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 2020 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 and nine months ended March 31, 2021, 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 limited availability of ocean containers and significant
increases in ocean container rates, limited availability and inflationary
pressures in key materials, and labor shortages both in Asia and the United
States. 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 and nine months ended
March 31, 2021 and 2020. Amounts presented are percentages of the Company's net
sales.
Three Months Ended Nine Months Ended
March 31, March 31,
2021 2020 2021 2020
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 80.5 86.0 79.5 84.4
Gross margin 19.5 14.0 20.5 15.6
Selling, general and
administrative 13.8 20.4 14.4 18.4
Restructuring expense 0.4 2.4 0.8 4.5
Gain on disposal of assets
due to restructuring - (0.3) (1.7) (6.4)
Operating income (loss) 5.4 (8.4) 7.0 (0.9)
Interest expense - 0.0 - 0.0
Other income 0.0 0.1 0.1 0.1
Income (loss) before income
taxes 5.4 (8.3) 7.1 (0.8)
Income tax provision
(benefit) 1.3 (3.0) 2.1 (0.4)
Net income (loss) 4.1 % (5.3) % 5.0 % (0.4) %
Results of Operations for the Quarter Ended March 31, 2021 vs. 2020
Net sales were $118.4 million for the quarter ended March 31, 2021 compared to
net sales of $98.8 million in the prior year quarter, an increase of 19.8%. The
increase in sales of $19.6 million was primarily driven by $26.5 million related
to home furnishing products sold through retailers and $2.8 million for home
furnishing products sold through e-commerce channels, partially offset by a
decline of $9.7 million primarily due to the exit from our Vehicle Seating and
Hospitality product lines during the fourth quarter of fiscal
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2020. Net sales growth in our home furnishing products were virtually in all
product categories due to demand and record backlog from the end of our second
quarter of fiscal year 2021 and continuing throughout the third quarter of
fiscal year 2021.
Gross margin as a percent of net sales for the quarter ended March 31, 2021 was
19.5%, compared to 14.0% for the prior year quarter, an increase of 550 basis
points ("bps"). The 550-bps increase was primarily due to structural cost
reductions, operational efficiencies, fixed cost leverage due to higher sales
volume as compared to the prior year quarter and lower inventory reserve due to
demand.
Selling, general and administrative ("SG&A") expenses decreased $3.8 million in
the quarter ended March 31, 2021 compared to the prior year quarter. The decline
in SG&A expenses was primarily due a $4.1 million bad debt expense in the prior
year driven by a customer bankruptcy. As a percentage of net sales, SG&A was
13.8% in the quarter ended March 31, 2021 compared to the prior year quarter of
20.4%. The 660 bps decline compared to the prior year quarter was driven largely
by a 350 bps decline due to higher bad debt expenses in the prior year quarter,
with the remaining decline primarily due to cost leverage gained from higher
sales.
During the quarter ended March 31, 2021, we incurred $0.5 million of
restructuring expenses primarily for on-going utilities and maintenance costs
for our facilities listed as held for sale. See Note 4, Restructuring, of the
Notes to Consolidated Financial Statements, included in this Quarterly Report on
Form 10-Q for more information.
Income tax expense was $1.5 million, or an effective rate of 23.9%, and income
tax benefit of $3.0 million, or an effective rate of 35.9% during the quarter
ended March 31, 2021 and March 31, 2020, respectively.
Net income was $4.8 million, or $0.67 per diluted share for the quarter ended
March 31, 2021, compared to net loss of $5.3 million, or ($0.66) per diluted
share in the prior year quarter.
Results of Operations for the Nine Months Ended March 31, 2021 vs. 2020
Net sales were $342.8 million for the nine months ended March 31, 2021 compared
to net sales of $302.1 million in the prior year nine-month period, an increase
of 13.5%. The increase in sales of $40.6 million was primarily driven by $60.2
million related to home furnishing products sold through retailers and $9.2
million for home furnishing products sold through e-commerce channels due to the
same factors discussed above for the third quarter, partially offset by a
decline of $28.8 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 nine months ended March 31, 2021
was 20.5%, compared to 15.6% for the prior year nine-month period, an increase
of 490 bps. The 490 bps increase was primarily driven by the same factors
discussed above for the quarter ended March 31, 2021.
Selling, general and administrative expenses decreased $6.3 million in the nine
months ended March 31, 2021 compared to the prior year nine-month period. As a
percentage of net sales, SG&A was 14.4% in the nine months ended March 31, 2021
compared to the prior year nine-month period of 18.4%. The 400 bps decline
compared to the prior year nine-month period was primarily due to cost leverage
gained from higher sales, reductions in non-essential spending due to COVID-19,
lower depreciation expense due to assets being held for sale and lower bad debt
expense as discussed above during the quarter ended March 31, 2021.
Restructuring expenses were $2.7 million during the nine months ended March 31,
2021, primarily for on-going utilities and maintenance costs for our facilities
listed as held for sale, professional fees, and employee termination costs as
part of our previously announced 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.
During the nine months ended March 31, 2021, we completed the sale of our
Dubuque, Iowa, Lancaster, Pennsylvania, and one of our Harrison, Arkansas
facilities, resulting in total net proceeds of $16.4 million, and a total gain
of $5.9 million.
Income tax expense was $7.2 million, or an effective rate of 29.4%, during the
nine months ended March 31, 2021 compared to income tax benefit of $1.3 million
in the prior year nine-month period, or an effective tax rate of 54.5%.
Net income was $17.2 million, or $2.28 per diluted share for the nine months
ended March 31, 2021, compared to net loss of $1.1 million, or $0.14 per diluted
share in the prior year nine-month period.
Liquidity and Capital Resources
Working capital (current assets less current liabilities) at March 31, 2021 was
$121.0 million compared to $128.4 million at June 30, 2020. The $7.3 million
decrease in working capital was due to a decrease in cash of $31.2 million,
decline in other current assets of $8.3 million primarily due to a tax refund, a
decline of $11.7 million in assets held for sale due to sale of facilities
during the fiscal year, and an increase in accounts payable of $4.1 million,
partially offset by a $12.0 million increase in trade receivables, $38.9 million
increase
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in inventory. The decline in cash of $31.2 million was primarily due to $28.5
million share repurchases, cash used in operating activities of $15.4 million,
partially offset by $18.5 million proceeds from the sale of the Company's
Dubuque, IA, Lancaster, PA and Harrison, AR, facilities. Capital expenditures
are estimated to be in the range of $2.5 million to $3.0 million for the fiscal
year ending June 30, 2021.
A summary of operating, investing and financing cash flow is shown in the
following table:
Nine Months Ended
March 31,
(in thousands) 2021 2020
Net cash (used in) provided by operating activities $ (15,401) $ 13,888
Net cash provided by investing activities
16,569 17,202
Net cash (used in) financing activities (32,394) 9,203
(Decrease) increase in cash and cash equivalents $ (31,226) $ 40,293
Net cash (used in) provided by operating activities
For the nine months ended March 31, 2021, net cash used in operating activities
was $15.4 million, which primarily consisted of net income of $17.2 million,
adjusted for non-cash items including, depreciation of $3.9 million, gain from
the sale of capital assets of $5.9 million, change in deferred income taxes of
$2.1 million, stock-based compensation of $2.8 million and bad debt expense of
$1.3 million. Net cash used in operating assets and liabilities was $36.6
million. The cash used in operating assets and liabilities of $36.6 million, was
primarily due to an increase in trade receivables of $13.3 million due to higher
sales, an increase in inventory of $38.9 million due to inventory build for the
fourth quarter and beginning of fiscal 2022, partially offset by a decline in
other current assets primarily due to receipt of income tax refund of $10.4
million, an increase in accounts payable of $4.1 million and accrued liabilities
of $1.2 million.
For the nine months ended March 31, 2020, net cash provided by operating
activities was $13.9 million, which primarily consisted of net loss of $1.1
million, adjusted for non-cash depreciation of $6.7 million, gain from the sale
of capital assets of $19.3 million, change in deferred income taxes of $7.5
million, non-cash stock based compensation of $3.9 million and bad debt expense
of $4.3 million. Net cash provided in operating assets and liabilities was $13.4
million. The cash provided in operating assets and liabilities of $13.4 million,
was primarily due to a decline in inventory of $18.6 million, coupled with an
increase in accounts payable of $4.5 million, partially by a reduction in
accrued liabilities of $7.1 million and an increase in other current asset of
$2.0 million.
Net cash provided by investing activities
For the nine months ended March 31, 2021, net cash provided by investing
activities was $16.6 million, primarily due to proceeds of $18.5 million for the
sale of our Dubuque, IA and Lancaster, PA, facilities and one of our Harrison,
Arkansas facilities, partially offset by capital expenditures of $2.0 million.
For the nine months ended March 31, 2020, net cash provided by investing
activities was $17.2 million, due to proceeds of $20.5 million from the sale of
our Riverside, California facility and other capital assets, partially offset by
capital expenditures of $3.3 million.
Net cash (used in) provided by financing activities
For the nine months ended March 31, 2021, net cash used in financing activities
was $32.4 million, primarily due to $28.5 million for treasury stock purchases,
dividends paid of $2.6 million and $1.3 million for tax payments on employee
vested restricted shares.
For the nine months ended March 31, 2020, net cash provided by financing
activities was $9.2 million, primarily due to $15.0 million of borrowings on our
lines of credit, partially offset by dividends paid of $5.3 million and $0.6
million for tax payments on employee vested restricted shares.
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
March 31, 2021.
Letters of credit outstanding at Wells Fargo Bank N.A. ("Wells") as of March 31,
2021, totaled $1.1 million, of which $1.2 million of the Company's cash held at
Wells is pledged as collateral.
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Contractual Obligations
As of March 31, 2021, 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.
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FLEXSTEEL INDUSTRIES, INC. 
