Annual Statements Open main menu

FLEXSTEEL INDUSTRIES INC - Annual Report: 2017 (Form 10-K)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

Form 10-K 

 

☒  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 For the fiscal year ended June 30, 2017

or

☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 For the transition period from                     to

Commission file number 0-5151 

 

  FLEXSTEEL INDUSTRIES, INC.  

(Exact name of registrant as specified in its charter)

 

     
Minnesota   42-0442319
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
385 Bell Street, Dubuque, Iowa   52001
(Address of principal executive offices)   (Zip Code)
Registrant’s telephone number, including area code:   (563) 556-7730

  

  Securities registered pursuant to Section 12(b) of the Act:  

 

Title of each class Name of each exchange on which registered
Common Stock, $1.00 Par Value The NASDAQ Stock Market LLC

 

Securities registered pursuant to Section 12(g) of the Act:

 None 

(Title of Class)

  

 

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☒  No

  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ☒  No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (check one). Large accelerated filer ☐ Accelerated filer ☒  Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  ☐ No ☒

 

The aggregate market value of the voting stock held by non-affiliates, computed by reference to the last sales price on December 31, 2016 (which was the last business day of the registrant’s most recently completed second quarter) was $391,665,307.

 

Indicate the number of shares outstanding of each of the registrant’s classes of Common Stock, as of the latest practicable date. 7,823,121 Common Shares ($1 par value) as of August 11, 2017.

  

DOCUMENTS INCORPORATED BY REFERENCE 

In Part III, portions of the registrant’s 2017 Proxy Statement to be filed with the Securities and Exchange Commission within 120 days of the Registrant’s fiscal year end.

 

1 

 

 

PART I

 

Cautionary Statement Relevant to Forward-Looking Information for the Purpose of “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995 

 

The Company and its representatives may from time to time make written or oral forward-looking statements with respect to long-term goals or anticipated results of the Company, including statements contained in the Company’s filings with the Securities and Exchange Commission and in its reports to stockholders. 

 

Statements, including those in this Annual Report on Form 10-K, which are not historical or current facts, are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. There are certain important factors that could cause our results to differ materially from those anticipated by some of the statements made herein. Investors are cautioned that all forward-looking statements involve risk and uncertainty. Some of the factors that could affect results are the cyclical nature of the furniture industry, supply chain disruptions, litigation, the effectiveness of new product introductions and distribution channels, the product mix of sales, pricing pressures, the cost of raw materials and fuel, retention and recruitment of key employees, actions by governments including laws, regulations, taxes and tariffs, the amount of sales generated and the profit margins thereon, competition (both U.S. and foreign), credit exposure with customers, participation in multi-employer pension plans and general economic conditions. For further information regarding these risks and uncertainties, see the “Risk Factors” section in Item 1A of this Annual Report on Form 10-K.

 

The Company specifically declines to undertake any obligation to publicly revise any forward-looking statements that have been made to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

  

Item 1.Business

 

General

 

Flexsteel Industries, Inc. and Subsidiaries (the “Company”) was incorporated in 1929 and is one of the oldest and largest manufacturer, importer and marketer of residential and contract upholstered and wood furniture products in the United States. Product offerings include a wide variety of upholstered and wood 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. The Company’s products are intended for use in home, office, hotel, healthcare and other contract applications. A featured component in most of the upholstered furniture is a unique steel drop-in seat spring from which our name “Flexsteel” is derived. The Company distributes its products throughout the United States through the Company’s sales force and various independent representatives.

 

The Company operates in one reportable segment, furniture products. Our furniture products business involves the distribution of manufactured and imported products consisting of a broad line of upholstered and wooden furniture for residential and contract markets. Set forth below is information for the past three fiscal years showing the Company’s net sales attributable to each of the areas of application:

 

(in thousands)  FOR THE YEARS ENDED JUNE 30, 
   2017   2016   2015 
Residential  $396,099   $420,884   $393,143 
Contract   72,665    79,222    73,761 
   $468,764   $500,106   $466,904 

 

Manufacturing and Offshore Sourcing

  

We operate manufacturing facilities that are located in Arkansas, California, Georgia, Iowa, Mississippi and Juarez, Mexico. These manufacturing operations are integral to our product offerings and distribution strategy by offering smaller and more frequent product runs of a wider product selection. We identify and eliminate manufacturing inefficiencies and adjust manufacturing schedules on a daily basis to meet customer requirements. We have established relationships with key suppliers to ensure prompt delivery of quality component parts. Our production includes the use of selected component parts sourced offshore to enhance our value in the marketplace.

 

We integrate our manufactured products with finished products acquired from offshore suppliers who can meet our quality specification and scheduling requirements. We will continue to pursue and refine this blended strategy, offering customers manufactured goods, products manufactured utilizing imported component parts, and ready-to-deliver imported products. This blended focus on products allows the Company to provide a wide range of price points, styles and product categories to satisfy customer requirements.

 

2 

 

 

Competition 

 

The furniture industry is highly competitive and includes a large number of U.S. and foreign manufacturers and distributors, none of which dominates the market. The markets in which we compete include a large number of relatively small manufacturers; however, certain competitors have substantially greater sales volumes than the Company. Our products compete based on style, quality, price, delivery, service and durability. We believe that our steel seat spring, manufacturing and sourcing capabilities, facility locations, commitment to customers, product quality, delivery, service, value and experienced production, sales, marketing and management teams, are some of our competitive advantages. 

 

Seasonality 

 

The Company’s business is not considered seasonal. 

 

Foreign Operations 

 

The Company makes minimal export sales. At June 30, 2017, the Company had approximately 100 employees located in Asia to ensure Flexsteel’s quality standards are met, and coordinate the delivery of purchased products. The Company leases and operates a 225,000 square foot production facility in Juarez, Mexico utilizing contracted labor.

 

Customer Backlog

 

The approximate backlog of customer orders believed to be firm as of the end of the current fiscal year and the prior two fiscal years were as follows (in thousands):

 

June 30, 2017   June 30, 2016   June 30, 2015
$55,000   $46,700   $58,600

  

Raw Materials

  

The Company utilizes various types of wood, fabric, leather, filling material, high carbon spring steel, bar and wire stock, polyurethane and other raw materials in manufacturing furniture. While the Company purchases these materials from numerous outside suppliers, both U.S. and foreign, it is not dependent upon any single source of supply. The costs of certain raw materials fluctuate, but all continue to be readily available. 

 

Working Capital Practices

 

For a discussion of the Company’s working capital practices, see “Liquidity and Capital Resources” in Item 7 of this Annual Report on Form 10-K.

 

Industry Factors

 

The Company has exposure to actions by governments, including tariffs, see “Risk Factors” in Item 1A of this Annual Report on Form 10-K.

 

Government Regulations

 

The Company is subject to various local, state, and federal laws, regulations and agencies that affect businesses generally, see “Risk Factors” in Item 1A of this Annual Report on Form 10-K.

 

Environmental Matters

  

The Company is subject to environmental laws and regulations with respect to product content and industrial waste, see “Risk Factors” in Item 1A and “Legal Proceedings” in Item 3 of this Annual Report on Form 10-K.

 

Trademarks and Patents

 

The Company owns the American and Canadian improvement patents to its Flexsteel seat spring, as well as patents on convertible beds. The Company has patents and owns certain trademarks in connection with its furniture products, which patents are due to expire on dates ranging from 2017-2034.

 

3 

 

 

It is not common in the furniture industry to obtain a patent for a furniture design. If a particular design of a furniture manufacturer is well accepted in the marketplace, it is common for other manufacturers to imitate the same design without recourse by the furniture manufacturer who initially introduced the design. Furniture products are designed by the Company’s own design staff and through the services of third-party designers. New models and designs of furniture, as well as new fabrics, are introduced continuously. In the last three fiscal years, these design activities involved the following expenditures (in thousands):

  

Fiscal Year Ended June 30,   Expenditures
 2017   $3,700
 2016   $4,170
 2015   $4,090

 

 Employees

  

The Company had 1,460 employees as of June 30, 2017, including 180 employees that are covered by collective bargaining agreements. Management believes it has good relations with employees.

 

Website and Available Information

 

Our website is located at www.flexsteel.com. Information on the website does not constitute part of this Annual Report on Form 10-K.

 

A copy of the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (“SEC”), other SEC reports filed or furnished and our Guidelines for Business Conduct are available, without charge, on the Company’s website at www.flexsteel.com or by writing to the Office of the Secretary, Flexsteel Industries, Inc., P. O. Box 877, Dubuque, IA 52004-0877. 

 

The executive officers of the Company, their ages, positions (in each case as of August 11, 2017), and the year they were first elected or appointed an officer of the registrant, are as follows:

 

Name (age)   Position (date first became officer)
Karel K. Czanderna (61)   President & Chief Executive Officer (2012)
Timothy E. Hall (59)   Senior Vice President Finance, Chief Financial Officer, Secretary & Treasurer (2000)
Julia K. Bizzis (60)   Senior Vice President Strategic Growth (2013)
Steven K. Hall (47)   Senior Vice President Global Supply Chain (2014)
Richard J. Stanley (45)   Senior Vice President Contract Group & Home Styles (2014)

  

Item 1A.Risk Factors

 

Our business is subject to a variety of risks. You should carefully consider the risk factors detailed below in conjunction with the other information contained in this Annual Report on Form 10-K. Should any of these risks actually materialize, our business, financial condition, and future prospects could be negatively impacted. There may be additional factors that are presently unknown to us or that we currently believe to be immaterial that could affect our business.

  

Our business information systems could be impacted by disruptions and security breaches. 

 

We employ information technology systems to support our global business. Security breaches and other disruptions to our information technology infrastructure could interfere with our operations, compromise information belonging to us and our customers and suppliers, and expose us to liability which could adversely impact our business and reputation. In the ordinary course of business, we rely on information technology networks and systems to process, transmit and store electronic information, and to manage or support a variety of business processes and activities. Additionally, we collect and store certain data, including proprietary business information, and may have access to confidential or personal information in certain areas of our businesses that is subject to privacy and security laws, regulations and customer-imposed controls. While security breaches and other disruptions to our information technology networks and infrastructure could happen, none have occurred to date that have had a material impact to us. Any such events could result in legal claims or proceedings, liability or penalties under privacy laws, disruption in operations, and damage to our reputation, which could adversely affect our business.

  

The implementation of a new business information system could disrupt our business. 

 

We are in the testing phase of implementing a new business information system.  The new system will replace our legacy systems to drive operational efficiencies.  An ineffective implementation of the new business information system may result in the following:

Disruption of our domestic and international supply chain;

Inability to fill customer orders accurately and on a timely basis;

Inability to process payments to our suppliers and vendors;

Negative impact on financials;

Unable 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.

 

4 

 

 

Our future success depends on our ability to manage our global supply chain.

 

We acquire raw materials, component parts and certain finished products from external suppliers, both U.S. and foreign. Many of these suppliers are dependent upon other suppliers in countries other than where they are located. This global interdependence within our supply chain is subject to delays in delivery, availability, quality and pricing (including tariffs) of products. The delivery of goods from these suppliers may be delayed by customs, labor issues, changes in political, economic and social conditions, weather, laws and regulations. Unfavorable fluctuations in price, quality, delivery and availability of these products could negatively affect our ability to meet demands of our customers and have a negative impact on product margin.

 

Competition from U.S. and foreign finished product manufacturers may adversely affect our business, operating results or financial condition.

  

The furniture industry is very competitive and fragmented. We compete with U.S. and foreign manufacturers and distributors. As a result, we may not be able to maintain or raise the prices of our products in response to competitive pressures or increasing costs. Also, due to the large number of competitors and their wide range of product offerings, we may not be able to significantly differentiate our products (through styling, finish and other construction techniques) from those of our competitors. As a result, we are continually subject to the risk of losing market share, which may lower our sales and earnings.

  

Future costs of complying with various laws and regulations may adversely impact future operating results. 

 

Our business is subject to various laws and regulations which could have a significant impact on our operations and the cost to comply with such laws and regulations could adversely impact our financial position, results of operations and cash flows. In addition, failure to comply with such laws and regulations, even inadvertently, could produce negative consequences which could adversely impact our operations.

  

Due to our participation in multi-employer pension plans, we may have exposures under those plans that could extend beyond what our obligations would be with respect to our employees.

 

We participate in, and make periodic contributions to, three multi-employer pension plans that cover union employees. Multi-employer pension plans are managed by trustee boards comprised of participating employer and labor union representatives, and the employers participating in a multi-employer pension plan are jointly responsible for maintaining the plan’s funding requirements. Based on the most recent information available to us, we believe that 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 our participation, we could experience greater volatility in our overall pension funding obligations. Our obligations may be impacted by the funded status of the plans, the plans’ investment performance, changes in the participant demographics, financial stability of contributing employers and changes in actuarial assumptions. See Note 9.

  

Our future results may be affected by various legal proceedings and compliance risk, including those involving product liability, environmental, or other matters.  

 

We face the business risk of exposure to product liability claims in the event that the use of any of our products results in personal injury or property damage. In the event any of our products prove to be defective, we may be required to recall or redesign such products. We are also subject to various laws and regulations relating to environmental protection and the discharge of materials into the environment. We 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 our business, operating results or financial condition.

  

Our success depends on our ability to recruit and retain key employees.

 

If we are not successful in recruiting and retaining key employees or experience the unexpected loss of key employees, our operations may be negatively impacted.

 

Our failure to anticipate or respond to changes in consumer or designer tastes and fashions in a timely manner could adversely affect our business and decrease our sales and earnings.

 

Furniture is a styled product and is subject to rapidly changing consumer and end-user trends and tastes and is highly fashion oriented, and if we are not able to acquire sufficient fabric variety, or if we are unable to predict or respond to changes in fashion trends, we may lose sales and have to sell excess inventory at reduced prices.

 

5 

 

 

Our products are considered deferrable purchases for consumers during economic downturns. Prolonged negative economic conditions could impact our 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, offices, hospitality, recreational vehicle seating and healthcare businesses resulting in an impact on our business. A recovery in our 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 our results of operations.

 

Terms of collective bargaining agreements that prevent us from competing effectively could adversely affect our financial condition, results of operations and cash flows. We are 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.

   

Item 1B.Unresolved Staff Comments

 

None.

  

Item 2.Properties

 

The Company owns the following facilities as of June 30, 2017:

  

Location  Approximate
Size (square feet)
  Principal Operations
Harrison, Arkansas   221,000   Manufacturing
Riverside, California   236,000   Manufacturing and Distribution
Riverside, California (1)   69,000   Held for Sale
Dublin, Georgia   315,000   Manufacturing
Huntingburg, Indiana   611,000   Distribution
Dubuque, Iowa (2)   719,000   Manufacturing
Dubuque, Iowa   40,000   Corporate Office
Edgerton, Kansas   500,000   Distribution
Starkville, Mississippi   349,000   Manufacturing
Lancaster, Pennsylvania   216,000   Distribution

  

(1)See Note 3 to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

(2)The Dubuque, Iowa manufacturing facility and land will be donated to a not-for-profit entity when vacated by the Company, which is expected to happen in fiscal year 2019.

  

The Company leases the following facilities as of June 30, 2017:

 

Location  Approximate
Size (square feet)
  Principal Operations
Cerritos, California   32,000   Distribution
Riverside, California   211,000   Distribution
Louisville, Kentucky   10,000   Administrative Offices
Juarez, Mexico   225,000   Manufacturing
Binh Duong, Vietnam   39,000   Warehouse

  

The Company leases showrooms for displaying its products in the furniture markets in High Point, North Carolina and Las Vegas, Nevada.

  

The Company’s operating plants are well suited for their manufacturing purposes and have been updated and expanded from time to time as conditions warrant.

  

6 

 

 

Item 3.Legal Proceedings

 

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. The Company received $1.2 million, $2.3 million and $0.3 million during the fiscal years ended June 30, 2017, 2016 and 2015, respectively, for recovery of litigation settlement costs from insurers. These amounts are recorded as “Litigation settlement reimbursements” in the consolidated statements of income.

  

The recovery of litigation settlement and defense costs from insurance carriers is complete.

 

Environmental Matters – In March 2016, the Company received a General Notice Letter for the Lane Street Groundwater Superfund Site located in Elkhart, Indiana from the United States Environmental Protection Agency (EPA). In April 2016, the EPA issued their proposed clean-up plan for groundwater pollution and request for public comment. The Company responded to the request for public comment in May 2016. The EPA issued a Record 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. Based on extensive sampling investigation performed on behalf of the Company, the Company believes that the source of the ground water contamination is upgradient of the site formerly owned by the Company. The Company continues to believe that it did not cause or contribute to the contamination. Accordingly, the Company has not recorded a liability in the consolidated balance sheets.

  

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 does not consider any of such other proceedings that are currently pending, individually or in the aggregate, to be material to its business or likely to result in a material effect on its consolidated operating results, financial condition, or cash flows.

  

Item 4.Mine Safety Disclosures

 

None.

 

7 

 

 

PART II

 

Item 5.Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

  

Share Investment Performance

 

The following graph shows changes over the past five-year period in the value of $100 invested in: (1) Flexsteel’s common stock (FLXS); (2) The NASDAQ Global Market; and (3) an industry peer group of the following: American Woodmark Corp, Bassett Furniture Ind., Culp Inc., Dixie Group Inc., Ethan Allen Interiors Inc., Hooker Furniture Corp., Johnson Outdoors Inc., Kimball International, Knoll Inc., La-Z-Boy Inc., Lifetime Brands Inc., Patrick Industries Inc., and Select Comfort Corp.

 

(LINE GRAPH) 

 

   2012  2013  2014  2015  2016  2017
Flexsteel  100.00  126.71  176.87  233.33  218.55  303.02
Peer Group  100.00  138.98  152.61  200.15  203.29  262.05
NASDAQ  100.00  130.16  174.87  202.69  146.18  187.38

 

The NASDAQ Global Select Market is the market on which the Company’s common stock is traded.

 

     Sale Price of Common Stock   Cash Dividends 
     Fiscal 2017   Fiscal 2016   Per Share 
     High   Low   High   Low   Fiscal 2017   Fiscal 2016 
  First Quarter   $54.25   $37.93   $44.95   $27.25   $0.20   $0.18 
  Second Quarter    62.99    39.98    48.67    30.31    0.20    0.18 
  Third Quarter    62.55    45.31    45.79    37.98    0.20    0.18 
  Fourth Quarter    57.48    48.44    45.29    36.06    0.20    0.18 

 

The Company estimates there were approximately 4,600 holders of common stock of the Company as of June 30, 2017. There were no repurchases of the Company’s common stock during the quarter ended June 30, 2017. The payment of future cash dividends is within the discretion of our Board of Directors and will depend, among other factors, on our earnings, capital requirements and operating and financial condition.

 

8

 

 

Item 6.Selected Financial Data

 

The selected financial data presented below should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in Item 8 of this Annual Report on Form 10-K and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of this Annual Report on Form 10-K. The selected consolidated statements of income data of the Company is derived from the Company’s consolidated financial statements.

 

Five-Year Review

(Amounts in thousands, except certain ratios and per share data)    
   2017   2016   2015   2014   2013 
SUMMARY OF OPERATIONS                    
Net sales   $468,764   $500,106   $466,904   $438,543   $386,189 
Gross margin    108,651    113,699    109,860    100,263    90,469 
Litigation settlement reimbursements (costs)    1,175    2,280    250    (6,250)    
Operating income    37,264    38,068    34,422    22,286    20,271 
Income before income taxes    37,586    37,927    35,559    23,800    20,881 
Income tax provision    13,800    13,690    13,260    8,810    7,730 
Net income    23,786    24,237    22,299    14,990    13,151 
Net income, as a percent of sales    5.1%   4.8%   4.8%   3.4%   3.4%
Weighted average diluted shares outstanding    7,886    7,765    7,708    7,511    7,326 
Diluted earnings per common share   $3.02   $3.12   $2.89   $2.00   $1.80 
Cash dividends declared per common share   $0.80   $0.72   $0.72   $0.60   $0.60 
                          
SELECTED DATA AS OF JUNE 30                         
Total assets   $270,045   $246,896   $244,619   $210,213   $192,539 
Shareholders’ equity    230,760    209,650    186,748    166,735    151,237 
Trade receivables, net    42,362    44,618    45,101    38,536    36,075 
Inventories    99,397    85,904    113,842    97,940    92,417 
Property, plant and equipment, net    70,661    64,124    64,770    31,900    32,145 
Capital expenditures    13,457    7,382    37,424    4,187    6,225 
Depreciation expense    7,936    7,556    4,945    4,197    3,803 

Working capital (current assets less current liabilities)

   158,055    143,086    115,682    128,644    113,699 
Current ratio    5.2 to 1    5.3 to 1    3.3 to 1    4.5 to 1    4.2 to 1 
Return on ending shareholders’ equity    10.3%   11.6%   11.9%   9.0%   8.7%
Average number of employees    1,440    1,440    1,340    1,380    1,320 

  

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

General

 

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

 

Critical Accounting Policies

 

The discussion and analysis of the Company’s consolidated financial statements and results of operations are based on consolidated financial statements prepared in accordance with generally accepted accounting principles (GAAP) in the United States of America. Preparation of these consolidated financial statements requires the use of estimates and judgments that affect the reported results. The Company uses estimates based on the best information available in recording transactions and balances resulting from business operations. Estimates are used for such items as collectability of trade accounts receivable and inventory valuation. Ultimate results may differ from these estimates under different assumptions or conditions.

 

Accounts receivable allowances – the Company establishes accounts receivable allowances to reduce trade accounts receivable to an amount that reasonably approximates their net realizable value. The Company’s accounts receivable allowances consist of an allowance for doubtful accounts which is established through review of open accounts, historical collection, and historical write-off amounts and an allowance for estimated returns on sales of the Company’s products which is based on historical product returns, as well as existing product return authorizations. The Company records a provision against revenue for estimated returns on sales of our 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.

 

9

 

  

Inventories – the Company values inventory at the lower of cost or net realizable value. The Company’s inventory valuation reflects markdowns for the excess of the cost over the amount expected to be realized and considers obsolete and excess inventory. Markdowns establish a new cost basis for the Company’s inventory. Subsequent changes in facts or circumstances do not result in the reversal of previously recorded markdowns or an increase in that newly established cost basis.

 

Revenue recognition – is when both product ownership and the risk of loss have transferred to the customer, collectability is reasonably assured, and the Company has no remaining obligations. The Company’s ordering process creates persuasive evidence of the sale arrangement and the sales price is determined. The delivery of the goods to the customer completes the earnings process. Net sales consist of product sales and related delivery charge revenue, net of adjustments for returns and allowances. Shipping and handling costs are included in cost of goods sold.

 

Recently Issued Accounting Pronouncements

 

See Item 8. Note 1 to the Company’s consolidated financial statements.

 

Results of Operations

 

The following table has been prepared as an aid in understanding the Company’s results of operations on a comparative basis for the fiscal years ended June 30, 2017, 2016 and 2015. Amounts presented are percentages of the Company’s net sales.

 

   FOR THE YEARS ENDED JUNE 30, 
   2017   2016   2015 
Net sales   100.0%   100.0%   100.0%
Cost of goods sold   (76.8)   (77.3)   (76.5)
Gross margin   23.2    22.7    23.5 
Selling, general and administrative   (15.5)   (15.6)   (16.2)
Litigation settlement reimbursements (costs)   0.2    0.4    0.1 
Operating income   7.9    7.5    7.4 
Interest and other income   0.1    0.0    0.2 
Interest expense       0.0    0.0 
Income before income taxes   8.0    7.5    7.6 
Income tax provision   (2.9)   (2.7)   (2.8)
Net income   5.1%   4.8%   4.8%

  

Fiscal 2017 Compared to Fiscal 2016

 

Net sales for fiscal year 2017 were $468.8 million compared to $500.1 million in the prior fiscal year, a decrease of 6.3%. For the fiscal year ended June 30, 2017, residential net sales were $396.1 million compared to $420.9 million for the year ended June 30, 2016, a decrease of 5.9%. The residential net sales decrease of $24.8 million for the year ended June 30, 2017 was substantially due to decreased sales volume in upholstered and ready-to-assemble products. Contract net sales were $72.7 million for the year ended June 30, 2017, a decrease of 8.2% from net sales of $79.2 million for the year ended June 30, 2016. The decrease in contract net sales was substantially due to volume.

 

Gross margin for the fiscal year ended June 30, 2017 was 23.2% compared to 22.7% for the prior fiscal year.

 

Selling, general and administrative (SG&A) expenses for the fiscal year ended June 30, 2017 were 15.5% of net sales compared to 15.6% of net sales in the prior fiscal year. The current fiscal year includes reductions in direct selling costs, professional fees and incentive compensation of $3.6 million, or 0.8% of net sales, offset by $2.9 million, or 0.6% of net sales, related to the business information system project. SG&A expenses for the current and prior fiscal years include reimbursements, net of recovery expenses, related to Indiana litigation of $0.9 million and $0.2 million, respectively.

 

Litigation settlement reimbursements related to Indiana litigation were $1.2 million or $0.10 per share and $2.3 million or $0.18 per share during the fiscal years ended June 30, 2017 and 2016, respectively. The recovery of litigation settlement and defense costs from insurance carriers is complete.

 

The effective tax rate was 36.7% and 36.1% for fiscal years ended June 30, 2017 and 2016, respectively. The prior fiscal year rate decrease was primarily related to changes in the measurement of uncertain tax positions based on experiences with various state tax authorities.

 

The above factors resulted in net income of $23.8 million or $3.02 per share for the fiscal year ended June 30, 2017 compared to $24.2 million or $3.12 per share in the prior year period. All earnings per share amounts are on a diluted basis.

 

10

 

 

Fiscal 2016 Compared to Fiscal 2015

 

Net sales for fiscal year 2016 were $500.1 million compared to $466.9 million in fiscal year 2015, an increase of 7.1%. For the fiscal year ended June 30, 2016, residential net sales were $420.9 million compared to $393.1 million for the year ended June 30, 2015, an increase of 7.1%. The residential net sales increase of $27.8 million for the year ended June 30, 2016 was substantially due to the increased sales volume in upholstered and ready-to-assemble products partially offset by discounting of certain case goods and lower delivery charges associated with lower fuel costs. Contract net sales were $79.2 million for the year ended June 30, 2016, an increase of 7.3% from net sales of $73.8 million for the year ended June 30, 2015. The increase in contract net sales was substantially due to volume.

 

Gross margin for the fiscal year ended June 30, 2016 was 22.7% compared to 23.5% for the prior fiscal year. The Company’s investment in its expanded distribution network, designed to meet current and future customer needs while improving operations became operational in the fourth quarter of fiscal year 2015. This investment increased costs by $2.5 million during fiscal year 2016 or 0.5% of net sales.

 

Selling, general and administrative (SG&A) expenses for the fiscal year ended June 30, 2016 were 15.6% of net sales compared to 16.2% of net sales in the prior fiscal year. The improvement in SG&A as a percentage of net sales reflects fixed cost leverage on higher sales volume. The Company incurred approximately $0.6 million of legal costs related to Indiana litigation during fiscal year 2016 which has been recorded in SG&A expense. The Company received reimbursements of legal costs of approximately $0.8 million from insurers which has been reflected as a reduction of legal expenses in SG&A expenses for fiscal year 2016. The prior fiscal year included $0.6 million in legal costs which was offset by reimbursements of $0.2 million from insurers.

 

Litigation settlement reimbursements related to Indiana litigation were $2.3 million for the fiscal year ended June 30, 2016 compared to $0.3 million for the prior fiscal year.

 

The effective tax rate was 36.1% and 37.3% for fiscal years ended June 30, 2016 and 2015, respectively. The rate decrease is primarily related to changes in the measurement of uncertain tax positions based on recent experiences with various state tax authorities.

 

The above factors resulted in net income of $24.2 million or $3.12 per share for the fiscal year ended June 30, 2016 compared to $22.3 million or $2.89 per share in the prior year period. All earnings per share amounts are on a diluted basis.

 

Liquidity and Capital Resources

 

Working capital (current assets less current liabilities) at June 30, 2017 was $158.1 million compared to $143.1 million at June 30, 2016. Significant changes in working capital during fiscal year 2017 included increases in investments of $18.0 million, inventory of $13.5 million and accounts payable of $5.7 million and decreases in cash and cash equivalents of $7.9 million and accounts receivable of $2.3 million. Inventory primarily increased to improve stocking positions and to support future sales growth. Accounts payable primarily increased due to inventory growth and timing of payments. For the fiscal year ended June 30, 2017, capital expenditures were $13.5 million including $10.6 million for the business information system project. Dividend payments totaled $6.1 million.

 

The Company’s main sources of liquidity are cash and cash equivalents, investments, cash flows from operations and credit arrangements. As of June 30, 2017 and 2016, the Company had cash and cash equivalents totaling $28.9 million and $36.8 million, respectively. During the current year, the Company invested $18.0 million in short-term investments. These investments consist of Treasury bills and U.S. Agencies that will mature within six months of June 30, 2017. The Company entered into an unsecured credit agreement on June 30, 2017, that provides short-term working capital financing up to $10.0 million with interest of LIBOR plus 1%, including up to $4.0 million of letters of credit. Letters of credit outstanding at June 30, 2017 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, 2017. The credit agreement expires June 30, 2018. At June 30, 2017, the Company was in compliance with all of the financial covenants contained in the credit agreement.

 

The Company maintains an additional unsecured $10.0 million line of credit, with interest at prime minus 2%. No amount was outstanding on the line of credit at June 30, 2017. This line of credit matures December 31, 2017.

 

Net cash provided by operating activities was $26.4 million and $54.4 million in fiscal years 2017 and 2016, respectively. The Company had net income of $23.8 million that included $9.0 million in non-cash charges which were offset by cash utilized for operating assets and liabilities of $6.4 million in fiscal year 2017. Non-cash charges included depreciation of $7.9 million. In fiscal year 2016, the Company had net income of $24.2 million that included $9.6 million in non-cash charges including depreciation of $7.6 million and cash provided by changes in operating assets and liabilities of $20.6 million.

 

11

 

 

Net cash used in investing activities was $29.7 million and $4.7 million in fiscal years 2017 and 2016, respectively. In fiscal year 2017, the Company had net purchases of investments of $18.1 million and capital expenditures of $13.5 million. In fiscal year 2016, the Company made capital expenditures of $7.4 million partially offset by $2.8 million of proceeds from life insurance policies.

 

Net cash used in financing activities was $4.6 million in fiscal year 2017 which included dividend payments of $6.1 million, which was partially offset by excess stock benefits of $1.5 million and proceeds from issuance of common stock of $1.1 million. Net cash used in financing activities was $14.2 million in fiscal year 2016 which included repayments of current notes payable of $11.9 million and dividend payments of $5.5 million. These amounts were offset by excess tax benefit from stock-based payment arrangements of $1.8 million and proceeds from issuance of common stock of $1.6 million.

 

Management believes that the Company has adequate cash and cash equivalents, investments, cash flows from operations and credit arrangements to meet its operating and capital requirements for fiscal year 2018. In the opinion of management, the Company’s liquidity and credit resources provide it with the ability to react to opportunities as they arise, to pay quarterly dividends to its shareholders, and to purchase productive capital assets that enhance safety and improve operations.

 

At June 30, 2017, the Company had no debt obligations and therefore, had no interest payments related to debt. The following table summarizes the Company’s contractual obligations at June 30, 2017 and the effect these obligations are expected to have on the Company’s liquidity and cash flow in the future (in thousands):

 

   Total   1 Year  

2 - 3
Years

  

4 - 5
Years

  

More than 
5 Years

 
Operating lease obligations   $14,290   $3,853   $7,002   $3,435   $ 

  

At June 30, 2017, the Company had no capital lease obligations, and no purchase obligations for raw materials or finished goods. The purchase price on all open purchase orders was fixed and denominated in U.S. dollars. The Company has excluded the uncertain tax positions from the above table as the timing of payments, if any, cannot be reasonably estimated.

 

Financing Arrangements

 

See Note 6 to the consolidated financial statements of this Annual Report on Form 10-K.

 

Outlook

 

During fiscal year 2018, the Company expects to have moderate revenue growth, tempered by an intentional sales decrease to certain Contract customers. The Company is focused on improving product delivery and driving efficiencies in operations.

 

Through June 30, 2017, “Property, plant & equipment, net” in the consolidated balance sheets includes $12.9 million for business information software and development. The Company has completed the design phase of the project and has progressed to the third of four testing cycles. Following successful testing, the Company will enter the training and readiness phase of the project for associates, customers and suppliers. Once this phase indicates readiness, the business information system will be implemented. The Company anticipates this work will be completed during the fiscal year ending June 30, 2018. During fiscal year 2018, the Company anticipates spending $5 million for capital expenditures and incurring $2 million of SG&A expenses related to the business information system project. Once completed, the business information system will be amortized over an average of 4 years.

 

During fiscal year 2018, the Company expects to spend $7 million in operating capital expenditures. During the next two fiscal years, the Company plans to invest $25 million in a new manufacturing facility in Dubuque, Iowa. The Company believes it has adequate working capital and borrowing capabilities to meet these requirements.

 

The Company remains committed to its core strategies, which include providing a wide range of quality product offerings and price points to the residential and contract markets, combined with a conservative approach to business. The Company will maintain its focus on a strong balance sheet through emphasis on cash flow and increasing profitability. The Company believes these core strategies are in the best interest of our shareholders.

 

Item 7A.Quantitative and Qualitative Disclosures About Market Risk

 

General – Market risk represents the risk of changes in the value of a financial instrument, derivative or non-derivative, caused by fluctuations in interest rates, foreign exchange rates and equity prices. As discussed below, management of the Company does not believe that changes in these factors could cause material fluctuations in the Company’s results of operations or cash flows. The ability to import furniture products can be adversely affected by political issues in the countries where suppliers are located, as well as, disruptions associated with shipping distances and negotiations with port employees. Other risks related to furniture product importation include government imposition of regulations and/or quotas; duties and taxes on imports; and significant fluctuation in the value of the U.S. dollar against foreign currencies. Any of these factors could interrupt supply, increase costs and decrease earnings.

 

12

 

  

Foreign Currency Risk – During fiscal years 2017, 2016, and 2015, the Company did not have sales, but has purchases and other expenses denominated in foreign currencies. The market risk associated with currency exchange rates and prices is not considered significant.

 

Interest Rate Risk – The Company’s primary market risk exposure with regard to financial instruments is changes in interest rates. At June 30, 2017, the Company did not have any debt outstanding.

 

Item 8.Financial Statements and Supplementary Data

  

  Page(s)
Report of Independent Registered Public Accounting Firm 14
Report of Independent Registered Public Accounting Firm – Internal Control Over Financial Reporting 15
Consolidated Balance Sheets at June 30, 2017 and 2016 16
Consolidated Statements of Income for the Years Ended June 30, 2017, 2016 and 2015 17
Consolidated Statements of Comprehensive Income for the Years Ended June 30, 2017, 2016 and 2015 17
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended June 30, 2017, 2016 and 2015 18
Consolidated Statements of Cash Flows for the Years Ended June 30, 2017, 2016 and 2015 19
Notes to Consolidated Financial Statements 20-29

  

13

 

  

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of

Flexsteel Industries, Inc.

 

We have audited the accompanying consolidated balance sheets of Flexsteel Industries, Inc. and Subsidiaries (the “Company”) as of June 30, 2017 and 2016, and 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, 2017. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, such financial statements referred to above present fairly, in all material respects, the financial position of Flexsteel Industries, Inc. and Subsidiaries as of June 30, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2017, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of June 30, 2017, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 22, 2017 expressed an unqualified opinion on the Company’s internal control over financial reporting.

 

/s/ DELOITTE & TOUCHE LLP

 

Minneapolis, Minnesota

 

August 22, 2017

 

14

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of 

Flexsteel Industries, Inc.

 

We have audited the internal control over financial reporting of Flexsteel Industries, Inc. and Subsidiaries (the “Company”) as of June 30, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2017, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended June 30, 2017 of the Company and our report dated August 22, 2017 expressed an unqualified opinion on those consolidated financial statements and financial statement schedule.

 

/s/ Deloitte & Touche LLP

 

Minneapolis, Minnesota

 

August 22, 2017

 

15

 

  

FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

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

 

   June 30,
   2017  2016

ASSETS

      
       

CURRENT ASSETS:

          
Cash and cash equivalents  $28,874   $36,780 
Investments   17,958     
Trade receivables - less allowances: 2017, $1,200;  2016, $1,300   42,362    44,618 
Inventories   99,397    85,904 
Other   6,659    9,141 
Total current assets   195,250    176,443 
NONCURRENT ASSETS:          
Property, plant and equipment, net   70,661    64,124 
Deferred income taxes   1,740    3,660 
Other assets   2,394    2,669 
TOTAL  $270,045   $246,896 
           

LIABILITIES AND SHAREHOLDERS’ EQUITY

          
           

CURRENT LIABILITIES:

          
Accounts payable - trade  $16,758   $11,023 
Accrued liabilities:          
Payroll and related items   6,255    6,986 
Insurance   5,423    5,252 
Other   8,759    10,096 
Total current liabilities   37,195    33,357 
LONG-TERM LIABILITIES:          
Other liabilities   2,090    3,889 
Total liabilities   39,285    37,246 
COMMITMENTS AND CONTINGENCIES (Note 12)          
SHAREHOLDERS’ EQUITY:          

Common stock - $1 par value; authorized 15,000,000 shares; outstanding 2017, 7,822,080 shares; 2016, 7,700,149 shares

   7,822    7,700 
Additional paid-in capital   26,186    23,259 
Retained earnings   198,465    180,919 
Accumulated other comprehensive loss   (1,713)   (2,228)
Total shareholders’ equity   230,760    209,650 
TOTAL  $270,045   $246,896 

 

See accompanying Notes to Consolidated Financial Statements.

 

16

 

 

FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(Amounts in thousands, except per share data)

 

   For the years ended June 30, 
   2017   2016   2015 
Net sales  $468,764   $500,106   $466,904 
Cost of goods sold   (360,113)   (386,407)   (357,044)
Gross margin   108,651    113,699    109,860 
Selling, general and administrative   (72,562)   (77,911)   (75,688)
Litigation settlement reimbursements   1,175    2,280    250 
Operating income   37,264    38,068    34,422 
Other income (expense):               
Other income (expense)   322    (72)   1,267 
Interest expense       (69)   (130)
Total   322    (141)   1,137 
Income before income taxes   37,586    37,927    35,559 
Income tax provision   (13,800)   (13,690)   (13,260)
Net income  $23,786   $24,237   $22,299 
Weighted average number of common shares outstanding:               
Basic   7,782    7,595    7,423 
Diluted   7,886    7,765    7,708 
Earnings per share of common stock:               
Basic  $3.06   $3.19   $3.00 
Diluted  $3.02   $3.12   $2.89 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

 

   For the years ended June 30, 
   2017   2016   2015 
Net income  $23,786   $24,237   $22,299 
Other comprehensive income (loss):               
Unrealized (losses) gains on securities   (87)   741    162 

Reclassification of realized gains (losses) on securities to other income

   145    (535)   (400)
Unrealized gains (losses) on securities before taxes   58    206    (238)
Income tax (expense) benefit related to securities gains (losses)   (22)   (78)   91 
Net unrealized gains (losses) on securities   36    128    (147)
                
Minimum pension liability   771    (999)   (537)

Income tax (expense) benefit related to minimum pension liability

   (292)   379    204 
Net minimum pension asset (liability)   479    (620)   (333)
                
Other comprehensive gain (loss), net of tax   515    (492)   (480)
                

Comprehensive income

  $24,301   $23,745   $21,819 

 

See accompanying Notes to Consolidated Financial Statements.

 

17

 

 

FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders’ Equity

(Amounts in thousands)

 

   Total Par           Accumulated     
   Value of   Additional       Other     
   Common   Paid-In   Retained   Comprehensive     
   Shares ($1 Par)   Capital   Earnings   (Loss) Income   Total 
Balance at June 30, 2014  $7,371   $15,386   $145,234   $(1,256)  $166,735 
Issuance of common stock:                         
Stock options exercised, net   83    707            790 
Unrealized loss on available for sale investments, net of tax               (147)   (147)
Long-term incentive compensation   26    1,310            1,336 
Stock-based compensation       607            607 
Excess tax benefit from stock-based payment arrangements       817            817 
Minimum pension liability adjustment, net of tax               (333)   (333)
Cash dividends declared           (5,357)       (5,357)
Net income           22,299        22,299 
Balance at June 30, 2015  $7,480   $18,827   $162,176   $(1,736)  $186,747 
Issuance of common stock:                         
Stock options exercised, net   184    1,407            1,591 
Unrealized loss on available for sale investments, net of tax               128    128 
Long-term incentive compensation   27    858            885 
Stock-based compensation   9    406            415 
Excess tax benefit from stock-based payment arrangements       1,761            1,761 
Minimum pension liability adjustment, net of tax               (620)   (620)
Cash dividends declared           (5,494)       (5,494)
Net income           24,237        24,237 
Balance at June 30, 2016  $7,700   $23,259   $180,919   $(2,228)  $209,650 
Issuance of common stock:                         
Stock options exercised, net   79    999            1,078 
Unrealized loss on available for sale investments, net of tax               36    36 
Long-term incentive compensation   35    (213)           (178)
Stock-based compensation   8    647            655 
Excess tax benefit from stock-based payment arrangements       1,494            1,494 
Minimum pension liability adjustment, net of tax               479    479 
Cash dividends declared           (6,240)       (6,240)
Net income           23,786        23,786 
Balance at June 30, 2017  $7,822   $26,186   $198,465   $(1,713)  $230,760 
                          

 

Cash dividends declared per common share were $0.80, $0.72 and $0.72 for fiscal years ended June 30, 2017, 2016 and 2015, respectively.

 

See accompanying Notes to Consolidated Financial Statements.

 

18

 

 

 

FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Amounts in thousands)

             
   FOR THE YEARS ENDED JUNE 30, 
   2017   2016   2015 
OPERATING ACTIVITIES:               
Net income  $23,786   $24,237   $22,299 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:               
Depreciation   7,936    7,556    4,945 
Deferred income taxes   1,606    2,731    605 
Stock-based compensation expense   1,609    1,470    1,943 
Excess tax benefit from stock-based payment arrangements   (1,494)   (1,761)   (817)
Change in provision for losses on accounts receivable   (100)   (100)   30 
Other non-cash, net           (28)
Gain on disposition of capital assets   (512)   (34)   (119)
Gain on life insurance policies       (346)   (745)
Changes in operating assets and liabilities:               
Trade receivables   2,356    584    (6,596)
Inventories   (13,492)   27,938    (15,902)
Other current assets   1,036    (1,962)   (3,882)
Other assets   450    59    (1,024)
Accounts payable - trade   4,028    (6,877)   2,083 
Accrued liabilities   477    2,052    201 
Other long-term liabilities   (1,298)   (1,180)   276 
Net cash provided by operating activities   26,388    54,367    3,269 
INVESTING ACTIVITIES:               
Purchases of investments   (30,537)   (3,100)   (1,955)
Proceeds from sales of investments   12,474    2,900    1,611 
Proceeds from sale of capital assets   1,848    76    155 
Proceeds from life insurance policies       2,814    5,053 
Capital expenditures   (13,457)   (7,382)   (37,423)
Net cash used in investing activities   (29,672)   (4,692)   (32,559)
FINANCING ACTIVITIES:               
Dividends paid   (6,062)   (5,455)   (5,115)
Proceeds from issuance of common stock   1,078    1,591    790 
Shares issued to employees, net of shares withheld   (1,132)   (170)    
Excess tax benefit from share-based payment   1,494    1,761    817 
(Repayments of) proceeds from short-term notes payable, net       (11,904)   11,904 
Net cash (used in) provided by financing activities   (4,622)   (14,177)   8,396 
(Decrease) increase in cash and cash equivalents   (7,906)   35,498    (20,894)
Cash and cash equivalents at beginning of period   36,780    1,282    22,176 
Cash and cash equivalents at end of period  $28,874   $36,780   $1,282 
                

   FOR THE YEARS ENDED JUNE 30, 
   2017   2016   2015 
SUPPLEMENTAL INFORMATION               
Income taxes paid, net  $9,780   $10,140   $13,920 
Capital expenditures in accounts payable  $1,740   $430   $130 

 

See accompanying Notes to Consolidated Financial Statements.

 

19

 

  

FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

DESCRIPTION OF BUSINESS – Flexsteel was incorporated in 1929 and is one of the oldest and largest manufacturers, importers and marketers of residential and contract upholstered and wood furniture products in the United States. Product offerings include a wide variety of upholstered and wood 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. The Company’s products are intended for use in home, office, hotel, healthcare and other contract applications. A featured component in most of the upholstered furniture is a unique steel drop-in seat spring from which our name “Flexsteel” is derived. The Company distributes its products throughout the United States through the Company’s sales force and various independent representatives.

 

PRINCIPLES OF CONSOLIDATION – the consolidated financial statements include the accounts of Flexsteel Industries, Inc. and its wholly owned subsidiaries. All intercompany transactions and accounts have been eliminated in consolidation. The Company’s consolidated financial statements and results of operations are based on consolidated financial statements prepared in accordance with GAAP in the United States of America.

 

USE OF ESTIMATES – the preparation of consolidated financial statements in conformity with GAAP in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Ultimate results could differ from those estimates.

 

FAIR VALUE – the Company’s cash and cash equivalents, investments, accounts receivable, other current assets, accounts payable, notes payable and certain accrued liabilities are carried at amounts which reasonably approximate their fair value due to their short-term nature. 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: Level 1: Quoted market prices in active markets for identical assets and liabilities; Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data; or Level 3: Unobservable inputs that are not corroborated by market data. The Company has not changed its valuation techniques in measuring the fair value of any financial assets and liabilities during the period.

 

INVESTMENTS - during fiscal year 2017, 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.” As of June 30, 2017, the fair market value and book value of the investments are $18.0 million. 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 our products in the same period that the related revenues are recognized. The amount ultimately realized from trade accounts receivable may differ from the amount estimated in the consolidated financial statements.

 

INVENTORIES – are stated at the lower of cost or net realizable value utilizing the first-in, first-out (“FIFO”) method.

 

PROPERTY, PLANT AND EQUIPMENT – is stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets.

 

VALUATION OF LONG–LIVED ASSETS – the Company periodically reviews the carrying value of long-lived assets and estimated depreciable or amortizable lives for continued appropriateness. This review is based upon projections of anticipated future cash flows and is performed whenever events or changes in circumstances indicate that asset carrying values may not be recoverable or that the estimated depreciable or amortizable lives may have changed. No impairments of long-lived assets or changes in depreciable or amortizable lives were incurred during fiscal years 2017, 2016 and 2015.

 

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.

 

20

 

 

REVENUE RECOGNITION – is when both product ownership and the risk of loss have transferred to the customer, collectability is reasonably assured, and the Company has no remaining obligations. The Company’s ordering process creates persuasive evidence of the sale arrangement and the sales price is determined. The delivery of the goods to the customer completes the earnings process. Net sales consist of product sales and related delivery charge revenue, net of adjustments for returns and allowances. Shipping and handling costs are included in cost of goods sold.

 

ADVERTISING COSTS – are charged to selling, general and administrative expense in the periods incurred. The Company conducts no direct-response advertising programs and there are no assets related to advertising recorded on the consolidated balance sheets. Advertising expenditures, primarily shared customer advertising in which an identifiable benefit is received and national trade-advertising programs, were approximately $7.3 million, $7.5 million and $6.9 million in fiscal years 2017, 2016 and 2015, respectively.

 

DESIGN, RESEARCH AND DEVELOPMENT COSTS – are charged to selling, general and administrative expense in the periods incurred. Expenditures for design, research and development costs were approximately $3.7 million, $4.2 million and $4.1 million in fiscal years 2017, 2016 and 2015, respectively.

 

INSURANCE – the Company is self-insured for health care and most workers’ compensation up to predetermined amounts above which third party insurance applies. The Company purchases specific stop-loss insurance for individual health care claims in excess of $150,000 per plan year. For workers’ compensation the Company retains the first $450,000 per claim and purchases excess coverage up to the statutory limits for amounts in excess of the retention limit. Losses are accrued based upon the Company’s estimates of the aggregate liability for claims incurred using certain actuarial assumptions followed in the insurance industry and based on Company experience. The Company records these insurance accruals within “Accrued liabilities – insurance” on the consolidated balance sheets.

 

INCOME TAXES – the Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company recognizes in its financial statements the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.

 

EARNINGS PER SHARE (EPS) – basic earnings per share (EPS) of common stock is based on the weighted-average number of common shares outstanding during each fiscal year. Diluted earnings per share 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 shares. The Company calculates the dilutive effect of outstanding options using the treasury stock method. 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.

 

In computing EPS for the fiscal years 2017, 2016 and 2015, net income as reported for each respective period is divided by the fully diluted weighted average number of shares outstanding:

  

   June 30, 
(in thousands)  2017   2016   2015 
             
Basic shares   7,782    7,595    7,423 
Potential common shares:               
Stock options   86    120    255 
Long-term incentive plan   18    50    30 
    104    170    285 
                
Diluted shares   7,886    7,765    7,708 
                
Anti-dilutive shares       26     

  

STOCK–BASED COMPENSATION – the Company recognizes compensation expense related to the cost of employee services received in exchange for Company equity interests based on the award’s fair value at the date of grant. See Note 8 Stock-Based Compensation.

 

21

 

 

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 by the Company’s internal sales force and various independent representatives. The Company makes minimal export sales. No single customer accounted for more than 10% of net sales.

 

ACCOUNTING DEVELOPMENTS – In July 2015, the FASB issued Inventory, Topic 330: Simplifying the Measurement of Inventory (ASU 2015-11), which affects inventory balances measured using the first-in, first-out (FIFO) or average cost methods. ASU 2015-11 requires entities to measure most inventories at the lower of cost and net realizable value, thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. The Company elected to early adopt ASU 2015-11 on June 30, 2017, on a prospective basis. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

 

In May 2014, the FASB issued Revenue from Contracts with Customers, Topic 606 (ASU No. 2014-09), 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. This guidance, which includes additional disclosure requirements regarding revenue, cash flows and obligations related to contracts with customers, was originally to be effective for the Company beginning in fiscal year 2018. In July 2015, the FASB confirmed a one year deferral of the effective date of the new revenue standard which also allows early adoption as of the original effective date. The updated guidance will be effective for the Company’s first quarter of 2019. The Company is currently evaluating the impact of adopting ASU 2014-09 on its consolidated financial statements.

 

In February 2016, the FASB issued Leases (ASU 2016-02), which amends ASC Topic 842. ASU 2016-02 introduces a new lessee model where substantially all leases will be brought onto the balance sheet. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2016-02 on its consolidated financial statements.

 

In March 2016, the FASB issued Improvements to Employee Share-Based Payment Accounting (ASU 2016-09), which amends ASC Topic 718, Compensation – Stock Compensation. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently in the process of evaluating the impact of adopting ASU 2016-09 on its consolidated financial statements.

 

2.INVENTORIES

 

A comparison of inventories is as follows:

 

(in thousands)  June 30, 
   2017   2016 
Raw materials  $15,043   $12,893 
Work in process and finished parts   7,047    5,810 
Finished goods   77,307    67,201 
Total  $99,397   $85,904 

 

22

 

 

3.PROPERTY, PLANT AND EQUIPMENT

 

(in thousands)  Estimated  June 30, 
   Life (Years)  2017   2016 
Land     $6,987   $7,279 
Buildings and improvements  5-39   70,741    72,900 
Machinery and equipment  3-7   33,441    34,015 
Delivery equipment  3-5   20,866    21,979 
Furniture and fixtures  3-7   4,474    4,509 
Computer software and hardware  3-10   18,903    6,370 
Total      155,412    147,052 
Less accumulated depreciation      (84,751)   (82,928)
Net     $70,661   $64,124 

 

The Company owns a 69,000 square foot facility in Riverside, California that is held for sale as it does not have sufficient square footage to meet the needs of the business. The sale of the building is expected to take place in early fiscal year 2018. The net book value of the facility is $4.3 million as of June 30, 2017.

 

4.OTHER NONCURRENT ASSETS

 

(in thousands)  June 30, 
   2017   2016 
Cash value of life insurance  $989   $965 
Other   1,405    1,704 
Total  $2,394   $2,669 

 

5.ACCRUED LIABILITIES – OTHER

 

(in thousands)  June 30, 
   2017   2016 
Advertising  $3,883   $4,068 
Dividends   1,564    1,386 
Warranty   1,080    1,070 
Other   2,232    3,572 
Total  $8,759   $10,096 

 

6.CREDIT ARRANGEMENTS

 

The Company entered into an unsecured credit agreement on June 30, 2017, that provides short-term working capital financing up to $10.0 million with interest of LIBOR plus 1% (2.22% at June 30, 2017), including up to $4.0 million of letters of credit. Letters of credit outstanding at June 30, 2017 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, 2017. The credit agreement expires June 30, 2018. At June 30, 2017, 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 minus 2% (2.25% at June 30, 2017). No amount was outstanding on the line of credit at June 30, 2017. This line of credit matures December 31, 2017.

 

23

 

 

7.INCOME TAXES

 

In determining the provision for income taxes, the Company uses an estimated annual effective tax rate that is based on the annual income, statutory tax rates and permanent differences between book and tax. This includes recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns to the extent pervasive evidence exists that they will be realized in future periods. The deferred tax balances are adjusted to reflect tax rates by tax jurisdiction, based on currently enacted tax laws, which are expected to be in effect in the years in which the temporary differences are expected to reverse. In accordance with the Company’s income tax policy, significant or unusual items are separately recognized when they occur.

 

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

 

(in thousands)  June 30, 
   2017   2016 
Gross unrecognized tax benefits  $320   $610 
Accrued interest and penalties   130    250 
Gross liabilities related to unrecognized tax benefits  $450   $860 
Deferred tax assets  $130   $250 

 

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

 

(in thousands)  2017   2016   2015 
Balance at July 1  $610   $1,580   $1,290 
Additions based on tax positions related to the current year   130    45    390 
Additions for tax positions of prior years            
Reductions for tax positions of prior years   (420)   (1,015)   (100)
Balance at June 30  $320   $610   $1,580 

 

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.

 

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

 

(in thousands)  2017   2016   2015 
Federal – current  $11,015   $9,343   $11,725 
State and other – current   1,179    1,616    930 
Deferred   1,606    2,731    605 
Total  $13,800   $13,690   $13,260 

 

Reconciliation between the U.S. federal statutory tax rate and the effective tax rate is as follows for the years ended June 30:

 

   2017   2016   2015 
Federal statutory tax rate   35.0%   35.0%   35.0%
State taxes, net of federal effect   2.7    3.8    2.6 
Other   (1.0)   (2.7)   (0.3)
Effective tax rate   36.7%   36.1%   37.3%

 

24

 

 

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

 

   June 30, 
(in thousands)  2017   2016 
Accounts receivable  $460   $490 
Inventory   (50)   500 
Self-insurance   560    660 
Payroll and related   1,690    3,120 
Accrued liabilities   1,240    1,100 
Property, plant and equipment   (2,850)   (3,080)
Investment tax credit   1,930    1,990 
Valuation allowance   (1,390)   (1,380)
Other   150    260 
Total  $1,740   $3,660 

 

The Company is subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. Generally, tax years 2013–2016 remain open to examination by the Internal Revenue Service or other taxing jurisdictions to which we are subject.

 

8.    STOCK-BASED COMPENSATION

 

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

 

(1)Long-Term Incentive Compensation Plans

 

Long-Term Incentive Compensation Plan

 

The long-term incentive compensation plan provides for shares of common stock to be awarded to officers and key employees based on performance targets set by the 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, 2017, 61,969 shares have been issued. The Committee selected fully-diluted earnings per share as the performance goal for the three-year performance periods July 1, 2014 – June 30, 2017 (2015-2017), July 1, 2015 – June 30, 2018 (2016-2018) and July 1, 2016 – June 30, 2019 (2017-2019). The Committee also selected total shareholder return as a performance goal for the executive officers for the three year performance period July 1, 2016 – June 30, 2019 (2017-2019). 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.

 

The Company recorded plan expenses of $0.9 million, $1.1 million and $1.1 million for fiscal years ended June 30, 2017, 2016 and 2015, respectively. If the target performance goals for 2015-2017, 2016-2018 and 2017-2019 would be achieved, the total amount of compensation cost recognized over the requisite performance periods would be $0.9 million, $1.0 million and $1.1 million, respectively.

 

The aggregate number of shares that could be awarded to key executives if the minimum, target or maximum performance goals are met is as follows:

 

(in thousands)            
Performance Period  Minimum   Target   Maximum 
Fiscal Year 2015 – 2017   11    28    55 
Fiscal Year 2016 – 2018   9    23    45 
Fiscal Year 2017 – 2019   11    27    52 

 

(2)Stock Plans

 

Omnibus Stock Plan

 

The Omnibus Stock Plan is for key employees, officers and directors and provides for the granting of incentive and nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights and performance units. The Company’s shareholders previously approved 700,000 shares to be issued under the plan.

 

 25

 

 

Under the plan, 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. It is the Company’s policy to issue new shares upon exercise of stock options. The Company accepts shares of the Company’s common stock as payment for the exercise price of options. These shares received as payment are retired upon receipt.

 

For fiscal years 2017, 2016 and 2015, the Company issued options for 24,317, 25,868, and 48,600 common shares at a weighted average exercise price of $47.45, $43.09 and $31.48 (the fair market value on the date of grant), respectively. The options were immediately available for exercise. For fiscal years ended June 30, 2017, 2016 and 2015, the Company recorded expense of $0.3 million, $0.2 million and $0.4 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 2017, 2016 and 2015, respectively, under this plan; dividend yield of 1.5%, 1.6% and 2.0%; expected volatility of 30.8%, 26.0% and 29.9%; risk-free interest rate of 1.2%, 1.6% and 1.6%; 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 2017, 2016 and 2015 were $11.76, $9.20 and $7.33, respectively. The cash proceeds from stock options exercised were $0.7 million, $0.1 million and $0.1 million for fiscal years ended 2017, 2016 and 2015, respectively. There was no income tax benefit related to the exercise of stock options for fiscal years ended June 30, 2017, 2016 and 2015.

 

Under the plan, the Company issued 6,997 and 6,208 restricted shares to non-executive directors as compensation and recorded expense of $0.4 million and $0.3 million during fiscal years ended June 30, 2017 and 2016, respectively.

 

At June 30, 2017, 537,762 shares were 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, 2017, 2016 and 2015.

 

The cash proceeds from stock options exercised were $0.4 million, $1.5 million and $1.6 million for fiscal years ended 2017, 2016 and 2015, respectively. The income tax benefit related to the exercise of stock options were $0.6 million, $1.6 million and $0.4 million for fiscal years ended 2017, 2016 and 2015, respectively.

 

A summary of the status of the Company’s stock option plans as of June 30, 2017, 2016 and 2015 and the changes during the years then ended is presented below:

 

           Aggregate 
   Shares   Weighted Average   Intrinsic Value 
   (in thousands)   Exercise Price   (in thousands) 
Outstanding and exercisable at June 30, 2015   457   $17.02   $11,916 
Granted   26    43.09      
Exercised   (207)   12.68      
Canceled   (6)   22.32      
Outstanding and exercisable at June 30, 2016   270   $22.85   $4,638 
Granted   24    47.45      
Exercised   (98)   20.57      
Canceled   (9)   20.51      
Outstanding and exercisable at June 30, 2017   187   $27.21   $5,039 

 

 26

 

 

The following table summarizes information for options outstanding and exercisable at June 30, 2017:

 

              
    Options    Weighted Average 
Range of
Prices
   Outstanding
(in thousands)
   Remaining
Life (Years)
   Exercise
Price
 
 $6.96 – 13.90    38    2.4   $12.13 
 17.23 – 19.77    34    4.5    18.54 
 20.50 – 27.57    40    6.1    25.72 
 31.06 – 32.13    33    7.4    31.60 
 43.09 – 47.45    42    8.7    45.52 
 $6.96 – 47.45    187     5.9   $27.21 

 

9.     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 $2.3 million, $1.8 million and $2.0 million in fiscal years 2017, 2016 and 2015, respectively. The amounts include $0.8 million, $0.5 million and $0.5 million in fiscal years 2017, 2016 and 2015, for the Company’s matching contribution to retirement savings plans.

 

Multi-employer Pension Plans

 

The Company contributes to three multi-employer defined benefit pension plans under the terms of collective-bargaining agreements that cover its union-represented employees. The risks of participating in these multi-employer plans are different from single-employer plans in the following aspects: 

         Assets contributed to the multi-employer plan by one employer may be used to provide benefits to employees of other participating employers. 

         If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be shared by the remaining participating employers. 

         If a participating employer chooses to stop participating in some of its multi-employer plans, the employer may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability.

 

The Company’s participation in these plans for the annual period ended June 30, 2017, is outlined in the following table. Unless otherwise noted, the most recent Pension Protection Act zone status available in 2017 and 2016 is for the plan’s year-end at December 31, 2016 and 2015, 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.

 

                                     
      Pension Protection                     Expiration Date  Number of 
      Act Zone Status     Company Contributions       of Collective  Company 
   EIN/Pension  June 30,  Rehabilitation  (in thousands)   Surcharge   Bargaining  Employees 
Pension Fund  Plan Number  2017  2016   Plan Status  2017   2016   2015   Imposed   Agreement  in Plan 
                                     
Central States SE and SW Areas Pension     Fund  36-6044243  Red   Red   Implemented  $166   $200   $248    No   03/31/2018   9 
                                           
Steelworkers Pension Trust  23-6648508  Green   Green   No   308    347    364    No   11/04/2017   171 
                                           
Central Pension Fund  36-6052390  Green   Green   No   6    6    7    No   02/15/2023   3 
                 $480   $553   $619              

 

 27

 

 

The estimated cumulative cost to exit the Company’s multi-employer plans was approximately $12.3 million on June 30, 2017.

 

Defined Benefit Plan

 

The Company’s defined benefit pension plan is frozen. There are a total of 379 participants in the plan. Retirement benefits are based on years of credited service multiplied by a dollar amount negotiated under collective bargaining agreements. The Company’s policy is to fund normal costs and amortization of prior service costs at a level that is equal to or greater than the minimum required under the Employee Retirement Income Security Act of 1974 (ERISA). As of June 30, 2017 and 2016, the Company recorded an accrued benefit liability related to the funded status of the defined benefit pension plan recognized on the Company’s consolidated balance sheets in other long-term liabilities of $0.2 million and $1.6 million, respectively. The accumulated benefit obligation was $8.5 million and $8.9 million at fiscal years ended June 30, 2017 and 2016, respectively. The Company recorded expense of $0.2 million, $0.1 million and $0.1 million during fiscal years 2017, 2016 and 2015, respectively, related to the plan.

 

10.  ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

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

 

   June 30, 
(in thousands)  2017   2016   2015 
Pension and other post-retirement benefit adjustments, net of tax (1)  $(1,725)  $(2,203)  $(1,584)
Available-for-sale securities, net of tax (2)   12    (25)   (152)
Total accumulated other comprehensive loss  $(1,713)  $(2,228)  $(1,736)
                

 

(1)The tax effect on the pension and other post-retirement benefit adjustments is a tax benefit of $1.1 million, $1.4 million and $1.0 million at June 30, 2017, 2016 and 2015, respectively.

(2)The tax effect on the available-for-sale securities is a tax benefit of $0.0 million, $0.0 million and $0.1 million at June 30, 2017, 2016 and 2015, respectively.

 

11.  LITIGATION

 

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. The Company received $1.2 million, $2.3 million and $0.3 million during the fiscal years ended June 30, 2017, 2016 and 2015, respectively, for recovery of litigation settlement costs from insurers. These amounts are recorded as “Litigation settlement reimbursements” in the consolidated statements of income.

 

During the fiscal years ended June 30, 2017, 2016 and 2015, the Company recorded $0.3 million, $0.6 million and $0.6 million, respectively, in legal and other related expenses that were incurred responding to the lawsuits and pursuing insurance coverage. These expenses are included in SG&A expense in the consolidated statements of income.

 

During the fiscal years ended June 30, 2017, 2016 and 2015, the Company received approximately $1.2 million, $0.8 million and $0.2 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.

 

The recovery of litigation settlement and defense costs from insurance carriers is complete.

 

Environmental Matters – In March 2016, the Company received a General Notice Letter for the Lane Street Groundwater Superfund Site located in Elkhart, Indiana from the United States Environmental Protection Agency (EPA). In April 2016, the EPA issued their proposed clean-up plan for groundwater pollution and request for public comment. The Company responded to the request for public comment in May 2016. The EPA issued a Record 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. Based on extensive sampling investigation performed on behalf of the Company, the Company believes that the source of the ground water contamination is upgradient of the site formerly owned by the Company. The Company continues to believe that it did not cause or contribute to the contamination. Accordingly, the Company has not recorded a liability in the consolidated balance sheets.

 

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 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.

 

 28

 

 

12.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 $4.6 million, $4.9 million and $3.8 million in fiscal years 2017, 2016 and 2015, respectively.

 

Expected future minimum commitments under operating leases as of June 30, 2017 were as follows:

 

(in thousands)      
       
Fiscal Year Ended June 30,      
2018    3,853 
2019    3,868 
2020    3,134 
2021    2,444 
2022    991 
Thereafter     
    $14,290 

 

13.SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION – UNAUDITED

 

(in thousands, except per share amounts)  FOR THE QUARTER ENDED 
   September 30   December 31   March 31   June 30 
Fiscal 2017:                
Net sales  $112,050   $118,530   $120,750   $117,434 
Gross margin   26,630    26,748    28,446    26,827 
Litigation settlement reimbursements           1,175     
Net income   4,752    5,389    7,624    6,021 
Earnings per share:                    
Basic  $0.62   $0.69   $0.98   $0.77 
Diluted  $0.61   $0.68   $0.96   $0.76 

 

(in thousands, except per share amounts)  FOR THE QUARTER ENDED 
   September 30   December 31   March 31   June 30 
Fiscal 2016:                
Net sales  $126,531   $125,410   $125,401   $122,764 
Gross margin   27,869    27,684    28,716    29,430 
Litigation settlement reimbursements       250    2,030     
Net income (1)   5,763    5,366    6,944    6,164 
Earnings per share:                    
Basic  $0.77   $0.71   $0.91   $0.80 
Diluted  $0.75   $0.69   $0.89   $0.79 

 

(1)The quarter ended June 30, 2016, reflects a change in the measurement of uncertain tax positions of $1.0 million (before tax).

 

14.SUBSEQUENT EVENTS

 

As of August 22, 2017, there were no subsequent events.

 

29

 

 

Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

Item 9A.Controls and Procedures

 

Evaluation of disclosure controls and procedures – Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective as of June 30, 2017.

 

Changes in internal control over financial reporting – During the fiscal quarter ended June 30, 2017, there were no significant changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended) that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

 

Management’s Annual Report on Internal Control Over Financial Reporting – Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) or 15d-15(f) of the Securities Exchange Act of 1934, as amended. We performed an evaluation under the supervision and with the participation of our management, including the CEO and CFO, to assess the effectiveness of the design and operation of our disclosure controls and procedures under the Exchange Act as of June 30, 2017. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework (2013). Based on those criteria, management concluded that the internal control over financial reporting is effective as of June 30, 2017. The effectiveness of the Company’s internal control over financial reporting as of June 30, 2017, has been audited by Deloitte & Touche LLP, our independent registered public accounting firm, as stated in their report in Part II, Item 8 of this Form 10-K.

 

Item 9B.Other Information

 

None.

 

PART III

 

Item 10.Directors, Executive Officers and Corporate Governance

 

The information contained in the Company’s 2017 definitive proxy statement to be filed with the Securities and Exchange Commission under the sections captioned “Proposal 1 Election of Directors,” “Corporate Governance – Audit and Ethics Committee,” “Corporate Governance – Nominating Matters,” “Corporate Governance – Code of Ethics” and “Section 16(a) Beneficial Ownership Reporting Compliance” is incorporated herein by reference.

 

Item 11.Executive Compensation

 

The information contained in the Company’s 2017 definitive proxy statement to be filed with the Securities and Exchange Commission under the sections captioned “Director Compensation,” “Corporate Governance – Compensation Committee Interlocks and Insider Participation” and “Executive Compensation” is incorporated herein by reference.

 

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The information contained in the Company’s 2017 definitive proxy statement to be filed with the Securities and Exchange Commission under the sections captioned “Ownership of Stock By Directors and Executive Officers,” “Ownership of Stock by Certain Beneficial Owners,” and “Equity Compensation Plan Information” is incorporated herein by reference.

 

Item 13.Certain Relationships and Related Transactions, and Director Independence

 

The information contained under the sections “Corporate Governance – Board of Directors” and “Corporate Governance – Related Party Transaction Policy” in the Company’s 2017 definitive proxy statement to be filed with the Securities and Exchange Commission is incorporated herein by reference.

 

Item 14.Principal Accountant Fees and Services

 

The information contained in the Company’s 2017 definitive proxy statement to be filed with the Securities and Exchange Commission under the sections captioned “Independent Registered Public Accounting Firm” is incorporated herein by reference.

 

30

 

 

PART IV

 

Item 15.Exhibits, Financial Statement Schedules, and Reports on Form 8-K

 

(a)(1)Financial Statements

 

The financial statements of the Company are set forth above in Item 8.

 

(2)Schedules

 

31

 

 

The following financial statement schedules for the years ended June 30, 2017, 2016 and 2015 are submitted herewith:

 

SCHEDULE II

 

VALUATION AND QUALIFYING ACCOUNTS

 

For the Years Ended June 30, 2017, 2016 and 2015

 

(in thousands)

Description

  Balance at Beginning of Year   (Additions) Reductions to Income   Deductions from Reserves  

Balance at End of Year

 
Accounts Receivable Allowances:                    
2017   1,300    70    (170)   1,200 
2016   1,400    (10)   (90)   1,300 
2015   1,370    72    (42)   1,400 

 

Other schedules are omitted because they are not required or are not applicable or because the required information is included in the financial statements.

 

(3)Exhibits

 

Exhibit No.

3.1Amended and Restated Articles of Incorporation of the Company (incorporated by reference to Form 8-K, as filed with the Securities and Exchange Commission on December 7, 2016).

 

3.2Amended and Restated Bylaws of the Company (incorporated by reference to Form 8-K, as filed with the Securities and Exchange Commission on December 7, 2016).

 

10.1Flexsteel Industries, Inc. Restoration Retirement Plan (incorporated by reference to Exhibit No. 10.6 to the Annual Report on Form 10-K for the fiscal year ended June 30, 2001). *

 

10.2Flexsteel Industries, Inc. Senior Officer Supplemental Retirement Plan (incorporated by reference to Exhibit No. 10.7 to the Annual Report on Form 10-K for the fiscal year ended June 30, 2001). *

 

10.32002 Stock Option Plan (incorporated by reference to Appendix A from the 2002 Flexsteel definitive proxy statement). *

 

10.4Flexsteel Industries, Inc. 2006 Stock Option Plan (incorporated by reference to Appendix C from the 2006 Flexsteel Proxy Statement filed with the Securities and Exchange Commission on October 31, 2006). *

 

10.5Flexsteel Industries, Inc. 2007 Long-Term Management Compensation Plan (incorporated by reference to Appendix C to the Definitive Proxy Statement on Schedule 14A filed with the Commission on November 1, 2007). *

 

10.62009 Stock Option Plan (incorporated by reference to Appendix A from the 2009 Flexsteel definitive proxy statement). *

 

10.7Restricted Stock Unit Award Agreement for Karel K. Czanderna, dated July 1, 2012 (incorporated by reference to Exhibit 4.1 of Flexsteel’s Form S-8 filed with the Securities and Exchange Commission on August 20, 2012). *

 

10.8Form of Notification of Award for the Cash Incentive Compensation Plan (incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on December 13, 2013). *

 

10.9Form of Notification of Award for the Long-Term Incentive Compensation Plan (incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on December 13, 2013). *

 

10.10Form of Notification of Award for incentive stock options issued under the Omnibus Stock Plan (incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on December 13, 2013). *

 

10.11Form of Notification of Award for non-qualified stock options issued under the Omnibus Stock Plan (incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on December 13, 2013). *

 

32

 

 

10.12Form of Notification of Award for director non-qualified stock options issued under the Omnibus Stock Plan (incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on December 13, 2013).*

 

10.13Form of Notification of Award for restricted stock units issued under the Omnibus Stock Plan (incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on December 13, 2013). *

 

10.14Long-Term Incentive Compensation Plan, dated July 1, 2013 (incorporated by reference to Exhibit 4.1 of Flexsteel’s Form S-8 filed with the Securities and Exchange Commission on December 23, 2013). *

 

10.15Omnibus Stock Plan, dated July 1, 2013 (incorporated by reference to Exhibit 4.1 of Flexsteel’s Form S-8 filed with the Securities and Exchange Commission on December 23, 2013). *

 

10.16Purchase and Sale Agreement dated August 8, 2014 between Flexsteel Industries, Inc. and ELHC I, LLC (incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on August 14, 2014).

 

10.17Completion of Acquisition of Assets dated September 26, 2014 between Flexsteel Industries, Inc. and ELHC I, LLC. (incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on October 1, 2014).

 

10.18Credit Agreement dated June 30, 2016 between Flexsteel Industries, Inc. and Wells Fargo Bank, N.A. (incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on July 1, 2016).

 

  10.19 Development Agreement dated June 5, 2017 between Flexsteel Industries, Inc. and The City of Dubuque, Iowa. Redevelopment Project Agreement dated May 15, 2017 between Flexsteel Industries, Inc., The City of Dubuque, Iowa and Dubuque Initiatives. (incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on June 12, 2017).

 

10.20Revolving Line of Credit Note dated June 30, 2017 between Flexsteel Industries, Inc. and Wells Fargo Bank, N.A. (incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on June 30, 2017).

 

10.21First Amendment to Credit Agreement dated June 30, 2017 between Flexsteel Industries, Inc. and Wells Fargo Bank, N.A. (incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on June 30, 2017).

 

21.1Subsidiaries of the Company. Filed herewith.

 

23Consent of Independent Registered Public Accounting Firm. Filed herewith.

 

31.1Certification. Filed herewith.

 

31.2Certification. Filed herewith.

 

32Certification by Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.

 

101.INS XBRL Instance Document.

 

101.SCH XBRL Taxonomy Extension Schema Document.

 

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.

 

101.LABXBRL Taxonomy Extension Labels Linkbase Document.

 

101.DEF XBRL Taxonomy Extension Definition Linkbase Document.

 

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.
   
  *Management contracts, compensatory plans and arrangements required to be filed as an exhibit to this report.

 

33

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

           
Date:  August 22, 2017     FLEXSTEEL INDUSTRIES, INC.  
           
      By: /S/ Karel K. Czanderna  
        Karel K. Czanderna  
        Chief Executive Officer  
        and  
        Principal Executive Officer  
           
      By: /S/ Timothy E. Hall  
        Timothy E. Hall  
        Chief Financial Officer  
        and  
        Principal Financial and Accounting Officer

 

34

 

  

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

         
Date: August 22, 2017   /S/ Eric S. Rangen  
      Eric S. Rangen  
      Chair of the Board of Directors  
         
Date: August 22, 2017   /S/ Karel K. Czanderna  
      Karel K. Czanderna  
      Director  
         
Date: August 22, 2017   /S/ Jeffrey T. Bertsch  
      Jeffrey T. Bertsch  
      Director  
         
Date: August 22, 2017   /S/ Mary C. Bottie  
      Mary C. Bottie  
      Director  
         
Date: August 22, 2017   /S/ Michael J. Edwards  
      Michael J. Edwards  
      Director  
         
Date: August 22, 2017   /S/ Thomas M. Levine  
      Thomas M. Levine  
      Director  
         
Date: August 22, 2017   /S/ Robert J. Maricich  
      Robert J. Maricich  
      Director  
         
Date: August 22, 2017   /S/ Nancy E. Uridil  
      Nancy E. Uridil  
      Director  

 

35