What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2020-08-31 compared with 2019-09-13 · 28 added, 188 removed, 27 unchanged (89% of the section changed)

Market for the Registrant’s Common Equity,

Related Stockholder Matters and Issuer Purchases of Equity Securities

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:

(3) an 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 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 Sleep Number Corp.

New Peer Group

Old Peer Group

The Company’s common stock is traded on the NASDAQ Global Select Market under the trading symbol FLXS.

The Company estimates there were approximately 278 holders of common stock of the Company as of June 30, 2020.

There were no repurchases of the Company’s common stock during the fiscal year ended June 30, 2019.

The payment of future cash dividends is within the discretion of the Company’s Board of Directors and will depend, among other factors, on its earnings, capital requirements and operating and financial condition.

Purchases of Equity Securities

On June 1, 2020, the Company’s Board of Directors authorized a $6 million share repurchase program through June 9, 2021.

The following table summarizes the activity of the common stock repurchases under the program for the year ended June 30, 2020.

Approximate Dollar Value

of Shares Purchased

of Shares that May Yet

as Part of Plan

June 1, 2020 through June 30, 2020

Subsequent to June 30, 2020, on August 21, 2020, the Company’s Board of Directors authorized a new share repurchase program authorizing the Company to purchase up to an aggregate of $8 million of the Company’s common stock.

The table above excludes the new $8 million share repurchase program.

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

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.

On April 6, 2020, the Company granted a stock option to its new Chief Financial Officer & Chief Operations Officer to purchase 78,884 shares of its common stock at an exercise price of $9.97 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 amended.

The option has a ten-year term and vests on April 6, 2023.

Vesting of the option is subject to such employee’s continued service with the Company through the applicable vesting date.

The Company intends to file a registration statement on a Form S-8 to register the shares of common stock underlying this option.

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 are derived from the Company’s consolidated financial statements.

Five-Year Review

4 unchanged sentences

Restructuring expense

Litigation settlement reimbursements (costs)

Gain on disposal of assets

Litigation settlement costs (reimbursement)

Operating income (loss)

4 unchanged sentences

Weighted average diluted shares outstanding

Diluted earnings per common share

Diluted earnings (loss) per common share

Cash dividends declared per common share

SELECTED DATA AS OF JUNE 30

Shareholders’

Shareholders’ equity

Trade receivables, net

2 unchanged sentences

Depreciation expense

Working capital (current assets less current liabilities)

Working capital (current assets less

current liabilities)

Current ratio

Return on ending shareholders’

Average number of employees

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

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 (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.

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 its 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.

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 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 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 identified employees.

Costs to terminate contracts as a result of restructuring activities are recognized upon termination agreement with the provider.

Other associated restructuring costs are expensed as incurred.

Any inventory impairment costs as a result of restructuring activities are accounted for as cost of goods sold.

Recently Issued Accounting Pronouncements

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, 2019, 2018 and 2017.

Amounts presented are percentages of the Company’s net sales.

FOR THE YEARS ENDED JUNE 30,

Cost of goods sold

Selling, general and administrative

Environmental remediation

ERP impairment

Restructuring expense

Gain on sale of facility

Litigation settlement (costs) reimbursements

Operating income (loss)

Interest and other income

Interest expense

Income (loss) before income taxes

Income tax benefit (provision)

Net income (loss)

Fiscal 2019 Compared to Fiscal 2018

Net sales for fiscal year 2019 were $443.6 million compared to $489.2 million in the prior fiscal year, a decrease of 9.3%.

For the fiscal year ended June 30, 2019, residential net sales were $374.5 million compared to $413.7 million for the year ended June 30, 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 the overall contraction in residential net sales.

An additional 38% of decline in residential net sales was driven by lost share on products sold through our ecommerce channel due to the significant disruption caused by the implementation of the 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, 2019, a decrease of 8.5% from net sales of $75.5 million for the year ended June 30, 2018.

Reductions in Commercial office products followed by Hospitality products drove a majority of the year over year decline.

In May 2019, the Company announced the exit of the commercial office and custom designed hospitality product lines.

The declines in these product lines was partially offset by 14% year on year growth in our Vehicle Seating product line.

Gross margin for the fiscal year ended June 30, 2019 was 15.8% compared to 20.1% for the prior year period, a decline of 430 basis points (bps).

The key drivers in the margin deterioration were one-time in nature, such as charges related to inventory impairment due to restructuring activity of $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 was driven primarily by improved pricing (80 bps) offset by higher material and input costs (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 twelve months ended June 30, 2019 were 18.3% of net sales compared to 14.7% of net sales in the prior year period.

The increase in SG&A as a percentage of net sales was primarily driven by lower volume, higher 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 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.

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 is in the process of executing 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 the 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 or ($4.13) per share for fiscal year 2019 compared to a net income of $17.7 million or $2.23 per share in the prior year period.

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 a 13% decline in Home Styles™ product sales to e-commerce customers primarily driven by product placement disruption due to the new business information system transition in the fourth quarter of fiscal 2018.

Gross margin for the fiscal year ended June 30, 2018 was 20.1% compared to 23.2% 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 29.7% compared to 36.7% in the prior year period.

The current fiscal year results were positively impacted by the passage of 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 $17.7 million or $2.23 per share for fiscal year 2018 compared to $23.8 million or $3.02 per share in the prior year period.

All earnings per share amounts are on a diluted basis.

Liquidity and Capital Resources

Working capital (current assets less current liabilities) at June 30, 2019 was $118.2 million compared to $148.7 million at June 30, 2018.

Significant changes in working capital during fiscal year 2019 included a reduction in Cash, Cash Equivalents, and Investments of $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 liabilities of $6.9 million were primarily driven by restructuring activities.

Other current

assets increased $3.5 million primarily due to income tax refunds receivable.

For the fiscal year ended June 30, 2019, capital expenditures were $21.3 million including $16.4 million for 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, 2019, and 2018, the Company had cash and cash equivalents totaling $22.2 million and $27.7 million, respectively.

The Company invested $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, 2019.

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.

Letters of credit outstanding at June 30, 2019 totaled $1.3 million.

Other than the outstanding letters of credit, the Company did not utilize borrowing availability under the credit facility, leaving borrowing availability of $8.7 million as of June 30, 2019.

The credit agreement expires June 30, 2020.

At June 30, 2019, the Company was in compliance with all of the financial covenants contained in the credit agreement.

The Company maintains an additional unsecured $10.0 million line of credit, with interest at prime minus 2%.

No amount was outstanding on the line of credit at June 30, 2019 or 2018.

This line of credit matures December 31, 2019.

Net cash provided by operating activities was $6.7 million and $27.3 million in fiscal years 2019 and 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 $17.7 million that included $8.2 million in non-cash charges and cash provided by changes in operating assets and liabilities of $3.4 million.

Non-cash charges included depreciation of $7.4 million.

Net cash used in investing activities was $5.2 million and $21.4 million in fiscal years 2019 and 2018, respectively.

In fiscal year 2019, the Company had capital expenditures of $21.3 million, proceeds from the disposition of capital assets of $0.2 million and net proceeds of investments of $15.9 million.

In fiscal year 2018, the Company had capital expenditures of $29.4 million, proceeds from 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 $7.0 million in fiscal year 2019 which included dividend payments of $6.9 million.

Net cash used in financing activities was $7.1 million in fiscal year 2018 which included dividend payments of $6.7 million.

Although Management believes that the Company currently has adequate liquidity 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 transformation process.

At June 30, 2019, the Company had no debt obligations and therefore, had no interest payments related to debt.

The following table summarizes the Company’s contractual obligations at June 30, 2019 and the effect these obligations are expected to have on the Company’s liquidity and cash flow in the future (in thousands):

Operating lease obligations

At June 30, 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.

The 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 7 to the consolidated financial statements of this Annual Report on Form 10-K.

During fiscal year 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 to position itself for growth at or above market and industry levels.

The Company has experienced and continues to experience headwinds to growth including the 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

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 fiscal 2020, the Company anticipates spending $5.0 million to $6.0 million for capital expenditures.

The Company believes it has adequate working capital and borrowing capabilities to meet these requirements.

Return on ending shareholders’ equity

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity