Flexsteel Industries, Inc. — Form 10-Q summary
Reporting period: The filing covers the three months ended September 30, 2019 (first quarter of fiscal 2020), compared with the three months ended September 30, 2018. This differs from the request metadata, which says 2018 Q1. Flexsteel manufactures, imports, and markets residential and contract furniture.
Key financial results
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Net sales | $100.3 million | $113.5 million |
| Gross margin | $17.2 million; 17.2% | $21.8 million; 19.2% |
| Operating income | $12.7 million | $1.6 million |
| Net income | $9.6 million | $1.3 million |
| Diluted EPS | $1.17 | $0.16 |
| Operating cash flow | $(3.3) million | $9.9 million |
| Cash at period end | $36.2 million | $23.3 million |
Amounts are rounded. The quarter’s reported operating income and earnings include an $18.9 million gain on the Riverside facility sale and $6.0 million of restructuring expense; reported profit therefore is not indicative of recurring operating performance. Excluding those two items, operating results would imply an operating loss of approximately $0.3 million.
- Sales fell 11.6% year over year: residential sales declined 7.7% and contract sales declined 32.7%.
- Gross margin contracted 200 basis points, primarily due to lower volume and unfavorable product mix; manufacturing productivity improvements partly offset the decline. SG&A fell $2.7 million and was 17.4% of sales versus 17.8%.
- Cash from operations was negative despite net income, reflecting the facility-sale gain and changes in working capital. Investing cash flow was $19.1 million, chiefly from $19.6 million of net Riverside sale proceeds; capital expenditures were $0.5 million.
- Working capital was $125.8 million, versus $118.2 million at June 30, 2019. The company had no debt outstanding, $8.7 million available under its $10 million working-capital facility after letters of credit, and a separate undrawn $10 million line. The facilities mature June 30, 2020 and December 31, 2019, respectively.
- Quarterly dividends declared were $0.22 per share. Shareholders’ equity was $214.5 million at September 30, 2019.
Material changes and management commentary
Management attributed most of the residential sales contraction to tariffs on furniture imported from China, which rose from 10% to 25%, and lost sales through the ecommerce channel. Ecommerce sales nevertheless increased sequentially in each of the two most recent fiscal quarters cited. Contract sales fell partly because Flexsteel is exiting commercial office and custom-designed hospitality lines, which together represented about 7% of revenue, and because healthcare demand declined.
The Riverside, California facility was sold for $20.5 million, producing $19.6 million in net proceeds and the $18.9 million gain. Flexsteel adopted lease accounting effective July 1, 2019, recognizing $11.5 million of operating lease right-of-use assets and $11.9 million of lease liabilities at September 30.
Outlook, risks, and contingencies
- The company expects $48–$53 million of pretax restructuring and related costs over a two-year transformation program, including $36–$40 million cash costs and $12–$13 million noncash costs. Cumulative costs incurred through September 30 were $23.9 million. The program includes simplification, facility closures, workforce reductions, and exits from noncore businesses.
- After completing footprint optimization, management plans to list additional properties for sale and estimates potential proceeds of $45–$55 million, dependent on market conditions. Fiscal 2020 capital expenditures are estimated at $5–$6 million.
- Management said liquidity was adequate for normal operations but was reviewing financing alternatives to support the transformation if needed. The filing provides no earnings or revenue guidance.
- A $3.6 million environmental remediation liability remains recorded for the Lane Street groundwater site. Flexsteel disputes responsibility and is pursuing legal and insurance options; the EPA had issued an order, with enforcement suspended while the company conducts an investigation under an agreement.
- The company agreed in principle to a $0.5 million class settlement of employment lawsuits; final court approval and payment were expected no earlier than 2020. Management reported no material change in the risk factors from its 2019 Form 10-K.
- Risks identified include tariffs and other government actions, import and supply-chain disruptions, demand and product mix, pricing and input costs, competition, litigation, and execution of restructuring.
Important facts for investors to verify
- Whether sales, gross margin, and operating performance improve after separating recurring results from the Riverside gain and restructuring charges.
- Actual restructuring costs, cash outlays, facility closures, and savings compared with management’s two-year estimates.
- Progress in replacing tariff-affected sales and sustaining ecommerce growth, along with demand trends in residential and healthcare products.
- Liquidity and refinancing options as the credit lines approach maturity, and the timing and proceeds of planned property sales.
- Developments in the Lane Street environmental matter, insurance recovery, and approval of the employment settlement.