Flexsteel Industries, Inc. — Form 10-Q Summary
Period discrepancy: Request metadata identifies 2015 Q3, but the filing itself is for the quarter and nine months ended March 31, 2017 (fiscal 2017 Q3). The figures below reflect the filing.
Business context and reporting period
Flexsteel manufactures, imports and markets residential and contract upholstered and wood furniture. The unaudited filing compares the three and nine months ended March 31, 2017 with the same periods in 2016. Management cautions that interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net sales | 2017: $120.8 million; 2016: $125.4 million, down 3.7% | 2017: $351.3 million; 2016: $377.3 million, down 6.9% |
| Gross margin | 2017: $28.4 million (23.6%); 2016: $28.7 million (22.9%) | 2017: $81.8 million (23.3%); 2016: $84.3 million (22.3%) |
| Operating income | 2017: $12.0 million; 2016: $11.3 million | 2017: $28.2 million; 2016: $29.1 million |
| Net income | 2017: $7.6 million; 2016: $6.9 million | 2017: $17.8 million; 2016: $18.1 million |
| Diluted EPS | 2017: $0.96; 2016: $0.89 | 2017: $2.26; 2016: $2.33 |
Quarterly sales fell in both residential (down 3.0%) and contract (down 7.1%) markets; nine-month sales declined 6.6% and 8.4%, respectively. Management attributed the lower sales primarily to reduced volume. Gross-margin improvement was primarily due to product mix. Quarterly SG&A was 14.6% of sales versus 15.5%; nine-month SG&A rose to 15.6% from 15.2%, including costs to upgrade the business information system. Litigation reimbursements also affected reported operating results.
- Cash flow: Nine-month operating cash flow was $23.7 million, down from $32.1 million. Investing cash outflow was $19.7 million, including $9.8 million of capital expenditures and net investment purchases of approximately $10.1 million. Financing cash outflow was $3.2 million, primarily dividends.
- Liquidity and debt: March 31 cash was $37.6 million and investments were $10.0 million; working capital was $155.4 million. No borrowings were outstanding under either credit line. The $10 million facility had $7.8 million available after letters of credit and expired June 30, 2017; a separate $10 million line matured December 31, 2017. The company reported compliance with financial covenants.
- Balance sheet: Total assets were $266.3 million, compared with $246.9 million at June 30, 2016. Total liabilities were $40.9 million and shareholders’ equity was $225.5 million. Inventory increased to $92.7 million from $85.9 million.
- Capital returns: Nine-month dividends paid were $4.5 million, up from $4.1 million. Dividends declared were $0.60 per share versus $0.54 in the prior-year period.
Outlook, risks and unusual items
Management expected fourth-quarter fiscal 2017 sales to remain steady with the March quarter, which it said would make fiscal 2017 the second-highest sales year compared with the prior-year record. It expected $4.7 million of capital expenditures for the rest of fiscal 2017, including $3.7 million for the business information system and $1.0 million for operating capital expenditures, plus $1.0 million of system-upgrade SG&A expense. Management expected the system project to be completed during fiscal 2018 and said cash flows and credit arrangements were adequate for planned requirements.
- The company completed recovery of Indiana litigation settlement and defense costs from insurers; reimbursements were $1.2 million in the quarter and nine-month period, versus $2.0 million and $2.3 million in the comparable 2016 periods. The insurer litigation was closed.
- The EPA identified Flexsteel as a potential responsible party at the Lane Street Groundwater Superfund Site. The EPA estimated total remediation costs at $3.6 million, but had not issued a special notice letter to Flexsteel. The company had not recorded a liability because its potential responsibility could not be reasonably estimated and it maintained it did not cause or contribute to contamination.
- Key disclosed risks include furniture-industry cyclicality, supply disruptions and import-related risks, pricing and input-cost pressures, competition, customer credit exposure, litigation, product introductions, and general economic conditions. Management reported no material change in previously disclosed risk factors.
- Management stated disclosure controls were effective as of March 31, 2017 and reported no significant change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is for March 31, 2017, not 2015 Q3.
- Track whether sales-volume declines continue and whether improved product mix sustains gross-margin gains.
- Review the effect of the completed insurer reimbursements on comparisons and future earnings, as these reimbursements are not recurring.
- Monitor business information system spending, implementation timing, and any resulting operational or cost risks.
- Follow EPA proceedings and any later determination of Flexsteel’s responsibility or potential remediation liability.
- Confirm renewal or replacement of the working-capital facility that was scheduled to expire June 30, 2017.