Flexsteel Industries, Inc. — Form 10-Q summary
Period: Quarter and six months ended December 31, 2020, compared with the periods ended December 31, 2019. The request metadata identifies “2019 Q2,” but the filing itself is for the quarter ended December 31, 2020.
Flexsteel manufactures, imports, and markets furniture in the U.S. through e-commerce and dealer channels. The company was exiting its Commercial Office, Hospitality, and Vehicle Seating product lines as part of a multiyear transformation.
Financial performance
| Metric | Three months ended Dec. 31, 2020 | Prior-year quarter | Six months ended Dec. 31, 2020 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $119.1 million | $102.9 million | $224.3 million | $203.3 million |
| Gross margin | $24.4 million; 20.5% | $16.1 million; 15.6% | $47.2 million; 21.0% | $33.3 million; 16.4% |
| Operating income (loss) | $9.8 million | $(7.1) million | $17.7 million | $5.6 million |
| Net income (loss) | $8.5 million | $(5.4) million | $12.3 million | $4.2 million |
| Diluted EPS | $1.13 | $(0.68) | $1.61 | $0.51 |
| Operating cash flow | Not separately presented for the quarter | $(10.9) million | $0.8 million |
Quarterly sales rose 15.7%; six-month sales rose 10.4%. Management attributed growth mainly to stronger home-furnishing demand through retailers and e-commerce, while discontinued product lines reduced sales. Gross-margin improvement reflected cost reductions, operational efficiencies, higher-volume fixed-cost leverage, and sales of previously reserved inventory. Quarterly SG&A rose $0.8 million in dollars but declined to 15.9% of sales from 17.6%; a $1.3 million bad-debt expense tied to a customer bankruptcy partially offset savings.
Liquidity, cash flow, and capital
- At December 31, 2020, cash was $33.3 million, down from $48.2 million at June 30, 2020. Working capital was $126.3 million, versus $128.4 million.
- Six-month operating cash use of $10.9 million reflected working-capital investment, including receivables up $15.4 million and inventory up $21.5 million. Investing activities provided $17.9 million, primarily from asset-sale proceeds; financing activities used $21.8 million, including $20.0 million of share repurchases and $1.5 million of dividends.
- No borrowings were outstanding on the $25 million secured revolving credit facility at quarter-end. The facility matures August 28, 2022; it is subject to financial and nonfinancial covenants. The filing reports $1.1 million of letters of credit and $1.3 million of cash pledged as collateral.
- Total liabilities were $67.4 million and shareholders’ equity was $168.4 million. Operating lease liabilities totaled $12.2 million.
- Capital expenditures for fiscal 2021 were estimated at $2–$3 million. The company repurchased 995,318 shares for $20.0 million during the six months; $22.7 million remained under the active repurchase authorization at December 31.
Changes, outlook, and risks
- Asset dispositions generated $18.5 million of cash proceeds and a $5.9 million gain for the six-month period. The quarter included a $5.2 million gain on sales of the Dubuque and Lancaster facilities. These gains materially affected reported operating results and cash flows.
- Restructuring costs were $2.3 million for the six months. Cumulative restructuring and related costs were $57.5 million against an estimated total of approximately $58 million, including about $26 million cash and $32 million noncash. Management expected the remaining activities relating to the Vehicle Seating and remaining Hospitality exits to be completed in fiscal 2021.
- Management said reopening retailers and increased orders improved conditions, but warned of continuing COVID-19 uncertainty, labor shortages in Asia, limited ocean-container availability, and inflation in key materials. No revenue or earnings guidance was provided.
- Environmental matter: the company continues to carry a $3.6 million liability related to the Lane Street groundwater site and is evaluating its legal position and insurance recovery. A $0.5 million class settlement for employment claims was accrued; court approval was anticipated within the following three months.
- Other stated risks include furniture-industry cyclicality, supply disruptions, raw-material and fuel costs, tariffs, competition, customer credit exposure, and general economic conditions. Management reported disclosure controls were effective and no material change in internal controls during the quarter.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied metadata says 2019 Q2, while this filing covers the quarter ended December 31, 2020.
- Assess whether strong sales and margin gains are sustainable amid supply constraints, cost inflation, and the company’s product-line exits.
- Separate operating performance from asset-sale gains and restructuring costs; review the cash-flow effect of rising receivables and inventory.
- Monitor the customer bankruptcy exposure, environmental liability and potential insurance recovery, and status of the employment settlement.
- Review remaining restructuring obligations, credit-facility covenants, and the effect of continued share repurchases on cash and liquidity.