Flexsteel Industries, Inc. — Form 10-Q Summary
Period: The filing is for the quarter ended March 31, 2015, and reports fiscal 2015 third-quarter and nine-month results. This does not match the request metadata of “2013 Q3.” Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless otherwise noted.
Business context and results
Flexsteel manufactures, imports, and markets residential and commercial upholstered and wood furniture. For the three months ended March 31, 2015, net sales rose 10.9% to $122.5 million. Residential sales increased 14.6% to $103.9 million, primarily reflecting stronger demand for upholstered and ready-to-assemble products; commercial sales fell 6.1% to $18.6 million.
For the nine months ended March 31, 2015, sales increased 5.5% to $345.6 million. Residential sales rose 9.1% to $290.2 million, while commercial sales declined 9.6% to $55.4 million.
Financial performance and liquidity
| Metric | Three months ended Mar. 31, 2015 | Nine months ended Mar. 31, 2015 |
|---|---|---|
| Net sales | $122.5 million | $345.6 million |
| Gross margin | $29.7 million; 24.2% | $82.3 million; 23.8% |
| Operating income | $11.2 million; 9.1% of sales | $25.8 million; 7.5% of sales |
| Net income | $7.0 million | $16.5 million |
| Diluted EPS | $0.90 | $2.15 |
| Dividends declared per share | $0.18 | $0.54 |
Gross margin improved year over year, which management attributed primarily to declining inventory write-downs. SG&A was 15.3% of quarterly sales and 16.4% of nine-month sales; management cited fixed-cost leverage from higher sales.
Nine-month operating cash flow was $6.1 million, down from $11.6 million a year earlier. Investing cash outflow was $34.0 million, including $33.8 million of capital expenditures. Financing provided $11.4 million, primarily from $14.7 million of long-term borrowings, partly offset by $3.8 million of dividends paid. Cash declined $16.4 million from the fiscal-year start to $5.7 million at March 31, 2015.
At March 31, 2015, current assets were $169.0 million and current liabilities were $43.0 million. Inventory was $108.1 million, up from $97.9 million at June 30, 2014; receivables were $46.7 million, up from $38.5 million. The company had $14.7 million of long-term notes payable under its main credit facility. The amended facility provides up to $65.0 million, with $47.4 million of availability remaining after borrowings and letters of credit. A separate $10.0 million unsecured line had no outstanding balance. The company reported compliance with financial covenants.
Changes, outlook, and risks
- Operating income for the nine-month period increased to $25.8 million from $13.5 million. The comparison includes a $6.25 million Indiana litigation settlement cost in the prior-year period; the current period also included a $0.25 million insurance reimbursement. Thus, the reported improvement reflects both stronger operating performance and a more favorable litigation comparison.
- Capital spending increased substantially to fund the Edgerton, Kansas distribution facility. The company had invested $30.4 million in the facility and expected to spend a further $1.5 million to complete and equip it. The facility began operations in April 2015. Management also reported $0.6 million of current-period expense on business information system development.
- Management expected top-line growth to continue in fiscal 2015’s fourth quarter, citing a strong order backlog and positive order trends. It anticipated residential growth, particularly in upholstered, ready-to-assemble, and case goods products, and commercial sales consistent with the nine-month trend. These are forward-looking expectations, not guarantees.
- Management said cash flows and credit arrangements were adequate for fiscal 2015 operating and capital needs. The filing does not provide specific earnings or sales guidance figures.
- The company continued pursuing insurance recovery for Indiana litigation costs; coverage remained disputed and related proceedings were ongoing in Iowa and Indiana. Management stated that other pending legal proceedings were not considered material.
- Disclosed risks include furniture-industry cyclicality, supply-chain and shipping disruptions, import duties and regulation, raw-material and fuel costs, pricing pressure, competition, customer credit exposure, litigation, and general economic conditions. The company reported minimal foreign-currency exposure.
Important facts for investors to verify
- Confirm the intended reporting period: this filing covers the quarter ended March 31, 2015, not 2013 Q3.
- Assess whether residential demand and order backlog can offset continuing weakness in commercial sales.
- Track inventory growth, receivables, and operating cash conversion, which weakened year over year as working-capital needs increased.
- Monitor completion costs and returns from the Edgerton facility and the company’s other multi-year initiatives.
- Review credit-facility availability, the funded-debt-to-EBITDA covenant, and the outcome of the disputed insurance coverage claims.