Flexsteel Industries, Inc. — Form 10-Q Summary
Period clarification: The filing is for the quarter ended March 31, 2012 (the third quarter of fiscal 2012), with year-to-date results for the nine months ended March 31, 2012. This differs from the request metadata identifying 2010 Q3.
Business context
Flexsteel manufactures, imports and markets upholstered and wood furniture for residential, commercial, hospitality, health care and vehicle markets. Its products are distributed primarily in the United States. Financial amounts below are in millions of dollars unless otherwise stated.
Financial performance and position
| Metric | Quarter ended March 31, 2012 | Prior-year quarter | Nine months ended March 31, 2012 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $91.6 | $85.2 | $258.2 | $255.2 |
| Gross margin | $22.1; 24.1% | $18.2; 21.4% | $61.5; 23.8% | $56.6; 22.2% |
| Operating income | $5.1 | $3.6 | $13.4 | $10.7 |
| Net income | $3.3 | $2.5 | $8.7 | $6.9 |
| Diluted EPS | $0.48 | $0.35 | $1.24 | $1.00 |
At March 31, 2012, cash was $19.3 million, working capital was $103.6 million, total assets were $175.4 million and shareholders’ equity was $136.2 million. The company had no borrowings outstanding. Its working-capital facility provided $15 million of financing and up to $10 million for letters of credit; a separate $8 million bank line was also undrawn. The filing reports $20 million of borrowing availability overall.
For the nine-month period, operating cash flow was $8.6 million, capital expenditures were $5.3 million and investing cash outflow was $5.6 million. Financing cash outflow was $1.7 million, including $1.9 million of dividends. Cash increased $1.4 million to $19.3 million. The company declared dividends of $0.10 per share for the quarter and $0.30 per share year to date.
Material changes versus comparable periods
- Quarterly sales rose 7.6%; residential sales increased 9.6%, while commercial sales increased 1.0%. Year-to-date sales rose 1.1%, reflecting 3.6% residential growth partly offset by a 6.6% decline in commercial sales.
- Gross margin improved by 2.7 percentage points for the quarter and 1.6 points year to date. Management attributed the improvement to better fixed-cost absorption and the prior-year impact of higher material costs; prior-year year-to-date margin also included $0.6 million of inventory write-downs.
- SG&A increased to $17.0 million for the quarter and $48.1 million year to date, and rose as a share of sales. Legal and professional fees related primarily to the Indiana lawsuit increased by $0.9 million in the quarter and $2.0 million year to date. Year-to-date SG&A also benefited from a $1.1 million decline in bad-debt expense.
- Prior-year nine-month results included $1.0 million of facility-closing costs; none were recorded in the current period.
- Capital spending was substantially higher year to date, including $3.6 million for a new corporate office building. Cash used in operations improved to $8.6 million from $6.0 million in the prior-year period.
Outlook, risks and unusual items
Management expected modest overall sales growth through the end of calendar 2012. It anticipated continued improvement in residential upholstered orders, modestly higher commercial office orders, and flat vehicle and hospitality seating orders. Approximately $7.0 million of additional fiscal-2012 capital expenditures were expected, including completion, furnishing and equipping of the office building, then forecast for August 2012. Management said liquidity was adequate for operating and capital needs and expected to renew the working-capital facility, which expired June 30, 2012.
The Indiana groundwater-contamination lawsuit was in preliminary stages. The company said it did not believe it caused or contributed to the contamination, but damages and insurance coverage had not been determined and it could not estimate a probable loss range; no related accrual was recorded. Legal and related expenses were $0.8 million for the quarter and $1.9 million year to date.
Other disclosed risks include furniture-industry cyclicality, supply-chain and import disruptions, raw-material and fuel costs, pricing pressure, competition, customer credit exposure, litigation and general economic conditions. Management reported no debt outstanding and compliance with credit-agreement covenants. The filing states there were no material changes in risk factors from the 2011 Form 10-K.
Important facts for investors to verify
- Confirm the reporting period: this filing covers fiscal Q3 2012, not 2010 Q3.
- Monitor the Indiana lawsuit, related legal spending, insurance coverage and any change in the company’s ability to estimate potential losses.
- Check renewal of the working-capital facility before its June 30, 2012 expiration and continued compliance with its covenants.
- Track residential and commercial order trends, margins, material costs, and whether planned capital spending and office completion stay on schedule.
- Assess cash conversion and working-capital movements, particularly receivables and inventory, which management says fluctuate with overseas lead times and customer ordering patterns.