Flexsteel Industries, Inc. — Form 10-Q Summary
Period clarification: The request identifies “2016 Q3,” but the filing provided is for the quarter ended March 31, 2018 (Flexsteel’s fiscal third quarter) and the nine months ended March 31, 2018. Comparisons below are with the corresponding 2017 periods. Dollar amounts are in millions unless stated otherwise.
Business context and reporting period
Flexsteel manufactures, imports and markets residential and contract upholstered and wood furniture in the United States. The unaudited filing covers the three and nine months ended March 31, 2018.
Financial performance
| Metric | Quarter ended Mar. 31, 2018 | Quarter ended Mar. 31, 2017 | Nine months ended Mar. 31, 2018 | Nine months ended Mar. 31, 2017 |
|---|---|---|---|---|
| Net sales | $126.9 | $120.8 | $376.1 | $351.3 |
| Gross margin | $27.6 / 21.8% | $28.4 / 23.6% | $81.2 / 21.6% | $81.8 / 23.3% |
| Operating income | $4.4 | $12.0 | $21.8 | $28.2 |
| Net income | $3.1 | $7.6 | $15.5 | $17.8 |
| Diluted EPS | $0.39 | $0.96 | $1.95 | $2.26 |
| Operating cash flow | Not separately provided | Not separately provided | $14.3 | $23.7 |
Quarterly sales rose 5.0%; residential sales increased 2.6% and contract sales 18.7%. Nine-month sales rose 7.1%, with residential up 7.1% and contract up 6.8%. Gross margin declined in both periods, primarily due to higher labor, raw-material and delivery costs, partly offset by fixed-cost leverage. The quarter included $0.6 million of anticipated costs for a voluntary replacement of a dual USB control in certain power-reclining furniture styles.
Quarterly SG&A was 15.5% of sales versus 14.6% a year earlier; the prior-year quarter included litigation-related expense offsets. Nine-month SG&A improved to 15.3% from 15.6%, primarily due to fixed-cost leverage, but included $0.6 million of business information system testing, training and readiness costs.
Financial position, cash flow and liquidity
At March 31, 2018, cash and cash equivalents were $23.6 million, investments $18.0 million, working capital $157.4 million, total assets $286.7 million, and shareholders’ equity $241.5 million. Cash plus investments totaled $41.6 million. No debt was outstanding. The company had $8.7 million available under a $10 million short-term facility (which expires June 30, 2018) and a separate undrawn $10 million line maturing December 31, 2018; letters of credit under the first facility were $1.3 million. The company reported compliance with its credit covenants.
Nine-month operating cash flow was $14.3 million, down from $23.7 million, with inventory growth of $6.8 million and increased receivables of $2.8 million among the cash uses. Investing activities used $14.1 million, including $20.1 million of capital expenditures; financing activities used $5.5 million, primarily for $5.0 million of dividends. Cash decreased $5.3 million from June 30, 2017. Inventory increased to $106.2 million from $99.4 million. Capital expenditures included $9.6 million for the business information system and $7.7 million for a new manufacturing facility.
Material changes, unusual items and risks
- Environmental matter: The EPA issued a unilateral administrative order on April 25, 2018 concerning the Lane Street Groundwater Superfund Site and directing remediation. Flexsteel accrued $3.6 million in the March quarter and nine-month results, although the order was issued after quarter-end. The EPA also demanded $5.5 million for remediation and past response costs. Flexsteel disputes responsibility, is assessing legal options and insurance coverage, and says it is pursuing recovery of expenses. The order calls for $3.6 million of financial assurance; the company believes it meets the order’s criteria without providing that assurance.
- Tax reform: The lower federal corporate tax rate reduced income-tax provision by approximately $0.3 million for the quarter and $1.6 million for the nine months. Management estimated a 25%–27% effective tax-rate range beginning in fiscal 2019.
- Prior-period and other items: The prior-year periods included litigation settlement reimbursements. The 2018 nine-month period included a $1.8 million pretax gain on a facility sale. The quarter’s net income also reflects the $3.6 million remediation accrual.
- Business risks: Management cited furniture-industry cyclicality, supply interruptions and import-related risks, pricing pressure, input costs, competition, customer credit exposure, litigation and product recalls, among other factors. It reported no material change to previously disclosed risk factors except the environmental matter.
Outlook and management commentary
Management expected fourth-quarter fiscal 2018 sales to be similar to the prior-year quarter, with continued raw-material inflation and moderating labor-cost increases. It identified price increases, service improvements and operating efficiencies as priorities for gross-margin expansion. The business information system entered stabilization for its first deployment in April 2018; implementation was expected to be completed in the first half of fiscal 2019. Planned remaining fiscal 2018 capital spending was approximately $10 million. Management stated that liquidity and borrowing capacity were adequate for planned investment and operations.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is for March 31, 2018, not 2016.
- Track the EPA order, remediation costs, financial-assurance requirements, litigation position and potential insurance recovery.
- Assess whether sales growth can offset inflation and restore gross margins.
- Monitor cash conversion, inventory growth, capital spending and completion of the business information system.
- Review renewal or replacement of the credit facility expiring June 30, 2018 and the stated fiscal 2019 tax-rate outlook.