Flexsteel Industries, Inc. (FLXS) Q2 2014 Earnings Report, Transcript and Summary

Welcome to the Flexsteel Industries Inc. Second Quarter Earnings Release Call. [Operator Instructions] 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. And welcome, everyone, to Flexsteel's conference call for our second fiscal quarter that ended December 31, 2013. 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 risks 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 6 months ended December 31, 2013, before I turn the call over to Karel for her comments. A brief review of our second quarter results. Sales were $113 million, an increase of 19% from the prior year quarter. This is the second-highest net sales reported for any fiscal quarter since the fourth quarter of 2007. Net income for the quarter was $0.16 versus $0.40 per diluted share in the prior year quarter. As described in our press release, during the quarter, we entered into a confidential agreement to settle Indiana civil litigation and eliminate the ongoing costs and distractions of litigation. Excluding these costs, adjusted net income was $0.60 versus $0.46 per diluted share for the second quarter. For the 6 months ended December 31, 2013, sales were $217 million, an increase of 17% over the prior year period. These were the highest sales reported for the first 6 months of any fiscal year. Net income for the 6 months was $0.66 versus $0.80 per diluted share in the prior year period. On an adjusted basis, net income was $1.18 versus $0.89 per diluted share in the prior year. For the 6-month period, net sales improved in both residential, up 18%; and commercial, up 13%. For the 6 months period, gross margin was lower by 0.7% to 22.9%. The decrease was primarily due to price discounting on certain case goods to address changing customer requirements. The discounting may continue the remainder of the fiscal year as we realign inventories to focus on growth opportunities. SG&A of 16.9% for the first half of 2014 compares to an adjusted SG&A of 17.5% for 2013, excluding $1 million of Indiana civil litigation defense costs and $1.2 million for executive transition costs in that period. Other income was $900,000 for the 6-month period, an increase of $700,000 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 collection, account receivables increased $5 million above the June 30, 2013 balance. Our day sales outstanding remain consistent at approximately 36 days. Since the start of the fiscal year, as we increased sales to existing customers and added customers, we also expanded our product portfolio. Inventories have increased $6 million or 7%. We are increasing inventories that are delivering growth, primarily upholstered and ready-to-assemble product for residential customers. Capital expenditures have totaled $1.5 million for the first 6-month period. Estimated capital expenditures will be approximately $3 million for the remainder of the fiscal year of 2014. The fiscal year expenditures will be primarily for delivery and manufacturing equipment and for IT infrastructure enhancements. Depreciation expense was $2 million for the 6-month period and will be approximately $4.2 million for all of fiscal year 2014. Our balance sheet remains strong. Working capital increased to $118 million, and we have no bank borrowings. Our cash balance was approximately $9 million at December 31, 2013. I will now turn the call over to Karel for her comments and business review. Karel?

Good morning, and thank you for joining our conference call. We are pleased with the first half of 2014. Adjusted net income grew 37% versus the first half of 2013, more than double the sales growth rate of 17%. The earnings were driven by ongoing double-digit revenue growth in upholstered seatings sold by retailers and ready-to-assemble products sold online, both targeting the residential market. Introducing a wide variety of new products on a 6-month cycle has been key to our success, engaging customers even more heavily than before. The recently conducted Las Vegas furniture market gave further confirmation to the strength of our home furnishings business, with increased customer attendance compared to the same market last winter. Our residential growth shows great balance across small, midsized and major furniture retailers. The Flexsteel gallery and studio dedicated space at retail has grown to an all-time high, approaching 2.8 million square feet. In addition, we are doing business with more top 100 retailers than ever before. As in past quarters, upholstered products continue to outpace case goods. Our product portfolio and service platforms are evolving to meet the changing needs of the many commercial markets we serve and our customers. During the second quarter, we expanded our offerings of comfortable, high-quality seating for the senior living and hospitality markets. At the recent recreational vehicle trade show in Kentucky, we introduced new products that enhance comfort, fulfill the demanding multi-use requirements of motor homes and ensure safety standards are followed. These continue to be well received by motor home manufacturers. The corporate order backlog remains strong at $47 million on December 31, and it's continuing into the third fiscal quarter. The company is in a good position to produce quality products to meet our customers' growing demand. Looking forward, less economic uncertainty will enhance business owner and consumer confidence and further enable 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 across all the markets we serve. At this time, please open the phone lines for questions, and then I'll wrap up.

[Operator Instructions] I'm currently showing no questions on the phone lines at this time.

Thank you for participating in our conference call today. We are pleased with the growth in our business and the continuing solid operating results during the first half of fiscal year 2014. Our team remains focused on creating value for our customers and our shareholders. We look forward to reviewing our third quarter operating results with you in April 2014. We appreciate your interest in Flexsteel.

This concludes today's conference call. You may now disconnect.