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Item 8. Financial Statements and Supplementary Data

2020-08-31 compared with 2019-09-13 · 391 added, 343 removed, 329 unchanged (69% of the section changed)

Financial Statements and Supplementary Data

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

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Notes to Consolidated Financial Statements

Schedule II Valuation and Qualifying Accounts

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Flexsteel Industries, Inc.

To the shareholders and the Board of Directors 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, 2019 and 2018, 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, 2019, the related notes to the consolidated financial statements, and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”).

and Subsidiaries (the "Company") as of June 30, 2020 and 2019, 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, 2020, the related notes to consolidated financial statements, and the schedule listed in the Index at Item 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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2020, 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.

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, 2020, 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 August 28, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's financial statements 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.

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/s/ Deloitte & Touche LLP

Minneapolis, Minnesota

September 13, 2019

We have served as the Company’s auditor since 1965.

Minneapolis, MN

August 28, 2020

We have served as the Company's auditor since 1965.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Flexsteel Industries, Inc.

To the shareholders and the Board of Directors of Flexsteel Industries, Inc.

Opinion on Internal Control over Financial Reporting

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In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2020, 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 consolidated financial statements and financial statement schedule as of and for the year ended June 30, 2019, of the Company and our report dated September 13, 2019, expressed an unqualified opinion on those financial statements.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements and financial statement schedule as of and for the year ended June 30, 2020, of the Company and our report dated August 28, 2020 expressed an unqualified opinion on those financial statements.

Basis for Opinion

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/s/ Deloitte & Touche LLP

Minneapolis, Minnesota

September 13, 2019

Minneapolis, MN

August 28, 2020

FLEXSTEEL INDUSTRIES, INC.

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Consolidated Balance Sheets

(Amounts in thousands, except share and per share data)

(Amounts in thousands)

CURRENT ASSETS:

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Trade Receivables - less allowances:

2020, $ 1,770 ;

Assets held for sale

Total current assets

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Property, plant and equipment, net

Operating lease right-of-use assets

Deferred income taxes

LIABILITIES AND SHAREHOLDERS’ EQUITY

LIABILITIES AND SHAREHOLDERS'

CURRENT LIABILITIES:

Accounts payable - trade

Current portion of operating lease liabilities

Accrued liabilities:

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LONG-TERM LIABILITIES:

Operating lease liabilities, less current maturities

Other liabilities

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COMMITMENTS AND CONTINGENCIES (Note 14)

SHAREHOLDERS’ EQUITY:

SHAREHOLDERS'

Common stock - $ 1 par value;

authorized 15,000 shares;

outstanding 2019, 7,902,708 shares;

2018, 7,868,298 shares

8,008 shares issued and 7,876 shares outstanding as of June 30, 2020 and 7,903 shares issued and outstanding as of June 30, 2019

Additional paid-in capital

Treasury stock, at cost;

132 shares and 0 shares as of June 30, 2020 and 2019, respectively

Retained earnings

Accumulated other comprehensive income (loss)

Total shareholders’ equity

Accumulated other comprehensive income

Total shareholders'

See accompanying Notes to Consolidated Financial Statements.

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Selling, general and administrative

Restructuring expense

Environmental remediation

ERP impairment

Restructuring expense

Gain on sale of facility

Litigation settlement (costs) reimbursements

Gain on disposal of assets

Litigation settlement costs

Operating income (loss)

Other income (expense):

Other income (expense)

Interest (expense)

Total other income

Income (loss) before income taxes

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Weighted average number of common shares outstanding:

Earnings per share of common stock:

Earnings (loss) per share of common stock

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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Net minimum pension asset

Other comprehensive gain, net of tax

Other comprehensive income (loss), net of tax

Comprehensive income (loss)

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(Amounts in thousands)

Shares ($1 Par)

Comprehensive

at June 30, 2016

of common stock:

options exercised, net

loss on available for sale investments, net of tax

incentive compensation

tax benefit from stock-based payment arrangements

pension liability adjustment, net of tax

dividends declared

at June 30, 2017

of common stock:

options exercised, net

loss on available for sale investments, net of tax

incentive compensation

pension liability adjustment, net of tax

dividends declared

of ASU 2018-02

at June 30, 2018

of common stock:

options exercised, net

loss on available for sale investments, net of tax

incentive compensation

pension liability adjustment, net of tax

dividends declared

income (loss)

at June 30, 2019

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.

Shares ($ 1 Par)

(Loss) Income

Balance at June 30, 2017

Issuance of common stock:

Stock options exercised, net

Unrealized loss on available for sale investments, net of tax

Long-term incentive compensation

Stock-based compensation

Minimum pension liability adjustment, net of tax

Cash dividends declared

ASU 2018-02 adoption

Balance at June 30, 2018

Issuance of common stock:

Stock options exercised, net

Unrealized gain on available for sale investments, net of tax

Long-term incentive compensation

Stock-based compensation

Minimum pension liability adjustment, net of tax

Cash dividends declared

Balance at June 30, 2019

Issuance of common stock:

Stock options exercised, net

Unrealized gain on available for sale investments, net of tax

Long-term incentive compensation

Stock-based compensation

Treasury stock purchases

Cash dividends declared

ASU 2016-02 adoption

Balance at June 30, 2020

Cash dividends declared per common share were $ 0.71 , $ 0.88 and $ 0.88 for the fiscal years ended June 30, 2020, 2019 and 2018, respectively.

See accompanying Notes to Consolidated Financial Statements .

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Net (loss) income

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Adjustments to reconcile net income to net cash provided by operating activities:

Deferred income taxes

Stock-based compensation expense

Excess tax benefit from stock-based payment arrangements

Change in provision for losses on accounts receivable

Loss reserve for uncollectible VAT

Changes in provision for losses on accounts receivable

Change in reserve for VAT receivable

Dubuque and Starkville property, plant and equipment impairment

Right-of-use asset impairment

ERP impairment

Restructuring expense

Cash payments for restructuring

(Gain) on disposition of capital assets

Gain on life insurance policies

Defined benefit plan termination

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Capital expenditures

Net cash used in investing activities

Net cash provided by (used in) investing activities

FINANCING ACTIVITIES:

Dividends paid

Treasury stock purchases

Proceeds from line of credits

Payments on line of credits

Proceeds from issuance of common stock

Shares issued to employees, net of shares withheld

Excess tax benefit from share-based payment

Shares withheld for tax payments on vested restricted shares

Net cash used in financing activities

(Decrease) increase in cash and cash equivalents

Increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

FOR THE YEARS ENDED JUNE 30,

SUPPLEMENTAL INFORMATION

Income taxes paid, net

Income taxes (refunded) paid

Capital expenditures in Accounts payable

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DESCRIPTION OF BUSINESS – Flexsteel Industries, Inc.

and Subsidiaries (the “Company”) incorporated in 1929 celebrated its 125 th anniversary of the Company’s founding in 1893 during 2018.

Flexsteel Industries, Inc.

is one of the oldest and largest manufacturers, importers and marketers of residential and contract upholstered and wooden furniture products in the United States.

Over the generations the Company has built a committed retail and consumer following based on its patented, guaranteed-for-life Blue Steel Spring TM – the all-riveted, high-carbon, steel-banded seating platform that gives upholstered and leather furniture the strength and comfort to last a lifetime.

With offerings for use in home, healthcare, and recreational seating, the Company distributes its furniture throughout the United States and Canada through the Company’s sales force and various independent representatives.

and Subsidiaries (the “Company”) is one of the largest manufacturers, importers and online marketers of residential furniture and products in the United States.

Product offerings include a wide variety of upholstered furniture such as sofas, loveseats, chairs, reclining and rocker-reclining chairs, swivel rockers, sofa beds, convertible bedding units, occasional tables, desks, dining tables and chairs and bedroom furniture.

A featured component in most of the upholstered furniture is a unique steel drop-in seat spring from which the name “Flexsteel” is derived.

The Company distributes its products throughout the United States through its e-commerce channel and dealer network.

COVID-19 – in March 2020, a novel strain of coronavirus (“COVID-19”) was declared a global pandemic by the World Health Organization.

This pandemic has negatively affected the U.S.

and global economies, disrupted global supply chains and financial markets, led to significant travel and transportation restrictions, including mandatory business closures and orders to shelter in place.

The Company’s business operations and financial performance for the fiscal year 2020 were impacted by COVID-19.

These impacts are discussed within these notes to the condensed consolidated financial statements.

The COVID-19 pandemic remains fluid and the extent of the impact to our business may be significant, however, we are unable to predict the extent or nature of these impacts at this time.

PRINCIPLES OF CONSOLIDATION – the consolidated financial statements include the accounts of Flexsteel Industries, Inc.

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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 Generally 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 and certain accrued liabilities are carried at amounts which reasonably approximate their fair value due to their short-term nature.

GAAP 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:

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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 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.

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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

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.

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.

For assets held for sale, if the net book value of the asset is greater than its estimated fair value less cost to sell, an impairment is recorded for the excess of net book value over estimated fair value less cost to sell.

ASSETS HELD FOR SALE – Assets held for sale represent land, buildings, machinery and equipment for locations that have met the criteria of “held for sale” accounting, as specified by Accounting Standards Codification (“ASC”) 360, “Property, Plant, and Equipment.” Once an asset is classified as held for sale, the Company ceases deprecating the asset.

The assets held for sale are being marketed for sale and it is the Company’s intention to complete the sale of the assets within the upcoming year.

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 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.

LEASES – On July 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No.

2016-02, Leases (Topic 842) (“ASC 842”) and the related amendments.

ASC 842 requires lessees to (i) recognize a right of use asset and a lease liability that is measured at the present value of the remaining lease payments, on the consolidated balance sheets, (ii) recognize a single lease cost, calculated over the lease term on a straight-line basis and (iii) classify lease related cash payments within operating and financing activities.

The Company adopted ASC 842 utilizing the optional transition method, which allows guidance to be initially applied at the adoption date with a cumulative-effect adjustment to the opening balance of retained earnings.

The Company elected the package of practical expedients, which allows the Company to forgo reassessing prior conclusions on lease definition, classification and initial direct costs related to existing leases as of the adoption date.

The Company has made an accounting policy election to not recognize short-term leases on the consolidated balance sheets and all non-lease components, such as common area maintenance, were excluded .

See Note 2, Leases , for the Company’s lease disclosures.

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 control of the promised 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.

REVENUE RECOGNITION – Revenue is recognized when control of the promised goods or services is transferred 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 United States.

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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:

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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 ).

The Company records revenue based on a five-step model in accordance with 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.

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 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):

The following table disaggregates the Company’s net sales by product category:

For the years ended June 30,

(in thousands)

ADVERTISING COSTS – are charged to selling, general and administrative expense in the periods incurred.

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Expenditures for design, research and development costs were approximately $ 4.0 million, $ 4.4 million and $ 3.9 million in fiscal years 2020, 2019 and 2018, respectively.

INSURANCE – the Company is self-insured for health care and most workers’

compensation up to predetermined amounts above which third party insurance applies.

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 $ 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.

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.

The Company records these insurance accruals within “Accrued liabilities – insurance” on the consolidated balance sheets.

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Diluted EPS of common stock includes the dilutive effect of potential common shares outstanding.

The Company’s potential common shares outstanding are stock options, shares associated with the long-term management incentive compensation plan and non-vested restricted shares.

The Company calculates the dilutive effect of outstanding options using the treasury stock method;

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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

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.

The Company calculates the dilutive effect of shares related to the long-term management incentive 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 2020, 2019 and 2018, net income as reported for each respective period is divided by the fully diluted weighted average number of shares outstanding:

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Anti-dilutive shares

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;

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SEGMENT REPORTING – the Company operates in one reportable segment, furniture products.

The Company’s operations involve the distribution of manufactured and imported furniture for residential and contract 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’s operations involve the distribution of manufactured and imported furniture for residential and contract 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.

TREASURY STOCK – treasury stock purchases are stated at cost and presented as a reduction of equity on the consolidated balance sheets.

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

As of June 30, 2020, the Company purchased a total of 132 thousand shares at a cost of $1.6 million.

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.

Unadopted Accounting Pronouncements

ASC 840, Leases .

The effects of adopting the new standard (ASC 842, Leases ) in fiscal 2020 will be recognized as a cumulative-effect

adjustment to retained 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 historical lease classification as operating or capital leases.

The most significant impact of adoption will

be the recognition of right of use assets and lease liabilities in the range of approximately $12.6 million to $13.4 million

for operating leases.

We currently estimate

the cumulative pre-tax impact of these changes to retained earnings to be immaterial in fiscal 2020.

We do not believe the

standard will materially affect our consolidated statements of income or cash flows.

As part of our adoption, we have also

modified our internal control procedures and processes.

In June 2016, the FASB issued ASU 2016-13 “Financial Instruments - Credit Losses (Topic 326)” and also issued subsequent amendments to the initial guidance under ASU 2018-19, ASU 2019-04 and ASU 2019-05 (collectively Topic 326).

Topic 326 requires the measurement and recognition of expected credit losses for financial assets held at amortized cost.

This replaces the existing incurred loss model with an expected loss model and requires the use of forward-looking information to calculate credit loss estimates.

The amendments in this guidance are effective for fiscal years beginning after December 15, 2019, with early adoption permitted for certain amendments.

Topic 326 must be adopted by applying a cumulative effect adjustment to retained earnings.

The Company does not expect adoption of the new guidance to have a significant impact on its financial statements.

In December 2019, the FASB issued ASU 2019 - 12 “Income Taxes Simplifying the Accounting for Income Taxes (Topic 740)” as part of its initiative to reduce complexity in the accounting standards.

The amendments in ASU 2019 - 12 eliminate certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences.

ASU 2019 - 12 also clarifies and simplifies other aspects of the accounting for income taxes.

The amendments in this guidance are effective for fiscal years beginning after December 15, 2020, with early adoption permitted.

The Company does not expect adoption of the new guidance to have a significant impact on its financial statements.

Effective July 1, 2019, the Company adopted ASC 842, which resulted in a recognition of right-of-use (“ROU”) assets and lease liabilities on the Company’s consolidated balance sheets.

ROU assets represent the right to use an underlying asset for the lease term and lease liabilities reflect the obligation to make lease payments arising from the lease.

At any given time during the lease term, the lease liability represents the present value of the remaining lease payments and the ROU asset is measured as the amount of the lease liability, adjusted for pre-paid rent, unamortized initial direct costs and the remaining balance of lease incentives received.

Both the lease ROU asset and liability are reduced to zero at the end of the lease term.

The Company leases distribution centers and warehouses, manufacturing facilities, showrooms and office space.

At the lease inception date, the Company determines if an arrangement is, or contains a lease.

Some of the Company’s leases include options to renew at

similar terms.

The Company assesses these options to determine if the Company is reasonably certain of exercising these options based on relevant economic and financial factors.

Options that meet these criteria are included in the lease term at the lease commencement date.

The Company does not record leases with a term of 12 months or less on the Company’s consolidated balance sheets.

For purposes of measuring the Company’s ROU asset and lease liability, the discount rate utilized by the Company was based on the average interest rates effective for the Company’s two $ 10.0 million lines of credit.

Some of the Company’s leases contain variable rent payments, including common area maintenance and utilities.

Due to the variable nature of these costs, they are not included in the measurement of the ROU asset and lease liability.

During the fourth quarter of fiscal 2020, as part of the Company’s strategic SKU rationalization initiative, the Company exited two showroom space leases.

In conjunction with the exit, the Company impaired the ROU assets to their fair value as of June 30, 2020.

The total amount of the write-off was $ 2.9 million and is included in selling, general and administrative expenses on the Company’s consolidated statements of income for the fiscal year ended June 30, 2020.

The components of the Company’s leases reflected on the Company’s consolidated statements of income were as follows:

(in thousands)

June 30, 2020

Operating lease expense

Variable lease expense

Total lease expense

Other information related to leases and future minimum lease payments under non-cancellable operating leases as were as follows:

June 30, 2020

(in thousands)

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases

Right-of-use assets obtained in exchange for lease liabilities:

Operating leases

Weighted-average remaining lease term (in years):

Operating leases

Weighted-average discount rate:

Operating leases

(in thousands)

Within one year

After one year and within two years

After two years and within three years

After three years and within four years

After four years and within five years

After five years

Total future minimum lease payments

Less – Discount

Lease liability

Prior to the adoption of ASU 842, future minimum lease payments under non-cancellable operating leases based on accounting standards applicable as of June 30, 2019 were as follows:

(in thousands)

Total future minimum lease payments

A comparison of inventories is as follows:

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Less accumulated depreciation

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.

The Company recognized impairment charges of $ 17.5 million and $ 21.3 million in fiscal 2020 and 2019, respectively.

No impairment charge was recorded in fiscal 2018.

The $ 17.5 million impairment charge in fiscal 2020 primarily resulted from the previously announced exit of the Company’s Vehicle Seating and remaining Hospitality product lines, which resulted in the closure of the Company’s Dubuque, Iowa and Starkville, Mississippi manufacturing facilities, and is recorded in restructuring expense on the Company’s consolidated statements of income.

The Company recorded these assets as held for sale as of June 30, 2020, see Note 6 Assets held for Sale for more information.

The $ 21.3 million impairment charge in fiscal 2019 was primarily due to reassessment of the Company’s future deployment related to its SAP implementation and is reflected in the ERP impairment of the Company’s consolidated statements of income.

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, and subsequently closed its Riverside, California manufacturing facility.

On September 26, 2019, the Company closed on the sale of the Riverside property resulting in net proceeds to the Company of $ 19.6 million after customary closing costs, prorations, and sales commissions and the Company recorded a pre-tax gain of $ 18.9 million and is reflected in the Gain (loss) on disposal assets of the Company’s consolidated statements of income.

These changes were initial outcomes driven from customer and product line profitability and footprint utilization analyses in the fourth quarter of fiscal 2019.

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 a two-year period, which includes previously announced restructuring activities on May 15, 2019.

The transformation program includes activities such as business simplification, process improvement, exiting of non-core businesses, facility closures, and reductions in work force.

The Company has substantially completed the portion of the restructuring activities related to the exit of the Commercial Office and custom-designed Hospitality product lines.

On April 28, 2020, the Company announced it will exit the Vehicle Seating and the remainder of the Hospitality product lines, and subsequently closed its Dubuque, Iowa and Starkville, Mississippi manufacturing facilities.

The Company expects to complete the restructuring activities related to the exit of the Vehicle Seating and the remainder of the Hospitality product lines during fiscal 2021.

As a result of these planned actions, the Company expects to incur pre-tax restructuring and related expenses of approximately $ 56 to $ 58 million over this two-year timeframe of which $ 25 to $ 26 million will be cash and $ 31 - $ 32 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):

Restructuring

Cost incurred

Total cumulative restructuring and related costs incurred as of June 30, 2020 were $ 55.2 million.

The following is a summary of restructuring costs:

For the years ended June 30,

(in thousands)

Inventory impairment

One-time employee termination benefits

Contract termination costs

Fixed asset impairments

Other associated costs

Total restructuring and related expenses

Cost of goods sold

Operating expenses

Other associated costs include legal and professional fees, stock-based compensation expense for retention restricted stock units in connection with the Company’s restructuring plan, on-going facilities and transition costs.

The rollfoward of the accrued restructuring costs is as follows, for the years ended June 30, 2020, 2019, and 2018:

(in thousands)

Accrual balance at June 30, 2018

Costs incurred

Expenses paid

Accrual balance at June 30, 2019

Costs incurred

Expenses paid

Accrual balance at June 30, 2020

ASSETS HELD FOR SALE

During the fiscal year 2020, the Company committed to a plan to sell assets located at the Company’s Harrison, Arkansas, Dubuque, Iowa, and Starkville, Mississippi locations as part of the Company’s restructuring plan, see Note 5 Restructuring .

The Company had previously included assets at its Huntingburg, Indiana location as assets held for sale for the quarter ended March 31, 2020.

During the quarter ended June 30, 2020, the Company has reclassified the Huntingburg, Indiana assets out of assets held for sale, since the Company is currently using the warehouse to store inventory.

As of June 30, 2020, the Company reclassified a net book value of $ 51 thousand for the Huntingburg, Indiana assets to property, plant and equipment.

A summary of the assets held for sale is included in the table below as of June 30, 2020.

Asset Category

(in thousands)

Harrison, Arkansas

Building & building improvements

Land & land improvements

Machinery & equipment

Dubuque, Iowa

Building & building improvements

Land & land improvements

Machinery & equipment

Starkville, Mississippi

Building & building improvements

Land & land improvements

Machinery & equipment

The Company has two facilities in Harrison, Arkansas and one of the facility has been sold subsequent to June 30, 2020.

See Note 16 Subsequent Events , for further discussion.

OTHER NONCURRENT ASSETS

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CREDIT ARRANGEMENTS

The Company entered into an unsecured credit agreement on June 30, 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% (3.40% at June 30, 2019), 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 unsecured $10.0 million line of credit, with interest at prime (Wall Street Journal US Prime Rate) minus 2% (3.5% at June 30, 2019).

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

This line of credit matures December 31, 2019.

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.

The Company had an unsecured credit agreement with Wells Fargo Bank N.A.

(“Wells”) that provided short-term capital financing up to $ 10.0 million with interest of LIBOR plus 1 %.

The credit agreement expired on June 30, 2020 and there were no balance outstanding as June 30, 2020.

Letters of credit outstanding at Wells as of June 30, 2020, totaled $ 1.2 million, of which $ 1.3 million of the Company’s cash held at Wells is pledged as collateral.

The Company had an additional unsecured $ 10.0 million line of credit with MidwestOne Bank, with interest at prime minus 2 %, subject to a floor of 3.75 %.

The credit agreement expired on June 30, 2020 and there were no balance outstanding as of June 30, 2020.

On August 28, 2020, the Company entered into a secured $ 25.0 million credi t facility with Dubuque Bank & Trust Company, with a two year term and interest of 1.50 % plus LIBOR, subject to a floor of 3.0 %.

The credit facility expires on August 28, 2022 .

The credit facility is secured by essentially all of the Company’s assets, excluding real property and requires the Company maintain compliance with certain financial and non-financial covenants.

No borrowings have been made on the $ 25.0 million credit facility.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted and signed into law in response to the COVID-19 global pandemic.

Certain provisions of the CARES Act impacted the current fiscal year 2020.

The CARES Act permits net operating losses (“NOLs”) incurred in tax years 2018, 2019, and 2020, (the Company’s fiscal years 2019, 2020 and 2021) to offset 100% of taxable income and be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes.

The Company evaluated the impact of the CARES Act during the year ended June 30, 2020 and recorded an income tax receivable of $ 4.5 million for the benefit of carrying back the fiscal year 2020 NOL and an income tax receivable of $ 8.2 M for the benefit of carryback the fiscal year 2019 NOL.

As the Company is carrying the losses back to years beginning before January 1, 2018, the receivables were recorded at the previous 35 % federal tax rate rather than the current statutory rate of 21 %.

The Company recognizes deferred tax assets to the extent that they believe the assets are more likely than not to be realized.

In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, and results of recent operations.

As of June 30, 2020, it was determined the Company has not reached a more likely than not position that the Company will realize all of its deferred tax assets.

Therefore, the Company has recorded a valuation allowance against the federal and state deferred tax assets of $ 8.5 million.

Income tax expense was calculated based upon the following components of income (loss) before income taxes for the years ended June 30:

(in thousands)

United States

Outside the United States

Income (loss) before income taxes

The income tax benefit (provision) is as follows for the years ended June 30:

(in thousands)

Federal - current

State and other - current

Reconciliation between the U.S.

federal statutory tax rate and the effective tax rate is as follows for the years ended June 30:

Federal statutory tax rate

State taxes, net of federal effect

Valuation allowance

CARES Act legislation

Effective tax rate

The components of the gross liabilities related to unrecognized tax benefits and the related deferred tax assets are as follows:

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Deferred tax assets

Valuation allowance

Net deferred tax assets

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

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Additions based on tax positions related to the current year

Additions for tax positions of prior years

Reductions for tax positions of prior years

Balance at June 30

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.

The income tax provision is as follows for the years ended June 30:

(in thousands)

Federal – current

State and other – current

Reconciliation between the U.S.

federal statutory tax rate and the effective tax rate is as follows for the years ended June 30:

Federal statutory tax rate

State taxes, net of federal effect

Effective tax rate

The Company records interest expense 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.

The amount of unrecognized tax benefits as of June 30, 2020 and 2019 that if recognized, would affect the effective tax rate was $ 0.5 million and $ 0.4 million respectively.

The primary components of deferred tax assets and (liabilities) are as follows:

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Net operating loss carryover

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.

Lease liabilities

At June 30, 2020, certain state tax attribute carryforwards of $ 3.2 million were available, with $ 0.6 million of credits expiring between 2021 and 2029, $ 1.6 million of credits with an indefinite carryforward period, and $ 1.0 million of state NOL carryforward.

Some of the state NOL carryforward will have an indefinite carryforward and some will expire in varying amounts between 2025 and 2040.

As of June 30, 2020, it was determined the Company has not reached a more likely than not position the Company will realize any portion of the state attribute carryforwards.

Therefore, the Company has recorded a valuation allowance against the state attribute carryforward.

As of June 30, 2020, it was determined the Company has not reached a more likely than not position that the Company will realize all of its U.S.

federal deferred tax assets.

As a result of the CARES Act, the Company is able to realize a portion of its U.S.

federal deferred tax assets, however, it will not realize the remainder.

Therefore, the Company has a recorded a valuation allowance against its U.S federal deferred tax assets for $ 4.6 million.

The Company is subject to U.S.

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Generally, tax years 2016–2019 remain open to examination by the Internal Revenue Service or other taxing jurisdictions to which the 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.

As of June 30, 2020, there is an ongoing federal income tax audit for tax years 2018-2019.

STOCK-BASED COMPENSATION

The Company has two stock-based compensation methods available when determining employee compensation.

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 Compensation Committee of the Board of Directors (the “Committee”).

The Company’s shareholders previously approved 700,000 shares to be issued under the plan.

As of June 30, 2019, 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, 2016 – June 30, 2019 (2017-2019), July 1, 2017 – June 30, 2020 (2018-2020) and July 1, 2018 – June 30, 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 verification of 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 (income) expense of ($0.2) million, ($0.4) million and $0.9 million for fiscal years ended June 30, 2019, 2018 and 2017, respectively.

If the target performance goals for 2017-2019, 2018-2020 and 2019-2021 would be achieved, the total amount of compensation cost recognized over the requisite performance periods would be $0.8 million, $0.5 million and $0.3 million for each of the performance 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

Fiscal Year 2017 – 2019

Fiscal Year 2018 – 2020

Fiscal Year 2019 – 2021

Omnibus Stock Plan

The Company accounts for its stock-based compensation plans in accordance with ASC 718, Stock Compensation , which requires the Company to measure all share-based payments at grant date fair value and recognize the cost over the requisite service period.

Restricted shares and restricted stock units (“RSUs”) generally vest over 1 to 3 years.

Stock options are granted at an exercise price equal to the fair value of the Company’s common stock price at the grant date and are exercisable for up to 10 years.

Stock-based compensation is included in selling, general and administrative, and restructuring expenses on the consolidated statements of income.

The stock-based compensation expense included in restructuring expense were for retention RSUs in connection with the Company’s restructuring plan.

Forfeitures are recognized as incurred.

Total stock-based compensation expense was $ 4.6 million, $ 1.4 million and $ 0.5 million for fiscal years 2020, 2019 and 2018, respectively.

The Company has two stock-based compensation plans available for granting awards to employees and directors.

(1) Long-Term Incentive Compensation Plan (“LTICP”)

The LTICP provides for RSUs to be awarded to officers and key employees based on performance targets set by the Compensation Committee of the Board of Directors (the “Committee”).

The Company selected fully-diluted earnings per share and total shareholder return as the performance goal for the three year performance periods from July 1, 2017 – June 30, 2020 (“2018-2020”) and July 1, 2018 – June 30, 2021 (“2019-2021”).

As of June 30, 2019, both the performance period 2018-2020 and 2019-2021 are no longer attainable.

For the July 1, 2019 – June 30, 2022 (“2020-2022”) three year performance period, the Committee selected Adjusted Earnings Before Interest and Tax with a defined percentage growth in fiscal year 2021 and 2022.

Since the 2018-2020 and 2019-2021 performance periods are no longer attainable, only RSU’s granted for the 2020-2022 performance period are included in the table below for the Company’s unvested LTICP RSUs during the year ended June 30, 2020:

Time Based Vest

Performance Based Vest

Weighted average

(shares in thousands)

Unvested as of June 30, 2019

Unvested as of June 30, 2020

Total unrecognized stock-based compensation related to the unvested LTICP RSUs was $ 1.0 million as of June 30, 2020, which is expected to be recognized over a period of 2.0 years.

(2) 2013 Omnibus Stock Plan and 2009 Stock Option Plan

The 2013 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.

The Company’s shareholders previously approved 700,000 shares to be issued under the plan.

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.

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.

Shares received as payment are retired upon receipt.

For fiscal years 2019, 2018 and 2017, the Company issued options for 100,392, 21,439 and 24,317 common shares at a weighted average exercise price of $26.89, $45.21 and $47.45 (the fair market value on the date of grant), respectively.

For fiscal years ended June 30, 2019, 2018 and 2017, the Company recorded expense of $0.6 million, $0.2 million and $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 years 2019, 2018 and 2017, respectively, under this plan;

dividend yield of 3.5%, 1.8% and 1.5%;

expected volatility of 32.7%, 31.1% and 30.8%;

risk-free interest rate of 2.7%, 1.7% and 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 years 2019, 2018 and 2017 were $5.85, $10.87 and $11.76, respectively.

The cash proceeds from stock options exercised were $0.0 million, $0.0 million and $0.7 million for fiscal years ended 2019, 2018 and 2017, respectively.

There was no income tax benefit related to the exercise of stock options for fiscal years ended June 30, 2019, 2018 and 2017.

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, 2019, there were 227,897 shares available for future grants.

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 plans during the fiscal years ended June 30, 2019, 2018 and 2017.

The cash proceeds from stock options exercised were $0.1 million, $0.2 million and $0.4 million for fiscal years ended 2019, 2018 and 2017, respectively.

The income tax benefit related to the exercise of stock options were $0.0 million, $0.1 million and $0.6 million for fiscal years ended 2019, 2018 and 2017, respectively.

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.

A summary of the status of the Company’s stock option plans as of June 30, 2019, 2018 and 2017 and the changes during the years then ended is presented below:

No additional stock options can be granted under the 2009 stock option plan.

Restricted shares and RSUs

A summary of the activity in the Company’s unvested restricted shares and unvested RSUs as June 30, 2020, is presented below:

Weighted average

Intrinsic Value

(in thousands)

Exercise Price

Unvested as of June 30, 2018

Unvested as of June 30, 2019

Unvested as of June 20, 2020

Total unrecognized stock-based compensation related to unvested restricted shares and unvested RSUs was $0.8 million as of June 30, 2020, which is expected to be recognized over a weighted average period of 0.9 years.

The weighted average grant date fair value of stock options granted during fiscal years 2020, 2019 and 2018 were $ 1.77 , $ 5.85 , and $ 10.87 , respectively.

The weighted average assumptions used to estimate these fair values were as follows:

For the years ended June 30,

Dividend yield

Expected volatility

Risk-free interest rate

Expected life (in years)

The expected volatility and expected life are determined based on historical data.

The interest rate is based on U.S.

Treasury risk-free rate in affect at the date of grant for the periods corresponding with the expected term of options.

A summary of the activity of the Company’s stock option plans during the years ended June 30, 2020, 2019 and 2018, is presented below:

(in thousands)

Exercise Price

Outstanding at June 30, 2018

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Outstanding at June 30, 2020

The following table summarizes information for options outstanding and exercisable at June 30, 2019:

The following table summarizes information for options outstanding at June 30, 2020:

Weighted Average

(in thousands)

17.23 - 19.77

20.50 - 27.57

31.06 - 32.80

43.09 - 47.45

Total unrecognized stock-based compensation expense related to options was $ 0.05 million as of June 30, 2020, which is expected to be recognized over a period of 2.0 years.

Stock-based compensation granted outside a plan

During the quarter ended December 31, 2018, the Company awarded its Chief Executive Officer 55,000 options outside of any Company stock plans.

During the quarter ended June 30, 2020, the Company awarded its Chief Financial Officer/Chief Operating Officer 79,000 options outside of any Company stock plans.

Total unrecognized stock-based compensation expense related to options awarded outside a plan was $ 0.1 million as of June 30, 2020, which is expected to be recognized over a period of 2.0 years.

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 $2.7 million, $2.8 million and $2.3 million in fiscal years 2019, 2018 and 2017, respectively.

The amounts include $2.6 million, $1.7 million and $0.8 million in fiscal years 2019, 2018 and 2017, for the Company’s matching contribution to retirement savings plans.

The Company sponsors a defined contribution retirement plan, which covers substantially all employees.

The Company’s total matching contribution expense was $ 2.3 million, $ 2.6 million and $ 1.7 million in fiscal years 2020, 2019 and, 2018, respectively.

Multi-employer Pension Plans

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 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, 2019, is outlined in the following table.

Unless otherwise noted, the most recent Pension Protection Act zone status available in 2019 and 2018 is for the plan’s year-end at December 31, 2018 and 2017, respectively.

The zone status is based on information that the Company received from the plan and is certified by the plan’s actuary.

The Company’s participation in these plans for the annual period ended June 30, 2020, is outlined in the following table.

Unless otherwise noted, the most recent Pension Protection Act zone status available in 2020 and 2019 is for the plan’s year-end at December 31, 2019 and 2018, 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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(in thousands)

Central States SE and SW Areas Pension Fund

Central States SE and

‎ SW Areas Pension Fund

Steelworkers Pension Trust

Not applicable

Central Pension Fund

estimated cumulative cost to exit the Company’s multi-employer plans was approximately $18.0 million on June 30, 2019.

Defined Benefit Plan

The DMI Furniture Pension plan is terminated.

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 pre-tax pension expense during the third quarter of fiscal 2019 of $2.5 million.

Retirement benefits were based on years of credited service multiplied by a dollar amount negotiated under collective bargaining agreements.

The Company’s policy was to fund normal costs and amortization of prior service costs at a level that was equal to or greater than the minimum required under the Employee Retirement Income Security Act of 1974 (ERISA).

As of June 30, 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 asset related to the funded status of the defined pension plan recognized on the Company’s consolidated balance sheets in other assets of $0.5 million.

The accumulated benefit obligation was $0.0 million and $8.1 million at fiscal years ended June 30, 2019 and 2018, respectively.

The Company recorded expense of $0.0 million, $0.2 million and $0.2 million during fiscal years 2019, 2018 and 2017, respectively, related to the plan.

Not applicable

With the closure of the Company’s Dubuque, Iowa and Starkville, Mississippi manufacturing facilities, the collective bargaining agreements for the Steelworkers Pension Trust and Central Pension Fund was terminated as of June 30, 2020.

As of June 30, 2020, the Company intends to exit the Steelworkers Pension Trust and has recorded a withdrawal liability of $ 1.4 million as restructuring and related expenses, see Note 5 Restructuring .

The estimated cumulative cost to exit the Company’s Central States SE and SW Areas Pension Fund and Central Pension Fund multi-employer plans was approximately $ 17.1 million on June 30, 2020.

No liability has been recorded as of June 30, 2020, as the Company intends to continue to contribute to these two plans.

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

components of accumulated other comprehensive income (loss), net of income taxes, are as follows:

(in thousands)

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Available-for-sale securities, net of tax (2)

Total accumulated other

comprehensive income (loss)

The tax effect on the pension and other post-retirement benefit adjustments is a tax benefit of $0.0 million, $0.7 million and $1.1 million at June 30, 2019, 2018 and 2017, respectively.

The tax effect on the available-for-sale securities is a tax benefit $0.0 million at June 30, 2019, 2018 and 2017.

Total accumulated other comprehensive income (loss)

(1) T he tax effect on the pension and other post-retirement benefit adjustments is a tax benefit of $ 0.0 million, $ 0.0 million and $ 0.7 million at June 30, 2020, 2019 and 2018, respectively.

(2) The t ax effect on the available-for-sale securities is a tax benefit $ 0.0 million at June 30, 2020, 2019 and 2018.

COMMITMENTS AND CONTINGENCIES

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.

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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.

The EPA issued a Record of 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.

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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.

To ensure completion of the remediation work, the EPA required the Company to secure financial assurance in the initial amount a $ 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

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 $1.2 million during the fiscal year ended June 30, 2017 for recovery of litigation settlement costs from insurers.

These amounts are recorded as “Litigation settlement (costs) reimbursements” in the consolidated statements of income.

During the fiscal year ended June 30, 2017, the Company recorded $0.3 million 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 year ended June 30, 2017, the Company received approximately $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.

On April 24, 2019, the Company signed an AOC with the EPA to conduct the upgradient investigation.

The Company negotiated site access to the upgradient property over a period of months in 2019, followed by completion of sampling activities on that property on September 28-29, 2019.

Following multiple exchanges from November 2019 through early 2020, the Company submitted a final and supplemental report to the EPA regarding the results of the upgradient investigation on June 17, 2020.

On July 13, 2020, the Company further entered in to a Second Amended

Tolling Agreement that tolls the statute of limitations for potential claims by the EPA through February 24, 2021.

The Company reflected a $3.6 million liability in the consolidated balance sheets 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 balance sheets for the fiscal year ended June 30, 2020 in accordance with FASB issued Asset Retirement and Environmental Obligations (ASC 410-30) .

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.

1 unchanged sentence

(“ 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 ”).

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 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 – 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 agreed 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 Long-Form Settlement Agreement.

The Company 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 the fiscal year ended June 30, 2021.

The settlement amount of $ 0.5 million, has been accrued in other current liabilities during the fiscal year ended June 30, 2019 and continues to reflect this liability in the consolidated balance sheets for the fiscal year ended June 30, 2020.

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.

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, $4.8 million and $4.6 million in fiscal years 2019, 2018 and 2017, respectively.

Expected future minimum commitments under operating leases, excluding non-lease components, as of June 30, 2019 were as follows:

(in thousands)

Fiscal Year Ended June 30,

SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION – UNAUDITED

QUARTERLY FINANCIAL INFORMATION – UNAUDITED

(in thousands, except per share amounts)

For the Quarter Ended

ERP impairment

Restructuring expense

Litigation settlement reimbursements (costs)

Operating income (loss)

Net income (loss)

Earnings per share:

(in thousands, except per share amounts)

Earnings (loss) per share:

For the Quarter Ended

Net sales (1)

Environmental remediation

Gain on sale of facility

Operating income (loss)

Net income (loss)

Earnings per share:

the quarter ended June 30, 2018, the Company recorded a $4.4 million fiscal year-to-date correction of an immaterial error

related to variable consideration provided to customers.

The correction decreased net sales and SG&A

Earnings (loss) per share:

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”.

in and Disagreements with Accountants on Accounting and Financial Disclosure

On June 26, 2020, the Company entered into a Purchase and Sale Agreement to sell one of its Harrison, Arkansas facilities for $ 0.7 million.

The transaction closed on August 14, 2020.

The Company has one facility remaining after the sale.

On August 28, 2020, the Company entered into a new credit facility with Dubuque Bank & Trust Company, see Note 9 Credit Arrangements for more information.

Subsequent to June 30, 2020, the Company’s Lancaster, Pennsylvania property was placed for sale.

The total net book value of the Lancaster property was $ 0.8 million as of June 30, 2020.

The Company expects the sale to be completed during the first quarter of fiscal 2021.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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 8. Financial Statements and Supplementary Data