Flexsteel(FLXS) - 2022 Q4 - Annual Report

PART I ITEM 1. BUSINESS Flexsteel Industries, Inc. is a leading US manufacturer, importer, and marketer of residential furniture, leveraging a patented spring and global sourcing - Flexsteel Industries, Inc. is one of the largest manufacturers, importers, and marketers of residential furniture products in the United States[9] - Product offerings include a wide variety of furniture such as sofas, loveseats, chairs, recliners, sofa beds, occasional tables, desks, dining tables and chairs, kitchen storage, bedroom furniture, and outdoor furniture[9] - The company operates in one reportable segment: furniture products, having substantially completed its exit from Commercial Office, custom design Hospitality, and Vehicle Seating product lines by fiscal 2021[10] Net Sales by Application Area ($ thousands) | Application Area | 2022 | 2021 | 2020 | |:-----------------|:----------|:----------|:----------| | Residential | $543,447 | $476,519 | $331,879 | | Contract | $835 | $2,406 | $35,047 | | Total | $544,282| $478,925| $366,926| - Manufacturing facilities are located in Dublin, Georgia, and Juarez, Mexico, integrating manufactured products with finished goods from offshore suppliers (Vietnam, China, Thailand, Mexico) to offer a wide range of price points and styles[10][12][48] - Key competitive advantages include its patented, guaranteed-for-life Blue Steel Spring, manufacturing and sourcing capabilities, facility locations, customer commitment, product quality, delivery, service, value, and experienced teams[13] Customer Order Backlog ($ thousands) | Date | Backlog Amount ($ thousands) | |:--------------|:---------------| | June 30, 2022 | $62,800 | | June 30, 2021 | $155,325 | | June 30, 2020 | $46,900 | - The company had approximately 1,800 employees on June 30, 2022, with 7 covered by collective bargaining agreements[22] ITEM 1A. RISK FACTORS The company faces operational risks from system disruptions, pension liabilities, and talent retention, alongside industry risks from macroeconomic factors, supply chain issues, and intense competition - Risks related to operations include potential disruptions and security breaches in business information systems, and challenges from migrating to new ERP systems (SAP)[25][28] - Participation in multi-employer pension plans poses a risk due to underfunded liabilities, potentially increasing the company's funding obligations[29][30] - The company is exposed to legal proceedings, including product liability and environmental matters, which could result in substantial costs[31][32] - Success is dependent on recruiting and retaining key employees and skilled workers in a competitive labor market, with potential negative impacts from unexpected loss of personnel or labor disruptions[33][34][35] - Industry-related risks include the continued adverse effects of the COVID-19 pandemic on operations, employee safety, and financial condition, as well as ongoing inflation impacting profitability[38][39][41][42] - The company's products are deferrable purchases, making the business vulnerable to prolonged negative economic conditions and shifts in consumer spending[43][44] - Managing the global supply chain is critical, with risks from delays, availability, quality, pricing fluctuations, changes in international trade policies (tariffs, especially on goods from China), and disruptions from foreign countries (e.g., COVID-19 related labor shortages in Vietnam)[45][46][47][48] - The highly competitive and fragmented furniture industry, coupled with a significant shift in consumer preference towards online purchasing, could adversely affect market share, revenues, and operating margins[49][50][51][52] ITEM 1B. UNRESOLVED STAFF COMMENTS The company reports no unresolved staff comments from the SEC - The company has no unresolved staff comments[56] ITEM 2. PROPERTIES As of June 30, 2022, Flexsteel owns and leases various facilities across the US, Mexico, and Asia for distribution, manufacturing, and corporate operations Owned Facilities as of June 30, 2022 (in square feet) | Location | Approximate Size (square feet) | Principal Operations | |:--------------------------|:-------------------------------|:----------------------------------| | Huntingburg, Indiana | 611,000 | Distribution | | Edgerton, Kansas | 500,000 | Distribution | | Starkville, Mississippi | 349,000 | Manufacturing (Held for Sale) | | Dublin, Georgia | 315,000 | Manufacturing | | Dubuque, Iowa | 40,000 | Corporate Office | Leased Facilities as of June 30, 2022 (in square feet) | Location | Approximate Size (square feet) | Principal Operations | |:--------------------------|:-------------------------------|:---------------------| | Greencastle, Pennsylvania | 242,000 | Distribution | | Sierra Ridge, California | 211,000 | Distribution | | Juarez, Mexico | 225,000 | Manufacturing | | Juarez, Mexico | 197,000 | Manufacturing | | Juarez, Mexico | 131,000 | Manufacturing | | High Point, North Carolina| 56,000 | Showroom | | El Paso, Texas | 38,000 | Warehouse | | Dubuque, Iowa | 3,000 | Office | | Shenzhen, China | 2,000 | Office | | Bangkok, Thailand | 1,500 | Office | | Binh Duong, Vietnam | 1,000 | Office | ITEM 3. LEGAL PROCEEDINGS Legal proceedings are detailed in Note 13 Commitments and Contingencies of the consolidated financial statements - Legal proceedings are discussed in Note 13 Commitments and Contingencies[60] ITEM 4. MINE SAFETY DISCLOSURES The company has no mine safety disclosures to report - There are no mine safety disclosures[61] PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Flexsteel's common stock trades on NASDAQ (FLXS), with its performance underperforming benchmarks in 2022, and the company has an active $30 million share repurchase program Share Investment Performance ($100 invested) | Year | Flexsteel ($) | NASDAQ ($) | Peer Group ($) | |:-----------|:----------|:---------|:-----------| | 2017 | 100.00 | 100.00 | 100.00 | | 2018 | 75.30 | 130.41 | 109.11 | | 2019 | 33.45 | 138.26 | 109.47 | | 2020 | 26.02 | 158.92 | 144.94 | | 2021 | 83.20 | 248.38 | 252.95 | | 2022 | 37.08 | 120.22 | 146.16 | - As of June 30, 2022, there were approximately 250 holders of common stock[65] - On January 20, 2022, the Board approved a repurchase program authorizing up to an additional $30 million of common stock through January 19, 2025[67] Common Stock Repurchases (Q4 Fiscal 2022) | Period | Total Shares Purchased | Average Price Paid per Share ($) | Total Shares Purchased as Part of Plan | Approximate Dollar Value of Shares that May Yet Be Purchased ($) | |:--------------------------------|:-----------------------|:-----------------------------|:---------------------------------------|:-------------------------------------------------------------| | April 1, 2022, to April 30, 2022| 118,217 | $20.05 | 2,620,781 | $12,947,944 | | May 1, 2022, to May 31, 2022 | 138,103 | $20.44 | 2,758,884 | $10,118,616 | | June 1, 2022, to June 30, 2022 | 131,569 | $19.92 | 2,890,453 | $7,490,620 | | As of June 30, 2022 | 2,892,404 | $22.96 | 2,890,453 | $7,490,620 | ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Fiscal 2022 saw net sales grow by 13.6% to $544.3 million, but gross margin declined by 680 basis points and net income fell to $1.9 million, while liquidity remained strong with an $85 million credit line - The company substantially completed restructuring activities related to the exit of Vehicle Seating and Hospitality product lines during fiscal 2021, which represented less than 1% of total net sales in fiscal 2022[72] Key Financial Ratios (as % of Net Sales) | Metric | 2022 (%) | 2021 (%) | 2020 (%) | |:-----------------------------|:--------|:--------|:--------| | Net sales | 100.0 | 100.0 | 100.0 | | Cost of goods sold | 86.6 | 79.8 | 85.5 | | Gross margin | 13.4 | 20.2 | 14.5 | | Selling, general and administrative | 12.3 | 14.2 | 19.7 | | Restructuring expense | 0.1 | 0.7 | 9.3 | | (Gain) on disposal of assets | (0.3) | (1.2) | (5.2) | | Operating income (loss) | 1.2 | 6.5 | (9.4) | | Income (loss) before income taxes | 1.1 | 6.6 | (9.2) | | Income tax provision (benefit) | 0.7 | 1.8 | (1.9) | | Net income (loss) | 0.3 | 4.8 | (7.3) | Fiscal 2022 vs. Fiscal 2021 Financial Highlights | Metric | FY2022 ($M) | FY2021 ($M) | Change ($M) | Change (%) | |:-------------------|:------------|:------------|:------------|:-----------| | Net Sales | 544.3 | 478.9 | 65.4 | 13.6% | | Gross Margin (%) | 13.4% | 20.2% | -6.8 bps | -33.7% | | SG&A Expenses | 66.7 | 68.0 | -1.2 | -1.8% | | Net Income | 1.9 | 23.0 | -21.1 | -91.7% | | Diluted EPS | $0.28 | $3.09 | -$2.81 | -90.9% | - Gross margin decrease of 680 bps was primarily due to 450 bps from domestic supply chain disruptions, 200 bps from pricing promotions and inventory write-downs, 110 bps from capacity growth investments, and 70 bps from cost inflation, partially offset by 150 bps from price realization[78] Fiscal 2021 vs. Fiscal 2020 Financial Highlights | Metric | FY2021 ($M) | FY2020 ($M) | Change ($M) | Change (%) | |:-------------------|:------------|:------------|:------------|:-----------| | Net Sales | 478.9 | 366.9 | 112.0 | 30.5% | | Gross Margin (%) | 20.2% | 14.5% | +5.7 bps | 39.3% | | SG&A Expenses | 68.0 | 72.4 | -4.5 | -6.2% | | Net Income (Loss) | 23.0 | (26.8) | 49.8 | N/A | | Diluted EPS | $3.09 | -$3.37 | $6.46 | N/A | - Working capital decreased by $3.4 million to $125.4 million on June 30, 2022, from $128.8 million on June 30, 2021[92] Summary of Cash Flow ($ thousands) | Cash Flow Type | 2022 ($ thousands) | 2021 ($ thousands) | 2020 ($ thousands) | |:-----------------------------------|:--------|:----------|:--------| | Net cash provided by (used in) operating activities | $7,993 | $(32,692) | $18,287 | | Net cash (used in) provided by investing activities | $(1,916)| $16,062 | $16,785 | | Net cash (used in) financing activities | $(5,235)| $(30,225) | $(9,122)| | Increase (decrease) in cash and cash equivalents | $842 | $(46,855) | $25,950 | - On September 8, 2021, the company entered into a five-year, $85 million revolving line of credit with Wells Fargo Bank, with $37.7 million outstanding as of June 30, 2022[101][103] Contractual Obligations as of June 30, 2022 ($ thousands) | Obligation Type | Total ($ thousands) | 1 Year ($ thousands) | 2-3 Years ($ thousands) | 4-5 Years ($ thousands) | More than 5 Years ($ thousands) | |:----------------------------|:---------|:---------|:----------|:----------|:------------------| | Operating lease obligations | $44,944 | $7,458 | $10,772 | $8,483 | $18,231 | | Warehouse management obligation | $6,428 | $1,512 | $3,025 | $1,891 | — | - For fiscal 2023, the company anticipates spending $4.0 million to $4.5 million on capital expenditures, primarily for manufacturing productivity improvements[109] ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Flexsteel's primary market risk is interest rate fluctuations on its $37.7 million credit line, with foreign currency risk deemed insignificant, alongside broader geopolitical and trade policy risks - The company's primary market risk exposure is changes in interest rates, with $37.7 million outstanding on its line of credit as of June 30, 2022[122][103] - Foreign currency risk from purchases and expenses denominated in foreign currencies is not considered significant[122] - Other market risks include political issues in supplier countries, shipping disruptions, and government imposition of regulations, duties, taxes, or tariffs on imports[121] ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This section provides audited consolidated financial statements for fiscal years 2020-2022, including balance sheets, income statements, and cash flow statements, along with detailed notes on accounting policies and specific financial items - Deloitte & Touche LLP issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of June 30, 2022[127][128][143] Consolidated Balance Sheets ($ thousands) | Asset/Liability Category | June 30, 2022 ($ thousands) | June 30, 2021 ($ thousands) | |:-------------------------|:--------------|:--------------| | ASSETS | | | | Cash and cash equivalents| $2,184 | $1,342 | | Trade receivables, net | $41,106 | $55,986 | | Inventories | $141,212 | $161,125 | | Total current assets | $190,068 | $228,540 | | Property, plant and equipment, net | $38,543 | $39,783 | | Operating lease right-of-use assets | $38,189 | $27,057 | | Total Assets | $268,741 | $296,779 | | LIABILITIES & EQUITY | | | | Accounts payable - trade | $32,147 | $67,773 | | Total current liabilities| $64,627 | $99,751 | | Line of credit | $37,739 | $3,500 | | Total liabilities | $137,181 | $128,811 | | Total shareholders' equity | $131,560 | $167,968 | | Total Liabilities & Equity | $268,741 | $296,779 | Consolidated Statements of Income (in thousands, except per share data) | Metric | 2022 ($ thousands) | 2021 ($ thousands) | 2020 ($ thousands) | |:---------------------------|:----------|:----------|:----------| | Net sales | $544,282 | $478,925 | $366,926 | | Gross margin | $72,680 | $96,730 | $53,053 | | Operating income (loss) | $6,617 | $31,200 | $(34,395) | | Income (loss) before income taxes | $5,903 | $31,467 | $(33,757) | | Net income (loss) | $1,853 | $23,048 | $(26,844) | | Basic EPS ($) | $0.29 | $3.20 | $(3.37) | | Diluted EPS ($) | $0.28 | $3.09 | $(3.37) | Consolidated Statements of Cash Flows ($ thousands) | Cash Flow Type | 2022 ($ thousands) | 2021 ($ thousands) | 2020 ($ thousands) | |:-----------------------------------|:----------|:----------|:----------| | Net cash provided by (used in) operating activities | $7,993 | $(32,692) | $18,287 | | Net cash (used in) provided by investing activities | $(1,916) | $16,062 | $16,785 | | Net cash (used in) financing activities | $(5,235) | $(30,225) | $(9,122) | | Increase (decrease) in cash and cash equivalents | $842 | $(46,855) | $25,950 | | Cash and cash equivalents at end of year | $2,184 | $1,342 | $48,197 | - The company's critical accounting policies include Allowance for Credit Losses, Inventories (lower of cost or net realizable value using FIFO), Valuation of Long-Lived Assets, Restructuring Costs, and Income Taxes (liability method, valuation allowances)[112][113][114][115][116] - Total restructuring and related costs incurred as of June 30, 2022, were $59.4 million, with $0.7 million recognized in fiscal 2022[206][207] - As of June 30, 2022, the company continues to actively market assets in Starkville, Mississippi, classified as held for sale[210] - Total stock-based compensation expense was $1.0 million, $3.7 million, and $4.6 million for fiscal years 2022, 2021, and 2020, respectively[230] - The company contributes to one multi-employer defined benefit pension plan (Central States SE and SW Areas Pension Fund), which was in 'Red Zone' status as of December 31, 2021[244][246] - The company is involved in environmental matters related to the Lane Street Groundwater Superfund Site, with a $3.6 million liability reflected as of June 30, 2022, and an employment class action lawsuit settled for $1.3 million[247][249][251][252] Quarterly Financial Information (in thousands, except per share amounts) - Fiscal 2022 | Metric | Sep 30, 2021 ($ thousands) | Dec 31, 2021 ($ thousands) | Mar 31, 2022 ($ thousands) | Jun 30, 2022 ($ thousands) | |:---------------------------|:-------------|:-------------|:-------------|:-------------| | Net sales | $137,689 | $141,668 | $140,408 | $124,517 | | Gross margin | $23,410 | $9,527 | $22,071 | $17,672 | | Operating income (loss) | $5,873 | $(8,636) | $5,814 | $3,566 | | Net income (loss) | $4,353 | $(7,545) | $5,316 | $(271) | | Basic EPS ($) | $0.64 | $(1.13) | $0.84 | $(0.05) | | Diluted EPS ($) | $0.61 | $(1.13) | $0.82 | $(0.05) | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The company reports no changes in or disagreements with its accountants regarding accounting and financial disclosure - There are no changes in or disagreements with accountants on accounting and financial disclosure[255] ITEM 9A. CONTROLS AND PROCEDURES As of June 30, 2022, the CEO and CFO confirmed effective disclosure controls and internal control over financial reporting, with no material changes during the quarter - The CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2022[256] - Management concluded that internal control over financial reporting was effective as of June 30, 2022, based on the COSO framework[258] - Deloitte & Touche LLP audited and expressed an unqualified opinion on the effectiveness of the company's internal control over financial reporting[259] - No material changes in internal control over financial reporting occurred during the fiscal quarter ended June 30, 2022[260] ITEM 9B. OTHER INFORMATION This section contains no other information to report - There is no other information to report[261] PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE Information for this item is incorporated by reference from the company's 2022 Proxy Statement - Information for this item is incorporated by reference from the 2022 Proxy Statement[262] ITEM 11. EXECUTIVE COMPENSATION Information for this item is incorporated by reference from the company's 2022 Proxy Statement - Information for this item is incorporated by reference from the 2022 Proxy Statement[263] ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS Information for this item is incorporated by reference from the company's 2022 Proxy Statement - Information for this item is incorporated by reference from the 2022 Proxy Statement[264] ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS AND DIRECTOR INDEPENDENCE Information for this item is incorporated by reference from the company's 2022 Proxy Statement - Information for this item is incorporated by reference from the 2022 Proxy Statement[265] ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information for this item is incorporated by reference from the company's 2022 Proxy Statement - Information for this item is incorporated by reference from the 2022 Proxy Statement[266] PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES This section lists financial statements, schedules, and exhibits, including Schedule II detailing Valuation and Qualifying Accounts for receivables and VAT - Financial statements and schedules are included as part of this Annual Report, with Schedule II detailing Valuation and Qualifying Accounts[268][269] Schedule II Valuation and Qualifying Accounts ($ thousands) | Description | Balance at Beginning of Year ($ thousands) | (Additions) Reductions to Income ($ thousands) | Deductions from Reserves ($ thousands) | Balance at End of Year ($ thousands) | |:-----------------------------|:-----------------------------|:---------------------------------|:-------------------------|:-----------------------| | Accounts Receivable Allowances: | | | | | | 2022 | $3,240 | $126 | $(386) | $2,980 | | 2021 | $1,770 | $1,618 | $(148) | $3,240 | | 2020 | $250 | $5,214 | $(3,694) | $1,770 | | VAT Allowances: | | | | | | 2022 | $— | $— | $— | $— | | 2021 | $237 | $— | $(237) | $— | | 2020 | $2,235 | $— | $(1,998) | $237 | SIGNATURES The report is duly signed by Flexsteel Industries, Inc.'s CEO and other principal officers and directors, certifying compliance - The report is signed by Jerald K. Dittmer (CEO), G. Alejandro Huerta (CFO), and other directors, dated August 26, 2022[274][275] EXHIBIT INDEX This section provides a comprehensive list of exhibits filed with or incorporated by reference into the Annual Report on Form 10-K - The exhibit index lists various documents, including Amended and Restated Articles of Incorporation and Bylaws, Stock Option Plans, Long-Term Incentive Compensation Plans, Credit Agreements, and certifications[277][278]