Flexsteel Industries, Inc. — Form 10-Q Summary
Reporting period: The filing covers the three months ended September 30, 2021 (fiscal 2022 first quarter), compared with the three months ended September 30, 2020. This differs from the request metadata’s “2020 Q1.” Amounts below are in U.S. dollars.
Business context and financial performance
Flexsteel manufactures, imports, and sells furniture in the United States through retailers, dealers, and e-commerce. Results improved sales and net income year over year, but supply-chain cost pressures significantly reduced gross margin and operating income.
| Metric | Quarter ended Sep. 30, 2021 | Prior-year quarter |
|---|---|---|
| Net sales | $137.7 million | $105.2 million |
| Gross profit / margin | $23.4 million / 17.0% | $22.8 million / 21.7% |
| Operating income / margin | $5.9 million / 4.3% | $7.9 million / 7.5% |
| Net income | $4.4 million | $3.9 million |
| Diluted EPS | $0.61 | $0.49 |
| Operating cash flow | $(44.3) million | $(2.2) million |
| Capital expenditures | $0.8 million | $0.4 million |
Financial position and liquidity
- At September 30, 2021, cash was $4.0 million, total assets were $323.9 million, and working capital was $181.5 million, versus $128.7 million at June 30, 2021.
- Inventory rose $32.6 million during the quarter to $193.7 million. Trade receivables fell $7.7 million and accounts payable fell $22.8 million.
- Debt under the new revolving credit agreement was $53.1 million; the facility provides up to $85 million over five years. The reported effective borrowing rate was 1.58025% at quarter-end. The agreement is secured by substantially all assets except real property and includes a minimum fixed-coverage-ratio covenant of 1.00:1.00.
- Operating lease liabilities totaled $29.1 million. Cash dividends paid were $1.1 million; the company also repurchased $1.9 million of stock.
Changes, management commentary, and outlook
- Sales increased 30.8%, principally from a $35.7 million increase in retailer-channel home-furnishing sales; e-commerce sales decreased $3.2 million, or 19.7%. Retail home-furnishings backlog was $133 million, up 56.5% year over year.
- Gross margin fell 470 basis points. Management attributed a 740-basis-point drag to supply-chain costs—including materials, labor, and ocean and domestic freight—partly offset by 270 basis points from volume, mix, and pricing.
- SG&A increased 32.5% to $18.8 million, reflecting higher sales, the phaseout of prior-year COVID-related expense reductions, and increased compensation, marketing, and growth investment.
- Operating cash use rose sharply, primarily from inventory build and lower accounts payable. Financing cash inflow included $74.6 million of credit-line proceeds and $25.0 million of repayments.
- The company reported continued container availability and freight-rate challenges, material inflation, and labor shortages in Asia and the United States. Management said the pandemic’s ongoing impact could be significant but was not predictable.
- Fiscal 2022 capital expenditures were estimated at $11.5–$13.5 million. The filing provides no earnings or revenue guidance.
- A $1.4 million gain from selling the Harrison, Arkansas property reduced reported restructuring-related expense. Restructuring expense was $0.15 million for the quarter; cumulative restructuring and related costs were $58.8 million.
- The company entered into leases for a planned 507,830-square-foot Mexicali facility and a 241,920-square-foot Pennsylvania warehouse. The Mexicali lease has annual base rent of $3.1 million and a 12-year term beginning in 2022; the Pennsylvania lease has annual base rent of $1.8 million and commenced October 1, 2021.
Risks and contingencies
- The company continued to carry a $3.6 million environmental remediation liability relating to the Lane Street Superfund Site. EPA proceedings and the company’s legal options and insurance recovery efforts remained unresolved; the company disputes that it caused or contributed to the contamination.
- Other stated risks include supply-chain disruptions, inflation and input costs, tariffs and regulation, competition, customer credit exposure, litigation, and general economic conditions. The filing reported no material change to the risk factors in the fiscal 2021 Form 10-K.
- Management stated that disclosure controls were effective and that there were no significant changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether elevated inventory and the $44.3 million operating cash outflow convert into sales and improved cash generation.
- Whether pricing, mix, and operational actions can offset continuing freight, labor, and material cost pressure on margins.
- Available borrowing capacity and covenant compliance under the $85 million revolving facility, including the effect of future borrowing costs.
- Developments in the $3.6 million environmental matter and the status of potential insurance recovery.
- Execution, costs, and operating benefits of the new facility and warehouse leases, alongside the fiscal 2022 capital expenditure estimate.