Flexsteel Industries Reports Second Quarter Fiscal 2024

February 5, 2024  by HFBusiness Staff in Business Strategy, Industry   

Key Results for the Second Quarter Ended December 31, 2023

• Healthy sales growth of 7.5%. Net sales for the quarter of $100.1 million compared to $93.1 million in the prior year quarter.
• Robust sales orders of $104.8 million representing growth of $12.8M, or 13.9%, compared to prior year quarter.
• Significant gross margin improvement to 21.9% compared to 17.0% in the prior year quarter.
• Solid GAAP operating income of $4.6 million or 4.6% of net sales compared to $3.8 million or 4.0% of net sales in the prior year quarter.
     - Non-GAAP operating income of $4.6 million or 4.6% of net sales for the second quarter compared to $1.0 million or 1.0% of net sales in the prior year quarter.
• GAAP net income per diluted share of $0.57 for the current quarter compared to net income of $0.53 in the prior year quarter.
     -Non-GAAP net income per diluted share of $0.57 for the quarter compared to non-GAAP net income of $0.08 in the prior year quarter.
• Strong cash flow generation: cash flow from operations of $18.9 million for the quarter driven by higher profits and a $15.6 million reduction in inventories.
• Strengthened balance sheet: debt repayments of $15.1 million for the quarter, or a 46% reduction in borrowings under the line of credit.

Management Commentary

“I am very pleased with our second quarter results, which are consistent with the preliminary results announced on January 11th,” said Jerry Dittmer, CEO of Flexsteel Industries, Inc. “While headwinds persist in our industry largely due to shifts in discretionary consumer spending towards experiences and away from home furnishings, we are competing well and growing both our top and bottom line.”

Mr. Dittmer continues, “We delivered strong net sales of $100.1 million, or growth of 7.5%, which was slightly above our sales guidance range of $94 to $100 million. Comparisons to prior year continued to be adversely impacted by the elimination of ocean freight surcharges in the prior year when ocean container delivery costs were inflated. Excluding the approximately $3.5 million impact from surcharge reductions, growth from unit volume and sales mix was an impressive 11.7% in the quarter, reflecting our strong sales execution. In addition, we are executing well operationally and leveraging the combined benefits of continued productivity and cost savings, pricing discipline, and ongoing product portfolio management, to meaningfully expand gross margin and improve operating income. Our operating margin of 4.6% in the second quarter was a significant improvement compared to the first quarter and prior year quarter, and above our guidance range of 2% to 4%. Lastly, we are making strong progress in improving working capital efficiency. Given improved demand stability and better supplier lead times, we optimized and reduced our inventories by $15.6 million in the second quarter while continuing to provide exceptional service levels to customers.”

Mr. Dittmer concludes, “Our strategies are working, and we’re seeing the outcomes in our improved financial performance. I’m encouraged by these second quarter results and excited about the direction we are headed. We are executing well on multiple fronts, but we are not done, and I am confident in our ability to continue growing profitably, generating cash, and creating significant value for our customers and shareholders long-term."

Operating Results for the Second Quarter Ended December 31, 2023

Net sales were $100.1 million for the second quarter compared to net sales of $93.1 million in the prior year quarter, an increase of $7.0 million, or 7.5%. The increase was driven by higher sales of home furnishings products sold through retail stores of $9.9M million, or 12.5%, led by unit volume and product mix. Sales of products sold through e-commerce channels decreased by ($2.9) million, or (20.3%), compared to the second quarter of the prior year. Lower sales in the e-commerce channel were driven by softer consumer demand and less promotional activity to improve overall profitability.

Gross margin for the quarter ended December 31, 2023, was 21.9%, compared to 17.0% for the prior-year quarter, an increase of 490 basis points (“bps”). The 490-bps increase was primarily due to cost control, material cost savings initiatives, and fixed cost leverage on higher sales volume.

Selling, general and administrative (SG&A) expenses increased to 17.3% of net sales in the second quarter of fiscal 2024 compared with 16.0% of net sales in the prior year quarter. The increase was mainly due to investment in growth initiatives and higher incentive compensation.

Operating income for the quarter ended December 31, 2023, was $4.6 million compared to $3.8 million in the prior-year quarter. On an adjusted non-GAAP basis, operating income for the quarter ended December 31, 2023 was $4.6 million compared to $1.0 million in the prior year quarter.

Income tax expense was $1.0 million, or an effective rate of 25.5%, during the second quarter compared to tax expense of $0.6 million, or an effective rate of 17.2%, in the prior year quarter.

Net income was $3.1 million, or $0.57 per diluted share, for the quarter ended December 31, 2023, compared to net income of $2.9 million, or $0.53 per diluted share, in the prior year quarter. On an adjusted non-GAAP basis, net income for the quarter ended December 31, 2023 was $3.1 million or $0.57 per diluted share compared to non-GAAP net income of $0.4 million or $0.08 per diluted share in the prior year quarter.

Liquidity

The Company ended the quarter with a cash balance of $3.3 million and working capital (current assets less current liabilities) of $100.5 million, and availability of approximately $39.1 million under its secured line of credit.

Capital expenditures for the six months ended December 31, 2023, were $3.1 million.

Manufacturing Network Optimization

As part of our ongoing commitment to improve the customer experience, optimize service levels, and remain cost competitive in the marketplace, the Company is closing its Dublin, Georgia manufacturing plant. While difficult, this decision will improve the customer experience through reduced lead times and reduced handling damage and will enable the company to streamline inventory, manufacturing, and logistics execution, while maintaining exceptional quality across our full product offering. Closure of the facility is expected to occur by the end of our fiscal fourth quarter. As part of the transition, the company expects to incur pre-tax restructuring and related expenses between $2.5 million and $3.2 million. The one-time costs include approximately $2.0 million to $2.5 million for employee separations and $0.5 million to $0.7 million for other expenses directly related to the closure. Substantially all of these expenses are expected to result in future cash expenditures primarily during the third and fourth quarters of fiscal year 2024. Once the closure is fully executed, the company expects annualized savings in the range of $4.0 million to $4.5 million. The Dublin, GA facility will be listed for sale upon closure and the company anticipates a future one-time gain in excess of the carrying value of the asset. The Dublin facility supports less than 5% of annual sales and the Company expects to retain the majority of these sales through this transition.