Flexsteel Industries, Inc. (NASDAQ:FLXS)
Q4 2014 Earnings Conference Call
August 20, 2014 11:00 am ET
Tim Hall - Chief Financial Officer, Senior Vice President - Finance, Treasurer, Secretary
Karel Czanderna - President, Chief Executive Officer, Director
Jim Marrone - Singular Research
Welcome to the Flexsteel Industries, Inc. Fiscal Year 2014 and Fourth Quarter Earnings Release Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions following at that time.
At this time, I will turn the call over to Mr. Tim Hall, Flexsteel's Senior Vice President of Finance and Chief Financial Officer.
Thank you, Stephanie. Welcome to Flexsteel's conference call for our fiscal year that ended June 30, 2014. Joining me this morning is Ms. Karel Czanderna, our President and Chief Executive Officer.
Our comments today may include forward-looking statements. While these statements reflect our best judgment at the present time, they are subject to risk and uncertainties, as described in our SEC filings. Accordingly, our actual results may differ materially from our current expectations. The company assumes no obligation to update or revise any forward-looking matters discussed during this call.
I will make some comments on our financial results for the quarter and the fiscal year that ended June 30, 2014, before I turn the call over to Karel for her comments.
Yesterday, we reported record net sales and net income for the fiscal year that ended June 30, 2014. As noted in the press release, this is our third consecutive year of record net income and our fifth consecutive year of net sales and net income growth.
For the fiscal year that ended June 30, 2014, sales were $349 million, an increase of 14% over the prior year period. Earnings per diluted share for the fiscal year were $2 versus $1.80 in the prior year. On an adjusted basis, net income was $2.46 versus $2 in the prior year.
For the fiscal year, net sales improved in both, residential markets, up 16% and in commercial markets up 5%. For the fiscal year, gross margin decreased by five-tenths of 1% to 22.9%. The decrease was primarily due to price discounting on certain case goods to address changing customer requirements. The discounting will continue during the first half of 2015.
Fourth quarter sales were $111 million, an increase of 9% from the prior year quarter. Earnings per diluted share for the quarter were $0.74 versus $0.57 in the prior year quarter.
As described in our second quarter press release, we entered into a confidential agreement to settle Indiana Civil Litigation and eliminate the ongoing costs and distractions of the litigation. Excluding these litigation and settlement costs, adjusted earnings per diluted share for the current quarter were $0.70 versus $0.63 for the prior year quarter.
Adjusted for special charges, SG&A of 16.2% for the fiscal year compares to adjusted SG&A of 17.2% for 2013. Other income was $1.5 million for the fiscal year, an increase of $0.9 million over the prior year period. This increase is primarily the result of liquidating Rabbi Trust assets at a gain to complete distribution to retired senior officers.
The distributions were made as scheduled in early January 2014. Due to higher sales volume and the timing of collections, accounts receivables increased $2.5 million above the June 30, 2013 balance. Our day sales outstanding decreased to 33 days from 36 days at the end of the previous year.
On June 30, 2014, our inventories were $5 million higher than at June 30, 2013, to support anticipated increased sales volume in upholstered and ready-to-assemble product categories. We will continue to actively manage inventory to meet market conditions.
Capital expenditures totaled $4 million for the fiscal year, primarily for delivery in manufacturing equipment. Depreciation expense was $4.2 million. Estimated fiscal 2015 capital expenditures will include $6 million to support ordinary operations.
Subject to closing, $35 million to $40 million to purchase and equip a Midwest distribution center to better serve our customers and support our growth.
Our balance sheet remained strong, working capital increased to $129 million and we have no bank borrowings. However, with the pending purchase and equipping of the Midwest distribution center, we may borrow $25 million to $30 million. Our cash balance was $22 million at June 30, 2014.
I will now turn the call over to Karel for her comments and business review. Karel?
Good morning. Thank you for joining our conference call. We are pleased with our sales of $439 million grew 14% for fiscal 2014 versus last year, while adjusted net income doubled that pace growing 27% or 4.2% of sales.
The earnings for the fiscal year were driven by ongoing double-digit revenue growth in upholstered seating sold by retailers ready-to-assemble products sold online both, targeting the residential market. The higher volume improved absorption of fixed costs.
Introducing a wide range of compelling products on a six-month cycle has been key to our success with brick and click retailers engaging customers even more heavily than before. Our residential growth at retail is balanced across independent retailers and major accounts, which had confidence in product availability, due to Flexsteel's strong balance sheet and long track record of delivering quality products as promised.
The Flexsteel gallery and studio dedicated space at retail covers over 2.8 million square feet and continues to expand. In addition, we are doing business with more top-100 retailers than ever before. As in past quarters, upholstered products continued to outpace case goods.
In the commercial markets, (Inaudible) is now projecting only 2.8% shipment growth in office furniture during calendar 2014. The recreational vehicle class A and C motor home market had grown well at about 16% for the first six months of calendar 2014, albeit down from 2013 calendar year significant growth nearing 40%.
Hospitality RevPAR remains in single-digit growth. Our product portfolio and service platform are evolving to meet the changing needs of the many commercial markets and customers we serve.
Last quarter, we discussed supporting [sales] growth with two multi-year infrastructure initiatives designed to enhance customer experience and increase shareholder value.
As Tim discussed, we will commit capital to execute our logistics strategy in 2015. We continue to assess future business information requirements. The timing and level of additional investments required for both initiatives will be determined as the projects progress.
The corporate order backlog remains strong at $45 million on June 30, up 3.9% from last June and is continuing into the first fiscal quarter of 2015. The company is in a good position to produce quality products that meet customers' growing demand.
Looking forward, a more stable economy will enhance the business owner and consumer confidence, enabling further growth in the furniture industry. Our team remains focused on providing a broad portfolio of quality products with knowledgeable customer service to enable our customers to grow in all the markets we serve.
Stephanie, at this time, please open the phone lines for questions. Then I will wrap up.
Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. (Operator Instructions) Our first question comes from the line of [Bob from SPG]. Your line is open.
Hi. Can you hear me?
Yes, Bob. Good morning.
Good morning. Thanks for taking the questions. I were an institutional holder. Just a question about the sales growth, which was impressive for the year and for the quarter, but it tends to be sort of volatile quarter-to-quarter. Just looking at it, say, over the last four quarters of, 40%, 19%, 12% and 9%, is there a trend there or am I reading too much into it?
I think as we have gone through this period of sales growth, it has been a bit lumpy from time-to-time, so I think that as our comps change in the quarters where you see growth heavy the year before, the percentage change some, but I think the trend line is in pretty good shape, Bob.
Okay, so 40% overall for the year and I realize you don't want to offer specific guidance. You have already indicated it would be up in '15, but if I said somewhere between, say, like 5% and 18%, I know that's a broad range, would you be comfortable with that?
We haven't commented on what we expect growth to be. Bob, I think I will avoid that one.
All right, sorry. Just trying to pin you down, let me ask it a slightly different way if I might. What leading indicators do you guys typically look at internally as far as the health of the business? Is it new housing starts? Is it consumer confidence? What sort of indicators do you think are the key for your business?
Bob, this is Karel. One of the things that we certainly believe is important to us is consumers' confidence and literally their willingness to go out and buy a product whether it would be in a retail store, online or whether it would be that consumer confidence has people traveling to more hotels and causes them to buy or go buy a recreational vehicle or any of the other markets that we serve. That is one that we track fairly closely.
Okay. I am not just a shareholder. I am actually customer, right. I have the sofa and a three-in-one, I guess, you would call it, upholstered and I have had it for quite some time and it's holding up well, especially the cushions. Some of the fabric is getting a little freed, but I have got two kids and stuff happens right.
I don't own any Flexsteel case goods and honestly until I started looking at the company, I even realized you guys were in the space. I know it's not a huge part of your business, but just sort of a high-level question. I hate to say it quite like this, but why are you even in case goods to begin with?
Bob, this is Karel, again. I would like to say we have asked ourselves that question. First of all, we believe, I would be joking and because it's a very significant, it's an important part of being a furniture company and selling both to consumers, so people that are making their home beautiful.
We do sell under the Flexsteel Wynwood Collection, our case goods for the home, which includes, home-office, bedroom dining room and occasional furniture and those products are ones that allows somebody's Flexsteel throughout their home.
We also sell case goods into the commercial office industry. For those products, those tend to be either traditional, transitional or contemporary products going into the office environment and that office environment could be literally in an office building, but it could also be in the offices for hospitality or for hope for around hospitals themselves or in healthcare industry and any of those places we would be selling through dealers into any place where people need office furniture.
Okay. Then just one more if I may. Also, along the same lines, I guess, case goods versus ready-to-assemble or do you combine that as a category, and the stuff that comes already assembled versus ready-to-assemble are the margins comparable?
Bob, we don't disclose the margins separately for the different product lines that we have.
Yes. I am not asking for a number. I am just wondering. The reason I ask is the following. I have done some ready-to-assemble good cases and stuff and there is a lot of competition obviously as you know in the space.
I tend to think of Flexsteel as higher end product, but when you get into the ready-to-assemble you run up against some fairly, for lack of better words, schlocky product out there, so just wondering how you position your ready-to-assemble versus the competitors.
First of all, thank you for looking at the ready-to-assemble market. We do pride ourselves on being not at the low end of that market, but being at the mid to upper end of that market. All of our products are wood products.
They are solid wood products, but you can go out as you know and buy a granite kitchen island and assemble it yourself and have the convenience of having it delivered to your home for you to assemble, so it is a growth market out there. Clearly, it is a growth business for us. We feel that it's just a different way to serve consumers with products that are right for them and the way they choose to purchase.
Okay. That's a good answer. Thank you. Could I ask just one more?
Okay. Regarding the distribution center in the Midwest, obviously, I guess you could say it's a good sign since you are seeing a lot of growth. How do you think it's going to play out in terms of the financials? Is it just - it's not manufacturing, it's just a distribution, so presumably it would not affect cost of goods sold, would it decrease the shipping cost. I mean, strategically, what are you thinking about there? Why do this?
I think, it will be good for our customers and good for our shareholders.
Okay. All right, very good. Thank you very much.
(Operator Instructions) Our next question comes from the line of Jim Marrone with Singular Research. Your line is open.
Jim Marrone - Singular Research
Yes. Good Morning. My name Is Jim Marrone. I am with Singular Research. I have been covering Flexsteel for a few quarters now. I noticed that one of your pluses, competitive edge that you have, particularly in sourcing supply suppliers, parts and again kind of having the logistics down and being able to meet customers rapidly. Am I fair in that assessment? With the distribution center, can you provide some color as far as the trajectory on that competitive edge, in getting the product sooner and faster to our customers?
Jim, this is Karel. Thank you so much for calling in today and asking us about this. You are absolutely correct that sourcing is a competitive edge. This company has focused on for well over a decade, for much longer than that. Certainly over the last decade, our sourcing abilities in the logistics that go with that are critical and we continue to grow and develop in them.
We focus on them so we can make sure that our customers can rely on getting their products from us whether it's a manufactured product or sourced product, we don't really differentiate as we are going selling them to a customer.
In terms of the distribution center we think of this very much as just making sure that we have warehouses and distribution centers in the places where we can best serve our customers and get the products to them in a timeline that is competitive, so anytime we remove or add or delete a warehouse it's just that overall ongoing business, running our business from day-to-day is how we think about it.
Jim Marrone - Singular Research
Okay, very good. Thank you. Just one follow-up question as well, as far as the different type of markets that you are dealing with, where do you foresee the areas of the highest growth? I'm talking specifically about your recreational vehicle seating. You mentioned the healthcare in the call, hospitality, if you could give us an idea where you see the potential growth, enhanced growth within those sectors.
It is interesting, Jim, because at this point the vehicle seating business continues to make a strong recovery from a huge decline, I mean, just a phenomenal decline a few years ago and they have recovered not quite back to where they were before the economic downturn, but they are getting pretty close in many of those markets.
That business is important, but it is a cyclical business. If you look over 50 years, the vehicle seating industry has been a cyclical industry, so long-term does that one stay where it is or go up and down, don't know.
Obviously, we hope it continues to grow and certainly consumers' confidence in going out and putting some of their money in a recreational vehicle as they once had an opportunity to move around. We are very, very happy to see that business growing.
If I think longer term though, the healthcare industry is clearly a growth industry just looking at the demographics. We all know that healthcare costs and needs are growing up with the Baby Boomers going through and that is a place where we just look at the healthcare market and say that is a big growth market.
Obviously we are thoughtful about in what parts of that market we can be competitive and play best and have the competencies to play, so we have some focus in those markets that's important. Today, that's not a material part of our company, but we certainly believe that over time it will be.
Jim Marrone - Singular Research
Okay. Thank you.
I am currently showing no further questions in the queue at this time. I would turn the call back over to the presenters.
Thank you so much for participating in our conference call today. We are pleased with the growth in our business throughout fiscal year 2014 and the continuing solid operating results. Our team remains dedicated to creating value for our customers and shareholders. We look forward to reviewing our first quarter fiscal year 2015 operating results with you in October 2014 and appreciate your interest in Flexsteel Industries. Have a good day.
This concludes today's conference call. You may now disconnect.
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