FGI Industries Ltd. — Q3 2023 Form 10-Q
Business context and reporting period. FGI supplies kitchen and bath products, primarily for repair and remodeling, through retail, wholesale, online and other distribution channels. This unaudited report covers the three and nine months ended September 30, 2023, compared with the same 2022 periods.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $29.9 million | $38.5 million | $86.3 million | $129.9 million |
| Gross profit / margin | $7.8 million / 26.2% | $8.0 million / 20.9% | $23.0 million / 26.7% | $24.0 million / 18.5% |
| Operating income / margin | $0.5 million / 1.6% | $1.7 million / 4.3% | $1.1 million / 1.2% | $4.1 million / 3.1% |
| Net income | $0.34 million | $1.27 million | $0.13 million | $2.97 million |
| EPS, basic and diluted | $0.04 | $0.13 | $0.02 | $0.32 |
| Operating cash flow | Not presented by quarter | $(2.60) million | $(6.33) million |
For the nine months, investing cash outflow was $0.27 million and financing cash outflow was $1.83 million, mainly reflecting repayment of bank borrowings. Cash fell $4.70 million from year-end 2022 to $5.37 million.
At September 30, cash was $5.37 million, working capital was $17.2 million, and current assets and current liabilities were $47.06 million and $29.84 million, respectively. Short-term bank loans were $7.96 million, down from $9.80 million at year-end. Operating lease liabilities totaled $15.39 million; total liabilities were $43.76 million. The East West Bank facility has an $18 million maximum and matures December 2024; borrowings are classified as short-term and deemed due on demand. Its stated rate was 8.25%. The Canadian revolver had no borrowings.
Changes versus prior comparable periods
- Revenue decreased 22.3% in Q3 and 33.6% for the first nine months. Management attributed declines to customer inventory destocking and weaker demand, particularly in sanitaryware and bath furniture.
- Nine-month revenue fell across sanitaryware (35.0%), bath furniture (47.4%) and shower systems (20.3%); “Other” revenue increased 17.2%.
- Despite lower sales, gross margin increased 530 basis points in Q3 and 824 basis points year to date, which management attributed to pricing, product mix and lower freight costs.
- Operating expenses rose 15.3% in Q3 and 10.5% for the first nine months, including higher public-company and legal costs, marketing and trade-show spending, and R&D. Nine-month net income fell 95.7%.
- Operating cash outflow improved from $6.33 million to $2.60 million year to date, but cash still declined. A $5.36 million increase in related-party prepayments and receivables was a significant operating cash use.
Outlook, risks and notable items
- Management said bath-furniture demand remained below historical levels but had improved quarter over quarter, and expected demand to pick up through the rest of 2023 and into early 2024. It reported sequential gains in sanitaryware and shower systems and cited retailer programs and a planned early-2024 kitchen cabinetry launch. The filing provides no quantified revenue or earnings guidance.
- Key risks include residential remodeling and construction demand, inflation and interest rates, material costs and tariffs, international operations, and reliance on key customers and suppliers. Huida represented 55.8% of Q3 purchases and 78.3% of accounts payable at September 30. Four customers represented 60.3% of receivables.
- Related-party prepayments and other receivables totaled $11.00 million, including $9.84 million due from Focal Capital Holding Limited, versus $5.64 million in total at year-end 2022. Related-party accounts payable increased to $2.49 million from $0.10 million.
- The company was in compliance with East West Bank financial covenants at September 30, but had obtained a waiver for overdue standalone audited financial statements required under the credit agreement.
- Management concluded disclosure controls were not effective because of material weaknesses involving IT controls, process and control documentation, and segregation of duties. Remediation actions included hiring accounting staff, establishing internal audit, and forming a cybersecurity committee; management anticipated remediating one or more weaknesses by year-end, subject to testing.
- The company described ongoing Ayers Bath-related litigation and a motion to compel arbitration, with a hearing scheduled for January 18, 2024. Management said it did not believe legal claims would have a material adverse effect, based on information then available.
- Adjusted nine-month net income, a non-GAAP measure, was $0.46 million versus $3.31 million a year earlier. The filing cautions that non-GAAP measures are supplemental and may not be comparable across companies.
Important facts for investors to verify
- Whether demand and customer ordering recover as management expected, particularly in bath furniture and the pro channel.
- The collectability, terms and business purpose of the substantial related-party advances, and their effect on working capital and cash generation.
- Whether the company continues to meet bank covenants and satisfies the lender’s waived standalone reporting requirement.
- Progress in remediating material weaknesses and whether controls are effective after sufficient testing.
- Exposure to customer and supplier concentration, including continued dependence on Huida.
- Developments in the Ayers Bath litigation and the expected timing and outcome of the arbitration motion.