FLEXSTEEL INDUSTRIES INC annual report, FY2014

Business context and reporting period

Flexsteel Industries, Inc. manufactures, imports and markets upholstered and wood furniture for residential and commercial markets. This is the Form 10-K for the fiscal year ended June 30, 2015—not a 2013 Q4 filing as indicated in the request metadata. The filing reports one operating segment.

Financial performance and position

Amounts are in millions of dollars except per-share data and ratios.

• Sales increased 6.5%. Residential sales rose 9.3% to $393.1 million, while commercial sales fell 6.6% to $73.8 million.
• Operating margin was 7.4%, versus 5.1%; net margin was 4.8%, versus 3.4%. Gross-margin improvement was attributed primarily to lower inventory write-downs.
• Operating cash flow declined despite higher earnings, chiefly because of cash use for inventories, receivables and other operating assets and liabilities. Inventory increased $15.9 million and receivables $6.6 million.
• The company reported no long-term debt. Current notes payable were $11.9 million; it also had a separate $10 million bank line, of which $1.3 million was outstanding. Current ratio was 3.3, down from 4.5.
• Shareholders’ equity was $186.7 million and total assets were $244.6 million. Dividends declared rose to $0.72 per share from $0.60.

Material changes and unusual items

• Flexsteel invested $32.0 million to acquire and equip its Edgerton, Kansas distribution facility, which began operations in April 2015. Total capital expenditures were $37.4 million.
• FY2015 included a $0.25 million litigation reimbursement recorded in operating income. FY2014 included the $6.25 million Indiana litigation settlement charge; FY2015 also included $0.6 million of legal defense costs, partly offset by $0.2 million of insurance reimbursements.
• Customer backlog increased to $58.6 million at June 30, 2015, from $45.0 million a year earlier.

Outlook, risks and contingencies

• Management expected top-line growth in FY2016, citing backlog and positive order trends. Residential growth was expected from existing and new customers and products; commercial sales were expected to be consistent with FY2015. Operating capital expenditures were estimated at $7 million.
• Management stated it believed cash, operating cash flows and credit arrangements were adequate for FY2016 requirements. The main credit facility was amended in June 2015, reducing availability from $65 million to $30 million; $16.5 million remained available after borrowings and letters of credit.
• The filing gives conflicting maturity dates for that facility: the MD&A says June 30, 2016, while Note 6 says December 31, 2016. The company reported compliance with its financial covenants at year end.
• Insurance recovery related to the Indiana environmental litigation remains uncertain and is being contested in ongoing coverage litigation. The company settled the underlying case without admitting wrongdoing and continues to deny causing or contributing to the contamination.
• Other stated risks include furniture-industry cyclicality and competition, changing consumer tastes, supply-chain disruption and input-cost pressures, economic downturns, labor issues, multi-employer pension-plan exposure, legal and environmental matters, and information-security or business-interruption events. Management said no IT security breach had materially affected the company to date.
• The Central States multi-employer pension plan was in the red zone; the company estimated its cumulative cost to exit the three plans at approximately $9.2 million. This is not presented as a current payable.
• Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management and auditors concluded controls were effective as of June 30, 2015.

Important facts for investors to verify

1. Confirm the intended reporting period: the supplied filing is FY2015, with a fiscal year-end of June 30, 2015.
2. Resolve the credit-facility maturity-date discrepancy and verify current borrowing availability and covenant terms.
3. Assess whether the sharp decline in operating cash flow and low year-end cash were temporary effects of the distribution-center investment and working-capital build.
4. Track residential versus commercial demand, backlog conversion, inventory levels and gross-margin sustainability.
5. Monitor outcomes of the Indiana insurance-coverage litigation and potential multi-employer pension exposure.
6. Review subsequent filings for FY2016 performance against management’s growth expectations and $7 million operating-capex estimate.