# Flexsteel Industries Inc: Form 10-Q for the period ended Sep 30, 2023

- Company: [Flexsteel Industries Inc](/companies/flxs.md) (CIK 37472)
- Form: 10-Q
- Filed: 2023-11-01
- Accepted by EDGAR: Nov 1, 2023, 17:15 ET
- Period: 2023-09-30
- Accession: 0000950170-23-057569
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/37472/000095017023057569/flxs-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/37472/000095017023057569/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $94.6m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-07-01 to 2023-09-30 | $76.2m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-07-01 to 2023-09-30 | $18.4m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2023-07-01 to 2023-09-30 | $16.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | $1.9m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $570.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $596.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | $752.0k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.14 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.15 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 5,375,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2023-07-01 to 2023-09-30 | −$1.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2023-07-01 to 2023-09-30 | $1.4m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2023-07-01 to 2023-09-30 | $879.0k | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2023-09-30 | $3.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $165.2m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $284.9m | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $46.8m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-30 | $143.5m | us-gaap:Liabilities |
| Shareholders' equity | at 2023-09-30 | $141.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 10,336 characters.

### 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.

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 2023 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, 2023 and 2022. The amounts presented are percentages of the Company’s net sales.

|  | Three Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Net sales | 100.0% | 100.0% |
| Cost of goods sold | 80.5 | 84.0 |
| Gross margin | 19.5 | 16.0 |
| Selling, general and administrative expenses | 17.4 | 15.2 |
| Other expense | — | 0.4 |
| Operating income | 2.1 | 0.4 |
| Interest expense | 0.6 | 0.3 |
| Income before income taxes | 1.5 | 0.1 |
| Income tax provision (benefit) | 0.6 | (0.2) |
| Net income and comprehensive income | 0.9% | 0.3% |

#### Results of Operations for the Quarter Ended September 30, 2023 vs. 2022

Net sales were $94.6 million for the quarter ended September 30, 2023, compared to net sales of $95.7 million in the prior year quarter, a decrease of (1.1%). The decrease was driven by lower sales in home furnishings products sold through retail stores of ($2.2) million, or (2.6%), led by a reduction of ($7.1) million due to the elimination of ocean freight surcharges which was partially offset by unit volume and product mix. Sales of products sold through e-commerce channels increased by $1.1 million, or 10.7%, compared to the first quarter of the prior year.

Retail home furnishings backlog was $48 million as of the quarter ended September 30, 2023, a decrease of (14.3%) compared to $56 million home furnishings backlog in the prior year quarter, mainly due to the Company’s focus on reducing manufactured backlog down to 3-5 week lead times.

Gross margin as a percent of net sales for the quarter ended September 30, 2023, was 19.5%, compared to 16.0% for the prior year quarter, an increase of 350 basis points (“bps”). The 350-bps increase was primarily due to cost control and material cost savings initiatives.

Selling, general and administrative (“SG&A”) expenses increased $1.9 million or 13.0% to $16.5 million in the first quarter ended September 30, 2023, as compared to $14.6 million in the prior year quarter. As a percentage of net sales, SG&A was 17.4% in the quarter ended September 30, 2023 compared to 15.2% of net sales in the prior year quarter. The 220-bps increase was due to investments in growth initiatives for the quarter ended September 30, 2023.

Income tax expense was $0.6 million, or an effective rate of 44.2% for the quarter ended September 30, 2023, compared to an income tax benefit of ($0.2) million, or an effective rate of (175.5%) during the quarter ended September 30, 2022. For the quarter ended September 30, 2023, the effective tax rate differs from the statutory tax rate of 21% due to nondeductible stock compensation, state taxes and impact of foreign operations. The prior year’s effective tax rate was primarily impacted by adjustments related to uncertain tax positions.

Net income was $0.8 million, or $0.14 per diluted share for the quarter ended September 30, 2023, compared to net income of $0.3 million, or $0.05 per diluted share in the prior year quarter.

#### Liquidity and Capital Resources

Working capital (current assets less current liabilities) on September 30, 2023, was $118.3 million compared to $115.5 million on June 30, 2023. The $2.8 million increase in working capital was primarily due to a decrease in other current liabilities of ($4.7) million, a decrease in accounts payable of ($3.7) million, and an increase in other current assets of $2.8 million partially offset by a decrease in net trade receivables of ($6.6) million, a decrease in inventory of ($1.3) million, a decrease in cash of ($0.4) million, and an increase of operating lease liabilities of $0.1 million. Refer to discussion of working capital changes below, under *Net cash (used in) provided by operating activities*. Capital expenditures were $1.4 million during the three months ended September 30, 2023.

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

*(in thousands)*

|  | Three Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Net cash (used in) provided by operating activities | $(1,781) | $12,994 |
| Net cash (used in) investing activities | (1,355) | (1,878) |
| Net cash provided by (used in) financing activities | 2,744 | (9,329) |
| (Decrease) increase in cash and cash equivalents | $(392) | $1,787 |

### Net cash (used in) provided by operating activities

For the three months ended September 30, 2023, net cash used by operating activities was $1.8 million, was primarily due to a decrease in accrued liabilities of $4.5 million, a decrease in accounts payable of $3.7 million, a decrease in other current assets of $2.8 million, and a decrease in other assets of $1.4 million partially offset by an increase in trade receivables of $6.7 million, an increase in inventory of $1.3 million, net income of $0.8 million, and adjustments for non-cash items including depreciation of $0.9 million and stock-based compensation of $0.9 million.

For the three months ended September 30, 2022, net cash provided by operating activities was $13.0 million, which primarily consisted of net income of $0.3 million, adjusted for non-cash items including depreciation of $1.1 million, and stock-based compensation of $0.8 million. Net cash provided by operating assets and liabilities was $10.8 million and was primarily due to a decrease in inventories of $19.8 million, and a decrease in trade receivables of $7.2 million, and an increase in accrued liabilities of $3.0 million, partially offset by a decrease in payables of $10.8 million, an increase in other current assets of $8.2 million, and a decrease in other long-term liabilities of $0.3 million.

### Net cash (used in) investing activities

For the three months ended September 30, 2023, net cash used in investing activities was $1.4 million due to capital expenditures.

For the three months ended September 30, 2022, net cash used in investing activities was $1.9 million due to capital expenditures.

### Net cash provided by (used in) financing activities

For the three months ended September 30, 2023, net cash provided by financing activities was $2.7 million, due to proceeds from the line of credit of $101.3 million partially offset by payments on the line of credit of $96.6 million, dividends paid of $0.9 million, $0.6 million for tax payments on employee vested restricted shares netted with proceeds from the issuance of common stock, and $0.5 million for purchases of company stock.

For the three months ended September 30, 2022, net cash used by financing activities was $9.3 million, primarily due to proceeds from the line of credit of $88.1 million, offset by payments on the line of credit of $95.8 million, $0.4 million for treasury stock purchases, dividends paid of $0.9 million, and $0.3 million for tax payments on employee vested restricted shares netted with proceeds from the issuance of common stock.

#### Line of Credit

On September 8, 2021, the Company, as the borrower, entered into a credit agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association (the “Lender”), and the other lenders party thereto. The Credit Agreement has a five-year term and provides for up to an $85 million revolving line of credit. Subject to certain conditions, the Credit Agreement also provides for the issuance of letters of credit in an aggregate amount up to $5 million which, upon issuance, would be deemed advances under the revolving line of credit.

Proceeds of borrowings were used to refinance all indebtedness owed to a prior lender and for working capital purposes. The Company’s obligations under the Credit Agreement are secured by substantially all its assets, excluding real property. The Credit Agreement contains customary representations, warranties, and covenants, including a financial covenant to maintain a fixed coverage ratio of not less than 1.00 to 1.00. In addition, the Loan Agreement places restrictions on the Company’s ability to incur additional indebtedness, to create liens or other encumbrances, to sell or otherwise dispose of assets, and to merge or consolidate with other entities. As of September 30, 2023, management believes the Company was in compliance with all covenants.

On April 18, 2022, the Company, as the borrower, entered into a first amendment to the September 8, 2021, Credit Agreement (“First Amendment to the Credit Agreement”), with the Lender and the lenders thereto. The amendment to the Credit Agreement changed the definition of the term ‘Payment Conditions’ and further defined default or event of default and the calculation of the Fixed Charge Coverage Ratio.

Subject to certain conditions, borrowings under the Credit Agreement initially bore interest at LIBOR plus 1.25% or 1.50% per annum. On May 24, 2023, the Company entered into a second amendment to the Credit Agreement ("Second Amendment to the Credit Agreement") with the lender to transition the applicable interest rate from LIBOR to Secured Overnight Financing Rate ("SOFR"). Effective as of the date of the Second Amendment to the Credit Agreement, borrowings under the amended Credit agreement bear interest at SOFR plus 1.36% to 1.61%, or an effective interest rate of 6.68%, on September 30, 2023.

As of September 30, 2023, there was $33.0 million outstanding under the Credit Agreement, exclusive of fees and letters of credit.

Letters of credit outstanding with the Lender as of September 30, 2023, totaled $1.1 million.

#### Contractual Obligations

As of September 30, 2023, 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, 2023.

## Market risk

As filed, 1,916 characters.

*General –* Market risk represents the risk of changes in the value of a financial instrument, derivative or non-derivative, caused by fluctuations in interest rates, foreign exchange rates and equity prices. As discussed below, management of the Company does not believe that changes in these factors could cause material fluctuations in the Company’s results of operations or cash flows. The ability to import furniture products can be adversely affected by political issues in the countries where suppliers are located, as well as disruptions associated with shipping distances and negotiations with port employees. Other risks related to furniture product importation include government imposition of regulations and/or quotas; duties, taxes or tariffs on imports; and significant fluctuation in the value of the U.S. dollar against foreign currencies. Any of these factors could interrupt supply, increase costs, and decrease earnings.

*Foreign Currency Risk –* During the quarters ended September 30, 2023 and 2022, the Company did not have sales but did have purchases and other expenses denominated in foreign currencies, primarily the Mexican Peso. The wages of our employees and certain other employee benefits and indirect costs related to our operations in Mexico are made in Pesos and subject to foreign currency fluctuation with the U.S. dollar. The Company does not employ any foreign currency hedges against this exposure. A negative shift in the value of the U.S. dollar against the Peso could increase the cost of our manufactured product. See “Risk Factors” in Item 1A in the most recent Annual Report on Form 10-K for further discussion.

*Interest Rate Risk –* The Company’s primary market risk exposure regarding financial instruments is changes in interest rates. On September 30, 2023, the Company had $33.0 million outstanding on its line of credit, exclusive of fees and letters of credit.

## Controls and procedures

As filed, 2,944 characters.

(a) *Evaluation of disclosure controls and procedures.* Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective as of September 30, 2023.

(b) *Changes in internal control over financial reporting.* During the quarter ended September 30, 2023, there were no significant changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended) that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

### Cautionary Statement Relevant to Forward-Looking Information for “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995

The Company and its representatives may from time to time make written or oral forward-looking statements concerning long-term goals or anticipated results of the Company, including statements contained in the Company’s filings with the Securities and Exchange Commission and its reports to stockholders.

Statements, including those in this Quarterly Report on Form 10-Q, which are not historical or current facts, are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.There are certain important factors that could cause the Company’s results to differ materially from those anticipated by some of the statements made herein. Investors are cautioned that all forward-looking statements involve risk and uncertainty. Some of the factors that could affect results are the cyclical nature of the furniture industry, supply chain disruptions, litigation, the effectiveness of new product introductions and distribution channels, the product mix of sales, pricing pressures, the cost of raw materials and fuel, changes in foreign currency values, retention and recruitment of key employees, actions by governments including laws, regulations, taxes and tariffs, the amount of sales generated and the profit margins thereon, competition (both U.S. and foreign), credit exposure with customers, participation in multi-employer pension plans, disruptions or security breaches to business information systems, the impact of any future pandemic, and general economic conditions. For further information regarding these risks and uncertainties, see the “Risk Factors” section in Item 1A of our most recent Annual Report on Form 10-K.

The Company specifically declines to undertake any obligation to publicly revise any forward-looking statements that have been made to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

## Risk factors

As filed, 185 characters.

There has been no material change in the risk factors set forth under Part 1, Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2023.

Filed Nov 1, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-057569. Last ingested by Listed: Oct 29, 2026, 05:20 ET. No prices; not investment advice.