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

Show all filings for FLEXSTEEL INDUSTRIES INC

Form 10-Q for FLEXSTEEL INDUSTRIES INC


18-Oct-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 2013 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 months ended September 30, 2013 and 2012. Amounts presented are percentages of the Company's net sales.

                                                    Three Months Ended
                                                       September 30,
                                                     2013          2012
            Net sales                                  100.0 %      100.0 %
            Cost of goods sold                         (77.3 )      (76.9 )
            Gross margin                                22.7         23.1
            Selling, general and administrative        (17.5 )      (18.3 )
            Operating income                             5.2          4.8
            Other income                                 0.5          0.2
            Income before income taxes                   5.7          5.0
            Income tax expense                          (2.1 )       (1.8 )
            Net income                                   3.6 %        3.2 %

The following table compares net sales in total and by area of application for the quarter ended September 30, 2013 to the prior year quarter.

                             Net Sales (in thousands)
                           Quarter Ended September 30,            $ Change
 Area of Application           2013               2012         (in thousands)       % Change
  Residential                      84,000          72,330     $         11,670           16.1 %
  Commercial                       20,348          18,907                1,441            7.6 %
   Total                          104,348          91,237     $         13,111           14.4 %

Results of Operations for the Quarter Ended September 30, 2013 vs. 2012

Net sales for the quarter ended September 30, 2013 were $104.3 million, a 14.4% increase compared to $91.2 million in the prior year quarter. Residential net sales were $84.0 million in the current quarter, an increase of 16.1% from the prior year quarter of $72.3 million, primarily due to increased sales of upholstered and ready to assemble products. Commercial net sales were approximately $20.3 million in the current quarter, an increase of 7.6% compared to $18.9 million in the prior year.

Gross margin as a percent of sales for the quarter ended September 30, 2013 was 22.7% compared to 23.1% in the prior year quarter. The decrease of 0.4% is primarily due to changes in product mix and price discounting on certain traditional case goods to improve operating efficiency. The discounting may continue for the remainder of the fiscal year as we realign inventory to focus on growth opportunities.

Selling, general and administrative expenses were $18.2 million or 17.5% of net sales, compared to $16.7 million or 18.3% of net sales in the prior year quarter ended September 30, 2012. The percentage decrease reflects fixed cost leverage on higher sales volume offset by increased legal costs of $0.4 million related to an Indiana civil lawsuit. In addition, the prior year quarter included approximately $0.5 million of executive transition costs.

Operating income for the first quarter ended September 30, 2013 was $5.4 million compared to operating income of $4.4 million.

The effective income tax expense rate for the current three-month period was 36.5% compared to an income tax expense rate of 36.9% in the prior year three-month period. The effective rates include the federal statutory rate as well as the effect of the various state taxing jurisdictions.

The above factors resulted in net income for the three months ended September 30, 2013 of $3.8 million or $0.51 per share compared to $2.9 million or $0.40 per share for the prior year quarter. All earnings per share amounts are on a diluted basis.

Liquidity and Capital Resources

Working capital (current assets less current liabilities) at September 30, 2013 was $117.2 million compared to $113.7 million at June 30, 2013. Changes in working capital from June 30, 2013 to September 30, 2013 include increases in inventory of $4.7 million, accounts receivable of $2.9 million, and current liabilities of $3.9 million. The higher inventory levels support increased residential sales volume and expanded product offerings. The accounts receivable increase is primarily due to higher sales volume in the current quarter and the timing of collections.

The Company's main source of liquidity is cash and cash flows from operations. As of September 30, 2013 and June 30, 2013, the Company had cash totaling $10.6 million and $10.9 million, respectively. The Company maintains a credit agreement which provides short-term working capital financing up to $10.0 million with interest of LIBOR plus 1%, including up to $4.0 million of letters of credit. Letters of credit outstanding at September 30, 2013 totaled $2.7 million, leaving borrowing availability of $7.3 million. The Company did not utilize any borrowing availability under the credit facility during the period other than the aforementioned letters of credit. The credit agreement expires June 30, 2014. At September 30, 2013, the Company was in compliance with all of the financial covenants contained in the credit agreement.

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. The Company did not utilize any borrowing availability during the period and no amount was outstanding on the line of credit at September 30, 2013.

Cash decreased by $0.3 million during the first fiscal quarter of 2014 with net cash provided by operating activities of $1.2 million, capital expenditures of $0.7 million and payment of dividends of $1.1 million.

Net cash provided by operating activities of $1.2 million in the first quarter ended September 30, 2013 was comprised primarily of net income of $3.8 million, changes in operating assets and liabilities of $3.5 million and non-cash charges of $0.9 million.

Net cash used in investing activities was $0.8 million and $3.2 million in the quarters ended September 30, 2013 and 2012, respectively. Net purchases of investments were $0.3 million for the quarter ended September 30, 2013 versus $0.2 million in the prior year quarter. Capital expenditures were $0.7 million and $3.0 million during the quarters ended September 30, 2013 and 2012, respectively.

Net cash used in financing activities was $0.6 million and $0.8 million in the quarters ended September 30, 2013 and 2012, respectively, primarily for the payment of dividends of $1.1 million compared to $1.0 million in the quarters ended September 30, 2013 and 2012, respectively.

The Company expects that capital expenditures for the remainder of fiscal year 2014will be approximately $3.5 million primarily for delivery and manufacturing equipment and information technology infrastructure. Management believes that the Company has adequate cash, cash flows from operations and credit arrangements to meet its operating and capital requirements for fiscal year 2014. 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.

Contractual Obligations

As of September 30, 2013, there have been no material changes to our contractual obligations presented in our Annual Report on Form 10-K for the year ended June 30, 2013.

Outlook

The Company believes that top line growth will continue through the end of fiscal year 2014. Residential growth is expected to 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 and ready to assemble products. The Company anticipates sales of commercial products to moderately increase for the remainder of the fiscal year. The Company is confident in its ability to take advantage of market opportunities.

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 increasing profitability. We believe these core strategies are in the best interest of our shareholders.

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