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FLXS > SEC Filings for FLXS > Form 10-Q on 10-Feb-2014All Recent SEC Filings

Show all filings for FLEXSTEEL INDUSTRIES INC

Form 10-Q for FLEXSTEEL INDUSTRIES INC


10-Feb-2014

Quarterly Report

2007 Long-Term Management Incentive Plan (2007 Plan)

The plan provides for shares of common stock and cash to be awarded to officers and key employees based on performance targets set by the Nominating and Compensation Committee of the Board of Directors (the "Committee"). The Company's shareholders approved 500,000 shares to be issued under the plan. No additional shares can be awarded under the 2007 Plan. As of December 31, 2013, 187,633 shares have been issued. The Committee selected consolidated operating results for organic net sales growth and fully-diluted earnings per share as the performance goal for the three-year performance periods beginning July 1, 2011 and ending on June 30, 2014 and beginning July 1, 2012 and ending on June 30, 2015. The Committee has also specified that payouts, if any, for awards earned in these performance periods will be 60% stock and 40% cash. Awards will be paid to participants as soon as practicable following the end of the performance periods subject to Committee approval and verification of results. The compensation cost related to the number of shares to be granted under each performance period is fixed on the grant date, which is the date the performance period begins. The compensation cost related to the cash portion of the award is re-measured based on the equity award's estimated fair value at the end of each reporting period. The accrual is based on the probable outcomes of the performance conditions. The short-term portion of the recorded cash award payable is classified within current liabilities, payroll and related items, and the long-term portion of the recorded cash award payable is classified within other long-term liabilities in the Consolidated Balance Sheets. As of December 31, 2013 and June 30, 2013, the Company has recorded cash awards payable of $0.5 million and $0.6 million within current liabilities and $0.3 million and $0.4 million within long-term liabilities, respectively. During the quarters ended December 31, 2013 and 2012, the Company recorded expense of $0.4 million and $0.3 million, respectively. For the six month periods ended December 31, 2013 and 2012, the Company recorded expense of $0.6 million and $0.7 million, respectively.

If the target performance goals would be achieved, the total amount of compensation cost recognized over the requisite service periods would be $0.8 million (2012-2014) and $0.9 million (2013-2015) based on the estimated fair values at December 31, 2013.

(2) Stock Plans

Omnibus Stock Plan

The Omnibus Stock Plan is for key employees, officers and directors and provides for the granting of incentive and nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights and performance units. In December 2013, the Company's shareholders approved 700,000 shares to be issued under the plan. The options are exercisable up to 10 years from the date of grant. It is the Company's policy to issue new shares upon exercise of stock options. The Company accepts shares of the Company's common stock as payment for the exercise price of options. These shares received as payment are retired upon receipt.

At December 31, 2013, 641,550 shares were available for future grants. During the quarter and six months ended December 31, 2013, the Company recorded expense of $0.4 million.

2006 and 2009 Stock Option Plans

The stock option plans were for key employees, officers and directors and provided for granting incentive and nonqualified stock options. Under the plans, options were granted at an exercise price equal to the fair market value of the underlying common stock at the date of grant and exercisable for up to 10 years. All options were exercisable when granted. No additional options can be granted under the 2006 and 2009 stock option plans.

There were no options granted and no expense was recorded under these Plans during the three and six months ended December 31, 2013. During the quarter ended December 31, 2012, the Company recorded expense of $0.3 million. For the six month periods ended December 31, 2012, the Company recorded expense of $0.4 million.


A summary of the status of the Company's stock plans as of December 31, 2013, June 30, 2013 and 2012 and the changes during the periods then ended is presented below:

                                                                      Weighted            Aggregate
                                                   Shares             Average          Intrinsic Value
                                               (in thousands)      Exercise Price      (in thousands)
     Outstanding and exercisable at June
     30, 2012                                              818    $          13.94    $           4,783
     Granted                                                89               20.31
     Exercised                                            (109 )             13.38
     Canceled                                              (11 )             16.09
     Outstanding and exercisable at June
     30, 2013                                              787               14.71                7,609
     Granted                                                57               27.49
     Exercised                                            (112 )             17.13
     Canceled                                              (29 )             19.35
     Outstanding and exercisable at
     December 31, 2013                                     703    $          15.18               10,939

The following table summarizes information for options outstanding and exercisable at December 31, 2013:

                                                       Weighted Average
                                   Options
                               Outstanding and
               Range of          Exercisable        Remaining       Exercise
                Prices         (in thousands)      Life (Years)       Price
            $   6.81 - 8.55                 116              5.5    $    7.66
              12.35 - 13.90                 205              4.6        12.87
              14.40 - 17.23                 239              3.1        16.01
              19.72 - 27.57                 143              9.3        23.19
            $  6.81 - 27.57                 703              5.2    $   15.18

6. EARNINGS PER SHARE

Basic earnings per share (EPS) of common stock is based on the weighted-average number of common shares outstanding during each period. Diluted earnings per share of common stock includes the dilutive effect of potential common shares outstanding. The Company's potential common shares outstanding are stock options and shares associated with the long-term management incentive compensation plan. The Company calculates the dilutive effect of outstanding options using the treasury stock method. Anti-dilutive shares are not included in the computation of diluted EPS when their exercise price is greater than the average closing market price of the common shares. The Company calculates the dilutive effect of shares related to the long-term management incentive compensation plan based on the number of shares, if any, that would be issuable if the end of the fiscal period were the end of the contingency period.

In computing EPS for the quarters and six months ended December 31, 2013 and 2012, net income as reported for each respective period is divided by the fully diluted weighted average number of shares outstanding:

                                      Three Months Ended       Six Months Ended
                                         December 31,            December 31,
         (in thousands)                2013         2012        2013       2012

         Basic shares                    7,205       7,030        7,165     6,984
         Potential common shares:
         Stock options                     311         219          291       233
         Long-term incentive plan           14          26           14        28
         Non-vested shares                   7           -            7
                                           332         245          312       261
         Diluted shares                  7,537       7,275        7,477     7,245
         Anti-dilutive shares               57          38           57         -


7. LITIGATION

Indiana Civil Litigation - In December 2013, the Company entered into a confidential agreement to settle the Indiana Civil Litigation. The Company agreed to pay $6.3 million to Plaintiffs to settle the matter without admission of wrongdoing. The Company continues to believe that it did not cause or contribute to the contamination. This settlement is recorded as Litigation Settlement Payable in the Consolidated Balance Sheet and Litigation Settlement Costs in the Consolidated Statements of Income.

During the three months ended December 31, 2013 and 2012, the Company recorded $0.8 million and $0.4 million, respectively, in legal and other related expenses that were incurred responding to the lawsuits and pursuing insurance coverage. During the six months ended December 31, 2013 and 2012, the Company recorded $1.7 million and $1.0 million, respectively, in legal and other related expenses. These expenses are included in Selling, General and Administrative (SG&A) expense in the Consolidated Statements of Income.

During the six months ended December 31, 2013, the Company received approximately $1.7 million from various insurance carriers to reimburse the Company for certain legal defense costs. These reimbursement amounts are recorded in SG&A as a reduction of legal expenses. The Company will continue to pursue the recovery of additional defense and settlement costs from insurance carriers. Based on policy language and jurisdiction, insurance coverage is in question. The Company has filed an appeal to the Iowa Supreme Court regarding two adverse opinions of an Iowa District Court regarding coverage issues.

Other Proceedings - From time to time, the Company is subject to various other legal proceedings, including lawsuits, which arise out of, and are incidental to, the conduct of the Company's business. The Company does not consider any of such other proceedings that are currently pending, individually or in the aggregate, to be material to its business or likely to result in a material effect on its consolidated operating results, financial condition, or cash flows.

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 and six months ended
December 31, 2013 and 2012. Amounts presented are percentages of the Company's
net sales.


                                            Three Months Ended       Six Months Ended
                                               December 31,            December 31,
                                             2013         2012        2013       2012
    Net sales                                  100.0 %     100.0 %      100.0 %   100.0 %
    Cost of goods sold                         (76.8 )     (76.0 )      (77.1 )   (76.4 )
    Gross margin                                23.2        24.0         22.9      23.6
    Selling, general and administrative        (16.3 )     (19.2 )      (16.9 )   (18.8 )
    Litigation settlement costs                 (5.6 )         -         (2.9 )       -
    Operating income                             1.3         4.8          3.1       4.8
    Interest and other income                    0.4         0.1          0.4       0.1
    Income before income taxes                   1.7         4.9          3.5       4.9
    Income tax provision                        (0.6 )      (1.8 )       (1.3 )    (1.8 )
    Net income                                   1.1 %       3.1 %        2.2 %     3.1 %


The following table compares net sales for the quarter ended December 31, 2013 to the prior year quarter.

                            Net Sales (in millions)
                          Quarter Ended December 31,
                            2013               2012         $ Change     % Change
         Residential   $          91.4     $        76.6   $     14.8         19.3 %
         Commercial               21.1              18.0          3.2         17.6 %
         Total         $         112.5     $        94.6   $     18.0         19.0 %

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

Net sales for the quarter ended December 31, 2013 were $112.5 million, a 19.0% increase compared to $94.6 million in the prior year quarter. Residential net sales were $91.4 million in the current quarter, an increase of 19.3% from the prior year quarter of $76.6 million, primarily due to increased demand for upholstered and, to a lesser extent, ready-to-assemble products. Commercial net sales were approximately $21.1 million in the current quarter, an increase of 17.6% compared to $18.0 million in the prior year quarter. The increase in commercial sales for the quarter ended December 31, 2013 is primarily from hospitality and vehicle seating products.

Gross margin for the quarters ended December 31, 2013 and 2012 was 23.2% and 24.0%, respectively. The decrease in the current year period was primarily due to price discounting on certain case goods to address changing customer requirements.

In December 2013 the Company entered into an agreement to settle Indiana civil litigation in order to eliminate the ongoing costs and distraction of the litigation. The Company will contribute $ 6.3 million to the settlement as part of an agreement whose terms are otherwise confidential. In reaching the agreement, the Company does not admit any wrongdoing and believes that it did not cause or contribute to the contamination at issue. This amount is recorded as litigation settlement payable on the Consolidated Balance Sheets and as litigation settlement cost in Consolidated Statements of Income. The Company incurred approximately $0.8 million of legal defense costs during the quarter ended December 31, 2013 which has been recorded in selling, general and administrative (SG&A) expense. The Company has received reimbursements of legal defense costs of approximately $1.7 million from insurers and this has been reflected as a reduction in SG&A expense for the quarter ended December 31, 2013. The Company continues to pursue recovery of defense and settlement costs from insurance carriers.

Selling, general and administrative (SG&A) expense for the quarters ended December 31, 2013 and 2012 were 16.3% and 19.2% of net sales, respectively. The current quarter includes $0.8 million pre-tax in legal defense costs and $1.7 million pre-tax in legal defense reimbursement related to the Indiana civil litigation. The prior year quarter includes $0.7 million pre-tax in executive transition costs and $0.4 million pre-tax in legal defense costs.

Operating income for the quarter ended December 31, 2013 was $1.5 million compared to operating income of $4.6 million.

The effective income tax expense rate for the current quarter was 37.8% compared to an income tax expense rate of 37.3% in the prior year 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 quarter ended December 31, 2013 of $1.2 million or $0.16 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.


The following table compares net sales for the six months ended December 31, 2013 to the prior year six-month period.

                            Net Sales (in millions)
                         Six Months Ended December 31,
                           2013                 2012          $ Change     % Change
       Residential   $          175.4     $          148.9   $     26.5         17.8 %
       Commercial                41.5                 36.9          4.6         12.5 %
       Total         $          216.9     $          185.8   $     31.1         16.7 %

Results of Operations for the Six Months Ended December 31, 2013 vs. 2012

Net sales for the six months ended December 31, 2013 were $216.9 million, a 16.7% increase compared to $185.8 million in the prior year six month period. Residential net sales were $175.4 million in the current six month period, an increase of 17.8% from the prior year period of $148.9 million, primarily due to increased demand for upholstered and, to a lesser extent, ready-to-assemble products. Commercial net sales were approximately $41.5 million in the current six month period, an increase of 12.5% compared to $36.9 million in the prior year period. The increase in commercial sales for the quarter ended December 31, 2013 is primarily from hospitality and vehicle seating products.

Gross margin for the six months ended December 31, 2013 was 22.9% of net sales compared to 23.6% of net sales in the prior year six month period. The decrease in the current year period was primarily due to price discounting on certain case goods to address changing customer requirements.

In December 2013 the Company entered into an agreement to settle Indiana civil litigation in order to eliminate the ongoing costs and distraction of the litigation. The Company will contribute $ 6.3 million to the settlement as part of an agreement whose terms are otherwise confidential. In reaching the agreement, the Company does not admit any wrongdoing and believes that it did not cause or contribute to the contamination at issue. This amount is recorded as litigation settlement payable on the Consolidated Balance Sheets and as litigation settlement cost in the Consolidated Statements of Income. The Company incurred approximately $1.7 million of legal defense costs during the six month period ended December 31, 2013 which has been recorded in SG&A expense. The Company has received reimbursements of legal defense costs of approximately $1.7 million from insurers and this has been reflected as a reduction in selling, general and administrative (SG&A) expenses for the six months ended December 31, 2013. The Company continues to pursue recovery of defense and settlement costs from insurance carriers.

SG&A expense for the six month period ended December 31, 2013 were 16.9% of net sales compared to 18.8% of net sales in the prior year six month period. SG&A expense for the six month period ended December 31, 2012 included pre-tax executive transition costs of $1.2 million or 0.6% of net sales and $1.0 million pre-tax or 0.5% of net sales for legal defense costs related to the Indiana civil litigation.

Operating income for the six months ended December 31, 2013 was $6.9 million compared to operating income of $9.0 million in the prior year period.

The effective income tax expense rate for the current six month period was 36.8% compared to an income tax expense rate of 37.1% in the prior year 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 six months ended December 31, 2013 of $4.9 million or $0.66 per share compared to $5.8 million or $0.80 per share for the prior year period. All earnings per share amounts are on a diluted basis.

Liquidity and Capital Resources

Working capital (current assets less current liabilities) at December 31, 2013 was $118.4 million compared to $113.7 million at June 30, 2013. Changes in working capital from June 30, 2013 to December 31, 2013 include increases in inventory of $6.4 million, accounts receivable of $ 5.4 million, and other current assets of $2.9 million, offset by a decrease in cash of $2.1 million and increases in accounts payable of $1.5 million and litigation settlement payable of $6.3 million. The higher inventory levels support the increases in residential sales volume and expanded product offerings. The increase in accounts receivable is due to increased sales volume and timing of related shipments and collections.


The Company's main source of liquidity is cash and cash flows from operations. As of December 31, 2013 and June 30, 2013, the Company had cash totaling $8.9 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 December 31, 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 on June 30, 2014. At December 31, 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%, with a maturity date of February 13, 2014 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 December 31, 2013. The Company is in the process of renewing this line of credit.

Net cash provided by operating activities of $1.2 million in the six months ended December 31, 2013 was comprised primarily of net income of $4.9 million, changes in operating assets and liabilities of $3.7 million. Net cash provided by operating activities in the six months ended December 31, 2012 was $2.1 million.

Net cash used in investing activities was $2.3 million and $5.5 million in the six months ended December 31, 2013 and 2012, respectively. Net purchases of investments were $0.8 million for the six months ended December 31, 2013 versus $0.6 million in the prior year six month period. Capital expenditures were $1.5 million and $4.9 million during the six months ended December 31, 2013 and 2012, respectively.

Net cash used in financing activities was $1.0 million and $2.3 million in the six months ended December 31, 2013 and 2012, respectively, primarily for the payment of dividends of $2.1 million compared to $3.1 million in the six months ended December 31, 2013 and 2012, respectively.

The Company expects that capital expenditures for the remainder of fiscal year 2014 will be approximately $3.0 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 December 31, 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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