What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-09-08 compared with 2020-08-31 · 69 added, 79 removed, 86 unchanged (63% of the section changed)

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The following analysis of the results of operations and financial condition of the Company should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

COVID-19 Pandemic

The World Health Organization (“WHO”) on March 11, 2020 declared the novel coronavirus 2019 (“COVID-19”) a global pandemic.

We are monitoring the impact of the COVID-19 pandemic on our business, results of operations and financial results.

The impact on our business will depend on the length of the pandemic and local government regulations.

We have taken precautionary measures to protect the health and safety our employees, including having our employees working from home.

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.

Statement Regarding the Impact of the COVID-19 Pandemic

The World Health Organization (“WHO”) on March 11, 2020, declared novel coronavirus 2019 (“COVID-19”) a global pandemic.

In response to this declaration, the Company has taken the following actions to maneuver the current economic landscape:

 Employees that can perform work outside of the workplace may work from home,

 Suspension of the Company’s 401K match effective June 1, 2020, through December 31, 2020,

 Temporary 50% reduction of cash compensation for the Company’s Board of Directors through October 1, 2020,

 Temporary 25% reduction of salary compensation for the Company’s Chief Executive Officer and Chief Financial Officer / Chief Operating Officer through October 1, 2020,

 Temporary elimination of all non-essential expenses and capital expenditures,

 Temporary reduction of quarterly dividend payments;

 Negotiations with vendors to extend payment terms.

During the year ended June 30, 2021, we have seen improvement in our business conditions as retailers have reopened and orders have increased, however, we continue to see supply chain challenges faced by the furniture industry due to limited availability of ocean containers and significant increases in ocean container rates, limited availability and inflationary pressures in key materials, and labor shortages both in Asia and the United States.

The COVID-19 pandemic remains fluid, including as a result of COVID-19 variants, and the extent of the ongoing impact to our business may be significant;

however, we are unable to predict the extent or nature of these impacts at this time.

Business Update

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

We expect to complete the restructuring activities related to the exit of our Vehicle Seating and the remainder of the Hospitality product lines during fiscal 2021.

Both of these product lines combined represented less than 8% of the Company’s total net sales for the fiscal year ended 2020.

On June 1, 2020, we announced our Board of Directors authorized a $6 million share repurchase program through June 9, 2021.

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.

There is no guarantee as to the exact number or value of shares that will be repurchased by the Company, and the Company may discontinue repurchases at any time that management determines additional repurchases are not warranted.

We completed substantially all of the restructuring activities related to the exit of our Vehicle Seating and the remainder of the Hospitality product lines during fiscal 2021.

Both product lines combined represented less than 1% of the Company’s total net sales for the fiscal year ended 2021.

Results of Operations

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Restructuring expense

Environmental remediation

ERP impairment

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Income (loss) before income taxes

Income tax benefit (provision)

Income tax provision (benefit)

Net income (loss)

Fiscal 2021 Compared to Fiscal 2020

Net sales were $478.9 million for the year ended June 30, 2021, compared to net sales of $366.9 million in the prior year, an increase of 30.5%.

The increase in sales of $112.0 million was primarily driven by $138.8 million, or an increase of 51.1%, related to home furnishing products sold through retailers and $5.9 million, or an increase of 9.7%, for home furnishing products sold through e-commerce.

Net sales growth in our home furnishing products were virtually in all product categories due to increased demand, partially offset by a decline of $32.7 million primarily due to the exit from our Vehicle Seating and Hospitality product lines during the fourth quarter of fiscal 2020.

Gross margin as a percent of net sales for the year ended June 30, 2021, was 20.2%, compared to 14.5% for the prior year, an increase of 570 basis points (“bps”).

The 570 bps increase was primarily driven by structural cost reductions, operational efficiencies, and fixed cost leverage due to higher sales volume as compared to the prior year and lower inventory reserve due to demand.

Selling, general and administrative expenses decreased $4.5 million in the year ended June 30, 2021, compared to the prior year.

The decline in SG&A expenses was primarily due to a $3.5 million reduction in bad debt expense from the prior year driven by a customer bankruptcy.

Higher sales commission expense resulting from increased sales was largely offset by other spending reductions and lower depreciation.

As a percentage of net sales, SG&A was 14.2% in the year ended June 30, 2021, compared to the prior year of 19.7%.

The 550 bps decline compared to the prior year was primarily due to cost leverage gained from higher sales, reductions in non-essential spending due to COVID-19, lower depreciation expense due to assets sold or being held for sale, and lower bad debt expense as discussed above during the year ended June 30, 2021.

Restructuring expenses were $3.5 million during the year ended June 30, 2021, primarily for on-going utilities and maintenance costs for our facilities listed as held for sale, professional fees, and employee termination costs as part of our previously announced comprehensive restructuring plan.

See Note 5, Restructuring , of the Notes to Consolidated Financial Statements, included in this Annual Report on Form 10-K for more information.

During the year ended June 30, 2021, we completed the sale of our Dubuque, Iowa, Lancaster, Pennsylvania, and one of our Harrison, Arkansas facilities, resulting in total net proceeds of $16.4 million, and a total gain of $5.9 million.

Income tax expense was $8.4 million, or an effective rate of 26.8%, during the year ended June 30, 2021, compared to income tax benefit of $6.9 million in the prior year, or an effective tax rate of 20.5%.

Net income was $23.0 million, or $3.09 per diluted share for the year ended June 30, 2021, compared to net loss of $26.8 million, or $3.37 per diluted share in the prior year.

Fiscal 2020 Compared to Fiscal 2019

Net sales for fiscal year 2020 were $366.9 million compared to $443.6 million in the prior fiscal year, a decrease of 17.3%.

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In April 2020, we announced the exit of our Vehicle Seating, and the remainder of the Hospitality product lines.

Gross margin for the fiscal year ended June 30, 2020 was 14.5% compared to 15.8% for the prior year period, a decline of 130 basis points (bps).

Gross margin for the fiscal year ended June 30, 2020, was 14.5% compared to 15.8% for the prior year period, a decline of 130 bps.

The 130 bps decline was primarily driven by a decline of 280 bps due to lower volume and product mix, a decline of 60 bps for increased costs to improve delivery lead times, partially offset by 120 bps from valuation allowance on foreign VAT as a result of collections made during the fiscal year and 80 bps from restructuring cost improvements.

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See Note 5 Restructuring of the Notes to Consolidated Financial Statements, included in this Annual Report on Form 10-K for more information.

During the fiscal year ended June 30, 2020, we completed the sale of our Riverside, California property for the sale price of $20.5 million generating net proceeds of $19.6 million after customary closes costs, prorations and commissions.

This resulted in a recognized pre-tax gain on sale of $18.9 million.

Subsequent to June 30, 2020, the Company sold one of its facilities in Harrison, Arkansas on August 14, 2020 for a sale price of $0.7 million.

For the twelve months ended June 30, 2020, the effective tax rate was 20.5% compared to 23.5% in the prior year period.

The difference between the 2020 and 2019 rates relate to recording the current year benefit at 35% federal tax rate rather than the current statutory rate of 21% due to the carryback benefit discussed below.

The difference between the 2020 and 2019 rates relate to recording the current year benefit at a 35% federal tax rate rather than the current statutory rate of 21% due to the carryback benefit discussed below.

In addition, we recorded an $8.4 million valuation allowance against the federal and state deferred tax assets of $10.6 million.

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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 $8.2M 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 above factors resulted in a net loss of $26.8 million or $3.37 per diluted share for fiscal year 2020 compared to a net loss of $32.6 million or $4.13 per diluted share in the prior year period.

Fiscal 2019 Compared to Fiscal 2018

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

For the fiscal year ended June 30, 2019, residential net sales were $374.5 million compared to $413.7 million for the year ended June 30, 2018, a decrease of 9.5%.

The implementation of the tariff on furniture imported from China at 10% followed by an increase to 25% drove approximately 45% of the overall contraction in residential net sales.

An additional 38% of decline in residential net sales was driven by lost share on products sold through our e-commerce channel due to the significant disruption caused by the implementation of the ERP system in the beginning of fourth quarter of fiscal 2018.

Over the 2019 fiscal year, the Company continued work stabilizing the ERP system, improving service levels, inventory positions and promotions to regain share positions through the end of the second quarter of fiscal 2019.

In addition, the Company has brought in new leadership over the Company’s e-commerce strategy and execution as well as a new Chief Information Officer to drive the information technology backbone including the ERP solution to facilitate success in the channel.

The remaining reduction in residential net sales versus the 2018 fiscal year was attributed to general market softness as well as two strong comparative quarters in fiscal 2018.

Contract net sales were $69.1 million for the year ended June 30, 2019, a decrease of 8.5% from net sales of $75.5 million for the year ended June 30, 2018.

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

In May 2019, the Company announced the exit of the Commercial Office and custom designed Hospitality product lines.

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

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

The key drivers in the margin deterioration were one-time in nature, such as charges related to inventory impairment due to restructuring activity of $7.7 million (170 bps), a valuation allowance on foreign VAT of $2.6 million (60 bps), and relocation costs of the Dubuque manufacturing facility of $1.0 million (20 bps).

The remaining deterioration to last year was driven primarily by improved pricing (80 bps) offset by higher material and input costs (180 bps) and higher inventory valuation allowances for excess and obsolescence as volume declined (50 bps).

Selling, general and administrative (SG&A) expenses for the twelve months ended June 30, 2019 were 18.3% of net sales compared to 14.7% of net sales in the prior year period.

The increase in SG&A as a percentage of net sales was primarily driven by lower volume, higher IT costs associated with the implementation and stabilization of the new ERP system of $3.8 million, DMI Pension termination of $2.5 million, CEO transition costs of $2.0 million, and higher marketing and advertising costs of $1.5 million.

The twelve months ended June 30, 2018 included $3.6 million related to the April 25, 2018 United States Environmental Protection Agency’s (“EPA”) issuance of a Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) 106(a) order (the “Order”) for the Lane Street Groundwater Superfund Site located in Elkhart, Indiana reported in “Environmental remediation”.

The after-tax basis reported in “Environmental remediation” is $2.5 million or $0.32 per share.

The Company completed a $6.5 million sale of a facility and recognized a pre-tax gain of $1.8 million during fiscal year 2018.

The after-tax basis reported in “Gain on sale of facility” is $1.3 million or $0.16 per share.

The twelve months ended June 30, 2019 included $21.3 million reported in “ERP impairment” related to the impairment of the abandoned components and development work associated with unusable elements of the business information system.

The after-tax basis reported in “ERP Impairment” is $16.3 million or $2.06 per share for fiscal 2019.

Reported under “Restructuring expense” in fiscal 2019 were $10.0 million associated with the restructuring plan the Company first announced on May 15, 2019.

The Company has been in the process of executing the restructuring plan.

In fiscal 2019, the after-tax basis reported in “Restructuring expense” were $7.7 million or $0.97 per share.

In fiscal 2019, reported under “Legal settlement (costs) reimbursements” were $0.5 million associated with an employment matter and the after-tax basis reported in “Legal settlement (costs) reimbursements” were $0.4 million or $0.05 per share.

For the twelve months ended June 30, 2019, the effective tax rate was 23.5% compared to 29.7% in the prior year period.

The fiscal 2019 results were favorably impacted by a full fiscal year impact of the 2018 Tax Cuts and Jobs Act in addition to net operating losses within the fiscal year ended June 30, 2019.

The above factors resulted in a net loss of ($32.6) million or ($4.13) per diluted share for fiscal year 2019 compared to a net income of $17.7 million or $2.23 per diluted share in the prior year period.

Liquidity and Capital Resources

COVID-19 update

Due to continued uncertainties as a result of COVID-19, we implemented measures to enhance our liquidity position and improve working capital.

Due to continued uncertainties because of COVID-19, we implemented measures to enhance our liquidity position and improve working capital.

During the fourth quarter of fiscal year 2020, we reduced our quarterly dividend from $0.22 per share to $0.05 per share.

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To further bolster liquidity, on August 28, 2020, we entered into an agreement with Dubuque Bank & Trust Company, for a secured $25.0 million credit facility with a two-year term.

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

The balance of borrowings on June 30, 2021, was $3.5 million.

Working capital (current assets less current liabilities) at June 30, 2021 was $128.8 million compared to $128.4 million at June 30, 2020.

The $10.2 million increase in working capital was due to an increase in cash of $26.0 million, primarily attributable to proceeds from the sale of the Riverside, California facility of $20.5 million, increase in assets held for sale of $12.3 million, increase in other current assets of $6.6 million, and a decrease in restructuring liability of $4.2 million, partially offset by $23.1 million in inventory reduction as a result of inventory management and SKU rationalization activities, decrease in trade receivables of $5.9 million due to lower sales, and an increase in accounts payable of $9.3 million.

A summary of operating, investing and financing cash flow is show in the following table:

The $0.4 million increase in working capital reflects a $46.7 million increase in current assets offset by a $46.3 million increase in current liabilities.

The increase in current assets is primarily due to a $90.6 million increase in inventory and a $25.2 million increase in trade receivables in response to increasing sales.

These increases were offset by a decrease in cash of $46.9 million, a decline in other current assets of $9.1 million primarily due to a tax refund, and a decline of $11.7 million in assets held for sale due to the sale of facilities during the fiscal year.

The increase in current liabilities is primarily due to an increase in accounts payable of $40.0 million and a $4.8 million increase in accrued liabilities primarily due to increases in advertising accruals, commission accruals and management incentive accruals.

The decline in cash of $46.9 million was primarily due to $29.8 million share repurchases, and cash used in operating activities of $32.7 million, partially offset by $18.6 million of proceeds from the sale of the Company’s Dubuque, IA, Lancaster, PA and Harrison, AR, facilities.

Capital expenditures were $2.6 million for the fiscal year ending June 30, 2021.

A summary of operating, investing and financing cash flow is shown in the following table:

For the years ended June 30,

(in thousands)

Net cash provided by operating activities

Net cash provided by (used in) investing activities

Net cash (used in) provided by operating activities

Net cash provided by investing activities

Net cash (used in) financing activities

Increase (decrease) in cash and cash equivalents

Net cash provided by operating activities

(Decrease) increase in cash and cash equivalents

Net cash (used in) provided by operating activities

For the twelve months ended June 30, 2021, cash used in operating activities was $32.7 million, which primarily consisted of net income of $23.0 million, adjusted for non-cash items including depreciation of $5.2 million, gain from the sale of capital assets of $5.9 million, change in deferred income taxes of $2.1 million, stock-based compensation of $3.7 million and bad debt expense of $1.6 million.

Net cash used in operating assets and liabilities was $62.7 million.

The cash used in operating assets and liabilities of $62.7 million, was primarily due to an increase in trade receivables of $25.2 million due to higher sales, an increase in inventory of $90.6 million due to inventory build for the beginning of fiscal 2022, partially offset by $9.4 million decline in other current assets primarily due to receipt of an income tax net refund of $5.6 million and increases in accounts payable of $40.0 million and accrued liabilities of $4.0 million.

For the twelve months ended June 30, 2020, net cash provided by operating activities was $18.3 million, which primarily consisted of net loss of $26.8 million, adjusted for non-cash depreciation of $8.4 million, gain from sale of capital assets of $19.0 million, stock-based compensation of $4.9 million, asset impairment charges of $20.4 million, change in deferred income taxes of $5.5 million and change in accounts receivable and VAT allowance of $0.5 million.

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The cash provided by operating assets and liabilities of $25.6 million, was primarily due to a decline in inventory and accounts receivable of $23.1 million and $4.4 million, respectively, coupled with an increase in accounts payable of $9.3 million, partially offset by a decline in accrued liabilities of $6.0 million.

For the twelve months ended June 30, 2019, net cash provided by operating activities was $6.7 million, which primarily consisted of net loss of $32.6 million, adjusted for non-cash depreciation of $7.4 million, stock based compensation of $1.4 million, ERP asset impairment charge of $21.3 million, change in deferred income taxes of $6.1 million, VAT allowance of $2.6 million, and defined benefit plan termination of $2.5 million.

Net cash provided by operating assets and liabilities was $6.7 million.

The cash provided by operating assets and liabilities of $10.4 million, was primarily due to decline in inventory and accounts receivable of $2.5 million and $3.1 million, respectively, couple with an increase in accounts payable and accrued liabilities, partially offset by an increase in other assets of $6.1 million.

Net cash provided by (used in) investing activities

Net cash provided by investing activities

For the twelve months ended June 30, 2021, net cash provided by investing activities was $16.1 million, primarily due to proceeds of $18.6 million for the sale of our Dubuque, IA and Lancaster, PA, facilities and one of our Harrison, Arkansas facilities, partially offset by capital expenditures of $2.6 million.

For the twelve months ended June 30, 2020, net cash provided by investing activities was $16.8 million, due to proceeds of $20.5 million for the sale of our Riverside, California facility and other capital assets, partially offset by capital expenditures of $3.7 million.

For the twelve months ended June 30, 2019, net cash used in investing activities was $5.2 million, due to capital expenditures of $21.3 million, proceeds from the disposition of capital assets of $0.2 million and net proceeds of investments of $15.9 million.

Net cash used in financing activities

For the twelve months ended June 30, 2021, net cash used in financing activities was $30.2 million, primarily due to $29.8 million for treasury stock purchases, dividends paid of $2.6 million and $1.3 million for tax payments on employee vested restricted shares.

For the twelve months ended June 30, 2020, net cash used in financing activities was $9.1 million, primarily due to dividends paid of $7.0 million, treasury stock purchases of $1.6 million and $0.6 million for tax payments on employee vested restricted shares.

For the twelve months ended June 30, 2019, net cash used in financing activities was $7.0 million, primarily due to dividend paid of $6.9 million.

Lines of Credit

On August 28, 2020, we 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%.

Line of Credit

On August 28, 2020, we 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%, which floor was in effect on June 30, 2021.

If LIBOR is redefined or becomes unavailable, the Bank has sole discretion to substitute another index and adjust the rate spread, however it cannot materially change the total interest cost without the Company’s advance written consent.

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.

We 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 was no balance outstanding as of June 30, 2020.

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

We 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 was no balance outstanding as of June 30, 2020.

On June 30, 2021, the balance of the line of credit was $3.5 million.

Letters of credit outstanding at Wells Fargo Bank N.A.

(“Wells”) as of June 30, 2021, totaled $1.1 million, of which $1.2 million of our cash held at Wells is pledged as collateral.

Contractual Obligations

The following table summarizes our contractual obligations at June 30, 2020 and the effect these obligations are expected to have on our liquidity and cash flow in the future (in thousands):

The following table summarizes our contractual obligations on June 30, 2021, and the effect these obligations are expected to have on our liquidity and cash flow in the future (in thousands):

Operating lease obligations

At June 30, 2020, we had no capital lease obligations, and no purchase obligations for raw materials or finished goods.

On June 30, 2021, we had no capital lease obligations, and no purchase obligations for raw materials or finished goods.

Financing Arrangements

See Note 9 Credit Arrangements of Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.

The COVID-19 global pandemic presents unprecedented challenges during fiscal 2021.

Our focus for fiscal 2021 will be to preserve cash and liquidity, improve our cost structure, return to profitability at lower sales levels, and improve our capital efficiency.

The COVID-19 global pandemic presented unprecedented challenges during fiscal 2021.

Our focus for fiscal 2022 will be to remain financially agile with strong liquidity, accelerate profitable long-term growth in both retail and e-commerce sales channels, build global supply chain resiliency, expand sourcing, manufacturing and distribution capacity to support future growth, strengthen digital capabilities, reimagine the customer experience, and build strong culture and talent.

During fiscal 2022, the Company anticipates spending $11.5 million to $13.5 million for capital expenditures.

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

The Company plans to spend approximately $7 million for manufacturing capacity expansion, approximately $2.5 million for manufacturing productivity improvements, and the remaining amounts for software maintenance and general maintenance.

The Company believes it has access to adequate working capital to meet these requirements.

Critical Accounting Policies

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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.

We recorded impairments of $20.4 million and $21.3 million in fiscal 2020 and 2019, respectively.

We recorded impairments of none and $20.4 million in fiscal 2021 and 2020, respectively.

The $20.4 million impairment recorded in fiscal 2020 include $2.9 million related to our leases of two showroom spaces.

No impairment was recorded in fiscal 2018.

Restructuring Costs – The Company groups exit or disposal cost obligations into three categories:

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Recently Issued Accounting Pronouncements

Note1 to the Company’s consolidated financial statements.

Note 1 Significant Accounting Policies of the Notes to the Company’s consolidated financial statements.

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 7. Management’s Discussion and Analysis