Flexsteel Industries, Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter and six months ended December 31, 2017, for fiscal 2018. This differs from the request metadata identifying 2016 Q2. Financial statements are unaudited. Flexsteel manufactures, imports, and markets residential and contract furniture.
Financial results and liquidity
| Metric | Three months ended Dec. 31, 2017 | Three months ended Dec. 31, 2016 | Six months ended Dec. 31, 2017 | Six months ended Dec. 31, 2016 |
|---|---|---|---|---|
| Net sales | $129.4m | $118.5m | $249.2m | $230.6m |
| Gross margin | $27.4m; 21.2% | $26.7m; 22.6% | $53.5m; 21.5% | $53.4m; 23.1% |
| Operating income | $7.7m | $8.4m | $17.5m | $16.1m |
| Net income | $6.2m | $5.4m | $12.4m | $10.1m |
| Diluted EPS | $0.78 | $0.68 | $1.56 | $1.29 |
| Operating cash flow | Not presented separately for the quarter | Not presented separately for the quarter | $1.3m | $12.1m |
- Sales and profitability: Quarterly sales increased 9.2%; six-month sales increased 8.1%. Residential sales drove most of the growth. Quarterly net income and diluted EPS rose despite lower operating income, reflecting a lower income-tax provision.
- Margins and expenses: Gross margin declined 1.4 percentage points for the quarter and 1.6 points for the six-month period, primarily due to higher labor and raw-material costs, partly offset by fixed-cost leverage. SG&A fell to 15.2% of sales from 15.5% for the quarter and 16.1% for the six-month period.
- Cash flow and investment: Six-month operating cash flow was $1.3m, down from $12.1m, primarily reflecting working-capital investment, including $10.8m in higher inventory and $5.0m in higher receivables. Capital expenditures were $12.9m, versus $6.0m a year earlier. Cash declined $11.3m to $17.6m.
- Balance sheet and liquidity: At December 31, 2017, current assets were $202.2m and current liabilities $39.4m; working capital was $162.9m. Investments were $19.9m. Total liabilities were $41.7m and shareholders’ equity was $239.8m. No debt was outstanding. An unsecured $10m facility had $8.7m available after $1.3m in letters of credit; a separate $10m line was undrawn. The facilities mature June 30, 2018 and December 31, 2018, respectively.
Material changes, outlook, and risks
- Tax reform: The December 2017 federal tax-rate reduction lowered the quarter’s income-tax provision by approximately $1.3m and increased quarterly earnings by about $0.16 per share. Management expects an effective tax rate of 25%–27% beginning in fiscal 2019. The six-month tax rate was 30.2%, versus 37.7% a year earlier.
- Unusual item: Flexsteel sold a facility for $6.5m and recorded a $1.8m pre-tax gain (about $1.3m after tax, or $0.16 per share) in the six-month period.
- Outlook: For the remainder of fiscal 2018, management expected high-single-digit revenue growth, while acknowledging intentional sales reductions to certain contract customers. It anticipated continued raw-material inflation and moderating labor-cost increases, and cited pricing, service levels, and operational efficiencies as priorities for gross-margin expansion. Planned remaining fiscal 2018 capital expenditures were approximately $14m; management said working capital and borrowing capacity were adequate.
- Contingency: The EPA seeks remediation and past-response costs related to the Lane Street Groundwater Superfund Site, with a prior demand of $5.5m. The company’s settlement offer was rejected, no agreement had been reached, and the company disputed responsibility, asserting contamination originated upgradient. The filing says previously recorded related current asset and liability were no longer recorded.
- Other risks and controls: The filing highlights potential supply interruptions and cost effects from imports, foreign currency, shipping, regulation, and tariffs, as well as industry cyclicality, competition, raw-material costs, customer credit, and general economic conditions. Management reported effective disclosure controls and no significant quarterly change in internal control over financial reporting.
Key facts for investors to verify
- Confirm the intended reporting period: the filing itself is for the quarter ended December 31, 2017, not 2016 Q2.
- Track whether sales growth and planned pricing or efficiency actions offset labor and raw-material inflation and restore gross margin.
- Assess working-capital needs, especially inventory growth, and cash generation relative to planned capital spending.
- Review the EPA matter’s progress, potential exposure, insurance coverage, and any subsequent accounting changes.
- Monitor renewal or replacement of the credit facility expiring June 30, 2018, and the timing and cost of planned facility and systems investments.