UNITED STATES |
SECURITIES AND EXCHANGE COMMISSION |
Washington, D.C. 20549 |
UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
For the fiscal year endedJune 30, 20082011
For the transition period from to
Commission file number0-51510-5151
FLEXSTEEL INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
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FLEXSTEEL INDUSTRIES, INC. | ||
(Exact name of registrant as specified in its charter) |
Minnesota | 42-0442319 | |||
(State or other jurisdiction of incorporation or | (I.R.S. Employer Identification No.) | |||
3400 Jackson Street, Dubuque, Iowa | 52004-0877 | |||
(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:
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)
Securities registered pursuant to Section 12(g) of the Act: | ||
None | ||
(Title of Class) | ||
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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. Yesx Noo
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). Yeso Noo
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.x
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one).
Large accelerated filero Accelerated filero Non-accelerated filero Smaller reporting companyx
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yeso Nox |
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The aggregate market value of the voting stock held by non-affiliates, computed by reference to the last sales price on December 29, 200731, 2010 (which was the last business day of the registrant’s most recently completed second quarter) was $49,984,743.
$74,061,443.
Indicate the number of shares outstanding of each of the registrant’s classes of Common Stock, as of the latest practicable date. 6,575,6336,715,612 Common Shares ($1 par value) as of September 9, 2008.
August 15, 2011.
DOCUMENTS INCORPORATED BY REFERENCE
In Part III, portions of the registrant’s 20082011 Proxy Statement to be filed with the Securities and Exchange Commission within 120 days of the Registrant’s fiscal year end.
EXPLANATORY NOTE
As discussed in Note 19 to the accompanying Consolidated Financial Statements in this Annual Report on Form 10-K, Flexsteel Industries, Inc. and Subsidiaries, (the “Company”) has restated the consolidated financial statements for the fiscal years ended June 30, 2007 and 2006 and the condensed consolidated financial statements for the quarters in the previously mentioned fiscal years and for the quarters ended March 31, 2008, December 31, 2007 and September 30, 2007. This Form 10-K also reflects the effects of the restatements within “Selected Financial Data” in Item 6, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Item 7 and “Controls and Procedures” in Item 9A.
Background of Restatement
During the 2008 fiscal year-end closing process the Company identified unsupported reconciling amounts that reduced the accounts payable balances at a material consolidated subsidiary. After completing analysis of these unsupported reconciling amounts, it was determined that they principally related to the historical accounting at the subsidiary for the capitalization of inventory costs and the clearing of accruals from accounts payable relating to transactions occurring in fiscal years 2004 and 2005. The historical subsidiary inventory standard costing system, established prior to the warehousing of inventory in China, did not appropriately differentiate the costing of inventory balances warehoused in China versus the United States. The warehoused inventories in China inappropriately included freight-in costs for shipments to the United States that had not been incurred. During fiscal year 2006, the Company modified the subsidiary’s inventory costing process which rectified the costing error in inventory on a prospective basis but resulted in the reclassification of the historical error in inventory freight costs as a reduction to accounts payable with the erroneous belief that the reduction to accounts payable would offset future freight invoices. As a result of this error, the $2.287 million reduction within accounts payable remained until identified during the fiscal year 2008 closing process.
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, foreign currency valuations,retention and recruitment of key employees, actions by governments including laws, regulations, taxes and tariffs, inflation, the amount of sales generated and the profit margins thereon, competition (both foreignU.S. and domestic)foreign), changes in interest rates, 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 manufacturers, importers and marketers of residential recreational vehicle and commercial upholstered and wooden furniture products in the country.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, motor home, travel trailer, yacht, pontoon, health carehotel and hotelother commercial applications. Featured as a basic 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 to furniture dealers, department stores, recreational vehicle manufacturers, catalogs and hospitality and healthcare facilities.representatives. The Company’s products are also sold to several national and regional chains, some of which sell on a private label basis. No single customer accounted for more than 10% of net sales.
The Company has one active wholly-owned subsidiary: DMI Furniture, Inc. (“DMI”), acquired effective September 17, 2003, which is a Louisville, Kentucky-based, manufacturer, importer and marketer of residential and commercial office furniture with manufacturing plants and warehouses in Indiana and manufacturing sources in Asia; DMI’s divisions are WYNWOOD, Homestyles and DMI Commercial Office Furniture. The Company has two inactive wholly-owned subsidiaries: (1) Desert Dreams, Inc., which owned and leased a commercial building to an unrelated entity until it was sold in June, 2007 and (2) Four Seasons, Inc.
The Company operates in one reportable operating 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 recreational vehicle, and commercial markets. The Company makes minimal export sales. No single customer accounted for more than 10% of net sales.
The Company’s furniture products have three primary areas of application – residential, recreational vehicle and commercial. 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):
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| FOR THE YEARS ENDED JUNE 30, |
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| 2011 |
| 2010 |
| 2009 |
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Residential |
| $ | 258,095 |
| $ | 246,041 |
| $ | 230,727 |
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Commercial |
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| 81,331 |
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| 80,425 |
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| 93,431 |
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| $ | 339,426 |
| $ | 326,466 |
| $ | 324,158 |
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| FOR THE YEARS ENDED JUNE 30, |
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| 2008 |
| 2007 |
| 2006 |
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Residential |
| $ | 258,084 |
| $ | 259,710 |
| $ | 267,714 |
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Recreational Vehicle |
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| 56,090 |
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| 66,165 |
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| 71,981 |
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Commercial |
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| 91,481 |
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| 99,525 |
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| 86,713 |
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| $ | 405,655 |
| $ | 425,400 |
| $ | 426,408 |
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Manufacturing and Offshore Sourcing
There has been a significant change in recent years in the manner by which we acquire products to be introduced to the market. We have traditionally been a furniture manufacturer, however our blended strategy now combines offshore sourcing of finished and component parts with our manufactured finished products and component parts.
We operate manufacturing facilities that are located in Arkansas, California, Georgia, Indiana, Iowa, Mississippi, and Pennsylvania. 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 offshore component parts to enhance our product quality and 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. The Company believes that it best serves customers by offering products from each of these categories to assist customers in reaching specific consumers with varied price points, styles and product categories. This blended focus on products allows the Company to provide a wide range of options to satisfy customer requirements.
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 offshore component parts to enhance our product quality and value in the marketplace.
Competition
The furniture industry is highly competitive and includes a large number of domesticU.S. and foreign manufacturers and distributors, none of which dominates the market. TheOur competition has significantly increased fromincludes foreign manufacturers, in countries such as China, which have lower production costs.and customers who obtain products directly from foreign manufacturers. The markets in which we compete include a large number of relatively small manufacturers; however, certain competitors have substantially greater sales volumes and financial resources compared to us.than we have. Our products compete based on style, quality, price, delivery, service and durability. We believe that our manufacturing capabilities, and facility locations, our commitment to our customers, our product quality and value and experienced production, marketing and management teams, now aided by offshore sourced components and finished product, are our competitive advantages.
Seasonality
The Company’s business is not considered seasonal.
Foreign Operations
The Company makes minimal export sales. At June 30, 2008,2011, the Company had approximately 10090 employees located in Asia to inspect and coordinate the delivery of purchased products.
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):
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June 30, 2011 |
| June 30, 2010 |
| June 30, 2009 |
$35,700 |
| $49,000 |
| $35,200 |
June 30, 2008 |
| June 30, 2007 |
| June 30, 2006 |
$ 45,700 |
| $ 50,900 |
| $ 50,600 |
Raw Materials
The Company’s manufactured furniture products utilizeCompany utilizes various types of wood, fabrics, leathers, upholstered 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 domesticU.S. and offshore,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. Tariffs are a possibilitytariffs, see “Risk Factors” in Item 1A of this Annual Report on any imported or exported products.Form 10-K.
Government Regulations
The Company is subject to various local, state, and federal laws, regulations and agencies that affect businesses generally. These include regulations promulgated by federal and state environmental and health agencies, the federal Occupational Safety and Health Administration, and laws pertaining to the hiring, treatment, safety, and dischargegenerally, see “Risk Factors” in Item 1A of employees.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. Compliance with these lawswaste, see “Risk Factors” in Item 1A and regulations has not had a material impact“Legal Proceedings” in Item 3 of this Annual Report on our capital expenditures, earnings, or competitive position.Form 10-K.
Trademarks Patents and LicensesPatents
The Company owns the American and Canadian improvement patents to its Flexsteel seat spring, as well as patents on convertible beds and various other recreational vehicle seating products.beds. The Company has patents and owns certain trademarks in connection with its furniture products, which trademarks are due to expire on dates ranging from 20082011 to 2023.2025. The Company does not consider its trademarks patents and licensespatents material to its business.
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 independent 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):
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Fiscal Year Ended June 30, |
| Expenditures |
2011 |
| $2,190 |
2010 |
| $2,040 |
2009 |
| $2,680 |
Fiscal Year Ended June 30, |
| Expenditures |
2008 |
| $3,130 |
2007 |
| $3,270 |
2006 |
| $2,990 |
Employees
The Company had approximately 2,0001,300 employees as of June 30, 20082011 including approximately 600250 employees that are covered by collective bargaining agreements. Management believes it has good relations with employees.
Website and Available Information
Our website is located atwww.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 ourGuidelines for Business Conduct are available, without charge, on the Company’s website atwww.flexsteel.com or by writing to the Office of the Secretary, Flexsteel Industries, Inc., P. O. Box 877, Dubuque, IA 52004-0877.
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. These risks are not the only ones we face. 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 products are considered highly deferrable purchases for consumers during economic downturns. Prolonged negative economic conditions could impact our business.
We may lose market share Home furnishings and commercial products are generally considered a deferrable purchase by most consumers and end-users. Economic downturns and prolonged negative economic conditions could affect consumer spending habits by decreasing the overall demand for home furnishings and commercial products. These events could impact retailers, hospitality, 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 competition, which would decreasethe deferrable nature and relatively significant cost of home furnishings and commercial products purchases.
Our future success depends on our future salesability to manage our global supply chain.
We acquire raw materials, component parts and earnings.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, 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 many domesticU.S. and foreign manufacturers. Some competitors have greater financial resources than we havemanufacturers and some often offer extensively advertised, well-recognized, branded products. Additionally, competition from foreign producers has increased dramatically in the past few years. These foreign producers typically have lower selling prices due to their lower operating costs.distributors. As a result, we may not be able to maintain or to raise the prices of our products in response to such 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. Large retail furniture dealersOur current and potential customers have the ability to obtain offshore sourcing on their own.products direct from the manufacturers. As a result, we are continually subject to the risk of losing market share, which may lower our sales and earnings.
We have been increasing our offshore capabilities to provide flexibility in product offerings and pricing to meet competitive pressures, but this approach may adversely affect our ability to service Business failures of large dealers or a group of customers which could lowerimpact our future sales and earnings.
Our sourcing vendors may not supply goods that meet our manufacturing, quality or safety specifications, in a timely manner and at an acceptable price. We may reject goods that do not meet our specifications and either manufacture or find alternative vendors potentially at a higher cost, or may be forcedbusiness practice has been to discontinue the product. Also, delivery of goods from our foreign sourcing vendors may be delayed for reasons not typically encountered with domestic manufacturing or sourcing, such as shipment delays caused by customs or labor issues.
Changes in political, economic, and social conditions, as well as laws and regulations in the other countries from which we source products could adversely affect us. This could make it more difficult for usextend payment terms to service our customers. International trade policies of the United States and countries from which we source products could adversely affect us. Imposition of trade sanctions relating to imports, taxes, import duties and other charges on imports could increase our costs and decrease our earnings. Also, significant fluctuations of foreign exchange rates against the value of the U.S. dollar could increase costs and decrease earnings.
Efforts to realign manufacturing could decrease our near-term earnings.
We continually review our manufacturing operations and offshore sourcing capabilities. As a result, we sometimes realign those operations and capabilities and institute cost savings programs. These programshave a large amount of trade receivables. Although we have no customers that individually represent 10% or more of our annual net sales, business failures of a large customer or a group of customers could require us to record additional receivable reserves, which would decrease earnings. Receivables collection can includebe significantly impacted by economic conditions. Deterioration of the consolidation and integrationeconomy or a lack of facilities, functions, systems and procedures. We also may shift certain products to or from domestic manufacturing to offshore sourcing. These realignments and cost savings programs generally involve some initial cost and can result in decreases in our near-term earnings until we achieve the expected cost reductions. We may not always accomplish these actions as quickly as anticipated, and we may not fully achieve the expected cost reductions.
An economic downturn could adversely affect our business and decrease our sales and earnings.
Economic downturns could affect consumer-spending habits by decreasing the overall demand for home furnishings, recreational vehicles and commercial products and adversely affect our business. Interest rates, consumer confidence, fuel costs, housing starts, and geopolitical factors that affect many other businesses are particularly significant to us because our products are consumer goods.
If we experience fluctuations in the price, availability and quality of raw materials, thisrecovery could cause manufacturing delays, adversely affect our ability to provide goods tofurther business failures of our customers, and increase our costs, any of which could decreasein turn require additional receivable reserves and lower our sales and earnings.
We use various types of wood, fabrics, leathers, upholstered filling material, high carbon spring steel, bar and wire stock and other raw materials in manufacturing furniture. Because we are dependent on outside suppliers for all of our raw material needs, we must obtain sufficient quantities of quality raw materials from our suppliers at acceptable prices and in a timely manner. We have no long-term supply contracts with our suppliers. Unfavorable fluctuations in the price, quality and availability of these raw materials could negatively affect our ability to meet demands of our customers. The inability to meet our customers' demands could result in the loss of future sales, and we may not always be able to pass along price increases to our customers due to competitive and marketing pressures.
Our failure to anticipate or respond to changes in consumer 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 trends and tastes. If we are unable to predict or respond to changes in theseend-user trends and tastes in a timely manner, we may lose sales and have to sell excess inventory at reduced prices. This could lower our sales and earnings.
If we experience the loss of large customers through business failures (or for other reasons), any extended business interruptions at our manufacturing facilities, or problems with our fabric suppliers, this could decrease our future sales and earnings.
Although we have no customers that individually represent 10% or more of our net sales, the possibility of business failures by, or the loss of, large customers could decrease our future sales and earnings. Lost sales may be difficult to replace and any amounts owed to us may become uncollectible. Our inability to fill customer orders during an extended business interruption could negatively impact existing customer relationships resulting in market share decreases.
Upholstered furniture 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.
At times it is necessary we discontinue certain relationships with customers (retailers, O.E.M. manufacturers Our success depends on our ability to recruit and others) who do not meet our growth, credit or profitability standards. Until realignment is established, there can be a decrease in near-term sales and earnings. We continually review relationships with our customers and future realignments are possible based upon such ongoing reviews.retain key employees.
WeOur success depends on our ability to recruit and retain key employees. If we are not successful in recruiting and may inretaining key employees or experience the future be, a party to legal proceedings and claims, including those involving product liability or environmental matters, someunexpected loss of which claim significant damages and could adversely affectkey employees, our business, operating results and financial condition.
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, weoperations may be required to recall or redesign such products. We maintain insurance against product liability claims, but there can be no assurance such coverage will continue to be available on terms acceptable to us or that such coverage will be adequate for liabilities actually incurred.negatively impacted.
Future costs of complying with various laws and regulations may adversely impact future operating results.
Given the inherent uncertainty of litigation, we can offer no assurance future litigation will not have a material adverse impact on ourOur business operating results or financial condition. We are alsois subject to various laws and regulations, relatingsuch as the California Transparency in Supply Chains Act of 2010, Patient Protection and Affordable Care Act of 2010, the Pension Protection Act of 2006, the Lacey Act, as amended in 2008 to environmental protectioncover plants and trees, the Consumer Product Safety Improvement Act of 2008, the Security and Accountability for Every (SAFE) Port Act of 2006 and the dischargeMaritime Transportation Security Act of materials into2002 as well as many others. Partially in response to the environmentfinancial markets crises and we could incur substantial costs as a result of the noncompliance with, or liability for cleanup or other costs or damages under, environmental laws.
We may become subject to litigation or other contingent liabilities, downgrades in our credit ratings, or potential additional cash and noncash charges because of our error corrections in our Consolidated Financial Statements whichglobal economic recession, regulatory initiatives have accelerated. These initiatives could have a material adverse effectsignificant impact on the Company.
As described in the Explanatory Note immediately preceding Part I, Item 1, and in Note 19 “Error Corrections” of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K, we identified certain errors in the reconciliation of accounts payable at June 30, 2008. As a result of these errors, we restated, in this Annual Report on Form 10-K, certain of our previously filed financial statements. We could be subject to litigation or other contingent liabilities, and credit rating downgrades, or cash or non-cash charges due to these errors, any or all of which could have a material adverse effect on us.
We may engage in acquisitions and investments in businesses, which could dilute our earnings per share and decrease the value of our common stock.
As part of our business strategy, we may make acquisitions and investments in businesses that offer complementary products. Risks commonly encountered in acquisitions include the possibility that we pay more than the acquired company or assets are worth, the difficulty of assimilating the operations and personnel of the acquired business, the potential disruption of our ongoing business and the distraction of our management from ongoing business. Consideration paid for future acquisitions could be in the form of cash or stock or a combination thereof. Dilution to existing stockholders and to earnings per share may result in connection with any such future acquisition.
We may experience impairment of our long-lived assets, which would decrease our earnings and net worth.
Accounting rules require that long-lived assets be tested for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. We have substantial long-lived assets, consisting primarily of property, plant and equipment, which based upon such events or changes in circumstances there could be a write-down of all or a portion of these assets negatively impacting earnings.
Restrictive covenants in our existing credit facilities may restrict our ability to pursue our business strategies.
Our existing credit facilities limit our ability, among other things, to: incur additional indebtedness; make investments; consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and create liens.
The restrictions contained in our credit facilities could: limit our ability to plan for or react to market conditions or meet capital needs or otherwise restrict our activities or business plans; and adversely affect our ability to finance our operations, strategic acquisitions, investments or alliances or other capital needs or to engage in other business activities that would be in our best interest.
A breach of any of these restrictive covenants or our inabilitycost to comply with the requiredsuch laws and regulations could adversely impact our financial ratiosposition, results of operations and cash flows. In addition, failure to comply with such laws and regulations, even inadvertently, could result in a default underproduce negative consequences which could adversely impact our credit facilities. If a default occurs, the lender under our credit agreement may elect to declare all borrowings outstanding, together with accrued interest and other fees, to be immediately due and payable which would result in an event of default under our outstanding notes. The lender will also have the right in these circumstances to terminate any commitments they have to provide further borrowings. If we are unable to repay outstanding borrowings when due, the lender will also have the right to initiate collection proceedings against us. If the indebtedness under our credit facilities were to be accelerated, we cannot assure you that our assets would be sufficient to repay in full the indebtedness under the credit facilities and our other indebtedness.operations.
Terms of collective bargaining agreements and labor disruptions could adversely impact our results of operations.
We employ approximately 2,0001,300 people, 30%250 of whom are covered by union contracts. Where a significant portion of our workers are unionized, our ability to implement productivity improvements and effect savings with respect to health care, pension and other retirement costs is more restricted than in many nonunion operations as a result of various restrictions specified in our collective bargaining agreements. 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 resolve conflicts as they arise. However, there can be no assurance that these efforts will be successful.
We Due to our participation in multi-employer pension plans, we may have material weaknessesexposures 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 200 of our 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 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 internal control overoverall 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 reportingstability of contributing employers and changes in actuarial assumptions.
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 existencedischarge of material weaknesses, if any, maymaterials into the environment and we could incur substantial costs as a result of the noncompliance with, or liability for cleanup or other costs or damages under, environmental laws. See Note 11, “Litigation” within the Notes to Consolidated Financial Statements for a description of an existing environmental claim against the Company. Additionally, the Company is involved in various other kinds of commercial disputes. Given the inherent uncertainty of litigation, these various legal proceedings and compliance matters could have an adversea material impact on our stock price.
Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect that our internal control overbusiness, operating results or financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluations of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Our internal control over financial reporting, however, is designed to provide reasonable assurance that the objectives of internal control over financial reporting are met. The existence of material weaknesses in our internal control over financial reporting may have an adverse impact on our stock price.condition.
Item 1B. | Unresolved Staff Comments |
None.
None. | |
Item 2. | Properties |
The Company owns the following facilities as of June 30, 2008:2011:
|
|
|
| ||
Approximate | |||||
Location | Size (square feet) | Principal Operations | |||
Dubuque, Iowa |
|
|
|
| Manufacturing, Distribution and Corporate Offices |
Lancaster, Pennsylvania |
| 216,000 |
|
| Distribution |
Riverside, California |
|
|
|
| Manufacturing and Distribution |
69,000 | Distribution | ||||
Dublin, Georgia |
| 300,000 |
|
| Manufacturing |
Harrison, Arkansas |
| 221,000 |
|
| Manufacturing |
Starkville, Mississippi |
| 349,000 |
|
| Manufacturing |
New Paris, Indiana |
| 168,000 |
|
| Held for sale |
Huntingburg, Indiana |
| 691,000 |
|
| |
|
|
|
* See Note 18 to the Consolidated Financial Statements included in this Annual Report on Form 10-K.
The Company leases the following facilities as of June 30, 2008:2011:
|
|
|
|
| |
|
|
|
|
| |
Location | Size (square feet) | Principal Operations | |||
Louisville, Kentucky |
| 15,000 |
| Administrative Offices | |
Ferdinand, Indiana |
|
|
|
| Distribution |
|
|
|
|
| |
|
|
| |||
|
|
|
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. Management believes there is adequate production and distribution capacity at the Company’s facilities to meet present market demands.
The Company leases showrooms for displaying its products in the furniture markets in High Point, North Carolina and Las Vegas, Nevada.
Item 3. | Legal Proceedings |
The Company has been named as one of several defendants in an Indiana civil lawsuit related to groundwater contamination. The lawsuit alleges that the contamination source is a property once owned by the Company. The Company does not believe that it caused or contributed to the contamination. This lawsuit is in its preliminary stages. Plaintiffs have not identified a dollar amount of their alleged damages and the status of insurance coverage has not been determined. We are unable to estimate a range of reasonably possible outcomes or losses at this time. Accordingly, no accrual related to this matter has been recorded in the June 30, 2011 financial statements. Legal and other related expenses of $0.5 million have been incurred responding to this lawsuit and are included in Selling, General and Administrative expense in the fiscal year 2011 Consolidated Statement of Operations.
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 adverse effect on its consolidated operating results, financial condition, or cash flows.
Item 4. |
|
During the quarter ended June 30, 2008 no matter was submitted to a vote of security holders.
PART II
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 is based upon the SIC Code #251 Household Furniture Index as a peer group. It shows changes over the past five-year period in the value of $100 invested in: (1) Flexsteel’s common stock; (2) The NASDAQ Global Market; and (3) an industry peer group of the following: Bassett Furniture Ind., Chromcraft Revington Inc., Ethan Allen Interiors, Furniture Brands Intl., Hooker Furniture Corp., InterfaceKimball International, La-Z-Boy Inc., Kimball International, Natuzzi S.P.A., La-Z-Boy Inc., and Stanley Furniture Inc.
| 2003 |
| 2004 |
| 2005 |
| 2006 |
| 2007 |
| 2008 |
Flexsteel | 100.00 |
| 146.06 |
| 91.75 |
| 86.56 |
| 100.25 |
| 81.05 |
Peer Group | 100.00 |
| 106.94 |
| 96.27 |
| 105.22 |
| 100.73 |
| 71.11 |
NASDAQ | 100.00 |
| 126.19 |
| 126.75 |
| 133.85 |
| 160.42 |
| 141.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2006 |
| 2007 |
| 2008 |
| 2009 |
| 2010 |
| 2011 |
| ||||||
Flexsteel |
| 100.00 |
|
| 115.82 |
|
| 93.64 |
|
| 73.16 |
|
| 97.88 |
|
| 132.62 |
|
|
Peer Group |
| 100.00 |
|
| 87.04 |
|
| 62.64 |
|
| 31.24 |
|
| 39.52 |
|
| 48.76 |
|
|
NASDAQ |
| 100.00 |
|
| 122.72 |
|
| 93.36 |
|
| 71.02 |
|
| 79.93 |
|
| 105.32 |
|
|
The NASDAQ Global Market is the principal market on which the Company’s common stock is traded.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Sale Price of Common Stock * |
| Cash Dividends |
| ||||||||||||||
|
| Fiscal 2011 |
| Fiscal 2010 |
|
| |||||||||||||
|
| High |
| Low |
| High |
| Low |
| Fiscal 2011 |
| Fiscal 2010 |
| ||||||
First Quarter |
| $ | 15.84 |
| $ | 10.08 |
| $ | 8.84 |
| $ | 6.64 |
| $ | 0.075 |
| $ | 0.05 |
|
Second Quarter |
|
| 18.75 |
|
| 14.22 |
|
| 10.34 |
|
| 7.77 |
|
| 0.075 |
|
| 0.05 |
|
Third Quarter |
|
| 19.69 |
|
| 14.11 |
|
| 16.50 |
|
| 9.33 |
|
| 0.075 |
|
| 0.05 |
|
Fourth Quarter |
|
| 16.60 |
|
| 13.80 |
|
| 15.74 |
|
| 10.75 |
|
| 0.075 |
|
| 0.05 |
|
|
| Sale Price of Common Stock * |
| Cash Dividends |
| ||||||||||||||
|
| Fiscal 2008 |
| Fiscal 2007 |
|
| |||||||||||||
|
| High |
| Low |
| High |
| Low |
| Fiscal 2008 |
| Fiscal 2007 |
| ||||||
First Quarter |
| $ | 14.75 |
| $ | 12.92 |
| $ | 13.59 |
| $ | 12.02 |
| $ | 0.13 |
| $ | 0.13 |
|
Second Quarter |
|
| 14.86 |
|
| 11.60 |
|
| 13.26 |
|
| 11.55 |
|
| 0.13 |
|
| 0.13 |
|
Third Quarter |
|
| 14.50 |
|
| 11.00 |
|
| 15.47 |
|
| 12.51 |
|
| 0.13 |
|
| 0.13 |
|
Fourth Quarter |
|
| 13.98 |
|
| 11.01 |
|
| 15.94 |
|
| 12.71 |
|
| 0.13 |
|
| 0.13 |
|
* Reflects the market price as reported on The NASDAQ Global Market.
The Company estimates there were approximately 1,9001,600 holders of common stock of the Company as of June 30, 2008.2011.
There were no repurchases of the Company’s common stock during the quarter ended June 30, 2008.2011.
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.
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 statement of operations 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)
|
| FOR THE YEARS ENDED JUNE 30, |
| |||||||||||||
|
| 2008 |
| 2007 |
| 2006 |
| 2005 |
| 2004 (6) |
| |||||
SUMMARY OF OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
| $ | 405,655 |
| $ | 425,400 |
| $ | 426,408 |
| $ | 410,023 |
| $ | 401,222 |
|
Cost of goods sold |
|
| 327,165 |
|
| 344,177 |
|
| 345,068 |
|
| 334,978 | (1) |
| 318,526 | (1) |
Operating income |
|
| 7,596 |
|
| 14,699 |
|
| 8,561 |
|
| 7,258 | (1) |
| 16,123 | (1) |
Interest and other income |
|
| 469 |
|
| 1,277 |
|
| 775 |
|
| 628 |
|
| 977 |
|
Interest expense |
|
| 1,468 |
|
| 1,491 |
|
| 1,557 |
|
| 990 |
|
| 839 |
|
Income before income taxes |
|
| 6,596 |
|
| 14,484 |
|
| 7,778 |
|
| 6,896 | (1) |
| 16,261 | (1) |
Provision for income taxes (5) |
|
| 2,360 |
|
| 5,150 |
|
| 3,060 |
|
| 1,990 | (1) |
| 6,430 | (1) |
Net income (2) (3) (4) (5) |
|
| 4,236 |
|
| 9,334 |
|
| 4,718 |
|
| 4,906 | (1) |
| 9,831 | (1) |
Earnings per common share: (2) (3) (4) (5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 0.64 |
|
| 1.42 |
|
| 0.72 |
|
| 0.75 | (1) |
| 1.53 | (1) |
Diluted |
|
| 0.64 |
|
| 1.42 |
|
| 0.72 |
|
| 0.74 | (1) |
| 1.51 | (1) |
Cash dividends declared per common share |
| $ | 0.52 |
| $ | 0.52 |
| $ | 0.52 |
| $ | 0.52 |
| $ | 0.52 |
|
SELECTED DATA AS OF JUNE 30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 6,574 |
|
| 6,568 |
|
| 6,558 |
|
| 6,531 |
|
| 6,440 |
|
Diluted |
|
| 6,611 |
|
| 6,583 |
|
| 6,577 |
|
| 6,601 |
|
| 6,530 |
|
CONSOLIDATED BALANCE SHEET DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
| $ | 179,906 |
| $ | 185,014 | (1) | $ | 184,176 | (1) | $ | 165,221 | (1) | $ | 169,220 | (1) |
Property, plant and equipment, net |
|
| 26,372 |
|
| 28,168 |
|
| 24,158 |
|
| 26,141 |
|
| 30,327 |
|
Capital expenditures |
|
| 1,228 |
|
| 10,839 |
|
| 3,411 |
|
| 3,347 |
|
| 6,030 |
|
Long-term debt |
|
| 20,811 |
|
| 21,336 |
|
| 21,846 |
|
| 12,800 |
|
| 17,583 |
|
Working capital (current assets less current liabilities) |
|
| 100,920 |
|
| 97,902 | (1) |
| 95,551 | (1) |
| 83,952 |
| 83,054 | (1) | |
Shareholders’ equity |
| $ | 112,752 |
| $ | 112,679 | (1) | $ | 106,066 | (1) | $ | 103,361 | (1) | $ | 101,313 | (1) |
SELECTED RATIOS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income as percent of sales |
|
| 1.0 | % |
| 2.2 | % |
| 1.1 | % |
| 1.2 | %(1) |
| 2.5 | %(1) |
Current ratio |
|
| 3.5 to | 1 |
| 3.2 to | 1(1) |
| 2.9 to | 1(1) |
| 3.0 to | 1(1) |
| 2.9 to | 1(1) |
Return on ending shareholders’ equity |
|
| 3.8 | % |
| 8.3 | %(1) |
| 4.5 | %(1) |
| 4.8 | %(1) |
| 9.7 | %(1) |
Return on beginning shareholders’ equity |
|
| 3.8 | % |
| 8.8 | %(1) |
| 4.6 | %(1) |
| 4.8 | %(1) |
| 10.5 | %(1) |
Average number of employees |
|
| 2,140 |
|
| 2,290 |
|
| 2,400 |
|
| 2,460 |
|
| 2,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2011 |
| 2010 |
| 2009 |
| 2008 |
| 2007 |
| |||||
SUMMARY OF OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
| $ | 339,426 |
| $ | 326,466 |
| $ | 324,158 |
| $ | 405,655 |
| $ | 425,400 |
|
Cost of goods sold |
|
| 262,124 |
|
| 251,685 |
|
| 263,083 |
|
| 327,165 |
|
| 344,177 |
|
Operating income (loss) |
|
| 15,864 |
|
| 17,529 |
|
| (2,272 | ) |
| 7,596 |
|
| 14,699 |
|
Interest and other income |
|
| 343 |
|
| 361 |
|
| 661 |
|
| 469 |
|
| 1,277 |
|
Interest expense |
|
| — |
|
| 439 |
|
| 968 |
|
| 1,469 |
|
| 1,491 |
|
Income (loss) before income taxes |
|
| 16,207 |
|
| 17,451 |
|
| (2,579 | ) |
| 6,596 |
|
| 14,484 |
|
Income tax provision (benefit) |
|
| 5,790 |
|
| 6,650 |
|
| (1,070 | ) |
| 2,360 |
|
| 5,150 |
|
Net income (loss) (1) (2) (3) |
|
| 10,417 |
|
| 10,801 |
|
| (1,509 | ) |
| 4,236 |
|
| 9,334 |
|
Earnings (loss) per common share: (1) (2) (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 1.56 |
|
| 1.63 |
|
| (0.23 | ) |
| 0.64 |
|
| 1.42 |
|
Diluted |
|
| 1.50 |
|
| 1.61 |
|
| (0.23 | ) |
| 0.64 |
|
| 1.42 |
|
Cash dividends declared per common share |
| $ | 0.30 |
| $ | 0.20 |
| $ | 0.36 |
| $ | 0.52 |
| $ | 0.52 |
|
SELECTED DATA AS OF JUNE 30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 6,693 |
|
| 6,608 |
|
| 6,576 |
|
| 6,574 |
|
| 6,568 |
|
Diluted |
|
| 6,929 |
|
| 6,697 |
|
| 6,576 |
|
| 6,611 |
|
| 6,583 |
|
Total assets |
| $ | 164,677 |
| $ | 157,670 |
| $ | 150,971 |
| $ | 179,906 |
| $ | 185,014 |
|
Property, plant and equipment, net |
|
| 21,387 |
|
| 21,614 |
|
| 23,298 |
|
| 26,372 |
|
| 28,168 |
|
Capital expenditures |
|
| 2,573 |
|
| 1,251 |
|
| 1,203 |
|
| 1,228 |
|
| 10,839 |
|
Long-term debt |
|
| — |
|
| — |
|
| — |
|
| 20,811 |
|
| 21,336 |
|
Working capital (current assets less current liabilities) |
|
| 100,683 |
|
| 90,800 |
|
| 78,416 |
|
| 100,920 |
|
| 97,902 |
|
Shareholders’ equity |
| $ | 128,573 |
| $ | 117,612 |
| $ | 106,998 |
| $ | 112,752 |
| $ | 112,679 |
|
SELECTED RATIOS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss), as a percent of sales |
|
| 3.1 |
|
| 3.3 |
|
| (0.5 | ) |
| 1.0 |
|
| 2.2 |
|
Current ratio |
|
| 4.6 to 1 |
|
| 3.9 to 1 |
|
| 3.2 to 1 |
|
| 3.5 to 1 |
|
| 3.2 to 1 |
|
Return on ending shareholders’ equity |
|
| 8.1 |
|
| 9.2 |
|
| (1.4 | ) |
| 3.8 |
|
| 8.3 |
|
Average number of employees |
|
| 1,320 |
|
| 1,400 |
|
| 1,600 |
|
| 2,140 |
|
| 2,290 |
|
| |
(1) |
|
(2) |
|
(3) | Fiscal 2007 net income and per share amounts reflect the net gain (after tax) on sale of building of approximately $2.5 million or $0.37 per share, the gain on life insurance of $0.6 million or $0.08 per share and the net gain (after tax) on the sale of vacant land of approximately $0.2 million or $0.04 per share. |
|
|
|
|
|
|
|
|
|
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
All of the financial information presented in this Item 7 has been revised to reflect the impact of the restatement of the Company’s Consolidated Financial Statements, which is more fully described in Note 19, “Error Corrections” of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K. The cumulative impact of the unreconciled accounts payable was an increase to accounts payable of $2.3 million, an increase to deferred income taxes-current of $0.9 million and a reduction to Shareholder’s Equity of $1.4 million, as of July 1, 2005.General
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 accounting principles generally accepted 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 collectibility of trade accounts receivable and inventory valuation, depreciable lives, self-insurance programs, warranty costs and income taxes.valuation. Ultimate results may differ from these estimates under different assumptions or conditions.
Allowance for doubtful accounts – the Company establishes an allowance for doubtful accounts through review of open accounts, and historical collection and allowances amounts. The allowance for doubtful accounts is intended to reduce trade accounts receivable to the amount that reasonably approximates their net realizable fair value due to their short-term nature.value. The amount ultimately realized from trade accounts receivable may differ from the amount estimated in the consolidated financial statements based on collection experience and actual returns and allowances.experience.
Inventories – the Company values inventory at the lower of cost or market. A large portion of our finished goods inventory is made to order and many of our raw material parts are interchangeable between products. Historically inventory write-downs to market have been in fabric, wood frame and trim, and sourced products purchased for inventory. Management assesses the inventory on hand versus estimated future usage and estimated selling prices and if necessary writes down the obsolete or excess inventory to market. Although, we believe that inventory valuations are reasonable, unexpected changes in sales volume due to economic or competitive conditions may impact inventory valuations. Raw steel, lumber and wood frame parts are valued on the last-in, first-out (“LIFO”) method. Other inventories are valued on the first-in, first-out (“FIFO”) method. Changes in the market conditions could require a write down of inventory.
Self-insurance programs – 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, with a $1.0 million individual lifetime maximum. For workers’ compensation the Company retains the first $350,000 per claim and purchases excess coverage up to the statutory limits for amounts in excess of the retention limit. The Company is contingently liable to insurance carriers under its comprehensive general, product, and vehicle liability policies, as well as some workers’ compensation. Losses are accrued based upon the Company’s estimates of the aggregate liability of claims incurred using certain actuarial assumptions followed in the insurance industry and based on Company experience. The actual claims experience could differ from the estimates made by the Company based on actual experience.
Income taxes – the Company accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. In the preparation of the Company’s consolidated financial statements, management calculates income taxes. This includes estimating the Company’s current tax liability as well as assessing temporary differences resulting from different treatment of items for tax and book accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded on the balance sheet. These assets and liabilities are analyzed regularly and management assesses the likelihood that deferred tax assets will be realized from future taxable income. We make judgments regarding the potential tax effects of various transactions including a liability for uncertain tax positions in accordance with FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109 (“FIN 48”).
Revenue recognition – is upon delivery of product to our customer and when collectibility is reasonably assured. Delivery of product to our customer is evidenced through the shipping terms indicating when title and risk of loss is transferred. Our ordering process creates persuasive evidence of the sale arrangement and the sales amount is determined. The delivery of the goods to our 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, 2008, 20072011, 2010 and 2006.2009. Amounts presented are percentages of the Company’s net sales.
|
|
|
|
|
|
|
|
|
|
|
|
| FOR THE YEARS ENDED JUNE 30, |
| |||||||
|
| 2011 |
| 2010 |
| 2009 |
| |||
Net sales |
|
| 100.0 | % |
| 100.0 | % |
| 100.0 | % |
Cost of goods sold |
|
| (77.2 | ) |
| (77.2 | ) |
| (81.2 | ) |
Gross margin |
|
| 22.8 |
|
| 22.8 |
|
| 18.8 |
|
Selling, general and administrative |
|
| (17.8 | ) |
| (17.5 | ) |
| (18.8 | ) |
Facility consolidation and other charges |
|
| (0.3 | ) |
| — |
|
| (0.8 | ) |
Operating income (loss) |
|
| 4.7 |
|
| 5.3 |
|
| (0.8 | ) |
Other income, net |
|
| 0.1 |
|
| 0.0 |
|
| 0.0 |
|
Income (loss) before income taxes |
|
| 4.8 |
|
| 5.3 |
|
| (0.8 | ) |
Income tax (provision) benefit |
|
| (1.7 | ) |
| (2.0 | ) |
| 0.3 |
|
Net income (loss) |
|
| 3.1 | % |
| 3.3 | % |
| (0.5 | )% |
|
| FOR THE YEARS ENDED JUNE 30, |
| ||||
|
| 2008 |
| 2007 |
| 2006 |
|
Net sales |
| 100.0 | % | 100.0 | % | 100.0 | % |
Cost of goods sold |
| (80.7 | ) | (80.9 | ) | (80.9 | ) |
Gross margin |
| 19.3 |
| 19.1 |
| 19.1 |
|
Selling, general and administrative |
| (17.5 | ) | (16.7 | ) | (17.1 | ) |
Gain on sale of land and building |
| — |
| 1.0 |
| — |
|
Operating income |
| 1.8 |
| 3.4 |
| 2.0 |
|
Other expense, net |
| (0.2 | ) | 0.0 |
| (0.2 | ) |
Income before income taxes |
| 1.6 |
| 3.4 |
| 1.8 |
|
Provision for income taxes |
| (0.6 | ) | (1.2 | ) | (0.7 | ) |
Net income |
| 1.0 | % | 2.2 | % | 1.1 | % |
Fiscal 20082011 Compared to Fiscal 20072010
Net sales for the fiscal year ended June 30, 20082011 were $405.7$339.4 million compared to $425.4$326.5 million in the prior fiscal year, a decreasean increase of 4.6%4%. ResidentialFor the fiscal year June 30, 2011, residential net sales were $258.1 million compared to $259.7$246.0 million infor the fiscal year ended June 30, 2007, a decrease2010, an increase of 0.6%4.9%. Commercial net sales were $91.5$81.3 million for the fiscal year ended June 30, 2008, a decrease2011, an increase of 8.1%1.1% from net sales of $80.5 million for the fiscal year ended June 30, 2007. Recreational vehicle net sales were $56.1 million2010.
Gross margin for the fiscalyears ended June 30, 2011 and 2010 was 22.8%. The gross margin for the year ended June 30, 2008, a decrease of 15.2% from2011, includes the fiscal year ended June 30, 2007. The fiscal year decline in all net sales categories is due to a generally soft market environment.
Net income for the fiscal year ended June 30, 2008 was $4.2 million or $0.64 per share compared to $9.3 million or $1.42 per share in the fiscal year ended June 30, 2007. Results for the fiscal year ended June 30, 2007 were favorably impacted by three significant non-recurring events. The Company sold a commercial property, which resulted in a pre-tax gain of approximately $4.0 million, or $0.37 per share after tax. The Company recognized a pre-tax gain on the sale of vacant land of approximately $0.4 million or $0.04 per share after tax. These gains are reported as “Gain on sale of capital assets” in the Consolidated Statements of Income. The Company also realized a non-taxable gain on life insurance of $0.6 million or $0.08 per share. This gain is included in “Interest and other income” in the Consolidated Statements of Income.inventory write-down related to facility closing offset by operational improvements.
Gross margin forFor the fiscal years ended June 30, 20082011 and 2007 was 19.3% and 19.1%, respectively.
Selling,2010, selling, general and administrative expenses were 17.5 %17.8% and 16.7%17.5% of net sales, for the fiscal years ended June 30, 2008 and 2007, respectively. The percentage increase for the year ended June 30, 2011 reflects higher legal and professional fees.
Operating income decreased by $1.7 million in selling, general and administrative costs comparedfiscal year 2011 in comparison to the prior year. During fiscal year 2011, the Company recorded pre-tax charges of $1.6 million related to closing a manufacturing facility. Of these pre-tax charges, employee separation and other closing costs of $1.0 million are reported as facility closing costs and an inventory write-down of $0.6 million is due primarily to higher marketing and sales support expenses and higher bad debt expensereported as cost of $1.1 million on reduced revenues on a year over year basis.goods sold.
The effective income tax rate for the fiscal year ended June 30, 20082011 was 35.8%, reflecting lower net income35.7% compared to the prior year.38.1% for fiscal year 2010. The change in effective income tax rate was 35.6% for the fiscal year ended June 30, 2007. The 2007 rate was reduced by approximately 1.4%is primarily due to the non-taxable life insurance gain.change in provision for uncertain tax positions related to various state taxing jurisdictions, stock-based compensation and the benefit of the Domestic Manufacturing Deduction under Internal Revenue Code Section 199 (DMD), which provides a tax benefit on U.S. based manufacturing. The DMD tax benefit available in previous years was being phased in by statute and was therefore lower than the full DMD tax benefit for 2011.
The above factors resulted in net income for the fiscal year ended June 30, 20082011 of $4.2$10.4 million or $0.64$1.50 per share compared to $9.3$10.8 million or $1.42$1.61 per share for thein fiscal year ended June 30, 2007.2010.
All earnings per share amounts are on a diluted basis.
Fiscal 20072010 Compared to Fiscal 20062009
Net sales for the fiscal year ended June 30, 20072010 were $425.4$326.5 million compared to $426.4$324.2 million in the prior fiscal year.year, an increase of 1%. Residential net sales were $259.7$246.0 million a decreasecompared to $230.7 million in fiscal 2009, an increase of 3% from the fiscal year ended June 30, 2006.7%. Commercial net sales were $99.5$80.5 million for the fiscal year ended June 30, 2007, an increase of 15% from the fiscal year ended June 30, 2006. This increase in commercial net sales for the fiscal year ended June 30, 2007 is primarily due to expanded commercial office product offerings and improved industry performance of hospitality products. Recreational vehicle net sales were $66.2 million for the fiscal year ended June 30, 2007,2010, a decrease of 8%14% from thenet sales of $93.5 million for fiscal 2009.
The Company’s operating income improved by $19.8 million in fiscal year ended June 30, 2006.2010 in comparison to the prior year. The Company benefited from strategies implemented and actions taken during fiscal year decline2009 including consolidation of manufacturing operations and workforce reductions that brought production capacity and fixed overhead more in recreational vehicle net sales isline with current product demand. During the prior fiscal year, the Company recorded pre-tax charges of approximately $2.6 million related to facility consolidation and employee separation costs. Company-wide employment was reduced approximately 30% through plant closures and workforce reductions and remains at these reduced levels. These factors contributed significantly to gross margin improvements and selling, general and administrative expense reductions.
Gross margin for fiscal year 2010 was 22.8% compared to 18.8% for the prior year period. The gross margin improvements for the year were greatly impacted by the operational changes discussed above. In addition, gross margin improved due to a generally soft wholesale market environment for recreational vehicles.stability in material and product costs and lower ocean freight costs.
Net income for the fiscal year ended June 30, 2007 was $9.3 million or $1.42 per share. Results for the fiscal year ended June 30, 2007 were favorably impacted by three significant non-recurring events. The Company sold a commercial property, which resulted in a pre-tax gain of approximately $4.0 million, or $0.37 per share after tax. The Company recognized a pre-tax gain on the sale of vacant land of approximately $0.4 million or $0.04 per share after tax. These gains are reported as “Gain on sale of capital assets” in the Consolidated Statements of Income. The Company also realized a non-taxable gain on life insurance of $0.6 million, or $0.08 per share. This gain is included in “Interest and other income” in the Consolidated Statements of Income.
Gross margin forFor the fiscal years ended June 30, 20072010 and 2006 was 19.1%.
Selling,2009, selling, general and administrative expenses were 16.7%17.5% and 17.1%18.8% of net sales, for the fiscal year ended June 30, 2007 and 2006, respectively. The decrease in selling, general and administrative costs of approximately $1.9 million comparedThese percentage improvements are due to the prior fiscal year is due primarily to lower marketing and sales support expenses andoperational changes discussed above, as well as, lower bad debt expense of $0.8 million.and advertising costs.
Interest expense decreased $0.6 million to $0.4 million for fiscal year 2010 due to lower borrowings.
The effective income tax rate for the fiscal year ended June 30, 20072010 was 35.6%38.1%. The rate was reduced by approximately 1.4% due to the non-taxable life insurance gain. The effective income tax benefit rate was 39.3%41.5% for the fiscal year ended June 30, 2006.2009 due to losses or low level of earnings in various tax jurisdictions.
The above factors resulted in net income for the fiscal year ended June 30, 20072010 of $9.3$10.8 million or $1.42$1.61 per share compared to $4.7a net loss of $1.5 million or $0.72$0.23 per share for thein fiscal year ended June 30, 2006.2009.
All earnings per share amounts are on a diluted basis.
Liquidity and Capital Resources
Working capital (current assets less current liabilities) at June 30, 2011 was $100.7 million as compared to $90.8 million at June 30, 2010. Significant changes in working capital from June 30, 2010 to June 30, 2011 included increased cash of $9.6 million and decreased accruals of $2.4 million offset by decreased accounts receivable of $4.3 million. The decrease in receivables is due to timing of collections and lower shipment volume in the fourth fiscal quarter.
Net cash provided by operating activities was $8.7$13.8 million for the fiscal year ended June 30, 2011 reflecting net income of $10.4 million, changes in operating assets and liabilities of $1.3 million and non-cash charges of $4.7 million. The change in net cash provided by operating activities of $19.1 million in fiscal year 2008 compared to $10.32010 was comprised primarily of net income of $10.8 million, changes in fiscal year 2007. Significant working capital changes fromoperating assets and liabilities of $4.4 million and non-cash charges of $3.9 million. Depreciation expense was $2.7 million and $3.0 million for the years ended June 30, 2007 to June 30, 2008 included: decreased accounts receivables of $12.5 million, increased inventory levels of $7.0 million2011 and decreased accounts payable of $1.3 million. The decrease in receivables is related to timing of shipments and related payment terms, collection efforts and lower net sales. The increase in inventory is due primarily to timing of inventory purchases to meet our forecasted customer demands especially sourced products where there are longer lead times for international shipments. The decrease in accounts payable is due to the timing of payments. The Company expects that due to the nature of our operations that there will continue to be significant fluctuations in inventory levels, the related accounts payable, and cash flows from operations due to the following: we purchase a significant amount of inventory in large orders from overseas suppliers with significant lead times and depending on the timing of those large orders inventory levels can be significantly impacted, we have various large customers that purchase significant quantities of inventory at a time and the timing of those purchases can significantly impact inventory levels, accounts receivable, accounts payable and short-term borrowings. As discussed below the Company believes it has adequate financing arrangements and access to capital to absorb these fluctuations in operating cash flow. 2010, respectively.
Net cash used in investing activities was $1.0$2.7 million in fiscal year 20082011 compared to $5.1cash used by investing activities of $1.6 million in fiscal year 2007. The significant change in investing activities is related to the large amount2010. Net purchases of capital expenditures made in 2007 somewhat offset by a sale of land and commercial property.investments were $0.3 million. Capital expenditures were $1.2$2.6 million $10.8during fiscal year 2011.
Net cash used in financing activities was $1.5 million in fiscal year 2011, primarily for the payment of dividends of $1.8 million, compared to $11.0 million in fiscal year 2010. For fiscal year 2010, the cash was used primarily to reduce borrowings by $10.0 million and $3.4 million (of which $2.6 million was a non-cash purchasepay dividends of equipment by assumption of a note payable) in fiscal years 2008, 2007 and 2006, respectively. Fiscal 2008 expenditures were primarily for manufacturing equipment. Depreciation and amortization expense was $4.4 million and $5.3 million for the fiscal years ended June 30, 2008 and 2007, respectively.$1.3 million.
The Company expects that capital expenditures will be approximately $3.0$15.0 million in fiscal year 2009.2012. The significant fiscal year 2007 capital expenditure cash outflows were offset byCompany plans to invest approximately $12 million to construct, furnish and equip a significant sale of commercial property resultingcorporate office building in total cash proceeds of $5.5 millionDubuque, Iowa, and a sale of vacant land of approximately $0.4 million. The commercial property was previously leased to a non-related third party and used as retail space. Neither the salebalance of the commercial property or vacant land is expected to significantly impact future operations.
Net cash used in financing activities was $5.8 million in fiscal year 2008 compared to $6.3 million in fiscal year 2007. For fiscal years 2008expenditures on delivery and 2007, repayment of debt and the payment of dividends were the primary financing activities utilizing cash. For fiscal year 2006, borrowings were used to pay for the expansion of inventory programs and accounts receivable and the payment of dividends. Cash dividends were $3.4 million in 2008 and in 2007.
manufacturing equipment. Management believes that the Company has adequate cash cash equivalents, and credit arrangements to meet its operating and capital requirements for fiscal year 2009.2012, including the construction of a corporate office. In the opinion of management, the Company’s liquidity and credit resources provide it with the ability to react to opportunities as they arise, the ability to pay quarterly dividends to its shareholders, and ensures thatto purchase productive capital assets that enhance safety and improve operationsoperations.
At June 30, 2011, the Company has no long-term debt obligations and therefore, no contractual interest payments are purchased as needed.
included in the table below. The following table summarizes the Company’s contractual obligations at June 30, 20082011 and the effect these obligations are expected to have on the Company’s liquidity and cash flow in the future (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| Less than |
| 1 - 3 |
| 3 - 5 |
| More than |
| |||||
Operating lease obligations |
| $ | 4,082 |
| $ | 1,851 |
| $ | 2,231 |
| $ | — |
| $ | — |
|
|
| Total |
| Less than |
| 1 – 3 |
| 3 – 5 |
| More than |
| |||||
Long-term debt obligations |
| $ | 25,954 |
| $ | 5,143 |
| $ | 811 |
| $ | 20,000 |
| $ | — |
|
Interest on long-term debt obligations |
|
| 3,252 |
|
| 1,030 |
|
| 2,060 |
|
| 162 |
|
| — |
|
Operating lease obligations |
|
| 6,244 |
|
| 2,601 |
|
| 3,359 |
|
| 284 |
|
| — |
|
Total contractual cash obligations |
| $ | 35,450 |
| $ | 8,774 |
| $ | 6,230 |
| $ | 20,446 |
| $ | — |
|
Contractual obligations associated with the Company’s deferred compensation plans were excluded from the table above as the Company cannot predict when the events that trigger payment will occur. Total accumulated deferred compensation liabilities were $5.3 million at June 30, 2008.2011. At June 30, 20082011 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. Additionally, the Company has excluded the FIN 48tax contingency reserve from the above table, as the timing of payments, if any, payments cannot be reasonably estimated.
Financing Arrangements
See Note 76 to the Consolidated Financial Statements on page 28 of this Annual Report on Form 10-K.
Outlook
The fiscalWe had modest gains in sales for the current year ended June 30, 2008 began well with the first two quarters showing improved earnings over fiscal year 2007 on only slightly lower net sales. Beginning in the third fiscal quarter net sales dropped more rapidly, and although net earnings were only about 55% of the prior year quarterly amount, our net income forpartially due to a strong backlog entering the nine-months was still ahead of the prior year nine-month total. The fourth quarter 12% decrease in net sales hampered the ability to absorb fixed costs and that, combined with additional bad debt and selling expenses, contributed negatively toyear. We enter fiscal year 2008 results. Normally, at least one2012 with lower backlogs and anticipate that first quarter fiscal year 2012 sales will be lower than first quarter fiscal year 2011. Macroeconomic conditions, such as, high unemployment, minimal job growth, a weak housing market and low levels of the markets in which we sell products is doing well. However, residential net sales were off 1%, commercial net sales were down 8%, and recreational vehicle seating net sales were down 15%. We do not believe that we are losing market share in these categories.
The U.S. economy, where most of our products are sold, has been greatly impacted by the credit crisis in the home mortgage sector, a fall in the value of the U.S. dollar versus most other major currencies, volatile high-cost fuel, increasing food prices and a changing political landscape. These factors have contributed to the lowest consumer confidence levels since 1981.
We have been negatively impacted by price increases incontinue to adversely impact our business. The macroeconomic environment tempers expectations of top line growth through the raw materials and component parts, such as steel, poly foam and fabrics, as well as increases in the cost to transport those materials to our manufacturing facilities and products to our customers. Our overseas manufacturers have also increased prices and the cost to transport those products to the U.S. has increased with the pricefirst part of fuel. We see no near term improvement in macro-economic operating conditions.
Thisfiscal year Flexsteel Industries, Inc. will complete it’s 115th year doing business in the furniture industry.2012. The commercial office industry is reporting improving order trends. While we have seen challenging business conditions before, they are never comfortable or reassuringbenefited minimally from those improvements to date, we believe we will see increased sales volume during fiscal year 2012. We anticipate increased orders for hospitality products during fiscal year 2012 resulting from pent up demand caused by delays in typical refurbishing cycles for hotel properties.
We remain committed to our shareholders. In response to these challenges, we have:
implemented price increases to offset cost increases where possible,
commenced the closing of two manufacturing operations, Lancaster, PA and New Paris, IN, to more closely match our manufacturing capacity with our expected demand for residential and recreational vehicle seating products and we anticipate annual pre-tax savings in the range of $3.5 million to $4.0 million from this manufacturing consolidation,
focused attention on our credit risk exposure,
maintained a close relationship with our customers to offer products and services they need to operate effectively and profitability, and
continued to focus on profitability and cash flow over top line growth to maintain a strong balance sheet.
While we expect that current business conditions will persist for most, if not all, of fiscal year 2009, we remain optimistic that our strategy ofcore strategies, which include a wide range of quality product offerings and price points to the residential recreational vehicle and commercial markets, combined with oura conservative approach to businessbusiness. We will be rewarded overmaintain our focus on a strong balance sheet through emphasis on cash flow and improving profitability. We believe these core strategies are in the longer-term.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, 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.
Impairment of long-lived assets – InflationAccounting rules require that long-lived assets be evaluated for impairment whenever events or changes in circumstances indicate that its carrying value may not be recoverable. We have substantial long-lived assets, consisting mainly of property, plant and equipment, which based upon such events or changes in circumstances, there could be a write-down of all or a portion of these assets and a corresponding reduction in our earnings and net worth. At June 30, 2008, no impairment of long-lived assets has been identified.
Foreign Currency Risk – During fiscal years 2008, 2007 and 2006, the Company did not have sales, purchases, or other expenses denominated in foreign currencies. As such, the Company is not exposed to market risk associated with currency exchange rates and prices.
Interest Rate Risk – The Company’s primary market risk exposure with regard to financial instruments is changes in interest rates. At June 30, 2008, a hypothetical 100 basis point increase in short-term interest rates would decrease annual pre-tax earnings by approximately $150,000, assuming no change in the volume or composition of debt. As of June 30, 2008, the Company has effectively fixed the interest rates at 4.5% on approximately $15.0 million of its long-term debt through the use of interest rate swaps, and the above estimated earnings reduction takes these swaps into account. On July 31, 2008, a $5.0 million swap matured. As of the date of this Annual Report on Form 10-K, the Company has effectively fixed its interest rate at 5.0% on approximately $10.0 million of it long-term debt through the use of interest rate swaps. As of June 30, 2008, the fair value of these swaps is a liability of approximately $0.3 million and is included in other liabilities. As of June 30, 2007, the fair value of these swaps were an asset of approximately $0.1 million and was included in other assets.
Tariffs – The Company has exposure to actions by governments, including tariffs. Tariffs are a possibility on any imported or exported products.
Inflation – Increased operating costs are reflected in product or services pricing with any limitations on price increases determined by the marketplace. TheInflation or other pricing pressures could impact of inflation on the Company has not been significant during the past three years because of the relatively low rates of inflation experienced in the United States. Rawraw material costs, labor costs and interest rates which are important components of costs for the Company. Inflation or other pricing pressuresCompany and could impact any or all of these components, with a possiblehave an adverse effect on our profitability, especially where increases in these costs exceed price increases on finished products. In recent
Foreign Currency Risk – During fiscal years 2011, 2010 and 2009, the Company has faced strong inflationarydid not have sales, purchases, or other expenses denominated in foreign currencies. As such, the Company is not directly exposed to market risk associated with currency exchange rates and other pricing pressuresprices.
Interest Rate Risk –The Company’s primary market risk exposure with respectregard to steel, fuel and health care costs, whichfinancial instruments is changes in interest rates. At June 30, 2011, the Company does not have been partially mitigated by pricing adjustments.any debt outstanding.
Item 8. | Financial Statements and Supplementary Data |
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Page(s) | ||
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| |
Consolidated Balance Sheets at June 30, |
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| |
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| |
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| |
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|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the ShareholdersBoard of Directors and Stockholders of Flexsteel Industries, Inc.
We have audited the accompanying consolidated balance sheets of Flexsteel Industries, Inc. and subsidiaries (the "Company"“Company”) as of June 30, 20082011 and 2007,2010, and the related consolidated statements of income,operations, changes in stockholders'shareholders’ equity, and cash flows for each of the three years in the period ended June 30, 2008.2011. Our audits also included the financial statement schedulesschedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company'sCompany’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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includesstatements, 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 consolidated financial statements present fairly, in all material respects, the financial position of Flexsteel Industries, Inc. and subsidiaries atas of June 30, 20082011 and June 30, 2007,2010, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2008,2011, 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, presentpresents fairly, in all material respects, the information set forth therein.
| |
DELOITTE & TOUCHE LLP | |
Minneapolis, Minnesota | |
August 19, 2011 |
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES |
(Amounts in thousands, except share and per share data) |
|
|
|
|
|
|
|
|
|
| JUNE 30, |
| ||||
|
| 2011 |
| 2010 |
| ||
| |||||||
ASSETS |
|
|
|
|
| ||
| |||||||
CURRENT ASSETS: |
|
|
|
|
|
|
|
Cash |
| $ | 17,889 |
| $ | 8,278 |
|
Trade receivables – less allowance for doubtful accounts: 2011, $2,000; 2010, $2,020 |
|
| 31,451 |
|
| 35,748 |
|
Inventories |
|
| 73,680 |
|
| 72,637 |
|
Deferred income taxes |
|
| 3,700 |
|
| 4,050 |
|
Other |
|
| 1,633 |
|
| 1,076 |
|
Total current assets |
|
| 128,353 |
|
| 121,789 |
|
NONCURRENT ASSETS: |
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
| 21,387 |
|
| 21,614 |
|
Deferred income taxes |
|
| 2,560 |
|
| 3,010 |
|
Other assets |
|
| 12,377 |
|
| 11,257 |
|
TOTAL |
| $ | 164,677 |
| $ | 157,670 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
Accounts payable – trade |
| $ | 9,899 |
| $ | 10,815 |
|
Accrued liabilities: |
|
|
|
|
|
|
|
Payroll and related items |
|
| 6,922 |
|
| 7,023 |
|
Insurance |
|
| 5,645 |
|
| 6,192 |
|
Other |
|
| 5,204 |
|
| 6,959 |
|
Total current liabilities |
|
| 27,670 |
|
| 30,989 |
|
LONG-TERM LIABILITIES: |
|
|
|
|
|
|
|
Deferred compensation |
|
| 5,270 |
|
| 5,096 |
|
Other liabilities |
|
| 3,164 |
|
| 3,973 |
|
Total liabilities |
|
| 36,104 |
|
| 40,058 |
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (Note 12) |
|
|
|
|
|
|
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|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY: |
|
|
|
|
|
|
|
Cumulative preferred stock – $50 par value; authorized 60,000 shares; outstanding – none |
|
|
|
|
|
|
|
Undesignated (subordinated) stock – $1 par value; authorized 700,000 shares; outstanding – none |
|
|
|
|
|
|
|
Common stock – $1 par value; authorized 15,000,000 shares; outstanding 2011, 6,710,612 shares; 2010, 6,645,532 shares |
|
| 6,711 |
|
| 6,646 |
|
Additional paid-in capital |
|
| 6,698 |
|
| 5,425 |
|
Retained earnings |
|
| 115,699 |
|
| 107,293 |
|
Accumulated other comprehensive loss |
|
| (535 | ) |
| (1,752 | ) |
Total shareholders’ equity |
|
| 128,573 |
|
| 117,612 |
|
TOTAL |
| $ | 164,677 |
| $ | 157,670 |
|
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
|
| JUNE 30, |
| ||||
ASSETS |
| 2008 |
| 2007 |
| ||
|
|
|
|
|
|
|
|
CURRENT ASSETS: |
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 2,841,323 |
| $ | 900,326 |
|
Investments |
|
| 1,160,066 |
|
| 976,180 |
|
Trade receivables – less allowance for doubtful |
|
| 43,783,224 |
|
| 56,273,874 |
|
Inventories |
|
| 85,791,400 |
|
| 78,756,985 |
|
Deferred income taxes |
|
| 4,210,000 |
|
| 4,700,000 |
|
Other |
|
| 2,853,634 |
|
| 1,759,045 |
|
Total current assets |
|
| 140,639,647 |
|
| 143,366,410 |
|
NONCURRENT ASSETS: |
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
| 26,372,392 |
|
| 28,168,244 |
|
Deferred income taxes |
|
| 1,392,187 |
|
| 1,270,000 |
|
Other assets |
|
| 11,501,992 |
|
| 12,209,528 |
|
TOTAL |
| $ | 179,906,218 |
| $ | 185,014,182 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
Accounts payable – trade |
| $ | 14,580,275 |
| $ | 15,893,964 |
|
Notes payable and current maturities on long-term debt |
|
| 5,142,945 |
|
| 7,030,059 |
|
Accrued liabilities: |
|
|
|
|
|
|
|
Payroll and related items |
|
| 6,759,941 |
|
| 7,530,083 |
|
Insurance |
|
| 7,176,799 |
|
| 7,615,532 |
|
Other |
|
| 6,059,575 |
|
| 7,394,448 |
|
Total current liabilities |
|
| 39,719,535 |
|
| 45,464,086 |
|
LONG-TERM LIABILITIES: |
|
|
|
|
|
|
|
Long-term debt |
|
| 20,810,597 |
|
| 21,336,352 |
|
Deferred compensation |
|
| 5,343,545 |
|
| 5,535,113 |
|
Other liabilities |
|
| 1,280,154 |
|
| — |
|
Total liabilities |
|
| 67,153,831 |
|
| 72,335,551 |
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (Note 14) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY: |
|
|
|
|
|
|
|
Cumulative preferred stock – $50 par value; authorized 60,000 shares; |
|
|
|
|
|
|
|
Undesignated (subordinated) stock – $1 par value; authorized |
|
|
|
|
|
|
|
Common stock – $1 par value; authorized 15,000,000 shares; |
|
| 6,575,633 |
|
| 6,570,467 |
|
Additional paid-in capital |
|
| 4,255,996 |
|
| 4,013,456 |
|
Retained earnings |
|
| 101,692,431 |
|
| 100,984,577 |
|
Accumulated other comprehensive income |
|
| 228,327 |
|
| 1,110,131 |
|
Total shareholders’ equity |
|
| 112,752,387 |
|
| 112,678,631 |
|
TOTAL |
| $ | 179,906,218 |
| $ | 185,014,182 |
|
See accompanying Notes to Consolidated Financial Statements.
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
|
| FOR THE YEARS ENDED JUNE 30, |
| |||||||
|
| 2008 |
| 2007 |
| 2006 |
| |||
|
|
|
|
|
|
|
|
|
|
|
NET SALES |
| $ | 405,654,829 |
| $ | 425,399,951 |
| $ | 426,407,585 |
|
COST OF GOODS SOLD |
|
| (327,165,396 | ) |
| (344,176,763 | ) |
| (345,068,305 | ) |
GROSS MARGIN |
|
| 78,489,433 |
|
| 81,223,188 |
|
| 81,339,280 |
|
SELLING, GENERAL AND ADMINISTRATIVE |
|
| (70,893,485 | ) |
| (70,895,260 | ) |
| (72,778,577 | ) |
GAIN ON SALE OF CAPITAL ASSETS |
|
| — |
|
| 4,370,712 |
|
| — |
|
OPERATING INCOME |
|
| 7,595,948 |
|
| 14,698,640 |
|
| 8,560,703 |
|
OTHER INCOME (EXPENSE): |
|
|
|
|
|
|
|
|
|
|
Interest and other income |
|
| 468,933 |
|
| 1,276,857 |
|
| 774,783 |
|
Interest expense |
|
| (1,468,476 | ) |
| (1,491,510 | ) |
| (1,557,303 | ) |
Total |
|
| (999,543 | ) |
| (214,653 | ) |
| (782,520 | ) |
INCOME BEFORE INCOME TAXES |
|
| 6,596,405 |
|
| 14,483,987 |
|
| 7,778,183 |
|
PROVISION FOR INCOME TAXES |
|
| (2,360,000 | ) |
| (5,150,000 | ) |
| (3,060,000 | ) |
NET INCOME |
| $ | 4,236,405 |
| $ | 9,333,987 |
| $ | 4,718,183 |
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: |
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 6,573,999 |
|
| 6,567,522 |
|
| 6,558,440 |
|
Diluted |
|
| 6,611,136 |
|
| 6,582,558 |
|
| 6,577,278 |
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE OF COMMON STOCK: |
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.64 |
| $ | 1.42 |
| $ | 0.72 |
|
Diluted |
| $ | 0.64 |
| $ | 1.42 |
| $ | 0.72 |
|
|
|
|
|
|
|
|
|
|
|
|
CASH DIVIDENDS DECLARED PER COMMON SHARE |
| $ | 0.52 |
| $ | 0.52 |
| $ | 0.52 |
|
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES |
(Amounts in thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
| FOR THE YEARS ENDED JUNE 30, |
| |||||||
|
| 2011 |
| 2010 |
| 2009 |
| |||
|
|
|
|
|
|
|
|
|
|
|
NET SALES |
| $ | 339,426 |
| $ | 326,466 |
| $ | 324,158 |
|
COST OF GOODS SOLD |
|
| (262,124 | ) |
| (251,685 | ) |
| (263,083 | ) |
GROSS MARGIN |
|
| 77,302 |
|
| 74,781 |
|
| 61,075 |
|
SELLING, GENERAL AND ADMINISTRATIVE |
|
| (60,422 | ) |
| (57,252 | ) |
| (60,792 | ) |
FACILITY CLOSING COSTS |
|
| (1,016 | ) |
| — |
|
| (2,555 | ) |
OPERATING INCOME (LOSS) |
|
| 15,864 |
|
| 17,529 |
|
| (2,272 | ) |
OTHER INCOME (EXPENSE): |
|
|
|
|
|
|
|
|
|
|
Interest and other income |
|
| 343 |
|
| 361 |
|
| 661 |
|
Interest expense |
|
| — |
|
| (439 | ) |
| (968 | ) |
Total |
|
| 343 |
|
| (78 | ) |
| (307 | ) |
INCOME (LOSS) BEFORE INCOME TAXES |
|
| 16,207 |
|
| 17,451 |
|
| (2,579 | ) |
INCOME TAX (PROVISION) BENEFIT |
|
| (5,790 | ) |
| (6,650 | ) |
| 1,070 |
|
NET INCOME (LOSS) |
| $ | 10,417 |
| $ | 10,801 |
| $ | (1,509 | ) |
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: |
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 6,693 |
|
| 6,608 |
|
| 6,576 |
|
Diluted |
|
| 6,929 |
|
| 6,697 |
|
| 6,576 |
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) PER SHARE OF COMMON STOCK: |
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 1.56 |
| $ | 1.63 |
| $ | (0.23 | ) |
Diluted |
| $ | 1.50 |
| $ | 1.61 |
| $ | (0.23 | ) |
|
|
|
|
|
|
|
|
|
|
|
CASH DIVIDENDS DECLARED PER COMMON SHARE |
| $ | 0.30 |
| $ | 0.20 |
| $ | 0.36 |
|
See accompanying Notes to Consolidated Financial Statements.
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES |
(Amounts in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Par |
| Additional |
| Retained |
| Accumulated |
| Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 1, 2008 |
| $ | 6,576 |
| $ | 4,256 |
| $ | 101,692 |
| $ | 228 |
| $ | 112,752 |
|
Unrealized loss on available for sale investments, net of tax |
|
| — |
|
| — |
|
| — |
|
| (1,022 | ) |
| (1,022 | ) |
Stock-based compensation |
|
| — |
|
| 114 |
|
| — |
|
| — |
|
| 114 |
|
Interest rate swaps valuation adjustment, net of tax |
|
| — |
|
| — |
|
| — |
|
| (1 | ) |
| (1 | ) |
Minimum pension liability adjustment, net of tax |
|
| — |
|
| — |
|
| — |
|
| (969 | ) |
| (969 | ) |
Cash dividends declared |
|
| — |
|
| — |
|
| (2,367 | ) |
| — |
|
| (2,367 | ) |
Net loss |
|
| — |
|
| — |
|
| (1,509 | ) |
| — |
|
| (1,509 | ) |
Balance at June 30, 2009 |
|
| 6,576 |
|
| 4,370 |
|
| 97,816 |
|
| (1,764 | ) |
| 106,998 |
|
Issuance of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised, net |
|
| 70 |
|
| 274 |
|
| — |
|
| — |
|
| 344 |
|
Unrealized gain on available for sale investments, net of tax |
|
| — |
|
| — |
|
| — |
|
| 39 |
|
| 39 |
|
Long-term incentive compensation |
|
| — |
|
| 510 |
|
| — |
|
| — |
|
| 510 |
|
Stock-based compensation |
|
| — |
|
| 271 |
|
| — |
|
| — |
|
| 271 |
|
Interest rate swaps valuation adjustment, net of tax |
|
| — |
|
| — |
|
| — |
|
| 177 |
|
| 177 |
|
Minimum pension liability adjustment, net of tax |
|
| — |
|
| — |
|
| — |
|
| (204 | ) |
| (204 | ) |
Cash dividends declared |
|
| — |
|
| — |
|
| (1,324 | ) |
| — |
|
| (1,324 | ) |
Net income |
|
| — |
|
| — |
|
| 10,801 |
|
| — |
|
| 10,801 |
|
Balance at June 30, 2010 |
|
| 6,646 |
|
| 5,425 |
|
| 107,293 |
|
| (1,752 | ) |
| 117,612 |
|
Issuance of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised, net |
|
| 65 |
|
| 259 |
|
| — |
|
| — |
|
| 324 |
|
Unrealized gain on available for sale investments, net of tax |
|
| — |
|
| — |
|
| — |
|
| 348 |
|
| 348 |
|
Long-term incentive compensation |
|
| — |
|
| 590 |
|
| — |
|
| — |
|
| 590 |
|
Stock-based compensation |
|
| — |
|
| 424 |
|
| — |
|
| — |
|
| 424 |
|
Minimum pension liability adjustment, net of tax |
|
| — |
|
| — |
|
| — |
|
| 869 |
|
| 869 |
|
Cash dividends declared |
|
| — |
|
| — |
|
| (2,011 | ) |
| — |
|
| (2,011 | ) |
Net income |
|
| — |
|
| — |
|
| 10,417 |
|
| — |
|
| 10,417 |
|
Balance at June 30, 2011 |
| $ | 6,711 |
| $ | 6,698 |
| $ | 115,699 |
| $ | (535 | ) | $ | 128,573 |
|
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders’ Equity
|
| Total Par |
| Additional |
| Retained |
| Accumulated |
| Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2005 (as previously reported) |
| $ | 6,541,436 |
| $ | 2,954,398 |
| $ | 95,196,022 |
| $ | 105,864 |
| $ | 104,797,720 |
|
Restatement adjustment (see Note 19) |
|
| — |
|
| — |
|
| (1,436,479 | ) |
| — |
|
| (1,436,479 | ) |
Balance at July 1, 2005 (as restated) |
|
| 6,541,436 |
|
| 2,954,398 |
|
| 93,759,543 |
|
| 105,864 |
|
| 103,361,241 |
|
Issuance of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised, net |
|
| 2,000 |
|
| 20,500 |
|
| — |
|
| — |
|
| 22,500 |
|
401(k) plan and management incentive shares |
|
| 20,314 |
|
| 268,254 |
|
| — |
|
| — |
|
| 288,568 |
|
Unrealized loss on available for sale investments, net of tax |
|
| — |
|
| — |
|
| — |
|
| (221 | ) |
| (221 | ) |
Stock-based compensation |
|
| — |
|
| 427,000 |
|
| — |
|
| — |
|
| 427,000 |
|
Interest rate swaps valuation adjustment, net of tax |
|
| — |
|
| — |
|
| — |
|
| 116,910 |
|
| 116,910 |
|
Minimum pension liability adjustment, net of tax |
|
| — |
|
| — |
|
| — |
|
| 543,559 |
|
| 543,559 |
|
Cash dividends declared |
|
| — |
|
| — |
|
| (3,411,894 | ) |
| — |
|
| (3,411,894 | ) |
Net income |
|
| — |
|
| — |
|
| 4,718,183 |
|
| — |
|
| 4,718,183 |
|
Balance at June 30, 2006 (as restated) |
|
| 6,563,750 |
|
| 3,670,152 |
|
| 95,065,832 |
|
| 766,112 |
|
| 106,065,846 |
|
Issuance of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised, net |
|
| 1,566 |
|
| 10,891 |
|
| — |
|
| — |
|
| 12,457 |
|
401(k) plan |
|
| 5,151 |
|
| 58,413 |
|
| — |
|
| — |
|
| 63,564 |
|
Unrealized gain on available for sale investments, net of tax |
|
| — |
|
| — |
|
| — |
|
| 301,611 |
|
| 301,611 |
|
Stock-based compensation |
|
| — |
|
| 274,000 |
|
| — |
|
| — |
|
| 274,000 |
|
Interest rate swaps valuation adjustment, net of tax |
|
| — |
|
| — |
|
| — |
|
| (168,137 | ) |
| (168,137 | ) |
SFAS No. 87 minimum pension liability |
|
| — |
|
| — |
|
| — |
|
| 254,638 |
|
| 254,638 |
|
SFAS No. 158 transition adjustment |
|
| — |
|
| — |
|
| — |
|
| (44,093 | ) |
| (44,093 | ) |
Cash dividends declared |
|
| — |
|
| — |
|
| (3,415,242 | ) |
| — |
|
| (3,415,242 | ) |
Net income |
|
| — |
|
| — |
|
| 9,333,987 |
|
| — |
|
| 9,333,987 |
|
Balance at June 30, 2007 (as restated) |
|
| 6,570,467 |
|
| 4,013,456 |
|
| 100,984,577 |
|
| 1,110,131 |
|
| 112,678,631 |
|
Adoption of FIN 48 |
|
|
|
|
|
|
|
| (110,000 | ) |
|
|
|
| (110,000 | ) |
Issuance of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised, net |
|
| 1,642 |
|
| 13,314 |
|
| — |
|
| — |
|
| 14,956 |
|
401(k) plan shares |
|
| 3,524 |
|
| 43,226 |
|
| — |
|
| — |
|
| 46,750 |
|
Unrealized loss on available for sale investments, net of tax |
|
| — |
|
| — |
|
| — |
|
| (84,342 | ) |
| (84,342 | ) |
Stock-based compensation |
|
| — |
|
| 186,000 |
|
| — |
|
| — |
|
| 186,000 |
|
Interest rate swaps valuation adjustment, net of tax |
|
| — |
|
| — |
|
| — |
|
| (273,062 | ) |
| (273,062 | ) |
Minimum pension liability, net of tax |
|
| — |
|
| — |
|
| — |
|
| (524,400 | ) |
| (524,400 | ) |
Cash dividends declared |
|
| — |
|
| — |
|
| (3,418,551 | ) |
| — |
|
| (3,418,551 | ) |
Net income |
|
| — |
|
| — |
|
| 4,236,405 |
|
| — |
|
| 4,236,405 |
|
Balance at June 30, 2008 |
| $ | 6,575,633 |
| $ | 4,255,996 |
| $ | 101,692,431 |
| $ | 228,327 |
| $ | 112,752,387 |
|
See accompanying Notes to Consolidated Financial Statements.
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES |
(Amounts in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
| FOR THE YEARS ENDED JUNE 30, |
| |||||||
|
| 2011 |
| 2010 |
| 2009 |
| |||
|
|
|
|
|
|
|
|
|
|
|
OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | 10,417 |
| $ | 10,801 |
| $ | (1,509 | ) |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
| 2,690 |
|
| 2,986 |
|
| 3,733 |
|
Deferred income taxes |
|
| 54 |
|
| (963 | ) |
| 449 |
|
Stock-based compensation expense |
|
| 1,014 |
|
| 781 |
|
| 114 |
|
Provision for losses on accounts receivable |
|
| 870 |
|
| 920 |
|
| 1,240 |
|
Other non-cash, net |
|
| 224 |
|
| 218 |
|
| 14 |
|
Gain on disposition of capital assets |
|
| (185 | ) |
| (9 | ) |
| (252 | ) |
Gain on sale of investments |
|
| — |
|
| — |
|
| (462 | ) |
Impairment of long-lived assets |
|
| — |
|
| — |
|
| 138 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
Trade receivables |
|
| 3,427 |
|
| (5,386 | ) |
| 11,261 |
|
Inventories |
|
| (1,043 | ) |
| 1,207 |
|
| 11,947 |
|
Other current assets |
|
| (557 | ) |
| 2,837 |
|
| (781 | ) |
Other assets |
|
| (270 | ) |
| (18 | ) |
| (288 | ) |
Accounts payable – trade |
|
| (841 | ) |
| 994 |
|
| (4,849 | ) |
Accrued liabilities |
|
| (2,541 | ) |
| 3,618 |
|
| (2,918 | ) |
Other long-term liabilities |
|
| 367 |
|
| 1,028 |
|
| (178 | ) |
Deferred compensation |
|
| 174 |
|
| 105 |
|
| (352 | ) |
Net cash provided by operating activities |
|
| 13,800 |
|
| 19,119 |
|
| 17,307 |
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
Purchases of investments |
|
| (698 | ) |
| (721 | ) |
| (520 | ) |
Proceeds from sales of investments |
|
| 410 |
|
| 359 |
|
| 1,460 |
|
Proceeds from sale of capital assets |
|
| 187 |
|
| 34 |
|
| 676 |
|
Capital expenditures |
|
| (2,573 | ) |
| (1,251 | ) |
| (1,203 | ) |
Net cash (used in) provided by investing activities |
|
| (2,674 | ) |
| (1,579 | ) |
| 413 |
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
(Repayments of) proceeds from short-term borrowings, net |
|
| — |
|
| (10,000 | ) |
| 4,857 |
|
Repayment of long-term borrowings |
|
| — |
|
| — |
|
| (20,811 | ) |
Dividends paid |
|
| (1,839 | ) |
| (1,320 | ) |
| (2,893 | ) |
Proceeds from issuance of common stock |
|
| 324 |
|
| 344 |
|
| — |
|
Net cash used in financing activities |
|
| (1,515 | ) |
| (10,976 | ) |
| (18,847 | ) |
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
| 9,611 |
|
| 6,564 |
|
| (1,127 | ) |
Cash and cash equivalents at beginning of year |
|
| 8,278 |
|
| 1,714 |
|
| 2,841 |
|
Cash and cash equivalents at end of year |
| $ | 17,889 |
| $ | 8,278 |
| $ | 1,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| FOR THE YEARS ENDED JUNE 30, |
| |||||||
|
| 2011 |
| 2010 |
| 2009 |
| |||
SUPPLEMENTAL INFORMATION CASH PAID DURING THE PERIOD FOR: |
|
|
|
|
|
|
|
|
|
|
Interest |
| $ | — |
| $ | 439 |
| $ | 979 |
|
Income taxes paid (refunded) |
| $ | 7,647 |
| $ | 3,587 |
| $ | (62 | ) |
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
|
| FOR THE YEARS ENDED JUNE 30, |
| |||||||
|
| 2008 |
| 2007 |
| 2006 |
| |||
OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 4,236,405 |
| $ | 9,333,987 |
| $ | 4,718,183 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 4,437,903 |
|
| 5,270,651 |
|
| 5,485,884 |
|
Deferred income taxes |
|
| 349,294 |
|
| 1,464,664 |
|
| (948,000 | ) |
Stock-based compensation expense |
|
| 186,000 |
|
| 274,000 |
|
| 427,000 |
|
Other non-cash, net |
|
| (88,309 | ) |
| — |
|
| — |
|
Gain on disposition of capital assets |
|
| (49,180 | ) |
| (4,407,682 | ) |
| (55,504 | ) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
Trade receivables |
|
| 12,490,650 |
|
| (5,094,083 | ) |
| (2,824,721 | ) |
Inventories |
|
| (7,034,415 | ) |
| 6,012,987 |
|
| (12,538,093 | ) |
Other current assets |
|
| (655,486 | ) |
| 255,076 |
|
| (162,251 | ) |
Other assets |
|
| (292,485 | ) |
| 57,919 |
|
| (582,112 | ) |
Accounts payable – trade |
|
| (2,188,444 | ) |
| (2,160,950 | ) |
| (2,777,949 | ) |
Accrued liabilities |
|
| (2,272,811 | ) |
| (631,804 | ) |
| 3,076,331 |
|
Other long-term liabilities |
|
| (197,497 | ) |
| (411,588 | ) |
| (1,218,862 | ) |
Deferred compensation |
|
| (191,568 | ) |
| 327,938 |
|
| 145,225 |
|
Net cash provided by (used in) operating activities |
|
| 8,730,057 |
|
| 10,291,115 |
|
| (7,254,869 | ) |
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
Purchases of investments |
|
| (631,704 | ) |
| (774,964 | ) |
| (1,118,446 | ) |
Proceeds from sales of investments |
|
| 762,783 |
|
| 476,840 |
|
| 1,773,698 |
|
Proceeds from sale of capital assets |
|
| 73,847 |
|
| 6,039,946 |
|
| 89,786 |
|
Capital expenditures |
|
| (1,227,863 | ) |
| (10,839,479 | ) |
| (850,444 | ) |
Net cash used in investing activities |
|
| (1,022,937 | ) |
| (5,097,657 | ) |
| (105,406 | ) |
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
(Repayments of) proceeds from short-term borrowings, net |
|
| (1,912,683 | ) |
| (2,470,729 | ) |
| 4,000,000 |
|
Repayment of long-term borrowings |
|
| (500,186 | ) |
| (475,889 | ) |
| (247,441 | ) |
Proceeds from long-term borrowings |
|
| — |
|
| — |
|
| 7,200,000 |
|
Dividends paid |
|
| (3,414,960 | ) |
| (3,414,369 | ) |
| (3,408,994 | ) |
Proceeds from issuance of common stock |
|
| 61,706 |
|
| 82,087 |
|
| 95,894 |
|
Net cash (used in) provided by financing activities |
|
| (5,766,123 | ) |
| (6,278,900 | ) |
| 7,639,459 |
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
| 1,940,997 |
|
| (1,085,442 | ) |
| 279,184 |
|
Cash and cash equivalents at beginning of year |
|
| 900,326 |
|
| 1,985,768 |
|
| 1,706,584 |
|
Cash and cash equivalents at end of year |
| $ | 2,841,323 |
| $ | 900,326 |
| $ | 1,985,768 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| FOR THE YEARS ENDED JUNE 30, |
| |||||||
|
| 2008 |
| 2007 |
| 2006 |
| |||
SUPPLEMENTAL INFORMATION |
|
|
|
|
|
|
|
|
|
|
CASH PAID DURING THE PERIOD FOR: |
|
|
|
|
|
|
|
|
|
|
Interest |
| $ | 1,473,000 |
| $ | 1,517,000 |
| $ | 1,598,000 |
|
Income taxes |
| $ | 3,205,000 |
| $ | 3,551,000 |
| $ | 3,244,000 |
|
See accompanying Notes to Consolidated Financial Statements.
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES |
1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
DESCRIPTION OF BUSINESS – Flexsteel Industries, Inc. and subsidiaries (the “Company”) is one of the oldest and largest manufacturers, importers and marketers of residential and commercial upholstered and wooden furniture products in the United States. The Company’s furniture products include a broad line of quality upholstered and wooden furniture for residential and commercial use. 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, bedroom furniture and home and commercial office furniture. The Company has one active wholly-owned subsidiary: DMI Furniture, Inc. (“DMI”), which is a Louisville, Kentucky-based, importer and marketer of residential and commercial office furniture with warehouses in Indiana and manufacturing sources in Asia; DMI’s divisions are WYNWOOD, Homestyles and DMI Commercial Office Furniture. | |
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. | |
USE OF ESTIMATES – the preparation of consolidated financial statements in conformity with accounting principles generally accepted 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, accounts receivable, other current assets, accounts payable and certain accrued liabilities are carried at amounts which reasonably approximate their fair value due to their short-term nature. Generally accepted accounting principles on fair value measurement for certain financial assets and liabilities requires 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. | |
ALLOWANCE FOR DOUBTFUL ACCOUNTS – the Company establishes an allowance for doubtful accounts through review of open accounts, and historical collection and allowances amounts. The allowance for doubtful accounts is intended to reduce trade accounts receivable to the amount that reasonably approximates their net realizable value. The amount ultimately realized from trade accounts receivable may differ from the amount estimated in the consolidated financial statements based on collection experience. | |
INVENTORIES – are stated at the lower of cost or market. Steel products are valued on the last-in, first-out (“LIFO”) method. Other inventories are valued on 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. For internal use software, the Company’s policy is to capitalize external direct costs of materials and services, directly related internal payroll and payroll-related costs, and interest costs. These costs are amortized using the straight-line method over the useful lives. | |
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. |
DESCRIPTION OF BUSINESS – Flexsteel Industries, Inc. and subsidiaries (the “Company”) is one of the oldest and largest manufacturers, importers and marketers of residential, recreational vehicle and commercial upholstered and wooden furniture products in the country. The Company’s furniture products include a broad line of quality upholstered and wooden furniture for residential, recreational vehicle and commercial use. 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, bedroom furniture and home and commercial office furniture. The Company has one active wholly-owned subsidiary: DMI Furniture, Inc. (“DMI”), acquired effective September 17, 2003, which is a Louisville, Kentucky-based, manufacturer, importer and marketer of residential and commercial office furniture with manufacturing plants and warehouses in Indiana and manufacturing sources in Asia; DMI’s divisions are WYNWOOD, Homestyles and DMI Commercial Office Furniture. The Company has two inactive wholly owned subsidiaries: (1) Desert Dreams, Inc., which owned and leased a commercial building to an unrelated entity until it was sold in June 2007 and (2) Four Seasons, Inc.
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.
USE OF ESTIMATES – the preparation of consolidated financial statements in conformity with accounting principles generally accepted 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, investments, accounts receivable, other assets, accounts payable, accrued liabilities, notes payable, interest rate swaps and other liabilities are carried at amounts, which reasonably approximate their fair value due to their short-term nature. The Company’s notes payable are at variable interest rates that approximate market. Fair values of investments in debt and equity securities are disclosed in Note 2.
CASH EQUIVALENTS – the Company considers highly liquid investments with original maturities of three months or less as the equivalent of cash.
ALLOWANCE FOR DOUBTFUL ACCOUNTS – the Company establishes an allowance for doubtful accounts through review of open accounts, and historical collection and allowances amounts. The allowance for doubtful accounts is intended to reduce trade accounts receivable to the amount that reasonably approximates their net realizable fair value due to their short-term nature. The amount ultimately realized from trade accounts receivable may differ from the amount estimated in the consolidated financial statements based on collection experience and actual returns and allowances.
INVENTORIES – are stated at the lower of cost or market. Raw steel, lumber and wood frame parts are valued on the last-in, first-out (“LIFO”) method. Other inventories are valued on 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. For internal use software, the Company’s policy is to capitalize external direct costs of materials and services, directly related internal payroll and payroll-related costs, and interest costs. These costs are amortized using the straight-line method over the useful lives.
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. These evaluations could result in a change in estimated useful lives in future periods. No impairments or changes occurred during the fiscal year ended June 30, 2008.
WARRANTY – the Company estimates the amount of warranty claims on sold product that may be incurred based on current and historical data. The actual warranty expense could differ from the estimates made by the Company based on product performance.
REVENUE RECOGNITION – is upon delivery of product to the Company’s customer and collectibiity is reasonably assured. The Company’s ordering process creates persuasive evidence of the sale arrangement and the sales amount 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 sheet. Advertising expenditures, primarily shared customer advertising in which an identifiable benefit is received and national trade-advertising programs, were approximately $4.6 million, $4.6 million and $4.4 million in fiscal 2008, 2007 and 2006, 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 $3.1 million, $3.3 million and $3.0 million in fiscal 2008, 2007 and 2006, respectively.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES – the Company utilizes interest rate swaps to hedge against adverse changes in interest rates relative to its variable rate debt. The notional principal amounts of the outstanding interest rate swaps totaled $15.0 million with a weighted average fixed rate of 4.5% at June 30, 2008. On July 31, 2008, a $5.0 million swap matured. Excluding the subsequently matured swap, the Company has effectively fixed its interest rate at 5.0% on approximately $10.0 million of its variable rate debt. The interest rate swaps are not utilized to take speculative positions. The Board of Directors established the Company’s policies with regards to activities involving derivative instruments. Management, along with the Board of Directors, periodically reviews those policies, along with the actual derivative related results. The Company recorded the fair market value of its interest rate swaps as cash flow hedges on its balance sheet and has marked them to fair value through other comprehensive income. The cumulative fair value of the swaps was a liability of approximately $0.3 million as of June 30, 2008 and is reflected as other liabilities on the accompanying consolidated balance sheet. At each reporting period, the Company performs an assessment of hedge effectiveness by verifying and documenting whether the critical terms of the derivative instruments and the hedged items have changed during the period in review. All of the derivatives used by the Company in its risk management are highly effective hedges because all of the critical terms of the derivative instruments match those of the hedged item. The Company does not hold these derivative instruments for trade and does not plan to sell the instruments.
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, with a $1.0 million individual lifetime maximum. For workers’ compensation the Company retains the first $350,000 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 the accrued liabilities insurance account on the balance sheet.
INCOME TAXES – the Company accounts for income taxes in accordance with the provisions SFAS No. 109, Accounting for Income Taxes and evaluates uncertainties in income taxes in accordance with FIN 48, Accounting for Uncertainty in Income Taxes. In the preparation of the Company’s consolidated financial statements, management calculates income taxes. This includes estimating the Company’s current tax liability as well as assessing temporary differences resulting from different treatment of items for tax and book accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded on the balance sheet. These assets and liabilities are analyzed regularly and management assesses the likelihood that deferred tax assets will be realized from future taxable income. The Company adopted the provisions of FIN 48 on July 1, 2007. The impact of the adoption was not significant and is discussed in Note 8, Income Taxes.
EARNINGS PER SHARE – basic earnings per share 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 only potential common shares outstanding are stock options, which resulted in a dilutive effect of 37,137 shares, 15,036 shares and 18,838 shares in fiscal 2008, 2007 and 2006, respectively. The Company calculates the dilutive effect of outstanding options using the treasury stock method. Options to purchase 567,411 shares, 572,200 shares and 420,201 shares of common stock were outstanding in fiscal 2008, 2007 and 2006, respectively, but were not included in the computation of diluted earnings per share as their exercise prices were greater than the average market price of the common shares.
STOCK–BASED COMPENSATION –The Company utilizes the fair value recognition provisions of SFAS No. 123 “Accounting for Stock-Based Compensation” (revised 2004), “Share-Based Payment” (123(R)), requiring the Company to recognize expense related to the fair value of stock-based compensation. The modified prospective transition method was used as allowed under SFAS No. 123(R). Under this method, the stock-based compensation expense includes: (a) compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of July 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”; and (b) compensation expense for all stock-based compensation awards granted subsequent to July 1, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). See Note 9 Stock-Based Compensation.
ACCOUNTING DEVELOPMENTS – In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes– an interpretation of FASB Statement No. 109 (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. FIN 48 requires that the Company recognize in its consolidated financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 were effective as of the beginning of the Company’s 2008 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company recognized an adjustment in the liability for unrecognized income tax benefit of $0.1 million, which is reported as an adjustment to the beginning balance of retained earnings. See Note 8, Income Taxes.
In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157,Fair Value Measurements,which defines fair value, establishes a framework for measuring the fair value of assets and liabilities. This framework is intended to provide increased consistency in how fair value determinations are made under various existing accounting standards, which permit, or in some cases require, estimates of fair market value. The provisions of SFAS No. 157 are effective as of the beginning of the Company’s 2009 fiscal year. In February 2008, the FASB issued FSP No. FAS 157-1,Application of SFAS No. 157 Classification or Measurements under SFAS No. 13,and FSP No. 157-2,Effective Date of SFAS No. 157. Collectively, the FSPs defer the effective date of SFAS No. 157 to fiscal years beginning after December 15, 2008, for non-financial assets and non-financial liabilities except for items that are recognized or disclosed at fair value on a recurring basis at least annually, and amend the scope of SFAS 157. The Company is currently evaluating the impact of adopting SFAS No. 157 on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. The provisions of SFAS No. 159 are effective as of the beginning of the Company’s 2009 fiscal year. The Company is currently evaluating the impact of adopting SFAS No. 159 on its consolidated statements.
|
|
WARRANTY – the Company estimates the amount of warranty claims on sold product that may be incurred based on current and historical data. The actual warranty expense could differ from the estimates made by the Company based on product performance. | |
REVENUE RECOGNITION – is upon delivery of product to the Company’s customer and collectibility is reasonably assured. The Company’s ordering process creates persuasive evidence of the sale arrangement and the sales amount 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 sheet. Advertising expenditures, primarily shared customer advertising in which an identifiable benefit is received and national trade-advertising programs, were approximately $4.5 million, $4.1 million and $4.5 million in fiscal 2011, 2010 and 2009, 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 $2.2 million, $2.0 million and $2.7 million in fiscal 2011, 2010 and 2009, 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 $350,000 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 the accrued liabilities insurance account 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 (LOSS) PER SHARE – basic earnings (loss) per share 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 and shares associated with the long-term management incentive compensation plan, which resulted in a dilutive effect of 236,082 shares and 89,403 shares in fiscal 2011 and 2010, respectively. The Company calculates the dilutive effect of outstanding options using the treasury stock method. The Company calculates the dilutive effect of shares related to the long-term management incentive compensation plan based on the number of shares, if any, that would be issuable if the end of the fiscal year were the end of the contingency period. The dilutive effect of 42,539 shares of stock options is excluded in fiscal 2009 because the net loss caused the effect of the options to be anti-dilutive. Options to purchase 424,150 shares, 716,939 shares and 759,689 shares of common stock were outstanding in fiscal 2011, 2010 and 2009, respectively, but were not included in the computation of diluted earnings per share as their exercise prices were greater than the average market price of the common shares. | |
STOCK–BASED COMPENSATION – the Company recognizes compensation expense related to the cost of employee services received in exchange for Company equity interests based on the award’s fair value at the date of grant. See Note 8 Stock-Based Compensation. | |
ACCOUNTING DEVELOPMENTS – In June 2011, the FASB issued guidance on presentation of comprehensive income. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Instead, an entity will be required to present either a continuous statement of net income and other comprehensive income or in two separate but consecutive statements. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption of the new guidance is permitted and full retrospective application is required. We will be required to adopt this guidance beginning with our first quarter of fiscal 2013. |
Debt and equity securities are included in Investments and in Other Assets (for those investments designated for deferred compensation plans), at fair value based on quoted market prices, and are classified as available-for-sale. Available-for-sale securities consist of debt and equity securities that will be held for indefinite periods of time, including securities that may be sold in response to changes in market interest or prepayment rates, needs for liquidity, or changes in the availability or yield of alternative investments. These securities are valued at current market value, with the resulting unrealized holding gains and losses excluded from earnings and reported, net of tax, as a separate component of shareholders’ equity until realized. Available-for-sale securities are included in current assets if they are available to fund current operations. Investments designated for deferred compensation are included within long-term other assets. Realized gains on the sale of securities were approximately $0.2 million, $0.3 million, and $0.1 million at June 30, 2008, June 30, 2007, and June 30, 2006, respectively. A summary of the carrying values and fair values of the Company’s investments is as follows (in thousands):
|
| June 30, 2008 |
| ||||||||||
|
| Cost |
| Gross Unrealized |
| Recorded |
| ||||||
|
| Basis |
| Gains |
| Losses |
| Basis |
| ||||
Debt securities |
| $ | 2,198 |
| $ | 27 |
| $ | — |
| $ | 2,225 |
|
Equity securities |
|
| 2,619 |
|
| 1,545 |
|
| — |
|
| 4,164 |
|
|
| $ | 4,817 |
| $ | 1,572 |
| $ | — |
| $ | 6,389 |
|
|
| June 30, 2007 |
| ||||||||||
|
| Cost |
| Gross Unrealized |
| Recorded |
| ||||||
|
| Basis |
| Gains |
| Losses |
| Basis |
| ||||
Debt securities |
| $ | 2,292 |
| $ | — |
| $ | (30 | ) | $ | 2,262 |
|
Equity securities |
|
| 2,656 |
|
| 1,741 |
|
| — |
|
| 4,397 |
|
|
| $ | 4,948 |
| $ | 1,741 |
| $ | (30 | ) | $ | 6,659 |
|
|
| June 30, 2008 |
| June 30, 2007 |
| ||||||||
|
| Investments |
| Other Assets |
| Investments |
| Other Assets |
| ||||
Debt securities |
| $ | — |
| $ | 2,225 |
| $ | — |
| $ | 2,262 |
|
Equity securities |
|
| 1,160 |
|
| 3,004 |
|
| 976 |
|
| 3,421 |
|
|
| $ | 1,160 |
| $ | 5,229 |
| $ | 976 |
| $ | 5,683 |
|
As of June 30, 2008, all debt securities mature within one year.
| |
2. | INVENTORIES |
Inventories valued on a LIFO basis (steel) would have been approximately $1.9 million and $1.7 million higher at June 30, 2011 and 2010, respectively, if they had been valued on a FIFO basis. At June 30, 2011 and 2010 the total value of LIFO inventory was $1.5 million and $2.3 million, respectively. There was no material liquidation of LIFO inventory in 2011 and 2010. A comparison of inventories is as follows (in thousands): |
Inventories valued on the LIFO method would have been approximately $3.3 million and $3.7 million higher at June 30, 2008 and 2007, respectively, if they had been valued on the FIFO method. At June 30, 2008 and 2007 the total value of LIFO inventory was $2.7 million and $3.1 million, respectively. A comparison of inventories is as follows (in thousands):
|
| June 30, |
| ||||
|
| 2008 |
| 2007 |
| ||
Raw materials |
| $ | 15,272 |
| $ | 16,389 |
|
Work in process and finished parts |
|
| 8,082 |
|
| 7,589 |
|
Finished goods |
|
| 62,437 |
|
| 54,779 |
|
Total |
| $ | 85,791 |
| $ | 78,757 |
|
|
|
|
|
|
|
|
|
|
| June 30, |
| ||||
|
| 2011 |
| 2010 |
| ||
Raw materials |
| $ | 9,235 |
| $ | 9,696 |
|
Work in process and finished parts |
|
| 3,951 |
|
| 4,943 |
|
Finished goods |
|
| 60,494 |
|
| 57,998 |
|
Total |
| $ | 73,680 |
| $ | 72,637 |
|
| |
3. | PROPERTY, PLANT AND EQUIPMENT |
(in thousands) |
| Estimated |
| June 30, |
| ||||
|
| Life (Years) |
| 2008 |
| 2007 |
| ||
Land |
|
|
| $ | 4,049 |
| $ | 4,049 |
|
Buildings and improvements |
| 3-39 |
|
| 41,138 |
|
| 40,242 |
|
Machinery and equipment |
| 3-20 |
|
| 31,322 |
|
| 34,010 |
|
Delivery equipment |
| 3-10 |
|
| 19,103 |
|
| 19,711 |
|
Furniture and fixtures |
| 3-5 |
|
| 4,251 |
|
| 4,564 |
|
Total |
|
|
|
| 99,863 |
|
| 102,576 |
|
Less accumulated depreciation |
|
|
|
| (73,491 | ) |
| (74,408 | ) |
Net |
|
|
| $ | 26,372 |
| $ | 28,168 |
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
| Estimated |
| June 30, |
| |||||
|
| Life (Years) |
| 2011 |
| 2010 |
| |||
Land |
|
|
|
| $ | 3,984 |
| $ | 3,984 |
|
Buildings and improvements |
| 5-39 |
|
| 39,851 |
|
| 40,248 |
| |
Machinery and equipment |
| 3-7 |
|
| 26,513 |
|
| 28,251 |
| |
Delivery equipment |
| 3-5 |
|
| 18,180 |
|
| 18,269 |
| |
Furniture and fixtures |
| 3-7 |
|
| 4,000 |
|
| 4,291 |
| |
Construction in progress |
|
|
|
|
| 366 |
|
| — |
|
Total |
|
|
|
|
| 92,894 |
|
| 95,043 |
|
Less accumulated depreciation |
|
|
|
|
| (71,507 | ) |
| (73,429 | ) |
Net |
|
|
|
| $ | 21,387 |
| $ | 21,614 |
|
| |
4. | OTHER NONCURRENT ASSETS |
(in thousands) |
| June 30, |
| ||||
|
| 2008 |
| 2007 |
| ||
Cash value of life insurance |
| $ | 6,232 |
| $ | 5,940 |
|
Investments designated for deferred compensation plans |
|
| 5,229 |
|
| 5,683 |
|
Other |
|
| 41 |
|
| 587 |
|
Total |
| $ | 11,502 |
| $ | 12,210 |
|
|
|
|
|
|
|
|
|
(in thousands) |
| June 30, |
| ||||
|
| 2011 |
| 2010 |
| ||
Cash value of life insurance |
| $ | 6,815 |
| $ | 6,560 |
|
Rabbi Trust assets (see Note 9) |
|
| 5,533 |
|
| 4,683 |
|
Other |
|
| 29 |
|
| 14 |
|
Total |
| $ | 12,377 |
| $ | 11,257 |
|
| |
5. | ACCRUED LIABILITIES – OTHER |
|
|
|
|
|
|
|
|
(in thousands) |
| June 30, |
| ||||
|
| 2011 |
| 2010 |
| ||
Dividends |
| $ | 504 |
| $ | 332 |
|
Income taxes |
|
| — |
|
| 1,445 |
|
Advertising |
|
| 1,873 |
|
| 2,200 |
|
Warranty |
|
| 970 |
|
| 980 |
|
Other |
|
| 1,857 |
|
| 2,002 |
|
Total |
| $ | 5,204 |
| $ | 6,959 |
|
(in thousands) |
| June 30, |
| ||||
|
| 2008 |
| 2007 |
| ||
Dividends |
| $ | 855 |
| $ | 854 |
|
Advertising |
|
| 1,309 |
|
| 1,327 |
|
Warranty |
|
| 1,090 |
|
| 1,040 |
|
Income taxes payable * |
|
| — |
|
| 987 |
|
Other |
|
| 2,806 |
|
| 3,186 |
|
Total |
| $ | 6,060 |
| $ | 7,394 |
|
* At June 30, 2008, the Company has an income tax receivable that is included in the balance sheet within our other current assets.
| |
| CREDIT ARRANGEMENTS |
At June 30, 2008, borrowings and credit arrangements consisted of the following (in thousands):
Current: |
|
|
|
|
Current maturities of long-term debt |
| $ | 526 |
|
Overnight borrowing interest rate at prime minus 1%; unsecured |
|
| 1,079 |
|
$12.0 million working capital line of credit through June 30, 2009; |
|
| 3,538 |
|
|
|
|
|
|
Long-Term: |
|
|
|
|
$20.0 million revolving note; expires September 30, 2012; |
|
| 20,000 |
|
$2.6 million fixed rate note; requiring payments through December 2010; |
|
| 811 |
|
Total |
| $ | 25,954 |
|
The Company had unsecured credit facilities of $32.1 million with a bank, with borrowings at differing rates based on the date and type of financing utilized. The unsecured credit facilities provided $12.0 million short-term (renewed annually), $20.0 million long-term (expires September 30, 2012) and $0.1 million in letters of credit that are used primarily for international inventory purchases. The credit facilities provided for interest selected at the option of the Company at prime or LIBOR plus an add-on percentage, based on a rolling four-quarter leverage ratio calculation. The short-term facility expired on June 30, 2008.
The short-term portion of the credit facility provides working capital financing up to $12.0 million, of which $3.5 million was outstanding at June 30, 2008, with interest selected at the option of the Company at prime (5% at June 30, 2008) or LIBOR (2.5% at June 30, 2008) plus 0.75%. The short-term portion also provides overnight credit when required for operations at prime minus 1.0%. At June 30, 2008, no amount was outstanding related to overnight credit. The long-term portion of the credit facility provides up to $20.0 million, of which $20.0 million was outstanding at June 30, 2008. Variable interest is set monthly at the option of the Company at prime or LIBOR plus 0.75%. The credit facility also provides $0.1 million to support letters of credit issued by the Company of which no amount was outstanding as of June 30, 2008. All interest rates are adjusted monthly, except for the overnight portion of the short-term line of credit, which varies daily at the prime rate minus 1.0%. As of June 30, 2008, the Company has effectively fixed the interest rates at 4.5% on approximately $15.0 million of its long-term debt through the use of interest rate swaps. On July 31, 2008, a $5.0 million swap matured. As of the date of this filing, the Company has effectively fixed its interest rate at 5.0% on approximately $10.0 million.
The credit agreement contains certain restrictive covenants that require the Company, among other things, to maintain an interest coverage ratio, leverage ratio, and limitations on capital disposals, all as defined in the credit agreement. At June 30, 2008, the Company was in compliance with all financial covenants contained in the credit agreement.
An officer of the Company is a director at a bank where the Company maintains a $4.0 million line of credit, cumulative letter of credit facilities of $5.2 million and where its routine daily banking transactions are processed. The Company is contingently liable to insurance carriers under its comprehensive general, product, and vehicle liability policies, as well as some workers’ compensation, and has provided letters of credit in the amount of $5.2 million. The Company receives no special services or pricing on the services performed by the bank due to the directorship of this officer. At June 30, 2008, $1.1 million was outstanding on the line of credit at prime minus 1 %.
| |
The Company maintains a credit agreement which provides short-term working capital financing up to $15.0 million with interest of LIBOR plus 1% including $5.0 million of letters of credit availability. No amounts were outstanding at June 30, 2011 and 2010 under the working capital facility. The credit agreement contains financial covenants. The primary covenant is an interest coverage ratio of 3.0 to 1.0. The ratio is computed as net (loss) income plus interest expense and stock-based compensation expense less dividends divided by interest expense. In addition, the Company must maintain working capital of $60 million. At June 30, 2011, the Company was in compliance with all of the covenants contained in the credit agreement. The Company is contingently liable to insurance carriers under its comprehensive general, product, and vehicle liability policies, as well as some workers’ compensation, and has provided letters of credit in the amount of $3.0 million at June 30, 2011. | |
An officer of the Company is a director at a bank where the Company maintains an additional unsecured $5.0 million line of credit at prime minus 1%, but not less than 2.5% and where its routine daily banking transactions are processed. No amount was outstanding on the line of credit at June 30, 2011 and 2010. In addition, the Rabbi Trust assets (Note 9) are administered by this bank’s trust department. The Company receives no special services or pricing on the services performed by the bank due to the directorship of this officer. | |
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 (loss), 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): |
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 tax planning opportunities available in the various jurisdictions in which the Company operates. This includes recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns to the extent pervasive evidence exists that they will be realized in future periods. The deferred tax balances are adjusted to reflect tax rates by tax jurisdiction, based on currently enacted tax laws, which are expected to be in effect in the years in which the temporary differences are expected to reverse. In accordance with the Company’s income tax policy, significant or unusual items are separately recognized when they occur.
The Company adopted the provisions of FIN 48 on July 1, 2007. As a result of the implementation of FIN 48, the Company recognized an adjustment in the liability for unrecognized income tax benefits of $0.1 million, which is reported as a cumulative effect of a change in accounting principle and is reported as an adjustment to the beginning balance of retained earnings as of July 1, 2007. At the adoption date of July 1, 2007, the Company had approximately $0.8 million of gross liabilities related to unrecognized tax benefits (composed of $0.6 million of gross unrecognized tax benefits and accrued interest and penalties of $0.2 million) and related deferred tax assets of approximately $0.2 million. At June 30, 2008, the Company had approximately $0.7 million of gross liabilities related to unrecognized tax benefits (composed of $0.5 million of gross unrecognized tax benefits and accrued interest and penalties of $0.2 million) and related deferred tax assets of approximately $0.2 million, all of which would affect our effective tax rate if recognized. 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. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
Balance at July 1, 2007 |
| $ | 617 |
|
Additions (reductions) based on tax positions related to the current year |
|
| (68 | ) |
Balance at June 30, 2008 |
| $ | 549 |
|
Consistent with prior periods and upon adoption of FIN 48 the Company records interest and penalties related to income taxes as income tax expense in the Consolidated Statements of Income. As of July 1, 2007 and June 30, 2008, the Company had approximately $0.2 million of accrued interest and penalties related to uncertain tax positions. The total income tax provision in fiscal years 2008, 2007 and 2006 was 35.8%, 35.6% and 39.3%, respectively, of income before income taxes. The rate increased by approximately 0.2% from fiscal year 2007 to 2008 due primarily to the decrease in nontaxable life insurance proceeds received in the current year compared to the prior year.
The provision for income taxes is as follows for the years ended June 30 (in thousands):
|
| 2008 |
| 2007 |
| 2006 |
| |||
Federal – current |
| $ | 1,510 |
| $ | 6,045 |
| $ | 1,762 |
|
State – current |
|
| 270 |
|
| 570 |
|
| 350 |
|
Deferred |
|
| 580 |
|
| (1,465 | ) |
| 948 |
|
Total |
| $ | 2,360 |
| $ | 5,150 |
| $ | 3,060 |
|
A reconciliation between the U.S. federal statutory tax rate and the effective tax rate is as follows for the years ended June 30:
|
| 2008 |
| 2007 |
| 2006 |
| |||
Federal statutory tax rate |
|
| 34.0 | % |
| 35.0 | % |
| 34.0 | % |
State taxes, net of federal effect |
|
| 2.7 |
|
| 2.6 |
|
| 2.8 |
|
Other |
|
| (0.9 | ) |
| (2.0 | ) |
| 2.5 |
|
Effective tax rate |
|
| 35.8 | % |
| 35.6 | % |
| 39.3 | % |
|
|
|
|
|
|
|
|
|
| June 30, |
| ||||
|
| 2011 |
| 2010 |
| ||
Gross unrecognized tax benefits |
| $ | 970 |
| $ | 995 |
|
Accrued Interest and penalties |
|
| 340 |
|
| 215 |
|
Gross liabilities related to unrecognized tax benefits |
| $ | 1,310 |
| $ | 1,210 |
|
|
|
|
|
|
|
|
|
Deferred tax assets |
| $ | 330 |
| $ | 230 |
|
The primary components of deferred tax assets and (liabilities) are as follows (in thousands):
|
| June 30, 2008 |
| June 30, 2007 |
| ||||||||
|
| Current |
| Long-term |
| Current |
| Long-term |
| ||||
Investments |
| $ | (580 | ) | $ | — |
| $ | (650 | ) | $ | — |
|
Accounts receivable |
|
| 780 |
|
| — |
|
| 800 |
|
| — |
|
Inventory |
|
| 1,730 |
|
| — |
|
| 1,590 |
|
| — |
|
Self insurance |
|
| 1,040 |
|
| — |
|
| 1,165 |
|
| — |
|
Employee benefits |
|
| 540 |
|
| — |
|
| 760 |
|
| — |
|
Accrued expenses |
|
| 700 |
|
| — |
|
| 1,035 |
|
| — |
|
Property, plant and equipment |
|
| — |
|
| (940 | ) |
| — |
|
| (900 | ) |
Deferred compensation |
|
| — |
|
| 2,030 |
|
| — |
|
| 2,130 |
|
Other |
|
| — |
|
| 302 |
|
| — |
|
| 40 | |
Total |
| $ | 4,210 |
| $ | 1,392 |
| $ | 4,700 |
| $ | 1,270 |
|
The Company is subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. Generally, tax years 2004–2007 remain open to examination by the Internal Revenue Service or other taxing jurisdictions to which we are subject.
| |
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands): |
|
|
|
|
|
|
|
|
Balance at June 30, 2009 |
|
|
|
| $ | 404 |
|
Additions for tax positions of prior years |
|
|
|
|
| 591 |
|
Balance at June 30, 2010 |
|
|
|
|
| 995 |
|
Reduction for tax positions of prior years |
|
|
|
|
| (25 | ) |
Balance at June 30, 2011 |
|
|
|
| $ | 970 |
|
The Company records interest and penalties related to income taxes as income tax expense in the Consolidated Statements of Operations. The total income tax provision in fiscal years 2011, 2010 and 2009 was 35.7%, 38.1% and 41.5%, respectively, of income (loss) before income taxes. 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 (benefit) is as follows for the years ended June 30 (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
| 2011 |
| 2010 |
| 2009 |
| |||
Federal – current |
| $ | 5,313 |
| $ | 6,630 |
| $ | (1,410 | ) |
State – current |
|
| 423 |
|
| 975 |
|
| (110 | ) |
Deferred |
|
| 54 |
|
| (955 | ) |
| 450 |
|
Total |
| $ | 5,790 |
| $ | 6,650 |
| $ | (1,070 | ) |
A reconciliation between the U.S. federal statutory tax rate and the effective tax rate is as follows for the years ended June 30: |
|
|
|
|
|
|
|
|
|
|
|
|
| 2011 |
| 2010 |
| 2009 |
| |||
Federal statutory tax rate |
|
| 35.0 | % |
| 35.0 | % |
| 34.0 | % |
State taxes, net of federal effect |
|
| 2.6 |
|
| 3.7 |
|
| 2.7 |
|
Other |
|
| (1.9 | ) |
| (0.6 | ) |
| 4.8 |
|
Effective tax rate |
|
| 35.7 | % |
| 38.1 | % |
| 41.5 | % |
The effective tax rate for the fiscal year ended June 30, 2011 was 35.7% compared to 38.1% for fiscal year 2010. The change in effective tax rate is primarily due to the change in provision for uncertain tax positions related to various state taxing jurisdictions, stock-based compensation and the benefit of the Domestic Manufacturing Deduction under Section 199 (DMD), which provides a tax benefit on U.S. based manufacturing. The DMD tax benefit available in previous years was being phased in by statute and was therefore lower than the full DMD tax benefit for 2011. | |
Although the Company’s effective full year tax expense rate has historically ranged from 35% to 39%, fiscal year ended June 30, 2009 reflects an effective income tax benefit rate of 41.5% due to losses or low level of earnings in various tax jurisdictions. | |
The primary components of deferred tax assets and (liabilities) are as follows (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2011 |
| June 30, 2010 |
| ||||||||
|
| Current |
| Long-term |
| Current |
| Long-term |
| ||||
Accounts receivable |
| $ | 740 |
| $ | — |
| $ | 750 |
| $ | — |
|
Inventory |
|
| 1,360 |
|
| — |
|
| 1,100 |
|
| — |
|
Self insurance |
|
| 620 |
|
| — |
|
| 690 |
|
| — |
|
Employee benefits |
|
| 360 |
|
| — |
|
| 680 |
|
| — |
|
Accrued expenses |
|
| 620 |
|
| — |
|
| 830 |
|
| — |
|
Property, plant and equipment |
|
| — |
|
| (760 | ) |
| — |
|
| (340 | ) |
Deferred compensation |
|
| — |
|
| 2,520 |
|
| — |
|
| 2,280 |
|
Other |
|
| — |
|
| 800 |
|
| — |
|
| 1,070 |
|
Total |
| $ | 3,700 |
| $ | 2,560 |
| $ | 4,050 |
| $ | 3,010 |
|
The Company is subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. Generally, tax years 2008–2011 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. |
The Company has three stock-based compensation methods available when determining employee compensation. The Company’s shareholders have approved all stock-based compensation and stock option plans.
| (1) |
|
|
|
The fair value of the equity portion of the award is estimated each period based on the market value of the Company’s common shares reduced by the present value of expected dividends to be paid prior to the service period, discounted using a risk-free interest rate. In the period the grant date occurs, cumulative compensation cost will be adjusted to reflect the cumulative effect of measuring compensation cost based on the fair value at the grant date. Under the plan the aggregate number of shares and cash that could be awarded to key executives if the target and maximum performance goals are met are as follows:
|
| At Target |
| At Maximum |
| ||||||
Performance Period |
| Stock |
| Cash |
| Stock |
| Cash |
| ||
July 1, 2007 – June 30, 2009 |
| 22,212 |
| $ | 210,567 |
| 35,544 |
| $ | 336,820 |
|
July 1, 2007 – June 30, 2010 |
| 33,330 |
| $ | 315,881 |
| 53,329 |
| $ | 505,395 |
|
July 1, 2008 – June 30, 2011 |
| 44,621 |
| $ | 334,714 |
| 71,398 |
| $ | 535,573 |
|
No compensation costs were accrued at June 30, 2008. If the target performance goals would be achieved the total amount of stock compensation cost recognized over the requisite service periods would be $0.6 million per year based on the estimated fair values at June 30, 2008. At June 30, 2008, 500,000 shares were available for awards.
|
| |
The aggregate number of shares and cash that could be awarded to key executives if the minimum, target and maximum performance goals are met, based upon the fair market value at June 30, 2011, is as follows (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Minimum |
| Target |
| Maximum |
| |||||||||
Performance Period |
| Shares |
| Cash |
| Shares |
| Cash |
| Shares |
| Cash |
| |||
Fiscal Year 2009 – 2011 |
| 16 |
| $ | 152 |
| 45 |
| $ | 435 |
| 71 |
| $ | 696 |
|
Fiscal Year 2010 – 2012 |
| 20 |
| $ | 198 |
| 58 |
| $ | 567 |
| 93 |
| $ | 907 |
|
Fiscal Year 2011 – 2013 |
| 17 |
| $ | 162 |
| 48 |
| $ | 463 |
| 76 |
| $ | 741 |
|
If the target performance goals would be achieved, the total amount of compensation cost recognized over the requisite service periods would be $0.9 million (2009-2011), $1.1 million (2010-2012) and $1.0 million (2011-2013) based on the estimated fair values at June 30, 2011. The Company recorded compensation expense of $1.3 million, $0.9 million, and $0 during fiscal years 2011, 2010 and 2009, respectively. | ||
(2) | Stock | |
In fiscal years 2011, 2010 and 2009, the Company issued options for 87,500, 165,000 and 265,000 common shares at weighted average exercise prices of $17.23, $8.43 and $6.82 (the fair market value on the date of grant), respectively. The options were immediately available for exercise and may be exercised for a period of 10 years. The Company recorded compensation expense of $0.4 million, $0.3 million and $0.1 million during fiscal years 2011, 2010 and 2009, respectively. The assumptions used in determining the compensation expense are discussed below. | ||
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 2011, 2010 and 2009, respectively; dividend yield of 1.2%, 2.4% and 7.6%, expected volatility of 33.4%, 25.3% and 21.8%; risk-free interest rate of 1.5%, 2.2% and 1.6%; and an expected life of 5, 5 and 6 years, respectively. 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 2011, 2010 and 2009 was $4.84, $1.64 and $0.45, respectively. The cash proceeds, income tax benefit and aggregate intrinsic value of options (the amount by which the market price of the stock on the date of exercise exceeded the market price of stock on the date of grant) exercised during the fiscal years ended June 30, 2011, 2010 and 2009, respectively, were not material. | ||
At June 30, 2011, 423,950 shares were available for future grants. 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. |
In fiscal years 2008, 2007 and 2006, the Company issued options for 120,000, 135,000 and 159,500 common shares at an exercise price of $12.40, $12.63 and $14.40 (the fair market value on the date of grant), respectively. The options were immediately available for exercise and may be exercised for a period of 10 years. In accordance with the provisions of SFAS No. 123(R) the Company recorded compensation expense of $0.2 million, $0.3 million and $0.4 million, respectively. The Company also recorded a reduction of its income tax expense of $28,000, $43,000 and $63,000, respectively, related to the issuance of these options. The assumptions used in determining the compensation expense and related income tax impacts are discussed below.
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 2008, 2007 and 2006, respectively; dividend yield of 4.2%, 4.1% and 3.6%; expected volatility of 19.5%, 21.6% and 23.3%; risk-free interest rate of 3.3%, 4.5% and 4.5%; and an expected life of 5, 6 and 6 years, respectively. The expected volatility and expected life are determined based on historical data.
The weighted-average grant date fair value of stock options granted during the fiscal years ended June 30, 2008, 2007 and 2006, was $1.55, $2.03 and $2.68, respectively. The cash proceeds, income tax benefit and aggregate intrinsic value of options (the amount by which the market price of the stock on the date of exercise exceeded the market price of stock on the date of grant) exercised during the fiscal years ended June 30, 2008, 2007 and 2006, respectively, was not material.
At June 30, 2008, 381,700 shares were available for future grants. 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 exercise of options. These shares received as payment are retired upon receipt.
A summary of the status of the Company’s stock option plans as of June 30, 2008, 2007 and 2006 and the changes during the years then ended is presented below:
|
| Shares |
| Weighted Average |
| Aggregate Intrinsic Value |
| ||
Outstanding and exercisable at July 1, 2005 |
| 503,601 |
| $ | 16.50 |
| $ | 0.2 |
|
Granted |
| 159,500 |
|
| 14.40 |
|
|
|
|
Exercised |
| (2,000 | ) |
| 11.25 |
|
|
|
|
Canceled |
| — |
|
| — |
|
|
|
|
Outstanding and exercisable at June 30, 2006 |
| 661,101 |
| $ | 16.01 |
| $ | 0.1 |
|
Granted |
| 135,000 |
|
| 12.63 |
|
|
|
|
Exercised |
| (4,427 | ) |
| 12.60 |
|
|
|
|
Canceled |
| (9,500 | ) |
| 15.60 |
|
|
|
|
Outstanding and exercisable at June 30, 2007 |
| 782,174 |
| $ | 15.45 |
| $ | 0.4 |
|
Granted |
| 120,000 |
|
| 12.40 |
|
|
|
|
Exercised |
| (3,400 | ) |
| 11.80 |
|
|
|
|
Canceled |
| (5,790 | ) |
| 16.07 |
|
|
|
|
Outstanding and exercisable at June 30, 2008 |
| 892,984 |
| $ | 15.05 |
| $ | 0.0 |
|
The following table summarizes information for options outstanding and exercisable at June 30, 2008:
|
|
|
| Weighted Average |
| ||||
Range of |
| Options |
| Remaining |
| Exercise |
| ||
$ | 10.30 – 10.75 |
| 23,800 |
| 2.9 |
| $ | 10.57 |
|
| 12.35 – 13.59 |
| 301,773 |
| 7.6 |
|
| 12.64 |
|
| 14.40 – 16.52 |
| 423,016 |
| 6.3 |
|
| 15.56 |
|
| 19.21 – 20.27 |
| 144,395 |
| 5.4 |
|
| 19.33 |
|
$ | 10.30 – 20.27 |
| 892,984 |
| 6.5 |
| $ | 15.05 |
|
|
| |
A summary of the status of the Company’s stock option plans as of June 30, 2011, 2010 and 2009 and the changes during the years then ended is presented below: |
The following table presents the changes in the Company’s product warranty liability for the fiscal years ended June 30 (in thousands):
|
| 2008 |
| 2007 |
| ||
Accrued warranty costs at beginning of year |
| $ | 1,040 |
| $ | 1,140 |
|
Payments made for warranty and related costs |
|
| (3,331 | ) |
| (3,558 | ) |
Accrual for product warranty and related costs |
|
| 3,381 |
|
| 3,458 |
|
Accrued warranty costs at end of year |
| $ | 1,090 |
| $ | 1,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Shares |
| Weighted Average |
| Aggregate |
| |||
Outstanding and exercisable at June 30, 2009 |
|
| 1,020 |
| $ | 12.94 |
| $ | 407 |
|
Granted |
|
| 165 |
|
| 8.43 |
|
|
|
|
Exercised |
|
| (99 | ) |
| 7.52 |
|
|
|
|
Canceled |
|
| (34 | ) |
| 13.40 |
|
|
|
|
Outstanding and exercisable at June 30, 2010 |
|
| 1,052 |
|
| 12.70 |
|
| 1,168 |
|
Granted |
|
| 88 |
|
| 17.23 |
|
|
|
|
Exercised |
|
| (91 | ) |
| 7.41 |
|
|
|
|
Canceled |
|
| (3 | ) |
| 17.30 |
|
|
|
|
Outstanding and exercisable at June 30, 2011 |
|
| 1,046 |
| $ | 13.56 |
| $ | 2,271 |
|
| |
The following table summarizes information for options outstanding and exercisable at June 30, 2011: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted Average |
| ||||||||||
Range of |
| Options Outstanding |
| Remaining |
| Exercise |
| ||||||||
| $ | 6.81 – 10.75 |
|
| 254 |
|
| 8.0 |
|
|
| $ | 7.71 |
|
|
|
| 12.35 – 12.74 |
|
| 230 |
|
| 6.0 |
|
|
|
| 12.51 |
|
|
|
| 14.40 – 16.52 |
|
| 352 |
|
| 3.4 |
|
|
|
| 15.54 |
|
|
|
| 17.23 – 20.27 |
|
| 210 |
|
| 5.3 |
|
|
|
| 18.46 |
|
|
| $ | 6.81 – 20.27 |
|
| 1,046 |
|
| 5.4 |
|
|
| $ | 13.56 |
|
|
9. | BENEFIT AND RETIREMENT PLANS |
The Company sponsors various defined contribution pension and retirement plans, which cover substantially all employees, other than employees covered by multi-employer pension plans under collective bargaining agreements. Total pension and retirement plan expense was $1.7 million, $1.5 million and $1.8 million in fiscal years 2011, 2010 and 2009. The amounts include $0.5 million in fiscal year 2011, $0.4 million in fiscal 2010 and $0.5 million in fiscal years 2009, for the Company’s matching contribution to retirement savings plans. The Company’s cost for pension plans is generally determined as 2% - 6% of each covered employee’s wages. The Company’s matching contribution for the retirement savings plans is generally 25% - 50% of employee contributions (up to 4% of employee earnings). | |
In addition to the above, amounts charged to pension expense and contributed to multi-employer defined benefit pension plans administered by others under collective bargaining agreements were $0.5 million in fiscal years 2011, 2010 and 2009, respectively. The cumulative cost to exit the Company’s multi-employer plans was approximately $7.2 million on June 30, 2011. | |
The Company has unfunded deferred compensation plans with executive officers. The plans require various annual contributions for the participants based upon compensation levels and age. All participants are fully vested. For fiscal 2011, 2010 and 2009, the benefit obligation was increased by interest expense of $0.2 million, $0.2 million and $0.1 million, service costs of $0.4 million, $0.3 million and $0.2 million, and decreased by payments of $0.4 million, $0.4 million and $0.6 million, respectively. At June 30, 2011 and 2010, the deferred compensation liability was $5.3 and $5.1 million, respectively. Funds of the deferred compensation plans are held in a Rabbi Trust. The assets held in the Rabbi Trust are not available for general corporate purposes. The Rabbi Trust is subject to creditor claims in the event of insolvency, but otherwise must be used only for purposes of providing benefits under the plans. As of June 30, 2011, the Company’s deferred compensation plan assets, held in the Rabbi Trust, were invested in stock and bond funds. As of June 30, 2011 and 2010, the fair market value of the assets held in the Rabbi Trust were $5.5 million and $4.7 million, respectively, and are classified as “Other Assets” in the Consolidated Balance Sheets. These assets are classified as Level 2 in accordance with fair value accounting as discussed in Note 1. |
The Company sponsors various defined contribution pension and retirement plans, which cover substantially all employees, other than employees covered by multi-employer pension plans under collective bargaining agreements. It is the Company’s policy to fund all pension costs accrued. Total pension and retirement plan expense was $2.0 million in each of the fiscal years 2008, 2007, and 2006. The amounts include $0.5 million in each of the fiscal years 2008, 2007 and 2006, for the Company’s matching contribution to retirement savings plans. The Company’s cost for pension plans is generally determined as 2% - 6% of each covered employee’s wages. The Company’s matching contribution for the retirement savings plans is generally 25% - 50% of employee contributions (up to 4% of employee earnings). In addition to the above, amounts charged to pension expense and contributed to multi-employer defined benefit pension plans administered by others under collective bargaining agreements were $0.8 million, $0.9 million and $1.0 million in fiscal 2008, 2007 and 2006, respectively. For fiscal 2008, 2007, and 2006, the discount rate was 6.10%, 6.25%, 6.25%, respectively and the rate of return on assets was 8.25%, 8.25%, and 8.25%, repectively. The cumulative cost to exit the Company’s multi-employer plans was approximately $3.5 million on June 30, 2008.
The Company has unfunded post-retirement benefit and deferred compensation plans with executive officers. The plans require various annual contributions for the participants based upon compensation levels and age. All participants are fully vested. For fiscal 2008, 2007 and 2006, the benefit obligation was increased by interest expense of $0.3 million, $0.2 million and $0.2 million, service costs of $0.3 million, $0.5 million and $0.3 million, and decreased by payments of $0.8 million, $0.5 million and $0.4 million, respectively. For fiscal 2008, 2007, and 2006, the discount rate was 6.10%, 6.25%, and 6.25%, respectively and the rate of return on assets was 8.25%, 8.25%, and 8.25%, respectively. At June 30, 2008, the benefit obligation was $5.3 million, including $0.3 million for defined benefits.
Under provisions of the Company’s Voluntary Deferred Compensation Plan, executive officers may defer common stock awards received as participants of the Management Incentive Plan until retirement. Under the plan, no shares were deferred during the fiscal years ended June 30, 2008 and 2007. At June 30, 2008 and 2007, 53,575 shares and 60,853 shares with an award date value of $0.8 million and $0.9 million, respectively, had been deferred and are being held on behalf of the employees. Under the plan, 7,278 shares were distributed in fiscal years 2008 and 2007, respectively.
The Company’s defined benefit pension plan covers 78 active hourly production employees of DMI. There are a total of 484 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). According to an agreement reached with the collective bargaining unit, all benefits and participants are fixed. Future benefits will accrue to current participants; however, new participants cannot be added to the plan. As of June 30, 2008, the Company recorded an accrued benefit liability related to the funded status of the defined benefit pension plan recognized on the Company’s balance sheet of $0.3 million and as of June 30, 2007 an accrued asset was recorded on the Company’s consolidated balance sheet of $0.4 million. The accumulated benefit obligation was $5.2 million and $4.9 million at fiscal years ended June 30, 2008 and 2007, respectively.
| |
Under provisions of the Company’s Voluntary Deferred Compensation Plan, executive officers may defer common stock awards received as part of incentive compensation plans until retirement. Under the plan, no shares were deferred during the fiscal years ended June 30, 2011 and 2010. At June 30, 2011 and 2010, 36,867 shares and 42,094 shares with an award date value of $0.5 million and $0.6 million, respectively, had been deferred and are being held on behalf of the employees. Under the plan, 5,227 shares and 5,228 shares were distributed in fiscal years 2011 and 2010, respectively. | |
As of June 30, 2011, the Company’s defined benefit pension plan has no active employees of DMI and is frozen. There are a total of 444 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, 2011 and 2010, 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 $1.1 million and $2.4 million, respectively. The accumulated benefit obligation was $6.2 million and $6.6 million at fiscal years ended June 30, 2011 and 2010, respectively. The Company recorded expense of $0.2 million, $0.2 million and $0 during fiscal years 2011, 2010 and 2009, respectively, related to the plan. | |
10. | COMPREHENSIVE INCOME (LOSS) |
The components of comprehensive income (loss), net of income taxes, for the years ended June 30, were as follows (in thousands): |
The components of comprehensive income, net of income taxes, for the years ended June 30, were as follows (in thousands):
|
| 2008 |
| 2007 |
| 2006 |
| |||
Net income |
| $ | 4,236 |
| $ | 9,334 |
| $ | 4,718 |
|
Other comprehensive income (OCI): |
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivatives, net of income taxes of $176, $70 and $(73), respectively |
|
| (273 | ) |
| (168 | ) |
| 117 |
|
Change in fair value of available-for-sale, Securities, net of income taxes of $54, $(205), $–, respectively |
|
| (84 | ) |
| 301 |
|
| – |
|
Change in minimum pension liability, net of income taxes of $321, $(140) and $(305), respectively |
|
| (524 | ) |
| 255 |
|
| 543 |
|
Total other comprehensive income |
|
| (881 | ) |
| 388 |
|
| 660 |
|
Total comprehensive income |
| $ | 3,355 |
| $ | 9,722 |
| $ | 5,378 |
|
The components of accumulated other comprehensive income, net of income taxes, are as follows (in thousands):
|
| June 30, |
| ||||
|
| 2008 |
| 2007 |
| ||
Available-for-sale securities |
| $ | 975 |
| $ | 1,059 |
|
Interest rate swaps |
|
| (178 | ) |
| 95 |
|
Pension and other post-retirement benefit adjustments |
|
| (569 | ) |
| (44 | ) |
Total accumulated other comprehensive income |
| $ | 228 |
| $ | 1,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2011 |
| 2010 |
| 2009 |
| |||
Net income (loss) |
| $ | 10,417 |
| $ | 10,801 |
| $ | (1,509 | ) |
Other comprehensive income (loss) (OCI): |
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivatives, net of income taxes of $0, $(109) and $5, respectively |
|
| — |
|
| 177 |
|
| (1 | ) |
Change in fair value of available-for-sale, Securities, net of income taxes of $(214), $(24), $631, respectively |
|
| 348 |
|
| 39 |
|
| (1,022 | ) |
Change in minimum pension liability, net of income taxes of $(532), $124 and $595, respectively |
|
| 869 |
|
| (204 | ) |
| (969 | ) |
Total other comprehensive income (loss) |
|
| 1,217 |
|
| 12 |
|
| (1,992 | ) |
Total comprehensive income (loss) |
| $ | 11,634 |
| $ | 10,813 |
| $ | (3,501 | ) |
|
|
The components of accumulated other comprehensive loss, net of income taxes, are as follows (in thousands): |
From time to time, the Company is subject to various 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 proceedings that are currently pending, individually or in the aggregate, to be material to its business or likely to result in a material adverse effect on its consolidated operating results, financial condition, or cash flows.
|
|
|
|
|
|
|
|
|
| June 30, |
| ||||
|
| 2011 |
| 2010 |
| ||
Available-for-sale securities |
| $ | 337 |
| $ | (11 | ) |
Pension and other post-retirement benefit adjustments |
|
| (872 | ) |
| (1,741 | ) |
Total accumulated other comprehensive loss |
| $ | (535 | ) | $ | (1,752 | ) |
| |
11. | LITIGATION |
The Company has been named as one of several defendants in an Indiana civil lawsuit related to groundwater contamination. The lawsuit alleges that the contamination source is a property once owned by the Company. The Company does not believe that it caused or contributed to the contamination. This lawsuit is in its preliminary stages. Plaintiffs have not identified a dollar amount of their alleged damages and the status of insurance coverage has not been determined. We are unable to estimate a range of reasonably possible outcomes or losses at this time. Accordingly, no accrual related to this matter has been recorded in the June 30, 2011 financial statements. Legal and other related expenses of $0.5 million have been incurred responding to this lawsuit and are included in Selling, General and Administrative expense in the fiscal year 2011 Consolidated Statement of Operations. |
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. | |
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 $2.7 million, $3.4 million and $4.3 million in fiscal 2011, 2010 and 2009, respectively. | |
Expected future minimum commitments under operating leases as of June 30, 2011 were as follows (in thousands): |
|
|
|
|
|
Fiscal Year Ended June 30, |
| |||
2012 |
| $ | 1,851 |
|
2013 |
|
| 1,315 |
|
2014 |
|
| 751 |
|
2015 |
|
| 165 |
|
2016 |
|
| — |
|
Thereafter |
|
| — |
|
|
| $ | 4,082 |
|
13. | FACILITY CLOSING COSTS |
During the fiscal year 2011, the Company closed a manufacturing facility and recorded pre-tax charges for facility closing costs of $1.0 million. The charges represent employee separation costs of $0.6 million and other closing costs of $0.4 million and were classified as “Facility Closing Costs” in the Consolidated Statements of Operations and June 30, 2011. At June 30, 2011, the closure is completed and there were no facility consolidation liabilities remaining. | |
14. | SEGMENT REPORTING |
The Company operates in one reportable operating segment, furniture products. Our operations involve the distribution of manufactured and imported furniture for residential and commercial 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. | |
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, |
| |||||||
|
| 2011 |
| 2010 |
| 2009 |
| |||
Residential |
| $ | 258,095 |
| $ | 246,041 |
| $ | 230,727 |
|
Commercial |
|
| 81,331 |
|
| 80,425 |
|
| 93,431 |
|
|
| $ | 339,426 |
| $ | 326,466 |
| $ | 324,158 |
|
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 $4.0 million, $3.6 million and $3.4 million in fiscal 2008, 2007 and 2006, respectively.
Expected future minimum commitments under operating leases as of June 30, 2008 were as follows (in thousands):
Fiscal Year Ended June 30 | |||
2009 |
|
| 2,601 |
2010 |
|
| 1,748 |
2011 |
|
| 983 |
2012 |
|
| 628 |
2013 |
|
| 284 |
|
| $ | 6,244 |
As described in Note 19, the Company identified certain errors in the reconciliation of accounts payable during its 2008 closing period. As a result of these errors, the Company restated, in this Annual Report on Form 10-K, certain of its previously filed financial statements. The Company could be subject to litigation or other contingent liabilities, which may result in cash and noncash charges, any or all of which could have a material adverse effect on the consolidated financial statements.
15. |
|
Non-Cash Financing Activities – During fiscal year 2006, the Company purchased delivery equipment of $2.6 million financed by a note payable. During fiscal year 2006, the Company issued shares with an award date value of $0.2 million, in settlement of management incentive compensation plan liabilities.
|
|
The Company operates in one reportable operating segment, furniture products. Our operations involve the distribution of manufactured and imported products consisting of a broad line 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 for residential, recreational vehicle, and commercial 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. The Company has no foreign manufacturing operations and all of our long-lived assets are located within the United States.
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, |
| |||||||
|
| 2008 |
| 2007 |
| 2006 |
| |||
Residential |
| $ | 258,084 |
| $ | 259,710 |
| $ | 267,714 |
|
|
|
|
|
|
|
|
|
|
|
|
Recreational Vehicle |
|
| 56,090 |
|
| 66,165 |
|
| 71,981 |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
| 91,481 |
|
| 99,525 |
|
| 86,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 405,655 |
| $ | 425,400 |
| $ | 426,408 |
|
| SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION– UNAUDITED |
The previously issued condensed consolidated balance sheets as of March 31, 2008, December 31, 2007, September 30, 2007, March 31, 2007, December 31, 2006 and September 30, 2006 contained an error as discussed in Note 19. The effect of the restatement on certain of the Company’s previously reported quarterly financial statements on Form 10-Q are as follows (amounts in thousands):
Consolidated Balance Sheets |
| Quarter Ended March 31, 2008 |
| |||||||
|
| As Reported |
| Adjustment |
| As Restated |
| |||
Deferred income taxes |
| $ | 3,420 |
| $ | 850 |
| $ | 4,270 |
|
Total current assets |
|
| 135,358 |
|
| 850 |
|
| 136,208 |
|
Total assets |
|
| 174,767 |
|
| 850 |
|
| 175,617 |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
| 9,672 |
|
| 2,287 |
|
| 11,959 |
|
Total current liabilities |
|
| 32,010 |
|
| 2,287 |
|
| 34,297 |
|
Total liabilities |
|
| 59,670 |
|
| 2,287 |
|
| 61,957 |
|
Retained earnings |
|
| 103,648 |
|
| (1,437 | ) |
| 102,211 |
|
Total shareholders’ equity |
|
| 115,097 |
|
| (1,437 | ) |
| 113,660 |
|
Total liabilities and shareholders’ equity |
|
| 174,767 |
|
| 850 |
|
| 175,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts) |
| FOR THE QUARTER ENDED |
| ||||||||||
|
| September 30 |
| December 31 |
| March 31 |
| June 30 |
| ||||
Fiscal 2011: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
| $ | 87,230 |
| $ | 82,821 |
| $ | 85,175 |
| $ | 84,200 |
|
Gross margin |
|
| 19,606 |
|
| 18,825 |
|
| 18,207 |
|
| 20,664 |
|
Net income (1) |
|
| 2,343 |
|
| 2,131 |
|
| 2,455 |
|
| 3,488 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.35 |
| $ | 0.32 |
| $ | 0.37 |
| $ | 0.52 |
|
Diluted |
| $ | 0.34 |
| $ | 0.31 |
| $ | 0.35 |
| $ | 0.50 |
|
Consolidated Balance Sheets |
| Quarter Ended December 31, 2007 |
| |||||||
|
| As Reported |
| Adjustment |
| As Restated |
| |||
Deferred income taxes |
| $ | 3,670 |
| $ | 850 |
| $ | 4,520 |
|
Total current assets |
|
| 144,470 |
|
| 850 |
|
| 145,320 |
|
Total assets |
|
| 184,793 |
|
| 850 |
|
| 185,643 |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
| 12,752 |
|
| 2,287 |
|
| 15,039 |
|
Total current liabilities |
|
| 41,740 |
|
| 2,287 |
|
| 44,027 |
|
Total liabilities |
|
| 69,290 |
|
| 2,287 |
|
| 71,577 |
|
Retained earnings |
|
| 103,653 |
|
| (1,437 | ) |
| 102,216 |
|
Total shareholders’ equity |
|
| 115,503 |
|
| (1,437 | ) |
| 114,066 |
|
Total liabilities and shareholders’ equity |
|
| 184,793 |
|
| 850 |
|
| 185,643 |
|
Consolidated Balance Sheets |
| Quarter Ended September 30, 2007 |
| |||||||
|
| As Reported |
| Adjustment |
| As Restated |
| |||
Deferred income taxes |
| $ | 3,720 |
| $ | 850 |
| $ | 4,570 |
|
Total current assets |
|
| 142,491 |
|
| 850 |
|
| 143,341 |
|
Total assets |
|
| 183,291 |
|
| 850 |
|
| 184,141 |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
| 11,904 |
|
| 2,287 |
|
| 14,191 |
|
Total current liabilities |
|
| 41,617 |
|
| 2,287 |
|
| 43,904 |
|
Total liabilities |
|
| 68,956 |
|
| 2,287 |
|
| 71,243 |
|
Retained earnings |
|
| 102,640 |
|
| (1,437 | ) |
| 101,203 |
|
Total shareholders’ equity |
|
| 114,335 |
|
| (1,437 | ) |
| 112,898 |
|
Total liabilities and shareholders’ equity |
|
| 183,291 |
|
| 850 |
|
| 184,141 |
|
35
Consolidated Balance Sheets |
| Quarter Ended March 31, 2007 |
| |||||||
|
| As Reported |
| Adjustment |
| As Restated |
| |||
Deferred income taxes |
| $ | 4,190 |
| $ | 850 |
| $ | 5,040 |
|
Total current assets |
|
| 134,554 |
|
| 850 |
|
| 135,404 |
|
Total assets |
|
| 179,532 |
|
| 850 |
|
| 180,382 |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
| 13,851 |
|
| 2,287 |
|
| 16,138 |
|
Total current liabilities |
|
| 43,518 |
|
| 2,287 |
|
| 45,805 |
|
Total liabilities |
|
| 70,689 |
|
| 2,287 |
|
| 72,976 |
|
Retained earnings |
|
| 97,435 |
|
| (1,437 | ) |
| 95,998 |
|
Total shareholders’ equity |
|
| 108,843 |
|
| (1,437 | ) |
| 107,406 |
|
Total liabilities and shareholders’ equity |
|
| 179,532 |
|
| 850 |
|
| 180,382 |
|
Consolidated Balance Sheets |
| Quarter Ended December 31, 2006 |
| |||||||
|
| As Reported |
| Adjustment |
| As Restated |
| |||
Deferred income taxes |
| $ | 4,480 |
| $ | 850 |
| $ | 5,330 |
|
Total current assets |
|
| 137,214 |
|
| 850 |
|
| 138,064 |
|
Total assets |
|
| 175,865 |
|
| 850 |
|
| 176,715 |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
| 16,256 |
|
| 2,287 |
|
| 18,543 |
|
Total current liabilities |
|
| 40,418 |
|
| 2,287 |
|
| 42,705 |
|
Total liabilities |
|
| 67,717 |
|
| 2,287 |
|
| 70,004 |
|
Retained earnings |
|
| 96,767 |
|
| (1,437 | ) |
| 95,330 |
|
Total shareholders’ equity |
|
| 108,148 |
|
| (1,437 | ) |
| 106,711 |
|
Total liabilities and shareholders’ equity |
|
| 175,865 |
|
| 850 |
|
| 176,715 |
|
Consolidated Balance Sheets |
| Quarter Ended September 30, 2006 |
| ||||||||
|
| As Reported |
| Adjustment |
| As Restated |
| ||||
Deferred income taxes |
| $ | 4,220 |
| $ | 850 |
| $ | 5,070 |
| |
Total current assets |
|
| 142,127 |
|
| 850 |
|
| 142,977 |
| |
Total assets |
|
| 179,092 |
|
| 850 |
|
| 179,942 |
| |
|
|
|
|
|
|
|
|
|
|
| |
Accounts payable |
|
| 15,131 |
|
| 2,287 |
|
| 17,418 |
| |
Total current liabilities |
|
| 44,604 |
|
| 2,287 |
|
| 46,891 |
| |
Total liabilities |
|
| 71,904 |
|
| 2,287 |
|
| 74,191 |
| |
Retained earnings |
|
| 96,212 |
|
| (1,437 | ) |
| 94,775 |
| |
Total shareholders’ equity |
|
| 107,188 |
|
| (1,437 | ) |
| 105,751 |
| |
Total liabilities and shareholders’ equity |
|
| 179,092 |
|
| 850 |
|
| 179,942 |
|
(in thousands, except per share amounts) |
| FOR THE QUARTER ENDED |
| ||||||||||||
|
| September 30 |
|
| December 31 |
| March 31 |
|
| June 30 |
| ||||
Fiscal 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
| $ | 100,900 |
|
| $ | 105,986 |
| $ | 98,138 |
|
| $ | 100,630 |
|
Gross margin |
|
| 19,763 |
|
|
| 22,070 |
|
| 18,019 |
|
|
| 18,637 |
|
Net income (1) (2) (3) |
|
| 1,183 |
|
|
| 1,868 |
|
| 849 |
|
|
| 336 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 0.18 |
|
|
| 0.28 |
|
| 0.13 |
|
|
| 0.05 |
|
Diluted |
|
| 0.18 |
|
|
| 0.28 |
|
| 0.13 |
|
|
| 0.05 |
|
(in thousands, except per share amounts) |
| FOR THE QUARTER ENDED |
| ||||||||||||
|
| September 30 |
|
| December 31 |
| March 31 |
|
| June 30 |
| ||||
Fiscal 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
| $ | 101,340 |
|
| $ | 105,700 |
| $ | 104,071 |
|
| $ | 114,289 |
|
Gross margin |
|
| 18,405 |
|
|
| 19,774 |
|
| 20,478 |
|
|
| 22,566 |
|
Net income (4) |
|
| 563 |
|
|
| 1,409 |
|
| 1,522 |
|
|
| 5,841 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 0.09 |
|
|
| 0.21 |
|
| 0.23 |
|
|
| 0.89 |
|
Diluted |
|
| 0.09 |
|
|
| 0.21 |
|
| 0.23 |
|
|
| 0.89 |
|
The sum of the per share amounts for the quarters may not equal the total for the year due to the treasury stock method.
| |
(1) | The quarter ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts) |
| FOR THE QUARTER ENDED |
| ||||||||||
|
| September 30 |
| December 31 |
| March 31 |
| June 30 |
| ||||
Fiscal 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
| $ | 75,941 |
| $ | 83,524 |
| $ | 81,451 |
| $ | 85,550 |
|
Gross margin |
|
| 16,556 |
|
| 20,041 |
|
| 18,033 |
|
| 20,151 |
|
Net income |
|
| 1,380 |
|
| 2,964 |
|
| 2,320 |
|
| 4,137 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.21 |
| $ | 0.45 |
| $ | 0.35 |
| $ | 0.62 |
|
Diluted |
| $ | 0.21 |
| $ | 0.45 |
| $ | 0.34 |
| $ | 0.61 |
|
|
|
|
|
|
|
|
|
|
On September 8, 2008, the Board of Directors approved the closure of its New Paris, Indiana recreational vehicle seating manufacturing facility and the end of manufacturing operations at its Lancaster, Pennsylvania facility. The Company announced the closures on September 10, 2008. The Company expects manufacturing at both locations to cease November 9, 2008. The Company intends to continue its warehousing and shipping operations in Lancaster.
Approximately 250 employees will be affected by this consolidation of manufacturing operations over the next two to three months. The Company estimates the manufacturing consolidation and transition will be completed by December 31, 2008 and anticipates pre-tax restructuring and impairment charges in the first half of fiscal year 2009 to be in the range of $2.0 million to $2.5 million.
|
|
The Company has restated the consolidated financial statements as of and for the fiscal years ended June 30, 2007 and 2006.
During the 2008 fiscal year-end closing process the Company identified unsupported reconciling amounts that reduced accounts payable balances at a material consolidated subsidiary. After completing analysis of these unsupported reconciling amounts, it was determined that they principally related to the historical accounting at the subsidiary for the capitalization of inventory costs and the clearing of accruals from the accounts payable relating to transactions occurring in fiscal years 2004 and 2005. The historical subsidiary inventory standard costing system, established prior to the warehousing of inventory in China, did not appropriately differentiate the costing of inventory balances warehoused in China versus the United States. The warehoused inventories in China inappropriately included freight-in costs for shipments to the United States that had not been incurred. During fiscal year 2006, the Company modified the subsidiary’s inventory costing process which rectified the costing error in inventory on a prospective basis but resulted in the reclassification of the historical error in inventory freight costs as a reduction to accounts payable with the erroneous belief that the reduction to accounts payable would offset future freight invoices. As a result of this error, the $2.287 million reduction within accounts payable remained until identified during the fiscal year 2008 closing process.
The effect of the restatement on the Company’s previously reported consolidated financial statements are as follows (amounts in thousands, except per share data):
Consolidated Statements of Changes in Shareholders’ Equity |
| Fiscal Year Ended June 30, 2006 |
| |||||||
|
| As Reported |
| Adjustment |
| As Restated |
| |||
Retained earnings |
| $ | 96,502 |
| $ | (1,437 | ) | $ | 95,065 |
|
Total shareholders’ equity |
|
| 107,502 |
|
| (1,437 | ) |
| 106,065 |
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Cash Flows |
| Fiscal Year Ended June 30, 2006 |
| |||||||
|
| As Reported |
| Adjustment |
| As Restated |
| |||
OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
Inventories |
| $ | (14,825 | ) | $ | 2,287 |
| $ | (12,538 | ) |
Accounts payable |
|
| (492 | ) |
| (2,287 | ) |
| (2,779 | ) |
Consolidated Balance Sheets |
| Fiscal Year Ended June 30, 2007 |
| |||||||
|
| As Reported |
| Adjustment |
| As Restated |
| |||
Deferred income taxes |
| $ | 3,850 |
| $ | 850 |
| $ | 4,700 |
|
Total current assets |
|
| 142,516 |
|
| 850 |
|
| 143,366 |
|
Total assets |
|
| 184,164 |
|
| 850 |
|
| 185,014 |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
| 13,607 |
|
| 2,287 |
|
| 15,894 |
|
Total current liabilities |
|
| 43,177 |
|
| 2,287 |
|
| 45,464 |
|
Total liabilities |
|
| 70,049 |
|
| 2,287 |
|
| 72,336 |
|
Retained earnings |
|
| 102,421 |
|
| (1,437) |
|
| 100,984 |
|
Total shareholders’ equity |
|
| 114,115 |
|
| (1,437) |
|
| 112,678 |
|
Total liabilities and shareholders’ equity |
|
| 184,164 |
|
| 850 |
|
| 185,014 |
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Changes in Shareholders’ Equity |
| Fiscal Year Ended June 30, 2007 |
| |||||||
|
| As Reported |
| Adjustment |
| As Restated |
| |||
Retained earnings |
| $ | 102,421 |
| $ | (1,437 | ) | $ | 100,984 |
|
Total shareholders’ equity |
|
| 114,115 |
|
| (1,437 | ) |
| 112,678 |
|
In addition, the opening retained earnings restatement adjustment of $1,437 thousand was comprised of $1,138 thousand and $299 thousand for the fiscal years ended June 30, 2005 and 2004, respectively.
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, the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e)) under the Securities Act of 1934, as amended) were not effective as of June 30, 2008 because of a material weakness in our internal control over financial reporting.2011.
Changes in internal control over financial reporting – During the quarter endedyear-ended June 30, 2008,2011, there was no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that has materially affected, or is 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, 2008.2011. 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. Based on that criteria, the material weakness described below has caused our management to conclude we did not maintain effective internal control over financial reporting as of June 30, 2008.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
As a result of their assessment, the Company’s CEO and CFO identified a material weakness in the Company’s internal control over financial reporting. The material weakness is related to the design and operating effectiveness of controls over the Company’s material consolidated subsidiary’s reconciliation of accounts payable records to the general ledger. Specifically, the subsidiary maintained an overly complex accounts payable account structure, which when combined with the processing of a large volume of transactions led to the subsidiary’s inability to perform adequate review procedures to timely identify reconciling amounts and the related reversals. This deficiency obscured the existence of unsupported reconciling amounts resulting in the untimely identification of the errors in the restatement discussed in Note 19 to the Consolidated Financial Statements in this Annual Report on Form 10-K.
The Company’s management is committed to continuing efforts aimed at improving the design adequacy and operational effectiveness of its system of internal control and intends to take all necessary steps to address this material weakness. Subsequent to June 30, 2008, the Company began taking the following measures to address the material weakness identified above and to enhance internal control over monthly, quarterly and year-end financial reporting:
simplifying the account structure surrounding the accounts payable transactions by reducing the number of general ledger accounts used to record accounts payable,
improving the accounts payable reconciliation process by revising the automatic postings to accounts payable, and
enhancing the review and approval of the accounts payable reconciliation process with our subsidiary associates.
The Company believes that these remediation actions, once they are fully implemented and operating for a sufficient period of time, will improve the Company’s internal controls over financial reporting and are sufficient to remediate the material weakness described above. While steps have been taken to remediate the material weakness, additional measures may be required. Management will assess the effectiveness of the remediation efforts in connection with management’s tests of internal control over financial reporting during fiscal year 2009.
Deloitte & Touche LLP, the independent registered public accounting firm that has audited our consolidated financial statements included in this Annual Report on Form 10-K, has issued their attestation report on our internal control over financial reporting, a copy of which is included in this Annual Report on Form 10-K.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of Flexsteel Industries, Inc.
We have audited Flexsteel Industries, Inc. and subsidiaries (the “Company’s”) internal control over financial reporting as of June 30, 2008, based on criteria established in Internal Control — Integrated Framework issued byFramework. Based on those criteria, management concluded that 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 Controls 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 that 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.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment: the design and operating effectiveness of controls over the Company’s material consolidated subsidiary’s reconciliation of accounts payable records to the general ledger were not effective. This matter represents a design and operating deficiency, and, based upon misstatements requiring correction to the consolidated financial statements that impacted accounts payable, retained earnings, and deferred income tax accounts, constitutes a material weakness. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended June 30, 2008, of the Company and this report does not affect our report on such financial statements and financial statement schedule.
In our opinion, because of the effect of the material weakness identified above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of June 30, 2008, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.2011.
We do not express an opinion on any other form of assurance on management’ statements regarding the measures taken to address the material weakness identified in Management’s Annual Report over Financial Reporting, and the statements made by management regarding the remediation efforts.
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 schedules as of and for the year ended June 30, 2008, of the Company and our report dated September 10, 2008 expressed an unqualified opinion on those financial statements and financial statement schedule.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
September 10, 2008
Item 9B. | Other Information |
None.
PART III
Item 10. | Directors, Executive Officers and Corporate Governance |
The information identifying directors of the Company, the Audit and Ethics Committee, the Audit and Ethics Committee Expert and Section 16(a) beneficial ownership reporting compliance, will be contained in the Company’s fiscal 20082011 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, of the Board of Directors”” “Corporate Governance – Nomination Matters” and “Compliance with Section“Section 16(a) of the Securities Exchange Act of 1934” and areBeneficial Ownership Reporting Compliance” is incorporated herein by reference.
The Company has adopted a code of ethics called theGuidelines for Business Conduct that applies to the Company’s employees, including the principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. A copy of the code of ethics is posted on our website at www.flexsteel.com.www.flexsteel.com.
The executive officers of the Company, their ages, positions (in each case as of June 30, 2008)2011), and the month and year they were first elected or appointed an officer of the registrant, are as follows:
|
| |
Name (age) | Position (date first became officer) | |
Ronald J. Klosterman |
| President & Chief Executive Officer |
James R. Richardson |
| Senior Vice President of Residential Sales and Marketing |
Thomas D. Burkart |
| Senior Vice President of Vehicle Seating |
Patrick M. Crahan |
| Senior Vice President of Commercial Seating |
Jeffrey T. Bertsch |
| Senior Vice President of Corporate Services |
Donald D. Dreher |
| Senior Vice President (2004), President & CEO of DMI Furniture, Inc. |
James E. Gilbertson |
| Senior Vice President of Vehicle Seating |
Timothy E. Hall |
| Senior Vice President-Finance, Chief Financial Officer, Secretary & |
Each named executive officer has held the same office or an executive or management position with the Company for at least five years except Mr. Dreher who has served as President and CEO of DMI Furniture, Inc. from 1986 to present.
Item 11. | Executive Compensation |
The information identifying executive compensation will be contained in the Company’s fiscal year 20082011 definitive proxy statement to be filed with the Securities and Exchange Commission under the sections captioned “Executive Compensation,” and “Director Compensation,” and “Corporate Governance - Compensation Committee Interlocks and Insider Participation” and areis incorporated herein by reference.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information identifying beneficial ownership of stock and supplementary data will be contained in the Company’s fiscal year 20082011 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” and areis incorporated herein by reference.
Item 13. | Certain Relationships and Related Transactions, and Director Independence |
This information will be contained under the headingsections “Interest of Management and Others in Certain Transactions” and “Corporate Governance – Board of Directors” in the Company’s fiscal year 20082011 definitive proxy statement to be filed with the Securities and Exchange Commission and is incorporated herein by reference.
Item 14. | Principal Accountant Fees and Services |
Deloitte & Touche LLP was the Company’s independent registered public accounting firm in fiscal 2008.2011. In addition to performing the audit of the Company’s consolidated financial statements, Deloitte & Touche LLP provided various audit-related services during fiscal 2008.2011.
The Audit and Ethics Committee pre-approves both the type of services to be provided by Deloitte & Touche LLP and the estimated fees related to these services. The Audit and Ethics Committee reviewed professional services and the possible effect on Deloitte & Touche LLP’s independence was considered. The Audit and Ethics Committee has considered and found the provision of services for non-audit services compatible with maintaining Deloitte & Touche LLP’s independence. All services provided by Deloitte & Touche LLP during fiscal 20082011 were pre-approved by the Audit and Ethics Committee.
The aggregate fees billed for each of the past two fiscal years ended June 30 for each of the following categories of services are set forth below:
|
| 2008 |
| 2007 |
| ||
Audit Fees (1) |
| $ | 578,000 |
| $ | 409,000 |
|
Audit Related Fees (2) |
|
| 38,000 |
|
| 50,000 |
|
Tax Fees (3) |
|
| 22,000 |
|
| — |
|
All Other Fees (4) |
|
| — |
|
| — |
|
Total |
| $ | 638,000 |
| $ | 459,000 |
|
|
|
|
|
|
|
|
|
|
| 2011 |
| 2010 |
| ||
Audit Fees (1) |
| $ | 357,500 |
| $ | 376,000 |
|
Tax Fees (2) |
|
| 15,000 |
|
| — |
|
|
| $ | 372,500 |
| $ | 376,000 |
|
(1) | Professional fees and expenses for the audit of financial statements |
(2) |
|
| Professional fees and expenses for tax services billed in fiscal |
|
|
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.
The financial statements of the Company are set forth above in Item 8. | ||
| (2) | Schedules |
The following financial statement schedules for the years ended June 30, 2008, 20072011, 2010 and 20062009 are submitted herewith:
SCHEDULE II
RESERVES
For the Years Ended June 30, 2008, 20072011, 2010 and 20062009
Description |
| Balance at Beginning of Year |
| Additions Charged to Income |
| Deductions from Reserves |
| Balance at End of Year |
| ||||
Allowance for Doubtful Accounts: |
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|
|
|
|
|
|
|
|
|
|
|
|
2008 |
| $ | 2,090,000 |
| $ | 1,050,000 |
| $ | (1,030,000 | ) | $ | 2,110,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
| $ | 2,820,000 |
| $ | — |
| $ | (730,000 | ) | $ | 2,090,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
| $ | 3,060,000 |
| $ | 850,000 |
| $ | (1,090,000 | ) | $ | 2,820,000 |
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|
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|
Description |
| Balance at |
| Additions |
| Deductions |
| Balance at |
| ||||
Allowance for Doubtful Accounts: |
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|
|
|
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2011 |
| $ | 2,020,000 | $ | 870,000 | $ | (890,000 | ) | $ | 2,000,000 | |||
2010 |
| $ | 1,760,000 | $ | 920,000 | $ | (660,000 | ) | $ | 2,020,000 | |||
2009 |
| $ | 2,110,000 | $ | 1,240,000 | $ | (1,590,000 | ) | $ | 1,760,000 |
Other schedules are omitted because they are not required or are not applicable or because the required information is included in the financial statements.
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) | Exhibit No. |
| 3.1 |
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| 3.2 |
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| 10.1 | 1995 Stock Option Plan incorporated by reference from the 1995 Flexsteel definitive proxy statement. * |
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| 1999 Stock Option Plan incorporated by reference from the 1999 Flexsteel definitive proxy statement.* |
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| |
10.3 | Flexsteel Industries, Inc. Voluntary Deferred Compensation Plan |
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| |
10.4 | Flexsteel Industries, Inc. Restoration Retirement Plan |
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| |
10.5 | Flexsteel Industries, Inc. Senior Officer Supplemental Retirement Plan |
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| |
10.6 | 2002 Stock Option Plan |
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| |
10.7 | Agreement and Plan of Merger, dated as of August 12, 2003, by and among Flexsteel, Churchill Acquisition Corp. and DMI (incorporated by reference to Exhibit 99(d)(1) of Flexsteel Industries, Inc.’s Tender Offer Statement on Schedule TO filed with the Securities and Exchange Commission on August 20, 2003) |
|
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| Flexsteel Industries, Inc. 2006 Stock Option Plan |
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| Employment Agreement dated October 1, 2006 between Flexsteel Industries, Inc. and Donald D. Dreher |
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| Amendment to Employment Agreement dated June 27, 2008 between Flexsteel Industries, Inc. and Donald D. Dreher |
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| |
10.11 | Flexsteel 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). * |
10.12 | 2009 Stock Option Plan (incorporated by reference to Appendix A from the 2009 Flexsteel definitive proxy statement). * | |
10.13 | Credit Agreement dated June 7, 2011 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 9, 2011). | |
10.14 | Revolving Line of Credit Note dated June 7, 2011 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 9, 2011). | |
| 21.1 | Subsidiaries of the Company. Filed herewith. |
| 23 | Consent of Independent Registered Public Accounting Firm. Filed herewith. |
| 31.1 |
|
| 31.2 |
|
| 32 | Certification 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. |
*Management contracts, compensatory plans and arrangements required to be filed as an exhibit to this report. |
*Management contracts, compensatory plans and arrangements required to be filed as an exhibit to this report.
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.
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Date: | August 19, 2011 | FLEXSTEEL INDUSTRIES, INC. | |||
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By: | /S/ Ronald J. Klosterman |
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Chief Executive Officer | |||||
and | |||||
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By: | /S/ Timothy E. Hall | ||||
Timothy E. Hall | |||||
Chief Financial Officer | |||||
and | |||||
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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.
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Date: |
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| /S/ Thomas M. Levine | |
Thomas M. Levine | ||||
Director | ||||
Date: | August 19, 2011 | /S/ Robert J. Maricich | ||
Robert J. Maricich | ||||
Director | ||||
Date: | August 19, 2011 | /S/ Eric S. Rangen | ||
Eric S. Rangen | ||||
Director | ||||
Date: | August 19, 2011 | /S/ James R. Richardson | ||
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| James R. Richardson | |
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| Director | |
Date: | August 19, 2011 | /S/ Nancy E. Uridil | ||
Nancy E. Uridil | ||||
Director |
33