Flexsteel Industries, Inc. — Form 10-Q Summary
Reporting period: The supplied filing is for the quarter and nine months ended March 31, 2019 (fiscal Q3 2019), not 2017 Q3 as indicated in the request metadata. Unless stated otherwise, amounts are in millions.
Business context and results
Flexsteel manufactures, imports and markets residential and contract furniture in the United States and Canada. Quarterly sales were $111.5, down 12.1% from $126.9 a year earlier. Nine-month sales were $343.4, down 8.7% from $376.1.
- Quarterly residential sales declined 10.9% to $93.8; contract sales declined 18.1% to $17.7.
- For nine months, residential sales fell 9.0% to $289.3 and contract sales fell 7.0% to $54.1.
- Management cited softer home-furnishings demand and ready-to-assemble ecommerce share loss; lower hospitality sales; and intentional reductions in unprofitable commercial-office customers and products. Vehicle-seating sales remained relatively strong.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Gross margin | $21.3; 19.1% | $27.6; 21.8% | $64.6; 18.8% | $81.2; 21.6% |
| Operating income (loss) | $(20.3) | $4.4 | $(16.6) | $21.8 |
| Net income (loss) | $(15.6) | $3.1 | $(12.7) | $15.5 |
| Diluted EPS | $(1.97) | $0.39 | $(1.61) | $1.95 |
- SG&A was 20.5% of quarterly sales versus 15.5% a year earlier, and 18.2% of nine-month sales versus 15.3%. The filing attributes higher costs to ERP support, marketing, a $2.5 million pension-plan termination expense and, for the first half of fiscal 2019, $2.0 million of CEO transition costs.
- At March 31, 2019, cash was $28.6, current assets $179.9, current liabilities $37.8 and working capital $142.1. Total liabilities were $38.8; the company reported no debt outstanding.
- Nine-month operating cash flow was $12.5, versus $14.3 in the prior-year period. Investing activities used $4.6, including $20.6 of capital expenditures; financing activities used $7.1, primarily dividends of $6.9. Cash increased $0.8 from June 30, 2018.
- Two unsecured credit lines provide up to $20.0 in total. The $10.0 working-capital facility had $8.7 available after letters of credit at March 31 and expires June 30, 2019; the separate $10.0 line was undrawn and matures December 31, 2019. The company was in compliance with covenants.
Material changes, outlook and risks
- An $18.7 non-cash ERP impairment was recorded in Q3 after rollout to approximately 20% of sales caused significant disruption. A further $6.1 of the remaining $7.2 ERP asset could be impaired if the company abandons broader implementation. Management said ongoing ERP support costs would continue while it determines the project’s direction.
- Gross margin was pressured by lower productivity and higher labor and raw-material costs, plant-relocation costs, and an approximately 80-basis-point adverse effect from classifying certain rebates as a reduction of sales under ASC 606. ASC 606 adoption itself did not materially affect the financial statements.
- The company recorded a $3.6 environmental-remediation liability related to the Lane Street Superfund Site. The EPA had issued an order directing remediation; enforcement was suspended while investigation work proceeded. Flexsteel signed a finalized agreement with the EPA on April 24, 2019 to conduct an upgradient investigation. The company disputes responsibility and is evaluating legal options and insurance recovery.
- Tariffs are a significant risk: the filing states that about 44% of fiscal 2018 sales were imported from China and notes a 10% U.S. tariff on Chinese goods, with potential increases to 25%. The company warned that inability to offset costs or pass through price increases could hurt volume, earnings and liquidity.
- Management estimated remaining fiscal 2019 capital expenditures at $0.4 and said available cash, operating cash flow and credit arrangements were adequate for fiscal 2019 needs, dividends and productive capital investment. No earnings or revenue guidance was provided.
- Other cited risks include furniture-industry cyclicality, supply-chain disruption, raw-material and fuel costs, pricing and competition, customer credit exposure, tariffs and general economic conditions. Management stated disclosure controls were effective and reported no significant quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether sales and margins stabilize after the reported demand weakness, productivity pressure and ecommerce-channel share loss.
- The ERP project’s future scope and the recoverability of the remaining $7.2 asset, including potential additional impairment of $6.1.
- Progress, expected costs and insurance recovery prospects for the Lane Street environmental matter.
- Actual tariff exposure and the company’s ability to mitigate import costs or pass them through to customers.
- Renewal or replacement of the $10.0 working-capital facility expiring June 30, 2019, and cash generation relative to dividends and capital needs.