Flexsteel Industries, Inc. — Form 10-Q Summary
Period clarification: The request identifies 2014 Q1, but the supplied filing is for the three months ended September 30, 2015, Flexsteel’s first fiscal quarter of fiscal 2016. Comparative results are for the three months ended September 30, 2014. The filing was signed October 21, 2015.
Business context and financial performance
Flexsteel manufactures, imports and markets residential and commercial upholstered and wood furniture. Amounts below are in millions except per-share data and percentages.
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Net sales | $126.5 | $108.7 |
| Gross profit / margin | $27.9 / 22.0% | $25.5 / 23.5% |
| Operating income / margin | $9.4 / 7.4% | $7.1 / 6.6% |
| Net income / net margin | $5.8 / 4.6% | $4.9 / 4.5% |
| Diluted EPS | $0.74 | $0.64 |
| Operating cash flow | $8.5 | $3.2 |
| Capital expenditures | $2.1 | $25.8 |
Sales increased 16.4%. Residential sales rose 16.3% to $106.3 million, primarily on increased demand for upholstered furniture and, to a lesser extent, ready-to-assemble furniture. Commercial sales grew 17.2% to $20.2 million. Gross margin declined 1.5 percentage points; management attributed $1.3 million, or 1.0 percentage point, to investments in the expanded distribution network. SG&A fell to 14.6% of sales from 16.9%, reflecting $1.9 million of fixed-cost leverage and $1.0 million of lower direct selling costs, primarily due to expenditure timing. The prior-year quarter included a $0.4 million non-taxable life-insurance gain. The effective tax rate was 38.0%, versus 37.0%.
Liquidity, debt and balance sheet
At September 30, 2015, cash was $1.9 million, working capital was $125.6 million, and current assets and liabilities were $168.9 million and $43.3 million, respectively. Total assets were $240.8 million; total liabilities were $48.9 million; shareholders’ equity was $191.9 million.
Current borrowings were $6.8 million, down from $11.9 million at June 30, 2015. Under its $30 million unsecured working-capital facility, Flexsteel had $20.6 million of borrowing availability after outstanding borrowings and $2.6 million of letters of credit. The facility bears interest at LIBOR plus 1% and expires December 31, 2016; the company reported compliance with its covenants. A separate $10 million unsecured line had no borrowings and also matures December 31, 2016.
Operating cash flow of $8.5 million was supported by net income, lower inventory and depreciation, partly offset by higher receivables and lower accounts payable. Investing used $2.1 million, principally for capital expenditures. Financing used $5.8 million, mainly to repay $5.1 million of borrowings and pay $1.3 million in dividends. Cash increased $0.6 million to $1.9 million.
Outlook, risks and notable items
Management expected top-line growth to continue in the second fiscal quarter, citing strong order trends and backlog. It anticipated continued residential growth from existing customers and products, as well as product-portfolio and customer-base expansion, with upholstered and ready-to-assemble products expected to contribute. This is management’s outlook, not quantified full-year guidance.
The company continued multi-year logistics and business-information-system initiatives. It estimated $6 million of operating capital expenditures for the remainder of fiscal 2016 and said operating cash flow and credit resources were adequate for its needs. Management also stated its intention to maintain quarterly dividends, emphasizing cash flow, profitability and a strong balance sheet.
Distribution-network investment pressured current-quarter gross margin, and management said the timing and amount of further investment would be assessed as projects progress. Risks cited include furniture-industry cyclicality, supply-chain and import disruptions, pricing and input-cost pressures, competition, customer credit exposure, litigation, product and distribution execution, and general economic conditions. Flexsteel continued seeking insurance recovery related to the Indiana civil litigation settlement; coverage remained disputed and proceedings were ongoing. The filing reported no material change in previously disclosed risk factors. Management said disclosure controls were effective and there were no significant changes in internal control over financial reporting.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing covers Q1 FY2016, not 2014 Q1.
- Monitor whether sales growth and strong order trends persist, and whether distribution investments improve operations without further margin pressure.
- Track working-capital movements, borrowing needs, capital spending, and the planned $6 million of remaining FY2016 operating capital expenditures.
- Review progress and potential recovery in the disputed insurance-coverage litigation; the filing does not establish the amount or timing of any recovery.
- Assess exposure to import and supply-chain disruption, raw-material and labor inflation, pricing pressures, and other risks identified by management.