in working
capital from June 30, 2009 to March 31, 2010 resulted from net income of $6.7
million and a decrease in inventory of $6.2 million. The Company expects that
due to the nature of our operations that there will be continuing fluctuations
in accounts receivable, inventory, accounts payable, and cash flows from
operations due to the following: (i) we purchase inventory from overseas
suppliers with long lead times and depending on the timing of the delivery of
those orders, inventory levels can be greatly impacted, and (ii) we have
various customers that purchase large quantities of inventory periodically and
the timing of those purchases can significantly impact inventory levels,
accounts receivable, accounts payable and short-term borrowings. As discussed
below, the Company believes it has adequate financing arrangements and access
to capital to absorb these fluctuations in operating cash flow.
Investing
Activities:
Net cash used
in investing activities was $1.4 million during the nine-month period ended
March 31, 2010 and included $1.2 million for the purchase of capital assets.
Depreciation expense was $2.3 million and $2.8 million for the nine-month
periods ended March 31, 2010 and 2009, respectively. The Company expects that
capital expenditures will be less than $0.5 million for the remainder of the
2010 fiscal year.
Financing
Activities:
Net cash used
in financing activities was $10.7 million during the nine-month period ended
March 31, 2010. Borrowings were reduced by $10.0 million. Dividends of $1.0
million were paid during the nine-month period. The Company received cash from
the issuance of stock of $0.3 million.
At March 31,
2010, the Company had available collateral, as defined by the bank, of $49.8
million with borrowing availability of $25.0 million. On April 19, 2010, the
Company terminated its $25 million secured credit facility.
On April 14,
2010, the Company entered into an unsecured $15 million short-term revolving
credit line with a bank with interest at the banks one month LIBOR rate plus
1.00%. The credit agreement contains certain financial covenants including net
working capital of $60 million at the end of each fiscal quarter and an
interest coverage ratio, as defined in the agreement, calculated on a rolling
four-quarter basis. The Company believes that the available credit under the
new agreement that expires June 30, 2011, is sufficient to support its
financing needs.
In the opinion
of management, the Companys current liquidity and credit resources provide it
with the ability to react to opportunities as they arise, to pay quarterly
dividends to its shareholders, and to purchase capital assets that enhance
safety and improve operations. Should economic conditions deteriorate
significantly, we would evaluate all uses of cash and credit facilities,
including the payment of dividends and purchase of capital assets.
Outlook
While sales
are still down slightly from the prior year on a year to date basis, we have
seen an increase in the current quarter due to improved residential sales. The
consolidation of manufacturing operations and workforce reductions that the
Company completed during the prior fiscal year has brought production capacity
and fixed overhead in line with current and expected demand for our products.
Company wide employment, which was reduced approximately 30% in the prior
fiscal year through plant closures and workforce reductions, remains at these
reduced levels. These factors contributed significantly to gross margin
improvement and selling, general and administrative expense reductions.
However, we are experiencing selected increases on various manufacturing
component materials and significant increases on ocean freight rates in
comparison to year ago rates.
Our
residential product category has performed reasonably well in relation to our
competition, and we anticipate modest continued improvement in the residential
sales category. However, the fact remains that residential furniture is a
highly deferrable purchase item and can be adversely impacted by existing factors,
such as, low levels of consumer confidence, a depressed market for new housing,
limited consumer credit and high unemployment. The commercial product category
fell considerably as the U. S. economy contracted and credit tightened. While
we believe that sales are at or near the bottom of the downward cycle and
should level off, we do not anticipate major improvements in commercial markets
through the end of the calendar year.
We remain
committed to our core strategies, which include a wide range of quality product
offerings and price points to the residential and commercial markets, combined
with a conservative approach to business. We will maintain our focus on a
strong balance sheet during these challenging economic times through emphasis
on cash flow and improving profitability.
11
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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General
Market
risk represents the risk of changes in 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 Companys 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, 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 and taxes 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 nine months ended March 31, 2010 and 2009, the Company did not have
sales, purchases, or other expenses denominated in foreign currencies. As such,
the Company is not exposed to material market risk associated with currency
exchange rates and prices.
Interest Rate Risk
The
Companys primary market risk exposure with regard to financial instruments is
changes in interest rates. The Company does not have any debt outstanding at
March 31, 2010.
Tariffs
The
Company has exposure to actions by governments, including tariffs. Tariffs are
a possibility on any imported or exported products.
Inflation
Increased operating costs are reflected in product or services pricing with any
limitations on price increases determined by the marketplace. The impact of
inflation on the Company has not been significant during the past three years
because of the relatively low rates of inflation experienced in the United
States. Raw material costs, labor costs and interest rates are important
components of costs for the Company. Inflation or other pricing pressures could
impact any or all of these components, with a possible adverse effect on our
profitability, especially where increases in these costs exceed price increases
on finished products. In recent years, the Company has faced strong
inflationary and other pricing pressures with respect to steel, fuel and health
care costs, which have been partially mitigated by pricing adjustments.
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Item 4.
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Controls and Procedures
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(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 March 31, 2010.
(b)
Changes in internal control over financial reporting.
During the quarter ended March 31, 2010, 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 has
materially affected, or is reasonable likely to materially affect the Companys
internal control over financial reporting.
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 long-term goals or anticipated results of the
Company, including statements contained in the Companys filings with the
Securities and Exchange Commission and in 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 our 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, the effectiveness of new product
introductions and distribution channels, the product mix of sales, pricing
pressures, the cost of raw materials and fuel, foreign currency valuations,
actions by governments including taxes and tariffs, inflation, the amount of
sales generated and the profit margins thereon, competition (both foreign and
domestic), changes in interest rates, credit exposure with customers and
general economic conditions. For further information regarding these risks and
uncertainties, see the Risk Factors section in Item 1A of the Companys
Annual Report on Form 10-K for the fiscal year ended June 30, 2009.
12
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 1A. Risk
Factors
There
has been no material change in the risk factors set forth under Part 1, Item 1A
Risk Factors in the Companys Annual Report on Form 10-K for the fiscal year
ended June 30, 2009.
Item 6. Exhibits
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31.1
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Certification.
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31.2
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Certification.
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32
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Certification
by Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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SIGNATURES
Pursuant to
the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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FLEXSTEEL
INDUSTRIES, INC.
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Date:
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April 23, 2010
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By:
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/
S/ Timothy
E. Hall
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Timothy E. Hall
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Chief Financial Officer
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(Principal Financial & Accounting
Officer)
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13
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