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FLXS > SEC Filings for FLXS > Form 10-Q on 18-Apr-2013All Recent SEC Filings

Show all filings for FLEXSTEEL INDUSTRIES INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for FLEXSTEEL INDUSTRIES INC


18-Apr-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

GENERAL:

The following analysis of the results of operations and financial condition of the Company should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this quarterly report on Form 10-Q.

CRITICAL ACCOUNTING POLICIES:

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", included in our 2012 annual report on Form 10-K.

Overview

The following table has been prepared as an aid in understanding the Company's results of operations on a comparative basis for the three and nine months ended March 31, 2013 and 2012. Amounts presented are percentages of the Company's net sales.

                                        Three Months Ended          Nine Months Ended
                                             March 31,                  March 31,
                                         2013          2012          2013         2012
Net sales                                  100.0 %      100.0 %        100.0 %     100.0 %
Cost of goods sold                         (76.8 )      (75.9 )        (76.5 )     (76.2 )
Gross margin                                23.2         24.1           23.5        23.8
Selling, general and administrative        (18.3 )      (18.5 )        (18.6 )     (18.6 )
Operating income                             4.9          5.6            4.9         5.2
Other income                                 0.1          0.1            0.1         0.1
Income before income taxes                   5.0          5.7            5.0         5.3
Income tax expense                          (1.8 )       (2.1 )         (1.9 )      (1.9 )
Net income                                   3.2 %        3.6 %          3.1 %       3.4 %

Results of Operations for the Quarter Ended March 31, 2013 vs. 2012



The following table compares net sales in total and by area of application for
the quarter ended March 31, 2013 to the prior year quarter.



                            Net Sales (in thousands)
                             Quarter Ended March 31,             $ Change
 Area of Application         2013               2012          (in thousands)       % Change
 Residential             $     79,917       $     71,183     $          8,734           12.3 %
 Commercial                    18,434             20,448               (2,014 )         (9.9 )%
  Total                  $     98,351       $     91,631     $          6,720            7.3 %

Net sales for the quarter ended March 31 2013 were $98.4 million, a 7.3% increase over the prior year quarter net sales of $91.6 million. Residential net sales were $79.9 million in the current quarter, an increase of 12.3% from the prior year quarter of $71.2 million. The net sales increase was primarily due to improved demand for upholstered products. Commercial net sales were approximately $18.4 million in the current year quarter compared to $20.4 million in the prior year quarter.

Gross margin for the quarter ended March 31, 2013 was 23.2% compared to 24.1% in the prior year quarter. The percentage change in gross margin is primarily due to changes in product and customer mix, and to a lesser extent freight, raw material and finished product cost increases. The Company adjusts its selling prices to reflect market conditions and cost changes.

Selling, general and administrative (SG&A) expenses for the quarter ended March 31, 2013 were $18.0 million or 18.3% of net sales compared to $17.0 million or 18.5% of net sales for the quarter ended March 31, 2012. SG&A expenses for the quarter ended March 31, 2013 include $0.3 million, or $0.03 per share, for employment inducement costs.

Operating income for the current quarter was $4.9 million compared to operating income of $5.1 million in the prior year quarter reflecting the aforementioned factors.

The effective income tax expense rate for the current fiscal quarter was 37.7% compared to an income tax expense rate of 36.5% in the prior year fiscal quarter. The change in effective tax rate is primarily due to a lower benefit of the Domestic Manufacturing Deduction under Internal Revenue Code Section 199 (DMD), which provides a tax benefit on U.S. based manufacturing and stock option exercises.

The above factors resulted in current quarter net income of $3.1 million or $0.42 per share, compared to net income of $3.3 million or $0.48 per share in the prior year quarter.

All earnings per share amounts are on a diluted basis.

Results of Operations for the Nine Months Ended March 31, 2013 vs. 2012



The following table compares net sales in total and by area of application for
the nine months ended March 31, 2013 to the prior year nine month period.



                             Net Sales (in thousands)
                           Nine Months Ended March 31,            $ Change
 Area of Application           2013               2012         (in thousands)       % Change
 Residential             $        228,864       $ 200,674     $         28,190           14.0 %
 Commercial                        55,314          57,479               (2,165 )         (3.8 )%
  Total                  $        284,178       $ 258,153     $         26,025           10.1 %

Net sales for the nine months ended March 31, 2013 were $284.2 million, a 10.1% increase, compared to the prior nine- month period of $258.2 million. Residential net sales were $228.9 million in the current nine-month period, an increase of 14.0% from the prior year nine-month period of $200.7 million. The net sales increase of $28.2 million was primarily due to improved demand for upholstered products. Commercial net sales were approximately $55.3 million in the current nine-month period compared to $57.5 million in the prior year nine-month period.

Gross margin for the nine months ended March 31, 2013 was 23.5% compared to 23.8% in the prior year nine month period.

SG&A expenses were $52.8 million or 18.6% of net sales compared to $48.1 million or 18.6% of net sales in the prior year nine-month period. SG&A expenses for the nine-month period ended March 31, 2013 include $1.0 million, or $0.09 per share, for employment inducement costs.

Operating income for the current nine month period was $13.9 million compared to operating income of $13.4 million in the prior year nine month period reflecting the aforementioned factors.

The effective income tax expense rate for the current nine month period was 37.3% compared to an income tax expense rate of 37.0% in the prior year nine month period. The change in effective tax rate is primarily due to a lower benefit of DMD, stock-based compensation and the change in provision for uncertain tax positions related to various state taxing jurisdictions.

The above factors resulted in net income for the current nine month period of $8.9 million or $1.22 per share, compared to net income of $8.7 million or $1.24 per share in the prior year nine month period.

All earnings per share amounts are on a diluted basis.

Liquidity and Capital Resources

Operating Activities:

Net cash provided by operating activities was $6.2 million during the nine months ended March 31, 2013. Working capital (current assets less current liabilities) at March 31, 2013 was $109.9 million compared to $103.7 million at June 30, 2012. Changes in working capital from June 30, 2012 to March 31, 2013 include a reduction in cash of $2.2 million offset by increases in accounts receivable of $3.4 million, inventory of $3.3 million, other current assets of $3.9 million, current liabilities of $1.2 million and accounts payable of $1.1 million. The higher inventory levels support the increases in residential sales volume and expanded product offerings. Depreciation expense was $2.8 million and $2.1 million in the nine-month periods ended March 31, 2013 and 2012.

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 $6.3 million during the nine-month period ended March 31, 2013. During the first nine months of fiscal year 2013 capital expenditures were $5.6 million, including $2.7 million for the recently completed corporate headquarters building and the remaining amount primarily for manufacturing and delivery equipment. The Company expects that capital expenditures will be approximately $0.5 million for the remainder of the 2013 fiscal year.

Financing Activities:

Net cash used in financing activities was $2.1 million during the nine-month period ended March 31, 2013. During the nine-month period ended March 31, 2013, the Company paid dividends to shareholders totaling $3.1 million. The dividends paid during the nine-month period were partially offset by cash received from the exercise of stock options of approximately $1.0 million.

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 up to $5.0 million of letters of credit. Letters of credit outstanding at March 31, 2013 totaled $2.3 million, leaving borrowing availability of $12.7 million. The Company did not borrow any amounts under the credit facility during the period other than the aforementioned letters of credit. The credit agreement expires June 30, 2013. At March 31, 2013, 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 $8.0 million line of credit, with interest at prime minus 1%, and where its routine banking transactions are processed. No amount was outstanding on the line of credit at March 31, 2013. In addition, the supplemental retirement plans assets, held in a Rabbi Trust, of $6.8 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.

Management believes that the Company has adequate cash and credit arrangements to meet its operating and capital requirements for fiscal year 2013. In the opinion of management, the Company's 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 productive 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, 2013. The Company believes that it will be able to successfully renew the terms of the current agreement prior to its expiration date.

Outlook

The Company believes that moderate top line growth will continue through the end of calendar year 2013. Residential growth will continue with existing customers and products, and through expanding our product portfolio and customer base. The Company expects this growth to be led by increased demand for upholstered products. The Company expects demand for commercial products to remain at current levels into the second half of the calendar year. The Company is confident in its ability to take advantage of market opportunities. However, our optimism is tempered due to continued economic uncertainty and its impact on the consumers' confidence and willingness to buy.

The Company remains committed to its 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.

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