FGI Industries Ltd. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; comparative periods are 2021. Unaudited consolidated results cover the kitchen and bath business. FGI completed its reorganization and IPO on January 27, 2022; pre-reorganization results are presented as if the business had operated on a standalone basis, which may not reflect actual standalone results.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $38.54m | $50.89m | $129.93m | $129.75m |
| Gross profit / margin | $8.04m / 20.9% | $8.13m / 16.0% | $23.99m / 18.5% | $24.63m / 19.0% |
| Operating income / margin | $1.67m / 4.3% | $1.81m / 3.6% | $4.09m / 3.1% | $7.01m / 5.4% |
| Net income | $1.27m | $1.40m | $2.97m | $6.87m |
| EPS, basic and diluted | $0.13 | $0.20 | $0.32 | $0.98 |
- Q3 revenue fell 24.3%, while nine-month revenue was essentially flat (+0.1%). Q3 weakness reflected lower sanitaryware sales, particularly pro-channel volume in the U.S. and Canada, and customer inventory destocking. Bath furniture revenue fell 62.9% in Q3; “Other” products, including shower systems and custom kitchen cabinetry, rose 60.8%.
- Q3 gross margin improved 490 basis points, attributed to pricing, favorable product mix and lower freight costs. Nine-month gross margin declined about 50 basis points. Nine-month operating income fell 41.7% and net income fell 56.7%; 2021 included $1.68m of PPP loan-forgiveness income.
- Operating expenses for the first nine months increased 12.9% to $19.90m, including higher general and administrative and R&D costs. Management cited public-company costs and a one-time IPO bonus as drivers of higher G&A.
- Management’s non-GAAP adjusted nine-month operating income was $4.34m versus $7.13m; adjusted net income was $3.18m versus $5.58m. These measures exclude specified items and should be considered alongside GAAP results.
Cash, debt and liquidity
- At September 30, cash was $5.98m, current assets $48.52m and current liabilities $32.80m, or working capital of approximately $15.71m. Working capital was $1.45m at December 31, 2021.
- Cash from operating activities was negative $6.33m for the nine months, compared with positive $0.86m a year earlier. The cash outflow was driven largely by an $18.26m reduction in accounts payable and a $3.90m increase in related-party prepayments/receivables, partly offset by collections and inventory reductions.
- Investing cash outflow was $1.35m; financing cash inflow was $10.72m, including $12.37m of net IPO proceeds and $1.65m of credit-facility repayments. Cash increased by $2.10m after a $0.94m adverse foreign-exchange effect.
- Short-term bank borrowings were $13.01m, down from $14.66m at year-end. The East West Bank facility is secured by subsidiary assets and personally guaranteed by a shareholder; its rate was 6.50% at quarter-end versus 3.50% at year-end. The facility was due December 21, 2022. Management expected a two-year renewal through December 2024, with an $18m borrowing base, to be executed by the end of November 2022.
- Operating lease liabilities totaled $9.73m. Management stated it believed available funds were sufficient for working capital and obligations over the next 12 months, while noting financing needs could change with business conditions or investment plans.
Outlook, risks and unusual items
- Management expected order patterns to normalize in coming quarters as channel inventories adjusted, and anticipated further gross-margin gains from favorable mix, pricing and freight conditions, along with a potential bath-furniture rebound. No quantified revenue or earnings guidance was provided.
- Supplier dependence is significant: Huida represented 51.4% of nine-month purchases and 72.4% of accounts payable at September 30. On September 28, 2022, an arbitrator ruled that the Huida cooperation agreement was not unlimited in duration and was being terminated. Huida remained a supplier; FGI intended to negotiate a replacement agreement, but gave no assurance terms could be agreed.
- Customer concentration is also material: two customers accounted for 43.2% of Q3 revenue, and three customers represented 57.8% of receivables at quarter-end. Management identified demand, inventory destocking, supply-chain disruption, inflation, material costs, foreign currency and dependence on suppliers/customers among relevant risks.
- FGI made a related-party property purchase agreement for approximately $1.97m; about $1.3m had been paid by September 30, with the balance paid in October. Related-party prepayments and other receivables were $5.72m on the balance sheet.
- The Ayers Bath-related litigation remained pending. The company stated that, based on information available, legal claims were not reasonably expected to materially harm results or financial condition. Management reported disclosure controls were effective and no material internal-control changes during the quarter.
Key facts for investors to verify
- Whether the East West Bank renewal was executed on the expected terms and before the December 2022 maturity.
- Whether FGI secured a replacement Huida agreement, and the effect of losing the prior exclusivity and intellectual-property protections.
- Whether customer destocking and demand weakness continued, particularly in bath furniture and the U.S./Canada pro channel.
- Whether operating cash flow improved after the substantial accounts-payable decline and related-party advances.
- The terms, rationale and ongoing balances of related-party transactions, including the property purchase.