Flexsteel(FLXS) - 2023 Q3 - Quarterly Report

Part I – Financial Information This section presents unaudited consolidated financial statements, management's discussion, market risk, and controls for the periods ended March 31, 2023 Item 1. Financial Statements This section presents unaudited consolidated financial statements, including balance sheets, income, equity, cash flows, and detailed notes for periods ended March 31, 2023 Consolidated Balance Sheets This section details the company's financial position, including assets, liabilities, and shareholders' equity, as of March 31, 2023, and June 30, 2022 | Metric | March 31, 2023 (in thousands) | June 30, 2022 (in thousands) | | :-------------------------------- | :----------------------------- | :----------------------------- | | ASSETS | | | | Cash and cash equivalents | $2,409 | $2,184 | | Trade receivables, net | $36,507 | $41,106 | | Inventories | $113,311 | $141,212 | | Total current assets | $160,415 | $190,068 | | Property, plant and equipment, net | $38,405 | $38,543 | | Operating lease right-of-use assets | $67,024 | $38,189 | | TOTAL ASSETS | $267,787 | $268,741 | | LIABILITIES | | | | Accounts payable - trade | $25,584 | $32,147 | | Total current liabilities | $53,777 | $64,627 | | Operating lease liabilities, less current maturities | $62,902 | $33,992 | | Lines of credit | $17,727 | $37,739 | | Total liabilities | $134,984 | $137,181 | | SHAREHOLDERS' EQUITY | | | | Total shareholders' equity | $132,803 | $131,560 | | TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $267,787 | $268,741 | - Total assets decreased slightly from $268.7 million on June 30, 2022, to $267.8 million on March 31, 2023. Current assets saw a notable decrease from $190.1 million to $160.4 million, primarily driven by a reduction in inventories and trade receivables[7] - Total liabilities decreased from $137.2 million to $135.0 million, mainly due to a reduction in lines of credit and accounts payable, partially offset by an increase in operating lease liabilities[7] Consolidated Statements of Income and Comprehensive Income This section presents the company's financial performance, including net sales, gross margin, operating income, and net income for the periods ended March 31, 2023 | Metric (in thousands, except per share) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Nine Months Ended March 31, 2023 | Nine Months Ended March 31, 2022 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Net sales | $99,052 | $140,408 | $287,873 | $419,765 | | Gross margin | $18,645 | $22,071 | $49,832 | $55,008 | | Operating income | $2,116 | $5,814 | $6,306 | $3,051 | | Net income and comprehensive income | $1,475 | $5,316 | $4,617 | $2,124 | | Basic EPS | $0.28 | $0.84 | $0.88 | $0.32 | | Diluted EPS | $0.28 | $0.82 | $0.85 | $0.31 | - Net sales decreased by 29.4% for the three months ended March 31, 2023, and by 31.4% for the nine months ended March 31, 2023, compared to the prior year periods[9] - Net income for the three months ended March 31, 2023, was $1.5 million ($0.28 diluted EPS), a significant decrease from $5.3 million ($0.82 diluted EPS) in the prior year. For the nine months, net income increased to $4.6 million ($0.85 diluted EPS) from $2.1 million ($0.31 diluted EPS) in the prior year[9] Consolidated Statements of Changes in Shareholders' Equity This section details changes in shareholders' equity, including par value, paid-in capital, treasury stock, and retained earnings, for the period ended March 31, 2023 | Metric (in thousands) | Balance on June 30, 2022 | Balance on March 31, 2023 | | :-------------------- | :----------------------- | :------------------------ | | Total Par Value of Common Shares ($1 Par) | $8,190 | $8,247 | | Additional Paid-In Capital | $34,467 | $36,463 | | Treasury Stock | $(66,372) | $(69,340) | | Retained Earnings | $155,275 | $157,433 | | Total Shareholders' Equity | $131,560 | $132,803 | - Total shareholders' equity increased from $131.6 million on June 30, 2022, to $132.8 million on March 31, 2023. This increase was primarily driven by net income and stock-based compensation, partially offset by treasury stock purchases and cash dividends[11] - Treasury stock purchases amounted to $2.97 million for the nine months ended March 31, 2023, contributing to the increase in the negative balance of treasury stock[11] Consolidated Statements of Cash Flows This section outlines cash flows from operating, investing, and financing activities for the nine months ended March 31, 2023 | Cash Flow Activity (in thousands) | Nine Months Ended March 31, 2023 | Nine Months Ended March 31, 2022 | | :-------------------------------- | :------------------------------- | :------------------------------- | | Net cash provided by (used in) operating activities | $30,462 | $(3,909) | | Net cash (used in) investing activities | $(3,597) | $(930) | | Net cash (used in) provided by financing activities | $(26,640) | $6,900 | | Increase in cash and cash equivalents | $225 | $2,061 | | Cash and cash equivalents at end of the period | $2,409 | $3,403 | - Net cash provided by operating activities significantly improved to $30.5 million for the nine months ended March 31, 2023, compared to net cash used of $3.9 million in the prior year, primarily due to a decrease in inventories and trade receivables[13][86] - Net cash used in financing activities was $26.6 million for the nine months ended March 31, 2023, primarily due to net payments on lines of credit, treasury stock purchases, and dividends paid[13][89] Notes to Consolidated Financial Statements This section provides detailed explanations and disclosures for financial statements, covering accounting policies, inventory, leases, and other significant items 1. Basis of Presentation and Description of Business This note describes Flexsteel Industries, Inc. as a major US furniture manufacturer, importer, and marketer - Flexsteel Industries, Inc. is a major manufacturer, importer, and marketer of furniture products in the United States, offering a wide range of furniture including sofas, chairs, tables, and bedroom furniture, distributed through e-commerce and a dealer sales force[16] 2. Inventories This note details the composition and changes in the company's inventory, including raw materials, work in process, and finished goods | Inventory Category (in thousands) | March 31, 2023 | June 30, 2022 | | :-------------------------------- | :------------- | :------------ | | Raw materials | $14,980 | $16,405 | | Work in process and finished parts | $4,323 | $5,534 | | Finished goods | $94,008 | $119,273 | | Total | $113,311 | $141,212 | - Total inventories decreased by $27.9 million from $141.2 million on June 30, 2022, to $113.3 million on March 31, 2023, primarily driven by a reduction in finished goods[18][83] 3. Assets Held for Sale This note provides information on assets actively marketed for sale from a prior restructuring plan, as of March 31, 2023 - The Company continues to actively market assets located at its Starkville, Mississippi facility, which were part of a fiscal year 2020 restructuring plan. The net book value of these assets held for sale was $616 thousand as of March 31, 2023[19][20] 4. Leases This note outlines the company's ASC 842 lease accounting, including new agreements and associated expenses - The Company accounts for leases under ASC 842, recognizing right-of-use assets and lease liabilities. New lease agreements include a showroom in Las Vegas (4-year term starting Oct 2022) and a manufacturing facility in Mexicali, Mexico (12-year term starting Aug 2022)[21][26][27] | Lease Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Nine Months Ended March 31, 2023 | Nine Months Ended March 31, 2022 | | :-------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Operating lease expense | $2,700 | $1,805 | $8,066 | $5,015 | | Variable lease expense | $482 | $177 | $1,390 | $719 | | Total lease expense | $3,182 | $1,982 | $9,456 | $5,734 | | Cash paid for operating leases | | | $6,575 | $4,515 | | Right-of-use assets obtained | | | $35,305 | $16,814 | | Weighted-average remaining lease term (years) | | | 9.4 | 4.4 | | Weighted-average discount rate | | | 2.9% | 3.2% | 5. Restructuring This note details the completion of the company's transformation program, including product line exits, facility closures, and related costs - The Company substantially completed its comprehensive transformation program, including exiting Commercial Office, Hospitality, and Vehicle Seating product lines, and facility closures. Total restructuring expenses incurred over the two-year timeframe ended June 30, 2022, were $59.4 million, with no further charges anticipated[32][33][34] - A class action lawsuit related to plant closures was settled for $1.3 million, which was paid during the nine months ended March 31, 2023. All remaining costs associated with the restructuring program were paid during the quarter ended September 30, 2022[35][36] 6. Credit Arrangements This note describes the company's revolving line of credit, outstanding balance, interest rate, and covenant compliance - The Company has a five-year, $85 million revolving line of credit with Wells Fargo Bank, entered into on September 8, 2021. As of March 31, 2023, $17.7 million was outstanding under this agreement, with an effective interest rate of 6.1%[40][42] - The Credit Agreement includes customary covenants, including a financial covenant to maintain a fixed coverage ratio of not less than 1.00 to 1.00. Management believes the Company was in compliance with all covenants as of March 31, 2023[40][94] 7. Income Taxes This note presents effective tax rates and explains factors causing differences from the statutory rate | Period | Effective Tax Rate | | :-------------------------------- | :------------------- | | Three Months Ended March 31, 2023 | 21.0% | | Three Months Ended March 31, 2022 | 5.9% | | Nine Months Ended March 31, 2023 | 14.8% | | Nine Months Ended March 31, 2022 | 17.2% | - The effective tax rate for the nine months ended March 31, 2023, was 14.8%, differing from the statutory rate due to nondeductible stock compensation, state taxes, uncertain tax positions, and the reversal of valuation allowance associated with deferred tax assets[43] 8. Stock-Based Compensation This note details stock-based compensation expense, equity incentive plans, and unrecognized compensation for unvested awards | Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Nine Months Ended March 31, 2023 | Nine Months Ended March 31, 2022 | | :-------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Total stock-based compensation expense | $802 | $(631) | $2,472 | $1,551 | - Total stock-based compensation expense for the nine months ended March 31, 2023, was $2.5 million, an increase from $1.6 million in the prior year. The 2022 Equity Incentive Plan was approved, replacing prior plans, and 3,791 shares were granted under it in Q3 2023[47][48] - As of March 31, 2023, total unrecognized stock-based compensation related to unvested PSUs and RSUs was $2.7 million, expected to be recognized over a weighted-average period of 1.2 years[50] 9. Earnings Per Share This note provides basic and diluted earnings per share calculations, including shares outstanding and cash dividends | Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Nine Months Ended March 31, 2023 | Nine Months Ended March 31, 2022 | | :-------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Basic shares | 5,179 | 6,330 | 5,249 | 6,615 | | Diluted shares | 5,352 | 6,494 | 5,427 | 6,842 | | Anti-dilutive shares | 154 | 76 | 161 | 48 | | Cash dividends declared per common share | $0.15 | $0.15 | $0.45 | $0.45 | - Basic EPS for the three months ended March 31, 2023, was $0.28, down from $0.84 in the prior year. For the nine months, basic EPS increased to $0.88 from $0.32 in the prior year[9] 10. Commitments and Contingencies This note discusses the environmental remediation settlement and other legal proceedings, assessing their potential financial impact - The Company reached a settlement with the EPA and the State of Indiana for the Lane Street Groundwater Superfund Site, requiring a payment of $9.8 million. Following insurance proceeds, the Company recorded income of $2.8 million related to this settlement during the quarter ended December 31, 2022[61] - The Company is subject to various other legal proceedings but does not consider any currently pending matters to be material to its business or likely to result in a material effect on its consolidated operating results, financial condition, or cash flows[63] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of financial condition and results for the periods ended March 31, 2023, highlighting sales, margins, and liquidity General This subsection introduces management's discussion and analysis of the company's financial performance Critical Accounting Policies This subsection confirms no material changes to critical accounting policies and estimates from the prior annual report - There have been no material changes to the Company's critical accounting policies and estimates from those provided in the 2022 annual report on Form 10-K[65] Overview This subsection presents a high-level overview of key financial metrics as a percentage of net sales for the reported periods | Metric (% of Net Sales) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Nine Months Ended March 31, 2023 | Nine Months Ended March 31, 2022 | | :---------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Net sales | 100.0 % | 100.0 % | 100.0 % | 100.0 % | | Cost of goods sold | 81.2 % | 84.3 % | 82.7 % | 86.9 % | | Gross margin | 18.8 % | 15.7 % | 17.3 % | 13.1 % | | Selling, general and administrative expenses | 16.7 % | 11.6 % | 16.0 % | 12.5 % | | Operating income | 2.1 % | 4.1 % | 2.2 % | 0.7 % | | Net income and comprehensive income | 1.5 % | 3.8 % | 1.6 % | 0.5 % | Results of Operations for the Quarter Ended March 31, 2023 vs. 2022 This subsection analyzes financial performance for the three months ended March 31, 2023, focusing on sales, margins, and net income - Net sales decreased by 29.4% to $99.1 million, primarily due to a $36.6 million decrease in home furnishing products sold through retailers and a $4.7 million decrease through e-commerce channels, reflecting a return to pre-pandemic volumes and softer consumer demand[68] - Gross margin as a percentage of net sales increased by 310 basis points to 18.8%, driven by cost control initiatives, despite deleveraging of fixed costs due to lower sales volume[70] - Selling, general and administrative (SG&A) expenses increased by 1.2% to $16.5 million, and as a percentage of net sales, increased by 510 basis points to 16.7% due to lower sales volume[71][72] - Net income for the quarter was $1.5 million ($0.28 diluted EPS), down from $5.3 million ($0.82 diluted EPS) in the prior year quarter[75] Results of Operations for the Nine Months Ended March 31, 2023, vs. 2022 This subsection analyzes financial performance for the nine months ended March 31, 2023, focusing on sales, margins, and net income - Net sales decreased by 31.4% to $287.9 million, driven by a $117.5 million decrease in retail sales and a $14.4 million decrease in e-commerce sales, consistent with the quarterly trends[76] - Gross margin as a percentage of net sales increased by 420 basis points to 17.3%, reflecting effective cost control[77] - SG&A expenses decreased by $6.7 million in absolute terms, but as a percentage of net sales, increased by 350 basis points to 16.0% due to lower sales volume[78] - The Company recorded $2.8 million in income related to the environmental remediation settlement during the nine months ended March 31, 2023[79] - Net income for the nine months was $4.6 million ($0.85 diluted EPS), an increase from $2.1 million ($0.31 diluted EPS) in the prior year period[82] Liquidity and Capital Resources This subsection discusses working capital, cash flow activities, capital expenditures, and credit arrangements as of March 31, 2023 - Working capital decreased by $18.8 million to $106.6 million on March 31, 2023, primarily due to decreases in inventory and trade receivables, partially offset by decreases in accounts payable and environmental liability[83] | Cash Flow Summary (in thousands) | Nine Months Ended March 31, 2023 | Nine Months Ended March 31, 2022 | | :------------------------------- | :------------------------------- | :------------------------------- | | Net cash provided by (used in) operating activities | $30,462 | $(3,909) | | Net cash (used in) investing activities | $(3,597) | $(930) | | Net cash (used in) provided by financing activities | $(26,640) | $6,900 | | Increase in cash and cash equivalents | $225 | $2,061 | - Capital expenditures for the nine months ended March 31, 2023, were $3.6 million[83][88] - As of March 31, 2023, the Company had $17.7 million outstanding on its $85 million revolving line of credit with Wells Fargo Bank and was in compliance with all covenants[94][96] Contractual Obligations This subsection confirms no material changes to contractual obligations from the prior annual report on Form 10-K - There have been no material changes to the Company's contractual obligations as presented in its Annual Report on Form 10-K for the year ended June 30, 2022[97] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, including foreign currency and interest rate risks, and management's assessment General This subsection overviews factors affecting company results, such as industry cycles, supply chain, and costs - The Company's results can be affected by factors such as the cyclical nature of the furniture industry, supply chain disruptions, litigation, raw material and fuel costs, inflation, and competition[105] Foreign Currency Risk This subsection assesses the company's foreign currency exchange rate exposure, noting it is not considered significant - The market risk associated with currency exchange rates and prices is not considered significant, as the Company primarily has purchases and other expenses, but no sales, denominated in foreign currencies[99] Interest Rate Risk This subsection identifies interest rate changes as the primary market risk exposure for financial instruments - The Company's primary market risk exposure regarding financial instruments is changes in interest rates, with $17.7 million outstanding on its line of credit as of March 31, 2023[100] Item 4. Controls and Procedures This section confirms effective disclosure controls and procedures and reports no significant changes in internal control over financial reporting Evaluation of disclosure controls and procedures This subsection confirms the effectiveness of the company's disclosure controls and procedures as of March 31, 2023 - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of March 31, 2023[101] Changes in internal control over financial reporting This subsection reports no significant changes in internal control over financial reporting during the quarter ended March 31, 2023 - There were no significant changes in the Company's internal control over financial reporting during the quarter ended March 31, 2023, that materially affected or are reasonably likely to materially affect it[102] Cautionary Statement Relevant to Forward-Looking Information This subsection provides a cautionary statement regarding forward-looking information, highlighting risks and disclaiming revision obligations - The report contains forward-looking statements subject to risks and uncertainties, including the cyclical nature of the furniture industry, supply chain disruptions, litigation, and economic conditions. The Company explicitly declines any obligation to publicly revise these statements[104][105][106] Part II – Other Information This section includes disclosures on risk factors, unregistered equity sales, use of proceeds, exhibits, and official signatures Item 1A. Risk Factors This section states no material changes to risk factors previously disclosed in the Company's Annual Report on Form 10-K - No material changes have occurred in the risk factors set forth in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2022[107] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the share repurchase program, including authorization and common stock repurchase activity for the quarter ended March 31, 2023 - The Board of Directors approved a share repurchase program on January 20, 2022, authorizing the Company to purchase up to $30 million of common stock through January 19, 2025[108] | Period | Total Number of Shares Purchased | Average Price Paid per Share | Approximate Dollar Value of Shares that May Yet Be Purchased | | :-------------------------------- | :------------------------------- | :--------------------------- | :----------------------------------------------------------- | | Three months ended March 31, 2023 | 41,273 | $17.98 | $4,422,399 | Item 6. Exhibits This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including certifications and XBRL documents - Exhibits include certifications from the CEO and CFO (31.1, 31.2, 32) and various XBRL taxonomy documents (101.INS, 101.SCH, 101.CAL, 101.LAB, 101.DEF, 101.PRE, 104.Cover)[110] Signatures This section contains official signatures, confirming the due authorization and filing of the report by Flexsteel Industries, Inc - The report was signed on May 3, 2023, by G. Alejandro Huerta, Chief Financial Officer (Principal Financial & Accounting Officer) of Flexsteel Industries, Inc[115]