Flexsteel Industries, Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter ended September 30, 2018, the first quarter of fiscal 2019, with comparisons to the quarter ended September 30, 2017. The request metadata says “2017 Q1,” which does not match the filing period.
Business context and financial results
Flexsteel manufactures, imports and markets residential and contract furniture. Amounts below are in millions of dollars except per-share data.
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Net sales | $113.5 | $119.8 |
| Gross profit / margin | $21.8 / 19.2% | $26.1 / 21.8% |
| Operating income | $1.6 | $9.7 |
| Net income | $1.3 | $6.2 |
| Diluted EPS | $0.16 | $0.78 |
| Operating cash flow | $9.9 | $1.5 |
| Capital expenditures | $10.4 | $5.1 |
Sales fell 5.3% year over year: residential sales declined 5.6% to $96.1 million, primarily due to ecommerce products, while contract sales declined 3.3% to $17.4 million. Gross margin contracted 2.6 percentage points; management cited higher labor costs, while pricing initiatives offset inflation in steel, plywood and foam. SG&A rose to $20.2 million from $18.2 million, including $1.3 million of pretax retirement-related severance and ancillary costs for the former CEO. Prior-year results included a $1.8 million pretax gain on a facility sale.
Liquidity, balance sheet and cash flow
At September 30, 2018, cash and equivalents were $23.3 million and investments were $18.0 million. Working capital was $139.8 million, down from $148.7 million at June 30, 2018. Total liabilities were $45.5 million and shareholders’ equity was $241.7 million. The company had no borrowings outstanding; its $10 million working-capital facility had $8.7 million available after letters of credit, and a separate $10 million line was undrawn. The facilities mature June 30, 2019 and December 31, 2018, respectively.
Operating cash flow benefited from a $5.9 million inventory reduction, partly offset by a $2.3 million increase in receivables. Investing used $12.4 million, including $10.4 million of capital expenditures; financing used $1.9 million, including $1.7 million in dividends. Management estimates another $14 million of capital expenditures for the remainder of fiscal 2019 and believes available liquidity and credit are adequate for fiscal-year needs.
Outlook, risks and unusual items
- Management expects sequential near-term revenue and earnings growth, subject to tariffs. It expects service levels to improve as the new business information system stabilizes, but said volume recovery—particularly in ecommerce—may be slower over coming quarters.
- Management cited labor efficiency and utilization challenges and ongoing efforts to mitigate labor cost increases. Import tariffs on China-origin goods were 10%, with a possible increase to 25% on January 1, 2019. About 44% of fiscal 2018 sales were imported from China; price increases and sourcing-cost reductions may not fully offset tariffs and could reduce volume.
- The company expects a 25%–27% effective tax rate for fiscal 2019. The quarter’s 27.0% rate included an approximately $0.2 million benefit related to federal tax reform.
- Flexsteel recorded a $3.6 million environmental remediation accrual for the Lane Street Superfund Site. The EPA had demanded $5.5 million and issued a remedial-action order; enforcement was suspended while testing and an administrative order process continued. The company disputes responsibility and is pursuing insurance recovery. The filing does not establish the ultimate cost or resolution.
- Adoption of ASC 606 in the quarter used the modified retrospective method and had no material financial-statement impact. Management reported disclosure controls were effective and no significant change in internal control over financial reporting.
Important facts for investors to verify
- Whether ecommerce service levels and sales volumes recover as management expects after business-system disruption.
- The effect of current or increased tariffs on costs, pricing, sales volume and earnings, including the company’s ability to pass through price increases.
- Progress on labor efficiency, the new manufacturing facility and planned capital expenditures.
- Developments in the EPA matter, the adequacy of the $3.6 million accrual, and insurance coverage or recovery.
- Availability and renewal or maturity of the credit lines, particularly the line maturing December 31, 2018.