Market Overview

Flexsteel Reports Fourth Quarter Results

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Flexsteel Industries, Inc. (NASDAQ:FLXS) today reported fourth quarter
and fiscal year-to-date financial results.

Financial Highlights:

  • Solid growth performance in fiscal year 2018
  • Completed first of two deployments to new SAP S/4 HANA business
    information system in the fourth quarter

Net sales for the quarters ended June 30, (in millions):

             
2018 2017

$ Change

% Change
Residential $ 95.8 $ 99.3 $   (3.5 ) -3.5 %
Contract 17.3 18.1   (0.8 ) -4.4 %
Total $ 113.1 $ 117.4 $   (4.3 ) -3.7 %
 

Net sales for the twelve months ended June 30, (in millions):

               
2018 2017

$ Change

% Change
Residential $ 413.7 $ 396.1 $   17.6 4.4 %
Contract 75.5 72.7   2.8 3.9 %
Total $ 489.2 $ 468.8 $   20.4 4.4 %
 

During preparation work for the July 1, 2018 adoption of Accounting
Standards Codification Topic 606, Revenue from Contracts with
Customers
, the Company identified approximately $1.0 million in the
fourth quarter and $4.4 million fiscal year-to-date of variable
consideration provided to our customers to increase brand awareness and
incentivize growth recorded in Selling, General & Administrative
("SG&A") expense consistent with prior years. Upon further review of
these transactions, it is the opinion of the Company that these amounts
should be reflected as a reduction in net sales. Although the error is
immaterial to the prior quarters of fiscal 2018 and to the prior years,
the Company corrected the fiscal year-to-date amount of $4.4 million to
decrease SG&A and decrease net sales in the quarter ended June 30, 2018.
The impact to Residential net sales was $4.2 million and Contract net
sales was $0.2 million. There was no impact to operating income, net
income or EPS. The impacts to gross margin rate and SG&A are described
below.

For the fourth quarter, net sales were $113.1 million, down 3.7% to
prior year quarter inclusive of a $4.4 million year-to-date adjustment
recorded in the fourth quarter. The Residential 3.5% decrease within the
quarter was a result of high single-digit sales growth in furniture sold
to retail offset by a 37% sales decline in products sold to e-commerce
customers and the $4.2 million adjustment described above. The sales
decline to e-commerce customers in the quarter was primarily driven by
the transition to the new business information system. One legacy system
is now retired. The sales growth to retail customers was driven by
higher-priced product mix in addition to pricing actions taken earlier
in the year to offset increased raw materials costs. In Contract, sales
declined 4.4% compared to the prior year quarter primarily driven by the
previously disclosed intentional decrease in sales to certain customers
and to a lesser extent the $0.2 million adjustment described above.
Excluding the intentional decrease to certain customers, Contract sales
increased 10.9% in the quarter due to strong sales growth in the
recreation and hospitality markets.

Net sales were $489.2 million for the twelve months ended June 30, 2018,
an increase of 4.4% over the prior year. The year included an all-time
record quarter for net sales in the second quarter followed by a record
third quarter. This result was primarily driven by high single-digit
growth in Residential products sold to furniture retailers, and greater
than 20% growth in Contract products targeting the recreational and
hospitality markets. These successes in the year were partially offset
by a 13% decline in sales to e-commerce customers, primarily driven by
product placement disruption and the new business information system
transition.

Gross margin as a percent of net sales for the quarter ended June 30,
2018 was 15.1%, compared to 22.8% for the prior year quarter. For the
twelve months ended June 30, 2018, gross margin as a percent of net
sales was 20.1%, compared to 23.2% for the prior year period. In
addition to impacting SG&A and net sales, the year-to-date correction of
expense from SG&A to net sales as previously discussed in this press
release adversely impacted gross margin 300 basis points in the fourth
quarter and 70 basis points in the full year.

Higher labor costs contributed approximately 270 basis points of the
gross margin decline quarter over quarter and approximately 180 basis
points of the gross margin decline for fiscal year 2018 over the prior
year. After rapid growth in certain core product categories, additional
manufacturing associates were hired to support product delivery speeds
customers have come to expect from the Company. Also, the Company
manufactures a majority of custom upholstered furniture in the United
States with a highly skilled workforce and has experienced higher
average wage rates and turnover from the tight labor markets. To bolster
the Company's success attracting and retaining skilled workers in highly
competitive labor markets, during the fiscal second and third quarters
of this year the Company changed its compensation approach for the
US-based manufacturing workforce. As this modified compensation
structure was implemented, the Company experienced declines in
productivity. The Company is working to return to productivity levels
realized before the compensation structure changes. Long term, the
Company expects these changes to result in skilled workforce attraction
and retention, reduced turnover and training costs, and continued
improvement in quality and productivity to support the long-term growth
of the Company. The Company's Juarez, Mexico facility contracted
employee wage rates also increased significantly due to Mexican
government mandated wage increases.

Higher material costs primarily driven by the increased cost of
polyfoam, plywood and to a lesser extent steel caused approximately 170
basis points of gross margin decline in the fourth quarter and caused
approximately 90 basis points decline in fiscal year 2018 over the prior
year. While the Company's furniture is renowned for the comfort and
quality from its "Heart of Steel", Flexsteel's Blue Steel Springs™ are
manufactured in the United States from steel produced primarily in the
United States. The increased material costs were partially offset by
higher pricing and improved product mix in both the quarter and fiscal
year with positive gross margin impact of approximately 80 basis points
quarter over quarter and approximately 90 basis points over the prior
year.

During implementation of the Company's first deployment of its new
business information system, the Company experienced higher than
expected disruption to customers which resulted in service level
penalties causing approximately 70 basis points of gross margin decline
compared to the prior year quarter and approximately 20 basis points of
gross margin decline in the fiscal year 2018 over the prior year. The
remaining 40 basis points in the quarter and 40 basis points in the
fiscal year comparisons were driven by events considered one-time in
nature or occurred in the prior year and were not repeated in the
current year.

Selling, general and administrative (SG&A) expenses were 12.7% of net
sales in the current year quarter compared to 15.1% of net sales in the
prior year quarter. For the twelve months ended June 30, 2018, SG&A
expenses were 14.7% of net sales compared to 15.5% of net sales in the
prior year period. As previously discussed in this press release, the
year-to-date correction of expense from SG&A to net sales favorably
impacted SG&A $4.4 million in the fourth quarter and the full year.
Excluding this adjustment, expenses increased $0.8 million in the
quarter and $1.1 million in the full year to support a strategic digital
marketing investment aimed at directly influencing consumers as they
dream and plan on-line for future furniture purchases.

The twelve months ended June 30, 2017 included $2.1 million offset to
expense related to the Indiana litigation, with $0.9 million or 0.2% of
net sales reported in "Selling, general & administrative," and $1.2
million or $0.10 per share reported in "Litigation settlement
reimbursements." As reported in fiscal third quarter, on April 25, 2018,
the United States Environmental Protection Agency ("EPA") issued a
CERCLA 106(a) order (the "Order") for the Lane Street Groundwater
Superfund Site located in Elkhart, Indiana. As a result of receiving
this Order, the Company recorded a $3.6 million liability at the end of
the fiscal third quarter. The Company maintains its position that it did
not cause nor contribute to the contamination. However, in accordance
with FASB issued Asset Retirement and Environmental Obligations (ASC
410-30), the Company reflected a $3.6 million liability in its results
for the quarter ended March 31, 2018. There has been no change in this
liability for the quarter and year ended June 30, 2018.

As reported earlier in this fiscal year, the Company completed a $6.5
million sale of a facility and recognized a pre-tax gain of $1.8
million. The after-tax basis reported in "Gain on sale of facility" is
$1.3 million or $0.16 per share.

The effective tax rate for the current year quarter was 23.5% compared
to 34.4% in the prior year quarter. For the twelve months ended June 30,
2018, the effective tax rate was 29.7% compared to 36.7% in the prior
year period. The current fiscal year results were positively impacted by
the passage of the Tax Cuts and Jobs Act (Tax Reform) resulting in a
$0.22 per share increase in net income. Beginning in fiscal year 2019,
the Company expects an effective tax rate range of 25% to 27%.

The above factors resulted in net income of $2.2 million or $0.28 per
share for the quarter ended June 30, 2018, compared to $6.0 million or
$0.76 per share in the prior year quarter. For the twelve months ended
June 30, 2018, net income was $17.7 million or $2.23 per share compared
to $23.8 million or $3.02 per share in the prior year period.

Working capital (current assets less current liabilities) at June 30,
2018 was $149 million compared to $158 million at June 30, 2017. Changes
in working capital include decreases of $3 million in inventory, $2
million in investments and an increase of $3 million in accrued
liabilities.

For the twelve months ended June 30, 2018, capital expenditures were
$29.4 million including $12.6 million invested to upgrade the business
information system and $13.8 million for the construction of a new
manufacturing facility.

All earnings per share amounts are on a diluted basis.

Outlook

The Company expects sales growth of mid-single digits in the first
fiscal quarter of 2019 with continued inflationary pressure on raw
materials and moderating labor cost increases. In addition, the Company
is acutely aware of the impending tariff affecting all imported
furniture and certain furniture components from China into the United
States which represents a significant risk to earnings. Should these
tariffs go into effect, the Company plans to pass through any
incremental costs to customers during the time these tariffs are
enforced. In addition, the Company is looking at supply chain options to
mitigate the tariff impacts should they be implemented. The Company is
focused and committed to driving gross margin expansion through improved
operational execution, targeted sales price increases and enhanced
service levels.

In the fourth quarter, the Company completed the first deployment of the
new business information system. During the readiness phase, the Company
determined that multiple deployments would ensure effective
implementation. The first deployment is now operating in approximately
20% of the Company and one of the two legacy systems has been retired.
After stabilization of the first deployment and documenting lessons
learned, the Company has re-scheduled the final deployment in fiscal
2020 and incorporated the remaining 80% of the Company into this
deployment. The additional time allotted de-risks the implementation and
integration for the Company allowing for additional configuration and
testing to be completed prior to launch and the subsequent retirement of
the second legacy system. Once fully implemented, SAP S4/HANA will
enable the Company to better meet market conditions, customer
requirements and increase operating efficiency.

During fiscal year 2019, the Company anticipates spending $9 million for
capital expenditures and incurring $3 million of SG&A expenses related
to the business information system project. The Company believes it has
adequate working capital and borrowing capabilities to meet these
requirements.

The Company remains committed to its core strategies, which include
providing a wide range of quality product offerings and price points to
the residential and contract markets, combined with a conservative
approach to business. We strive for an agile business model and supply
chain to adapt to changing customer requirements in all the markets we
serve with the expectation that the Company grows faster than the
market. The Company will maintain its focus on a strong balance sheet
through emphasis on cash flow and increasing profitability. The Company
believes these core strategies are in the best interest of its
shareholders.

About Flexsteel

Flexsteel Industries, Inc. and Subsidiaries (the "Company") incorporated
in 1929 is celebrating its 125th anniversary of the Company's
founding in 1893. Flexsteel Industries, Inc. is one of the oldest and
largest manufacturers, importers and marketers of residential and
contract upholstered and wooden furniture products in the United States.
Over the generations the Company has built a committed retail and
consumer following based on its patented, guaranteed-for-life Blue Steel
Spring™ – the all-riveted, high-carbon, steel-banded seating platform
that gives upholstered and leather furniture the strength and comfort to
last a lifetime. With offerings for use in home, hotel, healthcare,
recreational vehicle, marine and office, the Company distributes its
furniture throughout the United States & Canada through the Company's
sales force and various independent representatives.

Forward-Looking Statements

Statements, including those in this release, which are not historical or
current facts, are "forward-looking statements" made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. There are certain important factors that could cause our
results to differ materially from those anticipated by some of the
statements made herein. Investors are cautioned that all forward-looking
statements involve risk and uncertainty. Some of the factors that could
affect results are the cyclical nature of the furniture industry, supply
chain disruptions, litigation, product recalls, the effectiveness of new
product introductions and distribution channels, the product mix of
sales, pricing pressures, the cost of raw materials and fuel, retention
and recruitment of key employees, actions by governments including laws,
regulations, taxes and tariffs, the amount of sales generated and the
profit margins thereon, competition (both U.S. and foreign), credit
exposure with customers, participation in multi-employer pension plans
and general economic conditions. For further information regarding these
risks and uncertainties, see the "Risk Factors" section in Item 1A of
our most recent Annual Report on Form 10-K.

For more information, visit our web site at http://www.flexsteel.com.

 
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
(in thousands)
       
June 30, June 30,
2018 2017
 

ASSETS

 
CURRENT ASSETS:
Cash and cash equivalents $ 27,750 $ 28,874
Investments 15,951 17,958
Trade receivables, net 41,253 42,362
Inventories 96,204 99,397
Other 8,476 6,659
Total current assets 189,634 195,250
 
NONCURRENT ASSETS:
Property, plant, and equipment, net 90,725 70,661
Other assets 3,934 4,134
 
TOTAL $ 284,293 $ 270,045
 

LIABILITIES AND SHAREHOLDERS' EQUITY

 
CURRENT LIABILITIES:
Accounts payable – trade $ 17,228 $ 16,758
Accrued liabilities 23,701 20,437
Total current liabilities 40,929 37,195
 
LONG-TERM LIABILITIES:
Other long-term liabilities 1,666 2,090
Total liabilities 42,595 39,285
 
SHAREHOLDERS' EQUITY 241,698 230,760
 
TOTAL $ 284,293 $ 270,045
 

 
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share data)
       
Three Months Ended Twelve Months Ended
June 30, June 30,
2018     2017 2018     2017
NET SALES $ 113,093 $ 117,434 $ 489,180 $ 468,764
COST OF GOODS SOLD (96,049 ) (90,607 ) (390,961 ) (360,113 )
GROSS MARGIN 17,044 26,827 98,219 108,651

SELLING, GENERAL AND ADMINISTRATIVE

(14,353 )

(17,716

)

 

(71,949

)

(72,562

)

ENVIRONMENTAL REMEDIATION -- -- (3,600 ) --
LITIGATION SETTLEMENT REIMBURSEMENTS --

--

--

1,175

GAIN ON SALE OF FACILITY --   --   1,835   --  
OPERATING INCOME 2,691 9,111 24,505 37,264
OTHER INCOME 165   70   621   322  
INCOME BEFORE INCOME TAXES 2,856 9,181 25,126 37,586
INCOME TAX PROVISION (670 ) (3,160 ) (7,460 ) (13,800 )
NET INCOME $ 2,186   $ 6,021   $ 17,666   $ 23,786  
 

AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:

Basic 7,859   7,819   7,848   7,782  
Diluted 7,919   7,943   7,919   7,886  
 

EARNINGS PER SHARE OF COMMON STOCK:

Basic $ 0.28   $ 0.77  

 

$

2.25

  $ 3.06  
Diluted $ 0.28   $ 0.76  

 

$

2.23

  $ 3.02  
 

 
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
   
Twelve Months Ended
June 30,
2018     2017
 

OPERATING ACTIVITIES:

Net income $ 17,666 $ 23,786

Adjustments to reconcile net income to net cash provided by (used
in) operating activities:

Depreciation 7,367 7,936
Stock-based compensation expense 501 1,609
Deferred income taxes 286 1,606
Excess tax benefit from share-based payments -- (1,494 )

Change in provision for losses on accounts receivable

(100

)

 

(100

)

Gain on disposition of capital assets (1,792 ) (512 )
Changes in operating assets and liabilities 3,366   (6,443 )
Net cash provided by operating activities 27,294   26,388  
 

INVESTING ACTIVITIES:

Net proceeds (purchases) of investments 1,942 (18,063 )
Proceeds from sale of capital assets 6,152 1,848
Capital expenditures (29,447 ) (13,457 )
Net cash used in investing activities (21,353 ) (29,672 )
 

FINANCING ACTIVITIES:

Dividends paid (6,746 ) (6,062 )
Proceeds from issuance of common stock 233 1,078
Shares issued to employees, net of shares withheld (552 ) (1,132 )
Excess tax benefit from share-based payments --   1,494  
Net cash used in financing activities (7,065 ) (4,622 )
 
Decrease in cash and cash equivalents (1,124 ) (7,906 )
Cash and cash equivalents at beginning of period 28,874   36,780  
Cash and cash equivalents at end of period $ 27,750   $ 28,874  
 

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