Flexsteel Industries, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2022, the first quarter of fiscal 2023. The request metadata says “2021 Q1,” but the supplied filing covers 2022 Q1; figures below follow the filing. Flexsteel manufactures, imports, and markets furniture in the United States.
Financial results
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Net sales | $95.7 million | $137.7 million |
| Gross margin | $15.3 million; 16.0% | $23.4 million; 17.0% |
| Operating income | $0.4 million | $5.9 million |
| Net income | $0.3 million | $4.4 million |
| Diluted EPS | $0.05 | $0.61 |
| Operating cash flow | $13.0 million | $(44.3) million |
| Capital expenditures | $1.9 million | $0.8 million |
Sales declined 30.5%, primarily from lower retailer-channel sales, with a smaller decline in e-commerce. Gross margin fell 100 basis points, reflecting lower production volume’s effect on fixed manufacturing costs and higher delivery costs, partly offset by lower ancillary charges. SG&A decreased 22.4% to $14.6 million, but rose to 15.2% of sales from 13.6% as revenue contracted. Operating margin was 0.4%, versus 4.3%.
Operating cash flow improved substantially, principally from inventory reduction of $19.8 million and lower receivables of $7.2 million, partly offset by lower payables and higher other current assets. The prior-year quarter used cash largely because of inventory build and working-capital outflows. Cash increased by $1.8 million to $4.0 million during the quarter.
Balance sheet, debt, and liquidity
- At September 30, 2022, working capital was $116.1 million, down from $125.4 million at June 30, 2022. Current assets were $173.0 million and current liabilities $56.9 million.
- Lines of credit totaled $30.0 million, down from $37.7 million at June 30. The company had an $85 million revolving facility, $1.1 million of letters of credit outstanding, and an effective borrowing rate of 4.4%. The facility is secured by substantially all assets other than real property and includes a minimum fixed-charge coverage covenant of 1.00 to 1.00.
- Lease liabilities totaled $74.2 million, reflecting commencement of a 12-year lease for a new 507,830-square-foot Mexicali manufacturing facility. Annual base rent is $3.2 million, plus taxes, insurance, and common-area costs.
- The quarterly dividend was $0.15 per share. The company repurchased 22,636 shares for approximately $0.4 million; $7.1 million remained under its $30 million repurchase authorization.
Material developments, outlook, and risks
- Retail home-furnishings backlog was $56 million, down 57.8% from $133 million a year earlier. Management attributed the decline to efforts to reduce lead times to three to five weeks and softer consumer demand.
- No specific revenue or earnings guidance was provided. Management cautioned that quarterly results are not necessarily indicative of full-year results.
- Environmental matter: a consent decree filed in October 2022 requires a $9.8 million payment for the Lane Street groundwater site, subject to public comment and final court approval. Flexsteel recorded a $9.8 million liability and a $6.2 million insurance receivable for partial reimbursement. The company says it reached agreements with insurers for that partial reimbursement.
- The quarter’s income-tax benefit was $0.2 million, with an effective tax rate of negative 175.5%, primarily affected by adjustments related to uncertain tax positions.
- Restructuring activities are substantially complete; the company reported no new restructuring charges and paid the remaining accrued costs during the quarter. A Starkville property with a $0.6 million net book value remained held for sale.
- Risks highlighted include furniture-industry cyclicality, supply-chain and import disruption, inflation and fuel costs, pricing pressure, consumer demand, competition, customer credit exposure, litigation, and changes in tariffs or regulation. Management reported disclosure controls were effective and no material change in internal controls.
Important facts for investors to verify
- Whether consumer demand and retailer orders stabilize, and whether the reduced backlog reflects healthy lead times or weakening sales.
- Whether lower volumes, delivery costs, and other cost pressures continue to constrain gross margin and profitability.
- Final court approval and payment timing for the $9.8 million environmental settlement, and the amount and timing of insurance recoveries.
- Compliance with the revolving-credit covenants and the effect of interest-rate changes on borrowing costs and liquidity.
- Execution and occupancy costs of the Mexicali facility, including the impact of the new lease on cash requirements.