2017
Annual Report
Fiscal Year Ending
June 30, 2017
385 Bell Street | Dubuque, IA | 52001 | www.flexsteel.com
Financial Highlights
Directors
Officers
(in thousands, except per-share data)
For the Year Ended June 30,
2017
2016
2015
2014
2013
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 468,764
$ 500,106
$ 466,904
$ 438,543
$ 386,189
Operating income . . . . . . . . . . . . . . . . . . . . . . . 37,264
Income before income taxes . . . . . . . . . . . . . . 37,586
38,068
37,927
34,422
35,559
22,286
23,800
20,271
20,881
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,786
$ 24,237
$ 22,299
$ 14,990
$ 13,151
Weighted Average Common
Shares Outstanding – Diluted . . . . . . . . . . . . . . . 7,886
7,765
7,708
7,511
7,326
Earnings per share of
Common Stock – Diluted . . . . . . . . . . . . . . . . . $ 3.02
$ 3.12
$ 2.89
$ 2.00
$ 1.80
Cash dividends declared
per common share . . . . . . . . . . . . . . . . . . . . . . $ 0.80
$ 0.72
$ 0.72
$ 0.60
$ 0.60
Book value per share . . . . . . . . . . . . . . . . . . . $ 29.50
$ 27.23
$ 24.97
$ 22.62
$ 21.28
At June 30,
Working capital . . . . . . . . . . . . . . . . . . . $ 158,055
$ 143,086
$ 119,902
$ 128,644
$ 113,699
Total assets . . . . . . . . . . . . . . . . . . . . . . . . 270,045
246,896
244,619
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . 39,285
37,246
57,872
210,213
43,478
192,539
41,302
Shareholders’ equity . . . . . . . . . . . . . . . $ 230,760
$ 209,650
$ 186,747
$ 166,735
$ 151,237
$500
Net Income
[in millions]
Dividends
[in millions]
$467
$469
$24.2
$23.8
$22.3
$6.1
$5.5
$5.1
$15.0
$13.2
$4.2
$4.4
$439
$386
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
21%Revenue Growth
[From June 30, 2013 to June 30, 2017]
81%Profit Growth
[From June 30, 2013 to June 30, 2017]
45%Dividend Growth
[From June 30, 2013 to June 30, 2017]
Karel K. Czanderna
Independent Management Advisor
Eric S. Rangen
Chair of the Board of Directors
Retired Executive Vice President
Strategic Initiatives
Optum (part of UnitedHealth Group)
President and Chief Executive Officer
Flexsteel Industries, Inc.
Jeffrey T. Bertsch
Retired Senior Vice President
Flexsteel Industries, Inc.
Mary C. Bottie
Retired Vice President
Motorola, Inc.
Michael J. Edwards
Former Chief Executive Officer
eBags
Thomas M. Levine
Robert J. Maricich
Chief Executive Officer
International Market Centers LP
Nancy E. Uridil
Retired Senior Vice President
Moen Incorporated
Committees
Audit and Ethics
Committee
Compensation
Committee
Nominating and
Governance Committee
Thomas M. Levine, Chair
Mary C. Bottie, Chair
Nancy E. Uridil, Chair
Michael J. Edwards
Michael J. Edwards
Mary C. Bottie
Robert J. Maricich
Robert J. Maricich
Thomas M. Levine
Nancy E. Uridil
Julia K. Bizzis
Senior Vice President
Strategic Growth
Carrie T. Bleile
Vice President Merchandising
Home Furnishings
Steven K. Hall
Senior Vice President
Global Supply Chain
Timothy E. Hall
Senior Vice President Finance
Chief Financial Officer
Secretary, Treasurer
Stacy M. Kammes
Vice President
Human Resources
Timothy P. Newlin
Vice President
Home Furnishings
Charles T. Piekenbrock
Vice President
Strategic Sourcing
Michael A. Santillo
Vice President
Healthcare
Richard J. Stanley
Senior Vice President
Contract Group & Home Styles
TRANS FER AGENT AND REGISTRAR
Wells Fargo Shareowner Services
WEBSITE
www.flexsteel.com
PO Box 64854
South St. Paul, Minnesota 55164-0854
NASDAQ GLOBAL SELECT MARKET
NASDAQ Symbol • FLXS
ANNUAL MEETING
December 4, 2017, 2:00 p.m.
Dubuque, Iowa
LOCATIONS
• Flexsteel Industries, Inc.
Dubuque, Iowa
Global Headquarters
Dubuque Operations
Dublin, Georgia
Edgerton, Kansas
Harrison, Arkansas
Huntingburg, Indiana
Lancaster, Pennsylvania
Louisville, Kentucky
Riverside, California
Starkville, Mississippi
AFFIRMATIVE ACTION POLICY
It is the policy of Flexsteel Industries, Inc. that all employees and potential
employees shall be judged on the basis of qualifications and ability,
without regard to age, sex, race, creed, color, or national origin in all
personnel actions. No employee or applicant for employment shall receive
discriminatory treatment because of physical or mental disability in regard
to any position for which the employee or applicant for employment is
qualified. Employment opportunities and job advancement opportunities will
be provided for qualified disabled veterans and veterans of the Vietnam era.
This policy is consistent with the Company’s plan for “Affirmative Action”
in implementing the intent and provisions of the various laws relating to
employment and non-discrimination.
ANNUAL REPORT ON FORM 10-K AVAILABLE
A copy of the Company’s annual report on Form 10-K, as filed with the
Securities and Exchange Commission, can be found online via the website
www.flexsteel.com under “About Flexsteel” or can be obtained by writing to:
Office of the Secretary
Flexsteel Industries, Inc.
PO Box 877
Dubuque, Iowa 52004-0877
© 2017 Flexsteel Industries, Inc.
Net Sales[in millions]
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To Our Shareholders
The closing of fiscal year 2017 is characterized by a
continued focus on our customers and an affirmation
of the importance of quality as it relates to our brand.
This year Flexsteel delivered the second-best year
in the history of the company with $469 million in
sales. This was a 6.3 percent decrease compared
to the previous year’s record of $500 million.
Net income was $23.8 million or $3.02 per share
compared to the previous year’s record of $24.2
million or $3.12 per share. Due to cost controls
companywide, our net income decreased only
1.7 percent, despite the revenue decline and an
important investment in our business information
system. These actions maintained profitability in the
current year and will further enable future net sales
and net income growth.
We intentionally stopped selling products that
accounted for more than $25 million in sales during
the prior fiscal year because they did not meet our
discerning quality standards. Maintaining product
quality builds both customer loyalty to our brand
and operating income over time. Additionally, we
changed leadership in three of our businesses to
support our business information system project
and to accelerate business growth. Our customers
continue to respond positively to our on-trend
products for each of the markets we serve and the
value of our signature blue steel spring that continues
to generate interest and brand loyalty in the field.
Focused management of assets and alignment to
corporate goals increased our cash and investment
positions. Also contributing was the close of litigation
that consumed talent and money for six years and
from which we had significant recoveries. In fiscal year
2017 we invested $15 million developing the new
business information system for a total investment to
date of $17 million. We expect the total cost to be
$30 million; this is the most complex and strategic
investment in Flexsteel’s history and will support
delivering perfect orders every day to our customers
in both the residential and contract furniture markets
we serve. We are now well into the design phase and
anticipate implementing the new system during the
next fiscal year.
We increased the capacity of our Lancaster,
Pennsylvania, distribution center to speed product
deliveries to northeastern U.S. customers. We
committed to invest $25 million to construct a new
manufacturing facility in Dubuque, Iowa, replacing
a facility that is over 100 years old. We are also
extending our commitment to sustainability by
partnering in the redevelopment of the current site
for future use in the community. And finally, we again
increased our cash dividend to shareholders from
$5.5 million to $6.1 million for a five-year growth rate
of nearly 45 percent.
In December, Eric Rangen was elected chair of the
board of directors, succeeding Lynn Davis. During
Davis’s five years as board chair, we expanded
the board’s focus on strategy and governance,
increased the independent-to-inside director ratio
while decreasing average board tenure, established
director and officer stock ownership requirements
and aligned the committee structure to include
corporate governance. Looking forward, Rangen’s
extensive background in accounting, finance,
operations and human resources and his 15 years
of experience as a member and committee chair
on Flexsteel’s board are powerful guiding assets to
continue delivering planned profitable growth today
and long term.
We look forward with optimism to the next year, with
key improvements to continue offering premium
service to our customers that will create added
value for our shareholders. At the end of the day the
people—our customers, associates and suppliers—
are what make Flexsteel such a revered brand in the
furniture industry. They are the people who buy, sell
and make our furniture and are exactly what have
made our company so strong.
Karel K. Czanderna
President and
Chief Executive Officer
Eric S. Rangen
Chair of the Board of
Directors
Flexsteel Industries, Inc. is headquartered in Dubuque, Iowa. Flexsteel is a designer, manufacturer,
importer and marketer of quality upholstered, wood, and metal furniture for residential, recreational
vehicle, office, hospitality, and healthcare markets. All products are distributed nationally.
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Rhapsody Power Reclining
Sectional with Seville Tables
Bryant Group with Halo Tables
Senior Living
Hampton Bedroom Group
Hospitality
Carmen Dining Group
Healthcare
Seaside Lodge Bedroom Group
Marbella Kitchen Cart
Government
Bucket Seat
Easy Bed
Commercial Office
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[ ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended June 30, 2017
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission file number 0-5151
_______________________________________________
FLEXSTEEL INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
Minnesota 42-0442319
385 Bell Street, Dubuque, Iowa
(Address of principal executive offices)
52001
(Zip Code)
Registrant’s telephone number, including area code:
(563) 556-7730
_______________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $1.00 Par Value
Name of each exchange on which registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
_______________________________________________
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No []
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No []
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes [] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the
Exchange Act (check one). Large accelerated filer [ ] Accelerated filer [] Non-accelerated filer [ ] Smaller reporting company [ ] Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No []
The aggregate market value of the voting stock held by non-affiliates, computed by reference to the last sales price on December 31, 2016 (which was the last
business day of the registrant’s most recently completed second quarter) was $391,665,307.
Indicate the number of shares outstanding of each of the registrant’s classes of Common Stock, as of the latest practicable date. 7,823,121 Common Shares ($1 par
value) as of August 11, 2017.
DOCUMENTS INCORPORATED BY REFERENCE
In Part III, portions of the registrant’s 2017 Proxy Statement to be filed with the Securities and Exchange Commission within 120 days of the Registrant’s fiscal year
end.
1
PART I
Cautionary Statement Relevant to Forward-Looking Information for the Purpose of “Safe Harbor” Provisions of
the Private Securities Litigation Reform Act of 1995
The Company and its representatives may from time to time make written or oral forward-looking statements with respect to long-
term goals or anticipated results of the Company, including statements contained in the Company’s filings with the Securities and
Exchange Commission and in its reports to stockholders.
Statements, including those in this Annual Report on Form 10-K, 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, 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 this Annual Report on Form 10-K.
The Company specifically declines to undertake any obligation to publicly revise any forward-looking statements that have been made
to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
Item 1.
Business
General
Flexsteel Industries, Inc. and Subsidiaries (the “Company”) was incorporated in 1929 and is one of the oldest and largest
manufacturer, importer and marketer of residential and contract upholstered and wood furniture products in the United States. Product
offerings include a wide variety of upholstered and wood furniture such as sofas, loveseats, chairs, reclining and rocker-reclining
chairs, swivel rockers, sofa beds, convertible bedding units, occasional tables, desks, dining tables and chairs and bedroom furniture.
The Company’s products are intended for use in home, office, hotel, healthcare and other contract applications. A featured component
in most of the upholstered furniture is a unique steel drop-in seat spring from which our name “Flexsteel” is derived. The Company
distributes its products throughout the United States through the Company’s sales force and various independent representatives.
The Company operates in one reportable segment, furniture products. Our furniture products business involves the distribution of
manufactured and imported products consisting of a broad line of upholstered and wooden furniture for residential and contract
markets. Set forth below is information for the past three fiscal years showing the Company’s net sales attributable to each of the
areas of application:
(in thousands)
Residential ..................................... $
Contract .........................................
$
Manufacturing and Offshore Sourcing
FOR THE YEARS ENDED JUNE 30,
2016
420,884
79,222
500,106
2017
396,099
72,665
468,764
2015
393,143
73,761
466,904
$
$
$
$
We operate manufacturing facilities that are located in Arkansas, California, Georgia, Iowa, Mississippi and Juarez, Mexico. These
manufacturing operations are integral to our product offerings and distribution strategy by offering smaller and more frequent product
runs of a wider product selection. We identify and eliminate manufacturing inefficiencies and adjust manufacturing schedules on a
daily basis to meet customer requirements. We have established relationships with key suppliers to ensure prompt delivery of quality
component parts. Our production includes the use of selected component parts sourced offshore to enhance our value in the
marketplace.
We integrate our manufactured products with finished products acquired from offshore suppliers who can meet our quality
specification and scheduling requirements. We will continue to pursue and refine this blended strategy, offering customers
manufactured goods, products manufactured utilizing imported component parts, and ready-to-deliver imported products. This
blended focus on products allows the Company to provide a wide range of price points, styles and product categories to satisfy
customer requirements.
2
Competition
The furniture industry is highly competitive and includes a large number of U.S. and foreign manufacturers and distributors, none of
which dominates the market. The markets in which we compete include a large number of relatively small manufacturers; however,
certain competitors have substantially greater sales volumes than the Company. Our products compete based on style, quality, price,
delivery, service and durability. We believe that our steel seat spring, manufacturing and sourcing capabilities, facility locations,
commitment to customers, product quality, delivery, service, value and experienced production, sales, marketing and management
teams, are some of our competitive advantages.
Seasonality
The Company’s business is not considered seasonal.
Foreign Operations
The Company makes minimal export sales. At June 30, 2017, the Company had approximately 100 employees located in Asia to
ensure Flexsteel’s quality standards are met, and coordinate the delivery of purchased products. The Company leases and operates a
225,000 square foot production facility in Juarez, Mexico utilizing contracted labor.
Customer Backlog
The approximate backlog of customer orders believed to be firm as of the end of the current fiscal year and the prior two fiscal years
were as follows (in thousands):
June 30, 2017
$55,000
June 30, 2016
$46,700
June 30, 2015
$58,600
Raw Materials
The Company utilizes various types of wood, fabric, leather, filling material, high carbon spring steel, bar and wire stock,
polyurethane and other raw materials in manufacturing furniture. While the Company purchases these materials from numerous
outside suppliers, both U.S. and foreign, it is not dependent upon any single source of supply. The costs of certain raw materials
fluctuate, but all continue to be readily available.
Working Capital Practices
For a discussion of the Company’s working capital practices, see “Liquidity and Capital Resources” in Item 7 of this Annual Report
on Form 10-K.
Industry Factors
The Company has exposure to actions by governments, including tariffs, see “Risk Factors” in Item 1A of this Annual Report on Form
10-K.
Government Regulations
The Company is subject to various local, state, and federal laws, regulations and agencies that affect businesses generally, see “Risk
Factors” in Item 1A of this Annual Report on Form 10-K.
Environmental Matters
The Company is subject to environmental laws and regulations with respect to product content and industrial waste, see “Risk
Factors” in Item 1A and “Legal Proceedings” in Item 3 of this Annual Report on Form 10-K.
Trademarks and Patents
The Company owns the American and Canadian improvement patents to its Flexsteel seat spring, as well as patents on convertible
beds. The Company has patents and owns certain trademarks in connection with its furniture products, which patents are due to expire
on dates ranging from 2017-2034.
It is not common in the furniture industry to obtain a patent for a furniture design. If a particular design of a furniture manufacturer is
well accepted in the marketplace, it is common for other manufacturers to imitate the same design without recourse by the furniture
3
manufacturer who initially introduced the design. Furniture products are designed by the Company’s own design staff and through the
services of third-party designers. New models and designs of furniture, as well as new fabrics, are introduced continuously. In the
last three fiscal years, these design activities involved the following expenditures (in thousands):
Fiscal Year Ended June 30,
2017
2016
2015
Expenditures
$3,700
$4,170
$4,090
Employees
The Company had 1,460 employees as of June 30, 2017, including 180 employees that are covered by collective bargaining
agreements. Management believes it has good relations with employees.
Website and Available Information
Our website is located at www.flexsteel.com. Information on the website does not constitute part of this Annual Report on Form 10-K.
A copy of the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (“SEC”), other SEC
reports filed or furnished and our Guidelines for Business Conduct are available, without charge, on the Company’s website at
www.flexsteel.com or by writing to the Office of the Secretary, Flexsteel Industries, Inc., P. O. Box 877, Dubuque, IA 52004-0877.
The executive officers of the Company, their ages, positions (in each case as of August 11, 2017), and the year they were first elected
or appointed an officer of the registrant, are as follows:
Name (age)
Karel K. Czanderna (61)
Timothy E. Hall (59)
Julia K. Bizzis (60)
Steven K. Hall (47)
Richard J. Stanley (45)
Item 1A. Risk Factors
Position (date first became officer)
President & Chief Executive Officer (2012)
Senior Vice President Finance, Chief Financial Officer, Secretary & Treasurer (2000)
Senior Vice President Strategic Growth (2013)
Senior Vice President Global Supply Chain (2014)
Senior Vice President Contract Group & Home Styles (2014)
Our business is subject to a variety of risks. You should carefully consider the risk factors detailed below in conjunction with the
other information contained in this Annual Report on Form 10-K. Should any of these risks actually materialize, our business,
financial condition, and future prospects could be negatively impacted. There may be additional factors that are presently unknown to
us or that we currently believe to be immaterial that could affect our business.
Our business information systems could be impacted by disruptions and security breaches.
We employ information technology systems to support our global business. Security breaches and other disruptions to our information
technology infrastructure could interfere with our operations, compromise information belonging to us and our customers and
suppliers, and expose us to liability which could adversely impact our business and reputation. In the ordinary course of business, we
rely on information technology networks and systems to process, transmit and store electronic information, and to manage or support a
variety of business processes and activities. Additionally, we collect and store certain data, including proprietary business information,
and may have access to confidential or personal information in certain areas of our businesses that is subject to privacy and security
laws, regulations and customer-imposed controls. While security breaches and other disruptions to our information technology
networks and infrastructure could happen, none have occurred to date that have had a material impact to us. Any such events could
result in legal claims or proceedings, liability or penalties under privacy laws, disruption in operations, and damage to our reputation,
which could adversely affect our business.
The implementation of a new business information system could disrupt our business.
We are in the testing phase of implementing a new business information system. The new system will replace our legacy systems to
drive operational efficiencies. An ineffective implementation of the new business information system may result in the following:
Disruption of our domestic and international supply chain;
Inability to fill customer orders accurately and on a timely basis;
Inability to process payments to our suppliers and vendors;
Negative impact on financials;
Unable to fulfill federal, state and local tax filing requirements in a timely and accurate matter; and
Increased demands of management and associates to the detriment of other corporate initiatives.
4
Our future success depends on our ability to manage our global supply chain.
We acquire raw materials, component parts and certain finished products from external suppliers, both U.S. and foreign. Many of
these suppliers are dependent upon other suppliers in countries other than where they are located. This global interdependence within
our supply chain is subject to delays in delivery, availability, quality and pricing (including tariffs) of products. The delivery of goods
from these suppliers may be delayed by customs, labor issues, changes in political, economic and social conditions, weather, laws and
regulations. Unfavorable fluctuations in price, quality, delivery and availability of these products could negatively affect our ability to
meet demands of our customers and have a negative impact on product margin.
Competition from U.S. and foreign finished product manufacturers may adversely affect our business, operating results or
financial condition.
The furniture industry is very competitive and fragmented. We compete with U.S. and foreign manufacturers and distributors. As a
result, we may not be able to maintain or raise the prices of our products in response to competitive pressures or increasing costs.
Also, due to the large number of competitors and their wide range of product offerings, we may not be able to significantly
differentiate our products (through styling, finish and other construction techniques) from those of our competitors. As a result, we
are continually subject to the risk of losing market share, which may lower our sales and earnings.
Future costs of complying with various laws and regulations may adversely impact future operating results.
Our business is subject to various laws and regulations which could have a significant impact on our operations and the cost to comply
with such laws and regulations could adversely impact our financial position, results of operations and cash flows. In addition, failure
to comply with such laws and regulations, even inadvertently, could produce negative consequences which could adversely impact our
operations.
Due to our participation in multi-employer pension plans, we may have exposures under those plans that could extend beyond
what our obligations would be with respect to our employees.
We participate in, and make periodic contributions to, three multi-employer pension plans that cover union employees. Multi-
employer pension plans are managed by trustee boards comprised of participating employer and labor union representatives, and the
employers participating in a multi-employer pension plan are jointly responsible for maintaining the plan’s funding requirements.
Based on the most recent information available to us, we believe that the present value of actuarially accrued liabilities in one of the
multi-employer pension plans substantially exceeds the value of the assets held in trust to pay benefits. As a result of our
participation, we could experience greater volatility in our overall pension funding obligations. Our obligations may be impacted by
the funded status of the plans, the plans’ investment performance, changes in the participant demographics, financial stability of
contributing employers and changes in actuarial assumptions. See Note 9.
Our future results may be affected by various legal proceedings and compliance risk, including those involving product
liability, environmental, or other matters.
We face the business risk of exposure to product liability claims in the event that the use of any of our products results in personal
injury or property damage. In the event any of our products prove to be defective, we may be required to recall or redesign such
products. We are also subject to various laws and regulations relating to environmental protection and the discharge of materials into
the environment. We could incur substantial costs, including legal expenses, as a result of the noncompliance with, or liability for
cleanup or other costs or damages under, environmental laws. Given the inherent uncertainty of litigation, these various legal
proceedings and compliance matters could have a material impact on our business, operating results or financial condition.
Our success depends on our ability to recruit and retain key employees.
If we are not successful in recruiting and retaining key employees or experience the unexpected loss of key employees, our operations
may be negatively impacted.
Our failure to anticipate or respond to changes in consumer or designer tastes and fashions in a timely manner could
adversely affect our business and decrease our sales and earnings.
Furniture is a styled product and is subject to rapidly changing consumer and end-user trends and tastes and is highly fashion oriented,
and if we are not able to acquire sufficient fabric variety, or if we are unable to predict or respond to changes in fashion trends, we
may lose sales and have to sell excess inventory at reduced prices.
5
Our products are considered deferrable purchases for consumers during economic downturns. Prolonged negative economic
conditions could impact our business.
Economic downturns and prolonged negative economic conditions could affect consumer spending habits by decreasing the overall
demand for home furnishings and contract products. These events could impact retailers, offices, hospitality, recreational vehicle
seating and healthcare businesses resulting in an impact on our business. A recovery in our sales could lag significantly behind a
general economic recovery due to the deferrable nature and relatively significant cost of home furnishings and contract products
purchases.
Terms of collective bargaining agreements and labor disruptions could adversely impact our results of operations.
Terms of collective bargaining agreements that prevent us from competing effectively could adversely affect our financial condition,
results of operations and cash flows. We are committed to working with those groups to avert or resolve conflicts as they arise.
However, there can be no assurance that these efforts will be successful.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Properties
The Company owns the following facilities as of June 30, 2017:
Location
Harrison, Arkansas
Riverside, California
Riverside, California (1)
Dublin, Georgia
Huntingburg, Indiana
Dubuque, Iowa (2)
Dubuque, Iowa
Edgerton, Kansas
Starkville, Mississippi
Lancaster, Pennsylvania
Approximate
Size (square feet)
Principal Operations
221,000
236,000
69,000
315,000
611,000
719,000
40,000
500,000
349,000
216,000
Manufacturing
Manufacturing and Distribution
Held for Sale
Manufacturing
Distribution
Manufacturing
Corporate Office
Distribution
Manufacturing
Distribution
(1) See Note 3 to the Consolidated Financial Statements included in this Annual Report on Form 10-K.
(2) The Dubuque, Iowa manufacturing facility and land will be donated to a not-for-profit entity when vacated by the
Company, which is expected to happen in fiscal year 2019.
The Company leases the following facilities as of June 30, 2017:
Location
Cerritos, California
Riverside, California
Louisville, Kentucky
Juarez, Mexico
Binh Duong, Vietnam
Approximate
Size (square feet)
Principal Operations
32,000
211,000
10,000
225,000
39,000
Distribution
Distribution
Administrative Offices
Manufacturing
Warehouse
The Company leases showrooms for displaying its products in the furniture markets in High Point, North Carolina and Las Vegas,
Nevada.
The Company’s operating plants are well suited for their manufacturing purposes and have been updated and expanded from time to
time as conditions warrant.
6
Item 3.
Legal Proceedings
Indiana Civil Litigation – In December 2013, the Company entered into a confidential agreement to settle the Indiana Civil Litigation.
The Company paid $6.25 million to Plaintiffs to settle the matter without admission of wrongdoing. The Company received $1.2
million, $2.3 million and $0.3 million during the fiscal years ended June 30, 2017, 2016 and 2015, respectively, for recovery of
litigation settlement costs from insurers. These amounts are recorded as “Litigation settlement reimbursements” in the consolidated
statements of income.
The recovery of litigation settlement and defense costs from insurance carriers is complete.
Environmental Matters – In March 2016, the Company received a General Notice Letter for the Lane Street Groundwater Superfund
Site located in Elkhart, Indiana from the United States Environmental Protection Agency (EPA). In April 2016, the EPA issued their
proposed clean-up plan for groundwater pollution and request for public comment. The Company responded to the request for public
comment in May 2016. The EPA issued a Record of Decision selecting a remedy in August 2016 and estimated total costs to
remediate of $3.6 million. In July 2017, the EPA issued a Special Notice Letter to the Company demanding that the Company perform
the remedy selected and pay for the remediation cost and past response costs of $5.5 million. Based on extensive sampling
investigation performed on behalf of the Company, the Company believes that the source of the ground water contamination is
upgradient of the site formerly owned by the Company. The Company continues to believe that it did not cause or contribute to the
contamination. Accordingly, the Company has not recorded a liability in the consolidated balance sheets.
Other Proceedings – From time to time, the Company is subject to various other legal proceedings, including lawsuits, which arise out
of, and are incidental to, the conduct of the Company’s business. The Company does not consider any of such other proceedings that
are currently pending, individually or in the aggregate, to be material to its business or likely to result in a material effect on its
consolidated operating results, financial condition, or cash flows.
Item 4. Mine Safety Disclosures
None.
7
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Share Investment Performance
The following graph shows changes over the past five-year period in the value of $100 invested in: (1) Flexsteel’s common stock
(FLXS); (2) The NASDAQ Global Market; and (3) an industry peer group of the following: American Woodmark Corp, Bassett
Furniture Ind., Culp Inc., Dixie Group Inc., Ethan Allen Interiors Inc., Hooker Furniture Corp., Johnson Outdoors Inc., Kimball
International, Knoll Inc., La-Z-Boy Inc., Lifetime Brands Inc., Patrick Industries Inc., and Select Comfort Corp.
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
June 2017
350.00
300.00
250.00
200.00
150.00
100.00
50.00
0.00
2012
2013
Flexsteel Industries Inc.
2014
2016
NASDAQ Global Market Composite Index
2015
2017
Peer Group
Flexsteel
Peer Group
NASDAQ
2012
100.00
100.00
100.00
2013
126.71
138.98
130.16
2014
176.87
152.61
174.87
2015
233.33
200.15
202.69
2016
218.55
203.29
146.18
2017
303.02
262.05
187.38
The NASDAQ Global Select Market is the market on which the Company’s common stock is traded.
Sale Price of Common Stock
Fiscal 2017
Fiscal 2016
$
High
54.25
62.99
62.55
57.48
Low
37.93
39.98
45.31
48.44
$
$
High
44.95
48.67
45.79
45.29
Low
27.25
30.31
37.98
36.06
Cash Dividends
Per Share
$
Fiscal 2017
0.20
0.20
0.20
0.20
$
Fiscal 2016
0.18
0.18
0.18
0.18
$
First Quarter.......
Second Quarter ..
Third Quarter .....
Fourth Quarter ...
The Company estimates there were approximately 4,600 holders of common stock of the Company as of June 30, 2017. There were
no repurchases of the Company’s common stock during the quarter ended June 30, 2017. The payment of future cash dividends is
within the discretion of our Board of Directors and will depend, among other factors, on our earnings, capital requirements and
operating and financial condition.
8
Item 6.
Selected Financial Data
The selected financial data presented below should be read in conjunction with the Company’s consolidated financial statements and
notes thereto included in Item 8 of this Annual Report on Form 10-K and with “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included in Item 7 of this Annual Report on Form 10-K. The selected consolidated statements
of income data of the Company is derived from the Company’s consolidated financial statements.
Five-Year Review
(Amounts in thousands, except certain ratios and
per share data)
2017
2016
2015
2014
2013
$
SUMMARY OF OPERATIONS
Net sales .........................................................................................
Gross margin .................................................................................
Litigation settlement reimbursements (costs) ................................
Operating income ...........................................................................
Income before income taxes ..........................................................
Income tax provision .....................................................................
Net income .....................................................................................
Net income, as a percent of sales ...................................................
Weighted average diluted shares outstanding ................................
Diluted earnings per common share ..............................................
Cash dividends declared per common share ..................................
468,764 $
108,651
1,175
37,264
37,586
13,800
23,786
5.1%
7,886
3.02 $
0.80 $
$
$
SELECTED DATA AS OF JUNE 30
Total assets .....................................................................................
Shareholders’ equity ......................................................................
Trade receivables, net ....................................................................
Inventories .....................................................................................
Property, plant and equipment, net ................................................
Capital expenditures.......................................................................
Depreciation expense .....................................................................
270,045 $
230,760
42,362
99,397
70,661
13,457
7,936
$
Working capital (current assets less
current liabilities) ........................................................................
Current ratio ...................................................................................
Return on ending shareholders’ equity ..........................................
Average number of employees ......................................................
158,055
5.2 to 1
10.3%
1,440
$
$
$
$
$
$
$
$
500,106
113,699
2,280
38,068
37,927
13,690
24,237
4.8%
7,765
3.12
0.72
$
$
$
246,896 $
209,650
44,618
85,904
64,124
7,382
7,556
143,086
5.3 to 1
11.6%
1,440
466,904
109,860
250
34,422
35,559
13,260
22,299
4.8%
7,708
2.89
0.72
244,619
186,748
45,101
113,842
64,770
37,424
4,945
115,682
3.3 to 1
11.9%
1,340
438,543
100,263
(6,250)
22,286
23,800
8,810
14,990
3.4%
7,511
2.00
0.60
210,213
166,735
38,536
97,940
31,900
4,187
4,197
128,644
4.5 to 1
9.0%
1,380
386,189
90,469
--
20,271
20,881
7,730
13,151
3.4%
7,326
1.80
0.60
192,539
151,237
36,075
92,417
32,145
6,225
3,803
113,699
4.2 to 1
8.7%
1,320
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
The following analysis of the results of operations and financial condition of the Company should be read in conjunction with the
consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
Critical Accounting Policies
The discussion and analysis of the Company’s consolidated financial statements and results of operations are based on consolidated
financial statements prepared in accordance with generally accepted accounting principles (GAAP) in the United States of America.
Preparation of these consolidated financial statements requires the use of estimates and judgments that affect the reported results. The
Company uses estimates based on the best information available in recording transactions and balances resulting from business
operations. Estimates are used for such items as collectability of trade accounts receivable and inventory valuation. Ultimate results
may differ from these estimates under different assumptions or conditions.
Accounts receivable allowances – the Company establishes accounts receivable allowances to reduce trade accounts receivable to an
amount that reasonably approximates their net realizable value. The Company’s accounts receivable allowances consist of an
allowance for doubtful accounts which is established through review of open accounts, historical collection, and historical write-off
amounts and an allowance for estimated returns on sales of the Company’s products which is based on historical product returns, as
well as existing product return authorizations. The Company records a provision against revenue for estimated returns on sales of our
products in the same period that the related revenues are recognized. The amount ultimately realized from trade accounts receivable
may differ from the amount estimated in the consolidated financial statements.
9
Inventories – the Company values inventory at the lower of cost or net realizable value. The Company’s inventory valuation reflects
markdowns for the excess of the cost over the amount expected to be realized and considers obsolete and excess inventory.
Markdowns establish a new cost basis for the Company’s inventory. Subsequent changes in facts or circumstances do not result in the
reversal of previously recorded markdowns or an increase in that newly established cost basis.
Revenue recognition – is when both product ownership and the risk of loss have transferred to the customer, collectability is
reasonably assured, and the Company has no remaining obligations. The Company’s ordering process creates persuasive evidence of
the sale arrangement and the sales price is determined. The delivery of the goods to the customer completes the earnings process. Net
sales consist of product sales and related delivery charge revenue, net of adjustments for returns and allowances. Shipping and
handling costs are included in cost of goods sold.
Recently Issued Accounting Pronouncements
See Item 8. Note 1 to the Company’s consolidated financial statements.
Results of Operations
The following table has been prepared as an aid in understanding the Company’s results of operations on a comparative basis for the
fiscal years ended June 30, 2017, 2016 and 2015. Amounts presented are percentages of the Company’s net sales.
Net sales ...............................................................
Cost of goods sold ................................................
Gross margin ........................................................
Selling, general and administrative .......................
Litigation settlement reimbursements (costs) .......
Operating income ................................................
Interest and other income .....................................
Interest expense ....................................................
Income before income taxes .................................
Income tax provision ...........................................
Net income ..........................................................
FOR THE YEARS ENDED JUNE 30,
2016
100.0%
(77.3)
22.7
(15.6)
0.4
7.5
0.0
0.0
7.5
(2.7)
4.8%
2017
100.0%
(76.8)
23.2
(15.5)
0.2
7.9
0.1
–
8.0
(2.9)
5.1%
2015
100.0%
(76.5)
23.5
(16.2)
0.1
7.4
0.2
0.0
7.6
(2.8)
4.8%
Fiscal 2017 Compared to Fiscal 2016
Net sales for fiscal year 2017 were $468.8 million compared to $500.1 million in the prior fiscal year, a decrease of 6.3%. For the
fiscal year ended June 30, 2017, residential net sales were $396.1 million compared to $420.9 million for the year ended June 30,
2016, a decrease of 5.9%. The residential net sales decrease of $24.8 million for the year ended June 30, 2017 was substantially due
to decreased sales volume in upholstered and ready-to-assemble products. Contract net sales were $72.7 million for the year ended
June 30, 2017, a decrease of 8.2% from net sales of $79.2 million for the year ended June 30, 2016. The decrease in contract net sales
was substantially due to volume.
Gross margin for the fiscal year ended June 30, 2017 was 23.2% compared to 22.7% for the prior fiscal year.
Selling, general and administrative (SG&A) expenses for the fiscal year ended June 30, 2017 were 15.5% of net sales compared to
15.6% of net sales in the prior fiscal year. The current fiscal year includes reductions in direct selling costs, professional fees and
incentive compensation of $3.6 million, or 0.8% of net sales, offset by $2.9 million, or 0.6% of net sales, related to the business
information system project. SG&A expenses for the current and prior fiscal years include reimbursements, net of recovery expenses,
related to Indiana litigation of $0.9 million and $0.2 million, respectively.
Litigation settlement reimbursements related to Indiana litigation were $1.2 million or $0.10 per share and $2.3 million or $0.18 per
share during the fiscal years ended June 30, 2017 and 2016, respectively. The recovery of litigation settlement and defense costs from
insurance carriers is complete.
The effective tax rate was 36.7% and 36.1% for fiscal years ended June 30, 2017 and 2016, respectively. The prior fiscal year rate
decrease was primarily related to changes in the measurement of uncertain tax positions based on experiences with various state tax
authorities.
The above factors resulted in net income of $23.8 million or $3.02 per share for the fiscal year ended June 30, 2017 compared to $24.2
million or $3.12 per share in the prior year period. All earnings per share amounts are on a diluted basis.
10
Fiscal 2016 Compared to Fiscal 2015
Net sales for fiscal year 2016 were $500.1 million compared to $466.9 million in fiscal year 2015, an increase of 7.1%. For the fiscal
year ended June 30, 2016, residential net sales were $420.9 million compared to $393.1 million for the year ended June 30, 2015, an
increase of 7.1%. The residential net sales increase of $27.8 million for the year ended June 30, 2016 was substantially due to the
increased sales volume in upholstered and ready-to-assemble products partially offset by discounting of certain case goods and lower
delivery charges associated with lower fuel costs. Contract net sales were $79.2 million for the year ended June 30, 2016, an increase
of 7.3% from net sales of $73.8 million for the year ended June 30, 2015. The increase in contract net sales was substantially due to
volume.
Gross margin for the fiscal year ended June 30, 2016 was 22.7% compared to 23.5% for the prior fiscal year. The Company’s
investment in its expanded distribution network, designed to meet current and future customer needs while improving operations
became operational in the fourth quarter of fiscal year 2015. This investment increased costs by $2.5 million during fiscal year 2016 or
0.5% of net sales.
Selling, general and administrative (SG&A) expenses for the fiscal year ended June 30, 2016 were 15.6% of net sales compared to
16.2% of net sales in the prior fiscal year. The improvement in SG&A as a percentage of net sales reflects fixed cost leverage on
higher sales volume. The Company incurred approximately $0.6 million of legal costs related to Indiana litigation during fiscal year
2016 which has been recorded in SG&A expense. The Company received reimbursements of legal costs of approximately $0.8 million
from insurers which has been reflected as a reduction of legal expenses in SG&A expenses for fiscal year 2016. The prior fiscal year
included $0.6 million in legal costs which was offset by reimbursements of $0.2 million from insurers.
Litigation settlement reimbursements related to Indiana litigation were $2.3 million for the fiscal year ended June 30, 2016 compared
to $0.3 million for the prior fiscal year.
The effective tax rate was 36.1% and 37.3% for fiscal years ended June 30, 2016 and 2015, respectively. The rate decrease is
primarily related to changes in the measurement of uncertain tax positions based on recent experiences with various state tax
authorities.
The above factors resulted in net income of $24.2 million or $3.12 per share for the fiscal year ended June 30, 2016 compared to $22.3
million or $2.89 per share in the prior year period. All earnings per share amounts are on a diluted basis.
Liquidity and Capital Resources
Working capital (current assets less current liabilities) at June 30, 2017 was $158.1 million compared to $143.1 million at June 30,
2016. Significant changes in working capital during fiscal year 2017 included increases in investments of $18.0 million, inventory of
$13.5 million and accounts payable of $5.7 million and decreases in cash and cash equivalents of $7.9 million and accounts receivable
of $2.3 million. Inventory primarily increased to improve stocking positions and to support future sales growth. Accounts payable
primarily increased due to inventory growth and timing of payments. For the fiscal year ended June 30, 2017, capital expenditures
were $13.5 million including $10.6 million for the business information system project. Dividend payments totaled $6.1 million.
The Company’s main sources of liquidity are cash and cash equivalents, investments, cash flows from operations and credit
arrangements. As of June 30, 2017 and 2016, the Company had cash and cash equivalents totaling $28.9 million and $36.8 million,
respectively. During the current year, the Company invested $18.0 million in short-term investments. These investments consist of
Treasury bills and U.S. Agencies that will mature within six months of June 30, 2017. The Company entered into an unsecured credit
agreement on June 30, 2017, that provides short-term working capital financing up to $10.0 million with interest of LIBOR plus 1%,
including up to $4.0 million of letters of credit. Letters of credit outstanding at June 30, 2017 totaled $1.3 million. Other than the
outstanding letters of credit, the Company did not utilize borrowing availability under the credit facility, leaving borrowing
availability of $8.7 million as of June 30, 2017. The credit agreement expires June 30, 2018. At June 30, 2017, the Company was in
compliance with all of the financial covenants contained in the credit agreement.
The Company maintains an additional unsecured $10.0 million line of credit, with interest at prime minus 2%. No amount was
outstanding on the line of credit at June 30, 2017. This line of credit matures December 31, 2017.
Net cash provided by operating activities was $26.4 million and $54.4 million in fiscal years 2017 and 2016, respectively. The
Company had net income of $23.8 million that included $9.0 million in non-cash charges, which were offset by cash utilized for
operating assets and liabilities of $6.4 million in fiscal year 2017. Non-cash charges included depreciation of $7.9 million. In fiscal
year 2016, the Company had net income of $24.2 million that included $9.6 million in non-cash charges including depreciation of $7.6
million and cash provided by changes in operating assets and liabilities of $20.6 million.
11
Net cash used in investing activities was $29.7 million and $4.7 million in fiscal years 2017 and 2016, respectively. In fiscal year
2017, the Company had net purchases of investments of $18.1 million and capital expenditures of $13.5 million. In fiscal year 2016,
the Company made capital expenditures of $7.4 million partially offset by $2.8 million of proceeds from life insurance policies.
Net cash used in financing activities was $4.6 million in fiscal year 2017 which included dividend payments of $6.1 million, which
was partially offset by excess stock benefits of $1.5 million and proceeds from issuance of common stock of $1.1 million. Net cash
used in financing activities was $14.2 million in fiscal year 2016 which included repayments of current notes payable of $11.9 million
and dividend payments of $5.5 million. These amounts were offset by excess tax benefit from stock-based payment arrangements of
$1.8 million and proceeds from issuance of common stock of $1.6 million.
Management believes that the Company has adequate cash and cash equivalents, investments, cash flows from operations and credit
arrangements to meet its operating and capital requirements for fiscal year 2018. In the opinion of management, the Company’s
liquidity and credit resources provide it with the ability to react to opportunities as they arise, to pay quarterly dividends to its
shareholders, and to purchase productive capital assets that enhance safety and improve operations.
At June 30, 2017, the Company had no debt obligations and therefore, had no interest payments related to debt. The following table
summarizes the Company’s contractual obligations at June 30, 2017 and the effect these obligations are expected to have on the
Company’s liquidity and cash flow in the future (in thousands):
Operating lease obligations ..........................
$
Total
14,290
$
1 Year
3,853
$
2 - 3
Years
7,002
$
4 - 5
Years
3,435
More than
5 Years
–
$
At June 30, 2017, the Company had no capital lease obligations, and no purchase obligations for raw materials or finished goods. The
purchase price on all open purchase orders was fixed and denominated in U.S. dollars. The Company has excluded the uncertain tax
positions from the above table as the timing of payments, if any, cannot be reasonably estimated.
See Note 6 to the consolidated financial statements of this Annual Report on Form 10-K.
Financing Arrangements
Outlook
During fiscal year 2018, the Company expects to have moderate revenue growth, tempered by an intentional sales decrease to certain
Contract customers. The Company is focused on improving product delivery and driving efficiencies in operations.
Through June 30, 2017, “Property, plant & equipment, net” in the consolidated balance sheets includes $12.9 million for business
information software and development. The Company has completed the design phase of the project and has progressed to the third of
four testing cycles. Following successful testing, the Company will enter the training and readiness phase of the project for associates,
customers and suppliers. Once this phase indicates readiness, the business information system will be implemented. The Company
anticipates this work will be completed during the fiscal year ending June 30, 2018. During fiscal year 2018, the Company anticipates
spending $5 million for capital expenditures and incurring $2 million of SG&A expenses related to the business information system
project. Once completed, the business information system will be amortized over an average of 4 years.
During fiscal year 2018, the Company expects to spend $7 million in operating capital expenditures. During the next two fiscal years,
the Company plans to invest $25 million in a new manufacturing facility in Dubuque, Iowa. 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. 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 our shareholders.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
General – Market risk represents the risk of changes in the value of a financial instrument, derivative or non-derivative, caused by
fluctuations in interest rates, foreign exchange rates and equity prices. As discussed below, management of the Company does not
believe that changes in these factors could cause material fluctuations in the Company’s results of operations or cash flows. The
ability to import furniture products can be adversely affected by political issues in the countries where suppliers are located, as well as,
disruptions associated with shipping distances and negotiations with port employees. Other risks related to furniture product
importation include government imposition of regulations and/or quotas; duties and taxes on imports; and significant fluctuation in the
value of the U.S. dollar against foreign currencies. Any of these factors could interrupt supply, increase costs and decrease earnings.
12
Foreign Currency Risk – During fiscal years 2017, 2016, and 2015, the Company did not have sales, but has purchases and other
expenses denominated in foreign currencies. The market risk associated with currency exchange rates and prices is not considered
significant.
Interest Rate Risk – The Company’s primary market risk exposure with regard to financial instruments is changes in interest rates. At
June 30, 2017, the Company did not have any debt outstanding.
Item 8.
Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm .......................................................................................
Report of Independent Registered Public Accounting Firm – Internal Control Over Financial Reporting .................
Consolidated Balance Sheets at June 30, 2017 and 2016.............................................................................................
Consolidated Statements of Income for the Years Ended June 30, 2017, 2016 and 2015 ...........................................
Consolidated Statements of Comprehensive Income for the Years Ended June 30, 2017, 2016 and 2015 .................
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended June 30, 2017, 2016 and 2015 ...
Consolidated Statements of Cash Flows for the Years Ended June 30, 2017, 2016 and 2015 ....................................
Notes to Consolidated Financial Statements ...............................................................................................................
Page(s)
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15
16
17
17
18
19
20-29
13
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Flexsteel Industries, Inc.
We have audited the accompanying consolidated balance sheets of Flexsteel Industries, Inc. and Subsidiaries (the "Company") as of
June 30, 2017 and 2016, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity,
and cash flows for each of the three years in the period ended June 30, 2017. Our audits also included the financial statement schedule
listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements referred to above present fairly, in all material respects, the financial position of Flexsteel
Industries, Inc. and Subsidiaries as of June 30, 2017 and 2016, and the results of their operations and their cash flows for each of the
three years in the period ended June 30, 2017, in conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company's internal control over financial reporting as of June 30, 2017, based on the criteria established in Internal Control —
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report
dated August 22, 2017 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
August 22, 2017
14
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Flexsteel Industries, Inc.
We have audited the internal control over financial reporting of Flexsteel Industries, Inc. and Subsidiaries (the "Company") as of
June 30, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an
opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal
executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors,
management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.
Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to
the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30,
2017, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement schedule as of and for the year ended June 30, 2017 of the Company and our
report dated August 22, 2017 expressed an unqualified opinion on those consolidated financial statements and financial statement
schedule.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
August 22, 2017
15
June 30,
2017
2016
$
$
28,874
17,958
42,362
99,397
6,659
195,250
70,661
1,740
2,394
270,045
$
$
$
16,758
$
6,255
5,423
8,759
37,195
2,090
39,285
7,822
26,186
198,465
(1,713)
230,760
270,045
$
$
36,780
–
44,618
85,904
9,141
176,443
64,124
3,660
2,669
246,896
11,023
6,986
5,252
10,096
33,357
3,889
37,246
7,700
23,259
180,919
(2,228)
209,650
246,896
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in thousands, except share and per share data)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Investments
Trade receivables - less allowances: 2017, $1,200; 2016, $1,300
Inventories
Other
Total current assets
NONCURRENT ASSETS:
Property, plant and equipment, net
Deferred income taxes
Other assets
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade
Accrued liabilities:
Payroll and related items
Insurance
Other
Total current liabilities
LONG-TERM LIABILITIES:
Other liabilities
Total liabilities
COMMITMENTS AND CONTINGENCIES (Note 12)
SHAREHOLDERS' EQUITY:
Common stock - $1 par value; authorized 15,000,000 shares;
outstanding 2017, 7,822,080 shares; 2016, 7,700,149 shares
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total shareholders' equity
TOTAL
See accompanying Notes to Consolidated Financial Statements.
16
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Amounts in thousands, except per share data)
Net sales
Cost of goods sold
Gross margin
Selling, general and administrative
Litigation settlement reimbursements
Operating income
Other income (expense):
Other income (expense)
Interest expense
Total
Income before income taxes
Income tax provision
Net income
Weighted average number of common shares outstanding:
Basic
Diluted
Earnings per share of common stock:
Basic
Diluted
2017
For the years ended June 30,
2016
468,764
(360,113)
108,651
(72,562)
1,175
37,264
322
–
322
37,586
(13,800)
23,786
7,782
7,886
3.06
3.02
$
$
$
$
500,106
(386,407)
113,699
(77,911)
2,280
38,068
(72)
(69)
(141)
37,927
(13,690)
24,237
7,595
7,765
3.19
3.12
$
$
$
$
2015
466,904
(357,044)
109,860
(75,688)
250
34,422
1,267
(130)
1,137
35,559
(13,260)
22,299
7,423
7,708
3.00
2.89
$
$
$
$
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
Net income
Other comprehensive income (loss):
Unrealized (losses) gains on securities
Reclassification of realized gains (losses) on securities
to other income
Unrealized gains (losses) on securities before taxes
Income tax (expense) benefit related to securities gains
(losses)
Net unrealized gains (losses) on securities
Minimum pension liability
Income tax (expense) benefit related to minimum pension
liability
Net minimum pension asset (liability)
Other comprehensive gain (loss), net of tax
2017
For the years ended June 30,
2016
2015
$
23,786
$
24,237
$
22,299
(87)
145
58
(22)
36
771
(292)
479
515
741
(535)
206
(78)
128
(999)
379
(620)
(492)
162
(400)
(238)
91
(147)
(537)
204
(333)
(480)
Comprehensive income
$
24,301
$
23,745
$
21,819
See accompanying Notes to Consolidated Financial Statements.
17
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders’ Equity
(Amounts in thousands)
Total Par
Value of
Common
Shares ($1 Par)
Additional
Paid-In
Capital
Accumulated
Other
Retained
Comprehensive
Earnings
(Loss) Income
Total
$
7,371 $
15,386 $
145,234
$
(1,256)
$
166,735
83
–
26
–
–
–
–
–
707
–
1,310
607
817
–
–
–
–
–
–
–
–
–
(5,357)
22,299
–
(147)
–
–
–
(333)
–
–
790
(147)
1,336
607
817
(333)
(5,357)
22,299
$
7,480 $
18,827 $
162,176
$
(1,736)
$
186,747
184
–
27
9
–
–
–
–
1,407
–
858
406
1,761
–
–
–
–
–
–
–
–
–
(5,494)
24,237
–
128
–
–
–
(620)
–
–
1,591
128
885
415
1,761
(620)
(5,494)
24,237
$
7,700 $
23,259 $
180,919
$
(2,228)
$
209,650
Balance at June 30, 2014
Issuance of common stock:
Stock options exercised, net
Unrealized loss on available for sale investments, net of tax
Long-term incentive compensation
Stock-based compensation
Excess tax benefit from stock-based payment arrangements
Minimum pension liability adjustment, net of tax
Cash dividends declared
Net income
Balance at June 30, 2015
Issuance of common stock:
Stock options exercised, net
Unrealized loss on available for sale investments, net of tax
Long-term incentive compensation
Stock-based compensation
Excess tax benefit from stock-based payment arrangements
Minimum pension liability adjustment, net of tax
Cash dividends declared
Net income
Balance at June 30, 2016
Issuance of common stock:
Stock options exercised, net
Unrealized loss on available for sale investments, net of tax
Long-term incentive compensation
Stock-based compensation
Excess tax benefit from stock-based payment arrangements
Minimum pension liability adjustment, net of tax
Cash dividends declared
Net income
Balance at June 30, 2017
79
–
35
8
–
–
–
–
999
–
(213)
647
1,494
–
–
–
–
–
–
–
–
–
(6,240)
23,786
–
36
–
–
–
479
–
–
1,078
36
(178)
655
1,494
479
(6,240)
23,786
$
7,822 $
26,186 $
198,465
$
(1,713)
$
230,760
Cash dividends declared per common share were $0.80, $0.72 and $0.72 for fiscal years ended June 30, 2017, 2016 and 2015, respectively.
See accompanying Notes to Consolidated Financial Statements.
18
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Amounts in thousands)
(Amounts in thousands)
OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation
Deferred income taxes
Stock-based compensation expense
Excess tax benefit from stock-based payment arrangements
Change in provision for losses on accounts receivable
Other non-cash, net
Gain on disposition of capital assets
Gain on life insurance policies
Changes in operating assets and liabilities:
Trade receivables
Inventories
Other current assets
Other assets
Accounts payable - trade
Accrued liabilities
Other long-term liabilities
Net cash provided by operating activities
INVESTING ACTIVITIES:
Purchases of investments
Proceeds from sales of investments
Proceeds from sale of capital assets
Proceeds from life insurance policies
Capital expenditures
Net cash used in investing activities
FINANCING ACTIVITIES:
Dividends paid
Proceeds from issuance of common stock
Shares issued to employees, net of shares withheld
Excess tax benefit from share-based payment
(Repayments of) proceeds from short-term notes payable, net
Net cash (used in) provided by financing activities
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
SUPPLEMENTAL INFORMATION
Income taxes paid, net
Capital expenditures in accounts payable
$
$
$
See accompanying Notes to Consolidated Financial Statements.
2017
FOR THE YEARS ENDED JUNE 30,
2016
2015
$
23,786
$
24,237
$
22,299
7,936
1,606
1,609
(1,494)
(100)
–
(512)
–
2,356
(13,492)
1,036
450
4,028
477
(1,298)
26,388
(30,537)
12,474
1,848
–
(13,457)
(29,672)
(6,062)
1,078
(1,132)
1,494
–
(4,622)
(7,906)
36,780
28,874
$
7,556
2,731
1,470
(1,761)
(100)
–
(34)
(346)
584
27,938
(1,962)
59
(6,877)
2,052
(1,180)
54,367
(3,100)
2,900
76
2,814
(7,382)
(4,692)
(5,455)
1,591
(170)
1,761
(11,904)
(14,177)
35,498
1,282
36,780
$
4,945
605
1,943
(817)
30
(28)
(119)
(745)
(6,596)
(15,902)
(3,882)
(1,024)
2,083
201
276
3,269
(1,955)
1,611
155
5,053
(37,423)
(32,559)
(5,115)
790
–
817
11,904
8,396
(20,894)
22,176
1,282
2017
FOR THE YEARS ENDED JUNE 30,
2016
2015
9,780
1,740
$
$
10,140
430
$
$
13,920
130
19
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS – Flexsteel was incorporated in 1929 and is one of the oldest and largest manufacturers,
importers and marketers of residential and contract upholstered and wood furniture products in the United States. Product
offerings include a wide variety of upholstered and wood furniture such as sofas, loveseats, chairs, reclining and rocker-reclining
chairs, swivel rockers, sofa beds, convertible bedding units, occasional tables, desks, dining tables and chairs and bedroom
furniture. The Company’s products are intended for use in home, office, hotel, healthcare and other contract applications. A
featured component in most of the upholstered furniture is a unique steel drop-in seat spring from which our name “Flexsteel” is
derived. The Company distributes its products throughout the United States through the Company’s sales force and various
independent representatives.
PRINCIPLES OF CONSOLIDATION – the consolidated financial statements include the accounts of Flexsteel Industries, Inc.
and its wholly owned subsidiaries. All intercompany transactions and accounts have been eliminated in consolidation. The
Company’s consolidated financial statements and results of operations are based on consolidated financial statements prepared in
accordance with GAAP in the United States of America.
USE OF ESTIMATES – the preparation of consolidated financial statements in conformity with GAAP in the United States of
America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Ultimate results could differ from those estimates.
FAIR VALUE – the Company’s cash and cash equivalents, investments, accounts receivable, other current assets, accounts
payable, notes payable and certain accrued liabilities are carried at amounts which reasonably approximate their fair value due to
their short-term nature. GAAP on fair value measurement for certain financial assets and liabilities require that each asset and
liability carried at fair value be classified into one of the following categories: Level 1: Quoted market prices in active markets for
identical assets and liabilities; Level 2: Observable market based inputs or unobservable inputs that are corroborated by market
data; or Level 3: Unobservable inputs that are not corroborated by market data. The Company has not changed its valuation
techniques in measuring the fair value of any financial assets and liabilities during the period.
INVESTMENTS - during fiscal year 2017, the Company purchased available-for-sale securities, U.S. Treasury bills and U.S.
Agencies, which are recorded at fair market value. These securities are classified as “Investments” in the consolidated balance
sheets. Unrealized gains or losses are recorded in “Accumulated other comprehensive loss.” As of June 30, 2017, the fair market
value and book value of the investments are $18.0 million. These assets are classified as Level 1 in accordance with fair value
measurements described above.
ACCOUNTS RECEIVABLE ALLOWANCES – the Company establishes accounts receivable allowances to reduce trade
accounts receivable to an amount that reasonably approximates their net realizable value. The Company’s accounts receivable
allowances consist of an allowance for doubtful accounts which is established through review of open accounts, historical
collection, and historical write-off amounts and an allowance for estimated returns on sales of the Company’s products which is
based on historical product returns, as well as existing product return authorizations. The Company records a provision against
revenue for estimated returns on sales of our products in the same period that the related revenues are recognized. The amount
ultimately realized from trade accounts receivable may differ from the amount estimated in the consolidated financial statements.
INVENTORIES – are stated at the lower of cost or net realizable value utilizing the first-in, first-out (“FIFO”) method.
PROPERTY, PLANT AND EQUIPMENT – is stated at cost and depreciated using the straight-line method over the estimated
useful lives of the assets.
VALUATION OF LONG–LIVED ASSETS – the Company periodically reviews the carrying value of long-lived assets and
estimated depreciable or amortizable lives for continued appropriateness. This review is based upon projections of anticipated
future cash flows and is performed whenever events or changes in circumstances indicate that asset carrying values may not be
recoverable or that the estimated depreciable or amortizable lives may have changed. No impairments of long-lived assets or
changes in depreciable or amortizable lives were incurred during fiscal years 2017, 2016 and 2015.
WARRANTY – the Company estimates the amount of warranty claims on sold product that may be incurred based on current and
historical data. The actual warranty expense could differ from the estimates made by the Company based on product performance.
REVENUE RECOGNITION – is when both product ownership and the risk of loss have transferred to the customer, collectability
is reasonably assured, and the Company has no remaining obligations. The Company’s ordering process creates persuasive
20
evidence of the sale arrangement and the sales price is determined. The delivery of the goods to the customer completes the
earnings process. Net sales consist of product sales and related delivery charge revenue, net of adjustments for returns and
allowances. Shipping and handling costs are included in cost of goods sold.
ADVERTISING COSTS – are charged to selling, general and administrative expense in the periods incurred. The Company
conducts no direct-response advertising programs and there are no assets related to advertising recorded on the consolidated
balance sheets. Advertising expenditures, primarily shared customer advertising in which an identifiable benefit is received and
national trade-advertising programs, were approximately $7.3 million, $7.5 million and $6.9 million in fiscal years 2017, 2016
and 2015, respectively.
DESIGN, RESEARCH AND DEVELOPMENT COSTS – are charged to selling, general and administrative expense in the
periods incurred. Expenditures for design, research and development costs were approximately $3.7 million, $4.2 million and
$4.1 million in fiscal years 2017, 2016 and 2015, respectively.
INSURANCE – the Company is self-insured for health care and most workers’ compensation up to predetermined amounts above
which third party insurance applies. The Company purchases specific stop-loss insurance for individual health care claims in
excess of $150,000 per plan year. For workers’ compensation the Company retains the first $450,000 per claim and purchases
excess coverage up to the statutory limits for amounts in excess of the retention limit. Losses are accrued based upon the
Company’s estimates of the aggregate liability for claims incurred using certain actuarial assumptions followed in the insurance
industry and based on Company experience. The Company records these insurance accruals within “Accrued liabilities –
insurance” on the consolidated balance sheets.
INCOME TAXES – the Company uses the liability method of accounting for income taxes. Under this method, deferred tax
assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and
are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The
Company recognizes in its financial statements the tax benefit from an uncertain tax position only if it is more likely than not that
the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.
EARNINGS PER SHARE (EPS) – basic earnings per share (EPS) of common stock is based on the weighted-average number of
common shares outstanding during each fiscal year. Diluted earnings per share of common stock includes the dilutive effect of
potential common shares outstanding. The Company’s potential common shares outstanding are stock options, shares associated
with the long-term management incentive compensation plan and non-vested shares. The Company calculates the dilutive effect of
outstanding options using the treasury stock method. Anti-dilutive shares are not included in the computation of diluted EPS
when their exercise price was greater than the average closing market price of the common shares. The Company calculates the
dilutive effect of shares related to the long-term management incentive compensation plan and non-vested shares based on the
number of shares, if any, that would be issuable if the end of the fiscal year were the end of the contingency period.
In computing EPS for the fiscal years 2017, 2016 and 2015, net income as reported for each respective period is divided by the
fully diluted weighted average number of shares outstanding:
(in thousands)
2017
2016
2015
June 30,
Basic shares
7,782
7,595
7,423
Potential common shares:
Stock options
Long-term incentive plan
86
18
104
120
50
170
255
30
285
Diluted shares
7,886
7,765
7,708
Anti-dilutive shares
–
26
–
STOCK–BASED COMPENSATION – the Company recognizes compensation expense related to the cost of employee services
received in exchange for Company equity interests based on the award’s fair value at the date of grant. See Note 8 Stock-Based
Compensation.
SEGMENT REPORTING – the Company operates in one reportable segment, furniture products. The Company’s operations
involve the distribution of manufactured and imported furniture for residential and contract markets. The Company’s furniture
21
products are sold primarily throughout the United States by the Company’s internal sales force and various independent
representatives. The Company makes minimal export sales. No single customer accounted for more than 10% of net sales.
ACCOUNTING DEVELOPMENTS – In July 2015, the FASB issued Inventory, Topic 330: Simplifying the Measurement of
Inventory (ASU 2015-11), which affects inventory balances measured using the first-in, first-out (FIFO) or average cost methods.
ASU 2015-11 requires entities to measure most inventories at the lower of cost and net realizable value, thereby simplifying the
current guidance under which an entity must measure inventory at the lower of cost or market. ASU 2015-11 is effective for fiscal
years beginning after December 15, 2016 and interim periods within those fiscal years. The Company elected to early adopt ASU
2015-11 on June 30, 2017, on a prospective basis. The adoption of this guidance did not have a material effect on the Company’s
consolidated financial statements.
In May 2014, the FASB issued Revenue from Contracts with Customers, Topic 606 (ASU No. 2014-09), which provides a
framework for the recognition of revenue, with the objective that recognized revenues properly reflect amounts an entity is
entitled to receive in exchange for goods and services. This guidance, which includes additional disclosure requirements
regarding revenue, cash flows and obligations related to contracts with customers, was originally to be effective for the Company
beginning in fiscal year 2018. In July 2015, the FASB confirmed a one year deferral of the effective date of the new revenue
standard which also allows early adoption as of the original effective date. The updated guidance will be effective for the
Company’s first quarter of 2019. The Company is currently evaluating the impact of adopting ASU 2014-09 on its consolidated
financial statements.
In February 2016, the FASB issued Leases (ASU 2016-02), which amends ASC Topic 842. ASU 2016-02 introduces a new lessee
model where substantially all leases will be brought onto the balance sheet. ASU 2016-02 is effective for fiscal years beginning
after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently
evaluating the impact of adopting ASU 2016-02 on its consolidated financial statements.
In March 2016, the FASB issued Improvements to Employee Share-Based Payment Accounting (ASU 2016-09), which amends
ASC Topic 718, Compensation – Stock Compensation. ASU 2016-09 simplifies several aspects of the accounting for share-based
payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and
classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016 and
interim periods within those fiscal years. Early adoption is permitted. The Company is currently in the process of evaluating the
impact of adopting ASU 2016-09 on its consolidated financial statements.
2. INVENTORIES
A comparison of inventories is as follows:
(in thousands)
Raw materials
Work in process and finished parts
Finished goods
Total
June 30,
2017
2016
$
$
15,043
7,047
77,307
99,397
$
$
12,893
5,810
67,201
85,904
22
3. PROPERTY, PLANT AND EQUIPMENT
(in thousands)
Estimated
June 30,
Life (Years)
2017
2016
Land
$
6,987
$
Buildings and improvements
Machinery and equipment
Delivery equipment
Furniture and fixtures
5-39
3-7
3-5
3-7
Computer software and hardware
3-10
Total
Less accumulated depreciation
70,741
33,441
20,866
4,474
18,903
155,412
(84,751)
7,279
72,900
34,015
21,979
4,509
6,370
147,052
(82,928)
Net
$
70,661
$
64,124
The Company owns a 69,000 square foot facility in Riverside, California that is held for sale as it does not have sufficient square
footage to meet the needs of the business. The sale of the building is expected to take place in early fiscal year 2018. The net book
value of the facility is $4.3 million as of June 30, 2017.
4. OTHER NONCURRENT ASSETS
(in thousands)
Cash value of life insurance
Other
Total
5. ACCRUED LIABILITIES – OTHER
(in thousands)
Advertising
Dividends
Warranty
Other
Total
6. CREDIT ARRANGEMENTS
June 30,
2017
2016
989
1,405
2,394
$
$
965
1,704
2,669
June 30,
2017
2016
3,883
1,564
1,080
2,232
8,759
$
4,068
1,386
1,070
3,572
$
10,096
$
$
$
$
The Company entered into an unsecured credit agreement on June 30, 2017, that provides short-term working capital financing up
to $10.0 million with interest of LIBOR plus 1% (2.22% at June 30, 2017), including up to $4.0 million of letters of credit. Letters
of credit outstanding at June 30, 2017 totaled $1.3 million. Other than the outstanding letters of credit, the Company did not
utilize borrowing availability under the credit facility, leaving borrowing availability of $8.7 million as of June 30, 2017. The
credit agreement expires June 30, 2018. At June 30, 2017, the Company was in compliance with all of the financial covenants
contained in the credit agreement.
The Company maintains an unsecured $10.0 million line of credit, with interest at prime minus 2% (2.25% at June 30, 2017). No
amount was outstanding on the line of credit at June 30, 2017. This line of credit matures December 31, 2017.
23
7. INCOME TAXES
In determining the provision for income taxes, the Company uses an estimated annual effective tax rate that is based on the annual
income, statutory tax rates and permanent differences between book and tax. This includes recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns to
the extent pervasive evidence exists that they will be realized in future periods. The deferred tax balances are adjusted to reflect
tax rates by tax jurisdiction, based on currently enacted tax laws, which are expected to be in effect in the years in which the
temporary differences are expected to reverse. In accordance with the Company’s income tax policy, significant or unusual items
are separately recognized when they occur.
The components of the gross liabilities related to unrecognized tax benefits and the related deferred tax assets are as follows:
(in thousands)
Gross unrecognized tax benefits
Accrued interest and penalties
Gross liabilities related to unrecognized tax benefits
Deferred tax assets
June 30,
2017
2016
$
$
$
320 $
130
450 $
130 $
610
250
860
250
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
(in thousands)
Balance at July 1
2017
2016
$
610
$
1,580
$
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Balance at June 30
$
130
–
(420)
320
$
45
–
(1,015)
610
$
2015
1,290
390
–
(100)
1,580
The Company records interest and penalties related to income taxes as income tax expense in the consolidated statements of
income. The Company does not expect that there will be any positions for which it is reasonably possible that the total amounts of
unrecognized tax benefits will significantly increase or decrease within the next twelve months.
The income tax provision is as follows for the years ended June 30:
(in thousands)
Federal – current
State and other – current
Deferred
Total
2017
2016
2015
$
$
11,015
1,179
1,606
13,800
$
$
9,343
1,616
2,731
13,690
$
$
11,725
930
605
13,260
Reconciliation between the U.S. federal statutory tax rate and the effective tax rate is as follows for the years ended June 30:
2017
2016
2015
Federal statutory tax rate
35.0 %
35.0 %
35.0 %
State taxes, net of federal effect
Other
2.7
(1.0)
3.8
(2.7)
2.6
(0.3)
Effective tax rate
36.7 %
36.1 %
37.3 %
24
The primary components of deferred tax assets and (liabilities) are as follows:
(in thousands)
2017
2016
June 30,
Accounts receivable
$
Inventory
Self-insurance
Payroll and related
Accrued liabilities
Property, plant and equipment
Investment tax credit
Valuation allowance
Other
Total
$
460
(50)
560
1,690
1,240
(2,850)
1,930
(1,390)
150
1,740
$
$
490
500
660
3,120
1,100
(3,080)
1,990
(1,380)
260
3,660
The Company is subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. Generally,
tax years 2013–2016 remain open to examination by the Internal Revenue Service or other taxing jurisdictions to which we are
subject.
8. STOCK-BASED COMPENSATION
The Company has two stock-based compensation methods available when determining employee compensation.
(1)
Long-Term Incentive Compensation Plans
Long-Term Incentive Compensation Plan
The long-term incentive compensation plan provides for shares of common stock to be awarded to officers and key
employees based on performance targets set by the Compensation Committee of the Board of Directors (the “Committee”).
The Company’s shareholders previously approved 700,000 shares to be issued under the plan. As of June 30, 2017, 61,969
shares have been issued. The Committee selected fully-diluted earnings per share as the performance goal for the three-
year performance periods July 1, 2014 – June 30, 2017 (2015-2017), July 1, 2015 – June 30, 2018 (2016-2018) and July 1,
2016 – June 30, 2019 (2017-2019). The Committee also selected total shareholder return as a performance goal for the
executive officers for the three year performance period July 1, 2016 – June 30, 2019 (2017-2019). Stock awards will be
issued to participants as soon as practicable following the end of the performance periods subject to verification of results
and Committee approval. The compensation cost related to the number of shares to be granted under each performance
period is fixed on the grant date, which is the date the performance period begins.
The Company recorded plan expenses of $0.9 million, $1.1 million and $1.1 million for fiscal years ended June 30, 2017,
2016 and 2015, respectively. If the target performance goals for 2015-2017, 2016-2018 and 2017-2019 would be achieved,
the total amount of compensation cost recognized over the requisite performance periods would be $0.9 million, $1.0
million and $1.1 million, respectively.
The aggregate number of shares that could be awarded to key executives if the minimum, target or maximum performance
goals are met is as follows:
(in thousands)
Performance Period
Fiscal Year 2015 – 2017
Fiscal Year 2016 – 2018
Fiscal Year 2017 – 2019
Minimum
11
9
11
Target
28
23
27
Maximum
55
45
52
25
(2)
Stock Plans
Omnibus Stock Plan
The Omnibus Stock Plan is for key employees, officers and directors and provides for the granting of incentive and
nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights and performance units. The
Company’s shareholders previously approved 700,000 shares to be issued under the plan.
Under the plan, options were granted at an exercise price equal to the fair market value of the underlying common stock at
the date of grant and exercisable for up to 10 years. All options were exercisable when granted. It is the Company’s policy
to issue new shares upon exercise of stock options. The Company accepts shares of the Company’s common stock as
payment for the exercise price of options. These shares received as payment are retired upon receipt.
For fiscal years 2017, 2016 and 2015, the Company issued options for 24,317, 25,868, and 48,600 common shares at a
weighted average exercise price of $47.45, $43.09 and $31.48 (the fair market value on the date of grant), respectively. The
options were immediately available for exercise. For fiscal years ended June 30, 2017, 2016 and 2015, the Company
recorded expense of $0.3 million, $0.2 million and $0.4 million, respectively. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in fiscal years 2017, 2016 and 2015, respectively, under this plan; dividend yield of 1.5%,
1.6% and 2.0%; expected volatility of 30.8%, 26.0% and 29.9%; risk-free interest rate of 1.2%, 1.6% and 1.6%; and an
expected life of 5 years. The expected volatility and expected life are determined based on historical data. The weighted-
average grant date fair value of stock options granted during fiscal years 2017, 2016 and 2015 were $11.76, $9.20 and
$7.33, respectively. The cash proceeds from stock options exercised were $0.7 million, $0.1 million and $0.1 million for
fiscal years ended 2017, 2016 and 2015, respectively. There was no income tax benefit related to the exercise of stock
options for fiscal years ended June 30, 2017, 2016 and 2015.
Under the plan, the Company issued 6,997 and 6,208 restricted shares to non-executive directors as compensation and
recorded expense of $0.4 million and $0.3 million during fiscal years ended June 30, 2017 and 2016, respectively.
At June 30, 2017, 537,762 shares were available for future grants.
2006 and 2009 Stock Option Plans
The stock option plans were for key employees, officers and directors and provided for granting incentive and nonqualified
stock options. Under the plans, options were granted at an exercise price equal to the fair market value of the underlying
common stock at the date of grant and exercisable for up to 10 years. All options were exercisable when granted. No
additional options can be granted under the 2006 and 2009 stock option plans. There were no options granted and no
expense was recorded under these plans during the fiscal years ended June 30, 2017, 2016 and 2015.
The cash proceeds from stock options exercised were $0.4 million, $1.5 million and $1.6 million for fiscal years ended
2017, 2016 and 2015, respectively. The income tax benefit related to the exercise of stock options were $0.6 million, $1.6
million and $0.4 million for fiscal years ended 2017, 2016 and 2015, respectively.
A summary of the status of the Company’s stock option plans as of June 30, 2017, 2016 and 2015 and the changes during
the years then ended is presented below:
Shares
Weighted Average
Intrinsic Value
(in thousands)
Exercise Price
(in thousands)
Aggregate
Outstanding and exercisable at June 30, 2015
457
$
Granted
Exercised
Canceled
26
(207)
(6)
Outstanding and exercisable at June 30, 2016
270
$
Granted
Exercised
Canceled
24
(98)
(9)
Outstanding and exercisable at June 30, 2017
187
$
26
17.02
43.09
12.68
22.32
22.85
47.45
20.57
20.51
27.21
$
11,916
$
4,638
$
5,039
The following table summarizes information for options outstanding and exercisable at June 30, 2017:
Options
Weighted Average
Range of
Outstanding
Remaining
Prices
(in thousands)
Life (Years)
Exercise
Price
$
6.96 – 13.90
17.23 – 19.77
20.50 – 27.57
31.06 – 32.13
43.09 – 47.45
$
6.96 – 47.45
38
34
40
33
42
187
2.4
4.5
6.1
7.4
8.7
5.9
$
$
12.13
18.54
25.72
31.60
45.52
27.21
9. BENEFIT AND RETIREMENT PLANS
Defined Contribution and Retirement Plans
The Company sponsors various defined contribution retirement plans, which cover substantially all employees, other than
employees covered by multi-employer pension plans under collective bargaining agreements. Total retirement plan expense was
$2.3 million, $1.8 million and $2.0 million in fiscal years 2017, 2016 and 2015, respectively. The amounts include $0.8 million,
$0.5 million and $0.5 million in fiscal years 2017, 2016 and 2015, for the Company’s matching contribution to retirement savings
plans.
Multi-employer Pension Plans
The Company contributes to three multi-employer defined benefit pension plans under the terms of collective-bargaining
agreements that cover its union-represented employees. The risks of participating in these multi-employer plans are different
from single-employer plans in the following aspects:
Assets contributed to the multi-employer plan by one employer may be used to provide benefits to employees of other
participating employers.
remaining participating employers.
pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
If a participating employer chooses to stop participating in some of its multi-employer plans, the employer may be required to
If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be shared by the
The Company’s participation in these plans for the annual period ended June 30, 2017, is outlined in the following table. Unless
otherwise noted, the most recent Pension Protection Act zone status available in 2017 and 2016 is for the plan’s year-end at
December 31, 2016 and 2015, respectively. The zone status is based on information that the Company received from the plan and
is certified by the plan’s actuary. Among other factors, plans in the red zone are generally less than 65 percent funded, plans in
the yellow zone are between 65 percent and 80 percent funded, and plans in the green zone are at least 80 percent funded.
Pension
Protection
Act Zone Status
June 30,
EIN/Pension
Plan Number 2017
Rehabilitation
Plan Status
2016
Company Contributions
(in thousands)
2017
2016 2015
Surcharge
Imposed
Expiration Date
of Collective
Bargaining
Agreement
Number of
Company
Employees
in Plan
36-6044243 Red
Red
Implemented $ 166 $ 200 $ 248
No
03/31/2018
9
23-6648508 Green
Green
No
308
347
364
No
11/04/2017
171
36-6052390 Green
Green
No
6
6
7
No
02/15/2023
3
$ 480 $ 553 $ 619
Pension Fund
Central States SE
and SW Areas
Pension Fund
Steelworkers
Pension Trust
Central Pension
Fund
The estimated cumulative cost to exit the Company’s multi-employer plans was approximately $12.3 million on June 30, 2017.
27
Defined Benefit Plan
The Company’s defined benefit pension plan is frozen. There are a total of 379 participants in the plan. Retirement benefits are
based on years of credited service multiplied by a dollar amount negotiated under collective bargaining agreements. The
Company’s policy is to fund normal costs and amortization of prior service costs at a level that is equal to or greater than the
minimum required under the Employee Retirement Income Security Act of 1974 (ERISA). As of June 30, 2017 and 2016, the
Company recorded an accrued benefit liability related to the funded status of the defined benefit pension plan recognized on the
Company’s consolidated balance sheets in other long-term liabilities of $0.2 million and $1.6 million, respectively. The
accumulated benefit obligation was $8.5 million and $8.9 million at fiscal years ended June 30, 2017 and 2016, respectively. The
Company recorded expense of $0.2 million, $0.1 million and $0.1 million during fiscal years 2017, 2016 and 2015, respectively,
related to the plan.
10. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive loss, net of income taxes, are as follows:
(in thousands)
Pension and other post-retirement benefit adjustments,
net of tax (1)
Available-for-sale securities, net of tax (2)
Total accumulated other comprehensive loss
2017
June 30,
2016
$
$
(1,725)
$
(2,203)
$
12
(25)
(1,713)
$
(2,228)
$
2015
(1,584)
(152)
(1,736)
(1) The tax effect on the pension and other post-retirement benefit adjustments is a tax benefit of $1.1 million, $1.4 million and $1.0
million at June 30, 2017, 2016 and 2015, respectively.
(2) The tax effect on the available-for-sale securities is a tax benefit of $0.0 million, $0.0 million and $0.1 million at June 30, 2017, 2016
and 2015, respectively.
11. LITIGATION
Indiana Civil Litigation – In December 2013, the Company entered into a confidential agreement to settle the Indiana Civil
Litigation. The Company paid $6.25 million to Plaintiffs to settle the matter without admission of wrongdoing. The Company
received $1.2 million, $2.3 million and $0.3 million during the fiscal years ended June 30, 2017, 2016 and 2015, respectively, for
recovery of litigation settlement costs from insurers. These amounts are recorded as “Litigation settlement reimbursements” in
the consolidated statements of income.
During the fiscal years ended June 30, 2017, 2016 and 2015, the Company recorded $0.3 million, $0.6 million and $0.6 million,
respectively, in legal and other related expenses that were incurred responding to the lawsuits and pursuing insurance coverage.
These expenses are included in SG&A expense in the consolidated statements of income.
During the fiscal years ended June 30, 2017, 2016 and 2015, the Company received approximately $1.2 million, $0.8 million and
$0.2 million from insurance carriers to reimburse the Company for certain legal defense costs. These reimbursement amounts are
recorded in SG&A as a reduction of legal expenses.
The recovery of litigation settlement and defense costs from insurance carriers is complete.
Environmental Matters – In March 2016, the Company received a General Notice Letter for the Lane Street Groundwater
Superfund Site located in Elkhart, Indiana from the United States Environmental Protection Agency (EPA). In April 2016, the
EPA issued their proposed clean-up plan for groundwater pollution and request for public comment. The Company responded to
the request for public comment in May 2016. The EPA issued a Record of Decision selecting a remedy in August 2016 and
estimated total costs to remediate of $3.6 million. In July 2017, the EPA issued a Special Notice Letter to the Company
demanding that the Company perform the remedy selected and pay for the remediation cost and past response costs of $5.5
million. Based on extensive sampling investigation performed on behalf of the Company, the Company believes that the source of
the ground water contamination is upgradient of the site formerly owned by the Company. The Company continues to believe that
it did not cause or contribute to the contamination. Accordingly, the Company has not recorded a liability in the consolidated
balance sheets.
Other Proceedings – From time to time, the Company is subject to various other legal proceedings, including lawsuits, which
arise out of, and are incidental to, the conduct of the Company’s business. The Company does not consider any of such other
proceedings that are currently pending, individually or in the aggregate, to be material to its business or likely to result in a
material effect on its consolidated operating results, financial condition, or cash flows.
28
12. COMMITMENTS AND CONTINGENCIES
FACILITY LEASES – the Company leases certain facilities and equipment under various operating leases. These leases require
the Company to pay the lease cost, operating costs, including property taxes, insurance, and maintenance. Total lease expense
related to the various operating leases was approximately $4.6 million, $4.9 million and $3.8 million in fiscal years 2017, 2016
and 2015, respectively.
Expected future minimum commitments under operating leases as of June 30, 2017 were as follows:
(in thousands)
Fiscal Year Ended June 30,
2018
2019
2020
2021
2022
Thereafter
3,853
3,868
3,134
2,444
991
–
14,290
$
13. SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION – UNAUDITED
(in thousands, except per
share amounts)
Fiscal 2017:
Net sales
Gross margin
Litigation settlement
reimbursements
Net income
Earnings per share:
September 30
FOR THE QUARTER ENDED
March 31
December 31
June 30
$
112,050
26,630
$
118,530
26,748
$
120,750
28,446
$
117,434
26,827
–
4,752
–
5,389
1,175
7,624
–
6,021
Basic
Diluted
$
$
0.62
0.61
$
$
0.69
0.68
$
$
0.98
0.96
$
$
0.77
0.76
(in thousands, except per
share amounts)
Fiscal 2016:
Net sales
Gross margin
Litigation settlement
reimbursements
Net income (1)
Earnings per share:
September 30
FOR THE QUARTER ENDED
March 31
December 31
June 30
$
126,531
27,869
$
125,410
27,684
$
125,401
28,716
$
122,764
29,430
–
5,763
250
5,366
2,030
6,944
Basic
Diluted
$
$
0.77
0.75
$
$
0.71
0.69
$
$
0.91
0.89
$
$
–
6,164
0.80
0.79
(1) The quarter ended June 30, 2016, reflects a change in the measurement of uncertain tax positions of $1.0
million (before tax).
14. SUBSEQUENT EVENTS
As of August 22, 2017, there were no subsequent events.
29
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
Evaluation of disclosure controls and procedures – Based on their evaluation as of the end of the period covered by this Annual Report
on Form 10-K, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective as of June 30, 2017.
Changes in internal control over financial reporting – During the fiscal quarter ended June 30, 2017, there were no significant changes
in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended)
that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.
Management’s Annual Report on Internal Control Over Financial Reporting – Management is responsible for establishing and
maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) or 15d-15(f) of the Securities
Exchange Act of 1934, as amended. We performed an evaluation under the supervision and with the participation of our management,
including the CEO and CFO, to assess the effectiveness of the design and operation of our disclosure controls and procedures under
the Exchange Act as of June 30, 2017. In making this assessment, we used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control — Integrated Framework (2013). Based on those criteria,
management concluded that the internal control over financial reporting is effective as of June 30, 2017. The effectiveness of the
Company’s internal control over financial reporting as of June 30, 2017, has been audited by Deloitte & Touche LLP, our independent
registered public accounting firm, as stated in their report in Part II, Item 8 of this Form 10-K.
Item 9B.
Other Information
None.
Item 10.
Directors, Executive Officers and Corporate Governance
PART III
The information contained in the Company’s 2017 definitive proxy statement to be filed with the Securities and Exchange
Commission under the sections captioned “Proposal 1 Election of Directors,” “Corporate Governance – Audit and Ethics Committee,”
“Corporate Governance – Nominating Matters,” “Corporate Governance – Code of Ethics” and “Section 16(a) Beneficial Ownership
Reporting Compliance” is incorporated herein by reference.
Item 11.
Executive Compensation
The information contained in the Company’s 2017 definitive proxy statement to be filed with the Securities and Exchange
Commission under the sections captioned “Director Compensation,” “Corporate Governance – Compensation Committee Interlocks
and Insider Participation” and “Executive Compensation” is incorporated herein by reference.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information contained in the Company’s 2017 definitive proxy statement to be filed with the Securities and Exchange
Commission under the sections captioned “Ownership of Stock By Directors and Executive Officers,” “Ownership of Stock by
Certain Beneficial Owners,” and “Equity Compensation Plan Information” is incorporated herein by reference.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information contained under the sections “Corporate Governance – Board of Directors” and “Corporate Governance – Related
Party Transaction Policy” in the Company’s 2017 definitive proxy statement to be filed with the Securities and Exchange Commission
is incorporated herein by reference.
Item 14.
Principal Accountant Fees and Services
The information contained in the Company’s 2017 definitive proxy statement to be filed with the Securities and Exchange
Commission under the sections captioned “Independent Registered Public Accounting Firm” is incorporated herein by reference.
30
PART IV
Item 15.
Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)
(1)
Financial Statements
The financial statements of the Company are set forth above in Item 8.
(2)
Schedules
The following financial statement schedules for the years ended June 30, 2017, 2016 and 2015 are submitted herewith:
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended June 30, 2017, 2016 and 2015
(in thousands)
Description
Accounts Receivable Allowances:
2017…………..………….
2016…………..………….
2015…………..………….
Balance at
Beginning of
Year
(Additions)
Reductions to
Income
Deductions from
Reserves
Balance at End
of Year
1,300
1,400
1,370
70
(10)
72
(170)
(90)
(42)
1,200
1,300
1,400
Other schedules are omitted because they are not required or are not applicable or because the required information is
included in the financial statements.
(3)
Exhibits
Exhibit No.
3.1
Amended and Restated Articles of Incorporation of the Company (incorporated by reference to Form 8-K, as filed with
the Securities and Exchange Commission on December 7, 2016).
3.2
10.1
Amended and Restated Bylaws of the Company (incorporated by reference to Form 8-K, as filed with the Securities
and Exchange Commission on December 7, 2016).
Flexsteel Industries, Inc. Restoration Retirement Plan (incorporated by reference to Exhibit No. 10.6 to the Annual
Report on Form 10-K for the fiscal year ended June 30, 2001). *
10.2
Flexsteel Industries, Inc. Senior Officer Supplemental Retirement Plan (incorporated by reference to Exhibit No.
10.7 to the Annual Report on Form 10-K for the fiscal year ended June 30, 2001). *
10.3 2002 Stock Option Plan (incorporated by reference to Appendix A from the 2002 Flexsteel definitive proxy
statement). *
10.4
10.5
10.6
10.7
10.8
10.9
Flexsteel Industries, Inc. 2006 Stock Option Plan (incorporated by reference to Appendix C from the 2006 Flexsteel
Proxy Statement filed with the Securities and Exchange Commission on October 31, 2006). *
Flexsteel Industries, Inc. 2007 Long-Term Management Compensation Plan (incorporated by reference to Appendix
C to the Definitive Proxy Statement on Schedule 14A filed with the Commission on November 1, 2007). *
2009 Stock Option Plan (incorporated by reference to Appendix A from the 2009 Flexsteel definitive proxy
statement). *
Restricted Stock Unit Award Agreement for Karel K. Czanderna, dated July 1, 2012 (incorporated by reference to
Exhibit 4.1 of Flexsteel’s Form S-8 filed with the Securities and Exchange Commission on August 20, 2012). *
Form of Notification of Award for the Cash Incentive Compensation Plan (incorporated by reference to Form 8-K
filed with the Securities and Exchange Commission on December 13, 2013). *
Form of Notification of Award for the Long-Term Incentive Compensation Plan (incorporated by reference to Form
8-K filed with the Securities and Exchange Commission on December 13, 2013). *
31
10.10 Form of Notification of Award for incentive stock options issued under the Omnibus Stock Plan (incorporated by
reference to Form 8-K filed with the Securities and Exchange Commission on December 13, 2013). *
10.11 Form of Notification of Award for non-qualified stock options issued under the Omnibus Stock Plan (incorporated
by reference to Form 8-K filed with the Securities and Exchange Commission on December 13, 2013). *
10.12 Form of Notification of Award for director non-qualified stock options issued under the Omnibus Stock Plan
(incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on December 13,
2013).*
10.13 Form of Notification of Award for restricted stock units issued under the Omnibus Stock Plan (incorporated by
reference to Form 8-K filed with the Securities and Exchange Commission on December 13, 2013). *
10.14 Long-Term Incentive Compensation Plan, dated July 1, 2013 (incorporated by reference to Exhibit 4.1 of Flexsteel’s
Form S-8 filed with the Securities and Exchange Commission on December 23, 2013). *
10.15 Omnibus Stock Plan, dated July 1, 2013 (incorporated by reference to Exhibit 4.1 of Flexsteel’s Form S-8 filed with
the Securities and Exchange Commission on December 23, 2013). *
10.16 Purchase and Sale Agreement dated August 8, 2014 between Flexsteel Industries, Inc. and ELHC I, LLC
(incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on August 14, 2014).
10.17 Completion of Acquisition of Assets dated September 26, 2014 between Flexsteel Industries, Inc. and ELHC I, LLC.
(incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on October 1, 2014).
10.18 Credit Agreement dated June 30, 2016 between Flexsteel Industries, Inc. and Wells Fargo Bank, N.A. (incorporated
by reference to Form 8-K filed with the Securities and Exchange Commission on July 1, 2016).
10.19 Development Agreement dated June 5, 2017 between Flexsteel Industries, Inc. and The City of Dubuque, Iowa.
Redevelopment Project Agreement dated May 15, 2017 between Flexsteel Industries, Inc., The City of Dubuque,
Iowa and Dubuque Initiatives. (incorporated by reference to Form 8-K filed with the Securities and Exchange
Commission on June 12, 2017).
10.20 Revolving Line of Credit Note dated June 30, 2017 between Flexsteel Industries, Inc. and Wells Fargo Bank, N.A.
(incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on June 30, 2017).
10.21 First Amendment to Credit Agreement dated June 30, 2017 between Flexsteel Industries, Inc. and Wells Fargo
Bank, N.A. (incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on June 30,
2017).
21.1
Subsidiaries of the Company. Filed herewith.
23
Consent of Independent Registered Public Accounting Firm. Filed herewith.
31.1
Certification. Filed herewith.
31.2
Certification. Filed herewith.
32
Certification by Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.
101.INS XBRL Instance Document.
101.SCH XBRL Taxonomy Extension Schema Document.
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB XBRL Taxonomy Extension Labels Linkbase Document.
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
32
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.
*Management contracts, compensatory plans and arrangements required to be filed as an exhibit to this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: August 22, 2017
FLEXSTEEL INDUSTRIES, INC.
By:
/S/ Karel K. Czanderna
Karel K. Czanderna
Chief Executive Officer
and
Principal Executive Officer
By:
/S/ Timothy E. Hall
Timothy E. Hall
Chief Financial Officer
and
Principal Financial and Accounting Officer
33
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: August 22, 2017
Date: August 22, 2017
Date: August 22, 2017
Date: August 22, 2017
Date: August 22, 2017
Date: August 22, 2017
Date: August 22, 2017
Date: August 22, 2017
/S/ Eric S. Rangen
Eric S. Rangen
Chair of the Board of Directors
/S/ Karel K. Czanderna
Karel K. Czanderna
Director
/S/ Jeffrey T. Bertsch
Jeffrey T. Bertsch
Director
/S/ Mary C. Bottie
Mary C. Bottie
Director
/S/ Michael J. Edwards
Michael J. Edwards
Director
/S/ Thomas M. Levine
Thomas M. Levine
Director
/S/ Robert J. Maricich
Robert J. Maricich
Director
/S/ Nancy E. Uridil
Nancy E. Uridil
Director
34
Exhibit 21.1
Subsidiaries of Flexsteel Industries, Inc.
DMI Furniture, Inc. (Delaware)
o DMI Management, Inc. (Kentucky)*
o DMI Sourcing Company, LLC (Kentucky) *
DMI Business Consulting Company (Shenzhen) Co. Ltd. *
Home Styles Furniture Co., Ltd. (Thailand) (99.99% interest) *
Vietnam Representative Office *
Desert Dreams, Inc. (Iowa)
o Shelf Company No. 74 (Mexico)
* Subsidiaries of DMI Furniture, Inc.
35
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-140811, 333-105951, 333-164994, 333-193041 and
333-193042 on Form S-8 of our reports dated August 22, 2017, relating to the consolidated financial statements and financial
statement schedule of Flexsteel Industries, Inc. and Subsidiaries (the “Company”), and the effectiveness of the Company’s internal
control over financial reporting, appearing in this Annual Report on Form 10-K of Flexsteel Industries, Inc. for the year ended June
30, 2017.
EXHIBIT 23
/s/ DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
August 22, 2017
36
CERTIFICATION
EXHIBIT 31.1
I, Karel K. Czanderna, certify that:
1.
I have reviewed this annual report on Form 10-K of Flexsteel Industries, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the
periods presented in this report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
c) evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) disclosed in this report any changes in the Registrant’s internal control over financial reporting that occurred during
the Registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the
Registrant’s internal control over financial reporting; and
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the Registrant’s auditors and the Audit and Ethics Committee of the Registrant’s Board of
Directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial
reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and
report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
Registrant’s internal control over financial reporting.
Date: August 22, 2017
By:
/S/ Karel K. Czanderna
Karel K. Czanderna
Chief Executive Officer
37
CERTIFICATION
EXHIBIT 31.2
I, Timothy E. Hall, certify that:
1.
I have reviewed this annual report on Form 10-K of Flexsteel Industries, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the
periods presented in this report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
c) evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) disclosed in this report any changes in the Registrant’s internal control over financial reporting that occurred during
the Registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the
Registrant’s internal control over financial reporting; and
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the Registrant’s auditors and the Audit and Ethics Committee of the Registrant’s Board of
Directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial
reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and
report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
Registrant’s internal control over financial reporting.
Date: August 22, 2017
By:
/S/ Timothy E. Hall
Timothy E. Hall
Chief Financial Officer
38
EXHIBIT 32
CERTIFICATION BY
CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Flexsteel Industries, Inc. (the “Company”) on Form 10-K for the fiscal year ended
June 30, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Karel K. Czanderna, Chief
Executive Officer, and Timothy E. Hall, Chief Financial Officer, of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted
pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and;
The information contained in the Report fairly presents, in all material respects, the consolidated financial condition and
results of operations of the Company.
Date: August 22, 2017
By:
/S/ Karel K. Czanderna
Karel K. Czanderna
Chief Executive Officer
By:
/S/ Timothy E. Hall
Timothy E. Hall
Chief Financial Officer
39
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To Our Shareholders
The closing of fiscal year 2017 is characterized by a
We increased the capacity of our Lancaster,
continued focus on our customers and an affirmation
Pennsylvania, distribution center to speed product
of the importance of quality as it relates to our brand.
deliveries to northeastern U.S. customers. We
committed to invest $25 million to construct a new
This year Flexsteel delivered the second-best year
manufacturing facility in Dubuque, Iowa, replacing
in the history of the company with $469 million in
a facility that is over 100 years old. We are also
sales. This was a 6.3 percent decrease compared
extending our commitment to sustainability by
to the previous year’s record of $500 million.
partnering in the redevelopment of the current site
Net income was $23.8 million or $3.02 per share
for future use in the community. And finally, we again
compared to the previous year’s record of $24.2
increased our cash dividend to shareholders from
million or $3.12 per share. Due to cost controls
$5.5 million to $6.1 million for a five-year growth rate
companywide, our net income decreased only
of nearly 45 percent.
1.7 percent, despite the revenue decline and an
important investment in our business information
In December, Eric Rangen was elected chair of the
system. These actions maintained profitability in the
board of directors, succeeding Lynn Davis. During
current year and will further enable future net sales
Davis’s five years as board chair, we expanded
and net income growth.
the board’s focus on strategy and governance,
increased the independent-to-inside director ratio
We intentionally stopped selling products that
while decreasing average board tenure, established
accounted for more than $25 million in sales during
director and officer stock ownership requirements
the prior fiscal year because they did not meet our
and aligned the committee structure to include
discerning quality standards. Maintaining product
corporate governance. Looking forward, Rangen’s
quality builds both customer loyalty to our brand
extensive background in accounting, finance,
and operating income over time. Additionally, we
operations and human resources and his 15 years
changed leadership in three of our businesses to
of experience as a member and committee chair
support our business information system project
on Flexsteel’s board are powerful guiding assets to
and to accelerate business growth. Our customers
continue delivering planned profitable growth today
continue to respond positively to our on-trend
and long term.
products for each of the markets we serve and the
value of our signature blue steel spring that continues
We look forward with optimism to the next year, with
to generate interest and brand loyalty in the field.
key improvements to continue offering premium
service to our customers that will create added
Focused management of assets and alignment to
value for our shareholders. At the end of the day the
corporate goals increased our cash and investment
people—our customers, associates and suppliers—
positions. Also contributing was the close of litigation
are what make Flexsteel such a revered brand in the
that consumed talent and money for six years and
furniture industry. They are the people who buy, sell
from which we had significant recoveries. In fiscal year
and make our furniture and are exactly what have
2017 we invested $15 million developing the new
made our company so strong.
business information system for a total investment to
date of $17 million. We expect the total cost to be
$30 million; this is the most complex and strategic
investment in Flexsteel’s history and will support
delivering perfect orders every day to our customers
we serve. We are now well into the design phase and
anticipate implementing the new system during the
next fiscal year.
in both the residential and contract furniture markets
Chief Executive Officer
Directors
Karel K. Czanderna
President and
Eric S. Rangen
Chair of the Board of
Flexsteel Industries, Inc. is headquartered in Dubuque, Iowa. Flexsteel is a designer, manufacturer,
importer and marketer of quality upholstered, wood, and metal furniture for residential, recreational
vehicle, office, hospitality, and healthcare markets. All products are distributed nationally.
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Rhapsody Power Reclining
Sectional with Seville Tables
Bryant Group with Halo Tables
Senior Living
Hampton Bedroom Group
Hospitality
Carmen Dining Group
Healthcare
Seaside Lodge Bedroom Group
Marbella Kitchen Cart
Government
Bucket Seat
Easy Bed
Commercial Office
Financial Highlights
Directors
Officers
(in thousands, except per-share data)
For the Year Ended June 30,
2017
2016
2015
2014
2013
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 468,764
$ 500,106
$ 466,904
$ 438,543
$ 386,189
Operating income . . . . . . . . . . . . . . . . . . . . . . . 37,264
Income before income taxes . . . . . . . . . . . . . . 37,586
38,068
37,927
34,422
35,559
22,286
23,800
20,271
20,881
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,786
$ 24,237
$ 22,299
$ 14,990
$ 13,151
Weighted Average Common
Shares Outstanding – Diluted . . . . . . . . . . . . . . . 7,886
7,765
7,708
7,511
7,326
Common Stock – Diluted . . . . . . . . . . . . . . . . . $ 3.02
$ 3.12
$ 2.89
$ 2.00
$ 1.80
Earnings per share of
Cash dividends declared
per common share . . . . . . . . . . . . . . . . . . . . . . $ 0.80
$ 0.72
$ 0.72
$ 0.60
$ 0.60
Book value per share . . . . . . . . . . . . . . . . . . . $ 29.50
$ 27.23
$ 24.97
$ 22.62
$ 21.28
At June 30,
Working capital . . . . . . . . . . . . . . . . . . . $ 158,055
$ 143,086
$ 119,902
$ 128,644
$ 113,699
Total assets . . . . . . . . . . . . . . . . . . . . . . . . 270,045
246,896
244,619
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . 39,285
37,246
57,872
210,213
43,478
192,539
41,302
Shareholders’ equity . . . . . . . . . . . . . . . $ 230,760
$ 209,650
$ 186,747
$ 166,735
$ 151,237
$500
Net Income
[in millions]
Dividends
[in millions]
$467
$469
$24.2
$23.8
$22.3
$6.1
$5.5
$5.1
$15.0
$13.2
$4.2
$4.4
$439
$386
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
21%Revenue Growth
[From June 30, 2013 to June 30, 2017]
81%Profit Growth
[From June 30, 2013 to June 30, 2017]
45%Dividend Growth
[From June 30, 2013 to June 30, 2017]
Eric S. Rangen
Chair of the Board of Directors
Retired Executive Vice President
Strategic Initiatives
Optum (part of UnitedHealth Group)
Karel K. Czanderna
President and Chief Executive Officer
Flexsteel Industries, Inc.
Jeffrey T. Bertsch
Retired Senior Vice President
Flexsteel Industries, Inc.
Mary C. Bottie
Retired Vice President
Motorola, Inc.
Michael J. Edwards
Former Chief Executive Officer
eBags
Thomas M. Levine
Independent Management Advisor
Robert J. Maricich
Chief Executive Officer
International Market Centers LP
Nancy E. Uridil
Retired Senior Vice President
Moen Incorporated
Committees
Audit and Ethics
Committee
Thomas M. Levine, Chair
Michael J. Edwards
Robert J. Maricich
Compensation
Committee
Mary C. Bottie, Chair
Michael J. Edwards
Robert J. Maricich
Nancy E. Uridil
Nominating and
Governance Committee
Nancy E. Uridil, Chair
Mary C. Bottie
Thomas M. Levine
Julia K. Bizzis
Senior Vice President
Strategic Growth
Carrie T. Bleile
Vice President Merchandising
Home Furnishings
Steven K. Hall
Senior Vice President
Global Supply Chain
Timothy E. Hall
Senior Vice President Finance
Chief Financial Officer
Secretary, Treasurer
Stacy M. Kammes
Vice President
Human Resources
Timothy P. Newlin
Vice President
Home Furnishings
Charles T. Piekenbrock
Vice President
Strategic Sourcing
Michael A. Santillo
Vice President
Healthcare
Richard J. Stanley
Senior Vice President
Contract Group & Home Styles
TRANS FER AGENT AND REGISTRAR
Wells Fargo Shareowner Services
PO Box 64854
South St. Paul, Minnesota 55164-0854
NASDAQ GLOBAL SELECT MARKET
NASDAQ Symbol • FLXS
ANNUAL MEETING
December 4, 2017, 2:00 p.m.
Dubuque, Iowa
LOCATIONS
• Flexsteel Industries, Inc.
Dubuque, Iowa
Global Headquarters
Dubuque Operations
Dublin, Georgia
Edgerton, Kansas
Harrison, Arkansas
Huntingburg, Indiana
Lancaster, Pennsylvania
Louisville, Kentucky
Riverside, California
Starkville, Mississippi
WEBSITE
www.flexsteel.com
AFFIRMATIVE ACTION POLICY
It is the policy of Flexsteel Industries, Inc. that all employees and potential
employees shall be judged on the basis of qualifications and ability,
without regard to age, sex, race, creed, color, or national origin in all
personnel actions. No employee or applicant for employment shall receive
discriminatory treatment because of physical or mental disability in regard
to any position for which the employee or applicant for employment is
qualified. Employment opportunities and job advancement opportunities will
be provided for qualified disabled veterans and veterans of the Vietnam era.
This policy is consistent with the Company’s plan for “Affirmative Action”
in implementing the intent and provisions of the various laws relating to
employment and non-discrimination.
ANNUAL REPORT ON FORM 10-K AVAILABLE
A copy of the Company’s annual report on Form 10-K, as filed with the
Securities and Exchange Commission, can be found online via the website
www.flexsteel.com under “About Flexsteel” or can be obtained by writing to:
Office of the Secretary
Flexsteel Industries, Inc.
PO Box 877
Dubuque, Iowa 52004-0877
© 2017 Flexsteel Industries, Inc.
Net Sales[in millions]
2017
Annual Report
Fiscal Year Ending
June 30, 2017
385 Bell Street | Dubuque, IA | 52001 | www.flexsteel.com