Business context and reporting period
Flexsteel Industries, Inc. manufactures, imports, and markets residential and commercial upholstered and wood furniture. The filing is a Form 10-Q for the quarter ended December 31, 2013, covering the second quarter and first six months of fiscal 2014, with comparisons to the same periods of fiscal 2013. The request metadata says “2012 Q2,” which does not match the filing period.
Key financial results
Amounts below are in millions, except per-share data and percentages.
| Metric | Quarter ended Dec. 31, 2013 | Prior-year quarter | Six months ended Dec. 31, 2013 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $112.5 | $94.6 | $216.9 | $185.8 |
| Gross margin | $26.1; 23.2% | $22.7; 24.0% | $49.7; 22.9% | $43.8; 23.6% |
| Operating income | $1.5 | $4.6 | $6.9 | $9.0 |
| Net income | $1.2 | $2.9 | $4.9 | $5.8 |
| Diluted EPS | $0.16 | $0.40 | $0.66 | $0.80 |
| Cash from operating activities | Not separately presented for the quarter | $1.2 | $2.1 |
Quarterly sales rose 19.0%; residential sales increased 19.3% and commercial sales 17.6%. For the six-month period, sales grew 16.7%, with residential up 17.8% and commercial up 12.5%. Management attributed residential growth mainly to demand for upholstered and, to a lesser extent, ready-to-assemble products; commercial growth was led by hospitality and vehicle seating.
Gross margin declined year over year in both comparison periods, which management attributed primarily to discounting certain case goods to address changing customer requirements. Quarterly operating income included a $6.25 million Indiana litigation settlement charge. SG&A was 16.3% of quarterly sales versus 19.2% a year earlier; six-month SG&A was 16.9% versus 18.8%.
Financial position, liquidity, and cash flow
At December 31, 2013, cash was $8.9 million, down from $10.9 million at June 30, 2013. Working capital was $118.4 million, compared with $113.7 million at fiscal year-end. Inventories were $98.9 million versus $92.4 million, and trade receivables were $41.5 million versus $36.1 million; management linked the increases to higher sales volume, expanded offerings, and shipment and collection timing.
Six-month operating cash flow was $1.2 million, versus $2.1 million a year earlier. The current-period result included $6.25 million recorded as a litigation settlement payable, while increases in receivables and inventory used cash. Investing activities used $2.3 million, including $1.5 million of capital expenditures; financing activities used $1.0 million, including $2.1 million of dividends. Cash declined by $2.1 million over the six months.
No debt was outstanding at December 31. The $10 million working-capital facility had $7.3 million of borrowing availability after $2.7 million of letters of credit and was due to expire June 30, 2014; the company reported covenant compliance. A separate unsecured $8 million line had no balance outstanding and was due to mature February 13, 2014; the company was seeking renewal. Total liabilities were $50.7 million and shareholders’ equity was $155.8 million.
Outlook, risks, and unusual items
- Management expected top-line growth to continue through the end of fiscal 2014, with residential growth led by upholstered and ready-to-assemble products and commercial sales expected to increase moderately. It did not provide numerical sales or earnings guidance.
- Expected capital expenditures for the remainder of fiscal 2014 were approximately $3.0 million, mainly for delivery and manufacturing equipment and information-technology infrastructure. Management believed cash, operating cash flows, and credit arrangements were adequate for fiscal-year needs.
- The company agreed to pay $6.3 million to settle Indiana civil litigation without admitting wrongdoing. It continued to pursue insurance recovery; coverage was disputed, and the company had appealed two adverse Iowa court opinions. It received about $1.7 million in insurance reimbursements for legal defense costs during the six months.
- Risks cited include furniture-industry cyclicality, supply-chain and import disruptions, pricing and raw-material cost pressures, competition, customer credit exposure, litigation, and general economic conditions. Management said there was no material change to the risk factors in its latest Form 10-K.
- The filing states disclosure controls were effective as of December 31, 2013 and reports no significant change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the intended reporting period: the filing covers fiscal Q2 2014, not 2012 Q2.
- Track whether sales growth translates into improved margins, given discounting and the year-over-year gross-margin decline.
- Verify settlement payment timing and any additional insurance recoveries, including the outcome of the coverage appeal.
- Check renewal and terms of the credit lines approaching their stated maturities, and monitor cash generation as receivables and inventories rise.
- Compare subsequent results with management’s qualitative growth outlook and approximately $3.0 million remaining-year capital expenditure expectation.