Selling, general and administrative expenses were $14.1 million or 17.3% of net sales and $14.5 million or 19.6% of net sales for the quarters ended March 31, 2010 and 2009, respectively. The percentage improvement is due to widespread expense reductions through facility consolidations and staff reductions during the prior fiscal year.
During the prior year quarter the Company recorded pre-tax charges of approximately $0.5 million of employee separation costs.
The effective income tax expense rate for the current fiscal quarter was 39.3% compared to an income tax benefit rate of 36.8% in the prior year fiscal quarter. The current and prior year rates include the federal statutory rate as well as the effect of the various state taxing jurisdictions.
The above factors resulted in current quarter net income of $2.3 million or $0.34 per share, compared to the prior year quarter net loss of $1.9 million or $0.28 per share.
All earnings per share amounts are on a diluted basis.
The following table compares net sales (in thousands) in total and by area of application for the nine months ended March 31, 2010 to the prior year period.
Gross margin for the nine months ended March 31, 2010 was 22.7% compared to 18.2% in the prior year period. The nine-month gross margin improvements are primarily due to better capacity utilization and lower fixed manufacturing costs resulting from facility consolidations, changes in product mix, lower ocean freight costs and a $1.7 million (2.2% of net sales) inventory write-down in the prior year.
Selling, general and administrative expenses were $43.5 million or 18.1% of net sales and $46.6 million or 18.7% of net sales for the nine months ended March 31, 2010 and 2009, respectively.
The prior year nine-month period included pre-tax charges of approximately $2.4 million of facility consolidation and employee separation costs.
The effective income tax expense rate for the current nine-month period ended was 38.9% compared to an income tax benefit rate of 36.4% in the prior year period. The current year rate includes the federal statutory rate as well as the effect of the various state taxing jurisdictions.
The above factors resulted in current nine-months ended net income of $6.7 million or $1.00 per share, compared to the prior year net loss of $2.3 million or $0.35 per share.
All earnings per share amounts are on a diluted basis.
Working Capital (current assets less current liabilities) at March 31, 2010 was $86.1 million. Net cash provided by operating activities was $19.2 million during the nine months ended March 31, 2010 due to improved profitability and lower inventory. At March 31, 2010, the Company had cash of $8.8 million and no bank borrowings. Cash provided by operating activities was used primarily to reduce borrowings by $10.0 million and pay dividends of $1.0 million. Changes
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 bank’s 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 Company’s 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
| |
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 Company’s 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 Company’s 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.
| |
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, 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 Company’s 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 Company’s 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 Company’s 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 Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2009.
Item 6. Exhibits
| | |
| 31.1 | Certification. |
| | |
| 31.2 | Certification. |
| | |
| 32 | 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. |
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.
| | | | |
| | | FLEXSTEEL INDUSTRIES, INC. |
| | | | |
Date: | April 23, 2010 | | By: | /S/ Timothy E. Hall |
| | | Timothy E. Hall |
| | | Chief Financial Officer |
| | | (Principal Financial & Accounting Officer) |
13
