $ | 7,903 |
|
|
| 27,512 |
|
|
| 170,004 |
|
|
| 8 |
|
|
| 205,427 |
|
Cash dividends declared per common share were $0.88, $0.88 and $0.80 for fiscal years ended June 30, 2019, 2018 and 2017, respectively.
See accompanying Notes to Consolidated Financial Statements.
21
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Amounts in thousands)
|
| FOR THE YEARS ENDED JUNE 30, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
| $ | (32,605 | ) |
|
| 17,666 |
|
|
| 23,786 |
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
| 7,440 |
|
|
| 7,367 |
|
|
| 7,936 |
|
Deferred income taxes |
|
| (6,121 | ) |
|
| 286 |
|
|
| 1,606 |
|
Stock-based compensation expense |
|
| 1,355 |
|
|
| 501 |
|
|
| 1,609 |
|
Excess tax benefit from stock-based payment arrangements |
|
| – |
|
|
| – |
|
|
| (1,494 | ) |
Change in provision for losses on accounts receivable |
|
| (40 | ) |
|
| (100 | ) |
|
| (100 | ) |
Loss reserve for uncollectible VAT |
|
| 2,612 |
|
|
| – |
|
|
| – |
|
ERP impairment |
|
| 21,273 |
|
|
| – |
|
|
| – |
|
Restructuring expense |
|
| 10,048 |
|
|
| – |
|
|
| – |
|
Cash payments for restructuring |
|
| (3,845 | ) |
|
| – |
|
|
| – |
|
Gain on disposition of capital assets |
|
| (71 | ) |
|
| (1,792 | ) |
|
| (512 | ) |
Gain on life insurance policies |
|
| – |
|
|
| – |
|
|
| – |
|
Defined benefit plan termination |
|
| 2,455 |
|
|
| – |
|
|
| – |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Trade receivables |
|
| 3,136 |
|
|
| 1,209 |
|
|
| 2,356 |
|
Inventories |
|
| 2,545 |
|
|
| 3,193 |
|
|
| (13,492 | ) |
Other current assets |
|
| (3,540 | ) |
|
| (1,299 | ) |
|
| 1,036 |
|
Other assets |
|
| (2,589 | ) |
|
| 22 |
|
|
| 450 |
|
Accounts payable - trade |
|
| 5,128 |
|
|
| (1,874 | ) |
|
| 4,028 |
|
Accrued liabilities |
|
| (668 | ) |
|
| 2,546 |
|
|
| 477 |
|
Other long-term liabilities |
|
| 201 |
|
|
| (431 | ) |
|
| (1,298 | ) |
Net cash provided by operating activities |
|
| 6,714 |
|
|
| 27,294 |
|
|
| 26,388 |
|
INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investments |
|
| (13,042 | ) |
|
| (42,230 | ) |
|
| (30,537 | ) |
Proceeds from investments |
|
| 28,970 |
|
|
| 44,172 |
|
|
| 12,474 |
|
Proceeds from sale of capital assets |
|
| 248 |
|
|
| 6,152 |
|
|
| 1,848 |
|
Capital expenditures |
|
| (21,346 | ) |
|
| (29,447 | ) |
|
| (13,457 | ) |
Net cash used in investing activities |
|
| (5,170 | ) |
|
| (21,353 | ) |
|
| (29,672 | ) |
FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid |
|
| (6,918 | ) |
|
| (6,746 | ) |
|
| (6,062 | ) |
Proceeds from issuance of common stock |
|
| 81 |
|
|
| 233 |
|
|
| 1,078 |
|
Shares issued to employees, net of shares withheld |
|
| (210 | ) |
|
| (552 | ) |
|
| (1,132 | ) |
Excess tax benefit from share-based payment |
|
| – |
|
|
| – |
|
|
| 1,494 |
|
Net cash used in financing activities |
|
| (7,047 | ) |
|
| (7,065 | ) |
|
| (4,622 | ) |
(Decrease) increase in cash and cash equivalents |
|
| (5,503 | ) |
|
| (1,124 | ) |
|
| (7,906 | ) |
Cash and cash equivalents at beginning of year |
|
| 27,750 |
|
|
| 28,874 |
|
|
| 36,780 |
|
Cash and cash equivalents at end of year |
| $ | 22,247 |
|
|
| 27,750 |
|
|
| 28,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| FOR THE YEARS ENDED JUNE 30, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
SUPPLEMENTAL INFORMATION |
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid, net |
| $ | 1,190 |
|
|
| 8,460 |
|
|
| 9,780 |
|
Capital expenditures in accounts payable |
| $ | 142 |
|
|
| 4,084 |
|
|
| 1,740 |
|
See accompanying Notes to Consolidated FinancialStatements.
22
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. |
|
DESCRIPTION OF BUSINESS – Flexsteel Industries, Inc. and Subsidiaries (the “Company”) incorporated in 1929 celebrated its 125th anniversary of the Company’s founding in 1893 during 2018. Flexsteel Industries, Inc. is one of the oldest and largest manufacturer, importermanufacturers, importers and marketermarketers of residential and commercialcontract upholstered and wooden furniture products in the United States. The Company’s furniture products includeOver the generations the Company has built a broad line of qualitycommitted retail and consumer following based on its patented, guaranteed-for-life Blue Steel SpringTM – the all-riveted, high-carbon, steel-banded seating platform that gives upholstered and woodenleather furniture the strength and comfort to last a lifetime. With offerings for residentialuse in home, healthcare, and commercial use. Product offerings include a wide variety of upholsteredrecreational seating, the Company distributes its furniture throughout the United States and wood furniture such as sofas, loveseats, chairs, recliningCanada through the Company’s sales force and rocker-reclining chairs, swivel rockers, sofa beds, convertible bedding units, occasional tables, desks, dining tables and chairs, bedroom furniture and home and commercial office furniture.various independent representatives.
PRINCIPLES OF CONSOLIDATION – the consolidated financial statements include the accounts of Flexsteel Industries, Inc. and its wholly owned subsidiaries. All intercompany transactions and accounts have been eliminated in consolidation. The Company’s consolidated financial statements and results of operations are based on consolidated financial statements prepared in accordance with GAAP in the United States of America.
USE OF ESTIMATES – the preparation of consolidated financial statements in conformity with accounting principles generally acceptedGenerally Accepted Accounting Principles (GAAP) in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Ultimate results could differ from those estimates.
FAIR VALUE – the Company’s cash and cash equivalents, investments, accounts receivable, other current assets, accounts payable, notes payable and certain accrued liabilities are carried at amounts which reasonably approximate their fair value due to their short-term nature. Generally accepted accounting principlesGAAP on fair value measurement for certain financial assets and liabilities require that each asset and liability carried at fair value be classified into one of the following categories: Level 1: Quoted market prices in active markets for identical assets and liabilities; Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data; or Level 3: Unobservable inputs that are not corroborated by market data. The Company has not changed its valuation techniques in measuring the fair value of any financial assets and liabilities during the period.
INVESTMENTS - during fiscal year 2019, the Company purchased available-for-sale securities, U.S. Treasury bills and U.S. Agencies, which are recorded at fair market value. These securities are classified as “Investments” in the consolidated balance sheets. Unrealized gains or losses are recorded in “Accumulated other comprehensive loss.” The fair market value and book value of the investments were $0.0 million and $16.0 million for the fiscal years ended June 30, 2019 and 2018, respectively. These assets are classified as Level 1 in accordance with fair value measurements described above.
ACCOUNTS RECEIVABLE ALLOWANCES – the Company establishes accounts receivable allowances to reduce trade accounts receivable to an amount that reasonably approximates their net realizable value. The Company’s accounts receivable allowances consist of an allowance for doubtful accounts which is established through review of open accounts, historical collection, and historical write-off amounts and an allowance for estimated returns on sales of the Company’s products which is based on historical product returns, as well as existing product return authorizations. The Company records a provision against revenue for estimated returns on sales of ourits products in the same period that the related revenues are recognized. The amount ultimately realized from trade accounts receivable may differ from the amount estimated in the consolidated financial statements.
INVENTORIES – are stated at the lower of cost or net realizable value. Steel products are valued onvalue utilizing the last-in, first-out (“LIFO”) method. All other inventories are valued on the first-in – first-out (“FIFO”) method.
PROPERTY, PLANT AND EQUIPMENT – is stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets.
VALUATION OF LONG–LIVED ASSETS – the Company periodically reviews the carrying value of long-lived assets and estimated depreciable or amortizable lives for continued appropriateness. This review is based upon projections of anticipated future cash flows and is performed whenever events or changes in circumstances indicate that asset carrying values may not be recoverable or that the estimated depreciable or amortizable lives may have changed.
Flexsteel Industries Inc. began the implementation process to convert its operating and accounting systems to SAP during fiscal 2016. Flexsteel incurred various software, consulting and internal salaries costs that were capitalized. In fourth quarter of fiscal 2018, Flexsteel placed into service 20% of the capitalized costs related to SAP and began to depreciate those assets over useful lives of 36 months for software costs and 60 months for consulting and internal salary implementation costs. The 20% represented the two product lines that went live with the system in the fourth quarter of fiscal 2018: Home Styles and Commercial
23
Office. After significant disruption during the initial implementation phase, and a subsequent analysis of root cause and corrective action activities, the Company stopped further implementation across the network and focused on stabilization of the new ERP system environment. Concurrently, the Company completed a thorough evaluation of the work completed to date, its usefulness in the context of future deployments and the potential for revised project scope. Through this analysis the Company developed a plan for the future implementation of SAP. This plan, which focuses on simplifying our processes and use of the system, allowed more specific analysis regarding the usability of items contained in our construction in progress. As a result of this analysis, the Company recorded an impairment charge against capitalized costs of $21.3 million ($18.7 million in the quarter ended March 31, 2019, and $2.6 million in the quarter ended June 30, 2019).
No impairments of long-lived assets or changes in depreciable or amortizable lives were incurred during fiscal years 2016, 20152018 and 2014.2017.
LEASES – We conduct a significant portion of our manufacturing and distribution operations from leased locations. The leases generally require payment of real estate taxes, insurance and common area maintenance, in addition to rent. For most of our locations, the remaining life is less than 5 years with one or more renewal options thereafter. Some leases also contain escalation clauses. For leases that contain predetermined fixed escalations of the minimum rent, we recognize the related rent expense on a straight-line basis from the date we take possession of the property to the end of the initial lease term. We record any difference between the straight-line rent amounts and amounts payable under the leases as part of deferred rent, in accrued liabilities or long-term liabilities, as appropriate. Cash or lease incentives received upon entering into certain leases (“tenant allowances”) are recognized on a straight-line basis as a reduction to rent from the date we take possession of the property through the end of the initial lease term. We record the unamortized portion of tenant allowances as a part of deferred rent, in accrued liabilities or long-term liabilities, as appropriate. Refer to Note 13, Commitments and Contingencies, for maturity details.
WARRANTY – the Company estimates the amount of warranty claims on sold product that may be incurred based on current and historical data. The actual warranty expense could differ from the estimates made by the Company based on product performance.
REVENUE RECOGNITION – Revenue is recognized when both product ownership and the risk of loss have transferred to the customer, collectability is reasonably assured, and the Company has no remaining obligations. The Company’s ordering process creates persuasive evidencecontrol of the sale arrangementpromised goods or services is performed to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. We generate revenue primarily by manufacturing and delivering upholstered and wooden furniture products to independent furniture retailers in the sales priceUnited States. Each unit of furniture is determined. The deliverya separate performance obligation. We satisfy our performance obligations when control of our product is passed to our customer, which is the point in time that are customers are able to direct the use of and obtain substantially all of the remaining economic benefit of the goods to the customer completes the earnings process.or services. Net sales consist of product sales and related delivery charge revenue,shipping and handling charges, net of adjustments for returns and allowances. Shipping and handling costs are included in cost of goods sold.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASC 2014-09, Revenue from Contracts with Customers (Topic 606), which provides a framework for the recognition of revenue, with the objective that recognized revenues properly reflect amounts an entity is entitled to receive in exchange for goods and services. The guidance is effective for annual reporting periods beginning after December 15, 2017, the Company’s fiscal year 2019. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). The Company adopted the modified retrospective method on July 1, 2018. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements as revenue is recognized when product ownership and risk of loss is transferred to the customer, collectability is probable and the Company has no remaining performance obligations. Thus, the timing of revenue recognition is not impacted by the new standard.
The Company’s revenues result from the sale of goods and reflect the consideration to which the Company expects to be entitled. Revenue is reduced by appropriate allowances, estimated returns, price concessions, or similar adjustments as applicable. The Company records revenue based on a five-step model in accordance with Accounting Standards Codification (“ASC”) 2014-09, Revenue from Contracts with Customers (Topic 606). For its customer contracts, typically purchase orders, the Company identifies the performance obligations (goods), determines the transaction price, allocates the contract transaction price to the performance obligations, and recognizes the revenue when the performance obligation is transferred to the customer. A good is transferred when the customer obtains control of that good and risk of loss transfers at a point in time.
Provisions for customer volume rebates, product returns, discounts and allowances are variable consideration and are recorded as a reduction of revenue in the same period the related sales are recorded. Such provisions are calculated based upon historical data and discount percentages set with each customer. Consideration given to customers for cooperative advertising is recognized as a reduction of revenue except to the extent there is a distinct good or service and evidence of the fair value of the advertising, in which case the expense is classified as selling, general and administrative expense (SG&A).
The Company has a limited lifetime warranty on all products. The Company does not offer the option to purchase warranties. The Company accounts for warranties under ASC 460, Guarantees, and not as variable consideration related to revenue.
24
Occasionally the Company receives deposits from customers before it has transferred control of the product to customers, resulting in contract liabilities. These contract liabilities are reported within “Accounts payable - trade” in the consolidated balance sheets. As of June 30, 2019, the Company had $1.1 million of customer deposits. As of June 30, 2018, the Company had $2.2 million of customer deposits.
Upon adoption of ASC 606, the Company elected the following practical expedients and policy elections:
● | The Company did not adjust contract prices for the effects of a significant financing component, as it expects the period when the goods or services are transferred to the customer and when the customer pays for those goods and services to be less than a year. |
● | Costs for shipping and handling activities that occur before the customer obtains control of the product are accounted for as fulfillment activities. Accordingly, these expenses are recorded at the same time the Company recognizes revenue. |
● | Incremental costs of obtaining a contract, specifically commissions, are recorded as an SG&A expense when incurred. |
● | All taxes imposed on and concurrent with revenue-producing transactions and collected by the Company from a customer, including sales, use, excise, and franchise taxes are excluded from the measurement of the transaction price. |
These accounting treatments are consistent with the ASC 606 standard as adopted. Therefore, there was no impact to the consolidated financial statements.
Adoption of this standard did not result in significant changes to the Company’s accounting policies, business processes, systems or controls, or have a material impact on financial position, results from operations and cash flows or related disclosures. As such, prior period financial statements were not adjusted.
The following table disaggregates the Company’s net sales by product category for the year ended June 30, (in millions):
|
| 2019 |
|
| 2018 |
| ||
Residential |
| $ | 374.5 |
|
| $ | 413.7 |
|
Contract |
|
| 69.1 |
|
|
| 75.5 |
|
Total |
| $ | 443.6 |
|
| $ | 489.2 |
|
ADVERTISING COSTS – are charged to selling, general and administrative expense in the periods incurred. The Company conducts no direct-response advertising programs and there are no assets related to advertising recorded on the consolidated balance sheets. Advertising expenditures, primarily shared customer advertising in which an identifiable benefit is received and national trade-advertising programs, were approximately $7.5$4.3 million, $6.9$5.1 million and $6.1$7.3 million in fiscal years 2016, 20152019, 2018 and 2014,2017, respectively.
DESIGN, RESEARCH AND DEVELOPMENT COSTS – are charged to selling, general and administrative expense in the periods incurred. Expenditures for design, research and development costs were approximately $4.2$4.4 million, $4.1$3.9 million and $2.8$3.7 million in fiscal years 2016, 20152019, 2018 and 2014,2017, respectively.
INSURANCE – the Company is self-insured for health care and most workers’ compensation up to predetermined amounts above which third party insurance applies. The Company purchases specific stop-loss insurance for individual health care claims in excess of $150,000$175,000 per plan year. For workers’ compensation the Company retains the first $450,000 per claim and purchases excess coverage up to the statutory limits for amounts in excess of the retention limit. Losses are accrued based upon the Company’s estimates of the aggregate liability for claims incurred using certain actuarial assumptions followed in the insurance industry and based on Company experience. The Company records these insurance accruals within accrued“Accrued liabilities – insuranceinsurance” on the consolidated balance sheets.
INCOME TAXES – the Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company recognizes in its financial statements the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.
EARNINGS PER SHARE (EPS) – basic earnings per shareEPS of common stock is based on the weighted-average number of common shares outstanding during each fiscal year. Diluted earnings per shareEPS of common stock includes the dilutive effect of potential common shares outstanding. The Company’s potential common shares outstanding are stock options, and shares associated with the long-term management incentive compensation plan.plan and non-vested restricted shares. The Company calculates the dilutive effect of outstanding options using the treasury stock method.; all options are anti-dilutive when there is a loss. Anti-dilutive shares are not included in the computation of diluted EPS when their exercise price was greater than the average closing market price of the common shares. The Company calculates the dilutive effect of shares related to the long-term management incentive
25
compensation plan and non-vested shares based on the number of shares, if any, that would be issuable if the end of the fiscal year were the end of the contingency period.
In computing EPS for the fiscal years 2016, 20152019, 2018 and 2014,2017, net income as reported for each respective period is divided by the fully diluted weighted average number of shares outstanding:
|
|
|
|
|
|
|
|
|
| |||
|
| June 30, |
| |||||||||
(in thousands) |
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic shares |
|
| 7,889 |
|
|
| 7,848 |
|
|
| 7,782 |
|
Potential common shares: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
| – |
|
|
| 54 |
|
|
| 86 |
|
Long-term incentive plan |
|
| – |
|
|
| 17 |
|
|
| 18 |
|
|
|
| – |
|
|
| 71 |
|
|
| 104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted shares |
|
| 7,889 |
|
|
| 7,919 |
|
|
| 7,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive shares |
|
| 112 |
|
|
| 40 |
|
|
| – |
|
| June 30, | ||||||||||||
| (in thousands) | 2016 | 2015 | 2014 | |||||||||
| Basic shares | 7,595 | 7,423 | 7,231 | |||||||||
| Potential common shares: | ||||||||||||
| Stock options | 120 | 255 | 254 | |||||||||
| Long-term incentive plan | 50 | 30 | 26 | |||||||||
| 170 | 285 | 280 | ||||||||||
| Diluted shares | 7,765 | 7,708 | 7,511 | |||||||||
| Anti-dilutive shares | 26 | — | — | |||||||||
STOCK–BASED COMPENSATION – the Company recognizes compensation expense related to the cost of employee services received in exchange for Company equity interests based on the award’s fair value at the date of grant. The Company recognizes long-term incentive compensation plan expenses during the three-year performance periods; stock awards are issued following the end of the performance periods and are subject to verification of results and Compensation Committee of the Board of Directors approval. See Note 89 Stock-Based Compensation.
SEGMENT REPORTING – the Company operates in one reportable segment, furniture products. OurThe Company’s operations involve the distribution of manufactured and imported furniture for residential and commercialcontract markets. The Company’s furniture products are sold primarily throughout the United States and Canada by the Company’s internal sales force and various independent representatives. The Company makes minimal export sales. No single customer accounted for more than 10% of net sales.
ACCOUNTING DEVELOPMENTS –In November 2015,Unadopted Accounting Pronouncements
ASC 840, Leases. The effects of adopting the Financial Accounting Standards Board (FASB) issuednew standard (ASC 842, Balance Sheet Classification of Deferred Taxes (Accounting Standards Update (ASU) No. 2015-17)Leases, which amends Accounting Standards Codification (“ASC”) Topic 740, Income Taxes. ASU 2015-17 requires that deferred tax liabilities and assetsin fiscal 2020 will be classifiedrecognized as non-current in a classified statement of financial position. The ASU is effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments may be applied prospectivelycumulative-effect adjustment to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company elected to early adopt ASU 2015-17 on March 31, 2016 retrospectively to all periods presented. On June 30, 2015, the Company recorded $4.2 million in current assets “deferred income taxes” and $1.9 million in non-current assets “deferred income taxes” in the Consolidated Balance Sheets. Upon adoptionretained earnings as of the beginning of the fiscal first quarter. We will elect the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows us to carryforward the Company presented a non-current deferred tax assethistorical lease classification as operating or capital leases. The most significant impact of $6.1 million in non-current assets “deferred income taxes” in the Consolidated Balance Sheets.
In May 2014, the FASB issuedRevenue from Contracts with Customers, Topic 606 (ASU No. 2014-09), which provides a framework foradoption will be the recognition of revenue, withright of use assets and lease liabilities in the objective that recognized revenues properly reflect amounts an entity is entitledrange of approximately $12.6 million to receive in exchange$13.4 million for goods and services. This guidance, which includes additional disclosure requirements regarding revenue, cash flows and obligations relatedoperating leases. We currently estimate the cumulative pre-tax impact of these changes to contracts with customers, was originallyretained earnings to be effective for the Company beginningimmaterial in fiscal year 2018. In July 2015,2020. We do not believe the FASB confirmed a one year deferralstandard will materially affect our consolidated statements of the effective dateincome or cash flows. As part of the new revenue standard whichour adoption, we have also allows early adoption as of the original effective date. The updated guidance will be effective for the Company’s first quarter of 2019. The Company is currently evaluating the impact of adopting ASU 2014-09 on its consolidated financial statements, but believes there will be no material impact, if any.modified our internal control procedures and processes.
In July 2015, the FASB issuedInventory, Topic 330: Simplifying the Measurement of Inventory (ASU 2015-11), which affects inventory balances measured using the first-in, first-out (FIFO) or average cost methods. ASU 2015-11 requires entities to measure most inventories at the lower of cost and net realizable value, thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2015-11 on its consolidated financial statements.
2. | INVENTORIES |
In February 2016, the FASB issuedLeases (ASU 2016-02),which amends ASC Topic 842. ASU 2016-02 introduces a new lessee model where substantially all leases will be brought onto the balance sheet. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2016-02 on its consolidated financial statements.
In March 2016, the FASB issuedImprovements to Employee Share-Based Payment Accounting (ASU 2016-09), which amends ASC Topic 718, Compensation – Stock Compensation. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. Early adoption is permitted. The Company is currentlyin the process of evaluating the impact of adopting ASU 2016-09 on its consolidated financial statements.
2. INVENTORIES
Inventories valued on a LIFO basis (steel) would not differ significantly if they had been valued on a FIFO basis for the fiscal years ended June 30, 2016 and 2015. A comparison of inventories is as follows:
| (in thousands) | June 30, | |||||||
| 2016 | 2015 | |||||||
| Raw materials | $ | 12,893 | $ | 12,663 | ||||
| Work in process and finished parts | 5,810 | 5,772 | ||||||
| Finished goods | 67,201 | 95,407 | ||||||
| Total | $ | 85,904 | $ | 113,842 | ||||
3. PROPERTY, PLANT AND EQUIPMENT
| (in thousands) | Estimated | June 30, | ||||||||
| Life (Years) | 2016 | 2015 | ||||||||
| Land | $ | 7,279 | $ | 7,654 | ||||||
| Buildings and improvements | 5-39 | 72,900 | 72,684 | |||||||
| Machinery and equipment | 3-7 | 34,015 | 32,263 | |||||||
| Delivery equipment | 3-5 | 21,979 | 20,097 | |||||||
| Furniture and fixtures | 3-7 | 10,879 | 8,939 | |||||||
| Total | 147,052 | 141,637 | ||||||||
| Less accumulated depreciation | (82,928 | ) | (76,867 | ) | ||||||
| Net | $ | 64,124 | $ | 64,770 | ||||||
|
|
|
|
|
|
| ||
(in thousands) |
| June 30, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Raw materials |
| $ | 14,182 |
|
| $ | 13,335 |
|
Work in process and finished parts |
|
| 6,408 |
|
|
| 7,195 |
|
Finished goods |
|
| 73,069 |
|
|
| 75,674 |
|
Total |
| $ | 93,659 |
|
| $ | 96,204 |
|
4. OTHER NONCURRENT ASSETS
| (in thousands) | June 30, | |||||||
| 2016 | 2015 | |||||||
| Cash value of life insurance | $ | 965 | $ | 3,434 | ||||
| Rabbi Trust assets (see Note 9) | 844 | 2,404 | ||||||
| Other | 860 | 919 | ||||||
| Total | $ | 2,669 | $ | 6,757 | ||||
26
3. | PROPERTY, PLANT AND EQUIPMENT |
|
|
|
|
|
|
|
|
|
| |||
(in thousands) |
| Estimated |
|
| June 30, |
| ||||||
|
| Life (Years) |
|
| 2019 |
|
| 2018 |
| |||
Land |
|
|
|
|
| $ | 5,684 |
|
| $ | 5,684 |
|
Buildings and improvements |
|
| 5-39 |
|
|
| 86,299 |
|
|
| 66,823 |
|
Machinery and equipment |
|
| 3-7 |
|
|
| 32,402 |
|
|
| 32,127 |
|
Delivery equipment |
|
| 3-5 |
|
|
| 20,181 |
|
|
| 21,697 |
|
Furniture and fixtures |
|
| 3-7 |
|
|
| 4,151 |
|
|
| 4,034 |
|
Computer software and hardware |
|
| 3-10 |
|
|
| 11,051 |
|
|
| 30,000 |
|
Construction in progress |
|
|
|
|
|
| - |
|
|
| 14,239 |
|
Total |
|
|
|
|
|
| 159,768 |
|
|
| 174,604 |
|
Less accumulated depreciation |
|
|
|
|
|
| (80,530 | ) |
|
| (83,879 | ) |
Net |
|
|
|
|
| $ | 79,238 |
|
| $ | 90,725 |
|
4. | ACCRUED RESTRUCTURING |
On May 15, 2019, the Company announced its plans to exit the Commercial Office and custom-designed Hospitality product lines which represent approximately 7% of its revenue. In addition, the Company will permanently close its Riverside, California manufacturing facility. These changes were initial outcomes driven from customer and product line profitability and footprint utilization analyses. The changes are designed to increase organizational effectiveness, gain manufacturing efficiencies and provide cost savings that can be invested in growing the business.
On June 18, 2019, the Company announced it completed the analysis and planning process and set forth the comprehensive transformation program to be executed over the next two years, which includes previously announced restructuring activities. The transformation program includes activities such as business simplification, process improvement, exiting of non-core businesses, facility closures, and reductions in work force over the next two years.
As a result of these planned actions, the Company expects to incur pre-tax restructuring and related expenses of approximately $48.0 to $53.0 million over this two-year timeframe of which $36.0 to $40.0 million will be cash and $12.0 - $13.0 million non-cash. In addition, the Company plans to list several properties for sale when the footprint optimization is completed. When sold, the Company expects to generate $45.0 to $55.0 million in proceeds dependent upon market conditions at time of sale.
The components of restructuring costs are as follows (in thousands):
|
| Accrued |
|
|
|
|
|
|
|
| Accrued |
| ||||
|
| Restructuring |
|
|
|
|
| Expenses |
|
| Restructuring |
| ||||
|
| 6/30/2018 |
|
| Cost incurred |
|
| Paid |
|
| 6/30/2019 |
| ||||
One-time employee termination benefits |
| $ | - |
|
| $ | 3,775 |
|
| $ | 2,044 |
|
| $ | 1,731 |
|
Contract termination costs |
|
| - |
|
|
| 249 |
|
|
| - |
|
|
| 249 |
|
Other associated costs |
|
| - |
|
|
| 6,024 |
|
|
| 1,801 |
|
|
| 4,223 |
|
Total |
| $ | - |
|
| $ | 10,048 |
|
| $ | 3,845 |
|
| $ | 6,203 |
|
27
5. | OTHER NONCURRENT ASSETS |
|
|
|
|
|
|
| ||
(in thousands) |
| June 30, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Cash value of life insurance |
| $ | 1,024 |
|
| $ | 1,016 |
|
Other |
|
| 494 |
|
|
| 1,463 |
|
Total |
| $ | 1,518 |
|
| $ | 2,479 |
|
28
6. ACCRUED LIABILITIES – OTHER
|
|
|
|
|
| |||||||||||
| (in thousands) | June 30, |
| June 30, |
| ||||||||||||
| 2016 | 2015 |
| 2019 |
|
| 2018 |
| |||||||||
| Advertising | $ | 4,068 | $ | 3,661 | ||||||||||||
| Supplemental retirement plans - current | 1,751 | 1,208 | ||||||||||||||
| Dividends | 1,386 | 1,346 |
|
| 1,758 |
|
|
| 1,731 |
| ||||||
| Warranty | 1,070 | 1,010 |
|
| 1,060 |
|
|
| 1,160 |
| ||||||
| Other | 1,821 | 1,623 |
|
| 4,250 |
|
|
| 3,120 |
| ||||||
| Total | $ | 10,096 | $ | 8,848 |
| $ | 7,068 |
|
| $ | 6,011 |
| ||||
6.7. CREDIT ARRANGEMENTS
The Company entered into an unsecured credit agreement on June 30, 2016,2019, that provides short-term working capital financing up to $10.0 million with interest of LIBOR (as published by the ICE Benchmark Administration Limited, a United Kingdom company) plus 1% (1.47%(3.40% at June 30, 2016)2019), including up to $4.0 million of letters of credit. The Company reduced the borrowing availability from $30.0 million to $10.0 million to align with current business needs. Letters of credit outstanding at June 30, 20162019 totaled $2.3$1.3 million. Other than the aforementionedoutstanding letters of credit, the Company did not utilize borrowing availability under the credit facility, leaving borrowing availability of $7.7$8.7 million as of June 30, 2016.2019. The credit agreement expires June 30, 2017.2020. At June 30, 2016,2019, the Company was in compliance with all of the financial covenants contained in the credit agreement.
A director of the Company is a director at a bank where theThe Company maintains an unsecured $10.0 million line of credit, with interest at prime (Wall Street Journal US Prime Rate) minus 2% (1.50%(3.5% at June 30, 2016), and where its routine banking transactions are processed.2019). No amount was outstanding on the line of credit at June 30, 2016.2019. This line of credit matures December 31, 2016. In addition, the supplemental retirement plans assets, held in a Rabbi Trust, of $2.4 million are administered by this bank’s trust department. The Company receives no special services or pricing on the services performed by the bank due to the directorship of this director.2019.
7.8. INCOME TAXES
In determining the provision for income taxes, the Company uses an estimated annual effective tax rate that is based on the annual income, statutory tax rates and permanent differences between book and tax. This includes recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns to the extent pervasive evidence exists that they will be realized in future periods. The deferred tax balances are adjusted to reflect tax rates by tax jurisdiction, based on currently enacted tax laws, which are expected to be in effect in the years in which the temporary differences are expected to reverse. In accordance with the Company’s income tax policy, significant or unusual items are separately recognized when they occur.
During fiscal year 2016, the Company recorded changes in measurement of uncertain tax positions based on recent experiences with various state tax authorities which reduced the gross liabilities related to unrecognized tax benefits by $1.3 million and reduced deferred tax assets by $0.4 million. The components of the gross liabilities related to unrecognized tax benefits and the related deferred tax assets are as follows:
| (in thousands) | June 30, | |||||||
| 2016 | 2015 | |||||||
| Gross unrecognized tax benefits | $ | 610 | $ | 1,580 | ||||
| Accrued interest and penalties | 250 | 610 | ||||||
| Gross liabilities related to unrecognized tax benefits | $ | 860 | $ | 2,190 | ||||
| Deferred tax assets | $ | 250 | $ | 640 | ||||
|
| June 30, |
| |||||
(in thousands) |
| 2019 |
|
| 2018 |
| ||
Gross unrecognized tax benefits |
| $ | 350 |
|
| $ | 500 |
|
Accrued interest and penalties |
|
| 110 |
|
|
| 100 |
|
Gross liabilities related to unrecognized tax benefits |
| $ | 460 |
|
| $ | 600 |
|
Deferred tax assets |
| $ | 80 |
|
| $ | 100 |
|
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
| ||||||||||||||||
| (in thousands) | 2016 | 2015 | 2014 |
| 2019 |
|
| 2018 |
|
| 2017 |
| ||||||||||||
| Balance at July 1 | $ | 1,580 | $ | 1,290 | $ | 1,085 |
| $ | 500 |
|
| $ | 320 |
|
| $ | 610 |
| ||||||
| Additions based on tax positions related to the current year | 45 | 390 | 325 |
|
| – |
|
|
| 270 |
|
|
| 130 |
| |||||||||
| Additions for tax positions of prior years | — | — | — |
|
| – |
|
|
| – |
|
|
| – |
| |||||||||
| Reductions for tax positions of prior years | (1,015 | ) | (100 | ) | (120 | ) |
|
| (120 | ) |
|
| (90 | ) |
|
| (420 | ) | ||||||
| Balance at June 30 | $ | 610 | $ | 1,580 | $ | 1,290 |
| $ | 380 |
|
| $ | 500 |
|
| $ | 320 |
| ||||||
The Company records interest and penalties related to income taxes as income tax expense in the consolidated statements of income. The Company does not expect that there will be any positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next twelve months. Unrecognized tax benefits did not increase in the current year due to the loss situation.
29
The income tax provision is as follows for the years ended June 30:
| (in thousands) | 2016 | 2015 | 2014 | |||||||||
| Federal – current | $ | 9,343 | $ | 11,725 | $ | 8,395 | ||||||
| State and other – current | 1,616 | 930 | 553 | |||||||||
| Deferred | 2,731 | 605 | (138 | ) | ||||||||
| Total | $ | 13,690 | $ | 13,260 | $ | 8,810 | ||||||
(in thousands) |
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Federal – current |
| $ | (3,933 | ) |
| $ | 6,731 |
|
| $ | 11,015 |
|
State and other – current |
|
| 71 |
|
|
| 443 |
|
|
| 1,179 |
|
Deferred |
|
| (6,141 | ) |
|
| 286 |
|
|
| 1,606 |
|
Total |
| $ | (10,003 | ) |
| $ | 7,460 |
|
| $ | 13,800 |
|
A reconciliationReconciliation between the U.S. federal statutory tax rate and the effective tax rate is as follows for the years ended June 30:
|
|
|
|
|
|
|
|
| ||||||||||||||||
| 2016 | 2015 | 2014 |
| 2019 |
|
| 2018 |
|
| 2017 |
| |||||||||||||
| Federal statutory tax rate | 35.0 | % | 35.0 | % | 35.0 | % |
|
| 21.0 | % |
|
| 28.1 | % |
|
| 35.0 | % | ||||||
| State taxes, net of federal effect | 3.8 | 2.6 | 2.2 |
|
| 4.1 |
|
|
| 2.7 |
|
|
| 2.7 |
| |||||||||
| Other | (2.7 | ) | (0.3 | ) | (0.2 | ) |
|
| (1.6 | ) |
|
| (1.1 | ) |
|
| (1.0 | ) | ||||||
| Effective tax rate | 36.1 | % | 37.3 | % | 37.0 | % |
|
| 23.5 | % |
|
| 29.7 | % |
|
| 36.7 | % | ||||||
The primary components of deferred tax assets and (liabilities) are as follows:
|
|
|
|
|
|
| ||
|
| June 30, |
| |||||
(in thousands) |
| 2019 |
|
| 2018 |
| ||
Accounts receivable |
| $ | 260 |
|
| $ | 290 |
|
Inventory |
|
| 40 |
|
|
| 50 |
|
Self-insurance |
|
| 200 |
|
|
| 240 |
|
Payroll and related |
|
| 570 |
|
|
| 610 |
|
Accrued liabilities |
|
| 2,960 |
|
|
| 1,750 |
|
Property, plant and equipment |
|
| (3,200 | ) |
|
| (2,390 | ) |
Investment tax credit |
|
| 2,340 |
|
|
| 2,550 |
|
Valuation allowance |
|
| (1,700 | ) |
|
| (1,745 | ) |
Net operating loss carryover |
|
| 5,940 |
|
|
| – |
|
Other |
|
| 150 |
|
|
| 100 |
|
Total |
| $ | 7,560 |
|
| $ | 1,455 |
|
|
|
|
|
|
|
|
|
|
At June 30, 2019, certain state tax credit carryforwards of $2.3 million were available, with $0.7 million expiring between 2020 and 2028 and $1.6 million with an indefinite carryforward period.
| (in thousands) | June 30, 2016 | June 30, 2015 | ||||||
| Accounts receivable | $ | 490 | $ | 530 | ||||
| Inventory | 500 | 925 | ||||||
| Self-insurance | 660 | 595 | ||||||
| Compensation and benefits | 2,040 | 1,825 | ||||||
| Accrued expenses | 1,100 | 1,125 | ||||||
| Property, plant and equipment | (3,080 | ) | (1,225 | ) | ||||
| Supplemental retirement plans | 1,080 | 1,570 | ||||||
| Other | 870 | 745 | ||||||
| Total | $ | 3,660 | $ | 6,090 | ||||
The Company is subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. Generally, tax years 2012–20152015–2018 remain open to examination by the Internal Revenue Service or other taxing jurisdictions to which we arethe Company is subject. As of June 30, 2019, there were no ongoing federal or state income tax audits.
At June 30, 2019, federal and state NOL carryforwards were $5.0 million and $0.9 million, respectively. The federal and some state net operating losses will have an indefinite carryforward. The remainder of the state net operating losses will expire in varying amounts between 2024 and 2039.
On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Reform”), was enacted, which, among numerous provisions reduced the federal statutory corporate tax rate from 35% to 21%. Based on the provisions of the Tax Reform, the Company remeasured its deferred tax assets and liabilities and adjusted its estimated annual federal income tax rate to incorporate the lower corporate tax rate into the tax provision. For the fiscal year ended June 30, 2019, the Company utilized a rate of 21%.
The Company early adopted the FASB issued Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income(ASU 2018-02), which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Reform on June 30, 2018. The Company reclassified $0.3 million from accumulated other comprehensive income to retained earnings related to the Company’s minimum pension liability.
30
9. STOCK-BASED COMPENSATION
The Company has two stock-based compensation methods available when determining employee compensation.
(1) | Long-Term Incentive Compensation Plans |
Long-Term Incentive Compensation Plan
The long-term incentive compensation plan provides for shares of common stock to be awarded to officers and key employees based on performance targets set by the Nominating and Compensation Committee of the Board of Directors (the “Committee”). In December 2013, theThe Company’s shareholders previously approved 700,000 shares to be issued under the plan. As of June 30, 2016, 2,5942019, 102,183 shares have been issued. The Committee selected fully-diluted earnings per share as the performance goal for the three-year performance periods July 1, 20132016 – June 30, 2016 (2014-2016)2019 (2017-2019), July 1, 20142017 – June 30, 2017 (2015-2017)2020 (2018-2020) and July 1, 20152018 – June 30, 2018 (2016-2018)2021 (2019-2021). The Committee also selected total shareholder return as a performance goal for the executive officers for the three-year performance periods 2018-2020 and 2019-2021. Stock awards will be issued to participants as soon as practicable following the end of the performance periods subject to Committee approval and verification of results.results and Committee approval. The compensation cost related to the number of shares to be granted under each performance period is fixed on the grant date, which is the date the performance period begins.
During fiscal years 2019, 2018 and 2017, the Company issued 9,675, 30,539 and 59,375 shares for the three-year performance periods July 1, 2015 – June 30, 2018 (2016-2018), July 1, 2014 – June 30, 2017 (2015-2017) and July 1, 2013 – June 30, 2016 (2014-2016), respectively.
The Company recorded plan expenses(income) expense of $1.1($0.2) million, $1.1($0.4) million and $0.5$0.9 million for fiscal years ended June 30, 2016, 2015,2019, 2018 and 2014,2017, respectively. If the target performance goals for 2014-2016, 2015-20172017-2019, 2018-2020 and 2016-20182019-2021 would be achieved, the total amount of compensation cost recognized over the requisite serviceperformance periods would be $1.0$0.8 million, $0.5 million and $0.3 million for each three-yearof the performance period.periods, respectively.
The aggregate number of shares that could be awarded to key executives if the minimum, target or maximum performance goals are met is as follows:
| (in thousands) | ||||||||||||
| Performance Period | Minimum | Target | Maximum | |||||||||
| Fiscal Year 2014 – 2016 | 16 | 44 | 88 | |||||||||
| Fiscal Year 2015 – 2017 | 12 | 29 | 57 | |||||||||
| Fiscal Year 2016 – 2018 | 10 | 25 | 48 | |||||||||
2007 Long-Term Management Incentive Plan (2007 Plan)
The plan provides for shares of common stock and cash to be awarded to officers and key employees based on performance targets set by the Nominating and Compensation Committee of the Board of Directors (the “Committee”). The Company’s shareholders approved 500,000 shares to be issued under the plan. A total of 240,325 shares were issued from this plan, following the final distributions in September 2015. No additional shares can be awarded under the 2007 plan. The Committee selected consolidated operating results for organic net sales growth and fully-diluted earnings per share as the performance goals for the three-year performance periods. Payouts for awards earned in these performance periods were 60% stock and 40% cash. The compensation cost related to the number of shares granted under each performance period was fixed on the grant date, which was the date the performance period began. The short-term portion of the recorded cash award payable was classified within current liabilities, “payroll and related items”, and the long-term portion of the recorded cash award payable is classified within long-term liabilities, “other liabilities”, in the consolidated balance sheets. As of June 30, 2016, the company had no liability related to the 2007 plan. As of June 30, 2015, the Company recorded the cash-portion of awards payable of $0.7 million within current liabilities. For the fiscal years ended June 30, 2016, 2015 and 2014, the Company recorded expense of $0.0 million, $0.6 million and $0.9 million, respectively.
(in thousands) |
|
|
|
|
|
|
|
|
| |||
Performance Period |
|
| Minimum |
|
|
| Target |
|
|
| Maximum |
|
Fiscal Year 2017 – 2019 |
|
| 8 |
|
|
| 19 |
|
|
| 37 |
|
Fiscal Year 2018 – 2020 |
|
| 3 |
|
|
| 8 |
|
|
| 16 |
|
Fiscal Year 2019 – 2021 |
|
| 3 |
|
|
| 6 |
|
|
| 12 |
|
(2) | Stock Plans |
Omnibus Stock Plan
The Omnibus Stock Plan is for key employees, officers and directors and provides for the granting of incentive and nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights and performance units. In December 2013, theThe Company’s shareholders previously approved 700,000 shares to be issued under the plan. The
Under the Omnibus Stock Plan, options are granted at an exercise price equal to the fair market value of the underlying common stock at the date of grant and exercisable for up to 10 years from the date of grant.years. It is the Company’s policy to issue new shares upon exercise of stock options. The Company accepts shares of the Company’s common stock as payment for the exercise price of options. These sharesShares received as payment are retired upon receipt.
For fiscal years 2016, 20152019, 2018 and 2014,2017, the Company issued options for 25,868, 48,600100,392, 21,439 and 57,45024,317 common shares at a weighted average exercise price of $43.09, $31.48$26.89, $45.21 and $27.49$47.45 (the fair market value on the date of grant), respectively. The options were immediately available for exercise. For fiscal years ended June 30, 2016, 20152019, 2018 and 2014,2017, the Company recorded expense of $0.6 million, $0.2 million $0.4 million and $0.4$0.3 million, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in fiscal year 2016, 2015years 2019, 2018 and 2014,2017, respectively, under this plan; dividend yield of 1.6%3.5%, 2.0%1.8% and 2.2%1.5%; expected volatility of 26.0%32.7%, 29.9%31.1% and 32.6%30.8%; risk-free interest rate of 1.6%2.7%, 1.6%1.7% and 1.5%1.2%; and an expected life of 5 years. The expected volatility and expected life are determined based on historical data. The weighted-average grant date fair value of stock options granted during fiscal year 2016, 2015years 2019, 2018 and 20142017 were $9.20, $7.33$5.85, $10.87 and $6.63,$11.76, respectively. The cash proceeds from stock options exercised were $0.1$0.0 million, $0.1$0.0 million and $0.1$0.7 million for fiscal years ended 2016, 20152019, 2018 and 2014,2017, respectively. There was no income tax benefit related to the exercise of stock options for fiscal years ended June 30, 2016, 20152019, 2018 and 2014. 2017.
31
Under the Omnibus Stock Plan, the Company issued 15,585, 8,016 and 6,997 restricted shares to non-executive directors as compensation and recorded expense of $0.4 million, $0.3 million and $0.4 million during fiscal years ended June 30, 2019, 2018 and 2017, respectively.
During the fiscal year ended June 30, 2019, the Company recorded $0.2 million compensation expense for grants of an aggregate 18,789 restricted stock units under the plan to two executive officers as per their notification of award letters dated July 1, 2018. The Company also recorded $0.1 million compensation expense for grants of an aggregate 26,961 options under the plan to three executive officers as per their notification of award letters dated January 15, 2019.
The Company awarded 30,000 restricted stock units, 30,000 options and 3,186 restricted stock shares to its Chief Executive Officer per notification of award letters dated December 28, 2018. The Company recorded $0.5 million compensation expense during the fiscal year related to these grants to the Chief Executive Officer.
The Company granted 4,169 restricted stock units as inducement grants to non-executive officers during the fiscal year at a nominal expense.
During the fiscal year ended June 30, 2018, the Company recorded $0.3 million compensation expense for grants of an aggregate 6,280 restricted stock units under the plan to two executive officers as per their notification of award letters dated July 1, 2017.
At June 30, 2016, 566,4742019, there were 227,897 shares were available for future grants.
2002, 2006 and 2009 Stock Option Plans
The stock option plans were for key employees, officers and directors and provided for granting incentive and nonqualified stock options. Under the plans, options were granted at an exercise price equal to the fair market value of the underlying common stock at the date of grant and exercisable for up to 10 years. All options were exercisable when granted. No additional options can be granted under the 2006 and 2009 stock option plans. There were no options granted and no expense was recorded under these Plansplans during the fiscal years ended June 30, 2016, 20152019, 2018 and 2014.2017.
The cash proceeds from stock options exercised were $1.5$0.1 million, $1.6$0.2 million and $2.3$0.4 million for fiscal years ended 2016, 20152019, 2018 and 2014,2017, respectively. The income tax benefit related to the exercise of stock options were $1.6$0.0 million, $0.4$0.1 million and $0.4$0.6 million for fiscal years ended 2016, 20152019, 2018 and 2014,2017, respectively.
(3) | Outside a Plan |
During the fiscal year ended June 30, 2019, the Company awarded its new President and Chief Executive Officer 55,000 options outside any Company stock plan. The Company recorded $0.1 million compensation expense related to this grant during the fiscal year ended June 30, 2019.
(4) | Summary |
A summary of the status of the Company’s stock option plans as of June 30, 2016, 20152019, 2018 and 20142017 and the changes during the years then ended is presented below:
| Aggregate | ||||||||||||
| Shares | Weighted Average | Intrinsic Value | ||||||||||
| (in thousands) | Exercise Price | (in thousands) | ||||||||||
| Outstanding and exercisable at June 30, 2014 | 524 | $ | 15.39 | $ | 9,403 | |||||||
| Granted | 49 | 31.48 | ||||||||||
| Exercised | (110 | ) | 15.52 | |||||||||
| Canceled | (6 | ) | 16.98 | |||||||||
| Outstanding and exercisable at June 30, 2015 | 457 | $ | 17.02 | $ | 11,916 | |||||||
| Granted | 26 | 43.09 | ||||||||||
| Exercised | (207 | ) | 12.68 | |||||||||
| Canceled | (6 | ) | 22.32 | |||||||||
| Outstanding and exercisable at June 30, 2016 | 270 | $ | 22.85 | $ | 4,638 | |||||||
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
| Aggregate |
| |||
|
| Options |
|
| Weighted Average |
|
| Intrinsic Value |
| |||
|
| (in thousands) |
|
| Exercise Price |
|
| (in thousands) |
| |||
Outstanding at June 30, 2017 |
|
| 187 |
|
| $ | 27.21 |
|
| $ | 5,039 |
|
Granted |
|
| 21 |
|
|
| 45.21 |
|
|
|
|
|
Exercised |
|
| (21 | ) |
|
| 18.89 |
|
|
|
|
|
Canceled |
|
| (21 | ) |
|
| 26.77 |
|
|
|
|
|
Outstanding at June 30, 2018 |
|
| 166 |
|
| $ | 30.65 |
|
| $ | 1,841 |
|
Granted |
|
| 100 |
|
|
| 26.89 |
|
|
|
|
|
Exercised |
|
| (5 | ) |
|
| 15.50 |
|
|
|
|
|
Canceled |
|
| (36 | ) |
|
| 36.59 |
|
|
|
|
|
Outstanding at June 30, 2019 |
|
| 225 |
|
| $ | 28.37 |
|
| $ | 72 |
|
32
The following table summarizes information for options outstanding and exercisable at June 30, 2016:2019:
| Options | Weighted Average | |||||||||||||
| Range of | Outstanding | Remaining | Exercise | |||||||||||
| Prices | (in thousands) | Life (Years) | Price | |||||||||||
| $ | 6.81 – 12.74 | 42 | 1.4 | $ | 11.38 | |||||||||
| 13.75 – 17.23 | 68 | 4.9 | 15.60 | |||||||||||
| 19.72 – 27.57 | 90 | 6.9 | 23.56 | |||||||||||
| 31.06 – 43.09 | 70 | 8.6 | 35.81 | |||||||||||
| $ | 6.81 – 43.09 | 270 | 6.0 | $ | 22.85 | |||||||||
|
| Options |
|
| Weighted Average |
| ||||||||
Range of |
|
| Outstanding |
|
| Remaining |
|
| Exercise |
| ||||
Prices |
|
| (in thousands) |
|
| Life (Years) |
|
| Price |
| ||||
$ | 8.55–13.90 |
|
|
| 14,000 |
|
|
| 1.7 |
|
| $ | 11.91 |
|
| 17.23–19.77 |
|
|
| 24,600 |
|
|
| 2.7 |
|
|
| 18.82 |
|
| 20.50–27.57 |
|
|
| 94,548 |
|
|
| 7.4 |
|
|
| 24.22 |
|
| 31.06–32.80 |
|
|
| 53,778 |
|
|
| 7.3 |
|
|
| 32.27 |
|
| 43.09–47.45 |
|
|
| 38,238 |
|
|
| 7.2 |
|
|
| 45.33 |
|
$ | 8.55–47.45 |
|
|
| 225,164 |
|
|
| 6.5 |
|
| $ | 28.37 |
|
10. BENEFIT AND RETIREMENT PLANS
Defined Contribution and Retirement Plans
The Company sponsors various defined contribution retirement plans, which cover substantially all employees, other than employees covered by multi-employer pension plans under collective bargaining agreements. Total retirement plan expense was $1.8$2.7 million, $2.0$2.8 million and $1.9$2.3 million in fiscal years 2016, 20152019, 2018 and 2014,2017, respectively. The amounts include $0.5$2.6 million, $1.7 million and $0.8 million in each fiscal year 2016, 2015years 2019, 2018 and 2014,2017, for the Company’s matching contribution to retirement savings plans.
Multi-employer Pension Plans
The Company contributes to three multi-employer defined benefit pension plans under the terms of collective-bargaining agreements that cover its union-represented employees. The risks of participating in these multi-employer plans are different from single-employer plans in the following aspects:
● | → Assets contributed to the multi-employer plan by one employer may be used to provide benefits to employees of other participating employers. |
● | If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be shared by the remaining participating employers. |
● | If a participating employer chooses to stop participating in some of its multi-employer plans, the employer may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability. |
The Company’s participation in these plans for the annual period ended June 30, 2016,2019, is outlined in the following table. Unless otherwise noted, the most recent Pension Protection Act zone status available in 20162019 and 20152018 is for the plan’s year-end at December 31, 20152018 and 2014,2017, respectively. The zone status is based on information that the Company received from the plan and is certified by the plan’s actuary. Among other factors, plans in the red zone are generally less than 65 percent funded, plans in the yellow zone are between 65 percent and 80 percent funded, and plans in the green zone are at least 80 percent funded.
|
|
|
|
|
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|
|
|
|
|
| ||||||||||||||
|
| Pension Protection |
|
|
|
|
|
|
|
|
|
|
| Expiration Date |
|
| Number of |
| ||||||||||||
|
| Act Zone Status |
|
|
| Company Contributions |
|
|
|
| of Collective |
|
| Company |
| |||||||||||||||
| EIN/Pension |
| June 30, |
| Rehabilitation |
|
| (in thousands) |
|
| Surcharge |
|
| Bargaining |
|
| Employees |
| ||||||||||||
Pension Fund |
| Plan Number |
| 2019 |
| 2018 |
| Plan Status |
|
| 2019 |
|
| 2018 |
|
| 2017 |
|
| Imposed |
|
| Agreement |
|
| in Plan |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
Central States SE and SW Areas Pension Fund |
| 36-6044243 |
| Red |
| Red |
| Implemented |
|
| $ | 154 |
|
| $ | 150 |
|
| $ | 166 |
|
| No |
|
| 03/31/2022 |
|
| 9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steelworkers Pension Trust |
| 23-6648508 |
| Green |
| Green |
| No |
|
|
| 412 |
|
|
| 345 |
|
|
| 308 |
|
| No |
|
| 04/10/2020 |
|
| 175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central Pension Fund |
| 36-6052390 |
| Green |
| Green |
| No |
|
|
| 7 |
|
|
| 6 |
|
|
| 6 |
|
| No |
|
| 02/15/2023 |
|
| 2 |
|
|
|
|
|
|
|
|
|
|
|
| $ | 573 |
|
| $ | 501 |
|
| $ | 480 |
|
|
|
|
|
|
|
|
|
|
| Pension Protection | Expiration Date | Number of | ||||||||||||||||||||||||||||||
| Act Zone Status | Company Contributions | of Collective | Company | |||||||||||||||||||||||||||||
| EIN/Pension | June 30, | Rehabilitation | (in thousands) | Surcharge | Bargaining | Employees | ||||||||||||||||||||||||||
| Pension Fund | Plan Number | 2016 | 2015 | Plan Status | 2016 | 2015 | 2014 | Imposed | Agreement | in Plan | ||||||||||||||||||||||
| Central States SE and SW Areas Pension Fund | 36-6044243 | Red | Red | Implemented | $ | 200 | $ | 248 | $ | 252 | No | 03/31/2018 | 12 | |||||||||||||||||||
| Steelworkers Pension Trust | 23-6648508 | Green | Green | No | 347 | 364 | 380 | No | 11/04/2017 | 192 | ||||||||||||||||||||||
| Central Pension Fund | 36-6052390 | Green | Green | No | 6 | 7 | 7 | No | 05/31/2017 | 3 | ||||||||||||||||||||||
| $ | 553 | $ | 619 | $ | 639 | |||||||||||||||||||||||||||
The estimated cumulative cost to exit the Company’s multi-employer plans was approximately $9.6$18.0 million on June 30, 2016.2019.
33
Supplemental Retirement Plans
The Company has unfunded supplemental retirement plans with executive officers. The plans require various annual contributions for the participants based upon compensation levels and age. All participants are fully vested. At June 30, 2016 and 2015, the supplemental retirement plan liability was $2.4 million and $4.1 million, respectively, of which $1.5 million and $1.2 million were recorded in other current liabilities and $0.9 million and $2.9 million were recorded in other long-term liabilities, respectively. The Company maintains supplemental retirement plans, collectively referred to as the Supplemental Plan, which provides for additional annual defined contributions toward retirement benefits to certain of the Company’s executive officers. For fiscal years 2016, 2015 and 2014, the benefit obligation was increased by interest expense of $0.5 million, $0.5 million and $1.4 million, deposits of $0.2 million, $0.3 million and $0.3 million, and decreased by payments of $1.0 million, $0.9 million and $3.1 million, respectively. Funds of the deferred compensation plans are held in a Rabbi Trust. The assets held in the Rabbi Trust are not available for general corporate purposes. The Rabbi Trust is subject to creditor claims in the event of insolvency, but otherwise must be used only for purposes of providing benefits under the plans. As of June 30, 2016, the Company’s deferred compensation plan assets, held in the Rabbi Trust, were invested in stock and bond funds and are recorded in the consolidated balance sheets at fair market value. As of June 30, 2016 and 2015, the fair market value of the assets held in the Rabbi Trust were $2.3 million and $3.5 million, respectively, $1.5 million and $1.1 million, respectively, of the assets are classified as other current assets and $0.8 million and $2.4 million, respectively, are classified as other noncurrent assets in the consolidated balance sheets. These assets are classified as Level 2 in accordance with fair value accounting as discussed in Note 1.
Defined Benefit Plan
The Company’s defined benefit pensionDMI Furniture Pension plan is frozen. There areterminated. The last distribution was made on March 22, 2019. The IRS determination letter was received on November 28, 2018. In total, $8.9 million was distributed from the plan to 362 participants. Of that number, $6.5 million was used to purchase annuities for 261 participants. Another $2.5 million was paid out in lump sum distributions. Final filing to the Pension Benefit Guarantee Corporation was made on April 23, 2019. As part of the termination of the plan, the Company recognized a totalpre-tax pension expense during the third quarter of 387 participants in the plan. fiscal 2019 of $2.5 million.
Retirement benefits arewere based on years of credited service multiplied by a dollar amount negotiated under collective bargaining agreements. The Company’s policy iswas to fund normal costs and amortization of prior service costs at a level that iswas equal to or greater than the minimum required under the Employee Retirement Income Security Act of 1974 (ERISA). As of June 30, 2016 and 2015,2019, the Company did not have any assets or liabilities recorded for a defined benefit plan. As of June 30, 2018, the Company recorded an accrued benefit liabilityasset related to the funded status of the defined benefit pension plan recognized on the Company’s consolidated balance sheets in other long-term liabilitiesassets of $1.6 million and $0.9 million, respectively.$0.5 million. The accumulated benefit obligation was $8.9$0.0 million and $8.0$8.1 million at fiscal years ended June 30, 20162019 and 2015,2018, respectively. The Company recorded expense of $0.1$0.0 million, $0.1$0.2 million and $0.1$0.2 million during fiscal years 2016, 20152019, 2018 and 2014,2017, respectively, related to the plan.
11. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive loss,income (loss), net of income taxes, are as follows:
| June 30, | ||||||||||||
| (in thousands) | 2016 | 2015 | 2014 | |||||||||
| Pension and other post-retirement benefit adjustments, net of tax(1) | $ | (2,203 | ) | $ | (1,584 | ) | $ | (1,251 | ) | |||
| Available-for-sale securities, net of tax(2) | (25 | ) | (152 | ) | (5 | ) | ||||||
| Total accumulated other comprehensive loss | $ | (2,228 | ) | $ | (1,736 | ) | $ | (1,256 | ) | |||
| June 30, |
| ||||||||||
(in thousands) |
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Pension and other post-retirement benefit adjustments, net of tax (1) |
| $ | – |
|
| $ | (1,684 | ) |
| $ | (1,725 | ) |
Adoption of ASU 2018-02 |
|
| – |
|
|
| (334 | ) |
|
| – |
|
Available-for-sale securities, net of tax (2) |
|
| 8 |
|
|
| (26 | ) |
|
| 12 |
|
Total accumulated other comprehensive income (loss) |
| $ | 8 |
|
| $ | (2,044 | ) |
| $ | (1,713 | ) |
(1) | The tax effect on the pension and other post-retirement benefit adjustments is a tax benefit of |
(2) | The tax effect on the available-for-sale securities is a tax benefit |
2017.
12. LITIGATION
Environmental Matters – In March 2016, the Company received a General Notice Letter for the Lane Street Groundwater Superfund Site (the “Lane Street Site”) located in Elkhart, Indiana from the U.S. Environmental Protection Agency (EPA). In April 2016, the EPA issued their proposed clean-up plan for groundwater pollution and request for public comment. The Company responded to the request for public comment in May 2016. The EPA issued a Record Decision selecting a remedy in August 2016 and estimated total costs to remediate of $3.6 million. In July 2017, the EPA issued a Special Notice Letter to the Company demanding that the Company perform the remedy selected and pay for the remediation cost and past response costs of $5.5 million. On October 12, 2017, the Company, after consultation with its insurance carriers, offered an amount, fully reimbursable by insurance coverage, to the EPA to resolve this matter. On November 6, 2017, the settlement offer extended on October 12, 2017 was rejected.
In April 2018, the EPA issued a Unilateral Administrative Order for Remedial Design and Remedial Action (the “Order”) against the Company. The Order was issued under Section 106(a) of the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), 42 U.S.C. §9606(a). The Order directs the Company to perform remedial design and remedial action for the Lane Street Site. The Order was to be effective May 29, 2018. To ensure completion of the remediation work, the EPA required the Company to secure financial assurance in the initial amount of $3.6 million, which as noted above, is the estimated cost of remedial work. The Company believes that financial assurance is not required because it meets the relevant financial test criteria as provided in the Order. In May 2018, the EPA agreed to suspend enforcement of the Order so that the Company could conduct environmental testing upgradient to its former manufacturing location pursuant to an Administrative Order on Consent (AOC). On July 5, 2018, the EPA proposed a draft AOC, to which the Company provided revisions. During the latter part of 2018, Flexsteel submitted to the EPA its proposed work plan for the upgradient testing to be conducted pursuant to the draft AOC. The EPA provided comments on that documentation on December 4, 2018. On January 23, 2019, Flexsteel submitted responses to the EPA’s comments and revised work plan documents. On April 24, 2019, the Company signed the finalized AOC with the EPA to conduct the upgradient investigation. The Company reflected a $3.6 million liability in the consolidated financial results for the fiscal year ended June 30, 2018. Despite the Company’s position that it did not cause nor contribute to the contamination, the Company continues to reflect this liability in the consolidated financials for the fiscal year ended June 30, 2019 in accordance with FASB issued Asset Retirement and Environmental Obligations (ASC 410-30). The Company continues to evaluate the
34
Order, its legal options and insurance coverages to assert its defense and recovery of current and future expenses related to this matter.
Indiana Civil Litigation – In December 2013, the Company entered into a confidential agreement to settle the Indiana Civil Litigation. The Company paid $6.25 million to Plaintiffs to settle the matter without admission of wrongdoing. During fiscal year 2017, the recovery of litigation settlement and defense costs from insurance carriers was completed. During fiscal year 2018, the Company recorded no expenses or expense reimbursements related to the Indiana Civil Litigation in the consolidated statements of income. The Company received $2.3 million and $0.3$1.2 million during the fiscal yearsyear ended June 30, 2016 and 2015, respectively,2017 for recovery of litigation settlement costs from insurers. The Company continues to believe that it did not cause or contribute to the contamination. These amounts are recorded as “litigation“Litigation settlement reimbursements (costs)” reimbursements” in the consolidated statements of income.
The Company continues to pursue the recovery of defense and settlement costs from insurance carriers. Based on policy language and jurisdiction, insurance coverage is in question. The Iowa District Court dismissed litigation filed by the Company’s insurance carriers in Iowa after the Iowa Court of Appeals found that Indiana law applied to the insurance policies in question and the Iowa Supreme Court denied further review. The dismissal was then appealed by the insurance carriers to the Iowa Supreme Court, which referred the appeal to the Iowa Court of Appeals. On August 17, 2016, the Iowa Court of Appeals affirmed the Iowa District Court dismissal. The insurance carriers may appeal to the Iowa Supreme Court. Coverage litigation is proceeding against the insurance carriers in Indiana.
During the fiscal yearsyear ended June 30, 2016, 2015 and 2014,2017, the Company recorded $0.6$0.3 million $0.6 million and $2.1 million, respectively, in legal and other related expenses that were incurred responding to the lawsuits and pursuing insurance coverage. These expenses are included in SG&A expense in the consolidated statements of income.
During the fiscal yearsyear ended June 30, 2016, 2015 and 2014,2017, the Company received approximately $0.8 million, $0.2 million and $2.8$1.2 million from insurance carriers to reimburse the Company for certain legal defense costs. These reimbursement amounts are recorded in SG&A as a reduction of legal expenses.
Employment matters – The lawsuit entitled Juan Hernandez, et al. v. Flexsteel Industries, Inc. (“Hernandez I”), was filed on February 21, 2019 in the Superior Court for the County of Riverside by former employees Juan Hernandez and Richard Diaz (together, “Plaintiffs”). Flexsteel removed the action to the United States District Court for the Central District of California on March 25, 2019. Through their attorneys, Plaintiffs allege a series of wage-and-hour claims for: (1) failure to pay minimum wages; (2) failure to pay overtime; (3) failure to provide meal periods; (4) failure to authorize and permit rest periods; (5) failure to provide accurate wage statements; (6) failure to timely pay final wages; (7) failure to reimburse for all business expenses; and (8) unfair competition. Plaintiffs seek to bring these eight causes of action on behalf of a proposed class of all current and former employees who held a non-exempt, hourly position in California since March 25, 2015.
On April 29, 2019, Plaintiffs filed a second and similarly titled lawsuit in the Superior Court for the County of Riverside (“Hernandez II”). Hernandez II is brought by the same attorneys as Hernandez I and features a single cause of action for civil penalties under the Private Attorneys General Act (“PAGA”). Plaintiffs seek to bring the PAGA cause of action on behalf of a proposed group of all current and former employees who held a non-exempt, hourly position in California since February 21, 2018.
The Hernandez I case is still in the early stages, with the parties agreeing to defer most activities, including the exchange of initial rounds of written discovery, in an effort to explore a potential early resolution of this matter. Hernandez II was only recently filed, and Flexsteel has not yet filed its responsive pleading.
In connection with the closure of its manufacturing facility in Riverside, California, Flexsteel obtained individual releases of claims from approximately 53 persons who would otherwise be part of the class.
Flexsteel agreed with Plaintiffs to engage in a full-day mediation with third-party mediator on August 14, 2019. Those mediation efforts were ultimately successful, with Flexsteel agreeing to resolve both Hernandez I and Hernandez II in principle and on a class-wide basis for $0.5 million. That settlement will serve to resolve the claims of the two Plaintiffs, as well as the approximately 270 remaining members of the class and unless an individual class member asks to be excluded.
At present, the material terms of the settlement are captured in a Memorandum of Agreement, which will be supplemented in the next 30-to-90 days with a long-form Stipulation of Settlement. Flexsteel anticipates that obtaining final approval of the parties’ settlement from the court will take at least six months and potentially longer, such that any settlement payments will not be made until calendar year 2020. The settlement amount of $0.5 million, however, has been accrued during the fiscal year ended June 30, 2019.
Other Proceedings – In March 2016, the Company received a General Notice Letter for the Lane Street Groundwater Superfund Site located in Elkhart, Indiana from the United States Environmental Protection Agency (EPA). The EPA has determined that the Company may be responsible under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). In April 2016, the EPA issued their proposed clean-up plan for groundwater pollution and request for public comment. The Company provided public comment to the proposed plan in May 2016. As of June 30, 2016, no liability was recorded in the Consolidated Balance Sheets because it is not possible to reasonably estimate the amount, if any, of remediation cost due to the early stages of determining the extent of environmental impact, allocation amount to the potentially responsible parties and remediation alternatives.
From time to time, the Company is subject to various other legal proceedings, including lawsuits, which arise out of, and are incidental to, the conduct of the Company’s business. The Company does not consider any of such other proceedings that are currently pending, individually or in the aggregate, to be material to its business or likely to result in a material effect on its consolidated operating results, financial condition, or cash flows.
13. COMMITMENTS AND CONTINGENCIES
FACILITY LEASES – the Company leases certain facilities and equipment under various operating leases. These leases require the Company to pay the lease cost, operating costs, including property taxes, insurance, and maintenance. Total lease expense related to the various operating leases was approximately $4.9 million, $3.8$4.8 million and $2.8$4.6 million in fiscal 2016, 2015years 2019, 2018 and 2014,2017, respectively.
35
Expected future minimum commitments under operating leases, excluding non-lease components, as of June 30, 20162019 were as follows:
| (in thousands) | |||||
| Fiscal Year Ended June 30, | |||||
| 2017 | $ | 3,785 | |||
| 2018 | 2,870 | ||||
| 2019 | 2,912 | ||||
| 2020 | 2,209 | ||||
| 2021 | 1,491 | ||||
| Thereafter | — | ||||
| $ | 13,267 |
(in thousands) |
|
| ||
|
| |||
Fiscal Year Ended June 30, |
|
| ||
2020 |
| $ | 4,880 |
|
2021 |
|
| 3,884 |
|
2022 |
|
| 2,229 |
|
2023 |
|
| 1,283 |
|
2024 |
|
| 1,330 |
|
Thereafter |
|
| – |
|
|
| $ | 13,606 |
|
36
14. SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION – UNAUDITED
|
|
|
|
|
|
|
| |||||||||
(in thousands, except per share amounts) |
| FOR THE QUARTER ENDED |
| |||||||||||||
| September 30 |
|
| December 31 |
|
| March 31 |
|
| June 30 |
| |||||
Fiscal 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
| $ | 113,487 |
|
| $ | 118,352 |
|
| $ | 111,542 |
|
| $ | 100,207 |
|
Gross margin |
|
| 21,791 |
|
|
| 21,474 |
|
|
| 21,328 |
|
|
| 5,347 |
|
ERP impairment |
|
| – |
|
|
| – |
|
|
| (18,668 | ) |
|
| (2,605 | ) |
Restructuring expense |
|
| – |
|
|
| – |
|
|
| – |
|
|
| (10,048 | ) |
Litigation settlement reimbursements (costs) |
|
| – |
|
|
| – |
|
|
| – |
|
|
| (475 | ) |
Net income (loss) |
|
| 1,296 |
|
|
| 1,566 |
|
|
| (15,552 | ) |
|
| (19,916 | ) |
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.16 |
|
| $ | 0.20 |
|
| $ | (1.97 | ) |
| $ | (2.52 | ) |
Diluted |
| $ | 0.16 |
|
| $ | 0.20 |
|
| $ | (1.97 | ) |
| $ | (2.52 | ) |
|
|
|
|
|
|
|
| |||||||||
(in thousands, except per share amounts) |
| FOR THE QUARTER ENDED |
| |||||||||||||
| September 30 |
|
| December 31 |
|
| March 31 |
|
| June 30 |
| |||||
Fiscal 2018: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales (1) |
| $ | 119,834 |
|
| $ | 129,392 |
|
| $ | 126,861 |
|
| $ | 113,093 |
|
Gross margin |
|
| 26,140 |
|
|
| 27,402 |
|
|
| 27,632 |
|
|
| 17,044 |
|
Environmental remediation |
|
| – |
|
|
| – |
|
|
| (3,600 | ) |
|
| – |
|
Gain on sale of facility |
|
| 1,835 |
|
|
| – |
|
|
| – |
|
|
| – |
|
Net income (loss) |
|
| 6,180 |
|
|
| 6,221 |
|
|
| 3,079 |
|
|
| 2,186 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.79 |
|
| $ | 0.79 |
|
| $ | 0.39 |
|
| $ | 0.28 |
|
Diluted |
| $ | 0.78 |
|
| $ | 0.78 |
|
| $ | 0.39 |
|
| $ | 0.28 |
|
(1) |
| (in thousands, except per share amounts) | FOR THE QUARTER ENDED | |||||||||||||||
| September 30 | December 31 | March 31 | June 30 | |||||||||||||
| Fiscal 2016: | ||||||||||||||||
| Net sales | $ | 126,531 | $ | 125,410 | $ | 125,401 | $ | 122,764 | ||||||||
| Gross margin | 27,869 | 27,684 | 28,716 | 29,430 | ||||||||||||
| Litigation settlement reimbursements | — | 250 | 2,030 | — | ||||||||||||
| Net income (1) | 5,763 | 5,366 | 6,944 | 6,164 | ||||||||||||
| Earnings per share: | ||||||||||||||||
| Basic | $ | 0.77 | $ | 0.71 | $ | 0.91 | $ | 0.80 | ||||||||
| Diluted | $ | 0.75 | $ | 0.69 | $ | 0.89 | $ | 0.79 | ||||||||
| (in thousands, except per share amounts) | FOR THE QUARTER ENDED | |||||||||||||||
| September 30 | December 31 | March 31 | June 30 | |||||||||||||
| Fiscal 2015: | ||||||||||||||||
| Net sales | $ | 108,666 | $ | 114,386 | $ | 122,529 | $ | 121,323 | ||||||||
| Gross margin | 25,520 | 27,094 | 29,667 | 27,579 | ||||||||||||
| Litigation settlement reimbursements | — | — | 250 | — | ||||||||||||
| Net income | 4,878 | 4,685 | 6,956 | 5,780 | ||||||||||||
| Earnings per share: | ||||||||||||||||
| Basic | $ | 0.66 | $ | 0.63 | $ | 0.94 | $ | 0.77 | ||||||||
| Diluted | $ | 0.64 | $ | 0.61 | $ | 0.90 | $ | 0.74 | ||||||||
During the quarter ended June 30, |
15. SUBSEQUENT EVENTS
On August 29, 2019, Flexsteel Industries, Inc. entered into an Agreement of Purchase and Sale and Joint Escrow Instructions dated August 26, 2019 to sell the Riverside property located at 7227 Central Avenue, Riverside, California for $20.5 million to Greenlaw Acquisitions, LLC. There is a $0.5 million non-refundable deposit placed in escrow and the closing is scheduled for September 26, 2019. The property is being sold “As-Is, Where-Is”.
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
| Item 9A. | Controls and Procedures |
Evaluation of disclosure controls and procedures – Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, the Company’s Chief Executive Officer (“CEO”)chief executive officer and Chief Financial Officer (“CFO”)chief financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) orand 15d-15(e)) under the Securities Exchange Act of 1934, as amended) were effective as of June 30, 2016.2019.
Changes in internal control over financial reporting – During the fiscal quarter ended June 30, 2016, there was no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that has materially affected, or is reasonably likely to materially affect the Company’s internal control over financial reporting.
Management’s Annual Report on Internal Control Over Financial Reporting – Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) or 15d-15(f) of the Securities Exchange Act of 1934, as amended. WeThe Company performed an evaluation under the supervision and with the participation of ourits management, including the CEO and CFO, to assess the effectiveness of the design and operation of ourits disclosure controls and
37
procedures under the Exchange Act as of June 30, 2016.2019. In making this assessment, wethe Company used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework (2013). Based on those criteria, management concluded that the internal control over financial reporting is effective as of June 30, 2016.2019. The effectiveness of the Company’s internal control over financial reporting as of June 30, 2016,2019, has been audited by Deloitte & Touche LLP, ourthe Company’s independent registered public accounting firm, as stated in their report in Part II, Item 8 of this Form 10-K.
| Item 9B. | Other Information |
None.
PART III
| Item 10. | Directors, Executive Officers and Corporate Governance |
The information contained in the Company’s 20162019 definitive proxy statement to be filed with the Securities and Exchange Commission under the sections captioned “Proposal 1 Election of Directors,” “Corporate Governance – Audit and Ethics Committee,” “Corporate Governance – NominationNominating Matters,” “Corporate Governance – Code of Ethics” and “Section“Corporate Governance – Delinquent Section 16(a) Beneficial Ownership Reporting Compliance”Reports” is incorporated herein by reference.
| Executive Compensation |
The information contained in the Company’s 20162019 definitive proxy statement to be filed with the Securities and Exchange Commission under the sections captioned “Executive“Director Compensation,” “Corporate Governance – Compensation Committee Interlocks and “Director Compensation,”Insider Participation” and “Executive Compensation” is incorporated herein by reference.
| Item12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information contained in the Company’s 20162019 definitive proxy statement to be filed with the Securities and Exchange Commission under the sections captioned “Ownership of Stock By Directors and Executive Officers,” “Ownership of Stock by Certain Beneficial Owners,” and “Equity Compensation Plan Information” is incorporated herein by reference.
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information contained under the sections “Related Party Transaction Policy” and “Corporate Governance – Board of Directors” in the Company’s 20162019 definitive proxy statement to be filed with the Securities and Exchange Commission under the sections “Corporate Governance – Board of Directors” and “Corporate Governance – Related Party Transaction Policy” is incorporated herein by reference.
| Item 14. | Principal Accountant Fees and Services |
The information contained in the Company’s 20162019 definitive proxy statement to be filed with the Securities and Exchange Commission under the sections captioned “Independent Registered Public Accounting Firm” is incorporated herein by reference.
PART IV
| Item15. | Exhibits, Financial Statement Schedules, and Reports on Form 8-K |
(a) (1) Financial Statements
The financial statements of the Company are set forth above in Item 8.
(2) Schedules
38
The following financial statement schedules for the years ended June 30, 2019, 2018 and 2017 are submitted herewith:
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended June 30, 2016, 20152019, 2018 and 20142017
(in thousands) | Balance at Beginning of Year | (Additions) Reductions to Income | Deductions from Reserves |
Balance at End | ||||||||||||
| Accounts Receivable Allowances: | ||||||||||||||||
| 2016 | 1,400 | (10 | ) | (90 | ) | 1,300 | ||||||||||
| 2015 | 1,370 | 72 | (42 | ) | 1,400 | |||||||||||
| 2014 | 1,560 | 6 | (196 | ) | 1,370 | |||||||||||
(in thousands)
|
| Balance at Beginning of Year |
|
| (Additions) Reductions to Income |
|
| Deductions from Reserves |
|
| Balance at End of Year |
| ||||
Accounts Receivable Allowances: |
|
|
|
|
|
|
|
|
|
|
| |||||
2019 (1) |
|
| 290 |
|
|
| 110 |
|
|
| (150 | ) |
|
| 250 |
|
2018 |
|
| 1,200 |
|
|
| (80 | ) |
|
| (20 | ) |
|
| 1,100 |
|
2017 |
|
| 1,300 |
|
|
| 70 |
|
|
| (170 | ) |
|
| 1,200 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
VAT Allowances: |
|
|
|
|
|
|
|
|
|
|
| |||||
2019 |
|
| – |
|
|
| 2,612 |
|
|
| (377 | ) |
|
| 2,235 |
|
2018 |
|
| – |
|
|
| – |
|
|
| – |
|
|
| – |
|
2017 |
|
| – |
|
|
| – |
|
|
| – |
|
|
| – |
|
(1) | The beginning balance was adjusted by $0.8 million for the adoption of Revenue Recognition ASU 2014-9. |
Other schedules are omitted because they are not required or are not applicable or because the required information is included in the financial statements.
| (3) |
Exhibit No.
39
40
Consent of Independent Registered Public Accounting Firm. Filed herewith. |
* Management contracts, compensatory plans and arrangements required to be filed as an exhibit to this report.
101.INS XBRL Instance Document.
101.SCH XBRL Taxonomy Extension Schema Document.
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB XBRL Taxonomy Extension Labels Linkbase Document.
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.
| Item 16. | Form 10-K Summary |
None.
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: | September 13, 2019 | ||||
FLEXSTEEL INDUSTRIES, INC. | |||||
By: | /S/ | ||||
Jerald K. | |||||
Chief Executive Officer | |||||
and | |||||
Principal Executive Officer | |||||
By: | /S/ | ||||
Marcus D. Hamilton | |||||
Chief Financial Officer | |||||
and | |||||
Principal Financial and Accounting Officer |
42
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: | September 13, 2019 | /S/ Thomas M. Levine | ||
Thomas M. Levine | ||||
Chair of the Board of Directors | ||||
Date: | September 13, 2019 | |||
/S/ Mary C. Bottie | ||||
Mary C. Bottie | ||||
Director | ||||
Date: | September 13, 2019 | /S/ | ||
William S. Creekmuir | ||||
Director | ||||
Date: | September 13, 2019 | /S/ Jerald K. Dittmer | ||
Jerald K. Dittmer | ||||
Director | ||||
Date: | September 13, 2019 | /S/ Michael J. Edwards | ||
Michael J. Edwards | ||||
Director | ||||
Date: | September 13, 2019 | /S/ Robert J. Maricich | ||
Robert J. Maricich | ||||
Director | ||||
Date: | September 13, 2019 | /S/ Eric S. Rangen | ||
Eric S. Rangen | ||||
Director | ||||
Date: | September 13, 2019 | /S/ Nancy E. Uridil | ||
Nancy E. Uridil | ||||
Director |
43