Flexsteel Industries, Inc. — Form 10-Q Summary
Period clarification: The filing covers the quarter and six months ended December 31, 2015 (fiscal 2016 Q2), not 2014 Q2 as stated in the request metadata. Amounts below are in millions of dollars unless noted.
Business context and reporting period
Flexsteel manufactures, imports and markets residential and commercial upholstered and wood furniture. The company reported unaudited results for the three and six months ended December 31, 2015, compared with the corresponding 2014 periods.
Key financial results
| Metric | Quarter ended Dec. 31, 2015 | Quarter ended Dec. 31, 2014 | Six months ended Dec. 31, 2015 | Six months ended Dec. 31, 2014 |
|---|---|---|---|---|
| Net sales | $125.4 | $114.4 | $251.9 | $223.1 |
| Gross margin | $27.7; 22.1% | $27.1; 23.7% | $55.6; 22.1% | $52.6; 23.6% |
| Operating income | $8.4 | $7.5 | $17.8 | $14.6 |
| Net income | $5.4 | $4.7 | $11.1 | $9.6 |
| Diluted EPS | $0.69 | $0.61 | $1.43 | $1.25 |
| Cash dividends declared per share | $0.18 | $0.18 | $0.36 | $0.36 |
- Quarterly sales rose 9.6%; residential sales increased 11.6% to $105.8 million, while commercial sales were unchanged at $19.6 million. Six-month sales rose 12.9%, with residential sales up 13.8% and commercial sales up 8.2%.
- Quarterly gross margin declined 1.6 percentage points year over year; six-month gross margin declined 1.5 points. Management attributed the decrease mainly to customer and product mix and said distribution-capacity expansion was reducing gross margin by about $0.6 million per quarter, or 0.5% of sales.
- SG&A was 15.5% of quarterly sales versus 17.1% a year earlier, and 15.1% for six months versus 17.0%. Management cited fixed-cost leverage from higher sales.
- Six-month operating cash flow was $9.3 million, compared with cash used of $5.6 million in the prior-year period. Investing activities used $3.2 million, including $5.8 million of capital expenditures; the prior-year period used $30.5 million, including $30.2 million of capital expenditures. Financing activities used $7.0 million, principally for $6.0 million of net debt repayments and $2.7 million of dividends.
- Cash was $0.3 million at December 31, 2015, down from $1.3 million at June 30, 2015. Working capital was $134 million versus $120 million. Current assets were $177.8 million and current liabilities $44.0 million.
- Balance-sheet notes payable—current were $5.9 million. The company reported $5.6 million outstanding under its $30 million primary credit facility and $0.3 million on a separate $10 million line. Primary-facility availability was $22.1 million after outstanding borrowings and letters of credit. Both facilities mature December 31, 2016; the company reported covenant compliance.
Changes, outlook, risks and unusual items
- Sales growth reflected increased demand, particularly for upholstered and ready-to-assemble residential products. Prior-year West Coast port congestion was estimated to have reduced December 2014-quarter sales by at least $6 million, affecting the comparison.
- Management expects furniture demand to moderate and anticipates moderate top-line growth for the balance of fiscal 2016. It expects residential growth to continue through existing and expanded products and customers. Operating capital expenditures are estimated at $2.6 million for the remainder of fiscal 2016; timing and investment levels for logistics and business-information-system initiatives remain under evaluation.
- Management believes operating cash flows and credit arrangements are adequate for fiscal 2016 operating and capital needs. The filing provides no specific earnings or sales-growth target.
- Results included a $0.25 million insurer reimbursement related to the Indiana litigation and a $0.3 million nontaxable life-insurance gain (about $0.04 per share). Insurance recovery for additional litigation defense and settlement costs remains uncertain; related coverage proceedings are ongoing.
- Risks discussed include moderating furniture demand, customer/product mix and pricing, raw-material and labor costs, import and shipping disruptions, foreign currency, competition, customer credit exposure, litigation and general economic conditions. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the reporting period: the filing is for fiscal 2016 Q2, ended December 31, 2015.
- Track whether sales growth continues as management’s expected demand moderation and the prior-year port-congestion comparison affect results.
- Monitor gross-margin recovery as distribution expansion proceeds and customer/product mix changes.
- Review cash generation, capital spending, working-capital needs and the 2016 maturity dates of both credit facilities.
- Assess the outcome and potential additional recoveries in the Indiana litigation and related insurer-coverage disputes.