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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
______________________________________
FORM
______________________________________
For the quarterly period ended
or
For the transition period from to
Commission file number
______________________________________
(Exact Name of Registrant as Specified in Its Charter)
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Incorporated in the State of
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(State or other Jurisdiction of |
(I.R.S. Identification No.) |
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Incorporation or Organization) |
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(Address of Principal Executive Offices) (Zip Code)
(
(Registrant’s Telephone Number, Including Area Code)
______________________________________
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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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 (or for such a shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (check one).
Large Accelerated Filer
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
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Common Stock - $1.00 Par Value |
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Shares Outstanding as of February 7, 2024 |
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Table of Contents
FLEXST EEL INDUSTRIES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED December 31, 2023
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Page |
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Part I – Financial Information |
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Item 1. |
3 |
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Consolidated Balance Sheets as of December 31, 2023, and June 30, 2023 (Unaudited) |
3 |
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4 |
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5 |
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6 |
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7 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
14 |
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Item 3. |
16 |
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Item 4. |
17 |
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Part II – Other Information |
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Item 1A. |
17 |
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Item 2. |
17 |
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Item 6. |
18 |
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19 |
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2
Table of Contents
PART I FINANCIAL INFORMATION
Ite m 1. Financial Statements
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Amounts in thousands)
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December 31, |
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June 30, |
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2023 |
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2023 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
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$ |
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Trade receivables - less allowances: December 31, 2023, $
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Inventories |
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Other |
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Assets held for sale |
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Total current assets |
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NONCURRENT ASSETS: |
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Property, plant and equipment, net |
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Operating lease right-of-use assets |
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Deferred income taxes |
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Other assets |
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TOTAL ASSETS |
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$ |
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$ |
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LIABILITIES AND SHAREHOLDERS' EQUITY |
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CURRENT LIABILITIES: |
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Accounts payable - trade |
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$ |
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$ |
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Current portion of operating lease liabilities |
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Accrued liabilities: |
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Payroll and related items |
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Insurance |
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Sales and advertising related items |
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Other |
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Total current liabilities |
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LONG-TERM LIABILITIES: |
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Operating lease liabilities, less current maturities |
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Line of credit |
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Other liabilities |
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Total liabilities |
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SHAREHOLDERS' EQUITY: |
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Common stock - $
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Additional paid-in capital |
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Treasury stock, at cost;
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(
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(
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Retained earnings |
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Total shareholders' equity |
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY |
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$ |
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$ |
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See accompanying Notes to Consolidated Financial Statements (Unaudited).
3
Table of Contents
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
(Amounts in thousands, except per share data)
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Three Months Ended |
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Six Months Ended |
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December 31, |
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December 31, |
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2023 |
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2022 |
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2023 |
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2022 |
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Net sales |
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$ |
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$ |
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$ |
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$ |
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Cost of goods sold |
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Gross profit |
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Selling, general and administrative expenses |
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Environmental remediation |
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— |
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(
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— |
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(
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Other expense |
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— |
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— |
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— |
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Operating income |
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Interest expense |
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Other (income) expense |
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— |
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(
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— |
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Income before income taxes |
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Income tax provision |
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Net income and comprehensive income |
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$ |
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$ |
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$ |
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$ |
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Weighted average number of common shares outstanding: |
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Basic |
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Diluted |
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Earnings per share of common stock: |
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Basic |
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$ |
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$ |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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$ |
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$ |
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|
See accompanying Notes to Consolidated Financial Statements (Unaudited).
4
Table of Contents
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
(Amounts in thousands)
|
|
|
Six Months Ended December 31, 2023 |
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Total Par |
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Value of |
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Common |
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Additional |
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Shares |
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Paid-In |
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Treasury |
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Retained |
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|||||
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($
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Capital |
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Stock |
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Earnings |
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Total |
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|||||
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Balance on June 30, 2023 |
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$ |
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$ |
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$ |
(
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) |
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$ |
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$ |
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Stock-based compensation |
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— |
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— |
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Vesting of restricted stock units and restricted shares |
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(
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) |
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— |
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— |
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(
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) |
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Treasury stock purchases |
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— |
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— |
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(
|
) |
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— |
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(
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) |
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Cash dividends declared |
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— |
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— |
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— |
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(
|
) |
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(
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) |
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Net income |
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— |
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— |
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— |
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|
Balance on September 30, 2023 |
|
$ |
|
|
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$ |
|
|
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$ |
(
|
) |
|
$ |
|
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$ |
|
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|
Stock-based compensation |
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|
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— |
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— |
|
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Vesting of restricted stock units and restricted shares |
|
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(
|
) |
|
|
— |
|
|
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— |
|
|
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(
|
) |
|
Treasury stock purchases |
|
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— |
|
|
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— |
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(
|
) |
|
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— |
|
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(
|
) |
|
Cash dividends declared |
|
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— |
|
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— |
|
|
|
— |
|
|
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(
|
) |
|
|
(
|
) |
|
Net income |
|
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— |
|
|
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— |
|
|
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— |
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|
Balance on December 31, 2023 |
|
$ |
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$ |
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$ |
(
|
) |
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$ |
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$ |
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Six Months Ended December 31, 2022 |
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Total Par |
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Value of |
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Common |
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Additional |
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|||||
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Shares |
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Paid-In |
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Treasury |
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Retained |
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|||||
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($
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Capital |
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Stock |
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Earnings |
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Total |
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|||||
|
Balance on June 30, 2022 |
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$ |
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$ |
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$ |
(
|
) |
|
$ |
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$ |
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|
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Stock-based compensation |
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— |
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— |
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Vesting of restricted stock units and restricted shares |
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(
|
) |
|
|
— |
|
|
|
— |
|
|
|
(
|
) |
|
Treasury stock purchases |
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— |
|
|
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— |
|
|
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(
|
) |
|
|
— |
|
|
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(
|
) |
|
Cash dividends declared |
|
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— |
|
|
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— |
|
|
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— |
|
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|
(
|
) |
|
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(
|
) |
|
Net income |
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— |
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— |
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— |
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|
Balance on September 30, 2022 |
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$ |
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$ |
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$ |
(
|
) |
|
$ |
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$ |
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|
Stock-based compensation |
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|
|
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— |
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— |
|
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|
Vesting of restricted stock units and restricted shares |
|
|
|
|
|
|
(
|
) |
|
|
— |
|
|
|
— |
|
|
|
(
|
) |
|
Treasury stock purchases |
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— |
|
|
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— |
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(
|
) |
|
|
— |
|
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(
|
) |
|
Cash dividends declared |
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— |
|
|
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— |
|
|
|
— |
|
|
|
(
|
) |
|
|
(
|
) |
|
Net income |
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|
— |
|
|
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— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Balance on December 31, 2022 |
|
$ |
|
|
|
$ |
|
|
|
$ |
(
|
) |
|
$ |
|
|
|
$ |
|
|
See accompanying Notes to Consolidated Financial Statements (Unaudited).
5
Table of Contents
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
|
|
|
Six Months Ended |
|
|||||
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|
|
December 31, |
|
|||||
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|
2023 |
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|
2022 |
|
||
|
OPERATING ACTIVITIES: |
|
|
|
|
|
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||
|
Net income |
|
$ |
|
|
|
$ |
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
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|
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Depreciation |
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Deferred income taxes |
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|
|
|
|
|
— |
|
|
Stock-based compensation expense |
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|
|
|
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|
|
|
Change in provision for losses on accounts receivable |
|
|
(
|
) |
|
|
(
|
) |
|
Loss on disposal of assets |
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|
|
|
|
— |
|
|
Changes in operating assets and liabilities: |
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Trade receivables |
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Inventories |
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Other current assets |
|
|
(
|
) |
|
|
(
|
) |
|
Other assets |
|
|
(
|
) |
|
|
— |
|
|
Accounts payable - trade |
|
|
(
|
) |
|
|
(
|
) |
|
Accrued liabilities |
|
|
(
|
) |
|
|
(
|
) |
|
Other long-term liabilities |
|
|
|
|
|
|
(
|
) |
|
Net cash provided by operating activities |
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES: |
|
|
|
|
|
|
||
|
Capital expenditures |
|
|
(
|
) |
|
|
(
|
) |
|
Net cash (used in) investing activities |
|
|
(
|
) |
|
|
(
|
) |
|
FINANCING ACTIVITIES: |
|
|
|
|
|
|
||
|
Dividends paid |
|
|
(
|
) |
|
|
(
|
) |
|
Treasury stock purchases |
|
|
(
|
) |
|
|
(
|
) |
|
Proceeds from line of credit |
|
|
|
|
|
|
|
|
|
Payments on line of credit |
|
|
(
|
) |
|
|
(
|
) |
|
Shares withheld for tax payments on vested restricted shares |
|
|
(
|
) |
|
|
(
|
) |
|
Net cash (used in) financing activities |
|
|
(
|
) |
|
|
(
|
) |
|
(Decrease) in cash and cash equivalents |
|
|
(
|
) |
|
|
(
|
) |
|
Cash and cash equivalents at beginning of the period |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the period |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
||
|
SUPPLEMENTAL INFORMATION |
|
|
|
|
|
|
||
|
Interest paid |
|
|
|
|
|
|
|
|
|
Cash paid for income taxes, net |
|
|
|
|
|
|
|
|
|
Capital expenditures in accounts payable |
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements (Unaudited).
6
Table of Contents
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE PERIOD ENDED December 31, 2023
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
DESCRIPTION OF BUSINESS – Flexsteel Industries, Inc. and Subsidiaries (the “Company” or “Flexsteel” or “Our”) is one of the largest manufacturers, importers, and marketers of furniture products in the United States. Product offerings include a wide variety of furniture such as sofas, loveseats, chairs, reclining rocking chairs, swivel rockers, sofa beds, convertible bedding units, occasional tables, desks, dining tables and chairs, kitchen storage, bedroom furniture, and outdoor furniture. A featured component in most of the upholstered furniture is a unique steel drop-in seat spring from which the name “Flexsteel” is derived. The Company distributes its products throughout the United States through its e-commerce channel and direct sales force.
BASIS OF PRESENTATION – The unaudited Consolidated Financial Statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The information contained in the Consolidated Financial Statements includes normal recurring adjustments and reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of such Consolidated Financial Statements. Operating results for the three and six months ended December 31, 2023, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2024. Certain information and footnote disclosures normally included in the Consolidated Financial Statements prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. Except to the extent updated or described below, the significant accounting policies in Note 1 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended June 30, 2023 , appropriately represent, in all material respects, the current status of accounting policies.
2. INVENTORIES
A comparison of inventories is as follows:
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December 31, |
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June 30, |
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(in thousands) |
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2023 |
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2023 |
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Raw materials |
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$ |
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$ |
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Work in process and finished parts |
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Finished goods |
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Total |
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$ |
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$ |
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3. ASSETS HELD FOR SALE
During the fiscal year 2020, the Company committed to a plan to sell assets located at the Company’s Starkville, Mississippi location as part of a restructuring plan. As of December 31, 2023, the Company continues to actively market the assets in Starkville, Mississippi. A summary of the assets held for sale as of December 31, 2023, is included in the table below.
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Accumulated |
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Net Book |
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Location |
Asset Category |
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Cost |
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Depreciation |
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Value |
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(in thousands) |
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Starkville, Mississippi |
Building & building improvements |
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$ |
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$ |
(
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) |
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$ |
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Land & land improvements |
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(
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) |
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Total assets held for sale |
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$ |
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$ |
(
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) |
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$ |
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4. LEASES
The Company accounts for its leases in accordance with ASU No. 2016-02, Leases (Topic 842) (“ASC 842”). ASC 842 requires lessees to (i) recognize a right-of-use asset (“ROU asset”) and a lease liability that is measured at the present value of the remaining lease payments on the Consolidated Balance Sheets, (ii) recognize a single lease cost, calculated over the lease term on a straight-line basis and (iii) classify lease-related cash payments within operating and financing activities. The Company made an accounting policy election to not recognize short-term leases on the Consolidated Balance Sheets and all non-lease components, such as common area maintenance, were excluded. At any given time during the lease term, the lease liability represents the present value of the remaining lease payments,
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Table of Contents
and the ROU asset is measured as the amount of the lease liability, adjusted for pre-paid rent, unamortized initial direct costs, and the remaining balance of lease incentives received. Both the lease ROU asset and liability are reduced to zero at the end of the lease term.
The Company leases distribution centers and warehouses, manufacturing facilities, showrooms, and office space. At the lease inception date, the Company determines if an arrangement is, or contains a lease. Some of the Company’s leases include options to renew at similar terms. The Company assesses these options to determine if the Company is reasonably certain of exercising these options based on relevant economic and financial factors. Options that meet these criteria are included in the lease term at the lease commencement date.
For purposes of measuring the Company’s ROU asset and lease liability, the discount rate utilized by the Company was based on the average interest rates effective for the Company’s line of credit. Some of the Company’s leases contain variable rent payments, including common area maintenance and utilities. Due to the variable nature of these costs, they are not included in the measurement of the ROU asset and lease liability.
On August 20, 2021, Flexsteel entered into a lease agreement for the construction of a
At December 31, 2023, the Company determined that no impairment indicators exist with regard to the Mexicali lease given the current and expected sublease tenants and plans for future operations in the facility. At December 31, 2023, the right-of-use asset associated specifically with the Mexicali lease is
$
The components of the Company’s leases reflected on the Company’s Consolidated Statements of Income were as follows:
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Three Months Ended |
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Six Months Ended |
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December 31, |
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December 31, |
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(in thousands) |
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2023 |
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2022 |
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2023 |
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2022 |
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Operating lease expense |
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$ |
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$ |
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$ |
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$ |
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Variable lease expense |
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Total lease expense |
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$ |
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$ |
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$ |
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$ |
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Other information related to leases and future minimum lease payments under non-cancelable operating leases were as follows:
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Six Months Ended |
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December 31, 2023 |
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December 31, 2022 |
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(in thousands) |
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Cash paid for amounts included in the measurement of lease liabilities: |
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Operating cash flows paid for operating leases |
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$ |
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$ |
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Cash received from subleasing of operating lease: |
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Operating cash flows received from subleasing of operating lease |
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$ |
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$ |
— |
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Right-of-use assets obtained in exchange for lease liabilities: |
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Operating leases |
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$ |
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$ |
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Weighted-average remaining lease term (in years): |
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Operating leases |
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Weighted-average discount rate: |
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Operating leases |
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% |
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% |
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Future minimum lease payments under non-cancelable operating leases were as follows:
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December 31, 2023 |
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Remaining payments in FY2024 |
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$ |
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FY2025 |
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FY2026 |
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FY2027 |
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FY2028 |
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Thereafter |
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Total future minimum lease payments |
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$ |
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Less imputed interest |
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Lease liability |
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$ |
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5. CREDIT ARRANGEMENTS
On September 8, 2021, the Company, as the borrower, entered into a credit agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association (the “Lender”), and the other lenders party thereto. The Credit Agreement has a
On April 18, 2022, the Company, as the borrower, entered into a first amendment to the September 8, 2021, Credit Agreement (“First Amendment to the Credit Agreement”), with the Lender and the lenders thereto. The amendment to the Credit Agreement changed the definition of the term ‘Payment Conditions’ and further defined default or event of default and the calculation of the Fixed Charge Coverage Ratio.
Subject to certain conditions, borrowings under the Credit Agreement initially bore interest at LIBOR plus
As of December 31, 2023, there was
$
Letters of credit outstanding with the Lender as of December 31, 2023
, totaled $
6. INCOME TAXES
The provision for income taxes for the interim periods is based on an estimate of the Company’s annual effective tax rate adjusted to reflect the impact of discrete items. Management judgment is required in projecting ordinary income to estimate the Company’s annual effective tax rate. The Company’s effective tax rate for the three months ended December 31, 2023, and December 31, 2022, was
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Table of Contents
7. STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans in accordance with ASC 718,
Stock Compensation
, which requires the Company to measure all share-based payments at grant date fair value and recognize the cost over the requisite service period. Restricted shares and restricted stock units (“RSUs”) generally vest over
The following table is a summary of total stock-based compensation expenses for the three and six months ended December 31, 2023 and 2022.
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Three Months Ended |
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Six Months Ended |
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December 31, |
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December 31, |
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(in thousands) |
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2023 |
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2022 |
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2023 |
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2022 |
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Total stock-based compensation expense |
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$ |
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$ |
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$ |
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$ |
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On December 14, 2022, the Company’s shareholders approved the Flexsteel Industries, Inc. 2022 Equity Incentive Plan (“2022 Plan”).
The 2022 Plan replaced the Long-Term Incentive Compensation Plan (“LTIP”) and the 2013 Omnibus Stock Plan (collectively, the “Prior Plans”). No further awards will be made under either of the Prior Plans, but these Prior Plans will continue to govern awards previously granted under them.
The 2022 Plan is a long-term incentive plan pursuant to which awards may be granted to certain employees, independent contractors and directors of the Company, in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, performance shares or other stock-based awards. For periods beginning on or after July 1, 2023, restricted stock units ("RSUs") and performance stock units ("PSUs") granted to officers and key employees as part of long-term compensation programs are issued from the 2022 Plan. RSUs and PSUs awarded from the 2022 Plan are included in the Long-Term Incentive Compensation or Restricted Share and RSUs tables below.
The LTIP provided for PSUs to be awarded to officers and key employees based on performance goals set by the Compensation Committee of the Board of Directors (the “Committee”). In conjunction with each grant of PSUs, the Committee granted RSUs under the
2013 Omnibus Stock Plan that vested at the end of
The 2013 Omnibus Stock Plan was for key employees, officers and directors and provided for the granting of incentive and nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights, and performance units
.
Long-Term Incentive Compensation
The table below sets forth, as of December 31, 2023, the number of unvested PSUs granted at the target performance level for the 2022-2024, 2023-2025, and 2024-2026 performance periods under the 2022 Plan and LTIP (as applicable) and the number of unvested RSUs granted in conjunction with the PSUs.
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that year. The Committee selected Adjusted Earnings Before Interest and Tax based on a defined percentage growth as the performance metric for the performance periods ending June 30, 2024, 2025, and 2026.
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Time-Based Vest (RSUs) |
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Performance-Based Vest (PSUs) |
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Total |
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Weighted Average |
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Weighted Average |
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Weighted Average |
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Fair Value |
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Fair Value |
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Fair Value |
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(shares in thousands) |
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Shares |
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Per Share |
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Shares |
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Per Share |
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Shares |
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Per Share |
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Unvested as of June 30, 2023 |
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$ |
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$ |
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$ |
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Granted |
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Vested |
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— |
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— |
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(
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) |
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(
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) |
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Forfeited |
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(
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) |
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(
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) |
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(
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) |
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Unvested as of December 31, 2023 |
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$ |
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$ |
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$ |
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|
Total unrecognized stock-based compensation related to the unvested PSUs at the target performance level and the related unvested RSUs was
$
Restricted Shares and RSUs
A summary of the activity in the Company’s unvested restricted shares and unvested RSUs (not granted in conjunction with PSUs) during the three and six months ended December 31, 2023, is as follows:
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Weighted Average |
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Shares |
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Fair Value |
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(in thousands) |
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Per Share |
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Unvested as of June 30, 2023 |
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$ |
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Granted |
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Vested |
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(
|
) |
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Unvested as of December 31, 2023 |
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$ |
|
|
Total unrecognized stock-based compensation related to unvested restricted shares and unvested RSUs (not granted in conjunction with the PSUs) wa
s $
Options
A summary of the activity of the Company’s stock option plans as of December 31, 2023, is presented below:
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Weighted |
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Shares |
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Average |
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(in thousands) |
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Exercise Price |
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Outstanding at June 30, 2023 |
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$ |
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Canceled |
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(
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) |
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Outstanding at December 31, 2023 |
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$ |
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The following table summarizes information for options outstanding at December 31, 2023:
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Options |
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Weighted Average |
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Range of |
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Outstanding |
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Remaining |
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Exercise |
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Prices |
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(in thousands) |
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Life (Years) |
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Price |
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$ |
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$ |
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$ |
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$ |
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There is no unrecognized stock-based compensation expense related to these options as of December 31, 2023.
11
Table of Contents
Stock-based compensation granted outside a plan
During the quarter ended June 30, 2020, the Company awarded its Chief Financial Officer/Chief Operating Officer
During the quarter ended December 31, 2018, the Company awarded its Chief Executive Officer
8. EARNINGS PER SHARE
Basic earnings per share (EPS) of common stock are based on the weighted-average number of common shares outstanding during each period. Diluted earnings per share of common stock include the dilutive effect of potential common shares outstanding. The Company’s potential common shares outstanding are stock options, shares associated with the long-term incentive compensation plans, and non-vested restricted stock units. The Company calculates the dilutive effect of outstanding options and restricted stock units using the treasury stock method. Anti-dilutive options 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.
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Three Months Ended |
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Six Months Ended |
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December 31, |
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December 31, |
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(in thousands) |
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2023 |
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2022 |
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2023 |
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2022 |
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Basic shares |
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Potential common shares: |
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Stock options |
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Non-vested restricted stock units and restricted shares |
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Diluted shares |
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Anti-dilutive shares |
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Cash dividends declared per common share were $
9. COMMITMENTS AND CONTINGENCIES
Environmental Matters
– In March 2016, the Company received a General Notice Letter for the Lane Street Groundwater Superfund Site (the “Lane Street Site”) located in Elkhart, Indiana from the U.S. Environmental Protection Agency (EPA). In April 2016, the EPA issued their proposed clean-up plan for groundwater pollution and request for public comment. The Company responded to the request for public comment in May 2016. The EPA issued a Record of Decision selecting a remedy in August 2016 and estimated total costs to remediate of $
In April 2018, the EPA issued a Unilateral Administrative Order for Remedial Design and Remedial Action (the “Order”) against the Company. The Order was issued under Section 106(a) of the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), 42 U.S.C. §9606(a). The Order directed the Company to perform remedial design and remedial action for the Lane Street Site. The Order was to be effective May 29, 2018. To ensure completion of the remediation work, the EPA required the Company to secure financial assurance in the initial amount of $
Despite the Company’s position that it did not cause or contribute to the contamination, the Company reached a settlement with the EPA and the State of Indiana, which was filed as a consent decree in the U.S. District Court for the Northern District of Indiana on October 24, 2022. The consent decree required Flexsteel to pay $
12
Table of Contents
its
insurance carriers for partial reimbursement of the settlement. During the quarter ended December 31, 2022, the Company made full payment in accordance with the settlement agreement and as a result of insurance proceeds received, the Company recorded income of $
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.
10. SUBSEQUENT EVENTS
13
Table of Contents
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 2023 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, 2023 and 2022. The amounts presented are percentages of the Company’s net sales.
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Three Months Ended |
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Six Months Ended |
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December 31, |
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December 31, |
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2023 |
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2022 |
|
2023 |
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2022 |
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|
Net sales |
|
|
100.0 |
|
% |
|
|
100.0 |
|
% |
|
|
100.0 |
|
% |
|
|
100.0 |
|
% |
|
Cost of goods sold |
|
|
78.1 |
|
|
|
|
83.0 |
|
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|
|
79.3 |
|
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|
|
83.5 |
|
|
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Gross margin |
|
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21.9 |
|
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|
|
17.0 |
|
|
|
|
20.7 |
|
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16.5 |
|
|
|
Selling, general and administrative expenses |
|
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17.3 |
|
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|
|
16.0 |
|
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17.4 |
|
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15.6 |
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Environmental remediation |
|
|
— |
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(3.0 |
) |
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— |
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(1.5 |
) |
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Other expense |
|
|
— |
|
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|
|
— |
|
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— |
|
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0.2 |
|
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Operating income |
|
|
4.6 |
|
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|
|
4.0 |
|
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|
|
3.3 |
|
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|
2.2 |
|
|
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Interest expense |
|
|
0.5 |
|
|
|
|
0.3 |
|
|
|
|
0.5 |
|
|
|
|
0.3 |
|
|
|
Income before income taxes |
|
|
4.1 |
|
|
|
|
3.7 |
|
|
|
|
2.8 |
|
|
|
|
1.9 |
|
|
|
Income tax provision |
|
|
1.1 |
|
|
|
|
0.6 |
|
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|
|
0.8 |
|
|
|
|
0.2 |
|
|
|
Net income and comprehensive income |
|
|
3.0 |
|
% |
|
|
3.1 |
|
% |
|
|
2.0 |
|
% |
|
|
1.7 |
|
% |
Results of Operations for the Quarter Ended December 31, 2023 vs. 2022
Net sales were $100.1 million for the quarter ended December 31, 2023, compared to net sales of $93.1 million in the prior year quarter, an increase of 7.5%. The increase was driven by higher sales in home furnishings products sold through retail stores of $9.9 million, or 12.5%, led by unit volume increases and product mix. Sales of products sold through e-commerce channels decreased by ($2.9) million, or (20.3%), compared to the second quarter of the prior year. Lower sales in the e-commerce channel were driven by softer consumer demand and less promotional activity to improve overall profitability.
Retail home furnishings backlog was $55 million as of the quarter ended December 31, 2023, a decrease of (9.8%) compared to $61 million home furnishings backlog in the prior year quarter, mainly due to the Company’s focus on reducing manufactured backlog down to 3-5 week lead times.
Gross margin as a percent of net sales for the quarter ended December 31, 2023, was 21.9%, compared to 17.0% for the prior year quarter, an increase of 490 basis points (“bps”). The 490-bps increase was primarily due to supply chain cost saving initiatives and fixed cost leverage on higher sales volume.
Selling, general and administrative (“SG&A”) expenses increased $2.5 million or 16.8% to $17.4 million in the second quarter ended December 31, 2023, as compared to $14.9 million in the prior year quarter. As a percentage of net sales, SG&A was 17.3% in the quarter ended December 31, 2023 compared to 16.0% of net sales in the prior year quarter. The 130-bps increase primarily was due to investments to support growth and higher incentive compensation for the quarter ended December 31, 2023.
Income tax expense was $1.0 million, or an effective rate of 25.5% for the quarter ended December 31, 2023, compared to an income tax expense of $0.6 million, or an effective rate of 17.2% during the quarter ended December 31, 2022. For the quarter ended December 31, 2023, the effective tax rate differs from the statutory tax rate of 21% due to nondeductible stock compensation, state taxes, the impacts associated with uncertain tax positions, and the impact of foreign operations.
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Net income was $3.1 million, or $0.57 per diluted share for the quarter ended December 31, 2023, compared to net income of $2.9 million, or $0.53 per diluted share in the prior year quarter.
Results of Operations for the Six Months Ended December 31, 2023 vs. 2022
Net sales were $194.7 million for the six months ended December 31, 2023, compared to net sales of $188.8 million in the prior-year six-month period, an increase of 3.1%. The increase in sales of $5.9 million was driven by a $7.6 million increase related to home furnishing products sold through retailers and a decrease of ($1.7) million for home furnishing products sold through e-commerce channels.
Gross margin as a percent of net sales for the six months ended December 31, 2023, was 20.7%, compared to 16.5% for the prior-year six-month period, an increase of 420 bps. The 420-bps increase was primarily driven by the same factors discussed above for the quarter ended December 31, 2023.
Selling, general and administrative expenses increased $4.5 million in the six months ended December 31, 2023, compared to the prior-year six-month period. SG&A was 17.4% in the six months ended December 31, 2023, compared to the prior-year six-month period of 15.6%. The 180-bps increase was primarily due to investments in growth initiatives and higher incentive compensation for the six months ended December 31, 2023.
During the six months ended December 31, 2022, the Company recorded income of $2.8 million related to the settlement of the environmental remediation liability. See Note 10, Commitments and Contingencies, of the Notes to Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q for more information.
Income tax expense was $1.6 million, or an effective rate of 30.1%, during the six months ended December 31, 2023, compared to income tax expense of $0.4 million in the prior-year six-month period, or an effective tax rate of 11.5%. The effective tax rate for the six months ended December 31, 2023, was primarily impacted by nondeductible stock compensation, state taxes, the impacts associated with uncertain tax positions, and the impact of foreign operations.
Net income was $3.8 million, or $0.71 per diluted share for the six months ended December 31, 2023, compared to net income of $3.1 million, or $0.58 per diluted share in the prior-year six-month period.
Liquidity and Capital Resources
Working capital (current assets less current liabilities) on December 31, 2023, was $100.5 million compared to $115.5 million on June 30, 2023. The ($15.0) million decrease in working capital was primarily due to a decrease in inventory of ($16.8) million, a decrease in net trade receivables of ($6.8) million, and an increase of operating lease liabilities of $0.4 million, partially offset by a decrease in accounts payable of ($4.9) million, an increase in other current assets of $2.1 million, and a decrease in other current liabilities of ($2.0) million. Refer to discussion of working capital changes below, under Net cash provided by operating activities . Capital expenditures were $3.1 million during the six months ended December 31, 2023.
A summary of operating, investing, and financing cash flow is shown in the following table:
|
|
|
Six Months Ended |
|
|||||
|
|
|
December 31, |
|
|||||
|
(in thousands) |
|
2023 |
|
|
2022 |
|
||
|
Net cash provided by operating activities |
|
$ |
17,166 |
|
|
$ |
24,642 |
|
|
Net cash (used in) investing activities |
|
|
(3,058 |
) |
|
|
(2,176 |
) |
|
Net cash (used in) financing activities |
|
|
(14,161 |
) |
|
|
(22,876 |
) |
|
(Decrease) in cash and cash equivalents |
|
$ |
(53 |
) |
|
$ |
(410 |
) |
Net cash provided by operating activities
For the six months ended December 31, 2023, net cash provided by operating activities was $17.2 million, primarily due to a decrease in inventory of $16.8 million, a decrease in trade receivables of $6.9 million, net income of $3.8 million, and adjustments for non-cash items including depreciation of $1.9 million, stock-based compensation of $1.8 million, and deferred income taxes of $0.1 million partially offset by an increase in other assets of $5.3 million, a decrease in accounts payable of $5.0 million, an increase in other current assets of $2.1 million, and a decrease in accrued liabilities of $1.7 million.
For the six months ended December 31, 2022, net cash provided by operating activities was $24.6 million, which primarily consisted of net income of $3.1 million, adjusted for non-cash items including depreciation of $2.3 million, and stock-based compensation of $1.7
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million. Net cash provided by operating assets and liabilities was $17.7 million and was primarily due to a decrease in inventories of $30.4 million, and a decrease in trade receivables of $8.5 million, partially offset by a decrease in accrued liabilities of $4.9 million, a decrease in payables of $14.1 million, an increase in other current assets of $2.0 million, and a decrease in other long-term liabilities of $0.3 million. Sales volume declines drove the decrease in trade receivables, as well as decreased inventory purchases driving declines in inventory and payables. Accrued liabilities declined primarily due to the environmental remediation settlement.
Net cash (used in) investing activities
For the six months ended December 31, 2023, net cash used in investing activities was $3.1 million due to capital expenditures.
For the six months ended December 31, 2022, net cash used in investing activities was $2.2 million due to capital expenditures.
Net cash (used in) financing activities
For the six months ended December 31, 2023, net cash used in financing activities was $14.2 million, due to payments on the line of credit of $190.9 million partially offset by proceeds from the line of credit of $180.5 million, dividends paid of $1.7 million, $1.4 million paid for purchases of company stock, and $0.7 million paid for tax payments on employee vested restricted shares netted with proceeds from the issuance of common stock.
For the six months ended December 31, 2022, net cash used in financing activities was $22.9 million, primarily due to payments on lines of credit of $185.5 million, partially offset by proceeds from lines of credit of $166.9 million. In addition to the line of credit activity, net cash used in financing activities was also due to $2.2 million for treasury stock purchases, dividends paid of $1.7 million, and $0.4 million for tax payments on employee vested restricted shares netted with proceeds from the issuance of common stock.
Line of Credit
On September 8, 2021, the Company, as the borrower, entered into a credit agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association (the “Lender”), and the other lenders party thereto. The Credit Agreement has a five-year term and provides for up to an $85 million revolving line of credit. Subject to certain conditions, the Credit Agreement also provides for the issuance of letters of credit in an aggregate amount up to $5 million which, upon issuance, would be deemed advances under the revolving line of credit. Proceeds of borrowings were used to refinance all indebtedness owed to a prior lender and for working capital purposes. The Company’s obligations under the Credit Agreement are secured by substantially all its assets, excluding real property. The Credit Agreement contains customary representations, warranties, and covenants, including a financial covenant to maintain a fixed coverage ratio of not less than 1.00 to 1.00. In addition, the Loan Agreement places restrictions on the Company’s ability to incur additional indebtedness, to create liens or other encumbrances, to sell or otherwise dispose of assets, and to merge or consolidate with other entities. As of December 31, 2023, management believes the Company was in compliance with all covenants.
On April 18, 2022, the Company, as the borrower, entered into a first amendment to the September 8, 2021, Credit Agreement (“First Amendment to the Credit Agreement”), with the Lender and the lenders thereto. The amendment to the Credit Agreement changed the definition of the term ‘Payment Conditions’ and further defined default or event of default and the calculation of the Fixed Charge Coverage Ratio.
Subject to certain conditions, borrowings under the Credit Agreement initially bore interest at LIBOR plus 1.25% or 1.50% per annum. On May 24, 2023, the Company entered into a second amendment to the Credit Agreement ("Second Amendment to the Credit Agreement") with the Lender to transition the applicable interest rate from LIBOR to Secured Overnight Financing Rate ("SOFR"). Effective as of the date of the Second Amendment to the Credit Agreement, borrowings under the amended Credit Agreement bear interest at SOFR plus 1.36% to 1.61%, or an effective interest rate of 6.75%, on December 31, 2023.
As of December 31, 2023, there was $17.9 million outstanding under the Credit Agreement, exclusive of fees and letters of credit.
Letters of credit outstanding with the Lender as of December 31, 2023, totaled $1.1 million.
Contractual Obligations
As of December 31, 2023, 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, 2023.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
General – Market risk represents the risk of changes in the 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
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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, as well as 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, taxes or tariffs 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 quarters ended December 31, 2023 and 2022, the Company did not have sales but did have purchases and other expenses denominated in foreign currencies, primarily the Mexican Peso. The wages of our employees and certain other employee benefits and indirect costs related to our operations in Mexico are made in Pesos and subject to foreign currency fluctuation with the U.S. dollar. The Company does not employ any foreign currency hedges against this exposure. A negative shift in the value of the U.S. dollar against the Peso could increase the cost of our manufactured product. See “Risk Factors” in Item 1A in the most recent Annual Report on Form 10-K for further discussion.
Interest Rate Risk – The Company’s primary market risk exposure regarding financial instruments is changes in interest rates. On December 31, 2023, the Company had $17.9 million outstanding on its line of credit, exclusive of fees and letters of credit.
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 December 31, 2023.
(b) Changes in internal control over financial reporting. During the quarter ended December 31, 2023, 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 have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
Cautionary Statement Relevant to Forward-Looking Information for “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 concerning long-term goals or anticipated results of the Company, including statements contained in the Company’s filings with the Securities and Exchange Commission and 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 the Company’s 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, supply chain disruptions, litigation, restructurings, the effectiveness of new product introductions and distribution channels, the product mix of sales, pricing pressures, the cost of raw materials and fuel, changes in foreign currency values, retention and recruitment of key employees, actions by governments including laws, regulations, taxes and tariffs, the amount of sales generated and the profit margins thereon, competition (both U.S. and foreign), credit exposure with customers, participation in multi-employer pension plans, disruptions or security breaches to business information systems, the impact of any future pandemic, and general economic conditions. For further information regarding these risks and uncertainties, see the “Risk Factors” section in Item 1A of our most recent Annual Report on Form 10-K.
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, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On January 20, 2022, the Board of Directors approved a share repurchase program authorizing the Company to purchase up to $30 million of the Company’s common stock through January 19, 2025. All purchases were made in the open market.
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The following table summarizes the activity of the common stock repurchases made during the three months ended December 31, 2023.
|
|
|
Total Number |
|
|
Average |
|
|
Total Number
|
|
|
Approximate Dollar
|
|
||||
|
|
|
of Shares |
|
|
Price Paid |
|
|
Purchased |
|
|
that May Yet |
|
||||
|
Period |
|
Purchased |
|
|
per Share |
|
|
as Part of Plan |
|
|
Be Purchased |
|
||||
|
October 1, 2023, to October 31, 2023 |
|
|
5,315 |
|
|
$ |
19.78 |
|
|
|
1,424,774 |
|
|
$ |
3,218,216 |
|
|
November 1, 2023, to November 30, 2023 |
|
|
28,047 |
|
|
|
17.82 |
|
|
|
1,452,821 |
|
|
|
2,717,029 |
|
|
December 1, 2023, to December 31, 2023 |
|
|
20,026 |
|
|
|
18.34 |
|
|
|
1,472,847 |
|
|
|
2,348,851 |
|
|
Three months ended December 31, 2023 |
|
|
53,388 |
|
|
$ |
18.21 |
|
|
|
1,472,847 |
|
|
$ |
2,348,851 |
|
Item 6. Exhibits
|
Exhibit No. |
|
|
101.INS |
XBRL Instance Document** |
|
101.SCH |
Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents |
|
104.Cover Page |
Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
|
* |
Filed herewith |
|
** |
In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be “furnished” and not “filed.” |
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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: |
February 7, 2024 |
By: |
/s/ Michael J. Ressler |
|
|
|
|
|
Michael J. Ressler |
|
|
|
|
|
Chief Financial Officer |
|
|
|
|
|
(Principal Financial & Accounting Officer) |
|
19