Flexsteel Industries, Inc. — Form 10-K Summary
Period note: The supplied filing is for the fiscal year ended June 30, 2018, not 2016 Q4 as indicated in the request metadata. It also reports fiscal 2018, 2017 and 2016 results. Amounts below are in U.S. dollars; financial figures are in millions unless noted.
Business context and reporting period
Flexsteel manufactures, imports and markets upholstered and wood furniture for residential and contract customers, primarily in the U.S. and Canada. It reports one segment. Fiscal 2018 sales were $413.7 million residential and $75.5 million contract. The company completed the first deployment of its SAP S/4 HANA business system in fiscal Q4; about 20% of operations had transitioned by year-end.
Key financial metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $489.2 | $468.8 |
| Gross profit / gross margin | $98.2 / 20.1% | $108.7 / 23.2% |
| Operating income / margin | $24.5 / 5.0% | $37.3 / 7.9% |
| Net income | $17.7 | $23.8 |
| Diluted EPS | $2.23 | $3.02 |
| Cash from operating activities | $27.3 | $26.4 |
| Capital expenditures | $29.4 | $13.5 |
| Cash and short-term investments at year-end | $43.7 | $46.8 |
| Working capital / current ratio | $148.7 / 4.6 | $158.1 / 5.2 |
At June 30, 2018, total assets were $284.3 million, shareholders’ equity was $241.7 million, and the company reported no debt. It had $27.8 million cash, $16.0 million in short-term investments, and $8.7 million available under a $10 million working-capital facility after letters of credit. A separate $10 million line was also undrawn. Dividends declared were $0.88 per share, versus $0.80 in FY2017.
Fiscal Q4 2018 net sales were $113.1 million, gross profit $17.0 million, net income $2.2 million and diluted EPS $0.28. The comparable FY2017 quarter reported sales of $117.4 million, gross profit of $26.8 million, net income of $6.0 million and diluted EPS of $0.76.
Material changes versus the prior comparable period
- Full-year sales increased 4.4%; residential sales rose 4.4% and contract sales 3.9%. Management cited strong retail residential demand and contract growth in recreational and hospitality markets, partly offset by a 13% decline in e-commerce sales.
- Gross margin fell 3.1 percentage points to 20.1%, and net income declined 25.7%. The company attributed margin pressure primarily to higher U.S. and Mexican labor costs, lower productivity during compensation changes, increased costs for polyfoam and plywood, and customer service penalties during the SAP transition.
- FY2018 included a $3.6 million environmental remediation accrual and a $1.8 million pre-tax gain on the sale of a facility. FY2017 included $1.2 million of litigation settlement reimbursements.
- A $4.4 million year-to-date correction reclassified customer incentives from SG&A expense to a reduction in net sales. The filing says this corrected an immaterial prior-period error and had no effect on operating income, net income or EPS.
- Capital spending more than doubled, including $13.8 million for a new Dubuque manufacturing facility and $12.6 million for the business information system.
Outlook, risks, contingencies and unusual items
- For FY2019, management expected continued sales growth, inflationary pressure on raw materials and moderating labor-cost increases. It gave no numeric sales or earnings guidance; it expected a 25%–27% effective tax rate.
- Management targeted gross-margin improvement through operational execution, pricing and service-level improvements. It anticipated $9 million of FY2019 capital expenditures and $3 million of SG&A expense related to the business system project.
- Tariffs on imported furniture and components from China were identified as a significant earnings risk. The company planned to seek customer price increases and alternative supply-chain options if tariffs took effect.
- The remaining SAP deployment was rescheduled for FY2020. Management cited additional testing and implementation time as risk mitigation; the transition had already disrupted e-commerce product placement and customer service.
- The EPA issued an order concerning the Lane Street groundwater Superfund Site. Flexsteel disputes causing or contributing to contamination, but accrued $3.6 million. Enforcement was suspended while environmental testing and an administrative consent order were being pursued; the filing says the agreement was not finalized as of August 31, 2018. Insurance recovery and ultimate liability remain uncertain.
- The company ran a voluntary field modification for certain motion-furniture switches. The CPSC notified the company in August 2018 that no further action was required and it would not oversee a recall.
- Estimated cumulative cost to exit the company’s multi-employer pension plans was approximately $13.7 million. The Central States plan was in the red funding zone.
- Other cited risks include competitive pricing, supply-chain and tariff disruption, raw-material costs, changing consumer tastes, economic cycles, labor availability, litigation and regulatory compliance. Deloitte issued unqualified audit opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether revenue growth can translate into margin recovery after FY2018’s labor, material and SAP-related pressures.
- The actual impact and duration of any China-related tariffs, including the company’s ability to pass costs through or shift sourcing.
- The final scope, cost, insurance recovery and timing of the Lane Street EPA matter compared with the $3.6 million accrual.
- Whether the FY2020 SAP deployment proceeds as planned without further customer-service, sales or control disruption.
- The funding and potential withdrawal exposure of the multi-employer pension plans, especially the estimated $13.7 million exit cost.
- Whether FY2019 sales growth, planned investment and dividend payments are supported by operating cash flow and the company’s stated liquidity resources.