Business context and reporting period
Flexsteel Industries, Inc. manufactures, imports, and markets furniture through retailers, dealers, and e-commerce. The supplied filing is a Form 10-Q for the quarter ended March 31, 2021 (fiscal 2021 Q3), not 2019 Q3 as stated in the request metadata. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless noted.
Financial performance and position
- Quarter: Net sales were $118.4 million, up 19.8% year over year. Gross margin was 19.5%, versus 14.0%; operating income was $6.4 million, compared with an $8.3 million loss. Net income was $4.9 million, or $0.67 diluted EPS, versus a $5.3 million loss, or $0.66 loss per share.
- Nine months: Net sales were $342.8 million, up 13.5%. Gross margin was 20.5%, versus 15.6%; operating income was $24.1 million, compared with a $2.7 million loss. Net income was $17.2 million, or $2.28 diluted EPS, versus a $1.1 million loss, or $0.14 loss per share.
- Cash flow: For the nine months, operating activities used $15.4 million, versus $13.9 million provided in the prior-year period. Inventory increased $38.9 million and receivables increased $13.3 million, weighing on operating cash flow. Investing activities provided $16.6 million, including $18.5 million in property-sale proceeds; financing activities used $32.4 million, including $28.5 million for share repurchases. Cash fell $31.2 million to $17.0 million.
- Liquidity and debt: Working capital was $121.0 million, down from $128.4 million at June 30, 2020. No borrowings were outstanding on the $25 million revolving credit facility at March 31, 2021. The facility is secured by substantially all assets other than real property and matures August 2022. Lease liabilities totaled $31.9 million.
- Balance sheet and capital returns: Total assets were $251.7 million and shareholders’ equity was $163.5 million. The company repurchased approximately 1.25 million shares for $28.5 million during the nine months. Dividends declared were $0.30 per share for the period.
Material changes versus the prior comparable period
Sales growth reflected stronger home-furnishings demand and a record backlog, partly offset by the exit from Vehicle Seating and Hospitality product lines. Margin improvement was attributed to structural cost reductions, operating efficiencies, higher-volume fixed-cost leverage, and lower inventory reserves. SG&A fell year over year, notably because the prior-year quarter included $4.1 million of bad-debt expense related to a customer bankruptcy and because of cost leverage. Results also reflected lower restructuring costs and gains from asset disposals: the company recorded a $5.9 million gain during the nine months ended March 31, 2021, compared with $19.3 million in the prior-year period.
Outlook, risks, contingencies, and unusual items
- Management reported improved business conditions and increased orders, but cited limited ocean-container availability, sharply higher freight rates, constrained and more expensive key materials, and labor shortages in Asia and the United States. The pandemic’s future effects remain uncertain; no sales or earnings guidance is provided.
- Fiscal 2021 capital expenditures were estimated at $2.5 million to $3.0 million. The transformation program was expected to be completed during fiscal 2021; cumulative restructuring and related costs were $58.0 million at March 31, 2021, against an estimated total of approximately $59.0 million.
- The company continued to carry a $3.6 million liability for EPA remediation at the Lane Street groundwater site, while disputing responsibility and evaluating legal options and insurance recovery. The EPA claims limitation period was extended through August 24, 2021.
- COVID-19-related supply disruption, input-cost inflation, labor availability, import and currency risks, competition, customer credit exposure, litigation, and execution of restructuring were identified as risks. Management stated there had been no material change to the risk factors in its latest annual report.
- The company settled employment litigation for $0.5 million, paid in February 2021; no related accrual remained at quarter-end. Remaining assets held for sale had a net book value of $0.7 million.
Important facts for investors to verify
- Whether strong home-furnishings demand and backlog translate into sustained shipments and sales amid ongoing supply constraints.
- Whether inventory growth and other working-capital needs continue to pressure operating cash flow.
- Future freight, materials, and labor costs and their effect on gross margins.
- Final restructuring costs, remaining property-sale proceeds, and the outcome and potential insurance recovery for the $3.6 million environmental liability.
- Share-repurchase pace, remaining authorization, and liquidity needs under the secured credit facility.