UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM
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For the quarterly period ended
or
For the transition period from to
Commission file number
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(Exact Name of Registrant as Specified in Its Charter)
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Incorporated in the State of | |
(State or other Jurisdiction of | (I.R.S. Identification No.) |
Incorporation or Organization) |
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(Address of Principal Executive Offices) (Zip Code)
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(Registrant’s Telephone Number, Including Area Code)
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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 |
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 October 31, 2022 | |
FLEXSTEEL INDUSTRIES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2022
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Part I – Financial Information | ||
Item 1. | 3 | |
| Consolidated Balance Sheets as of September 30, 2022, and June 30, 2022 (Unaudited) | 3 |
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| 6 | |
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 13 |
Item 3. | 16 | |
Item 4. | 16 | |
Part II – Other Information | ||
Item 1A. | 17 | |
Item 2. | 17 | |
Item 6. | 17 | |
| 18 |
PART I FINANCIAL INFORMATION
Item 1.Financial Statements
FLEXSTEEL INDUSTRIES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Amounts in thousands)
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| September 30, |
| June 30, | ||
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| 2022 |
| 2022 | ||
ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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Trade receivables - less allowances: September 30, 2022, $ |
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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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Other assets |
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TOTAL ASSETS |
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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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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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Restructuring costs |
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Advertising |
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Environmental remediation |
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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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Lines 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; June 30, 2022, respectively |
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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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| $ | |
See accompanying Notes to Consolidated Financial Statements (Unaudited).
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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| 2021 | ||
Net sales |
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Cost of goods sold |
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Gross margin |
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Selling, general and administrative expenses |
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Restructuring expense |
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Other expense |
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Gain on disposal of assets due to restructuring |
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Operating income |
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Interest expense |
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Other expense |
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Income before income taxes |
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Income tax (benefit) provision |
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Net income and comprehensive income |
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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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Diluted |
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See accompanying Notes to Consolidated Financial Statements (Unaudited).
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
(Amounts in thousands)
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| Three Months Ended September 30, 2022 | |||||||||||||
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| Capital |
| Stock |
| Earnings |
| Total | |||||
Balance on June 30, 2022 |
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| $ | ( |
| $ | |
| $ | |
Stock-based compensation |
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Vesting of restricted stock units and restricted shares |
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Treasury stock purchases |
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Cash dividends declared |
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Net income |
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Balance on September 30, 2022 |
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| Stock |
| Earnings |
| Total | |||||
Balance on June 30, 2021 |
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| $ | |
| $ | ( |
| $ | |
| $ | |
Stock-based compensation |
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Vesting of restricted stock units and restricted shares |
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Treasury stock purchases |
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Cash dividends declared |
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Net income |
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Balance on September 30, 2021 |
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| $ | ( |
| $ | |
| $ | |
See accompanying Notes to Consolidated Financial Statements (Unaudited).
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
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| Three Months Ended | ||||
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| 2021 | ||
OPERATING ACTIVITIES: |
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Net income |
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| $ | |
Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
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Depreciation |
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Stock-based compensation expense |
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Change in provision for losses on accounts receivable |
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(Gain) 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 |
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Other assets |
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Accounts payable - trade |
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Accrued liabilities |
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Other long-term liabilities |
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Net cash provided by (used in) operating activities |
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INVESTING ACTIVITIES: |
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Proceeds from the sale of capital assets |
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Capital expenditures |
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Net cash (used in) provided by investing activities |
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FINANCING ACTIVITIES: |
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Dividends paid |
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Treasury stock purchases |
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Proceeds from lines of credit |
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Payments on lines of credit |
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Shares withheld for tax payments on vested restricted shares |
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Net cash (used in) provided by financing activities |
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Increase in cash and cash equivalents |
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Cash and cash equivalents at beginning of the period |
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Cash and cash equivalents at end of the period |
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SUPPLEMENTAL INFORMATION |
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Cash paid for amounts included in lease liabilities |
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Right-of-use assets exchanged for lease liabilities |
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Interest paid |
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Income taxes, net |
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Capital expenditures in accounts payable |
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| $ | ( |
See accompanying Notes to Consolidated Financial Statements (Unaudited).
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE PERIOD ENDED SEPTEMBER 30, 2022
Statements in the Company’s Annual Report on Form 10-K for the year ended June 30, 2022, appropriately represent, in all material respects, the current status of accounting policies.
A comparison of inventories is as follows:
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| September 30, |
| June 30, | ||
(in thousands) |
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| 2022 | ||
Raw materials |
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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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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 the Company’s restructuring plan, see Note 5 Restructuring. As of September 30, 2022, the Company continues to actively market the assets in Starkville, Mississippi. A summary of the assets held for sale as of September 30, 2022, is included in the table below.
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| Accumulated |
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Location | Asset Category |
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| Depreciation |
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(in thousands) |
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Starkville, Mississippi | Building & building improvements |
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| Land & land improvements |
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| Total assets held for sale |
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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 has 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, 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
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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(in thousands) |
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Operating lease expense |
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Variable lease expense |
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Total lease expense |
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Other information related to leases and future minimum lease payments under non-cancellable operating leases were as follows:
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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 from operating leases |
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Right-of-use assets obtained in exchange for lease liabilities: |
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Operating leases |
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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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Future minimum lease payments under non-cancellable operating leases were as follows:
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(in thousands) |
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Within one year |
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After one year and within two years |
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After two years and within three years |
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After three years and within four years |
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After four years and within five years |
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After five years |
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Total future minimum lease payments |
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Less – Discount |
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Lease liability |
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On May 15, 2019, the Company announced its plans to exit the Commercial Office and custom-designed Hospitality product lines. The changes were initial outcomes driven by customer and product line profitability and footprint utilization analyses in the fourth quarter of fiscal 2019.
On June 18, 2019, the Company announced it completed the analysis and planning process and set forth the comprehensive transformation program to be executed over a period, which included the previously announced restructuring activities on May 15, 2019. The transformation program included activities such as business simplification, process improvement, exiting of non-core businesses, facility closures, and reductions in the workforce. The Company has substantially completed the portion of the restructuring activities related to the exit of the Commercial Office and custom-designed Hospitality product lines.
On April 28, 2020, the Company announced the exit of Vehicle Seating, and the remainder of the Hospitality product lines, and subsequently closed its Dubuque, Iowa and Starkville, Mississippi manufacturing facilities. The Company substantially completed the restructuring activities related to the exit of Vehicle Seating and the remainder of the Hospitality product lines during fiscal 2021.
These actions are now complete, with one property remaining as held for sale as discussed in Note 3, Assets Held for Sale. The Company has incurred $
The following is a summary of restructuring costs:
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| Three Months Ended | ||||
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Other associated costs |
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| $ | |
Total restructuring and related expenses |
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Reported as: |
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Operating expenses |
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Other associated costs include legal and professional fees as well as facilities and transition costs. During the quarter ended September 30, 2022, the Company paid all remaining expenses related to the restructuring program.
The roll-forward of the accrued restructuring costs is as follows:
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(in thousands) |
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| Total | |||
Accrual balance on June 30, 2022 |
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(Income) costs incurred |
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Expenses reimbursed (paid) |
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Accrual balance on September 30, 2022 |
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| $ | — |
6. CREDIT ARRANGEMENTS
On August 28, 2020, the Company entered a secured $
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 -year term and provides for up to an $
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 defines “default” or “event of default” and the calculation of the Fixed Charge Coverage Ratio.
As of September 30, 2022, there was $
Letters of credit outstanding at the Lender as of September 30, 2022, totaled $
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 quarters ended September 30, 2022, and September 30, 2021, was (
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 months ended September 30, 2022.
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| Three Months Ended | ||||
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| September 30, | ||||
(in thousands) |
| 2022 |
| 2021 | ||
Total stock-based compensation expense |
| $ | |
| $ | |
The Company has
(1) Long-Term Incentive Compensation Plan (“LTIP”)
The LTIP provides for performance stock units (“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”). For awards under the LTIP for the
three years ending June 30, 2023, 2024, and 2025, participants may earn -third of the award in each of the
The table below sets forth, as of September 30, 2022, the number of unvested PSUs granted at the target performance level for the 2021-2023, 2022-2024 and 2023-2025 performance periods under the LTIP and the number of unvested RSUs granted in conjunction with the PSUs:
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| Time-Based Vest (RSUs) |
| Performance-Based Vest (PSUs) |
| Total | |||||||||
|
|
|
| Weighted Average |
|
|
| Weighted Average |
|
|
| Weighted Average | |||
|
|
|
| Fair Value |
|
|
| Fair Value |
|
|
| Fair Value | |||
(shares in thousands) |
| Shares |
| Per Share |
| Shares |
| Per Share |
| Shares |
| Per Share | |||
Unvested as of June 30, 2022 |
| |
| $ | |
| |
| $ | |
| |
| $ | |
Granted |
| |
|
| |
| |
|
| |
| |
|
| |
Vested |
| — |
|
| — |
| ( |
|
| |
| ( |
|
| |
Forfeited |
| ( |
|
| |
| ( |
|
| |
| ( |
|
| |
Unvested as of September 30, 2022 |
| |
| $ | |
| |
| $ | |
| |
| $ | |
Total unrecognized stock-based compensation related to the unvested PSUs at the target performance level and the related unvested RSUs was $
(2) 2013 Omnibus Stock Plan
The 2013 Omnibus Stock Plan is for key employees, officers and directors and provides for the granting of incentive and nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights, and performance units.
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 months ended September 30, 2022, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted Average | |
|
| Shares |
| Fair Value | |
|
| (in thousands) |
| Per Share | |
Unvested as of June 20, 2022 |
| |
| $ | |
Granted |
| |
|
| |
Vested |
| ( |
|
| |
Forfeited |
| ( |
|
| |
Unvested as of September 30, 2022 |
| |
| $ | |
Total unrecognized stock-based compensation related to unvested restricted shares and unvested RSUs (not granted in conjunction with the PSUs) was $
Options
A summary of the activity of the Company’s stock option plans as of September 30, 2022, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted | |
|
| Shares |
| Average | |
|
| (in thousands) |
| Exercise Price | |
Outstanding at June 30, 2022 |
| |
| $ | |
Granted |
| — |
|
| — |
Exercised |
| — |
|
| — |
Canceled |
| ( |
|
| |
Outstanding at September 30, 2022 |
| |
| $ | |
The following table summarizes information for options outstanding at September 30, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Options |
| Weighted Average | |||
Range of |
| Outstanding |
| Remaining |
| Exercise | ||
Prices |
| (in thousands) |
| Life (Years) |
| Price | ||
$ | |
| |
| |
| $ | |
|
| |
| |
|
| | |
|
| |
| |
|
| | |
|
| |
| |
|
| | |
|
| |
| |
|
| | |
$ | |
| |
| |
| $ | |
The total unrecognized stock-based compensation expense related to options was $
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
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 Plan, and non-vested restricted stock units and restricted shares. The Company calculates the dilutive effect of outstanding options, restricted stock units, and restricted shares 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended | ||||
|
| September 30, | ||||
(in thousands) |
| 2022 |
| 2021 | ||
Basic shares |
|
| |
|
| |
Potential common shares: |
|
|
|
|
|
|
Stock options |
|
| |
|
| |
Non-vested restricted stock units and restricted shares |
|
| |
|
| |
|
|
| |
|
| |
Diluted shares |
|
| |
|
| |
|
|
|
|
|
|
|
Anti-dilutive shares |
|
| |
|
| |
Cash dividends declared per common share were $
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 directs 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 requires Flexsteel to pay $
Employment Matters - On March 22, 2021, the Company received notice of a class action lawsuit filed against Flexsteel Industries, Inc., and J.K. Dittmer and D.P. Schmidt as individuals, by a number of employees who had worked at the Dubuque Operations and Starkville plants prior to the closure of the locations due to the impact of COVID-19 on the business at that period of time. The allegations with the claim include failure to pay employee benefits as required by an ERISA-governed severance plan, failure of J.K. Dittmer and D.P. Schmidt to act with respect to the ERISA-governed severance plan, and failure to provide 60-days’ notice or the equivalent amount of pay to the employees required by the WARN Act when the Company closed the Dubuque and Starkville locations. The parties participated in a lengthy mediation and on December 3, 2021, agreed to resolve the matter for $
Other Proceedings – From time to time, the Company is subject to various other legal proceedings, including lawsuits, which arise out of, and are incidental to, the conduct of the Company’s business. The Company does not consider any of such other proceedings that are currently pending, individually or in the aggregate, to be material to its business or likely to result in a material effect on its consolidated operating results, financial condition, or cash flows.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
GENERAL
The following analysis of the results of operations and financial condition of the Company should be read in conjunction with the Consolidated Financial Statements and related notes included elsewhere in this quarterly report on Form 10-Q.
CRITICAL ACCOUNTING POLICIES:
There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", included in our 2022 annual report on Form 10-K.
Overview
The following table has been prepared as an aid in understanding the Company’s results of operations on a comparative basis for the three months ended September 30, 2022, and 2021. The amounts presented are percentages of the Company’s net sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended | ||||
|
| September 30, | ||||
|
| 2022 |
| 2021 | ||
Net sales |
| 100.0 | % |
| 100.0 | % |
Cost of goods sold |
| 84.0 |
|
| 83.0 |
|
Gross margin |
| 16.0 |
|
| 17.0 |
|
Selling, general and administrative expenses |
| 15.2 |
|
| 13.6 |
|
Restructuring expense |
| — |
|
| 0.1 |
|
Other expense |
| 0.4 |
|
| — |
|
Gain on disposal of assets due to restructuring |
| — |
|
| (1.0) |
|
Operating income |
| 0.4 |
|
| 4.3 |
|
Interest expense |
| 0.3 |
|
| 0.1 |
|
Other expense |
| 0.0 |
|
| 0.0 |
|
Income before income taxes |
| 0.1 |
|
| 4.2 |
|
Income tax (benefit) provision |
| (0.2) |
|
| 1.0 |
|
Net income and comprehensive income |
| 0.3 | % |
| 3.2 | % |
Results of Operations for the Quarter Ended September 30, 2022 vs. 2021
Net sales were $95.7 million for the quarter ended September 30, 2022, compared to net sales of $137.7 million in the prior year quarter, a decrease of 30.5%. The decrease in sales of $42.0 million was primarily driven by a decrease of $38.7 million related to home furnishing products sold through retailers and a decrease of $3.3 million for home furnishing products sold through e-commerce channels, compared to the prior year quarter.
Retail home furnishings backlog was $56 million for the quarter ended September 30, 2022, a decrease of 57.8% as compared to $133 million home furnishings backlog in the prior year quarter mainly due to focus of the organization to reduce backlog down to 3-5 week lead times and softness of consumer demand in the quarter.
Gross margin as a percent of net sales for the quarter ended September 30, 2022, was 16.0%, compared to 17.0% for the prior year quarter, a decrease of 100 basis points (“bps”). The 100-bps decrease was primarily due to a volume impact on fixed manufacturing costs, and higher delivery costs mainly driven by fuel price inflation partially offset by reduction of ancillary charges taken in the prior year quarter.
Selling, general and administrative (“SG&A”) expenses decreased $4.2 million or 22.4% to $14.6 million in the first quarter ended September 30, 2022, as compared to $18.8 million in the first quarter of fiscal 2022. As a percentage of net sales, SG&A was 15.2% in the first quarter of fiscal 2023 compared to 13.6% of net sales in the prior year quarter. The decrease in SG&A is due primarily to reduction of salaries, wages, and related costs of $0.9 million, a decrease in sales volume related expense of $1.2 million and a decrease in all other expenses of $2.1 million in the first quarter of fiscal year 2023.
During the quarter ended September 30, 2022, no additional restructuring expenses were realized for our facilities listed as held for sale. See Note 5, Restructuring, of the Notes to Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q for more information.
Income tax was a benefit of $0.2 million, or an effective rate of (175.5%), and $1.3 million, or an effective rate of 23.2% during the quarter ended September 30, 2022, and September 30, 2021, respectively. The effective tax rate for the quarter ended September 30, 2022 was primarily impacted by adjustments related to uncertain tax positions.
Net income was $0.3 million, or $0.05 per diluted share for the quarter ended September 30, 2021, compared to net income of $4.4 million, or $0.61 per diluted share in the prior year.
Liquidity and Capital Resources
Working capital (current assets less current liabilities) on September 30, 2022, was $116.1 million compared to $125.4 million on June 30, 2022. The $9.3 million decrease in working capital was primarily due to a decrease in inventory of $19.8 million, a decrease in trade receivables of $7.2 million, and an increase in the environmental remediation liability of $6.2 million, partially offset by a decrease in accounts payable of $11.1 million, an increase in other current assets of $8.2 million, an increase in cash of $1.8 million, a
decrease in other current liabilities of $1.5 million, and a decrease in the restructuring liability of $1.3 million. Capital expenditures were $1.9 million during the quarter ended September 30, 2022.
A summary of operating, investing, and financing cash flow is shown in the following table:
|
|
|
|
|
|
|
|
| Three Months Ended | ||||
|
| September 30, | ||||
(in thousands) |
| 2022 |
| 2021 | ||
Net cash provided by (used in) operating activities |
| $ | 12,994 |
| $ | (44,315) |
Net cash (used in) provided by investing activities |
|
| (1,878) |
|
| 629 |
Net cash (used in) provided by financing activities |
|
| (9,329) |
|
| 46,339 |
Increase in cash and cash equivalents |
| $ | 1,787 |
| $ | 2,653 |
Net cash provided by (used in) operating activities
For the three months ended September 30, 2022, net cash provided by operating activities was $13.0 million, which primarily consisted of net income of $0.3 million, adjusted for non-cash items including depreciation of $1.1 million, and stock-based compensation of $0.8 million. Net cash provided by operating assets and liabilities was $10.8 million and was primarily due to a decrease in inventories of $19.8 million, and a decrease in trade receivables of $7.2 million, and an increase in accrued liabilities of $3.0 million, partially offset by a decrease in payables of $10.8 million, an increase in other current assets of $8.2 million, and a decrease in other long-term liabilities of $0.3 million.
For the three months ended September 30, 2021, net cash used in operating activities was $44.3 million, which primarily consisted of net income of $4.4 million, adjusted for non-cash items including depreciation of $1.3 million, gain from the sale of capital assets of $1.4 million, and stock-based compensation of $1.2 million. Net cash used in operating assets and liabilities was $49.8 million. The cash used in operating assets and liabilities of $49.8 million was primarily due to an increase in inventory of $32.6 million due to continued inventory build, an increase in other current assets of $1.4 million, a decrease in accounts payable of $22.8 million and a decrease in accrued liabilities of $0.7 million, partially offset by a decrease in trade receivables of $7.7 million.
Net cash (used in) provided by investing activities
For the three months ended September 30, 2022, net cash used by investing activities was $1.9 million, due to capital expenditures of $1.9 million.
For the three months ended September 30, 2021, net cash provided by investing activities was $0.6 million, primarily due to proceeds of $1.45 million for the sale of our Harrison, Arkansas, facility, partially offset by capital expenditures of $0.8 million.
Net cash (used in) provided by financing activities
For the three months ended September 30, 2022, net cash used by financing activities was $9.3 million, primarily due to proceeds from lines of credit of $88.1 million, offset by payments on lines of credit of $95.8 million, $0.4 million for treasury stock purchases, dividends paid of $0.9 million, and $0.3 million for tax payments on employee vested restricted shares netted with proceeds from the issuance of common stock.
For the three months ended September 30, 2021, net cash provided by financing activities was $46.3 million, primarily due to proceeds from lines of credit of $74.6 million, offset by payments on lines of credit of $25.0 million, $1.9 million for treasury stock purchases, dividends paid of $1.1 million, and $0.2 million for tax payments on employee vested restricted shares.
Line of Credit
On August 28, 2020, the Company entered a two-year secured $25.0 million revolving line of credit with Dubuque Bank and Trust Company, with an interest rate of 1.50% plus LIBOR, subject to a floor of 3.00%. The revolving line of credit was secured by essentially all the Company’s assets, excluding real property, and required the Company to maintain compliance with certain financial and non-financial covenants. This line of credit was subsequently canceled in the first quarter of the fiscal year 2022.
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. The Company’s $1.1 million letters of credit previously issued by the Lender are being treated as outstanding under the Credit Agreement
and reduce the amount of available borrowings under the revolving line of credit. Proceeds of borrowings were used to refinance all indebtedness owed to Dubuque Bank & Trust and for working capital purposes. The Company’s obligations under the Credit Agreement are secured by substantially all its assets, excluding real property. Subject to certain conditions, borrowings under the Credit Agreement bear interest at LIBOR plus 1.25% or 1.50% per annum, or an effective interest rate of 4.4% on September 30, 2022. When LIBOR becomes unavailable, the replacement rate will be determined pursuant to the terms of the Credit Agreement. 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 to1.00. 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.
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 defines “default” or “event of default” and the calculation of the Fixed Charge Coverage Ratio.
As of September 30, 2022, there was $30.0 million outstanding under the Credit Agreement, exclusive of fees and letters of credit.
Letters of credit outstanding at the Lender as of September 30, 2022, totaled $1.1 million.
Contractual Obligations
As of September 30, 2022, 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, 2022.
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, the management of the Company does not believe that changes in these factors could cause material fluctuations in the Company’s results of operations or cash flows. The ability to import furniture products can be adversely affected by political issues in the countries where suppliers are located, disruptions associated with shipping distances, and negotiations with port employees. Other risks related to furniture product importation include government imposition of regulations and/or quotas; duties, tariffs, and taxes on imports; and significant fluctuation in the value of the U.S. dollar against foreign currencies. Any of these factors could interrupt supply, decrease sales, increase costs and decrease earnings.
Foreign Currency Risk – During the quarters ended September 30, 2022, and 2021, the Company did not have sales, but had purchases and other expenses denominated in foreign currencies. The market risk associated with currency exchange rates and prices is not considered significant.
Interest Rate Risk – The Company’s primary market risk exposure regarding financial instruments is changes in interest rates. On September 30, 2022, the Company had $30.0 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 September 30, 2022.
(b) Changes in internal control over financial reporting. During the quarter ended September 30, 2022, 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. Certain important
factors could cause our results to differ materially from those anticipated by some of the statements made herein. Investors are cautioned that all forward-looking statements involve risk and uncertainty. Some of the factors that could affect results are the cyclical nature of the furniture industry, supply chain disruptions, litigation, the effectiveness of new product introductions and distribution channels, the product mix of sales, pricing pressures, the cost of raw materials and fuel, retention and recruitment of key employees, actions by governments including laws, regulations, taxes and tariffs, inflation, 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, the impact of the COVID-19 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, 2022.
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.
The following table summarizes the activity of the common stock repurchases made during the three months ended September 30, 2022.
|
|
|
|
|
|
|
|
|
|
|
|
| Total Number |
| Average |
| Total Number |
| Approximate Dollar Value | ||
|
| of Shares |
| Price Paid |
| of Shares Purchased |
| of Shares that May Yet | ||
Period |
| Purchased |
| per Share |
| as Part of Plans |
| Be Purchased | ||
July 1, 2022, to July 31, 2022 |
| — |
| $ | — |
| — |
| $ | 7,490,620 |
August 1, 2022, to August 31, 2022 |
| — |
|
| — |
| — |
|
| 7,490,620 |
September 1, 2022, to September 30, 2022 |
| 22,636 |
|
| 15.56 |
| 22,636 |
|
| 7,137,278 |
Three months ended September 30, 2022 (1) |
| 22,636 |
| $ | 15.56 |
| 22,636 |
| $ | 7,137,278 |
(1) Excludes 3,268 shares purchased with cash in September 2022, with trade settlements after September 30, 2022.
Item 6. Exhibits
|
|
Exhibit No. |
|
101.INS | XBRL Instance Document** |
101.SCH | XBRL Taxonomy Extension Schema Document |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
101.LAB | XBRL Taxonomy Extension Labels Linkbase Document |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
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.” |
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.
|
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|
|
| FLEXSTEEL INDUSTRIES, INC. |
| |
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|
|
Date: | October 31, 2022 | By: | /S/ G. Alejandro Huerta |
|
|
|
| G. Alejandro Huerta |
|
|
|
| Chief Financial Officer |
|
|
|
| (Principal Financial & Accounting Officer) |
|
EXHIBIT 31.1
CERTIFICATION
I, Jerald K. Dittmer, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of Flexsteel Industries, Inc.; |
2. |
Based on my knowledge, this 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 report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this 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 report; |
4. |
The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; |
b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) |
evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) |
disclosed in this report any changes in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and |
5. |
The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the Audit and Ethics Committee of the Registrant’s Board of Directors (or persons performing the equivalent functions): |
a) |
all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and |
b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. |
Date: October 31, 2022
/s/ Jerald K. Dittmer |
Jerald K. Dittmer Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION
I, G. Alejandro Huerta, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of Flexsteel Industries, Inc.; |
2. |
Based on my knowledge, this 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 report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this 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 report; |
4. |
The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; |
b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) |
evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) |
disclosed in this report any changes in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and |
5. |
The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the Audit and Ethics Committee of the Registrant’s Board of Directors (or persons performing the equivalent functions): |
a) |
all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and |
b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. |
Date: October 31, 2022
/s/ G. Alejandro Huerta |
G. Alejandro Huerta Chief Financial Officer |
EXHIBIT 32
CERTIFICATION BY
CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Flexsteel Industries, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Jerald K. Dittmer, Chief Executive Officer, and G. Alejandro Huerta, Chief Financial Officer, of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and; |
(2) |
The information contained in the Report fairly presents, in all material respects, the consolidated financial condition and results of operations of the Company. |
Date: October 31, 2022
/s/ Jerald K. Dittmer |
Jerald K. Dittmer Chief Executive Officer |
/s/ G. Alejandro Huerta |
G. Alejandro Huerta Chief Financial Officer |