Flexsteel Industries - 10-Q quarterly report FY

Incorporated in State of Minnesota

42-0442319

(State or other Jurisdiction of
Incorporation or Organization)

(I.R.S. Identification No.)

ASSETS

CURRENT ASSETS:

    Cash

$

7,160

$

8,278

    Trade receivables – less allowance for doubtful accounts:

        December 31, 2010, $2,190; June 30, 2010, $2,020

32,454

35,748

    Inventories

77,907

72,637

    Deferred income taxes

3,740

4,050

    Other

       Total current assets

122,779

121,789

NON-CURRENT ASSETS:

       Property, plant and equipment, net

20,669

21,614

       Deferred income taxes

3,630

3,010

       Other

               TOTAL

$

159,026

$

157,670

LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES:

    Accounts payable – trade

$

10,076

$

10,815

    Accrued liabilities:

       Payroll and related items

5,464

7,023

       Insurance

6,278

6,192

       Other

            Total current liabilities

27,392

30,989

LONG-TERM LIABILITIES:

    Deferred compensation

5,067

5,096

    Other

        Total liabilities

SHAREHOLDERS’ EQUITY:

Cumulative preferred stock – $50 par value;
authorized 60,000 shares; outstanding – none

Undesignated (subordinated) stock – $1 par value;
authorized 700,000 shares; outstanding – none

Common stock – $1 par value; authorized 15,000,000 shares;
outstanding December 31, 2010, 6,694,432 shares;
outstanding June 30, 2010, 6,645,532 shares

6,694

6,646

    Additional paid-in capital

6,282

5,425

    Retained earnings

110,763

107,293

    Accumulated other comprehensive loss

)

)

         Total shareholders’ equity

               TOTAL

$

159,026

$

157,670

Six Months Ended
December 31,

OPERATING ACTIVITIES:

Net income

$

4,474

$

4,343

Adjustments to reconcile net income to net cash provided by operating activities:

    Depreciation

1,408

1,545

    Provision for losses on accounts receivable

800

640

    Deferred income taxes

(498

)

(922

)

    Stock-based compensation expense

699

431

    Gain on disposition of capital assets

(8

)

(6

)

    Changes in operating assets and liabilities:

        Trade receivables

2,494

(2,321

)

        Inventories

(5,270

)

7,010

        Other current assets

(442

)

2,182

        Other assets

(8

)

4

        Accounts payable – trade

(650

)

(151

)

        Accrued liabilities

(3,028

)

4,405

        Other long-term liabilities

300

683

        Deferred compensation

)

)

Net cash provided by operating activities

INVESTING ACTIVITIES:

    Proceeds from sales of investments

254

245

    Purchases of investments

(443

)

(537

)

    Proceeds from sale of capital assets

42

11

    Capital expenditures

)

)

Net cash used in investing activities

)

)

FINANCING ACTIVITIES:

    Repayment of short-term borrowings, net

―

(5,000

)

    Dividends paid

(834

)

(658

)

    Proceeds from issuance of common stock

Net cash used in financing activities

)

)

(Decrease) increase in cash

(1,118

)

11,161

Cash at beginning of period

Cash at end of period

Six Months Ended
December 31,

Interest

$

―

$

233

Income taxes paid, net

$

4,402

$

(1,290

)

1.

The consolidated financial statements included herein have been prepared by Flexsteel Industries, Inc. and Subsidiaries (the “Company” or “Flexsteel”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  The information furnished in the consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of such consolidated financial statements.  Operating results for the three and six-month periods ended December 31, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2011.  Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.  Except to the extent updated or described below, the significant accounting policies set forth in Note 1 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended June 30, 2010, appropriately represent, in all material respects, the current status of accounting policies and are incorporated by reference. 

DESCRIPTION OF BUSINESS – Flexsteel was incorporated in 1929 and is one of the oldest and largest manufacturers, importers and marketers of residential and commercial upholstered and wooden furniture products in the country.  Product offerings include a wide variety of upholstered and wood 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.  The Company’s products are intended for use in home, office, hotel and other commercial applications.  Featured as a basic component in most of the upholstered furniture is a unique steel drop-in seat spring from which our name “Flexsteel” is derived.  The Company distributes its products throughout the United States through the Company’s sales force and various independent repre sentatives.  The Company’s products are also sold to several national and regional chains, some of which sell on a private label basis.

The Company has one active wholly-owned subsidiary, DMI Furniture, Inc. (“DMI”), which is a Louisville, Kentucky-based, manufacturer, importer and marketer of residential and commercial office furniture. DMI’s divisions are WYNWOOD, Homestyles and DMI Commercial Office Furniture. 

2.

INVENTORIES

The Company values inventory at the lower of cost or market.  Raw steel is valued on the last-in, first-out (“LIFO”) method.  Other inventories are valued on the first-in, first-out (“FIFO”) method.  Inventories valued on the LIFO method would have been approximately $1.5 million higher at December 31, 2010 and $1.7 million higher at June 30, 2010, if they had been valued on the FIFO method.  At December 31, 2010 and June 30, 2010 the total value of LIFO inventory was $2.4 million and $2.3 million, respectively. A comparison of inventories is as follows (in thousands):

Raw materials

$

8,583

$

9,696

Work in process and finished parts

5,053

4,943

Finished goods

              Total

3.

BORROWINGS AND CREDIT ARRANGEMENTS

The Company maintains a credit agreement which provides short-term working capital financing up to $15.0 million with interest of LIBOR plus 1% including $10.0 million of letters of credit availability. No amounts were outstanding at December 31, 2010 and June 30, 2010 under the working capital facility. The Company is contingently liable to insurance carriers under its comprehensive general, product, and vehicle liability policies, as well as some workers’ compensation, and has provided letters of credit in the amount of $3.0 million. The credit agreement contains financial covenants.  The primary covenant is an interest coverage ratio of 3.0 to 1.0. The ratio is computed as net income plus interest expense and stock-based compensation expense less dividends divided by interest expense.  In addition, the Company must maintain working capital of $60 million.  At December 31, 2010, the Company was in compliance with all of the financial covenants contained in the credit agreement. 

An officer of the Company is a director at a bank where the Company maintains an unsecured $5.0 million line of credit at prime minus 1%, but not less than 2.5%, and where its routine daily banking transactions are processed.  No amount was outstanding on the line of credit at December 31, 2010 and June 30, 2010. In addition, the Rabbi Trust assets of $4.9 million are administered by this bank’s trust department.  The Company receives no special services or pricing on the services performed by the bank due to the directorship of this officer.

4.

STOCK-BASED COMPENSATION

The Company has two stock-based compensation methods available when determining employee compensation.

(1)

Long-Term Management Incentive Compensation Plan – The plan provides for shares of common stock and cash to be awarded to officers and key employees based on performance targets set by the Nominating and Compensation Committee of the Board of Directors (the “Committee”). The Company’s shareholders approved 500,000 shares to be issued under the plan.  No shares have been issued as of December 31, 2010.  The Committee selected consolidated operating results for organic net sales growth and fully-diluted earnings per share for the three-year performance periods beginning July 1, 2008 and ending on June 30, 2011, beginning July 1, 2009 and ending on June 30, 2012, and beginning July 1, 2010 and ending on June 30, 2013. The Committee has also specified that payouts, if any, for awards earned in these performance periods will be 60% stock and 40% cash.  Awards will be paid to parti cipants as soon as practicable following the end of the performance periods and verification of results. The compensation cost related to the number of shares to be granted under each performance period is fixed on the grant date, which is the date the performance period begins.  The compensation cost related to the cash portion of the award is re-measured based on the award’s estimated fair value at the end of each reporting period.  The accrual is based on the probable outcomes of the performance conditions. The portion of the accrued award payable in stock is classified within equity and the portion of the accrued award payable in cash is classified within payroll and related accruals and other long-term liabilities. At December 31, 2010 and June 30, 2010, the Company accrued $0.3 million and $0, respectively, in payroll and related accruals for the short-term portion of estimated awards of stock and cash under the long-term incentive plan.  At December 31, 2010 and June 30, 2010, the Company accrued $1.4 million and $0.9 million, respectively, in other long-term liabilities for estimated awards of stock and cash under the long-term incentive plan.

If the target performance goals would be achieved, the total amount of compensation cost recognized over the requisite service periods would be $1.0 million (2009-2011), $1.2 million (2010-2012) and $1.1 million (2011-2013) based on the estimated fair values at December 31, 2010.

(2)

Stock Option Plans – The stock option plans for key employees and directors provide for the granting of incentive and nonqualified stock options.  Under the plans, options are granted at an exercise price equal to the fair market value of the underlying common stock at the date of grant, and may be exercisable for up to 10 years.  All options are exercisable when granted. 

At December 31, 2010, 423,950 shares were available for future grants.  It is the Company’s policy to issue new shares upon exercise of stock options.  The Company accepts shares of the Company’s common stock as payment for the exercise price of options.  These shares received as payment are retired upon receipt.

A summary of the status of the Company’s stock option plans as of December 31, 2010, June 30, 2010 and 2009 and the changes during the years then ended is presented below:

The following table summarizes information for options outstanding and exercisable at December 31, 2010:

5.

INCOME TAXES

In determining the quarterly provision for income taxes, the Company uses an estimated annual effective tax rate, which is based on the expected annual income, statutory tax rates and tax planning opportunities available to the Company in the various jurisdictions in which it operates.   This includes recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns to the extent pervasive evidence exists that they will be realized in future periods. The deferred tax balances are adjusted to reflect tax rates by tax jurisdiction, based on currently enacted tax laws, which are expected to be in effect in the years in which the temporary differences are expected to reverse.  In accordance with the Company’s income tax policy, significant or unusual items are separately recognized in the quarter in which they occur.

The components of the gross liabilities related to unrecognized tax benefits and the related deferred tax assets are as follows (in thousands):

Gross unrecognized tax benefits

$

1,040

$

995

Accrued interest and penalties

Gross liabilities related to unrecognized tax benefits

$

1,280

$

1,210

Deferred tax assets

The recognition of the above amounts would impact the Company’s effective tax rate.  The Company does not expect that there will be any positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within twelve months.  The Company records interest and penalties related to income taxes as income tax expense in the Consolidated Statements of Operations.

6.

EARNINGS PER SHARE – Basic earnings per share (“EPS”) is computed based upon the weighted-average number of common shares outstanding for each period.  Diluted EPS is computed based on the weighted-average number of common shares and common equivalent shares.  Common equivalent shares represent the effect of stock options during each period presented, which if exercised, would dilute EPS and the dilutive effect of long-term incentive compensation shares granted.  In computing EPS for the three and six months ended December 31, 2010 and 2009, net income as reported for each respective period is divided by (in thousands):

7.

COMPREHENSIVE INCOME

The components of comprehensive income, net of income taxes, for the three and six months ended, were as follows (in thousands):

Three Months Ended
December 31,

Six Months Ended
December 31,

Net income

$

2,131

$

2,964

$

4,474

$

4,343

Other comprehensive income (loss) (OCI):

Change in fair value of derivatives, net of income taxes of $0, $(19), $0 and $(39), respectively

―

31

―

64

Change in fair value of available-for-sale securities, net of income taxes of $(111), $73, $(187) and $(93), respectively

)

Total other comprehensive income (loss)

)

Total comprehensive income

The components of accumulated other comprehensive loss, net of income tax, are as follows (in thousands):

Available-for-sale securities

$

295

$

(11

)

Pension and other post-retirement benefit adjustments

)

)

Accumulated other comprehensive loss

$

(1,446

)

$

(1,752

)

8.

LITIGATION

From time to time, the Company is subject to various legal proceedings, including lawsuits, which arise out of, and are incidental to, the conduct of the Company’s business.  The Company does not consider any of such proceedings that are currently pending, individually or in the aggregate, to be material to its business or likely to result in a material adverse effect on its consolidated operating results, financial condition, or cash flows.

9.

ACCOUNTING DEVELOPMENTS

No accounting pronouncements have been adopted or have become effective during the second quarter of fiscal 2011 that impact the Company.

10.

FACILITY CLOSING COSTS

During the quarter ended September 30, 2010, the Company announced the planned closure of a manufacturing facility and recorded pre-tax charges for facility closing costs of $1.0 million.  The charges represent employee separation costs of $0.6 million and other closing costs of $0.4 million with no future benefit to the Company and are classified as “Facility Closing Costs” in the Consolidated Statements of Income at December 31, 2010.  At December 31, 2010, the closure is completed and $0.3 million remains to be paid and is included in other current liabilities.

Three Months Ended
December 31,

Six Months Ended
December 31,

2009

2010

Net sales

100.0

%

%

%

100.0

%

Cost of goods sold

(77.3

)

)

)

)

Gross margin

24.0

22.6

22.9

Selling, general and administrative

(18.7

)

(18.3

)

(17.9

)

(18.4

)

Facility consolidation and other costs

)

Operating income

4.0

5.7

4.1

4.5

Other income (expense), net

0.0

0.0

)

Income before income taxes

4.2

4.4

Income tax expense

(1.4

)

(2.2

)

)

)

Net income

Net Sales (in thousands)
Quarter Ended December 31,

Residential

$

63,528

$

62,592

$

936

 2 %

Commercial

)

  Total

$

82,821

$

83,524

$

(703

)

(1)%

Net Sales (in thousands)
Six Months Ended December 31,

Residential

$

128,753

$

118,797

$

9,956

8%

Commercial

  Total

$

170,051

$

159,465

$

10,586

7%

FLEXSTEEL INDUSTRIES, INC.

Date: 

By: 

Timothy E. Hall
Chief Financial Officer
(Principal Financial & Accounting Officer)