Flexsteel Industries, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended June 30, 2021. The request metadata says “2019 Q4,” but the supplied filing is the company’s FY2021 annual report; the figures below relate to FY2021.
Business context
Flexsteel manufactures, imports, and sells residential furniture through retailers, dealers, and e-commerce. It reports one segment. The company substantially completed its exit from Vehicle Seating and remaining Hospitality product lines; together, those lines generated less than 1% of FY2021 sales. Residential sales accounted for $476.5 million of total sales.
Financial results and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net sales | $478.9 million | $366.9 million |
| Gross profit / margin | $96.7 million / 20.2% | $53.1 million / 14.5% |
| Operating income (loss) | $31.2 million | ($34.4 million) |
| Net income (loss) | $23.0 million | ($26.8 million) |
| Diluted earnings (loss) per share | $3.09 | ($3.37) |
| Cash from (used in) operations | ($32.7 million) | $18.3 million |
| Cash and cash equivalents at year-end | $1.3 million | $48.2 million |
Sales rose 30.5%, principally from stronger home-furnishings demand through retailers and e-commerce. Gross margin improved 570 basis points, reflecting structural cost reductions, operating efficiencies, and fixed-cost leverage. SG&A fell to $68.0 million from $72.4 million, while restructuring expense declined to $3.4 million from $34.2 million. FY2021 included a $5.9 million gain on asset disposals.
Operating cash use reflected working-capital investment, especially a $90.6 million inventory increase and a $25.2 million increase in receivables, partly offset by higher payables. Year-end inventory was $161.1 million, versus $70.6 million a year earlier. Working capital was $128.8 million; the current ratio was 2.3. The company had $3.5 million outstanding under a secured $25 million credit facility, expiring August 2022. Total liabilities were $128.8 million and shareholders’ equity was $168.0 million.
Capital expenditures were $2.6 million. The company repurchased $29.8 million of shares and declared dividends of $0.45 per share, down from $0.71 in FY2020. Firm customer backlog at June 30, 2021 was $155.3 million, compared with $46.9 million a year earlier.
Material changes and outlook
Results rebounded from FY2020’s loss and lower sales, but FY2021’s operating cash flow was negative despite the return to profitability. The company sold several facilities and received $18.6 million in proceeds during FY2021. At year-end, remaining assets held for sale had a net book value of $0.7 million.
Management’s FY2022 priorities include profitable retail and e-commerce growth, more resilient sourcing and supply chains, expanded manufacturing and distribution capacity, and stronger digital capabilities. Planned FY2022 capital spending is $11.5 million to $13.5 million, including approximately $7 million for manufacturing capacity and $2.5 million for productivity improvements. Management stated that it believes working capital is adequate; it did not provide quantified sales or earnings guidance.
After year-end, the company entered a five-year revolving credit agreement for up to $85 million, secured by substantially all assets other than real property, with a fixed-coverage covenant and other restrictions. It also signed a lease for a planned 507,830-square-foot Mexicali manufacturing facility; the 12-year lease is expected to begin in 2022, with annual base rent of $3.1 million plus related costs.
Risks, contingencies, and unusual items
- COVID-19-related uncertainty, constrained ocean-container availability and elevated freight rates, labor shortages, material inflation, and supply disruption could impair deliveries, sales, and margins. Polyurethane foam availability remained constrained at year-end.
- Management warned that cost inflation may outpace or exceed price recovery. A 25% tariff applied to certain furniture products imported from China; the company also sources from Vietnam, Thailand, and Mexico.
- The company was implementing SAP modules, with additional ordering, sourcing, warehousing, and transportation modules planned for FY2022. Implementation problems could disrupt operations and financial reporting.
- A $3.6 million environmental remediation liability remained recorded for the Lane Street groundwater site. The company disputes responsibility and is pursuing legal and insurance options.
- The Central States multi-employer pension plan was reported in the red zone. The company estimated cumulative withdrawal costs of approximately $20 million but recorded no liability because it intends to continue contributing. The separate Steelworkers plan withdrawal liability was $1.4 million.
- A $7.3 million valuation allowance was recorded against federal and state deferred tax assets. The Hernandez employment class settlement of $0.5 million was paid in February 2021; no accrual remained at year-end.
- Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting. Inventory valuation was identified as a critical audit matter because estimating net realizable value involves judgment.
Important facts for investors to verify
- Whether the unusually large backlog converts to shipments and cash, and whether inventory growth is absorbed without markdowns or margin pressure.
- Whether operating cash flow and cash balances recover as working capital normalizes; review borrowing availability, covenants, and the post-year-end $85 million facility terms.
- Progress on FY2022 capital projects and the Mexicali facility, including the lease’s full costs and expected operational contribution.
- Developments in freight, raw-material and labor costs, product availability, tariffs, and the company’s ability to pass cost increases through to customers.
- Updates on the Lane Street environmental matter, the underfunded Central States pension plan, and realization of deferred tax assets.