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Flexsteel(FLXS) - 2021 Q4 - Annual Report

PART I Item 1. Business Flexsteel Industries, Inc. is a leading US manufacturer, importer, and online marketer of residential furniture, operating in a single segment, having recently exited its Commercial Office, Hospitality, and Vehicle Seating product lines General - Flexsteel is a leading US manufacturer, importer, and online marketer of residential furniture, known for its unique steel drop-in seat spring12 - The company operates in one reportable segment: furniture products for residential and contract markets13 | Application (in thousands) | 2021 | 2020 | 2019 | | :---------- | :-------- | :-------- | :-------- | | Residential | $476,519 | $331,879 | $374,473 | | Contract | $2,406 | $35,047 | $69,115 | | Total | $478,925 | $366,926 | $443,588 | - Substantially completed exit from Commercial Office, Hospitality, and Vehicle Seating product lines in fiscal 2020-202113 Manufacturing and Offshore Sourcing - Operates manufacturing facilities in Georgia and Juarez, Mexico, for flexible production14 - Employs a blended manufacturing and sourcing strategy, combining in-house production with imported components and finished goods to offer diverse products16 Competition - The furniture industry is highly competitive with many manufacturers, none dominating17 - Flexsteel competes on style, quality, price, delivery, service, and durability, highlighting its patented 'guaranteed-for-life Blue Steel Spring' as a key advantage17 Seasonality - Business is not seasonal18 Foreign Operations - Minimal export sales, with 41 employees in Asia for quality control and coordination19 - Operates three leased manufacturing facilities in Juarez, Mexico, totaling 553,000 sq ft, using contracted labor19 Customer Backlog | Date | Backlog (in thousands) | | :------------ | :-------- | | June 30, 2021 | $155,325 | | June 30, 2020 | $46,900 | | June 30, 2019 | $47,400 | Raw Materials - Utilizes diverse raw materials from numerous suppliers, not dependent on a single source20 - Experienced a shortage of polyurethane foam in February 2021 due to weather, which remained constrained as of June 30, 202120 Industry Factors - The company is exposed to government actions, including tariffs, as detailed in the "Risk Factors" section21 Government Regulations - Subject to various government regulations, but compliance did not materially impact capital expenditures, earnings, or competitive position in fiscal year 202122 Environmental Matters - Committed to sustainable business practices and subject to environmental laws and regulations concerning product content and industrial waste2324 Trademarks and Patents - Owns US patents for its "Flexsteel guaranteed-for-life Blue Steel Spring" and convertible beds, with intellectual property expiring between 2021-203625 - Furniture design patents are uncommon in the industry, and imitation of successful designs is frequent26 Employees - As of June 30, 2021, the company had 665 employees, with 8 under collective bargaining agreements27 - Implemented various measures to protect employee health and productivity during the COVID-19 pandemic, including enhanced cleaning, face coverings, and social distancing27 Available Information - SEC filings (10-K, 10-Q, 8-K) are available free of charge on the company's website (www.flexsteel.com) and the SEC's website (www.sec.gov)[28](index=28&type=chunk) Item 1A. Risk Factors The company faces significant operational risks, including potential disruptions from cybersecurity breaches and the implementation of a new ERP system, alongside financial threats from underfunded multi-employer pension plans and legal proceedings Risks related to our operations - Business information systems are vulnerable to disruptions and security breaches, which could interfere with operations, compromise data, and expose the company to liability30 - The implementation of a new SAP ERP system in fiscal 2021-2022 could disrupt the supply chain, order fulfillment, payment processing, and financial reporting32 - Participation in underfunded multi-employer pension plans exposes the company to potential volatility in funding obligations beyond its direct employee contributions34 - The company faces risks from product liability claims, environmental laws, and other legal proceedings, which could result in substantial costs36 - Success depends on recruiting and retaining key employees and skilled workers; unexpected loss or COVID-19 related incapacitation could negatively impact operations and productivity373839 Risks related to our industry - The COVID-19 pandemic has had and could continue to have a material adverse effect on operations, employee safety, results, and financial condition, causing supply chain disruptions, raw material inflation, and decreased demand434446 - Continuing cost inflation (ocean container rates, raw materials, labor, transportation) may hurt profitability if price increases lag cost increases47 - Global supply chain management is critical, with risks including delivery delays, availability issues, quality concerns, pricing fluctuations, and impacts from international trade policies like tariffs (e.g., 25% tariff on Chinese furniture)485051 - The highly competitive and fragmented furniture industry, coupled with a significant shift in consumer preference towards online purchasing (accelerated by COVID-19), could adversely affect sales and operating margins5354 - Failure to anticipate or respond to changes in consumer tastes and fashions could lead to lost sales and reduced prices for excess inventory59 - Furniture is a deferrable purchase, making the business vulnerable to economic downturns and prolonged negative economic conditions, which could decrease demand and impact sales6061 Item 1B. Unresolved Staff Comments There are no unresolved staff comments - No unresolved staff comments63 Item 2. Properties The company owns and leases various facilities across the US, Mexico, and China for manufacturing, distribution, corporate offices, showrooms, and warehouses, with two manufacturing facilities classified as held for sale as of June 30, 2021 | Location | Approximate Size (sq ft) | Principal Operations | | :------------------------ | :----------------------- | :-------------------------------- | | Harrison, Arkansas | 92,000 | Manufacturing (Held for Sale) | | Dublin, Georgia | 315,000 | Manufacturing | | Huntingburg, Indiana | 611,000 | Distribution | | Dubuque, Iowa | 40,000 | Corporate Office | | Edgerton, Kansas | 500,000 | Distribution | | Starkville, Mississippi | 349,000 | Manufacturing (Held for Sale) | | Location | Approximate Size (sq ft) | Principal Operations | | :------------------------ | :----------------------- | :------------------- | | Sierra Ridge, California | 211,000 | Distribution | | High Point, North Carolina| 62,000 | Showroom | | Las Vegas, Nevada | 30,000 | Showroom | | El Paso, Texas | 19,000 | Warehouse | | Dubuque, Iowa | 2,800 | Office | | Juarez, Mexico | 225,000 | Manufacturing | | Juarez, Mexico | 131,000 | Manufacturing | | Juarez, Mexico | 197,000 | Manufacturing | | Shenzhen, China | 2,000 | Office | Item 3. Legal Proceedings Information regarding legal proceedings is detailed in Note 13 Commitments and Contingencies of the Consolidated Financial Statements - Legal proceedings are discussed in Note 13 Commitments and Contingencies66 Item 4. Mine Safety Disclosures There are no mine safety disclosures to report - No mine safety disclosures67 PART II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Flexsteel's common stock (FLXS) is traded on the NASDAQ Global Select Market, with its performance rebounding strongly in 2021 after lagging from 2017-2020, and the company authorized multiple share repurchase programs totaling $44 million in 2020 Share Investment Performance - Flexsteel's common stock (FLXS) is traded on the NASDAQ Global Select Market71 | | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | | :----------- | :----- | :----- | :----- | :---- | :---- | :----- | | Flexsteel | 100.00 | 138.65 | 104.40 | 46.37 | 36.07 | 115.36 | | NASDAQ | 100.00 | 128.19 | 167.17 | 177.22| 203.71| 318.38 | | Peer Group | 100.00 | 124.19 | 135.51 | 135.95| 180.00| 314.15 | - As of June 30, 2021, there were approximately 263 common stock holders72 Purchases of Equity Securities - The Board authorized $6 million (June 2020), $8 million (August 2020), and $30 million (October 2020) share repurchase programs73 - The $6 million and $8 million programs were completed by October 31, 202073 | Period | Total Shares Purchased | Average Price Paid per Share | Total Shares Purchased as Part of Plan | Approximate Dollar Value of Shares that May Yet Be Purchased (in thousands) | | :----------------------- | :--------------------- | :--------------------------- | :------------------------------------- | :----------------------------------------------------------- | | As of June 30, 2020 | 132,197 | $11.83 | 132,197 | $4,429 | | July 1, 2020, to July 31, 2020 | 155,808 | $14.46 | 155,808 | $2,168 | | August 1, 2020, to August 31, 2020 | 116,562 | $17.24 | 116,562 | $153 | | September 1, 2020, to September 30, 2020 | 223,905 | $21.16 | 223,905 | $3,405 | | As of September 30, 2020 | 628,472 | $16.81 | 628,472 | $3,405 | | October 1, 2020, to October 31, 2020 | 132,326 | $25.69 | 132,326 | $30,000 | | November 1, 2020, to November 30, 2020 | 132,831 | $29.55 | 132,831 | $26,067 | | December 1, 2020, to December 31, 2020 | 101,689 | $32.69 | 101,689 | $22,738 | | As of December 31, 2020 | 995,318 | $21.31 | 995,318 | $22,738 | | January 1, 2021, to January 31, 2021 | 84,012 | $35.15 | 84,012 | $19,780 | | February 1, 2021, to February 28, 2021 | 94,104 | $34.24 | 94,104 | $16,553 | | March 1, 2021, to March 31, 2021 | 75,536 | $35.23 | 75,536 | $13,888 | | As of March 31, 2021 | 1,248,970 | $24.06 | 1,248,970 | $13,888 | | April 1, 2021, to April 30, 2021 | 34,825 | $36.51 | 34,825 | $12,615 | | As of June 30, 2021 | 1,283,795 | $24.40 | 1,283,795 | $12,615 | Item 6. Selected Financial Data This section provides a five-year summary of key financial data, highlighting significant fluctuations in net sales, profitability, and balance sheet items, notably a rebound to net income in 2021 after losses in prior years | Metric (in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | | :--------------------------------------- | :---------- | :---------- | :---------- | :---------- | :---------- | | Net sales | $478,925 | $366,926 | $443,588 | $489,180 | $468,764 | | Gross margin | $96,730 | $53,053 | $69,940 | $98,219 | $108,651 | | Operating income (loss) | $31,200 | $(34,395) | $(43,154) | $24,505 | $37,264 | | Net income (loss) | $23,048 | $(26,844) | $(32,605) | $17,666 | $23,786 | | Diluted earnings (loss) per common share | $3.09 | $(3.37) | $(4.13) | $2.23 | $3.02 | | Cash dividends declared per common share | $0.45 | $0.71 | $0.88 | $0.88 | $0.80 | | Total assets | $296,779 | $237,259 | $254,287 | $284,293 | $270,045 | | Shareholders' equity | $167,968 | $175,505 | $205,427 | $241,698 | $230,760 | | Inventories | $161,125 | $70,565 | $93,659 | $96,204 | $99,397 | | Capital expenditures | $2,580 | $3,688 | $21,346 | $29,447 | $13,457 | | Current ratio | 2.3 to 1 | 3.4 to 1 | 3.5 to 1 | 4.6 to 1 | 5.2 to 1 | | Return on ending shareholders' equity | 13.7% | (15.3)% | (15.9)% | 7.3% | 10.3% | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Flexsteel's financial performance, highlighting its navigation of the COVID-19 pandemic through cost-saving measures and a credit facility, a significant rebound in fiscal 2021 net sales and profitability, and a strategic outlook for fiscal 2022 focused on profitable growth and supply chain resilience General - This section analyzes the company's financial condition and results of operations, to be read in conjunction with the consolidated financial statements79 Statement Regarding the Impact of the COVID-19 Pandemic - Implemented COVID-19 response measures: remote work, 401K match suspension, temporary executive/board compensation reductions, non-essential expense cuts, dividend reduction, and extended vendor payment terms80 - Fiscal 2021 saw improved business conditions with reopened retailers and increased orders, but supply chain challenges (ocean containers, material availability/inflation, labor shortages) persist81 Business Update - Completed the exit from Vehicle Seating and remaining Hospitality product lines in fiscal 2021, which accounted for less than 1% of total net sales82 Results of Operations | | 2021 | 2020 | 2019 | | :---------------------------------------- | :-------- | :-------- | :-------- | | Net sales | 100.0 % | 100.0 % | 100.0 % | | Cost of goods sold | 79.8 | 85.5 | 84.2 | | Gross margin | 20.2 | 14.5 | 15.8 | | Selling, general and administrative | 14.2 | 19.7 | 18.3 | | Restructuring expense | 0.7 | 9.3 | 2.3 | | ERP impairment | — | — | 4.8 | | (Gain) on disposal of assets | (1.2) | (5.2) | — | | Litigation settlement costs | 0.0 | — | 0.1 | | Operating income (loss) | 6.5 | (9.4) | (9.7) | | Other income | 0.1 | 0.2 | 0.1 | | Interest (expense) | (0.0) | (0.0) | (0.0) | | Income (loss) before income taxes | 6.6 | (9.2) | (9.6) | | Income tax provision (benefit) | 1.8 | (1.9) | (2.2) | | Net income (loss) | 4.8 % | (7.3)% | (7.4)% | Fiscal 2021 Compared to Fiscal 2020 - Net sales increased by 30.5% to $478.9 million in fiscal 2021, primarily driven by a $138.8 million increase in home furnishing products sold through retailers and a $5.9 million increase in e-commerce sales88 - Gross margin as a percentage of net sales increased by 570 basis points to 20.2% in fiscal 2021, attributed to structural cost reductions, operational efficiencies, fixed cost leverage from higher sales, and lower inventory reserves89 - Selling, general and administrative (SG&A) expenses decreased by $4.5 million, or 550 bps as a percentage of net sales, primarily due to reduced bad debt expense, cost leverage from higher sales, and lower depreciation90 - Net income was $23.0 million ($3.09 diluted EPS) in fiscal 2021, a significant improvement from a net loss of $26.8 million ($3.37 diluted EPS) in fiscal 202093 Fiscal 2020 Compared to Fiscal 2019 - Net sales decreased by 17.3% to $366.9 million in fiscal 2020, primarily due to tariffs on Chinese imports and the COVID-19 pandemic, despite a 35.7% growth in e-commerce ready-to-assemble furniture95 - Contract net sales declined by 49.3% to $35.0 million in fiscal 2020, driven by the decision to exit Commercial Office and custom-designed Hospitality product lines96 - Gross margin declined by 130 basis points to 14.5% in fiscal 2020, mainly due to lower volume, product mix, and increased costs for delivery lead times, partially offset by valuation allowance on foreign VAT and restructuring cost improvements97 - SG&A expenses decreased by $8.9 million but increased to 19.7% of net sales (from 18.3% in 2019), primarily due to a $5.0 million increase in bad debt expense and $2.9 million in right-of-use lease asset impairments98 - Incurred $34.2 million in restructuring expenses in fiscal 2020, primarily for asset write-downs, facility closures, professional fees, pension withdrawal liability, and employee termination costs99 - Reported a net loss of $26.8 million ($3.37 diluted EPS) in fiscal 2020, compared to a net loss of $32.6 million ($4.13 diluted EPS) in fiscal 2019103 COVID-19 update - Reduced quarterly dividend from $0.22 to $0.05 per share and extended executive compensation reductions to enhance liquidity104 - Secured a $25.0 million secured credit facility with Dubuque Bank & Trust Company on August 28, 2020, with a balance of $3.5 million as of June 30, 2021104 Liquidity and Capital Resources - Working capital was $128.8 million at June 30, 2021, a slight increase of $0.4 million from June 30, 2020, reflecting increased current assets (inventory, receivables) offset by increased current liabilities (accounts payable, accruals) and decreased cash105 | (in thousands) | 2021 | 2020 | | :------------------------------------------------ | :---------- | :---------- | | Net cash (used in) provided by operating activities | $(32,692) | $18,287 | | Net cash provided by investing activities | $16,062 | $16,785 | | Net cash (used in) financing activities | $(30,225) | $(9,122) | | (Decrease) increase in cash and cash equivalents | $(46,855) | $25,950 | Net cash (used in) provided by operating activities - Cash used in operating activities was $32.7 million in fiscal 2021, primarily driven by a $25.2 million increase in trade receivables and a $90.6 million increase in inventory for fiscal 2022 build-up109 - In fiscal 2020, net cash provided by operating activities was $18.3 million, mainly due to a decline in inventory and accounts receivable, and an increase in accounts payable110 Net cash provided by investing activities - Net cash provided by investing activities was $16.1 million in fiscal 2021, primarily from $18.6 million in proceeds from the sale of facilities in Dubuque, IA, Lancaster, PA, and Harrison, AR111 - Capital expenditures were $2.6 million for fiscal year 2021105 Net cash used in financing activities - Net cash used in financing activities was $30.2 million in fiscal 2021, largely due to $29.8 million in treasury stock purchases and $2.6 million in dividends paid113 Line of Credit - As of June 30, 2021, the company had a $25.0 million secured credit facility with Dubuque Bank & Trust, with $3.5 million outstanding115 - $1.1 million in letters of credit were outstanding, collateralized by $1.2 million in cash116 Contractual Obligations | Obligation (in thousands) | Total | 1 Year | 2-3 Years | 4-5 Years | More than 5 Years | | :---------------------- | :---------- | :-------- | :---------- | :---------- | :---------------- | | Operating lease obligations | $34,357 | $6,790 | $10,409 | $5,264 | $11,894 | - No capital lease obligations or purchase obligations for raw materials or finished goods as of June 30, 2021117 Financing Arrangements - Further details on financing arrangements are provided in Note 9 Credit Arrangements120 Outlook - Fiscal 2022 focus areas include financial agility, profitable growth in retail and e-commerce, global supply chain resiliency, capacity expansion, digital capabilities, customer experience, and talent development122 - Anticipates $11.5 million to $13.5 million in capital expenditures for fiscal 2022, with approximately $7 million for manufacturing capacity expansion and $2.5 million for productivity improvements123 Critical Accounting Policies - Critical accounting policies involve significant estimates and judgments for accounts receivable allowances, inventory valuation (lower of cost or net realizable value), and long-lived asset valuation (impairment review based on future cash flows)125126127128 - Restructuring costs are categorized into employee termination benefits, contract termination costs, and other associated costs, recognized as incurred or upon agreement129 Recently Issued Accounting Pronouncements - Details on recently issued accounting pronouncements are in Note 1 Significant Accounting Policies131 Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company's market risk exposure primarily stems from changes in interest rates, with $3.5 million outstanding on its line of credit, and while foreign currency risk from purchases is not considered significant, broader importation risks from political issues, supply chain disruptions, government regulations (tariffs), and currency fluctuations are acknowledged General - Market risk is the risk of financial instrument value changes due to interest rates, foreign exchange rates, and equity prices, which management believes will not cause material fluctuations133 - Importation of furniture products faces risks from political issues, supply chain disruptions, government regulations (tariffs), and significant fluctuations in the U.S. dollar against foreign currencies133 Foreign Currency Risk - Foreign currency risk is not considered significant, as the company had purchases and expenses but no sales denominated in foreign currencies in fiscal years 2021, 2020, and 2019134 Interest Rate Risk - Primary market risk exposure is interest rate changes, with $3.5 million outstanding on the line of credit as of June 30, 2021134 Item 8. Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for fiscal years 2019-2021, with unqualified opinions from Deloitte & Touche LLP on both financial statements and internal control, noting inventory valuation as a critical audit matter, and includes detailed notes on accounting policies, leases, inventories, property, restructuring, assets held for sale, credit arrangements, income taxes, stock-based compensation, benefit plans, commitments, contingencies, and unaudited quarterly data, with subsequent events including a new $85 million credit facility and a new manufacturing facility lease in Mexico Report of Independent Registered Public Accounting Firm - Deloitte & Touche LLP issued an unqualified opinion on the consolidated financial statements for June 30, 2021, and 2020, and for the three years ended June 30, 2021139 - An unqualified opinion was also expressed on the effectiveness of the company's internal control over financial reporting as of June 30, 2021140 - A critical audit matter was the auditing of management's estimates of net realizable value for inventories, due to its materiality and the subjective judgments involved in estimating markdowns144145 Report of Independent Registered Public Accounting Firm – Internal Control Over Financial Reporting - Deloitte & Touche LLP issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of June 30, 2021150 Consolidated Balance Sheets | ASSETS (in thousands) | June 30, 2021 | June 30, 2020 | | :------------------------------------------------------------------ | :------------ | :------------ | | Cash and cash equivalents | $1,342 | $48,197 | | Trade receivables - net | $55,986 | $32,217 | | Inventories | $161,125 | $70,565 | | Total current assets | $228,540 | $181,843 | | Property, plant and equipment, net | $39,783 | $43,312 | | Operating lease right-of-use assets | $27,057 | $8,683 | | Total Assets | $296,779 | $237,259 | | LIABILITIES AND SHAREHOLDERS' EQUITY (in thousands) | | | | Accounts payable - trade | $67,773 | $27,747 | | Total current liabilities | $99,751 | $53,462 | | Operating lease liabilities, less current maturities | $24,317 | $7,607 | | Line of Credit | $3,500 | — | | Total liabilities | $128,811 | $61,754 | | Total shareholders' equity | $167,968 | $175,505 | | TOTAL | $296,779 | $237,259 | Consolidated Statements of Income | (in thousands) | 2021 | 2020 | 2019 | | :---------------------------------------- | :---------- | :---------- | :---------- | | Net sales | $478,925 | $366,926 | $443,588 | | Cost of goods sold | $382,195 | $313,873 | $373,648 | | Gross margin | $96,730 | $53,053 | $69,940 | | Selling, general and administrative | $67,977 | $72,442 | $81,298 | | Restructuring expense | $3,422 | $34,222 | $10,048 | | Operating income (loss) | $31,200 | $(34,395) | $(43,154) | | Income (loss) before income taxes | $31,467 | $(33,757) | $(42,608) | | Income tax provision (benefit) | $8,419 | $(6,913) | $(10,003) | | Net income (loss) | $23,048 | $(26,844) | $(32,605) | | Diluted earnings (loss) per common share | $3.09 | $(3.37) | $(4.13) | Consolidated Statements of Comprehensive Income | (in thousands) | 2021 | 2020 | 2019 | | :-------------------------------------------------------------------------------------- | :---------- | :---------- | :---------- | | Net income (loss) | $23,048 | $(26,844) | $(32,605) | | Other comprehensive income (loss), net of tax | — | $(8) | $2,052 | | Comprehensive income (loss) | $23,048 | $(26,852) | $(30,553) | Consolidated Statements of Changes in Shareholders' Equity - Cash dividends declared per common share were $0.45, $0.71, and $0.88 for fiscal years 2021, 2020, and 2019, respectively164 | | Common Shares ($1 Par) (in thousands) | Paid-In Capital (in thousands) | Treasury Stock (in thousands) | Retained Earnings (in thousands) | Total Shareholders' Equity (in thousands) | | :---------------------------------------- | :--------------------- | :-------------- | :------------- | :---------------- | :------------------------- | | Balance at June 30, 2019 | 7,903 | $27,512 | — | $170,004 | $205,427 | | Stock-based compensation | 103 | $3,770 | — | — | $3,873 | | Treasury stock purchases | — | — | $(1,563) | — | $(1,563) | | Cash dividends declared | — | — | — | $(5,782) | $(5,782) | | Net loss | — | — | — | $(26,844) | $(26,844) | | Balance at June 30, 2020 | 8,008 | $31,748 | $(1,563) | $137,312 | $175,505 | | Long-term incentive compensation | — | $2,321 | — | — | $2,321 | | Stock-based compensation | 112 | $(24) | — | — | $88 | | Treasury stock purchases | — | — | $(29,757) | — | $(29,757) | | Cash dividends declared | — | — | — | $(3,220) | $(3,220) | | Net Income | — | — | — | $23,048 | $23,048 | | Balance at June 30, 2021 | 8,133 | $34,015 | $(31,320) | $157,140 | $167,968 | Consolidated Statements of Cash Flows | OPERATING ACTIVITIES: (in thousands) | 2021 | 2020 | 2019 | | :---------------------------------------------------------------- | :---------- | :---------- | :---------- | | Net income (loss) | $23,048 | $(26,844) | $(32,605) | | Depreciation | $5,210 | $8,370 | $7,440 | | Stock-based compensation expense | $3,738 | $4,877 | $1,355 | | (Gain) on disposition of capital assets | $(5,948) | $(19,033) | $(71) | | Changes in operating assets and liabilities: | | | | | Trade receivables | $(25,239) | $4,419 | $3,136 | | Inventories | $(90,560) | $23,093 | $2,545 | | Accounts payable - trade | $39,893 | $9,334 | $5,128 | | Net cash (used in) provided by operating activities | $(32,692) | $18,287 | $6,714 | | INVESTING ACTIVITIES: | | | | | Proceeds from sale of capital assets | $18,643 | $20,467 | $248 | | Capital expenditures | $(2,580) | $(3,688) | $(21,346) | | Net cash provided by (used in) investing activities | $16,062 | $16,785 | $(5,170) | | FINANCING ACTIVITIES: | | | | | Dividends paid | $(2,622) | $(7,022) | $(6,918) | | Treasury stock purchases | $(29,757) | $(1,563) | — | | Net cash (used in) financing activities | $(30,225) | $(9,122) | $(7,047) | | (Decrease) increase in cash and cash equivalents | $(46,855) | $25,950 | $(5,503) | | Cash and cash equivalents at end of year | $1,342 | $48,197 | $22,247 | Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Flexsteel is a major US manufacturer, importer, and online marketer of residential furniture, operating in one segment172200 - COVID-19 impacted fiscal 2020 and continues to present supply chain challenges, material inflation, and labor shortages in fiscal 2021173 - Inventories are valued at the lower of cost or net realizable value using the FIFO method178 - Revenue is recognized when control of goods is transferred to customers, primarily independent furniture retailers, with provisions for variable consideration like rebates and returns185186187 - The company adopted Topic 326 (Credit Losses) effective July 1, 2020, with no impact on financial statements193 - Treasury stock purchases totaled $31.3 million for 1,283,785 shares as of June 30, 2021, with $12.6 million remaining in the $30 million repurchase program201 2. LEASES - The company adopted ASC 842, recognizing Right-of-Use (ROU) assets and lease liabilities on the balance sheet, and leases distribution centers, manufacturing facilities, showrooms, and office space203204 | Metric (in thousands) | June 30, 2021 | June 30, 2020 | | :------------------------------------------------------------------ | :------------ | :------------ | | Operating lease expense | $4,790 | $5,023 | | Variable lease expense | $301 | $273 | | Total lease expense | $5,091 | $5,296 | | Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases | $4,511 | $4,060 | | Right-of-use assets obtained in exchange for lease liabilities: Operating leases | $22,770 | $3,573 | | Weighted-average remaining lease term (in years): Operating leases | 4.5 | 1.8 | | Weighted-average discount rate: Operating leases | 3.2% | 3.5% | | Total future minimum lease payments | $34,357 | $12,795 | | Lease liability | $30,150 | $12,015 | 3. INVENTORIES | (in thousands) | June 30, 2021 | June 30, 2020 | | :--------------------------- | :------------ | :------------ | | Raw materials | $22,500 | $11,119 | | Work in process and finished parts | $6,234 | $3,925 | | Finished goods | $132,391 | $55,521 | | Total | $161,125 | $70,565 | 4. PROPERTY, PLANT AND EQUIPMENT - Recognized impairment charges of $17.5 million in fiscal 2020 (due to Vehicle Seating and Hospitality product line exits) and $21.3 million in fiscal 2019 (due to SAP implementation reassessment), but no impairment in fiscal 2021210 | (in thousands) | June 30, 2021 | June 30, 2020 | | :--------------------------------- | :------------ | :------------ | | Land | $3,457 | $3,498 | | Buildings and improvements | $49,166 | $51,237 | | Machinery and equipment | $17,038 | $16,781 | | Delivery equipment | $3,203 | $15,701 | | Furniture and fixtures | $3,628 | $3,676 | | Computer software and hardware | $12,058 | $9,633 | | Construction in progress | $377 | $1,478 | | Total | $88,927 | $102,004 | | Less accumulated depreciation | $(49,144) | $(58,692) | | Net | $39,783 | $43,312 | 5. RESTRUCTURING - The company implemented a comprehensive transformation program, including exiting Commercial Office, Hospitality, and Vehicle Seating product lines, facility closures, and workforce reductions212213 - Total cumulative restructuring and related costs incurred as of June 30, 2021, were $58.7 million214 | (in thousands) | 2021 | 2020 | 2019 | | :-------------------------------------------- | :------ | :------ | :------ | | Inventory impairment | $45 | $3,241 | $7,653 | | One-time employee termination benefits | $433 | $2,455 | $3,775 | | Contract (recoveries) termination costs | — | $(58) | $249 | | Fixed asset impairments | — | $17,482 | — | | Other associated costs | $2,989 | $14,343 | $6,024 | | Total restructuring and related expenses | $3,467 | $37,463 | $17,701 | | Reported as: Cost of goods sold | $45 | $3,241 | $7,653 | | Reported as: Operating expenses | $3,422 | $34,222 | $10,048 | 6. ASSETS HELD FOR SALE - Assets in Harrison, Arkansas, and Starkville, Mississippi, were classified as held for sale as of June 30, 2021, as part of the restructuring plan217 | Location (in thousands) | Asset Category | Cost | Accumulated Depreciation | Net Book Value | | :------------------------ | :----------------------------- | :------ | :----------------------- | :------------- | | Harrison, Arkansas | Building & building improvements | $1,000 | $(1,000) | $— | | | Land & land improvements | $86 | $(36) | $50 | | | Machinery & equipment | $1,330 | $(1,330) | $— | | Starkville, Mississippi | Building & building improvements | $4,615 | $(4,254) | $361 | | | Land & land improvements | $694 | $(439) | $255 | | Total | | $7,725 | $(7,059) | $666 | 7. OTHER NONCURRENT ASSETS | (in thousands) | 2021 | June 30, 2020 | | :--------------------------- | :------ | :------------ | | Cash value of life insurance | $1,042 | $1,033 | | Other | $357 | $277 | | Total | $1,399 | $1,310 | 8. ACCRUED LIABILITIES – OTHER | (in thousands) | 2021 | June 30, 2020 | | :------------- | :------ | :------------ | | Dividends | $1,165 | $567 | | Warranty | $805 | $1,029 | | Other | $3,163 | $3,265 | | Total | $5,133 | $4,861 | 9. CREDIT ARRANGEMENTS - Entered a $25.0 million secured credit facility with Dubuque Bank & Trust in August 2020, expiring August 2022, with $3.5 million outstanding as of June 30, 2021223 - Has $1.1 million in letters of credit outstanding with Wells Fargo, collateralized by $1.2 million in cash224 10. INCOME TAXES - The CARES Act allowed net operating losses (NOLs) from 2018-2020 to be carried back, resulting in income tax receivables of $4.5 million (2020 NOL) and $8.2 million (2019 NOL) at a 35% federal tax rate225 - As of June 30, 2021, a $7.3 million valuation allowance was recorded against federal and state deferred tax assets, as the company determined it was not "more likely than not" that all deferred tax assets would be realized226229 | (in thousands) | 2021 | 2020 | 2019 | | :-------------------------------------- | :------ | :-------- | :-------- | | United States | $33,353 | $(32,395) | $(42,457) | | Outside the United States | $(1,886)| $(1,362) | $(151) | | Income (loss) before income taxes | $31,467 | $(33,757) | $(42,608) | | Federal - current | $(5,480)| $12,668 | $3,933 | | State and other - current | $(828) | $(302) | $(71) | | Deferred | $(2,111)| $(5,453) | $6,141 | | Total | $(8,419)| $6,913 | $10,003 | | | 2021 | 2020 | 2019 | | :--------------------------------------------------------------------------------------- | :------- | :------- | :------- | | Federal statutory tax rate | 21.0 % | 21.0 % | 21.0 % | | State taxes, net of federal effect | 4.0 | 3.3 | 4.1 | | Foreign rate differential | 2.8 | — | — | | Remeasurement of deferred tax assets and valuation allowance | (3.7) | (20.0) | 0.1 | | Beginning of year true ups | 4.0 | — | — | | Stock FMV over Award | (1.4) | — | — | | Tax rate change on net operating loss carryback related to CARES Act | — | 17.2 | — | | Other | 0.1 | (1.0) | (1.7) | | Effective tax rate | 26.8 % | 20.5 % | 23.5 % | 11. STOCK-BASED COMPENSATION - Total stock-based compensation expense was $3.7 million in fiscal 2021, $4.6 million in 2020, and $1.4 million in 2019232 - The Long-Term Incentive Compensation Plan (LTICP) awards RSUs to officers and key employees based on performance targets (e.g., Adjusted EBIT growth)235 - The 2013 Omnibus Stock Plan allows for granting incentive/nonqualified stock options, restricted stock, RSUs, stock appreciation rights, and performance units to key employees, officers, and directors236 - Total unrecognized stock-based compensation for unvested LTICP RSUs was $1.6 million as of June 30, 2021, expected to be recognized over 1.6 years235 - Total unrecognized stock-based compensation for unvested restricted shares and RSUs was $0.7 million as of June 30, 2021, expected to be recognized over 1.5 years237 - Total unrecognized stock-based compensation for options (including those outside a plan) was $0.07 million as of June 30, 2021, expected to be recognized over 0.7 to 1.4 years240241 12. BENEFIT AND RETIREMENT PLANS - Sponsors a defined contribution retirement plan, with matching contributions of $1.0 million (2021), $2.3 million (2020), and $2.6 million (2019)242 - Contributes to one multi-employer defined benefit pension plan, the Central States SE and SW Areas Pension Fund, which was in "Red Zone" status (less than 65% funded) as of December 31, 2020243244245 - Withdrew from the Steelworkers Pension Trust, recording a $1.4 million withdrawal liability in fiscal years 2021 and 2020245 - Estimated cumulative cost to exit the Central States SE and SW Areas Pension Fund was approximately $20.0 million as of June 30, 2021, but no liability recorded as the company intends to continue contributions246 13. COMMITMENTS AND CONTINGENCIES - Faces an environmental liability of $3.6 million for the Lane Street Groundwater Superfund Site in Elkhart, Indiana, despite disputing causation, and continues to evaluate legal options and insurance coverage247248 - Settled two employment lawsuits (Hernandez I and II) on a class-wide basis for $0.5 million in February 2021, with no accrued amounts remaining as of June 30, 2021250 - Subject to various other legal proceedings, none considered material to business, operating results, or cash flows251 14. QUARTERLY FINANCIAL INFORMATION – UNAUDITED | Fiscal 2021: (in thousands) | September 30 | December 31 | March 31 | June 30 | | :----------------------- | :----------- | :---------- | :------- | :------ | | Net sales | $105,239 | $119,106 | $118,408 | $136,172| | Gross margin | $22,815 | $24,378 | $23,124 | $26,413 | | Operating income | $7,911 | $9,833 | $6,352 | $7,104 | | Net income | $3,879 | $8,450 | $4,878 | $5,841 | | Earnings per share: Basic| $0.50 | $1.17 | $0.70 | $0.85 | | Earnings per share: Diluted| $0.49 | $1.13 | $0.67 | $0.81 | | Fiscal 2020: (in thousands) | September 30 | December 31 | March 31 | June 30 | | :----------------------- | :----------- | :---------- | :------- | :------ | | Net sales | $100,348 | $102,949 | $98,821 | $64,808 | | Gross margin | $17,221 | $16,050 | $13,848 | $5,934 | | Operating income (loss) | $12,683 | $(7,079) | $(8,342) | $(31,657)| | Net income (loss) | $9,551 | $(5,384) | $(5,270) | $(25,741)| | Earnings (loss) per share: Basic| $1.20 | $(0.68) | $(0.66) | $(3.23) | | Earnings (loss) per share: Diluted| $1.17 | $(0.68) | $(0.66) | $(3.23) | 15. SUBSEQUENT EVENTS - On September 8, 2021, entered a new five-year, $85 million revolving credit agreement with Wells Fargo Bank, N.A., replacing the previous facility and secured by substantially all assets (excluding real property)253 - On August 20, 2021, entered a 12-year lease for a new 507,830 sq ft manufacturing facility in Mexicali, Mexico, with an annual base rent of $3.1 million, commencing June 1, 2022254255 - On July 27, 2021, entered a Purchase and Sale Agreement for the Harrison, Arkansas facility, pending buyer financing and environmental study256 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no changes in or disagreements with accountants on accounting and financial disclosure - No changes in or disagreements with accountants on accounting and financial disclosure257 Item 9A. Controls and Procedures The CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2021, and management also assessed and confirmed the effectiveness of internal control over financial reporting, a conclusion independently audited by Deloitte & Touche LLP, with no material changes to internal control occurring during the last fiscal quarter - CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2021258 - Management assessed and concluded that internal control over financial reporting was effective as of June 30, 2021, a conclusion audited by Deloitte & Touche LLP259260 - No material changes in internal control over financial reporting occurred during the fiscal quarter ended June 30, 2021261 Item 9B. Other Information The company entered into a new five-year, $85 million revolving credit agreement with Wells Fargo Bank, N.A. on September 8, 2021, to refinance existing debt and provide working capital, secured by substantially all of the company's assets, excluding real property - On September 8, 2021, the company entered a new five-year, $85 million revolving credit agreement with Wells Fargo Bank, N.A., to refinance existing debt and provide working capital262 - The credit agreement is secured by substantially all of the company's assets (excluding real property) and includes financial and non-financial covenants264 PART III Item 10. Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance will be filed in the company's 2021 Proxy Statement within 120 days of the fiscal year end - Information regarding directors, executive officers, and corporate governance will be filed in the 2021 Proxy Statement267 Item 11. Executive Compensation Information regarding executive compensation will be filed in the company's 2021 Proxy Statement within 120 days of the fiscal year end - Information regarding executive compensation will be filed in the 2021 Proxy Statement268 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management, and related stockholder matters, will be filed in the company's 2021 Proxy Statement within 120 days of the fiscal year end - Information regarding security ownership and related stockholder matters will be filed in the 2021 Proxy Statement269 Item 13. Certain Relationships and Related Party Transactions and Director Independence Information regarding certain relationships, related party transactions, and director independence will be filed in the company's 2021 Proxy Statement within 120 days of the fiscal year end - Information regarding certain relationships, related party transactions, and director independence will be filed in the 2021 Proxy Statement270 Item 14. Principal Accountant Fees and Services Information regarding principal accountant fees and services will be filed in the company's 2021 Proxy Statement within 120 days of the fiscal year end - Information regarding principal accountant fees and services will be filed in the 2021 Proxy Statement271 PART IV Item 15. Exhibits, Financial Statements and Schedules This section lists the financial statements and schedules included in the report, referring to Item 8 for the main financial statements, and specifically includes Schedule II, detailing Valuation and Qualifying Accounts for accounts receivable and VAT allowances across fiscal years 2019-2021 Financial Statements and Financial Statement Schedules - Financial statements are located in Part II, Item 8273 - Schedule II, Valuation and Qualifying Accounts, is included273 Exhibits - A list of exhibits filed or incorporated by reference is provided274 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS | Description (in thousands) | Balance at Beginning of Year | (Additions) Reductions to Income | Deductions from Reserves | Balance at End of Year | | :------------------------------- | :--------------------------- | :------------------------------- | :----------------------- | :--------------------- | | Accounts Receivable Allowances: | | | | | | 2021 | $1,770 | $1,618 | $(148) | $3,240 | | 2020 | $250 | $5,214 | $(3,694) | $1,770 | | 2019 | $290 | $110 | $(150) | $250 | | VAT Allowances: | | | | | | 2021 | $237 | — | $(237) | $0 | | 2020 | $2,235 | — | $(1,998) | $237 | | 2019 | — | $2,612 | $(377) | $2,235 | SIGNATURES The report is duly signed by authorized individuals, including the Chief Executive Officer, Chief Financial Officer, and members of the Board of Directors, on September 8, 2021, certifying its contents - The report is signed by authorized individuals, including the CEO, CFO, and members of the Board of Directors, on September 8, 2021279280 Exhibit Index This section provides a comprehensive index of all exhibits accompanying the 10-K report, including corporate documents, stock plans, compensation agreements, and credit agreements - Provides a comprehensive index of all exhibits filed or incorporated by reference with the Annual Report on Form 10-K282