Flexsteel Industries, Inc. — FY2017 Form 10-K Summary
Period clarification: The supplied filing is for the fiscal year ended June 30, 2017, not 2015 Q4 as indicated in the request metadata. It also provides unaudited quarterly results, including the quarter ended June 30, 2017. Unless noted otherwise, financial amounts below are in millions of dollars.
Business context and reporting period
Flexsteel manufactures, imports and markets upholstered and wood furniture for residential and contract markets. It reports one segment, furniture products. FY2017 sales were primarily residential ($396.1 million) and contract ($72.7 million). The company has U.S. manufacturing and distribution operations, a Mexico facility and offshore sourcing.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $468.8 | $500.1 |
| Gross profit / margin | $108.7 / 23.2% | $113.7 / 22.7% |
| Operating income / margin | $37.3 / 7.9% | $38.1 / 7.5% |
| Net income / net margin | $23.8 / 5.1% | $24.2 / 4.8% |
| Diluted EPS | $3.02 | $3.12 |
| Cash from operations | $26.4 | $54.4 |
| Capital expenditures | $13.5 | $7.4 |
At June 30, 2017, cash and cash equivalents were $28.9 million and short-term investments were $18.0 million. Working capital was $158.1 million, with a 5.2-to-1 current ratio. The company reported no debt outstanding. Its new $10 million short-term facility had $8.7 million available after $1.3 million of letters of credit; a separate $10 million line was also undrawn. Operating lease commitments totaled $14.3 million.
For the quarter ended June 30, 2017, sales were $117.4 million, gross profit was $26.8 million, net income was $6.0 million and diluted EPS was $0.76. The comparable FY2016 quarter recorded sales of $122.8 million, gross profit of $29.4 million, net income of $6.2 million and diluted EPS of $0.79.
Changes versus prior comparable periods
- FY2017 sales declined 6.3%; residential sales fell 5.9% and contract sales fell 8.2%, primarily due to lower sales volume.
- Gross margin increased 0.5 percentage point to 23.2%, while SG&A declined slightly as a share of sales, to 15.5% from 15.6%.
- Net income fell 1.9% and diluted EPS decreased from $3.12 to $3.02, despite the improved gross and operating margins.
- Operating cash flow fell to $26.4 million from $54.4 million, with the prior year benefiting from a substantial inventory reduction; inventory increased $13.5 million in FY2017.
- Cash dividends declared per share rose to $0.80 from $0.72. Capital spending increased, including $10.6 million for the business information system project.
Outlook, risks, and unusual items
- Management expected moderate revenue growth in FY2018, tempered by an intentional sales decrease to certain contract customers. It cited improving delivery and operational efficiency as priorities.
- Management anticipated FY2018 spending of $5 million on the business information system project, plus $2 million of related SG&A expense; the system was expected to be completed during FY2018. It also expected $7 million of operating capital expenditures and planned $25 million for a new Dubuque manufacturing facility over the following two fiscal years.
- The company received $1.2 million of insurance reimbursement related to previously settled Indiana litigation in FY2017; it stated that recovery of settlement and defense costs was complete.
- In July 2017, after fiscal year-end, the EPA demanded that Flexsteel perform remediation and pay $5.5 million of remediation and past response costs for an Indiana groundwater site. Flexsteel disputed responsibility and recorded no liability.
- Multi-employer pension plans pose potential additional exposure; the company estimated cumulative withdrawal costs of approximately $12.3 million. It also reported that one plan was in the red zone and believed its actuarial liabilities substantially exceeded plan assets.
- Other identified risks include furniture-industry competition and economic cyclicality, supply-chain and import disruption, raw-material costs and tariffs, changing consumer tastes, labor relations, legal and environmental matters, and implementation of the new business information system.
- Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective.
Important facts for investors to verify
- Confirm the intended reporting period: this filing covers FY2017, although the request metadata says 2015 Q4.
- Track sales volumes, particularly residential upholstered and ready-to-assemble products and contract sales, alongside management’s FY2018 growth outlook.
- Assess whether operating cash flow recovers and whether the inventory build supports demand without creating excess or obsolete stock.
- Monitor timing, costs and operational risks of the business information system implementation and the planned Dubuque facility investment.
- Review developments in the EPA matter, including potential remediation liability, and changes in multi-employer pension funding or withdrawal exposure.
- Check the status and terms of the credit facilities, lease commitments and dividend policy as capital spending proceeds.