Gross margin
for the nine months ended March 31, 2011 was 22.2% compared to 22.7% in the
prior year period. Gross margin for the nine-month period was adversely
impacted by inventory write-down of $0.6 million associated with the facility
closing and increases in material costs.
Selling,
general and administrative expenses were $45.0 million or 17.6% of net sales
and $43.5 million or 18.1% of net sales for the nine months ended March 31,
2011 and 2010, respectively, reflecting better absorption of fixed costs.
The current
nine-month period includes a pre-tax charge of approximately $1.0 million for
employee separation and other costs related to finalizing the closing of a
facility.
Operating
income for the nine months ended March 31, 2011 was $10.7 million compared to
$11.1 million in the prior year period reflecting the aforementioned factors
.
The effective
income tax expense rate for the current nine-month period ended was 36.4%
compared to a rate of 38.9% in the prior year period. This rate fluctuates due
to projected income levels and the impact of various state taxing
jurisdictions.
The above
factors resulted in nine months ended net income of $6.9 million or $1.00 per
share, compared to the prior year of $6.7 million or $1.00 per share.
All earnings
per share amounts are on a diluted basis.
Liquidity and Capital Resources
Operating
Activities:
Working
Capital (current assets less current liabilities) at March 31, 2011 was $97.7
million. Net cash provided by operating activities was $6.0 million during the
nine months ended March 31, 2011. Net income of $6.9 million and depreciation
of $2.0 million were offset by a $2.1 million increase in inventory and a $0.8
million increase in accounts receivable.
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 $1.1 million during the nine month period ended
March 31, 2011 primarily related to $1.0 million for the purchase of capital
assets. The Company expects that capital expenditures will be less than $2.0
million for the remainder of the fiscal year. On April 1, 2011, the Company
announced plans to construct a $12 million, four-story, 40,000 square foot,
corporate office building in Dubuque, Iowa, the majority of which will occur in
fiscal year 2012.
Financing
Activities:
Net cash used
in financing activities was $1.0 million during the nine month period ended
March 31, 2011. Dividends of $1.3 million were paid during the nine month
period ended March 31, 2011 offset by $0.3 million of cash received from the
exercise of stock options.
Management
believes that the Company has adequate cash and credit arrangements to meet its
operating and capital requirements for fiscal year 2011. In the opinion of
management, the Companys 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. The Company has begun the process of obtaining a renewal of
its working capital line of credit that expires June 30, 2011. The Company
believes that it will be able to successfully renew the terms of the current
agreement prior to its expiration date.
9
Outlook
Our balance
sheet remains strong reflecting working capital in excess of $97 million and no
bank borrowings. We were able to realize gains in residential sales for the
current year over the prior year. There are indications that improving job
prospects and improving consumer sentiment are having a positive impact on
residential sales even though the housing market remains weak. We expect to
continue top-line growth of our residential products through fiscal year 2012.
Our commercial product sales are up slightly for the current year over the
prior year. The commercial office industry continues to report increases in
sales over last year. While we have benefited minimally from those increases to
date, we believe we will see increased sales volume during fiscal year 2012.
Based on low demand for an extended period, we anticipate increased orders for
hospitality products during fiscal year 2012 as the economy improves.
The Company
continues to experience increases in the cost of certain raw materials, such as
steel, polyester fiber, fabric and leather, and finished products. We are
implementing price increases to help mitigate the impact of the increased
material and finished product costs, however, we will continue to experience
downward pressure on gross margin until we realize the full benefits of these sell
price increases and see an end to the cost increases.
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 through emphasis on cash flow and improving profitability.
We believe these core strategies are in the best interest of our shareholders.
Item
3. Quantitative and Qualitative
Disclosures About Market Risk
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 three and nine months ended March 31, 2011 and 2010, 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. At March 31, 2011, the Company had no debt
outstanding.
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. Inflation or
other pricing pressures could impact raw material costs, labor costs and
interest rates which are important components of costs for the Company and
could have an adverse effect on our profitability, especially where increases
in these costs exceed price increases on finished products.
Item
4. Controls and Procedures
(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, 2011.
(b)
Changes in internal control over financial reporting.
During the quarter ended March 31, 2011, 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 reasonably likely to materially affect the Companys
internal control over financial reporting.
10
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, 2010.
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, 2010.
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 21,
2011
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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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11
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