Flexsteel Industries, Inc. — FY2012 Form 10-K Summary
Period note: The supplied filing is the annual report for the fiscal year ended June 30, 2012, not a 2010 Q4 filing. It also provides unaudited quarterly figures, including the quarter ended June 30, 2012.
Business context
Flexsteel manufactures, imports and markets upholstered and wooden furniture for residential and commercial customers. It reports one segment. Residential sales were 78% of FY2012 revenue; no single customer accounted for more than 10% of sales. Former CEO Ronald Klosterman retired at fiscal year-end; Karel Czanderna became CEO on July 1, 2012.
Key financial results
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales | $352.1 million | $339.4 million |
| Gross margin | $85.3 million; 24.2% | $77.3 million; 22.8% |
| Operating income | $20.2 million; 5.8% of sales | $15.9 million; 4.7% of sales |
| Net income | $13.1 million | $10.4 million |
| Diluted EPS | $1.86 | $1.50 |
| Cash from operations | $9.0 million | $13.8 million |
- Revenue rose 3.7%. Residential sales increased 6.7% to $275.4 million, while commercial sales declined 5.8% to $76.6 million.
- Gross margin improved primarily from better fixed-cost absorption on higher sales and lower freight costs; FY2011 included a $0.6 million inventory write-down.
- SG&A increased to $65.0 million, or 18.4% of sales, from $60.4 million, or 17.8%. FY2012 included $2.4 million of legal and related costs for the Indiana lawsuit; bad-debt expense decreased by $1.0 million.
- Cash and cash equivalents were $14.0 million, down from $17.9 million. Working capital was $103.7 million and the current ratio was 4.3. Inventory increased $9.0 million, partly to support sales and expanded offerings.
- The company had no debt outstanding. Its credit agreement provides up to $15.0 million, including $5.0 million of letter-of-credit availability; management’s discussion separately cites borrowing availability of up to $12.5 million. The company reported covenant compliance.
- Capital expenditures were $10.9 million, including $8.8 million for a corporate office building. FY2012 cash dividends paid were $2.5 million; dividends declared were $0.45 per share.
Changes, outlook and material matters
- Operating income increased $4.4 million year over year; FY2011 also included $1.6 million of facility-closing and inventory-write-down charges.
- Backlog was $38.7 million at June 30, 2012, up from $35.7 million a year earlier but below $49.0 million in 2010.
- Management expected capital expenditures of approximately $6.0 million in FY2013, including $2.6 million to complete the office building, and said cash and credit arrangements were adequate for operating and capital needs.
- Management anticipated moderate overall sales growth through the end of calendar 2012, supported by product additions and residential customer growth. It expected commercial order trends to continue, while cautioning that economic factors and the upcoming elections could weigh on consumer confidence.
- An Indiana groundwater-contamination lawsuit remains unresolved. The company disputes responsibility; damages and insurance coverage were undetermined, and the company could not estimate a reasonably possible loss range. No accrual was recorded. Legal and related expenses were $2.4 million in FY2012.
- Management reported that the three multi-employer pension plans were substantially underfunded based on available information. The estimated cumulative cost to exit was $7.8 million at June 30, 2012.
- Principal risks include weak or delayed demand for discretionary furniture purchases, competition and pricing pressure, raw-material and freight costs, global supply-chain disruption, customer credit exposure, labor matters, pension-plan exposure and litigation. Management described its outlook as guarded amid economic uncertainty.
Important facts for investors to verify
- Confirm the intended reporting period: this source is FY2012, with FY2012 Q4 ending June 30, 2012—not 2010 Q4.
- Review the Indiana lawsuit’s subsequent developments, insurance coverage and potential financial exposure; the filing provides no estimated loss range.
- Assess pension-plan funding and potential withdrawal liability, particularly the underfunded Central States plan and the reported $7.8 million exit-cost estimate.
- Reconcile the credit facility’s stated $15.0 million size and $5.0 million letter-of-credit component with management’s stated borrowing availability of up to $12.5 million.
- Track inventory growth, operating cash generation, residential and commercial demand, and completion costs for the office building.