Flexsteel Industries, Inc. — Form 10-Q Summary
Period: Quarter and six months ended December 31, 2011 (fiscal 2012 second quarter). The filing’s period differs from the request metadata, which specifies 2010 Q2. Unless otherwise noted, amounts below are in U.S. dollars; financial statement amounts are shown in millions.
Business context and financial performance
Flexsteel manufactures, imports and markets upholstered and wood furniture for residential and commercial uses, including office, hospitality, healthcare and vehicle applications. Its products are sold through dealers, retailers and other channels.
| Metric | Three months ended Dec. 31, 2011 | Prior-year quarter | Six months ended Dec. 31, 2011 | Prior-year period |
|---|---|---|---|---|
| Net sales | $85.0 | $82.8 | $166.5 | $170.1 |
| Gross margin | $20.5; 24.1% | $18.8; 22.7% | $39.4; 23.7% | $38.4; 22.6% |
| Operating income | $4.7 | $3.3 | $8.3 | $7.0 |
| Net income | $2.9 | $2.1 | $5.3 | $4.5 |
| Diluted EPS | $0.42 | $0.31 | $0.76 | $0.65 |
| Dividends declared per share | $0.10 | $0.075 | $0.20 | $0.15 |
Quarterly sales increased 2.6%, led by residential sales up 5.4%; commercial sales fell 6.5%. For the six-month period, sales decreased 2.1%, as residential sales rose 0.6% while commercial sales declined 10.3%. No interest expense or debt balance was reported; the company had no borrowings outstanding at December 31, 2011.
Cash flow, liquidity and balance sheet
- Six-month operating cash flow was $2.0 million, versus $0.2 million in the prior-year period. Net income and a $1.6 million increase in trade payables were partly offset by a planned $5.3 million inventory increase.
- Investing cash outflow was $3.0 million; financing cash outflow was $1.1 million, primarily reflecting $1.2 million of dividends paid. Cash decreased $2.0 million to $15.9 million.
- At December 31, 2011, working capital was $102.8 million; current assets were $132.7 million and current liabilities were $29.8 million. Inventory was $79.0 million, up from $73.7 million at June 30, 2011.
- The company had a $15 million working-capital facility, including $10 million available for letters of credit, and a separate unsecured $8 million bank line. Neither had a balance outstanding. It had $2.5 million of letters of credit and was in compliance with credit covenants.
- Capital expenditures were approximately $3.4 million in the first six months, including $2.1 million for a corporate office building. The company expected approximately $10 million of capital expenditures during the remainder of fiscal 2012; completion of the building was expected in August 2012.
Material changes and management outlook
Quarterly and six-month gross margins improved year over year. Management attributed part of the comparison to a $0.6 million inventory write-down in the prior-year period related to a facility closure. The prior-year six-month results also included $1.0 million of facility-closing costs; none were recorded in the current period. Selling, general and administrative expense included increased legal and professional fees related primarily to the Indiana lawsuit, partly offset by lower bad-debt expense.
Management expected modest top-line growth through the second half of fiscal 2012. It anticipated residential seating orders slightly above prior-year levels, modest improvement in commercial office activity, and flat vehicle and hospitality seating orders. Management cited high unemployment, limited job growth, a depressed housing market and low consumer confidence as headwinds, and stated that cash and credit arrangements were adequate for operating and capital needs.
Risks, contingencies and unusual items
- The company is a defendant in an Indiana groundwater-contamination lawsuit concerning a property it once owned. It disputes that it caused or contributed to the contamination. Plaintiffs had not specified damages, insurance coverage was undetermined, and the company could not estimate a reasonably possible loss range; no accrual was recorded. Legal and related costs were $0.6 million for the quarter and $1.1 million for the six months.
- Management identified risks including furniture-industry cyclicality, supply-chain disruption, import-related political and shipping issues, raw-material and fuel costs, pricing pressure, customer credit exposure, competition, litigation and general economic conditions.
- The company noted that imported inventory lead times and periodic large customer orders can cause significant fluctuations in inventory, receivables, payables and operating cash flow.
- Unrecognized tax-benefit liabilities, including accrued interest and penalties, totaled $1.36 million at December 31, 2011. The company did not expect a significant change in unrecognized tax benefits within twelve months.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is for the quarter ended December 31, 2011, not 2010 Q2.
- Track commercial sales and the company’s stated modest-growth outlook against subsequent results.
- Monitor inventory growth, operating cash conversion and planned office-building and other capital spending.
- Follow developments, insurance coverage and potential financial exposure in the groundwater lawsuit.
- Review future dividend levels, credit-facility availability and covenant compliance.