Flexsteel Industries, Inc. — FY2020 Form 10-K Summary
Period clarification: The request metadata says “2018 Q4,” but the supplied filing is Flexsteel’s Form 10-K for the fiscal year ended June 30, 2020, filed August 28, 2020. Comparisons below are primarily with FY2019.
Business context and reporting period
Flexsteel manufactures, imports and sells residential and contract furniture, primarily in the United States through dealers and e-commerce. It reports one segment. During FY2020, the company continued a transformation and restructuring, including exiting Vehicle Seating and the remaining Hospitality business and closing its Dubuque, Iowa, and Starkville, Mississippi, facilities. The COVID-19 pandemic disrupted operations, supply chains and customer demand; U.S. and Mexico manufacturing facilities temporarily closed and had reopened by the filing date.
Financial performance and condition
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $366.9 million | $443.6 million |
| Gross profit / gross margin | $53.1 million / 14.5% | $69.9 million / 15.8% |
| Operating loss | $34.4 million | $43.2 million |
| Net loss / diluted loss per share | $26.8 million / $3.37 | $32.6 million / $4.13 |
| Cash from operating activities | $18.3 million | $6.7 million |
| Capital expenditures | $3.7 million | $21.3 million |
| Cash and cash equivalents at year-end | $48.2 million | $22.2 million |
| Working capital / current ratio | $128.4 million / 3.4:1 | $118.2 million / 3.5:1 |
| Total assets / shareholders’ equity | $237.3 million / $175.5 million | $254.3 million / $205.4 million |
FY2020 sales fell 17.3%. Residential sales decreased 11.4% to $331.9 million; Contract sales fell 49.3% to $35.0 million, reflecting exited product lines and weaker demand. E-commerce ready-to-assemble furniture sales grew 35.7%, partly offsetting declines. Gross margin contracted 130 basis points, mainly because of lower volume and less favorable product mix and costs to improve delivery lead times.
Reported results included $34.2 million of restructuring expense in operating expenses, plus $3.2 million of restructuring-related inventory impairment recorded in cost of goods sold. A $19.2 million gain on asset disposals, primarily from the Riverside property sale, partly offset operating losses. The company recorded $20.4 million of asset impairment charges, including facility and lease impairments. Cash from operations improved, supported in part by inventory reduction of $23.1 million and lower receivables; investing cash flow was positive largely because of Riverside sale proceeds. Cash dividends paid were $7.0 million, and $1.6 million was spent on repurchases.
No debt was outstanding at June 30, 2020. Two prior unsecured $10 million credit lines expired at that date. In August 2020, Flexsteel obtained a secured $25 million, two-year facility; no borrowings had been made by the filing date. Lease liabilities totaled $12.0 million. The company reported $12.3 million of assets held for sale and $61.8 million of total liabilities.
Material changes versus the prior comparable period
- Sales and gross margin continued to decline, while reported net loss narrowed to $26.8 million from $32.6 million. Both years were loss-making and included substantial unusual charges.
- Operating cash flow rose to $18.3 million from $6.7 million, while capital expenditures dropped to $3.7 million from $21.3 million.
- FY2019 included a $21.3 million ERP impairment; FY2020 instead included significant restructuring and facility impairment costs and the gain on the Riverside property sale.
- Cash increased by $26.0 million, substantially reflecting Riverside sale proceeds. Inventory fell by $23.1 million year over year.
- The quarterly dividend was reduced from $0.22 to $0.05 per share in the fourth quarter of FY2020. A new $8 million repurchase authorization was approved after year-end, following the FY2020 $6 million program.
Outlook, risks and contingencies
Management said FY2021 priorities were preserving cash and liquidity, improving the cost structure, returning to profitability at lower sales levels and improving capital efficiency. Planned FY2021 capital expenditures were $3–$4 million. Management stated it believed working capital was adequate, but could not predict the extent or duration of COVID-19’s effects. The company expected to complete restructuring related to Vehicle Seating and the remaining Hospitality operations during FY2021. Total expected two-year restructuring and related costs were approximately $56–$58 million, of which $25–$26 million were expected to be cash costs; cumulative costs recorded through FY2020 were $55.2 million.
- COVID-19 and demand: Further restrictions, renewed facility closures, recession-driven weakness, customer store closures and shifts to online purchasing could harm sales, supply and operations.
- Supply chain and tariffs: China tariffs, vendor capacity and labor constraints, shipping disruptions and sourcing costs could affect availability, pricing and margins.
- Restructuring execution: Delays or unexpected costs could reduce expected savings, disrupt customer service and pressure cash flow.
- Customer credit: A customer bankruptcy and economic conditions contributed to $5.0 million of higher bad-debt expense. The company warned that customers could delay or fail to pay.
- Environmental matter: A $3.6 million liability remains accrued for the Lane Street Superfund site. Flexsteel disputes responsibility; EPA-related proceedings and insurance recovery remain unresolved. A tolling agreement extends through February 24, 2021.
- Pension exposure: The company recorded a $1.4 million withdrawal liability for one multi-employer plan. It estimated approximately $17.1 million in cumulative costs to exit two other plans but recorded no liability because it intended to continue participating.
- Other matters: A proposed $0.5 million class-wide employment settlement was accrued, subject to court approval. The company also cited ERP conversion and cybersecurity risks. Its independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether sales, gross margin and profitability recover, particularly after product-line exits and as COVID-19 and consumer purchasing patterns evolve.
- Actual cash costs, timing and savings from the restructuring, and proceeds and timing of planned property sales.
- Customer collections and bad-debt exposure, especially following the customer bankruptcy and any extensions of payment terms.
- Resolution and potential cash impact of the EPA matter, employment settlement and multi-employer pension obligations.
- Liquidity and covenant terms under the secured $25 million facility, dividend policy and use of the repurchase authorization.
- Tax recovery and realizability: the filing reports CARES Act carryback tax receivables of $4.5 million for FY2020 and $8.2 million for FY2019, alongside an $8.5 million valuation allowance against deferred tax assets.