Business context and reporting period
Flexsteel Industries, Inc. manufactures, imports, and markets furniture through retail and e-commerce channels. The filing is a Form 10-Q for the quarter ended March 31, 2022 (fiscal Q3 2022), not 2020 Q3 as indicated in the request metadata. Financial statements are unaudited; amounts below are in millions unless noted.
Financial performance and position
| Metric | Three months ended March 31, 2022 | Nine months ended March 31, 2022 |
|---|---|---|
| Net sales | $140.4; up 18.6% | $419.8; up 22.5% |
| Gross margin | $22.1; 15.7% | $55.0; 13.1% |
| Operating income | $5.8; 4.1% of sales | $3.1; 0.7% of sales |
| Net income | $5.3; diluted EPS $0.82 | $2.1; diluted EPS $0.31 |
| Cash from operations | Not presented for the quarter | $(3.9) |
At March 31, cash was $3.4, working capital was $138.4, and total assets were $289.9. Revolver borrowings were $41.6, with $1.2 in letters of credit outstanding, under a new $85 million, five-year facility. Interest was 1.70% at quarter-end. Total liabilities were $149.3. Nine-month capital expenditures were $2.9; management estimated fiscal 2022 spending of $7–$9 million.
Material changes versus prior comparable periods
- Quarterly sales rose 18.6%, primarily from pricing and a strong opening retail backlog; e-commerce sales declined $0.9. Retail backlog fell 29.3% year over year to $99 million.
- Quarterly gross margin declined 380 basis points year over year to 15.7%. Management attributed the decline mainly to domestic supply-chain ancillary and per diem charges (160 bps), capacity investments (130 bps), and materials, labor, and transportation inflation (90 bps), partly offset by pricing.
- Nine-month gross margin fell 740 basis points to 13.1%, primarily reflecting supply-chain charges (600 bps), capacity investments (110 bps), and inflation (30 bps). Nine-month net income fell from $17.2 to $2.1 and diluted EPS from $2.28 to $0.31.
- Operating cash use improved from $15.4 to $3.9 year over year, but remained negative. The nine-month period included a $28.6 decrease in trade payables; cash from receivables and inventory reductions partly offset this use.
- Share repurchases were $28.0 for the nine months. The company completed its prior $30 million repurchase authorization in February 2022 and approved a new authorization of up to $30 million.
Outlook, risks, contingencies, and unusual items
- No sales or earnings guidance is provided. Management said supply-chain challenges continued, including limited ocean-container availability and higher freight charges, materials inflation, and labor shortages in Asia and the U.S. It could not predict the extent of the ongoing COVID-19 impact.
- New capacity includes a 507,830-square-foot Mexico manufacturing facility, with a 12-year lease beginning June 2022 and annual base rent of $3.1 million, and a Pennsylvania distribution facility with annual base rent of $1.8 million. Lease costs and capacity investments weighed on margins.
- The company recorded a $3.6 million environmental remediation liability related to the Lane Street Superfund Site. It disputes responsibility, is evaluating legal options and insurance recovery, and the EPA-related limitations period was extended through June 30, 2022.
- Restructuring costs incurred cumulatively were $59.3 million against approximately $60 million anticipated. The company reported a $1.4 million gain on asset disposals in the first nine months of 2022, versus $5.9 million in the prior-year period.
- Key risks include supply-chain disruption, inflation, tariffs and other government actions, competition, customer credit exposure, employee retention, litigation, and general economic conditions. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Confirm the filing period: the source is for the quarter ended March 31, 2022, notwithstanding the request’s 2020 Q3 label.
- Track whether pricing can offset freight, material, labor, and other supply-chain costs, and whether gross margins recover as new capacity is utilized.
- Monitor retail backlog, e-commerce trends, and operating cash flow, including working-capital movements.
- Review revolver utilization, covenant compliance, interest-rate exposure, and cash needs associated with leases and capital spending.
- Assess the outcome and potential insurance recovery for the $3.6 million environmental liability, and the remaining restructuring and asset-sale obligations.