SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[|X|] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[NO FEE REQUIRED] For the quarterly period
ended December 31, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____________ to ____________
Commission file number 0-5151
Incorporated in State of Minnesota I.R.S. Identification No. 42-0442319
FLEXSTEEL INDUSTRIES, INC.
P. O. BOX 877
DUBUQUE, IOWA 52004-0877
Area code 563 Telephone 556-7730
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_. No ___.
Common Stock - $1.00 Par Value
Shares Outstanding as of December 31, 2002 6,270,752
---------------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
December 31, June 30,
2002 2002
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................ $ 16,741,737 $ 5,375,683
Investments .......................................................... 7,314,037 15,876,088
Trade receivables - less allowance for doubtful accounts:
December 31, 2002, $2,560,000;
June 30, 2002, $2,540,000 ........................................ 27,370,533 31,361,285
Inventories .......................................................... 31,927,201 30,322,288
Deferred income taxes ................................................ 4,320,000 4,500,000
Other ................................................................ 3,058,217 1,316,136
------------- -------------
Total current assets ...................................................... 90,731,725 88,751,480
PROPERTY, PLANT, AND EQUIPMENT
At cost less accumulated depreciation:
December 31, 2002, $65,557,351; ...................................... 21,368,474 20,558,338
June 30, 2002, $63,674,333
DEFERRED INCOME TAXES ..................................................... 880,000 700,000
OTHER ASSETS .............................................................. 8,241,734 8,739,940
------------- -------------
TOTAL ..................................................................... $ 121,221,933 $ 118,749,758
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade .................................................. $ 3,936,603 $ 4,876,260
Accrued liabilities:
Payroll and related items ............................................ 4,594,981 5,454,501
Insurance ............................................................ 9,275,563 7,066,148
Restructuring ........................................................ 1,404,738 1,700,609
Other ................................................................ 5,838,712 6,775,889
Industrial revenue bonds payable .......................................... 650,000 650,000
------------- -------------
Total current liabilities ................................................. 25,700,597 26,523,407
DEFERRED COMPENSATION ..................................................... 4,661,253 4,509,782
-------------
Total liabilities ......................................................... 30,361,850 31,033,189
------------- -------------
SHAREHOLDERS' EQUITY:
Cumulative preferred stock - $50 par value:
authorized 60,000 shares: outstanding - none
Undesignated (subordinated) stock - $1 par value:
authorized 700,000 shares: outstanding - none
Common stock - $1 par value; authorized 15,000,000 shares; outstanding
December 31, 2002, 6,270,752 shares;
outstanding June 30, 2002, 6,198,551 shares ..................... 6,270,752 6,198,551
Additional paid-in capital ........................................... 1,230,481 492,223
Retained earnings .................................................... 83,378,011 80,756,107
Accumulated other comprehensive income (loss) ........................ (19,161) 269,688
------------- -------------
Total shareholders' equity ................................................ 90,860,083 87,716,569
------------- -------------
TOTAL ..................................................................... $ 121,221,933 $ 118,749,758
============= =============
See accompanying Notes to Consolidated Financial Statements (Unaudited).
- --------------------------------------------------------------------------------
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------- -------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
NET SALES .................................... $ 73,580,061 $ 65,826,772 $ 143,599,437 $ 129,034,342
COST OF GOODS SOLD ........................... (56,214,774) (52,599,938) (110,941,589) (103,047,047)
------------- ------------- ------------- -------------
GROSS MARGIN ................................. 17,365,287 13,226,834 32,657,848 25,987,295
SELLING, GENERAL AND
ADMINISTRATIVE ............................. (14,007,513) (12,304,638) (26,684,830) (25,008,806)
GAIN ON SALE OF LAND ......................... 403,065
------------- ------------- ------------- -------------
OPERATING INCOME ............................. 3,357,774 922,196 6,376,083 978,489
------------- ------------- ------------- -------------
OTHER:
Interest and other income ............... 291,729 224,833 607,068 483,455
Interest expense ........................ (3,260) (6,271) (6,048) (14,293)
------------- ------------- ------------- -------------
Total ........................................ 288,469 218,562 601,020 469,162
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES ................... 3,646,243 1,140,758 6,977,103 1,447,651
PROVISION FOR INCOME TAXES ................... (1,430,000) (430,000) (2,730,000) (540,000)
------------- ------------- ------------- -------------
NET INCOME ................................... $ 2,216,243 $ 710,758 4,247,103 $ 907,651
============= ============= ============= =============
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
BASIC ................................. 6,247,512 6,072,020 6,230,212 6,065,357
============= ============= ============= =============
DILUTED ............................... 6,358,711 6,120,703 6,340,860 6,116,550
============= ============= ============= =============
EARNINGS PER SHARE OF COMMON
STOCK:
BASIC ................................. $ 0.35 $ 0.12 $ 0.68 $ 0.15
============= ============= ============= =============
DILUTED ............................... $ 0.35 $ 0.12 $ 0.67 $ 0.15
============= ============= ============= =============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------- -------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
NET INCOME ................................... $ 2,216,243 $ 710,758 $ 4,247,103 $ 907,651
------------- ------------- ------------- -------------
OTHER COMPREHENSIVE INCOME
(LOSS), BEFORE TAX:
Unrealized gains (losses) on securities
arising during period ............... 126,040 353,265 (458,708) (163,592)
Reclassification adjustment for losses
(gains) included in net income ...... (22,140) (32,669) (9,093) (16,169)
------------- ------------- ------------- -------------
Other comprehensive income (loss), before tax 103,900 320,596 (467,801) (179,761)
------------- ------------- ------------- -------------
INCOME TAX BENEFIT (EXPENSE):
Income tax benefit (expense) related to
securities losses arising during period ... (49,156) (130,709) 175,405 54,326
Income tax benefit related to securities
reclassification adjustment ............... 8,635 12,088 3,547 6,181
------------- ------------- ------------- -------------
Income tax benefit (expense) related to other
comprehensive income (loss) ............... (40,521) (118,621) 178,952 60,507
------------- ------------- ------------- -------------
OTHER COMPREHENSIVE INCOME
(LOSS), NET OF TAX ........................ 63,379 201,975 (288,849) (119,254)
------------- ------------- ------------- -------------
COMPREHENSIVE INCOME ......................... $ 2,279,622 $ 912,733 $ 3,958,254 $ 788,397
============= ============= ============= =============
See accompanying Notes to Consolidated Financial Statements (Unaudited).
- --------------------------------------------------------------------------------
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
Six Months Ended
December 31,
-----------------------------
2002 2001
------------ ------------
OPERATING ACTIVITIES:
Net income ................................................................. $ 4,247,103 $ 907,651
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation ........................................................... 2,422,486 2,795,586
Restructuring (income) charges ......................................... (56,793) 890,000
Gain on disposition of capital assets .................................. (402,520) (23,537)
Changes in operating assets and liabilities:
Trade receivables .................................................. 3,779,036 4,078,434
Inventories ........................................................ (1,604,913) 765,595
Other current assets ............................................... (1,742,080) 9,223
Other assets ....................................................... (15,077) (15,076)
Accounts payable - trade ........................................... (939,657) (2,358,468)
Accrued liabilities ................................................ 663,154 1,092,491
Deferred compensation .............................................. 151,471 431,716
------------ ------------
Net cash provided by operating activities .................................. 6,502,210 8,573,615
------------ ------------
INVESTING ACTIVITIES:
Purchases of investments ............................................... (9,771,812) (5,805,518)
Proceeds from sales of investments ..................................... 18,467,271 4,714,194
Payments received from customers on notes receivable ................... 302,743 78,997
Proceeds from sales of capital assets .................................. 612,121 27,650
Capital expenditures ................................................... (3,442,222) (204,839)
------------ ------------
Net cash provided by (used in) investing activities ........................ 6,168,101 (1,189,516)
------------ ------------
FINANCING ACTIVITIES:
Dividends paid ......................................................... (1,616,726) (1,573,568)
Proceeds from issuance of common stock ................................. 312,469 36,585
------------ ------------
Net cash used in financing activities ...................................... (1,304,257) (1,536,983)
------------ ------------
Increase in cash and cash equivalents ...................................... 11,366,054 5,847,116
Cash and cash equivalents at beginning of year ............................. 5,375,683 10,048,562
------------ ------------
Cash and cash equivalents at end of period ................................. $ 16,741,737 $ 15,895,678
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest .............................................................. $ 5,700 $ 15,000
Income taxes .......................................................... $ 4,151,000 $ 189,000
See accompanying Notes to Consolidated Financial Statements (Unaudited).
- --------------------------------------------------------------------------------
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. These consolidated financial statements do not include certain information
and footnotes required by accounting principles generally accepted in the
United States of America for complete financial statements. However, in the
opinion of management, all adjustments considered necessary for a fair
presentation have been included and are of a normal recurring nature.
Operating results for the six-month period ended December 31, 2002 are not
necessarily indicative of the results that may be expected for the fiscal
year ending June 30, 2003.
DESCRIPTION OF BUSINESS - Flexsteel Industries, Inc. (the Company)
manufactures a broad line of upholstered furniture for residential,
recreational vehicle and commercial seating use. Products include sofas,
love seats, chairs, reclining and rocker-reclining chairs, swivel rockers,
sofa beds, and convertible bedding units. The Company has two wholly owned
subsidiaries: (1) Desert Dreams, Inc. owns and leases a commercial building
to an unrelated entity, and (2) Four Seasons, Inc. operates two retail
furniture stores. All significant intercompany accounts and transactions
have been eliminated.
2. The inventories are categorized as follows:
December 31, June 30,
2002 2002
------------ ------------
Raw materials.............................. $ 15,159,329 $ 15,623,962
Work in process and finished parts......... 8,294,030 8,092,398
Finished goods............................. 8,473,842 6,605,928
------------ ------------
Total................. $ 31,927,201 $ 30,322,288
============ ============
3. EARNINGS PER SHARE - Basic earnings per share of common stock is based on
the weighted average number of common shares outstanding during each
period. Diluted earnings per share of common stock takes into effect the
dilutive effect of potential common shares outstanding. The Company's only
potential common shares outstanding are stock options, which resulted in a
dilutive effect of 111,199 shares and 48,683 shares in quarters ended and
110,648 and 51,193 shares in the six months ended December 31, 2002 and
2001, respectively. The Company calculates the dilutive effect of
outstanding options using the treasury stock method. Options to purchase
163,050 and 136,000 shares of common stock were outstanding during the
three and six months ended December 31, 2002 and 2001, respectively, but
were not included in the computation of diluted earnings per share as their
exercise prices were greater than the average market price of the common
shares.
4. ACCOUNTING DEVELOPMENTS - In August 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS. SFAS No. 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and supersedes SFAS No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF, along with certain other reporting standards.
SFAS No. 144 was effective for the Company on July 1, 2002. The adoption of
SFAS No. 144 did not have a material impact on the Company's financial
position or results of operations.
In April 2002, the FASB issued SFAS No. 145, RESCISSION OF FASB STATEMENTS
No. 4, 44, And 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL
CORRECTIONS. SFAS No. 145 was effective for the Company on July 1, 2002.
The adoption of the technical corrections contained in SFAS No. 145 did not
have a material impact on the Company's financial position or results of
operations.
In June 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED
WITH EXIT OR DISPOSAL ACTIVITIES. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER
COSTS TO EXIT AN ACTIVITY (INCLUDING CERTAIN COSTS INCURRED IN A
RESTRUCTURING). SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF 94-3, a liability for an exit cost was
recognized at the date of an entity's commitment to an exit plan. SFAS No.
146 will be effective for exit or disposal activities that are initiated by
the Company after December 31, 2002.
In November 2002, the FASB issued FASB Interpretation No. 45, GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS OF OTHERS (FIN 45). FIN 45 clarifies the
requirements for a guarantor's accounting for and disclosure of certain
guarantees issued and outstanding. The initial recognition and initial
measurement provisions of FIN 45 are applicable to guarantees issued or
modified after December 31, 2002. The disclosure requirements of FIN 45 are
effective for financial statements of interim or annual periods ending
after December 15, 2002 (see Note 6).
In December 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION-TRANSITION AND DISCLOSURE, WHICH AMENDS SFAS NO. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION. SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. In addition, SFAS No.
148 amends the disclosure requirement of SFAS No. 123 to require more
prominent and more frequent disclosures in financial statements of the
effects of stock-based compensation. The transition guidance and annual
disclosure provisions of SFAS No. 148 are effective for fiscal years ending
after December 15, 2002. The interim disclosure provisions are effective
for financial reports containing condensed financial statements for interim
periods beginning after December 15, 2002. The Company has elected to
continue to apply Accounting Principles Board (APB) Opinion No. 25 and
related interpretations in accounting for its stock option plans, as
permitted under SFAS No. 123 and SFAS No. 148. Accordingly, no compensation
cost has been recognized for its stock option plans. However, the Company
has early adopted the disclosure provisions of SFAS No. 148 (see Note 5).
5. STOCK OPTIONS - The Company has stock option plans for key employees and
directors that provide for the granting of incentive and nonqualified stock
options. Under the plans, options are granted at an exercise price equal to
the fair market value of the underlying common stock at the date of grant,
and may be exercisable for up to 10 years. All options are exercisable when
granted. At December 31, 2002, 593,400 shares were available for future
grants. The Company applies Accounting Principles Board (APB) Opinion No.
25 and related interpretations in accounting for its stock option plans, as
permitted under SFAS No. 123 and SFAS No. 148. Accordingly, no compensation
cost has been recognized for its stock option plans. Had the compensation
cost for the Company's incentive stock option plans been determined based
on the fair value at the grant dates for awards under those plans
consistent with the fair-value methodology of SFAS No. 123, the Company's
net income and earnings per share would have been reduced to the following
pro forma amounts:
Three Months Ended Six Months Ended
December 31, December 31,
----------------------------- ----------------------------
2002 2001 2002 2001
------------- ----------- ------------- ----------
Net income, as reported $ 2,216,243 $ 710,758 $ 4,247,103 907,651
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all
awards, net of related tax effects (286,000) (162,000) (286,000) (162,000)
------------- ----------- ------------- ----------
Pro forma net income $ 1,930,243 $ 548,758 $ 3,961,103 745,651
============= =========== ============= ==========
Earnings per share:
Basic - as reported $ 0.35 $ 0.12 $ 0.68 0.15
Basic - pro forma 0.31 0.09 0.64 0.12
Diluted - as reported 0.35 0.12 0.67 0.15
Diluted - pro forma 0.30 0.09 0.62 0.12
The fair value of each option grant is estimated on the date of grant using
the Black-Sholes option-pricing model with the following weighted-average
assumptions used for grants in fiscal 2003 and 2002, respectively; dividend
yield of 3.3% and 5.0%; expected volatility of 24.8% and 24.8%; risk-free
interest rates of 4.1% and 6.5%; and an expected life of 10 years on all
options. The Company does not anticipate that additional options will be
granted during fiscal 2003.
6. ACCRUED WARRANTY COSTS - The Company estimates the amount of warranty
claims on sold product that may be incurred based on current and
historical data. The actual warranty expense could differ from the
estimates made by the Company based on product performance. The following
table presents the changes in the companies product warranty liability:
Accrued warranty costs at June 30, 2002................ $ 500,000
Payments made for warranty costs....................... (1,596,630)
Accrual for product warranty........................... 1,596,630
------------
Accrued warranty costs at December 31, 2002............ $ 500,000
============
7. RESTRUCTURING - The Company established an accrual for restructuring
liabilities in fiscal 2002 for estimated employee separation costs and
facility closing costs related to the closure of (1) the Elkhart, Indiana
manufacturing facility and (2) a retail store. The accrual includes
estimated employee severance, inventory write-offs, and lease commitments
with no future benefit to the Company. Utilization of the accrual may
differ from the initial restructuring charge as amounts are paid and become
known to the Company.
The following table summarizes the activity related to the restructuring
charges during the six months ended December 31, 2002:
Employee Facility
Separation Closing
Costs Costs Total
----------- ----------- -----------
Accrued restructuring costs at June 30, 2002 ...... $ 431,793 $ 1,268,816 $ 1,700,609
Restructuring (income) charges for the period ended
December 31, 2002 .............................. (431,793) 375,000 (56,793)
Recovery (utilization) for the period ended
December 31, 2002 .............................. (239,078) (239,078)
----------- ----------- -----------
Accrued restructuring costs at December 31, 2002 .. 0 $ 1,404,738 $ 1,404,738
=========== =========== ===========
8. SEGMENTS - The Company operates in two reportable operating segments: (1)
Seating Products and (2) Retail Stores. The Seating Products segment
involves the manufacturing of a broad line of upholstered furniture for
residential, recreational vehicle, and commercial seating markets. The
Company's products are sold primarily throughout the United States by the
Company's internal sales force and various independent representatives.
The Retail Stores segment involves the operation of two retail furniture
stores that offer the Company's residential seating products for sale
directly to consumers. No single customer accounted for more than 10% of
sales in either of the Company's two segments.
Segment operating income is based on profit or loss from operations before
interest income and expense, other income and income taxes.
Segment information for the three-month periods ended December 31 is as
follows:
December 31, 2002 December 31, 2001
---------------------------------------------- -----------------------------------------------
Seating Retail Seating Retail
Products Stores Total Products Stores Total
------------- ----------- ------------- ------------- ------------ -------------
Net sales................... $ 71,857,995 $ 1,722,066 $ 73,580,061 $ 63,991,093 1,835,679 65,826,772
Operating income (loss)..... 3,895,579 (537,805) 3,357,774 1,649,544 (613,516) 1,036,028
Depreciation................ 1,235,082 28,524 1,263,606 1,353,059 47,599 1,400,658
Capital expenditures........ 1,465,652 1,465,652 112,666 39,883 152,549
Segment information for the six-month periods ended December 31 is as
follows:
December 31, 2002 December 31, 2001
---------------------------------------------- -----------------------------------------------
Seating Retail Seating Retail
Products Stores Total Products Stores Total
------------- ----------- ------------- ------------- ------------ -------------
Net sales................... $ 140,593,964 $ 3,005,473 143,599,437 $ 125,684,546 3,349,796 $ 129,034,342
Operating income (loss)..... 7,179,525 (803,442) 6,376,083 2,285,836 (1,193,515) 1,092,321
Depreciation................ 2,362,035 60,451 2,422,486 2,702,276 93,310 2,795,586
Capital expenditures........ 3,442,222 3,442,222 162,019 42,820 204,839
Assets...................... 119,839,054 1,382,879 121,221,933 106,958,167 2,180,456 109,138,623
9. RECLASSIFICATIONS - Certain prior year amounts have been reclassified to
conform to the current period presentation. These reclassifications had no
impact on net income or shareholders' equity as previously reported.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations:
- ----------------------
GENERAL:
The following analysis of the results of operations and financial condition of
Flexsteel Industries, Inc. (the Company) should be read in conjunction with the
consolidated financial statements and related notes included elsewhere in this
document.
CRITICAL ACCOUNTING POLICIES:
The discussion and analysis of the Company's consolidated financial statements
and results of operation are based on consolidated financial statements prepared
in accordance with accounting principles generally accepted in the United States
of America. Preparation of these consolidated financial statements requires the
use of estimates and judgments that affect the reported results. Actual results
may differ from these estimates under different assumptions or conditions.
USE OF ESTIMATES - the Company uses estimates based on the best information
available in recording transactions and balances resulting from business
operations. Estimates are used for such items as collectability of trade
accounts receivable, inventory valuation, depreciable lives, self-insurance
programs, restructuring costs, warranties and income taxes.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - the Company establishes an allowance for
doubtful accounts through review of open accounts, and historical collection and
allowances amounts. The allowance for doubtful accounts is intended to reduce
trade accounts receivable to the amount that reasonably approximates their fair
value due to their short-term nature. The amount ultimately realized from trade
accounts receivable may differ from the amount estimated in the financial
statements based on collection experience and actual returns and allowances.
INVENTORIES - the Company values inventory at the lower of cost or market. Raw
steel, lumber and wood frame parts are valued on the last-in, first out (LIFO)
method. Other inventories are valued on the first-in, first-out (FIFO) method.
Changes in the market conditions could require a write down of inventory.
SELF-INSURANCE PROGRAMS - the Company is self-insured for health care and most
workers' compensation up to predetermined amounts above which third party
insurance applies. The Company is contingently liable to insurance carriers
under its comprehensive general, product, and vehicle liability policies, as
well as some workers' compensation. Losses are accrued based upon the Company's
estimates of the aggregate liability of claims incurred using certain actuarial
assumptions followed in the insurance industry and based on Company experience.
The actual claims experience could differ from the estimates made by the
Company.
RESTRUCTURING - the Company established an accrual for restructuring liabilities
in fiscal 2002 for estimated employee separation costs and facility closing
costs related to the closure of (1) the Elkhart, Indiana manufacturing facility
and (2) a retail store. The accrual includes estimated employee severance,
inventory write-offs, and lease commitments with no future benefit to the
Company. Utilization of the accrual may differ from the initial restructuring
charge as amounts are paid and become known to the Company.
WARRANTY EXPENSE - the Company estimates the amount of warranty claims on sold
product that may be incurred based on current and historical data. The actual
warranty expense could differ from the estimates made by the Company based on
product performance.
REVENUE RECOGNITION - is upon delivery of product. Net sales consist of product
sales and related delivery charge revenue, net of adjustments for returns and
allowances. The actual amounts for returns and allowances could differ from the
estimated amounts.
The following table has been prepared as an aid in understanding the Company's
results of operations on a comparative basis for the fiscal second quarter and
six-month periods ended December 31, 2002 and 2001. Amounts presented are
percentages of the Company's net sales.
Second Quarter Ended Six Months Ended
December 31, December 31,
-------------------------------- ----------------------------------
2002 2001 2002 2001
------------- ------------ ------------- --------------
Net sales...................................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............................. (76.5%) (79.9%) (77.3%) (79.9%)
------------- ------------ ------------- --------------
Gross margin................................... 23.5% 20.1% 22.7% 20.1%
Selling, general and administrative............ (19.0%) (18.7%) (18.6%) (19.4%)
Gain on sale of land........................... 0.3%
------------- ------------ ------------- --------------
Operating income............................... 4.5% 1.4% 4.4% 0.7%
Other income, net.............................. 0.4% 0.3% 0.5% 0.4%
------------- ------------ ------------- --------------
Income before income taxes..................... 4.9% 1.7% 4.9% 1.1%
Provision for income taxes..................... (1.9%) (0.6%) (1.9%) (0.4%)
------------- ------------ ------------- --------------
Net income..................................... 3.0% 1.1% 3.0 0.7%
============= ============ ============= ==============
RESULTS OF OPERATIONS FOR THE QUARTER - Net sales for the quarter ended December
31, 2002 increased by $7.8 million or 11.8% compared to the prior year quarter.
Residential seating sales volume increased $3.1 million or 6.5%. Recreational
vehicle seating sales increased $3.9 million or 28.5%. Commercial seating sales
increased $0.7 million or 16.2%. The increase in net sales reflects some
improvement in consumer confidence for residential seating and the industry
improvement for vehicle seating products.
During the quarter ended December 31, 2001, the Company recorded a charge of
$0.9 million to cost of goods sold for estimated facility closing costs. Because
the Company has been able to lease the facility to a third party that has
employed most of the former employees, the Company has recorded a credit to cost
of goods sold of $0.4 million during the quarter ended December 31, 2002.
Excluding the facility closing costs described in the preceding paragraph, gross
margin increased $2.8 million to $16.9 million or 23.0% of net sales in the
current quarter, from $14.1 million or 21.4% in the prior year quarter. The
increase in gross margin largely reflects higher sales and production volume,
which resulted in improved absorption of fixed costs and, to a lesser degree,
changes in product mix.
Selling, general and administrative expenses as a percentage of net sales were
19.0% and 18.7% for the current quarter and prior year quarter, respectively.
During the quarter ended December 31, 2002 the Company finalized an agreement on
a closed retail store, and as a result, has recorded a facility closing charge
of $0.4 million to selling, general and administrative expense or 0.5% of net
sales. In the current quarter, higher advertising costs were offset by improved
fixed cost absorption on higher net sales.
The above factors resulted in current fiscal quarter net income of $2.2 million
or $0.35 per share compared to $0.7 million or $0.12 per share in the prior year
quarter, a net increase of $1.5 million or $0.23 per share. Excluding the
facility closing cost items described above, net income improved $0.9 million or
$0.13 per share.
All earnings per share amounts are on a diluted basis.
RESULTS OF OPERATIONS FOR THE LAST SIX MONTHS - Net sales for the six-months
ended December 31, 2002 increased by $14.6 million or 11.3% compared to the
prior year six-month period. Residential seating sales volume increased $7.3
million or 8.2%. Recreational vehicle seating sales increased $7.0 million or
23.0%. Commercial seating sales increased $0.2 million or 2.1%. The increase in
net sales reflects improved industry performance for vehicle seating products
and modest market share gains for residential products.
Excluding the facility closing adjustments described above, gross margin
increased $5.3 million to $32.2 million or 22.4% of sales in the current period
from $26.9 million or 20.8% of sales in the prior year period. The increase in
gross margin reflects changes in product mix and improved absorption of fixed
costs from higher sales and production volume.
Selling, general and administrative expenses as a percentage of sales were 18.6%
and 19.4% for the current year and prior year, respectively. The cost percentage
decrease was primarily due to improved fixed cost absorption on the higher net
sales.
During the first quarter of fiscal 2003, the Company sold land adjacent to the
Lancaster, Pennsylvania factory at a net gain (after tax) of $0.2 million or
$0.04 per share.
The above factors resulted in current fiscal year to date net income of $4.2
million or $0.67 per share compared to $0.9 million or $0.15 per share in the
prior year period, an increase of $3.3 million or $0.52 per share from the prior
year six-month period. Excluding the first quarter gain on sale of land and the
facility closing adjustment described above, net income was $4.0 million or
$0.63 per share, significantly higher than the prior year period of $1.5 million
or $0.24 per share, an increase of $2.5 million or $0.39 per share.
All earnings per share amounts are on a diluted basis.
Liquidity and Capital Resources:
- --------------------------------
Working capital at December 31, 2002 was $65.0 million, which includes cash,
cash equivalents and investments of $24.1million. Working capital increased by
$2.8 million or 5% from June 30, 2002.
During the six-month period ended December 31, 2002, cash, cash equivalents, and
investments increased by $2.8 million. Operating activities provided $6.5
million in cash that was primarily used to invest $3.4 million for capital
assets and to pay dividends of $1.6 million.
The Company believes its low debt position coupled with adequate cash, cash
equivalents, and investments adds a stabilizing effect to its operations. The
Company's liquidity and capital resources provide it with the ability to react
to opportunities as they arise, the ability to pay quarterly dividends to its
shareholders, and ensures that productive capital assets that enhance safety and
improve operations are purchased as needed.
Item 3. Quantitative and Qualitative Information About Market Risk.
Not applicable
Item 4. Controls and Procedures
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on their evaluation
as of a date within 90 days of the filing date of this Quarterly Report on Form
10-Q, the Company's chief executive officer and chief financial officer have
concluded that the Company's disclosure controls and procedures (as defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as
amended) were effective as of the date of such evaluation to ensure that
information we are required to disclose in reports that we file or submit under
the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms.
(b) CHANGES IN INTERNAL CONTROLS. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation, nor were there any
significant deficiencies or material weaknesses in the Company's internal
controls. As a result, no corrective actions were required or undertaken.
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 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 report, 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 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, the product mix of our
sales, the cost of raw materials, the amount of sales generated and the profit
margins thereon, competition, both foreign and domestic, credit exposure to our
customers, and general economic conditions.
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 5. Submission of Matters to a Vote of Security Holders
At the annual meeting of stockholders on December 9, 2002, Proposals 1, 2 and 3
set forth in the Board of Directors' definitive Proxy Statement dated October
29, 2002 were approved and adopted by the stockholders as follows:
Proposal 1 (Election of Directors): K. Bruce Lauritsen: For 5,953,811, Withheld
1,319, Abstentions and Broker Non-votes 32,455. L. Bruce Boylen: For 5,953,696,
Withheld 1,434, Abstentions and Broker Non-votes 32,455. Thomas E. Holloran: For
5,739,636, Withheld 215,494, Abstentions and Broker Non-votes 32,455. The names
of each Director whose term of office as a Director continued after the meeting
are as follows: K. Bruce Lauritsen, Edward J. Monaghan, Jeffrey T. Bertsch, L.
Bruce Boylen, Lynn J. Davis, Thomas E. Holloran, Jim R. Richardson, Patrick M.
Crahan, Marvin M. Stern, Robert E. Deignan and Eric S. Rangen.
Proposal 2 (Approval of the 2002 Stock Option Plan): For: 4,563,749, Against:
229,950, and Abstain: 474,138, and Broker Non-votes 719,748.
Proposal 3 (Appointment of Deloitte & Touche LLP as Independent Auditors): For:
5,941,944, Against: 31,008, and Abstain: 14,333.
Item 6. Exhibits and Reports on Form 8-K
The registrant did not file a report on Form 8-K during the quarter for which
this report is filed.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on by its behalf by the
undersigned officer there unto duly authorized.
FLEXSTEEL INDUSTRIES, INC.
Date: February 7, 2003 By: /s/ R. J. Klosterman
---------------- ---------------------------
R.J. Klosterman
Financial Vice President &
Principal Financial Officer
CERTIFICATION BY CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, K. Bruce Lauritsen, Chief Executive Officer of Flexsteel Industries, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Flexsteel
Industries, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 7, 2003
------------------------
By: /S/ K. Bruce Lauritsen
-------------------------
K. Bruce Lauritsen
Chief Executive Officer
CERTIFICATION BY CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Ronald J. Klosterman, Chief Financial Officer of Flexsteel Industries, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Flexsteel
Industries, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 7, 2003
------------------------
By: /S/ R. J. Klosterman
--------------------------
Ronald J. Klosterman
Chief Financial Officer