Flexsteel Industries, Inc. — Form 10-Q Summary
Period clarification: The request metadata labels this as 2016 Q1, but the filing covers the three months ended September 30, 2017—Flexsteel’s first quarter of fiscal 2018—and compares results with the quarter ended September 30, 2016. Amounts below are in U.S. dollars.
Business context and reporting period
Flexsteel manufactures, imports and markets residential and contract upholstered and wood furniture. The unaudited filing includes consolidated results for the quarter ended September 30, 2017. Management cautions that quarterly results are not necessarily indicative of full-year results.
Financial performance and liquidity
| Metric | Q1 FY2018 | Prior-year quarter |
|---|---|---|
| Net sales | $119.8 million | $112.1 million |
| Gross margin | $26.1 million; 21.8% | $26.6 million; 23.8% |
| Operating income | $9.7 million; 8.2% | $7.7 million; 6.9% |
| Net income | $6.2 million | $4.8 million |
| Diluted EPS | $0.78 | $0.61 |
| Operating cash flow | $1.5 million | $11.2 million |
| Capital expenditures | $5.1 million | $4.5 million |
Sales increased 6.9% year over year: residential sales rose 8.6% to $101.8 million, while contract sales declined 2.2% to $18.0 million. Gross margin fell 2.0 percentage points, principally because of higher raw-material costs, partly offset by better fixed-cost absorption. SG&A declined to 15.2% of sales from 16.9%, reflecting improved fixed-cost leverage and prior-year retail brand-related expenses. A $1.8 million pretax facility-sale gain contributed approximately $1.1 million after tax, or $0.14 per diluted share.
Operating cash flow decreased to $1.5 million, primarily reflecting increases in inventory of $4.8 million and receivables of $3.4 million. Investing activities provided $5.1 million, including $6.2 million of facility-sale proceeds, while financing activities used $2.0 million, mainly for $1.6 million of dividends. Cash and cash equivalents were $33.4 million at quarter-end; investments were $14.0 million. Working capital was $164.2 million, compared with $158.1 million at June 30, 2017. The company had no debt outstanding and reported $8.7 million available under its $10 million short-term credit facility; a separate $10 million line was also undrawn.
Material changes versus the prior comparable period
- Revenue growth was led by residential furniture, while contract sales softened.
- Gross margin contracted despite higher sales, with raw-material inflation identified as the primary pressure.
- Operating income and net income increased, aided by the facility-sale gain and lower SG&A as a percentage of sales.
- Operating cash flow fell substantially from the prior-year quarter, with working-capital investment—especially inventory and receivables—an important factor.
- Quarterly dividends declared per share increased to $0.22 from $0.20.
Outlook, risks and unusual items
Management expected moderate revenue growth for the remainder of fiscal 2018, including an intentional sales decrease to certain contract customers. It anticipated continuing raw-material cost increases into calendar 2018 and cited targeted price increases, delivery improvements and operating efficiencies as actions to improve gross margin. Planned capital expenditures for the remainder of fiscal 2018 were approximately $21 million: $3 million for business information system software and development, $12 million for a manufacturing facility, and $6 million for operations. Management believed available working capital and borrowing capacity were adequate to fund requirements.
The company disclosed an environmental matter concerning the Lane Street Groundwater Superfund Site. In July 2017, the EPA demanded that Flexsteel perform the selected remedy and pay $5.5 million for remediation and past response costs. Flexsteel disputed responsibility, stating it believed the contamination originated upgradient of its former property. On October 12, 2017, after consulting insurers, it offered an amount fully reimbursable by insurance coverage to resolve the matter. The filing does not state the offer amount or report a final resolution.
Other disclosed risks include furniture-industry cyclicality, supply-chain and import disruptions, raw-material and fuel costs, pricing and competition, customer credit exposure, litigation, tariffs and other government actions, and general economic conditions. Management reported effective disclosure controls and no material change in internal control over financial reporting. The company was in compliance with credit-facility covenants.
Important facts for investors to verify
- Confirm the reporting-period label: the filing is for Q1 FY2018, not 2016 Q1.
- Assess whether sales growth and planned pricing or efficiency actions can offset continuing raw-material inflation and restore gross margin.
- Monitor inventory, receivables and operating cash flow, given the sharp year-over-year reduction in operating cash generation.
- Verify the status, financial exposure and insurance reimbursement of the EPA Superfund matter; the filing does not disclose the proposed settlement amount.
- Track execution and funding of the planned $21 million remaining-year capital program, and renewal of the $10 million line maturing December 31, 2017.
- Separate recurring earnings from the facility-sale gain, which added approximately $0.14 per diluted share after tax.