Flexsteel Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2020, Flexsteel’s first quarter of fiscal 2021. Although the request metadata says “2019 Q1,” the filing itself reports 2020 results and compares them with the quarter ended September 30, 2019.
Business and operating results
Flexsteel manufactures, imports, and markets furniture in the United States through retailers, dealers, and e-commerce. Amounts below are in millions except per-share data.
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Net sales | $105.2 | $100.3 |
| Gross margin | $22.8; 21.7% | $17.2; 17.2% |
| Operating income | $7.9 | $12.7 |
| Net income | $3.9 | $9.6 |
| Diluted EPS | $0.49 | $1.17 |
| Cash from operations | $(2.2) | $(3.3) |
Sales rose 4.9%, reflecting stronger retailer and e-commerce demand, partly offset by the exits from Vehicle Seating and Hospitality. Gross margin improved 450 basis points, which management attributed primarily to structural cost reductions, operating efficiencies, and fixed-cost leverage. SG&A fell $3.3 million to $14.2 million. Net income and EPS declined despite higher sales and gross margin, in part because the current quarter included $1.381 million of restructuring expense and a $2.1 million additional tax expense. The prior-year quarter included an $18.941 million gain on asset disposals related to restructuring; this unusual gain materially affects the comparison of operating income.
Cash, liquidity, and capital
Cash and cash equivalents were $36.5 million at September 30, 2020, down $11.7 million from June 30, 2020. Operating cash use was $2.2 million, driven largely by increases in receivables ($7.5 million), inventory ($5.2 million), and other current assets ($2.3 million). Investing provided $0.3 million, including $0.7 million from a facility sale, while financing used $9.8 million, including $9.0 million for share repurchases and $0.5 million in dividends paid.
Current assets were $186.0 million and current liabilities $58.2 million. The filing reports working capital of $127.8 million, but its MD&A comparison cites June 30, 2019, whereas the balance sheet presents June 30, 2020; verify the intended comparison. The company had no borrowings on its new $25 million secured revolving credit facility at quarter-end. The facility matures August 28, 2022, bears interest at 1.50% plus LIBOR subject to a 3.00% floor, and has financial and non-financial covenants. Letters of credit were $1.2 million, with $1.3 million of cash pledged as collateral. No debt was outstanding at quarter-end.
Capital expenditures were $0.4 million in the quarter; management estimated $3.0–$4.0 million for fiscal 2021. The company repurchased $9.0 million of stock during the quarter. Cash dividends declared were $0.05 per share, versus $0.22 in the prior-year quarter.
Restructuring, outlook, and risks
- The company expects total restructuring and related costs of approximately $56–$58 million over its two-year transformation program, including $25–$26 million cash and $31–$32 million non-cash. Cumulative costs incurred were $56.6 million at September 30, 2020. Management expected the Vehicle Seating and remaining Hospitality exits to be completed during fiscal 2021.
- Management reported improved conditions as retailers reopened and orders increased, but cited supply-chain labor shortages in Asia, limited ocean-container availability, and inflation in key materials. It could not predict the pandemic’s full effect.
- The expected effective tax rate for the remaining nine months of fiscal 2021 was 25%–26%, following a 51.3% rate in the quarter. The current-quarter rate reflected $2.1 million of additional tax expense after the company revised its expected tax outlook and reassessed deferred tax assets.
- No revenue or earnings guidance was provided. The filing cautions that furniture-industry cyclicality, supply-chain disruption, input costs, pricing, competition, customer credit exposure, restructuring execution, and COVID-19 could affect results.
- The company retained a $3.6 million liability for EPA-related remediation at the Lane Street groundwater site while evaluating its legal position and insurance recovery. A separate employment-class settlement of $0.5 million had been accrued; final court approval was pending.
Key facts for investors to verify
- Confirm the intended period: the filing is for the quarter ended September 30, 2020, not 2019 Q1.
- Assess how much of the gross-margin improvement is sustainable and how supply constraints and materials inflation may affect future margins.
- Review the $2.1 million tax adjustment, deferred-tax-asset assumptions, and the projected 25%–26% tax rate.
- Track restructuring costs, remaining cash obligations, asset-sale proceeds, and completion of planned exits.
- Monitor cash conversion and working-capital needs, credit-facility covenant compliance, environmental exposure, and settlement approval.
- Consider the scale and timing of share repurchases relative to cash balances and business investment needs.