Flexsteel Industries, Inc. — Form 10-Q Summary
Period clarification: Although the request identifies 2013 Q2, the filing is for the quarter ended December 31, 2014, and covers the first six months of fiscal 2015. Dollar amounts below are in millions unless otherwise noted. The unaudited statements include management’s normal recurring adjustments.
Business context and results
Flexsteel manufactures, imports and markets residential and commercial upholstered and wood furniture. For the three and six months ended December 31, 2014, sales rose year over year, led by residential products; commercial sales declined. Management said West Coast port congestion reduced quarterly sales by at least $6 million.
| Metric | Quarter ended Dec. 31, 2014 | Quarter ended Dec. 31, 2013 | Six months ended Dec. 31, 2014 | Six months ended Dec. 31, 2013 |
|---|---|---|---|---|
| Net sales | $114.4 | $112.5 | $223.1 | $216.9 |
| Gross margin | $27.1; 23.7% | $26.1; 23.2% | $52.6; 23.6% | $49.7; 22.9% |
| Operating income | $7.5; 6.6% | $1.5; 1.3% | $14.6; 6.6% | $6.9; 3.1% |
| Net income | $4.7 | $1.2 | $9.6 | $4.9 |
| Diluted EPS | $0.61 | $0.16 | $1.25 | $0.66 |
Quarterly residential sales increased 3.8% to $94.8 million, while commercial sales decreased 7.5% to $19.6 million. For the six-month period, residential sales increased 6.2% to $186.3 million and commercial sales decreased 11.3% to $36.8 million. Gross margin improvement reflected product mix and lower inventory write-downs. SG&A was 17.1% of quarterly sales versus 16.3% a year earlier, and 17.0% for six months versus 16.9%.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was a use of $5.6 million, versus $1.2 million provided in the prior-year period. Management attributed the current-period use primarily to changes in operating assets and liabilities; receivables and inventory used $5.0 million and $11.5 million, respectively.
- Investing cash outflow was $30.5 million, including $30.2 million of capital expenditures, compared with $2.3 million and $1.5 million, respectively, in the prior-year period. Financing provided $14.0 million, including $16.0 million of net borrowings, partly offset by $2.4 million of dividends.
- Cash fell from $22.2 million at June 30, 2014 to $0.2 million at December 31, 2014. Inventory increased to $109.4 million from $97.9 million; accounts receivable rose to $43.5 million from $38.5 million.
- Total notes payable were approximately $16.0 million at December 31: $6.5 million short-term and $9.5 million long-term. The company reported $175.2 million in shareholders’ equity and $61.4 million in total liabilities.
- At December 31, the $25 million revolving facility had $9.5 million drawn and $2.9 million of letters of credit outstanding, leaving $12.6 million of availability. The company was compliant with its financial covenants. A separate $8 million unsecured line had $6.5 million outstanding.
- After quarter-end, the revolver was increased to $65 million and extended to December 31, 2016; the amendment added a maximum total funded debt-to-EBITDA covenant of 2.5:1. Effective January 1, 2015, the unsecured line was replaced with a $10 million line maturing December 31, 2015.
Material changes, outlook and risks
- Earnings increased substantially versus the prior-year quarter and six-month period. Comparisons were affected by a $6.3 million Indiana litigation settlement recorded in the prior-year period, with no settlement charge in the current period. Current-period results also included a $0.4 million non-taxable life-insurance gain for the six months.
- Management cited strong backlog and positive order trends and expected fiscal 2015 top-line growth, especially in residential upholstered, case goods and ready-to-assemble products. Commercial sales were expected to be consistent with fiscal 2014. These are expectations, not guaranteed results.
- The Edgerton, Kansas distribution center was being prepared for operation in fiscal 2015’s fourth quarter. Management estimated another $6 million for its construction and equipment during the remainder of fiscal 2015, plus $2 million of other operating capital expenditures. The company also spent $0.6 million on business-information-system development during the first six months.
- Management said working capital and borrowing capacity should support operations and planned investment. However, port congestion disrupted supply and sales timing and contributed to higher inventory. Import-related risks include shipping disruptions, political and regulatory developments, tariffs, and currency movements; cost inflation, pricing pressure, competition, customer credit exposure and economic cyclicality were also identified risks.
- Flexsteel continued pursuing insurance recovery for Indiana litigation defense and settlement costs. Coverage remained in question, with proceedings in Iowa and Indiana; the company said it would continue seeking recovery. It recorded $0.3 million of related legal expenses in the six-month period.
- Management reported effective disclosure controls at December 31, 2014 and no significant quarterly change in internal control over financial reporting. The filing states there was no material change to previously disclosed annual-report risk factors.
Important facts for investors to verify
- Whether port congestion eased and whether delayed orders converted to sales; compare inventory levels and residential and commercial order trends.
- Actual remaining Edgerton and information-system spending, facility opening timing, and the returns generated by these investments.
- Subsequent debt balances, revolver availability, covenant headroom and compliance with the new debt-to-EBITDA covenant.
- Progress and potential recoveries in the Indiana insurance-coverage litigation, including any related costs or cash receipts.
- Whether management’s fiscal 2015 growth outlook was achieved; the filing cautions that interim results are not necessarily indicative of full-year results.