Flexsteel Industries, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2014, compared primarily with fiscal 2013. The filing metadata refers to “2012 Q4,” but the filing itself is the FY2014 annual report; it also provides unaudited quarterly results for FY2014 and FY2013.
Business context
Flexsteel manufactures, imports and markets residential and commercial upholstered and wood furniture. It reports one segment, furniture products. FY2014 sales were predominantly residential: $359.6 million residential and $79.0 million commercial. The company uses a mix of domestic manufacturing, imported components and finished goods.
Financial performance and liquidity
| Metric | FY2014 | FY2013 | Change / context |
|---|---|---|---|
| Net sales | $438.5 million | $386.2 million | Up 13.6%; residential sales rose 15.5%, commercial sales 5.3%. |
| Gross margin | 22.9% | 23.4% | Down 0.5 percentage points; management cited discounting on certain case goods. |
| Operating income | $22.3 million | $20.3 million | Includes FY2014 litigation settlement expense of $6.25 million. |
| Net income | $15.0 million | $13.2 million | Up $1.8 million; FY2014 includes settlement costs of $3.9 million after tax. |
| Diluted EPS | $2.00 | $1.80 | FY2014 reported amount includes $0.52 per share of after-tax settlement costs. |
| Operating cash flow | $16.2 million | $5.9 million | Higher primarily with net income; increased inventory and receivables used cash. |
| Cash at year-end | $22.2 million | $10.9 million | Working capital was $128.6 million, versus $113.7 million. |
SG&A was 16.4% of sales versus 18.2% in FY2013. FY2014 included $2.1 million in legal defense costs and approximately $2.8 million of insurance reimbursements recorded as reductions to legal expense. The effective tax rate was 37% in both years. Capital expenditures were $4.2 million, down from $6.2 million.
Flexsteel had no long-term debt outstanding at June 30, 2014. Its $25 million working-capital facility had $22.3 million of borrowing availability after $2.7 million of letters of credit; the company also had an unused unsecured $8 million line of credit. The current ratio was 4.5:1. Total assets were $210.2 million and shareholders’ equity was $166.7 million.
Material changes and unusual items
- Sales growth was led by residential upholstered and ready-to-assemble products; firm order backlog increased to approximately $45.0 million from $43.3 million.
- The Indiana civil litigation was settled for $6.25 million, paid in February 2014, without admission of wrongdoing. The company continues pursuing insurance recovery; coverage remains in question and related proceedings continue.
- Inventory increased $5.5 million to $97.9 million, which management said supported anticipated sales growth.
- Cash dividends declared remained $0.60 per share. The company paid $4.3 million in dividends during FY2014.
Outlook, risks and contingencies
Management expected top-line growth to continue in FY2015, citing order backlog and positive order trends, with growth anticipated from existing customers and products and from expansion of the product portfolio and customer base. It expected upholstered and ready-to-assemble products to lead growth. This is management’s outlook, not a quantified earnings forecast.
FY2015 planned capital spending included approximately $35–$40 million for purchasing and equipping a Midwest distribution center, plus about $6 million for other operating capital. Separately, after year-end, Flexsteel agreed to buy a 500,000-square-foot property in Edgerton, Kansas, for $24.1 million, using available cash and borrowing capacity. Management stated it believed liquidity and credit resources were adequate for operating needs and these initiatives.
- Key risks include cyclical demand for deferrable furniture purchases, competition and pricing pressure, raw-material and labor cost changes, supply-chain disruption, changing consumer tastes, and reliance on key employees.
- Flexsteel participates in three multi-employer pension plans. One reported plan was in the red zone; the company disclosed an estimated cumulative cost to exit its plans of approximately $8.9 million at June 30, 2014.
- Other exposures include product liability, environmental compliance, labor relations, information-system disruption and uncertain insurance recovery related to litigation.
- The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether FY2015 sales growth and demand in upholstered and ready-to-assemble products materialized, and how backlog converted to sales.
- How margins developed after the FY2014 decline and whether discounting, input costs or product mix continued to pressure profitability.
- The final cost, timing and funding of the Midwest distribution center investment and the Edgerton property purchase.
- Any insurance recoveries, additional costs or material developments in the Indiana litigation and coverage proceedings.
- Changes in multi-employer pension plan funding status, potential withdrawal exposure and required contributions.