Flexsteel Industries, Inc. — Form 10-Q Summary
Period note: The filing covers the quarter and six months ended December 31, 2022 (the second quarter of fiscal 2023), not 2021 Q2 as indicated in the request metadata. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Business context and reporting period
Flexsteel manufactures, imports, and markets furniture in the United States through dealer sales and e-commerce. The unaudited report compares the three and six months ended December 31, 2022, with the same periods in 2021. Management cautions that interim results are not necessarily indicative of full-year results.
Financial results and liquidity
| Metric | Three months ended Dec. 31, 2022 | Three months ended Dec. 31, 2021 | Six months ended Dec. 31, 2022 | Six months ended Dec. 31, 2021 |
|---|---|---|---|---|
| Net sales | $93.1 | $141.7 | $188.8 | $279.4 |
| Gross margin | $15.8; 17.0% | $9.5; 6.7% | $31.2; 16.5% | $32.9; 11.8% |
| Operating income (loss) | $3.8 | $(8.6) | $4.2 | $(2.8) |
| Net income (loss) | $2.9; diluted EPS $0.53 | $(7.5); diluted EPS $(1.13) | $3.1; diluted EPS $0.58 | $(3.2); diluted EPS $(0.47) |
| Operating cash flow | Not presented by quarter | $24.6 | $(41.0) |
Quarterly sales fell 34.3%; six-month sales fell 32.4%. Retail home-furnishing sales and e-commerce sales both declined. Gross margin improved substantially, primarily because ancillary charges declined. SG&A decreased in dollars but rose as a share of sales because of lower volume. The $2.8 million environmental-remediation insurance recovery contributed to reported operating income; excluding that recovery, operating income was approximately $1.0 million for the quarter and $1.4 million for the six-month period.
At December 31, cash was $1.8 million, trade receivables $32.7 million, and inventory $110.8 million. Working capital was $107.1 million, down from $125.4 million at June 30, 2022. Six-month operating cash flow of $24.6 million reflected, among other items, inventory reduction of $30.4 million and lower receivables of $8.5 million; accounts payable fell $14.1 million. Capital expenditures were $2.2 million. Cash declined by $0.4 million to $1.8 million.
Lines of credit outstanding were $19.2 million, versus $37.7 million at June 30, 2022. The revolving facility has an $85 million commitment; $1.1 million of letters of credit also reduce availability. The borrowing rate was 5.6% at December 31, 2022, and the company reported compliance with its covenants. Lease liabilities totaled $72.5 million, including current and long-term portions; these are separate from line-of-credit borrowings.
Material changes versus the prior comparable period
- Sales declined sharply as home-furnishing demand returned toward pre-pandemic levels and prior-year comparisons reflected unusually strong pandemic-driven demand. Management also cited softer consumer demand.
- Retail backlog fell 50.4% year over year to $60 million, which management attributed to efforts to reduce lead times to 3–5 weeks as well as softer demand.
- Gross margin rose by 1,030 basis points for the quarter and 470 basis points for the six-month period, while lower sales caused SG&A to rise as a percentage of revenue.
- Operating cash flow improved from a $41.0 million use to $24.6 million provided, aided substantially by inventory reduction; the prior-year period included inventory buildup and lower accounts payable.
- Lease right-of-use assets and liabilities increased, including following commencement of a 12-year lease for a Mexicali manufacturing facility. The company also entered a four-year Las Vegas showroom lease.
Outlook, commentary, risks, and unusual items
- The filing provides no specific revenue, earnings, or margin guidance. Management says results are exposed to furniture-industry cyclicality, consumer demand, supply-chain disruption, pricing and product mix, raw-material and fuel costs, inflation, competition, tariffs and other government actions, customer credit exposure, and employee recruitment and retention.
- The company settled the Lane Street groundwater matter with the EPA and Indiana for $9.8 million, paid the settlement, and received partial insurance reimbursement. It recorded $2.8 million of income from insurance proceeds in the quarter. The company had previously disputed responsibility for contributing to the contamination.
- The restructuring program is substantially complete; management does not anticipate further charges. The remaining Starkville, Mississippi property, carried at $0.6 million, continued to be marketed for sale.
- The company repurchased shares under a $30 million authorization. During the quarter it purchased 125,217 shares at an average price of $15.14; $5.3 million remained authorized at December 31, 2022. Six-month treasury-stock purchases were $2.2 million.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no material change to the risk factors in the prior annual report.
Important facts for investors to verify
- Confirm the intended filing period: the document is for fiscal Q2 2023, ended December 31, 2022.
- Assess whether margin improvement and profitability can persist as sales remain substantially below the prior-year level; reported results include the $2.8 million insurance recovery.
- Track consumer demand, backlog, order lead times, and inventory conversion, including whether cash generation continues after the recent inventory reduction.
- Monitor revolver availability, interest costs, covenant compliance, and the company’s ability to meet lease obligations.
- Review the environmental settlement and reimbursement terms, and whether any additional costs or recoveries arise.