Item 1A. Risk Factors
Item 1A. Risk Factors
The Company is subject to a variety of risks. You should carefully consider the risk factors detailed below in conjunction with the other information contained in this Annual Report on Form 10-K. Should any of these risks materialize, the Company’s business, financial condition, and future prospects could be negatively impacted. There may be additional factors that are presently unknown to the Company or that the Company currently believes to be immaterial that could affect its business.
The ongoing global COVID-19 pandemic has caused a significant disruption in non-essential retail commerce and may continue to have a material adverse impact on our financial conditions and results of operations.
On March 11, 2020, the World Health Organization declared the current coronavirus (“COVID-19”) outbreak to be a global pandemic. In response to this declaration and the rapid spread of COVID-19 within the United States, Federal, state and local governments throughout the country have imposed varying degrees of restriction on social and commercial activity to promote social distancing in an effort to slow the spread of the illness. These measures have had a significant adverse impact upon many sectors of the economy, including non-essential retail commerce. The COVID-19 pandemic has adversely affected and is expected to continue to adversely affect our operations, supply chains, manufacturing and distribution systems. We have experienced and expect to continue to experience unpredictable reductions in the demand for our products primarily due to our customers closing their stores. We temporarily closed our manufacturing facilities in the United States and Mexico and many of our Corporate employees are working remotely. As of the date of this filing, we have reopened our manufacturing facilities. Whereas most state and local governments have begun to ease restrictions on commercial retail activity, it is possible that a resurgence in COVID-19 cases could prompt a return to tighter restrictions in certain areas of the county. In addition, there may be a risk that one or more of our employees may contract COVID-19, which may result in the need to shutdown a manufacturing or distribution location for an extended period of time, which could interrupt business service to our customers. If COVID-19 spikes in the geographic locations we are in, local governments may mandate a shutdown of one or more of our operating sites, which could interrupt service to our customers. Furthermore, the economic recession brought on by the pandemic may have a continuing adverse impact on consumer demand for our products. We expect the pandemic to have a continuing material adverse effect on our business, financial condition and results of operations, however, we are unable to predict the extent or nature of these future impacts at this time.
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Business information systems could be impacted by disruptions and security breaches.
The Company employs information technology systems to support its global business. Security breaches and other disruptions to the Company’s information technology infrastructure could interfere with operations, compromise information belonging to the Company and its customers and suppliers and expose the Company to liability which could adversely impact the Company’s business and reputation. In the ordinary course of business, the Company relies on information technology networks and systems to process, transmit and store electronic information, and to manage or support a variety of business processes and activities. Additionally, the Company collects and stores certain data, including proprietary business information, and may have access to confidential or personal information in certain areas of its businesses that is subject to privacy and security laws, regulations and customer-imposed controls. While security breaches and other disruptions to the Company’s information technology networks and infrastructure could happen, none have occurred to date that have had a material impact to the Company. Any such events could result in legal claims or proceedings, liability or penalties under privacy laws, disruption in operations, and damage to the Company’s reputation, which could adversely affect the Company’s business.
In addition, due to the COVID-19 pandemic, we have allowed certain of our employees the option to work from home. Although we continue to implement strong physical and cybersecurity measures to ensure that our business operations remain functional and to ensure uninterrupted service to our customers, our systems and our operations remain vulnerable to cyberattacks and other disruptions due to the fact that a significant portion of our employees work remotely as a result of the ongoing COVID-19 pandemic, and we cannot be certain that our mitigation efforts will be effective.
The implementation of a new business information system could disrupt the business.
The Company plans to convert certain modules from its legacy ERP system to SAP during the second quarter of fiscal 2021, which include the revenue, expenditure, fixed asset, and financial accounting modules. An ineffective implementation of the new ERP system may result in the following:
Disruption of the Company’s domestic and international supply chain;
Inability to fill customer orders accurately and on a timely basis;
Inability to process payments to suppliers and vendors;
Negative impact on financial results;
Inability to fulfill federal, state and local tax filing requirements in a timely and accurate matter; and
Increased demands of management and associates to the detriment of other corporate initiatives.
The execution of the Company’s comprehensive restructuring plan.
On June 18, 2019, the Company announced it completed the analysis and planning process and set forth the comprehensive transformation program including previously announced activities, restructuring and related expenses, expected benefits both on-going and one-time in nature to be executed over a two year period. As of June 30, 2020, 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. The Company has recorded a total cumulative cost of $55.2 million in restructuring costs through the year ended June 30, 2020. See Note 5 Restructuring of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for more information.
Delayed or missed execution or implementation of the restructuring plan may result in the following:
Ina bility to fill customer orders on a timely basis resulting in lost sales;
Increased one-time costs to implement;
Sub-optimized business model resulting in higher on-going costs and lower profitability;
Reduced savings opportunity achieved;
Overall negative impact on financial performance including cash flow from operations; and
Reduce d liquidity to fund the daily operations of the business.
Future success depends on the Company’s ability to manage its global supply chain.
The Company acquires raw materials, component parts and certain finished products from external suppliers, both U.S. and foreign. Many of these suppliers are dependent upon other suppliers in countries other than where they are located. This global interdependence
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within the Company’s supply chain is subject to delays in delivery, availability, quality, and pricing. Changes in international trade policies including tariffs could disrupt the supply chain, increase cost and reduce competitiveness. The delivery of goods from these suppliers may be delayed by customs, labor issues, geo-political pressures associated with the COVID-19 pandemic, changes in political, economic and social conditions, weather, laws and regulations. Unfavorable fluctuations in price, international trade policies, quality, delivery and availability of these products could adversely affect the Company’s ability to meet demands of customers and cause negative impacts to the Company’s cost structure, profitability and its cash flow.
Recently enacted tariffs and potential future increases in tariffs on manufactured goods imported from China could adversely affect our business. Effective September 24, 2018, the current U.S. administration imposed a 10% tariff on goods imported into the United States from China, including all furniture and furniture components manufactured in China. Effective May 10, 2019, the tariff was increased to 25% on furniture imported on or after June 1, 2019. As trade negotiations between the United States and China continue, it is unclear as to whether or not the U.S. administration will take further tariff action or perhaps grant relief to actions already put in place. Inability to reduce acquisition costs or pass through price increases may have an adverse impact on sales volume, earnings and liquidity. Similarly, increases in pricing may have an adverse impact on the competitiveness of the Company’s products relative to other furniture manufacturers with less exposure to the tariff and could also lead to adverse impacts on volume, earnings and liquidity.
Additionally, a disruption in supply from foreign countries could adversely affect our ability to timely fill customer orders for those products and decrease our sales, earnings and liquidity. Our main foreign countries we source from are Vietnam, China, Thailand and Mexico. In early 2020, the COVID-19 outbreak in China resulted in the temporary shutdown or reduced capacity of our vendors’ factories. Consequently, we experienced some out-of-stocks, but in some cases were able to provide substitutions out of inventory on hand, in-transit and from our domestic warehouses, but not enough to entirely mitigate the lost sales. Many of our vendors’ factories are back online, however, the COVID-19 outbreak has caused travel restrictions due to government regulations. The travel restrictions have caused labor shortages for our Vietnam suppliers due to limited access to workers from other surrounding countries. Consequently, we may experience shortages of certain products. It is unclear how our supply chain could be further impacted by COVID-19 and there are many unknowns including how long we will be impacted, the severity of the impacts and the probability of a recurrence of COVID-19 or similar regional or global pandemics. If we were to be unsuccessful in obtaining those products from other sources or at comparable cost, a disruption in our supply chain could adversely affect our sales, earnings, financial condition and liquidity.
Competition from U.S. and foreign finished product manufacturers may adversely affect the business, operating results or financial condition.
The furniture industry is very competitive and fragmented. The Company competes with U.S. and foreign manufacturers and distributors. As a result, the Company may not be able to maintain or raise the prices of its products in response to competitive pressures or increasing costs. Also, due to the large number of competitors and their wide range of product offerings, the Company may not be able to significantly differentiate its products (through styling, finish and other construction techniques) from those of its competitors.
Additionally, a majority of our sales are to distribution channels that rely on physical stores to merchandise and sell our products and a significant shift in consumer preference toward purchasing products online could have a materially adverse impact on our sales and operating margin. The COVID-19 pandemic could accelerate or increase the shift to online furniture purchases by changing customer shopping patterns and behaviors, including decreased consumer willingness to visit physical retail locations.
These and other competitive pressures could cause us to lose market share, revenues and customers, increase expenditures or reduce prices, any of which could have a material adverse effect on our results of operations or liquidity.
Future costs of complying with various laws and regulations may adversely impact future operating results.
The Company’s business is subject to various laws and regulations which could have a significant impact on operations and the cost to comply with such laws and regulations could adversely impact the Company’s financial position, results of operations and cash flows. In addition, inadvertently failing to comply with such laws and regulations could produce negative consequences which could adversely impact the Company’s operations.
The Company’s participation in multi-employer pension plans may have exposures under those plans that could extend beyond what its obligations would be with respect to its employees.
The Company participates in, and makes periodic contributions to, three multi-employer pension plans that cover union employees. Multi-employer pension plans are managed by trustee boards comprised of participating employer and labor union representatives, and the employers participating in a multi-employer pension plan are jointly responsible for maintaining the plan’s funding requirements. Based on the most recent information available to the Company, the present value of actuarially accrued liabilities in one of the multi-employer pension plans substantially exceeds the value of the assets held in trust to pay benefits. As a result of the Company’s participation, it could experience greater volatility in the overall pension funding obligations. The Company’s obligations may be
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impacted by the funded status of the plans, the plans’ investment performance, changes in the participant demographics, financial stability of contributing employers and changes in actuarial assumptions. See Note 12 Benefit and Retirement Plans of Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for more information.
Future results may be affected by various legal proceedings and compliance risk, including those involving product liability, environmental, or other matters.
The Company faces the risk of exposure to product liability claims in the event the use of any of its products results in personal injury or property damage. In the event any of the Company’s products prove to be defective, it may be required to recall or redesign such products. The Company is also subject to various laws and regulations relating to environmental protection and the discharge of materials into the environment. The Company could incur substantial costs, including legal expenses, as a result of the noncompliance with, or liability for cleanup or other costs or damages under, environmental laws. Given the inherent uncertainty of litigation, these various legal proceedings and compliance matters could have a material impact on the business, operating results and financial condition. See Note 14 Commitments and Contingencies of Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for more information .
The Company’s success depends on its ability to recruit and retain key employees and highly skilled workers in a competitive labor market.
If the Company is not successful in recruiting and retaining key employees and highly skilled workers or experiences the unexpected loss of those employees, the operations may be negatively impacted.
Additionally, we are and will continue to be dependent upon our senior management team and other key personnel. Losing the services of one or more key members of our management team or other key personnel could adversely affect our operations. In addition, COVID-19 increases the risk that certain senior executive officers or a member of the board of directors could become ill, causing them to be incapacitated or otherwise unable to perform their duties for an extended absence. Furthermore, because of the nature of the disease, multiple people working in close proximity could also become ill simultaneously which could result in the same department having extended absences. This could negatively impact the efficiency and effectiveness of processes and internal controls throughout the Company.
We have implemented work-from-home policies for certain employees. The effects of our work-from-home policies may negatively impact productivity and disrupt our business, the magnitude of which will depend, in part, on the length and severity of the restrictions and other limitations on our ability to conduct our business in the ordinary course.
Failure to anticipate or respond to changes in consumer or designer tastes and fashions in a timely manner could adversely affect the Company’s business and decrease sales and earnings.
Furniture is a styled product and is subject to rapidly changing consumer and end-user trends and tastes and is highly fashion oriented. If the Company is not able to acquire sufficient fabric variety or if the Company is unable to predict or respond to changes in fashion trends, it may lose sales and have to sell excess inventory at reduced prices.
The Company’s products are considered deferrable purchases for consumers during economic downturns. Prolonged negative economic conditions could impact the business.
Economic downturns and prolonged negative economic conditions could affect consumer spending habits by decreasing the overall demand for home furnishings and contract products. These events could impact retailers, recreational seating and healthcare businesses resulting in an impact on the Company’s business. A recovery in the Company’s sales could lag significantly behind a general economic recovery due to the deferrable nature and relatively significant cost of home furnishings and contract products purchases.
Terms of collective bargaining agreements and labor disruptions could adversely impact results of operations.
Terms of collective bargaining agreements that prevent the Company from competing effectively could adversely affect its financial condition, results of operations and cash flows. The Company is committed to working with those groups to avert or resolve conflicts as they arise. However, there can be no assurance that these efforts will be successful.
We may not be able to collect amounts owed to us.
We grant 30-day payment terms to most customers. As a result of the COVID-19 pandemic, some customers have requested extended payment terms or informed us they will not pay amounts within agreed upon terms. Some of our customers have experienced, and may in the future experience, cash flow and credit-related issues. If the negative economic effects of COVID-19 were to persist or a similar
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pandemic or another major, unexpected event with negative economic effects were to occur, we may not be able to collect amounts owed to us or such payment may only occur after significant delay. While we perform credit evaluations of our customers, those evaluations may not prevent uncollectible trade accounts receivable. Credit evaluations involve significant management diligence and judgment, especially in the current environment. Should more customers than we anticipate experience liquidity issues, if payment is not received on a timely basis, or if a customer declares bankruptcy or closes stores, we may have difficulty collecting amounts owed to us by these customers, which could adversely affect our sales, earnings, financial condition and liquidity.
Item 1B. Unresolved Staff Comments
None.