FGI Industries Ltd. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022; unaudited. FGI supplies kitchen and bath products, principally for repair and remodeling. The financial statements present the kitchen-and-bath business following a January 2022 reorganization and IPO; pre-reorganization periods are presented on a carve-out basis.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $47.8 million (+12.5%) | $42.5 million | $91.4 million (+15.9%) | $78.9 million |
| Gross profit / margin | $8.4 million / 17.6% | $9.2 million / 21.6% | $15.9 million / 17.5% | $16.5 million / 20.9% |
| Operating income / margin | $1.7 million / 3.6% | $3.3 million / 7.8% | $2.4 million / 2.6% | $5.2 million / 6.6% |
| Net income | $1.2 million | $2.5 million | $1.7 million | $5.5 million |
| Basic / diluted EPS | $0.13 / $0.10 | $0.36 / $0.36 | $0.19 / $0.15 | $0.78 / $0.78 |
Revenue growth reflected stronger sanitaryware and other-product sales, partly offset by weaker bath furniture. Sanitaryware represented 67.5% of Q2 revenue, up from 48.7% a year earlier. Q2 bath furniture revenue fell 51.7%; management attributed this mainly to customer order delays associated with warehousing and supply-chain constraints.
Higher raw-material and freight costs reduced gross margin. Operating expenses also increased: Q2 general and administrative expense rose 28.9%, including incremental public-company costs and a one-time IPO bonus. First-half other income and expense was unfavorable year over year, principally because the prior-year period included $1.68 million of PPP-loan forgiveness income.
Cash flow, balance sheet and debt
- Cash: $3.1 million at June 30, 2022, versus $3.9 million at December 31, 2021. Reported working capital was $15.7 million, versus $1.4 million at year-end.
- Cash flow, first half: $13.0 million used in operations, compared with $0.6 million provided in the prior-year period. The 2022 outflow included a $10.8 million reduction in accounts payable and a $5.3 million increase in related-party prepayments and receivables.
- Financing: $12.4 million provided, largely from IPO net proceeds; investing used $43,000. The IPO raised approximately $12.4 million net from 2.5 million units.
- Borrowings: $14.69 million outstanding under the East West Bank credit facility, classified as short-term and due on demand. The rate was 4.75% at June 30, up from 3.50% at year-end. The facility’s stated maturity was September 23, 2022; it is secured by subsidiary assets and guaranteed by a Foremost shareholder. FGI reported covenant compliance at June 30; it had received a waiver for noncompliance at December 31, 2021.
- Leases and liabilities: Operating lease liabilities totaled $7.57 million. Total liabilities were $48.82 million.
Outlook, risks and unusual items
- Management expected margin-expansion measures, including price increases and cost reductions, to support margin recovery in the second half of 2022. It also expected bath-furniture results to improve as delayed orders shipped. The filing provides no quantified full-year guidance.
- Management described current working capital as sufficient for foreseeable operating needs, while noting possible future financing needs from changing conditions, inflation, higher interest rates, investment or acquisition opportunities, and potential support to Foremost.
- Material exposure includes supply-chain disruption, freight and input-cost inflation, reliance on key customers and suppliers, and international and currency risks. Three customers represented 51.3% of Q2 revenue; Huida represented 58.8% of Q2 purchases and 68.9% of accounts payable at June 30.
- Related-party prepayments and other receivables totaled $8.64 million at June 30. In July, FGI agreed to buy a building and sublease land from a related party for approximately $1.97 million; approximately $0.6 million had been paid by the report date.
- FGI disclosed ongoing Ayers Bath-related litigation and an arbitration initiated by Huida concerning the duration or termination of an exclusive distribution agreement. The arbitration had been delayed, with no new date set. Management did not believe other asserted or unasserted legal matters were reasonably likely to have a material adverse effect.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether the East West Bank facility was renewed, refinanced or repaid after its stated September 23, 2022 maturity, and the resulting borrowing rate and covenant status.
- Collection, recoverability and commercial terms of the $8.64 million related-party prepayments and receivables, and completion and terms of the related-party property transaction.
- Whether cost and pricing actions improve gross margins, and whether delayed bath-furniture orders convert to sales as management expected.
- Developments in the Huida arbitration and Ayers Bath litigation, given Huida’s supplier concentration and importance to accounts payable.
- Cash generation and working-capital trends, particularly operating cash use despite reported net income and the substantial first-half reduction in accounts payable.