SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended December 31, 1998 Commission file number 0-5151 FLEXSTEEL INDUSTRIES, INC. Incorporated in State of Minnesota I.R.S. Identification No. 42-0442319 FLEXSTEEL INDUSTRIES, INC. P. O. BOX 877 DUBUQUE, IOWA 52004-0877 Area code 319 Telephone 556-7730 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . Common Stock - $1.00 Par Value Shares Outstanding as of December 31, 1998 6,827,017 ---------
FLEXSTEEL INDUSTRIES, INC. BALANCE SHEETS (UNAUDITED) <TABLE> <CAPTION> December 31, June 30, 1998 1998 ------------ ------------ <S> <C> <C> ASSETS CURRENT ASSETS: Cash and cash equivalents .......................................................... $ 5,554,715 $ 5,464,261 Investments ........................................................................ 10,374,470 9,877,784 Trade receivables - less allowance for doubtful accounts: December 31, 1998, $2,460,000; June 30, 1998, $2,198,000 ...................................................... 26,364,745 28,722,752 Inventories ........................................................................ 29,332,585 26,607,296 Deferred income taxes .............................................................. 2,785,000 2,785,000 Other .............................................................................. 711,135 632,730 ------------ ------------ Total current assets ........................................ 75,122,650 74,089,823 PROPERTY, PLANT, AND EQUIPMENT at cost less accumulated depreciation: December 31, 1998, $53,497,753; June 30, 1998, $51,333,347 ......................................................... 24,553,929 23,095,589 OTHER ASSETS ............................................................................. 7,542,374 7,487,729 ------------ ------------ TOTAL ................................................ $107,218,953 $104,673,141 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable - trade ........................................................... $ 6,295,573 $ 5,792,708 Accrued liabilities: Payroll and related items ..................................................... 3,783,663 5,448,032 Insurance ..................................................................... 5,152,156 5,834,895 Other accruals ................................................................ 6,026,101 4,515,177 Industrial revenue bonds payable ................................................... 1,950,000 1,950,000 ------------ ------------ Total current liabilities .................................... 23,207,493 23,540,812 DEFERRED COMPENSATION .................................................................... 3,077,625 3,052,525 ------------ ------------ Total liabilities ............................................................. 26,285,118 26,593,337 ------------ ------------ SHAREHOLDERS' EQUITY: Common Stock - $1 par value; authorized 15,000,000 shares; issued December 31, 1998, 6,827,017 shares; issued June 30, 1998, 6,794,730 shares ....................................... 6,827,017 6,794,730 Additional paid-in capital ......................................................... 317,341 Retained earnings .................................................................. 72,801,069 70,450,282 Unrealized investment gain ......................................................... 988,408 834,792 ------------ ------------ Total shareholders' equity ................................... 80,933,835 78,079,804 ------------ ------------ TOTAL .............................................. $107,218,953 $104,673,141 ============ ============ </TABLE> See accompanying Notes to Financial Statements
FLEXSTEEL INDUSTRIES, INC. STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED) <TABLE> <CAPTION> STATEMENTS OF INCOME Three Months Ended Six Months Ended December 31, December 31, ----------------------------- ----------------------------- 1998 1997 1998 1997 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> NET SALES ......................... $ 62,575,129 $ 56,260,249 $122,628,510 $111,419,373 COST OF GOODS SOLD ................ 48,435,226 44,312,905 95,338,293 88,180,395 ------------ ------------ ------------ ------------ GROSS MARGIN ...................... 14,139,903 11,947,344 27,290,217 23,238,978 SELLING, GENERAL AND ADMINISTRATIVE 10,890,191 10,064,132 21,430,161 19,900,923 ------------ ------------ ------------ ------------ OPERATING INCOME .................. 3,249,712 1,883,212 5,860,056 3,338,055 ------------ ------------ ------------ ------------ OTHER: Interest and other income .... 301,818 1,094,140 576,506 1,340,409 Interest and other expense ... 79,782 87,297 159,911 173,559 ------------ ------------ ------------ ------------ Total ................... 222,036 1,006,843 416,595 1,166,850 ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES ........ 3,471,748 2,890,055 6,276,651 4,504,905 PROVISION FOR INCOME TAXES ........ 1,275,000 790,000 2,285,000 1,375,000 ------------ ------------ ------------ ------------ NET INCOME ........................ $ 2,196,748 $ 2,100,055 $ 3,991,651 $ 3,129,905 ============ ============ ============ ============ AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: BASIC ...................... 6,841,514 6,956,174 6,831,929 6,957,269 ============ ============ ============ ============ DILUTED .................... 6,915,103 7,024,263 6,899,896 7,018,357 ============ ============ ============ ============ EARNINGS PER SHARE OF COMMON STOCK: BASIC ..................... $ 0.32 $ 0.30 $ 0.58 $ 0.45 ============ ============ ============ ============ DILUTED ................... $ 0.32 $ 0.30 $ 0.58 $ 0.45 ============ ============ ============ ============ STATEMENTS OF COMPREHENSIVE INCOME Three Months Ended Six Months Ended December 31, December 31, ----------------------------- ----------------------------- 1998 1997 1998 1997 ------------ ------------ ------------ ------------ NET INCOME ........................ $ 2,196,748 $ 2,100,005 3,991,651 3,129,905 ------------ ------------ ------------ ------------ OTHER COMPREHENSIVE INCOME BEFORE TAX: Unrealized gains on securities arising during period ... 363,556 218,000 237,119 418,500 Less: reclassification adjustment for gains (losses) included in net income .................. 4,844 (95,000) 4,844 (95,000) ------------ ------------ ------------ ------------ Other comprehensive income, before tax .............. 368,400 123,000 241,963 323,500 ------------ ------------ ------------ ------------ INCOME TAX BENEFIT (EXPENSE): Income tax expense related to securities gains arising during period .. (130,880) (76,300) (85,363) (146,475) Income tax benefit related to securities reclassification adjustment .. (1,744) 33,250 (1,744) 33,250 ------------ ------------ ------------ ------------ Income tax benefit (expense) related to other comprehensive income ... (132,624) (43,050) (87,107) (113,225) ------------ ------------ ------------ ------------ OTHER COMPREHENSIVE INCOME, NET OF TAX ........... 235,776 79,950 154,856 210,275 ------------ ------------ ------------ ------------ COMPREHENSIVE INCOME .............. $ 2,432,524 $ 2,179,955 4,146,507 3,340,180 ============ ============ ============ ============ </TABLE> See accompanying Notes to Financial Statements.
FLEXSTEEL INDUSTRIES, INC. CONDENSED STATEMENTS OF CASH FLOW (UNAUDITED) <TABLE> <CAPTION> Six Months Ended December 31, ---------------------------- 1998 1997 ----------- ----------- OPERATING ACTIVITIES: <S> <C> <C> Net Income ..................................... $ 3,991,651 $ 3,129,905 Adjustments to reconcile net income to net cash provided by operating activities ........... 1,775,047 2,459,842 ----------- ----------- Net cash provided by operating activities ...... 5,766,698 5,589,747 ----------- ----------- INVESTING ACTIVITIES: Purchases of investments ............... (2,297,528) (3,495,933) Proceeds from sales of investments ...... 1,954,458 846,805 Proceeds from sales of capital assets ... 36,328 162,056 Capital expenditures .................... (4,080,043) (1,810,420) ----------- ----------- Net cash used in investing activities .......... (4,386,785) (4,297,492) ----------- ----------- FINANCING ACTIVITIES: Payment of dividends .................... (1,639,087) (1,668,229) Proceeds from issuance of common stock .. 549,253 364,873 Repurchase of common stock .............. (199,625) (38,250) ----------- ----------- Net cash used in financing activities .......... (1,289,459) (1,341,606) ----------- ----------- Increase (decrease) in cash and cash equivalents 90,454 (49,351) Cash and cash equivalents at beginning of year . 5,464,261 4,445,327 ----------- ----------- Cash and cash equivalents at end of period ..... $ 5,554,715 $ 4,395,976 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for Interest .................................. $ 37,000 $ 48,000 Income taxes .............................. $ 2,723,000 $ 2,564,000 </TABLE> See accompanying Notes to Financial Statements.
FLEXSTEEL INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. The accompanying financial statements, which are unaudited, have been prepared in accordance with generally accepted accounting principles applied on a consistent basis, which is consistent with that followed in the financial statements for the year ended June 30, 1998. The statements include all adjustments (comprised of only normal recurring adjustments) which are, in the opinion of management, necessary to a fair statement of the financial position and results of operations and cash flows, prepared on a summary basis, as of such dates and for the stated dates then ended. The results of operations for the six month period ended December 31, 1998 are not necessarily indicative of the results which may be expected for the year ending June 30, 1999. 2. The inventories are categorized as follows: December 31, June 30, 1998 1998 ----------- ----------- Raw materials .................... $14,591,115 $13,538,911 Work in process and finished parts 8,203,252 7,227,558 Finished goods ................... 6,538,218 5,840,827 ----------- ----------- Total ....... $29,332,585 $26,607,296 =========== =========== 3. In 1997, the Financial Accounting Standards board issued Statement No. 128, EARNINGS PER SHARE (SFAS 128). SFAS 128 replaced the calculation of primary and fully dilated earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of stock options. All earnings per share amounts for all periods have been presented and, where appropriate, restated to conform to the SFAS 128 requirements. <TABLE> <CAPTION> Three Months Ending Six Months Ending December 31, December 31, ---------------------------- ---------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Basic Earnings Per Share: Income available to common shareholders ............... $ 2,196,748 $ 2,100,055 3,991,651 $ 3,129,905 Weighted average shares outstanding ................ 6,841,514 6,956,174 6,831,929 6,957,269 ----------- ----------- ----------- ----------- Earnings Per Share - Basic ...... 0.32 0.30 0.58 0.45 =========== =========== =========== =========== Diluted Earnings Per Share: Income available to common shareholders ............... $ 2,196,748 $ 2,100,055 $ 3,991,651 $ 3,129,905 ----------- ----------- ----------- ----------- Weighted average shares outstanding ................ 6,841,514 6,956,174 6,831,929 6,957,269 Dilutive shares issuable in connection with stock option plans ...................... 504,445 431,295 461,220 382,908 Less shares purchasable with proceeds ................... (430,856) (363,206) (393,253) (321,820) ----------- ----------- ----------- ----------- Total Shares .................... 6,915,103 7,024,263 6,899,896 7,018,357 ----------- ----------- =========== =========== Earnings Per Share - Diluted .... $ 0.32 $ 0.30 $ 0.58 $ 0.45 =========== =========== =========== =========== </TABLE> 4. RECLASSIFICATIONS - certain prior year amounts have been reclassified to conform to the 1998 presentation. These reclassifications had no impact on net income or shareholders' equity as previously reported.
FLEXSTEEL INDUSTRIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONDENSED STATEMENT OF EARNINGS Results of Operations: The following table has been prepared as an aid in understanding the Company's results of operations on a comparative basis for the second quarter and six month ended December 31, 1998 and 1997. Amounts presented are percentages of the Company's net sales. Second Quarter Ended Six Month Ending December 31, December 31, ---------------- ----------------- 1998 1997 1998 1997 ----- ----- ----- ----- Net Sales ....................... 100.0% 100.0% 100.0% 100.0% Cost of goods sold .............. 77.4% 78.8% 77.7% 79.1% ----- ----- ----- ----- Gross margin .................... 22.6% 21.2% 22.3% 20.9% Selling, general & administrative expense .................... 17.4% 17.9% 17.5% 17.9% ----- ----- ----- ----- Operating income ................ 5.2% 3.3% 4.8% 3.0% Other income, net ............... 0.4% 1.7% 0.4% 1.0% ----- ----- ----- ----- Income before income taxes ...... 5.6% 5.0% 5.2% 4.0% Income tax expense .............. 2.0% 1.4% 1.9% 1.2% ----- ----- ----- ----- Net income ...................... 3.6% 3.6% 3.3% 2.8% ===== ===== ===== ===== RESULTS OF OPERATIONS FOR THE QUARTER - Net sales for the quarter ended December 31, 1998, increased by $6,315,000 or 11.2% compared to the prior year quarter. Residential sales volume increased $2,750,000 or 8%. Recreational vehicle seating sales increased $2,188,000 or 12.9%. Commercial seating volume increased $1,377,000 or 26.6%. Gross margin increased $2,192,559 to $14,139,903 or 22.6% of sales, in the current year, from $11,947,344 or 21.2% in the prior year. The gross margin percentage increase was due primarily to improved utilization of available production capacity. Selling, general and administrative expenses as a percentage of sales were 17.4% and 17.9% for the current quarter and comparable prior year quarter, respectively. The cost percentage decrease was due to improved absorption of fixed costs. The prior year quarter ended December 31, 1997 included non-taxable other income of $720,000, or $0.10 per share, from life insurance proceeds which resulted in higher net other income, as well as, a lower effective tax rate. The above factors resulted in current quarter earnings of $2,196,748 or $0.32 per share (diluted) compared to $2,100,055 or $0.30 per share (diluted) in the comparable prior year quarter, a net increase of $96,693 or $0.02 per share. Excluding the life insurance proceeds reported in the prior year, net earnings for the quarter ended December 31, 1998, improved $0.12 per share over the prior year quarter. RESULTS OF OPERATIONS FOR THE LAST SIX MONTHS - Net sales for the six-months ended December 31, 1998, increased by $11,209,000 or 10.1% compared to the prior year six-month period. Residential sales volume increased $6,332,000 or 9.6%. Recreational vehicle seating sales increased $3,434,000 or 9.7%. Commercial seating volume increased $1,443,000 or 14.1%. Gross margin increased $4,051,239 to $27,290,217 or 22.3% of sales, in the current year, from $23,238,978 or 20.9% in the prior year. The gross margin percentage increase was due primarily to improved utilization of available production capacity.
Selling, general and administrative expenses as a percentage of sales were 17.5% and 17.9% for the current year and prior year, respectively. The cost percentage decrease was due to improved absorption of fixed costs. The prior year six-months ended December 31, 1997 included non-taxable other income of $720,000, or $0.10 per share, from life insurance proceeds which resulted in higher net other income, as well as, a lower effective tax rate. The above factors resulted in current fiscal year earnings of $3,991,651 or $0.58 per share (diluted) compared to $3,129,905 or $0.45 per share (diluted) in the prior year, a net increase of $861,746 or $0.13 per share. Excluding the life insurance proceeds reported in the prior year, net earnings for the six-months ended December 31, 1998, improved $0.23 per share or 64% over the prior year six-month period. Liquidity and Capital Resources: Working capital at December 31, 1998 is $51,915,000 which includes cash, cash equivalents and investments of $15,929,000. Working capital increased by $1,366,000 from the June 30, 1998 amount. Net cash provided by operating activities was $5,767,000 during the first six months of fiscal year 1999 versus $5,590,000 in the first six months of fiscal year 1998. Capital expenditures were $4,080,000 and $1,080,000 during the first six months of fiscal 1999 and 1998, respectively. The current year expenditures were incurred primarily for manufacturing and delivery equipment and the expansion of our Dublin, Georgia facility. During the next six months approximately $4,000,000 will be spent on manufacturing equipment and facility additions including completion of the expansion project in Georgia. The funds for projected capital expenditures are expected to be provided by cash generated from operations and available cash. On November 4, 1998 the Company announced a plan to repurchase up to 700,000 shares, or slightly more than 10% of the Company's outstanding common stock. The Company will make the purchases, from time to time, in the open market as the Company deems appropriate. Under this authorization, 41,000 shares of common stock have been repurchased to date. Year 2000 Issue - The Company has been modifying its computer information systems to ensure the proper processing of transactions relating to the year 2000 and beyond. The Company has also reviewed its computer-dependent manufacturing activities and necessary hardware and software changes are being made. The Company expects its year 2000 conversion projects to be completed by June 30, 1999. The conversion costs are not expected to be material to the financial statements and will be accomplished using existing employees. The Company is communicating with major suppliers to emphasize that operations must continue without interruption through January 1, 2000. However, there can be no assurances that systems of other companies, on which the Company's systems rely, will be converted in a timely manner or that any failure to convert by another company would not have an adverse effect on the Company's system. CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION FOR THE PURPOSE OF "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 with respect to goals and expectations of the Company, including statements contained in the Company's filings with the Securities and Exchange Commission and in its reports to stockholders. Statements, including those in this report, 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 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 effectiveness of new product introductions, the product mix of our sales, the cost of raw
materials, the amount of sales generated and the profit margins thereon or volatility in the major markets, competition and general economic conditions. 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. PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders At the annual meeting of stockholders on December 15, 1998, Proposals one and two set forth in the Board of Directors' definitive Proxy Statement dated November 13, 1998, were approved and adopted by the stockholders. Proposals one and two, respectively, received votes as follows: Proposal 1 (Election of Directors): Edward J. Monaghan: For 5,216,810, Withheld 10,415, Abstentions and Broker Non-votes 1,617,806. Jeffrey T. Bertsch: For 5,217,065, Withheld 10,160, Abstentions and Broker Non-votes 1,617,806. The names of each Director whose term of office as a Director continued after the meeting are as follows: K. Bruce Lauritsen, Thomas E. Holloran, L. Bruce Boylen, John R. Easter, James R. Richardson and Patrick M. Crahan. Proposal 2 (Appointment of Deloitte & Touche, LLP as Independent Auditors): For: 5,465,842, Against: 14,368, and Abstain: 3,615. Item 6. Exhibits and Reports on Form 8-K The registrant filed on January 4, 1999, a report on Form 8-K which reported that John R. Easter was elected Chairman of the Board when Jack B. Crahan, standing Chairman of the Board, declined to stand for re-election to the Board of Directors. Long-time board member Art D. Richardson retired, and Marvin M. Stern was appointed to the registrant's Board of Directors. The registrant has amended Article V Section 2 of its Bylaws. The Bylaws as amended are attached hereto as Exhibit A. FLEXSTEEL INDUSTRIES, INC. Date: February 12, 1999 By: /s/ R. J. Klosterman ----------------- -------------------- R.J. Klosterman Financial Vice President & Principal Financial Officer