Business context and reporting period
Flexsteel Industries, Inc. manufactures, imports and markets residential and commercial furniture. This Form 10-Q covers the quarter and six months ended December 31, 2016, the second quarter of fiscal 2017—not 2015 Q2 as stated in the request metadata. Financial statements are unaudited.
Financial results and position
| Metric | Three months ended Dec. 31, 2016 | Year-over-year | Six months ended Dec. 31, 2016 | Year-over-year |
|---|---|---|---|---|
| Net sales | $118.5 million | Down 5.5% | $230.6 million | Down 8.5% |
| Gross margin | $26.7 million; 22.6% | 22.1% prior year | $53.4 million; 23.1% | 22.1% prior year |
| Operating income | $8.4 million; 7.1% of sales | $8.4 million; 6.8% | $16.1 million; 7.0% | $17.8 million; 7.1% |
| Net income | $5.4 million | $5.4 million | $10.1 million | $11.1 million |
| Diluted EPS | $0.68 | $0.69 | $1.29 | $1.43 |
Quarterly residential sales fell 5.0% to $100.5 million and commercial sales fell 8.2% to $18.0 million. For the six-month period, residential sales declined 8.4% to $194.2 million and commercial sales declined 8.5% to $36.4 million. Management attributed declines mainly to lower volume; prior-year sales benefited from products shipped to clear West Coast port congestion ($3 million for the quarter; approximately $6 million for six months). Casegoods sales also weakened amid soft retail demand.
Quarterly SG&A was 15.5% of sales, unchanged as a percentage year over year. Six-month SG&A rose to 16.1% of sales from 15.1%, reflecting lower sales leverage and business information system costs. Gross margin improved, partly offset by lower fixed-cost absorption. Dividends declared were $0.20 per share for the quarter and $0.40 for six months, versus $0.18 and $0.36, respectively, in the prior-year periods.
At December 31, 2016, cash was $40.8 million, working capital $148.0 million, and total liabilities $44.4 million. No borrowings were outstanding under either credit line. Six-month operating cash flow was $12.1 million, compared with $9.3 million; investing cash use was $6.0 million and financing cash use was $2.1 million. Capital expenditures were $6.0 million, including $4.6 million for the business information system. Inventory increased $10.4 million from June 30, while trade payables increased $9.0 million.
Outlook, risks and unusual items
Management expected U.S. furniture demand to remain sporadic amid economic uncertainty, with third- and fourth-quarter fiscal 2017 net sales expected to be comparable to the corresponding prior-year quarters. It cited product-introduction streamlining and discretionary-spending control as priorities. For the remainder of fiscal 2017, the company expected $12.8 million of information-system capital expenditures, $2.5 million of related SG&A expense, and $1.6 million of other operating capital expenditures (about $14.4 million total capital expenditures). Management said cash flows and borrowing capacity should be adequate to fund requirements and support dividends.
The company had $7.8 million available under its $10 million unsecured working-capital facility after $2.2 million of letters of credit; it expires June 30, 2017. A separate $10 million unsecured line had no balance and matures December 31, 2017. The company reported compliance with credit covenants.
Flexsteel continues to seek insurance recovery related to Indiana civil litigation; coverage is disputed and litigation is ongoing. The EPA estimated $3.6 million in total remediation costs for the Lane Street Groundwater Superfund Site. Flexsteel disputes that it caused or contributed to contamination; no liability was recorded because the company said its potential share could not be reasonably estimated and the EPA had not issued a special notice letter naming it for contribution.
Other risks cited include cyclical demand, supply-chain and import disruption, foreign exchange, tariffs and regulation, inflation and input costs, pricing pressure, competition, litigation, customer credit exposure, and general economic conditions. Management reported effective disclosure controls and no material change in risk factors or internal controls.
Most important facts for investors to verify
- Confirm the period: the filing is for the quarter ended December 31, 2016 (fiscal 2017 Q2), despite the request metadata’s “2015 Q2.”
- Track whether lower sales volumes persist and whether gross-margin gains can continue despite lower fixed-cost absorption.
- Monitor information-system spending, remaining fiscal 2017 capital expenditures, and the effect on cash flow and SG&A.
- Review renewal or replacement of the working-capital facility expiring June 30, 2017, and continuing availability under both credit lines.
- Follow developments in insurance-coverage litigation and the EPA Superfund matter, including any notice, allocation of remediation costs, or liability recognition.