Flexsteel Industries, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended September 30, 2011 (first quarter of fiscal 2012), not 2010 Q1 as indicated in the request metadata. Comparative results are for the quarter ended September 30, 2010. Amounts below are in millions unless noted.
Business context and reporting period
Flexsteel manufactures, imports and markets upholstered and wooden furniture for residential, commercial, hospitality, healthcare and motor vehicle markets. The unaudited consolidated results cover the three months ended September 30, 2011.
Financial results and liquidity
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Net sales | $81.52 | $87.23 |
| Gross margin | $18.96; 23.3% | $19.61; 22.5% |
| Operating income | $3.63 | $3.69 |
| Net income | $2.38 | $2.34 |
| Diluted EPS | $0.34 | $0.34 |
| Cash used in operating activities | $2.95 | $3.61 |
- Operating margin was 4.5% versus 4.2%; net margin was 2.9% versus 2.7%. Dividends declared were $0.10 per share, compared with $0.075.
- Cash was $14.09 at September 30, down from $17.89 at June 30. Working capital was $102.7. Current assets were $130.0 and current liabilities $27.3.
- No borrowings were outstanding under either the $15 million working-capital facility or the separate $8 million line of credit. The company reported compliance with credit covenants and no debt outstanding.
- Quarterly investing cash use was $0.43, including $0.58 in capital expenditures. Financing cash use was $0.42, including $0.50 in dividends. Inventory increased $4.70 and receivables increased $0.62, contributing to operating cash use.
- Total liabilities were $35.33 and shareholders’ equity was $130.19 at quarter-end.
Material changes versus the prior comparable quarter
- Sales fell 6.5% year over year. Residential sales declined 4.1% to $62.52 million; commercial sales declined 13.7% to $19.00 million.
- Management said the prior-year quarter benefited from unusually long shipment lag on spring 2010 orders. New orders in the current quarter were approximately 8.4% higher year over year.
- Gross margin improved 0.8 percentage points, primarily from lower ocean freight costs and lower fixed costs following manufacturing-capacity reductions.
- SG&A rose to $15.33 million, or 18.8% of sales, from $14.90 million, or 17.1%. The filing cites dealer gallery conversion and installation support, as well as higher legal and professional fees.
- Current-quarter operating income was slightly lower despite the improved gross-margin rate; the prior-year quarter included $1.02 million of facility-closing costs, fully paid by June 30, 2011.
- Other comprehensive loss was $0.29 million, compared with comprehensive income of $2.47 million in the prior-year quarter, reflecting securities losses.
Outlook, risks and unusual items
- Management expected modest top-line growth for fiscal 2012. It cited high unemployment, weak job growth, a weak housing market and low consumer confidence as adverse conditions, while anticipating improvement in commercial and hospitality orders.
- Management expected approximately $14 million of capital expenditures for the remainder of fiscal 2012, including construction and furnishing of a new corporate office. It believed available cash and credit were adequate for operating and capital needs and quarterly dividends.
- A groundwater-contamination lawsuit in Indiana names the company among several defendants and relates to property formerly owned by Flexsteel. The company disputes causing or contributing to contamination; damages and insurance coverage were undetermined, and no loss accrual was recorded. The company incurred $0.5 million of related legal and other costs in the quarter.
- Risks include furniture-industry cyclicality, economic conditions, supply-chain and import disruptions, tariffs, foreign-exchange movements, raw-material, labor and fuel costs, pricing pressure, competition, customer credit exposure and litigation. The company reported no foreign-currency-denominated sales, purchases or expenses in either comparative quarter.
- Management stated that the quarter’s results are not necessarily indicative of full-year results. No material change to previously disclosed risk factors was reported.
Important facts for investors to verify
- Confirm the reporting period: this filing covers the quarter ended September 30, 2011, despite the request’s “2010 Q1” label.
- Track whether new-order growth translates into sales, particularly in commercial and hospitality markets, and whether the expected modest fiscal-2012 growth materializes.
- Monitor inventory growth, operating cash conversion, planned capital spending and dividend cash requirements.
- Follow developments in the Indiana lawsuit, including any quantified claims, insurance coverage and potential loss accrual.
- Assess whether improved gross margins can be sustained while SG&A remains elevated relative to sales.