Flexsteel Industries, Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter and six months ended December 31, 2012, in fiscal 2013. This differs from the request metadata, which labels the filing “2011 Q2.” Financial amounts below are in U.S. dollars; unless stated otherwise, amounts are in millions.
Business context and results
Flexsteel manufactures, imports and markets upholstered and wooden furniture for residential and commercial applications, including home, office, hospitality, health care and motor vehicle markets.
| Metric | Quarter ended Dec. 31, 2012 | Quarter ended Dec. 31, 2011 | Six months ended Dec. 31, 2012 | Six months ended Dec. 31, 2011 |
|---|---|---|---|---|
| Net sales | $94.6 | $85.0 | $185.8 | $166.5 |
| Gross margin | $22.7; 24.0% | $20.5; 24.1% | $43.8; 23.6% | $39.4; 23.7% |
| Operating income | $4.6 | $4.7 | $9.0 | $8.3 |
| Net income | $2.9 | $2.9 | $5.8 | $5.3 |
| Diluted EPS | $0.40 | $0.42 | $0.80 | $0.76 |
| Operating cash flow | Not separately stated | Not separately stated | $2.1 | $2.0 |
Financial position, cash flow and liquidity
- Six-month sales grew 11.6%; residential sales rose 15.0% to $148.9 million, while commercial sales were essentially flat at $36.9 million. In the quarter, residential sales grew 14.4% and commercial sales declined 0.3%.
- Quarterly diluted EPS declined from $0.42 to $0.40 despite higher sales; six-month diluted EPS increased from $0.76 to $0.80. Gross margin edged down in both comparisons. SG&A increased to 19.2% of quarterly sales from 18.6%, and to 18.8% for six months from 18.7%.
- At December 31, cash was $8.1 million, total assets $185.8 million, total liabilities $41.0 million and shareholders’ equity $144.8 million. Working capital was $105.8 million, compared with $103.7 million at June 30, 2012.
- Six-month operating cash flow of $2.1 million was below net income of $5.8 million. Inventory increased $5.0 million, and capital expenditures were $4.9 million, including $2.5 million for the headquarters building. Cash declined $5.8 million to $8.1 million.
- No borrowings were outstanding under the credit facility or otherwise at December 31. The facility provides up to $15 million of short-term working capital financing, including $5 million of letter-of-credit availability, and expires June 30, 2013. Letters of credit issued for insurance obligations totaled $2.3 million. The company reported compliance with its financial covenants.
- Dividends paid were $3.1 million in the six-month period; dividends declared were $0.30 per share, versus $0.20 in the prior-year period. Management said cash and credit arrangements were adequate for fiscal 2013 needs.
Outlook, commentary and risks
- Management expected moderate sales growth through the remainder of fiscal 2013, led by residential business, and expected current commercial order trends to continue. It cautioned that economic uncertainty could affect consumer confidence and purchasing.
- Management expected approximately $1.0 million of capital expenditures for the remainder of fiscal 2013 and emphasized cash flow, profitability and maintaining a strong balance sheet. Results for the interim periods are not necessarily indicative of full-year results.
- Quarterly and six-month SG&A included $0.7 million of employment inducement costs, described as $0.06 per share. The filing also reports legal expenses related to Indiana groundwater-contamination litigation of $0.4 million for the quarter and $1.0 million for six months. The company denied causing or contributing to the contamination; damages and insurance coverage were undetermined, and it could not estimate a reasonably possible loss range. No accrual was recorded.
- Reported risks include furniture-industry cyclicality, economic conditions and consumer demand, supply-chain and import disruptions, tariffs, raw-material and fuel costs, pricing pressure, competition, customer credit exposure, litigation and employee retention. The company reported no material change to the risk factors in its latest annual report.
- Unrecognized tax benefits and related interest and penalties totaled $1.5 million at December 31; the company did not expect a significant increase or decrease in these positions within twelve months. The filing states disclosure controls were effective and reports no significant internal-control changes during the quarter.
Important facts for investors to verify
- Confirm the intended period: the filing is for the quarter ended December 31, 2012, despite the “2011 Q2” request metadata.
- Track whether sales growth translates into improved operating margins, given nearly flat gross margins and increased SG&A as a percentage of sales.
- Assess inventory growth, operating cash conversion, and the timing and returns of capital spending.
- Monitor renewal or replacement of the credit facility, which expires June 30, 2013, and continued covenant compliance.
- Follow developments in the Indiana litigation, including potential damages, insurance coverage and future legal costs.
- Evaluate whether management’s moderate-growth outlook is achieved amid economic uncertainty and import-related risks.