Filing summary
Period clarification: The supplied filing is Flexsteel Industries, Inc.’s Form 10-Q for the quarter ended March 31, 2020 (fiscal 2020 Q3), not 2018 Q3 as stated in the request metadata. Financial amounts below are in U.S. dollars; statement figures are converted to millions unless noted.
Business context and reporting period
Flexsteel manufactures, imports, and markets residential and contract furniture in the United States and Canada. Results cover the three and nine months ended March 31, 2020, compared with the corresponding 2019 periods. The company reported that COVID-19 had constrained supply and reduced customer demand, with the full effect still uncertain.
Financial performance and liquidity
| Metric | Three months ended Mar. 31, 2020 | Three months ended Mar. 31, 2019 | Nine months ended Mar. 31, 2020 | Nine months ended Mar. 31, 2019 |
|---|---|---|---|---|
| Net sales | $98.8m | $111.5m | $302.1m | $343.4m |
| Gross margin | $13.8m; 14.0% | $21.3m; 19.1% | $47.1m; 15.6% | $64.6m; 18.8% |
| Operating loss | $(8.3)m | $(20.3)m | $(2.7)m | $(16.6)m |
| Net loss | $(5.3)m | $(15.6)m | $(1.1)m | $(12.7)m |
| Loss per diluted share | $(0.66) | $(1.97) | $(0.14) | $(1.61) |
For the nine months, operating cash flow was $13.9m, investing cash flow was $17.2m, and financing cash flow was $9.2m. Cash increased $40.3m to $62.5m, including $20.5m of proceeds from asset sales and $15.0m of credit-facility borrowings. Capital expenditures were $3.3m; the company estimated full-year fiscal 2020 capital spending of $3.6m–$4.1m.
At March 31, 2020, working capital was approximately $122.6m. The company had $15.0m drawn on its two $10m credit lines, with reported remaining availability of $1.2m and $2.5m, respectively. The lines matured June 30, 2020. Total liabilities were $73.6m, including $13.2m of operating lease liabilities; shareholders’ equity was $202.3m. The company had not met Wells Fargo’s interest-coverage covenant at quarter-end, but obtained a waiver on April 28, 2020.
Material changes versus prior comparable periods
- Quarterly sales declined 11.4%; nine-month sales declined 12.0%. Contract sales fell 41.7% for the quarter and 42.8% year to date, while residential sales fell 5.7% and 6.3%, respectively.
- Gross margin contracted 510 basis points for the quarter and 320 basis points year to date. The quarter’s main pressures included a SKU-rationalization inventory adjustment (about 240 basis points), product mix, costs to improve service, and foreign exchange; favorable labor and material costs partly offset them.
- Net losses narrowed versus 2019. Comparability is affected by the prior-year $18.7m ERP impairment and, for the nine-month comparison, the current-year $19.3m gain on asset disposals, principally the Riverside facility sale.
- Cash rose from $22.2m at June 30, 2019 to $62.5m at March 31, 2020, reflecting asset-sale proceeds, working-capital movements, and new borrowings. Inventory declined $18.6m over the nine months.
- Residential ready-to-assemble furniture, sold primarily through e-commerce, grew 37.1% in the quarter and 19.1% year to date.
Outlook, management commentary, risks, and unusual items
- Management said COVID-19 was adversely affecting demand, supply chains, manufacturing, and distribution and expected continued adverse effects, but could not predict their extent. U.S. and Mexico manufacturing had been temporarily suspended, subject to regular review.
- Cost and liquidity actions included temporary salary reductions, employee layoffs, suspension of the 401(k) match beginning June 1, reduced director compensation, expense and capital-spending controls, supplier payment-term negotiations, and the $15m credit draw.
- The two-year transformation program was expected to incur $48m–$53m in pretax restructuring and related costs, including $36m–$40m cash costs. Cumulative costs were $31.4m at March 31, 2020. Management expected $45m–$55m of proceeds from planned property sales, including the Riverside proceeds already received.
- On April 28, 2020, the company approved plans to exit its recreational-vehicle and remaining hospitality businesses; together they represented less than 9% of nine-month fiscal 2020 sales and 12% of fiscal 2019 sales.
- The CARES Act led to recorded tax receivables of $8.2m for a fiscal 2019 NOL carryback and $0.8m for a fiscal 2020 carryback. A $3.9m valuation allowance was recorded against federal and state deferred tax assets.
- The company continued to carry a $3.6m environmental-remediation liability relating to the Lane Street Superfund Site while contesting responsibility and evaluating insurance and legal options. A separate $0.5m employment-class settlement was accrued, pending court approval.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied document is for March 31, 2020, despite the request’s 2018 Q3 label.
- Monitor the June 30, 2020 credit-line maturities, extension negotiations, borrowing availability, and covenant status following the waiver.
- Assess the duration and financial effects of COVID-related closures, demand weakness, supply constraints, and cost-reduction measures.
- Track restructuring charges, planned property-sale proceeds, and execution of the announced business exits.
- Review the filing’s apparent date inconsistencies: certain MD&A and control disclosures refer to March 31, 2019 where the reporting period is March 31, 2020. The filing text does not clearly resolve these references.