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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Flexsteel Industries, Inc.    FLXS

FLEXSTEEL INDUSTRIES, INC.

(FLXS)
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FLEXSTEEL INDUSTRIES : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

10/30/2020 | 02:21pm EST

GENERAL:

The following analysis of the results of operations and financial condition of the Company should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this quarterly report on Form 10-Q.

Statement Regarding the Impact of the COVID-19 Pandemic

The World Health Organization ("WHO") on March 11, 2020 declared novel coronavirus 2019 ("COVID-19") a global pandemic. In response to this declaration, the Company has taken the following actions to maneuver the current economic landscape;

?Employees that can perform work outside of the workplace are working from home,

?Suspension of the Company's 401K match effective June 1, 2020 through the end of the calendar year,

?Temporary 50% reduction of cash compensation for the Company's Board of Directors through October 1, 2020,

?Temporary 25% reduction of salary compensation for the Company's Chief Executive Officer and Chief Financial Officer / Chief Operating Officer through October 1, 2020,

?Elimination of all non-essential expenses and capital expenditures; and

?Negotiated with vendors to extend payment terms.

During the three months ended September 30, 2020, we have seen improvement in our business conditions as retailers have reopened and orders have increased, however, we continue to see supply chain challenges faced by the furniture industry due to labor shortages specifically in Asia, limited availability of ocean containers, and inflationary pressures in key materials. The COVID-19 pandemic remains fluid and the extent of the impact to our business may be significant, however, we are unable to predict the extent or nature of these impacts at this time.

CRITICAL ACCOUNTING POLICIES:

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", included in our 2020 annual report on Form 10-K.

Overview


The following table has been prepared as an aid in understanding the Company's
results of operations on a comparative basis for the three months ended
September 30, 2020 and 2019. Amounts presented are percentages of the Company's
net sales.

                                                    Three Months Ended
                                                       September 30,
                                                    2020            2019
Net sales                                          100.0 %         100.0 %
Cost of goods sold                                  78.3            82.8
Gross margin                                        21.7            17.2
Selling, general and administrative                 13.5            17.4
Restructuring expense                                1.3             6.0
Gain on disposal of assets due to restructuring    (0.6)          (18.9)
Operating income                                     7.5            12.7
Other income                                         0.0             0.1
Income before income taxes                           7.6            12.8
Income tax provision                                 3.9             3.2
Net income                                           3.7 %           9.6 %

Results of Operations for the Quarter Ended September 30, 2020 vs. 2019

Net sales were $105.2 million for the quarter ended September 30, 2020 compared to net sales of $100.3 million in the prior year quarter, an increase of 4.9%. The increase in sales of $4.9 million was primarily driven by $11.4 million related to home furnishing products sold through retailers and $4.6 million for home furnishing products sold through e-commerce channels due to increased

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demand, partially offset by a decline of $11.1 million primarily due to the exit from our Vehicle Seating and Hospitality product lines during the fourth quarter of fiscal 2020.

Gross margin as a percent of net sales for the quarter ended September 30, 2020 was 21.7%, compared to 17.2% for the prior year quarter, an increase of 450 basis points ("bps"). The 450-bps increase was primarily due to structural cost reductions, operational efficiencies and fixed cost leverage due to higher sales volume as compared to the prior year quarter.

Selling, general and administrative ("SG&A") expenses decreased $3.3 million in the quarter ended September 30, 2020 compared to the prior year quarter. As a percentage of net sales, SG&A was 13.5% in the quarter ended September 30, 2020 compared to the prior year quarter of 17.4%. The decrease in SG&A was primarily due to a reduction in salaries and wages due to cost saving measures taken during the fourth quarter of fiscal 2020 and continued through the three months ended September 30, 2020 in response to COVID-19 pandemic, coupled with decreased selling and travel expenses.

During the quarter ended September 30, 2020, we incurred $1.4 million of restructuring expenses primarily for facility closures, professional fees, and employee termination costs as part of our previously announced comprehensive transformation program. See Note 4, Restructuring, of the Notes to Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q for more information.

In August 2020, we completed the sale of one of our facilities in Harrison, Arkansas, resulting in net proceeds of $0.7 million and a gain of $0.7 million.

Income tax expense was $4.1 million, or an effective rate of 51.3%, and $3.2 million, or an effective rate of 25.2% during the quarter ended September 30, 2020 and September 30, 2019, respectively. The increase in the Company's effective tax rate compared to the prior year quarter was primarily due to the Company's prior expectation during the quarter ended June 30, 2020 that it would generate a net operating loss for tax purposes during the fiscal year ended June 30, 2021, and the net operating loss would be carried back up to five preceding taxable years at prior years' statutory rates as provided by the Coronavirus Aid, Relief, and Economic Security Act. The Company now expects to generate a net operating profit for tax purposes during the fiscal year ended June 30, 2021, so certain deferred tax assets were remeasured to the current statutory rate of 21% while other deferred tax assets are no longer expected to be realizable and, as a result, the Company recorded an additional tax expense of $2.1 million during the quarter. The effective tax rate for the remaining nine months of the fiscal year ending June 30, 2021 is expected to be 25% to 26%.

Net income was $3.9 million, or $0.49 per diluted share for the quarter ended September 30, 2020, compared to net income of $9.6 million, or $1.17 per diluted share in the prior year quarter.

Liquidity and Capital Resources

Working capital (current assets less current liabilities) at September 30, 2020 was $127.8 million compared to $128.4 million at June 30, 2019. The $0.6 million decrease in working capital was due to a decrease in cash of $11.7 million primarily due $9.0 million share repurchases during the quarter and an increase in trade accounts payable of $1.1 million, partially offset by $5.2 million increase in inventory due to inventory build and a $7.6 million increase in trade receivables. Capital expenditures are estimated to be in the range of $3.0 million to $4.0 million for the fiscal year ending June 30, 2021.


A summary of operating, investing and financing cash flow is shown in the
following table:

                                                    Three Months Ended
                                                      September 30,
(in thousands)                                       2020        2019
Net cash used in operating activities             $   (2,186)$ (3,319)
Net cash provided by investing activities                 319     19,113
Net cash used in financing activities                 (9,783)    (1,805)

(Decrease) Increase in cash and cash equivalents $ (11,650)$ 13,989

Net cash used in operating activities

For the quarter ended September 30, 2020, net cash used in operating activities was $2.2 million, which primarily consisted of net income of $3.9 million, adjusted for non-cash depreciation of $1.4 million, gain from the sale of capital assets of $0.6 million, change in deferred income taxes of $2.1 million, and non-cash stock based compensation of $1.0 million. Net cash used in operating assets and liabilities was $9.8 million. The cash used in operating assets and liabilities of $9.8 million, was primarily due to an increase in trade receivables of $7.5 million, an increase in inventory of $5.2 million, and an increase in other current assets of $2.3 million, partially offset by an increase in accrued liabilities of $3.9 million and accounts payable of $1.1 million.

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For the quarter ended September 30, 2019, net cash used in operating activities was $3.3 million, which primarily consisted of net income of $9.6 million, non-cash depreciation of $2.5 million and a gain from the sale of capital assets of $18.9 million, coupled with net cash provided in operating assets and liabilities of $2.4 million. The cash provided in operating assets and liabilities of $2.4 million, was primarily due to a decline in trade receivables of $2.1 million and other current assets of $7.5 million, and a decline in accounts payable and accrued liabilities of $3.8 million and $3.2 million, respectively. The decline in other current assets was primarily driven by a tax refund of $4.6 million.

Net cash provided by investing activities

For the quarter ended September 30, 2020, net cash provided by investing activities was $0.3 million, primarily due to proceeds of $0.7 million for the sale of one of our Harrison, Arkansas facilities, partially offset by capital expenditures of $0.4 million.

Net cash provided by investing activities was $19.1 million for the quarter ended September 30, 2019, primarily due to proceeds of $19.6 million from the sale of our Riverside, California facility, partially offset by capital expenditures of $0.5 million.

Net cash used in financing activities

For the quarter ended September 30, 2020, net cash used in financing activities was $9.8 million, primarily due to $9.0 million for treasury stock purchases and dividends paid of $0.5 million.

For the quarter ended September 30, 2019, net cash used in financing activities was $1.8 million primarily due to dividends paid of $1.7 million.

Line of Credit

On August 28, 2020, we entered into a new two-year secured $25.0 million revolving line of credit with Dubuque Bank and Trust Company, with interest of 1.50% plus LIBOR, subject to a floor of 3.00%. The revolving line of credit is secured by essentially all of the Company's assets, excluding real property and requires the Company to maintain compliance with certain financial and non-financial covenants. The revolving line of credit matures on August 28, 2022. There was no outstanding amount under the revolving line of credit as of September 30, 2020.

Letters of credit outstanding at Wells Fargo Bank N.A. ("Wells") as of September 30, 2020, totaled $1.2 million, of which $1.3 million of the Company's cash held at Wells is pledged as collateral.

Contractual Obligations

As of September 30, 2020, there have been no material changes to our contractual obligations presented in our Annual Report on Form 10-K for the year ended June 30, 2020.

© Edgar Online, source Glimpses

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