Flexsteel Industries, Inc.

US tariffs against China - starting with 10% tariffs in September 2018 and followed by 25% tariffs in May 2019 - has several US victims. One of them is Flexsteel Industries, Inc. (FI), a manufacturer of residential, contract upholstered, and wooden furniture products. They import 42% of their sales from China, and were hit badly.

FI is a long-established company - and one of a multitude of relatively small furniture manufacturers serving the US and Canada. There are few dominant players in this industry.

The dominance of online purchasing trends has also impacted profit margins. FI announced a restructuring exercise in June 2019 expected to last two years. Management budgeted $48-53m in restructuring costs, of which $31.4m have been incurred to March 31st 2020.

FI generated $402m in sales and net losses of $21m in the last twelve months. Average net income over the last five years can be pegged at between $12m-$15m.

A closer examination of the restructuring costs reveals non-cash items like $18.6m in inventory write-downs, $3.9m in doubtful receivables, impairment of the ERP system (in prior year) of $18.7m, etc.

The cash flow statement reveals the company generated cash from operations of $8m in the last twelve months, and positive operating cash flows in all of the previous five years. Estimated capital expenditure for 2020 is $4m.

Part of the restructuring includes the disposal of various properties – including $20.5m from the sale of a California property in the last twelve months. This has helped bolster the cash balances. Management estimates that disposals of unprofitable segments would amount to less than 9% of recent sales.

The balance sheet reveals net working capital (a proxy for liquidation value) of $113m as at March 31, 2020. Bulk of this is in cash of $62.5m including credit facilities of $15m from two banks.

Covid-19 has temporarily suspended operations but FI appears to have sufficient financial resources to survive the downturn.

The equity sells for just $66m or less than 60 cents on liquidation value (and 33 cents on tangible asset value), and less than 6x average earnings. In addition, management have maintained steady dividends of $6.9m every year – yielding over 10% on the common.

Investors appear to have a sufficient margin of safety at the current price that appears to promise safety of principal and a satisfactory return (including a generous dividend return).