Flexsteel Industries, Inc. Reports Fiscal Fourth Quarter and Full Year 2020 Results
Flexsteel Industries, Inc. (“Flexsteel” or the “Company”), one of the largest manufacturers, importers and online marketers of residential furniture and products in the United States, reported fourth-quarter and full-year fiscal 2020 results. For the fourth quarter 2020, the Company reported net sales of $64.8 million and a net loss of $25.7 million. GAAP net loss per diluted share was ($3.23), compared to ($2.52) in the prior year quarter. Non-GAAP adjusted net income (loss) per diluted share was ($0.47), compared to ($0.54) in the prior year. GAAP to non-GAAP reconciliations follow the financial statements in this press release. For the full-year fiscal 2020, the Company reported net sales of $366.9 million and a net loss of $26.8 million, or ($3.37) per diluted share.
Net sales were $64.8 million for the quarter ended June 30, 2020 compared to net sales of $100.2 million in the prior year quarter, a decrease of 35.3%.
Residential net sales declined 28.7% compared to the prior year quarter. Home furnishings sales, sold primarily through retail stores, were $40.1 million, down $34.0 million or 46%, primarily due to the adverse impact of the COVID-19 pandemic. Home StylesTM products sold through e-commerce channels were $20.5 million, up $9.5 million or 86% versus the prior-year quarter.
Contract net sales fell 72.5%, resulting from the Company’s partial exit of its hospitality business earlier in the fiscal year, its recent exit from its non-core RV seating and remaining hospitality businesses in the fourth quarter, and the adverse sales impact from the COVID-19 pandemic.
For fiscal 2020, net sales were $366.9 million, compared to $443.6 million in fiscal 2019, a 17.3% decline. The lower sales in fiscal 2020 were a function of higher China tariffs, the COVID-19 pandemic, and the exit from the RV seating and remaining hospitality businesses. The decline was partially offset by an increase in the Company’s ready- to-assemble furniture sold through e-commerce, which grew 35.7% year-over-year, primarily driven by increased demand.
Operating Results for the Fourth Quarter Ended June 30, 2020
The Company’s fourth quarter financial results were impacted by a multitude of factors including: dramatic volume de-leverage of fixed costs due to the precipitous drop in sales from COVID-19 related store shutdowns; sizable cost inefficiencies from quickly closing plants and distribution centers during COVID-19 shutdowns, and then subsequently ramping operations back up; one-time costs associated with the exit from the RV and remaining hospitality businesses; closure of a distribution center, and one-time costs associated with its SKU rationalization efforts and the deep discounting required to sell these discontinued items.
The Company reported a net loss of $25.7 million or $3.23 per share for the quarter ended June 30, 2020, compared to a net loss of $19.9 million or $2.52 per share in the prior year quarter. The reported net loss included a $20.8 million pre-tax restructuring expense, a $3.0 million inventory impairment charge related to the Company’s exit from certain product lines, and a $2.9 million right-of-use asset impairment expense related to leases. Excluding these expenses (see attached non-GAAP disclosure), the non-GAAP adjusted net loss was $3.7 million, or $0.47 per diluted share in this fiscal fourth quarter as compared to a non-GAAP adjusted net loss of $4.3 million or $0.54 per diluted share in the fourth quarter last year.
Gross margin as a percent of net sales for the fiscal fourth quarter was 9.2% compared to 5.3% for the prior-year quarter. The key drivers of the 390 basis-point improvement in adjusted gross margin were a combination of a 720 basis-point benefit or ($4.7 million) lower inventory impairment due to the Company’s restructuring program, and a 440 basis points benefit ($2.9 million) valuation allowance on foreign VAT, and a 770 basis point detriment related to fixed cost deleverage from lower volume and operational inefficiencies related to closing and ramping up operations during COVID-19 related shutdowns.
Selling, general and administrative (“SG&A”) expenses were 25.9% of net sales in the fourth quarter of fiscal 2020 compared with 18.8% of net sales in the prior-year quarter. Approximately 440 basis points were due to lease impairments, 200 basis points for COVID-19 related costs and 110 basis points due to higher bad debt expenses.
Liquidity and COVID-19 Update
Due to continued uncertainties resulting from COVID-19, the Company implemented measures to enhance its liquidity position and improve working capital. During the fourth quarter of fiscal year 2020, the Company reduced its quarterly dividend from $0.22 per share to $0.05 per share. Temporary compensation measures implemented in April were extended through October 1, 2020, including a 25% salary reduction for the CEO and CFO/COO and 50% cash compensation reduction for the Board of Directors.
Working capital (current assets minus current liabilities) at June 30, 2020 was $128.4 million compared to $118.2 million at June 30, 2019. The $10.2 million increase in working capital was due to an increase in cash of $26.0 million, primarily attributable to proceeds from the sale of the Riverside, California facility of $20.5 million, an increase in assets held for sale of $12.3 million, an increase in other current assets of $6.6 million, and a decrease in restructuring liability of $4.2 million, partially offset by $23.1 million in inventory reduction as a result of inventory management and SKU rationalization activities, a decrease in trade receivables of $5.9 million due to lower sales, and an increase in accounts payable of $9.3 million. The Company took aggressive and decisive actions during the quarter to reduce costs and preserve cash, and as a result, ended the fourth quarter with a strong cash position of $48.2 million and no debt.
Capital expenditures for the twelve months ended June 30, 2020 were $3.7 million. During fiscal 2021, the Company anticipates spending $3 million to $4 million for capital expenditures. The Company believes it has adequate working capital to meet these requirements.
Fiscal 2020 Restructuring Expense
During the fiscal year ended June 30, 2020, the Company incurred $34.2 million of restructuring expense primarily for write-down of assets due to impairment, facility closures, professional fees, pension withdrawal liability and employee termination costs as part of Flexsteel’s previously announced comprehensive transformation program. The Company expects to incur approximately $2.0 million of on-going facility and transition restructuring expenses in fiscal 2021.
The Company reported a tax benefit of $5.6 million, or an effective rate of 17.8% during the fourth quarter compared to a tax benefit of $6.5 million in the prior year quarter, or an effective rate of 24.7%.
“Our nation is still in the grips of the COVID-19 pandemic that continues to inflict widespread damage on our well-being and economy. Like many companies, we felt its enormous impact on our fourth quarter sales and financial results. Due to state and local regulations, virtually all the brick and mortar stores of our retail partners were closed for varying periods of time, which greatly depressed sales demand. At the same time, we saw a healthy increase in our e-commerce sales, yet this gain was greatly overshadowed by the loss of in-store sales,” said Jerry Dittmer, President and CEO of Flexsteel Industries.
“As retail stores began to reopen around Memorial Day, we experienced a surge of sales related to pent-up consumer demand, which was sustained for several weeks in June. Overall, we have seen a consistent trend whereby sales demand has returned to or slightly above historical levels for most retail customers within 3-4 weeks of reopening their stores. In the near-term, a greater proportion of consumer discretionary spending appears to be shifting toward home furnishings and other home-related categories, presumably as spending falls in travel and other recreational categories impacted by COVID-19. We also believe the recent sales up-tick was partially related to pent-up demand from shutdowns across late March through early June, and may have been further buoyed by recent government stimulus. Once these two factors diminish, we expect that demand may moderate, but cannot predict to what level with any degree of certainty.
“While solid demand in June and July was encouraging, we are conservatively planning for sales order growth to recede late in the first quarter and for the remainder of calendar year 2020. This outlook could change dramatically in either direction depending on the unfolding situation with COVID-19, U.S. unemployment, consumer confidence, and future government stimulus programs.
“Right now, we are not in a position to provide any profit guidance not only due to sales uncertainty, but also due to several cost headwinds we are currently encountering that include: ocean container surcharges, wage rate increases, and Vietnam supplier capacity constraints.
“Despite the near-term sales uncertainty and profit headwinds, we remain confident in our ability to continue to preserve cash and effectively navigate a multitude of various economic scenarios. We also remain confident that the moves we’ve made to focus the organization on our core businesses, reduce complexity, upgrade talent, reset our cost structure, and position ourselves as an omni-channel leader in the furniture industry will accelerate our return to profitability and generate sustainable shareholder value over the long term. I am especially grateful to all our Flexsteel co-workers for their commitment and perseverance as we navigate the challenges ahead,” concluded Dittmer.
Share Repurchase Authorization
The Board of Directors approved a new share repurchase program authorizing the Company to purchase up to an aggregate of $8 million of the Company’s common stock. There is no guarantee as to the exact number or value of shares that will be repurchased by the Company, and the Company may discontinue repurchases at any time that management determines additional repurchases are not warranted. The timing and amount of share repurchases under the stock repurchase program will depend on a number of factors, including the Company’s stock price performance, ongoing capital planning considerations, general market conditions and applicable legal requirements.
For the full fiscal fourth quarter and year 2020 results, click here.
Flexsteel Industries, Inc. and Subsidiaries (the “Company”) is one of the largest manufacturers, importers and online marketers of residential furniture and products in the United States. Product offerings include a wide variety of upholstered furniture such as sofas, loveseats, chairs, reclining and rocker-reclining chairs, swivel rockers, sofa beds, convertible bedding units, occasional tables, desks, dining tables and chairs and bedroom furniture. A featured component in most of the upholstered furniture is a unique steel drop-in seat spring from which the name “Flexsteel” is derived. The Company distributes its products throughout the United States through its e-commerce channel and dealer network.
Derek Schmidt – Investor Relations – firstname.lastname@example.org – (563) 585-8383
Source: Flexsteel Industries, Inc.