Flexsteel Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2014, the first quarter of fiscal 2015. The filing compares results with the quarter ended September 30, 2013; this differs from the “2013 Q1” period in the request metadata. Amounts below are in U.S. dollars.
Business context and financial results
Flexsteel manufactures, imports and markets upholstered and wood furniture for residential and commercial customers. Quarterly net sales rose 4% to $108.7 million from $104.3 million. Residential sales increased 9% to approximately $92 million, while commercial sales declined 15% to approximately $17 million.
| Metric | Quarter ended Sep. 30, 2014 | Prior-year quarter |
|---|---|---|
| Gross margin | $25.5 million; 23.5% of sales | $23.6 million; 22.7% |
| Operating income | $7.1 million | $5.4 million |
| Income before taxes | $7.7 million | $5.9 million |
| Net income | $4.9 million | $3.8 million |
| Diluted earnings per share | $0.64 | $0.51 |
| Cash dividends declared per share | $0.18 | $0.15 |
| Operating cash flow | $3.2 million | $1.2 million |
Gross margin improved 0.8 percentage points, which management attributed to product mix and greater focus on margin realization. SG&A was $18.4 million, or 16.9% of sales, compared with $18.2 million, or 17.5%. The effective tax rate was 37.0%, versus 36.5%.
Cash flow, liquidity and debt
Cash declined $11.9 million during the quarter to $10.3 million. Operating activities provided $3.2 million; investing activities used $25.9 million, including $25.8 million of capital expenditures; and financing activities provided $10.9 million. The principal investment was the September acquisition of a 500,000-square-foot distribution facility in Edgerton, Kansas, for $24 million, funded with $12 million of cash and $12 million of borrowing.
At September 30, 2014, current assets were $165.4 million and current liabilities were $58.2 million, yielding working capital of approximately $107.2 million, down from $128.6 million at June 30, 2014. Inventory increased $8.2 million to $106.2 million, primarily to support anticipated sales growth. Trade accounts payable increased $9.7 million, which the company attributed mainly to payment timing.
Notes payable totaled $12.0 million: $8.0 million drawn under the $25.0 million credit facility and $4.0 million under a separate unsecured $8.0 million line. The main facility had $14.1 million of availability after outstanding letters of credit and borrowings; it expires June 30, 2016. The unsecured line expires February 13, 2015. The company reported compliance with financial covenants. Management said available cash, operating cash flow and credit arrangements were adequate for fiscal 2015 requirements.
Outlook, risks and notable items
Management expected fiscal 2015 top-line growth, citing a strong order backlog and positive order trends. It expected residential growth from existing and expanded products and customers, particularly upholstered and ready-to-assemble products; commercial sales were expected to be consistent with fiscal 2014. These are expectations, not guarantees, and the filing states that quarterly results may not indicate full-year results.
The company expected to spend a further $8–$10 million to complete and equip the Kansas distribution facility, plus approximately $5 million on other operating capital expenditures for the remainder of fiscal 2015. It was assessing business information system requirements, but the timing and amount of any related investment had not yet been determined.
Net income included a $0.4 million non-taxable gain on life insurance, or $0.06 per diluted share. The company also reported $0.1 million of legal and related expenses for the Indiana civil litigation in the quarter, versus $0.9 million a year earlier. It had previously paid $6.3 million to settle that matter without admitting wrongdoing and continued seeking insurance recovery; coverage remained in question, with further proceedings pending in Iowa. Management did not consider other pending proceedings material.
Risks cited include furniture-industry cyclicality, supply-chain and import disruptions, litigation, product mix and pricing, raw-material and fuel costs, competition, customer credit exposure, tariffs and regulation, employee retention, multi-employer pension-plan participation and general economic conditions. Management reported effective disclosure controls and no significant quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether residential growth and the strong order trends continue, and whether commercial sales stabilize after the 15% decline.
- Progress, total cost and completion timing for the distribution facility and the still-under-assessment information-system initiative.
- Working-capital and cash-flow trends, particularly inventory growth, supplier-payment timing and the use of short-term borrowings.
- Renewal or repayment plans for the unsecured credit line expiring in February 2015, and continued covenant compliance.
- Developments in the insurance-recovery proceedings related to the Indiana litigation and any resulting cash recoveries or costs.
- The contribution of the $0.4 million life-insurance gain to quarterly earnings and whether future results depend on comparable unusual items.