Flexsteel Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended March 31, 2014; comparative periods ended March 31, 2013. Financial statements are unaudited. Amounts below are in millions of dollars except per-share data.
Business context
Flexsteel manufactures, imports and markets residential and commercial upholstered and wood furniture in the United States. Its products serve home, office, hospitality, healthcare and other commercial markets.
Financial results and liquidity
| Metric | Three months 2014 | Three months 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $110.5 | $98.4 | $327.4 | $284.2 |
| Gross margin | $25.0; 22.7% | $22.8; 23.2% | $74.7; 22.8% | $66.7; 23.5% |
| Operating income | $6.6 | $4.9 | $13.5 | $13.9 |
| Net income | $4.4 | $3.1 | $9.4 | $8.9 |
| Diluted EPS | $0.58 | $0.42 | $1.24 | $1.22 |
| Operating cash flow | Not presented by quarter | $11.6 | $6.2 |
Quarterly sales rose 12.4%, led by residential sales (+13.5%); commercial sales increased 7.4%. For the nine months, sales grew 15.2%, with residential up 16.3% and commercial up 10.8%. Gross margin declined in both comparisons, primarily due to discounting certain case goods. Quarterly operating income and diluted EPS improved; nine-month operating income was lower, while net income and diluted EPS increased.
Nine-month operating cash flow was $11.6 million, investing cash outflow $4.1 million, and financing cash outflow $1.1 million. Capital expenditures were $3.8 million. Cash was $17.3 million at March 31, up from $10.9 million at June 30, 2013. Working capital was $122.3 million, compared with $113.7 million at June 30, 2013. The company reported no debt outstanding. A $10 million working-capital facility had $7.3 million availability after $2.7 million of letters of credit; a separate $8 million line was unused. Dividends declared were $0.15 per share for the quarter and $0.45 for the nine-month period.
Material changes, outlook and risks
- The company recorded $6.3 million of Indiana litigation settlement costs in the nine-month period and paid the settlement without admitting wrongdoing. It continues to seek insurance recovery; coverage is disputed, and the company appealed adverse coverage rulings.
- Nine-month interest and other income increased, reflecting $1.2 million of realized gains on investments held to fund supplemental retirement plans. Those plan assets are held in a Rabbi Trust and are unavailable for general corporate purposes.
- Management expected fourth-quarter fiscal 2014 sales growth, citing positive order trends and a $51 million backlog at March 31, up 16% year over year. Residential growth was expected from upholstered and ready-to-assemble products; commercial sales were expected to increase moderately.
- Management anticipated approximately $0.5 million of capital expenditures for the rest of fiscal 2014 and stated that cash, operating cash flows and credit arrangements should meet operating and capital needs. Two multiyear initiatives—logistics strategy and business-information assessment—were underway; investment timing and amount were not yet determined.
- Risks include furniture-industry cyclicality, supply-chain and import disruptions, pricing and input-cost pressures, competition, customer credit exposure, litigation and general economic conditions. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- The credit-facility expiration date is inconsistent in the filing: the note says June 30, 2014, while MD&A says June 30, 2015. Confirm the operative renewal or maturity date.
- Common-stock issuance proceeds differ between the cash-flow statement ($1.7 million) and MD&A ($2.1 million) for the nine months. Confirm the correct figure.
- Track the outcome of insurance recovery efforts and the Iowa coverage appeal; the filing says coverage remains in question.
- Assess whether margin pressure from case-goods discounting persists as sales grow, and monitor execution and investment needs for the announced initiatives.