Business context and reporting period
Flexsteel Industries, Inc. manufactures, imports, and sells furniture through retail, e-commerce, and dealer channels. The supplied filing is the Form 10-Q for the quarter ended December 31, 2021 (fiscal 2022 second quarter), not 2020 Q2 as stated in the request metadata. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Three months ended Dec. 31, 2021 | Three months ended Dec. 31, 2020 | Six months ended Dec. 31, 2021 | Six months ended Dec. 31, 2020 |
|---|---|---|---|---|
| Net sales | $141.7 | $119.1 | $279.4 | $224.3 |
| Gross margin | $9.5; 6.7% | $24.4; 20.5% | $32.9; 11.8% | $47.2; 21.0% |
| Operating income (loss) | $(8.6) | $9.8 | $(2.8) | $17.7 |
| Net income (loss) | $(7.5) | $8.5 | $(3.2) | $12.3 |
| Diluted EPS | $(1.13) | $1.13 | $(0.47) | $1.61 |
For the six months, operating cash flow was $(41.0), versus $(10.9) a year earlier; investing cash flow was $0.4, versus $17.9; and financing cash flow was $43.3, versus $(21.8). Cash increased $2.7 to $4.1. Operating cash use primarily reflected a $17.9 inventory build and a $29.5 decrease in trade payables, partly offset by a $5.8 decrease in receivables.
At December 31, 2021, working capital was $171.1, up from $128.7 at June 30, 2021. Total assets were $323.8 and total liabilities $168.7. Inventory was $179.0. Borrowings under the revolving credit facility were $59.7, compared with $3.5 in lines of credit at June 30; the company had an $85 million facility and $1.2 million of letters of credit outstanding. The reported effective borrowing rate was 1.35%. Capital expenditures were $1.5 for the six-month period; management estimated fiscal 2022 capex of $10.5–$12.5.
Material changes versus prior comparable periods
- Quarterly sales increased 18.9%; six-month sales increased 24.5%. Retail-channel home furnishings drove the gains, while e-commerce sales were flat for the quarter and down $3.0 for the six-month period.
- Gross margin fell 1,380 basis points for the quarter and 920 basis points for the six months. Management attributed the decline mainly to supply-chain-related ancillary and per diem charges, capacity investments, and higher material, labor, and transportation costs, partly offset by pricing.
- Despite higher sales, the company moved from profit to loss in both comparison periods. Quarterly SG&A declined $1.4 to $17.5; six-month SG&A rose $3.2 to $36.3, but declined as a share of sales.
- Prior-year periods included larger gains on facility disposals: $5.9 for the six months ended December 2020 versus $1.4 in the current six-month period. Current-period results also included interest expense following adoption of the new credit facility.
- Six-month dividends paid were $3.1 and treasury-stock purchases were $9.7. The company repurchased 276,881 shares in the December quarter under its existing plan.
Outlook, risks, contingencies, and unusual items
- Management said supply-chain pressures continued, including constrained ocean-container availability, higher freight rates, materials inflation, and labor shortages in Asia and the United States. The pandemic and its potential business impact remained uncertain; management did not provide specific earnings or sales guidance.
- Retail home-furnishings backlog was $121 million at quarter-end, up 20.4% from $101 million a year earlier. Backlog is not a guarantee of future sales.
- The company expected its restructuring program to be completed in fiscal 2022. Cumulative restructuring and related costs were $59.4 million against an anticipated total of approximately $60 million; $0.6 million was recorded in the quarter.
- A $3.6 million environmental remediation liability remained recorded for the Lane Street groundwater site. The company disputes responsibility, is evaluating defenses and insurance recovery, and the EPA-related limitations extension ran through February 28, 2022.
- New lease arrangements include a planned 507,830-square-foot Mexicali facility with a 12-year term beginning June 2022 and annual base rent of $3.1 million, and a Pennsylvania warehouse lease with annual base rent of $1.8 million. Lease costs and commitments will increase as these arrangements take effect.
- The credit agreement includes a minimum fixed-coverage covenant of 1.00:1.00 and restrictions on additional debt, liens, asset dispositions, and certain corporate transactions. Import exposure, tariffs, currency fluctuations, inflation, customer credit risk, litigation, and broader economic conditions were also identified as risks.
- On January 20, 2022, after quarter-end, the board authorized an additional $30 million share-repurchase program through January 19, 2025. The filing reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether price increases and operational improvements can offset freight, materials, labor, and other supply-chain costs and restore gross margins.
- Whether inventory converts into shipments and cash, given the significant inventory build and negative operating cash flow.
- Available borrowing capacity and covenant headroom under the $85 million credit facility, especially if losses or working-capital needs persist.
- Timing and costs of the new facilities and leases, planned fiscal 2022 capital expenditures, and completion of restructuring activities.
- Developments in the Lane Street environmental matter, including remediation exposure, insurance recoveries, and the status of the February 2022 limitations extension.
- The exact reporting period: the filing itself covers the quarter ended December 31, 2021, notwithstanding the request metadata’s 2020 Q2 label.