FGI Industries Ltd. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Filed August 11, 2023. FGI is a global supplier of kitchen and bath products, primarily serving repair and remodeling markets through retail, wholesale, online and distributor channels.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $29.2 million | $47.8 million | $56.4 million | $91.4 million |
| Gross profit | $8.0 million | $8.4 million | $15.2 million | $15.9 million |
| Gross margin | 27.4% | 17.6% | 27.0% | 17.5% |
| Operating income | $0.6 million | $1.7 million | $0.6 million | $2.4 million |
| Net income (loss) | $0.09 million | $1.17 million | $(0.21) million | $1.70 million |
| Operating cash flow | Not presented for the quarter | $(1.0) million | $(13.0) million |
- Q2 revenue fell 38.9% year over year; first-half revenue declined 38.3%. Lower sales across sanitaryware, bath furniture and shower systems were attributed mainly to customer destocking and soft demand. First-half “Other” revenue, including custom cabinetry, rose 54.1%.
- Gross margin increased substantially year over year, reflecting pricing gains, product mix and lower freight costs. These factors more than offset lower sales in percentage terms, although gross profit dollars declined.
- Operating expenses rose 11.0% in Q2 and 8.2% in the first half, including higher selling, marketing and trade-show spending, public-company costs and legal expenses. Higher interest expense also weighed on earnings.
- Q2 basic and diluted EPS were each $0.01, versus $0.13 and $0.10, respectively, in Q2 2022. First-half EPS was $(0.02), versus $0.19 basic and $0.15 diluted.
Financial position and liquidity
- At June 30, cash was $6.9 million, compared with $10.1 million at year-end 2022. Current assets were $43.8 million and current liabilities $27.3 million; management reported working capital of $16.5 million.
- First-half operating cash outflow was $1.0 million, investing outflow $0.2 million and financing outflow $1.9 million, primarily repayments under the bank facility. Cash declined by $3.2 million during the period.
- East West Bank borrowings were $7.9 million, down from $9.8 million at year-end, under an asset-based facility with an $18 million maximum and a December 2024 maturity. Borrowings are classified as short-term and deemed due on demand. The rate was 8.00% at June 30. The company reported covenant compliance.
- FGI obtained a waiver for the borrower’s standalone audited annual statements required under the credit agreement, which had been due April 30, 2023. Its Canadian revolving facility had no borrowings at period-end.
- Operating lease liabilities totaled $15.7 million, up from $9.4 million at year-end; right-of-use assets were $16.0 million. Total liabilities were $41.6 million and shareholders’ equity $22.8 million.
- Related-party prepayments and other receivables were $8.6 million, including $7.3 million due from Focal Capital Holding Limited. First-half operating cash flow also reflected a $3.0 million increase in related-party prepayments and receivables.
Outlook, risks and unusual items
- Management said it expects sanitaryware orders to rebound in the second half as customer inventories normalize and cited a 23% sequential increase in sanitaryware revenue from Q1 2023. It expects bath-furniture demand to improve and plans several shower-system product launches with national retail partners in the second half.
- Management expects the pricing, product-mix and freight-cost factors that supported first-half gross margins to continue for the remainder of 2023. The filing provides no formal numerical revenue or earnings guidance.
- Principal risks include continued destocking and weak demand, inflation and interest rates, reliance on key suppliers and customers, material availability and tariffs, and international operating exposure. One supplier, Huida, accounted for 53.4% of first-half purchases and 78.1% of accounts payable at June 30. Three customers represented 46.4% of Q2 revenue.
- Management believes available funds are sufficient for working capital and debt obligations over the next 12 months, but notes possible future financing needs if conditions change or investments are pursued.
- Disclosure controls were concluded to be ineffective at June 30, 2023 because of material weaknesses involving IT controls, financial-process documentation and risk assessment, and segregation of duties. The company reported hiring accounting staff, beginning to establish an internal audit function and conducting cybersecurity training; it anticipates remediating one or more weaknesses by year-end, subject to testing.
- In the Ayers Bath litigation, FGI filed an amended complaint on June 27, 2023. Tangshan Ayers moved to compel arbitration; FGI’s opposition was due in late September. Management said other legal matters were not expected to have a material adverse effect based on information then available.
Key facts for investors to verify
- Whether customer destocking eases and the expected second-half demand recovery materializes, particularly in sanitaryware and bath furniture.
- Whether gross-margin gains persist as volumes remain significantly below the prior-year period.
- Cash conversion and the recoverability and timing of the $8.6 million in related-party prepayments and receivables.
- Availability and terms of the East West Bank facility, continued covenant compliance, and fulfillment of the waived standalone-reporting requirement.
- Progress and independent testing of remediation for the disclosed material weaknesses in financial reporting controls.
- Exposure to concentrated suppliers and customers, and developments in the Ayers Bath dispute and arbitration motion.