Flexsteel Industries, Inc. — FY2019 Form 10-K Summary
Period clarification: The supplied filing is the annual report for the fiscal year ended June 30, 2019, not a 2017 Q4 filing. Financial amounts below are in U.S. dollars; millions unless noted.
Business context and reporting period
Flexsteel manufactures, imports and markets residential and contract upholstered and wood furniture, primarily in the United States and Canada. It reports one segment: furniture products. Fiscal 2019 sales were 84% residential and 16% contract, approximately.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $443.6 million | $489.2 million |
| Gross margin | $69.9 million; 15.8% | $98.2 million; 20.1% |
| Operating income (loss) | ($43.2 million) | $24.5 million |
| Net income (loss) | ($32.6 million); diluted EPS ($4.13) | $17.7 million; diluted EPS $2.23 |
| Cash from operating activities | $6.7 million | $27.3 million |
| Capital expenditures | $21.3 million | $29.4 million |
| Cash and cash equivalents | $22.2 million | $27.8 million |
| Working capital / current ratio | $118.2 million / 3.5 | $148.7 million / 4.6 |
| Total assets / shareholders’ equity | $254.3 million / $205.4 million | $284.3 million / $241.7 million |
The company had no debt outstanding at year-end. It reported $8.7 million available under a $10 million working-capital facility after letters of credit, plus a separate unused $10 million line expiring December 31, 2019. Operating lease obligations totaled $13.6 million. The dividend declared was $0.88 per share.
Material changes versus the prior year
- Sales fell 9.3%; residential sales declined 9.5% to $374.5 million and contract sales fell 8.5% to $69.1 million. Customer-order backlog decreased to $47.4 million from $53.7 million.
- Gross margin contracted 430 basis points. Reported pressures included higher material costs, lower volume and inventory valuation allowances; identified items included $7.7 million of restructuring-related inventory impairment, a $2.6 million foreign VAT valuation allowance and $1.0 million of Dubuque relocation costs.
- Operating results included a $21.3 million ERP-system impairment and $10.0 million of restructuring expense. SG&A also reflected higher ERP costs, pension-plan termination expense, CEO-transition costs and marketing expense.
- Cash from operations fell to $6.7 million. Cash and investments declined by $21.5 million, primarily due to capital spending, restructuring and reduced profitability; short-term investments were nil at year-end versus $16.0 million in FY2018.
Outlook, risks and contingencies
- Management expects to execute a two-year transformation and restructuring program. Estimated pre-tax restructuring and related costs are $48–$53 million, including $36–$40 million cash costs; $10.0 million was recorded in FY2019. Management expects the program to improve profitability, but gives no quantified earnings guidance.
- Management plans to list properties for sale and estimates proceeds of $45–$55 million, subject to market conditions. After year-end, the company agreed to sell its Riverside property for $20.5 million, with closing scheduled for September 26, 2019.
- Management forecast FY2020 capital expenditures of $5–$6 million and stated it believed liquidity and borrowing capacity were adequate, while also considering financing options during the transformation.
- The failed ERP implementation disrupted customer service and ecommerce sales, prompted the impairment, and remains an execution risk. The company also cited China tariffs, competitive pricing, input costs, soft retail demand, supply-chain disruptions and the need to regain market share. It reported that about 42% of sales were imported from China.
- The company continued to accrue $3.6 million for the EPA’s Lane Street groundwater remediation matter while disputing responsibility and evaluating defenses and insurance recovery. California wage-and-hour and PAGA claims were agreed in principle to be settled for $0.5 million; the amount was accrued, with court approval still pending.
- Estimated cumulative cost to exit the company’s multi-employer pension plans was approximately $18 million. Auditors gave unqualified opinions on the financial statements and internal controls; management and the auditor concluded internal control over financial reporting was effective at year-end.
Most important facts for investors to verify
- Whether sales, margins and ecommerce service levels recover after the ERP disruption and China tariff impacts.
- Actual restructuring cash costs, timing, savings achieved and execution effects on customers and liquidity.
- Completion and proceeds from the Riverside sale and other planned real-estate dispositions.
- Available borrowing capacity and cash needs as operating cash generation remains below recent levels.
- Resolution and ultimate cost of the EPA remediation matter, employment settlement approval, and potential multi-employer pension exposure.