SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the quarterly period ended March 31, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-5151
Incorporated in State of Minnesota I.R.S. Identification No. 42-0442319
FLEXSTEEL INDUSTRIES, INC.
P. O. BOX 877
DUBUQUE, IOWA 52004-0877
Area code 563 Telephone 556-7730
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_. No ___.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes _X_. No ___.
Common Stock - $1.00 Par Value
Shares Outstanding as of March 31, 2003 6,277,378
-------------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, June 30,
2003 2002
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................ $ 12,314,378 $ 5,375,683
Investments .............................................. 12,205,220 15,876,088
Trade receivables - less allowance for doubtful accounts:
March 31, 2003, $2,550,000;
June 30, 2002, $2,540,000 ............................ 28,871,491 31,361,285
Inventories .............................................. 31,379,961 30,322,288
Deferred income taxes .................................... 4,200,000 4,500,000
Other .................................................... 2,410,753 1,316,136
------------- -------------
Total current assets .......................................... 91,381,803 88,751,480
PROPERTY, PLANT, AND EQUIPMENT
At cost less accumulated depreciation:
March 31, 2003, $65,260,998;
June 30, 2002, $63,674,333 ............................... 20,724,881 20,558,338
DEFERRED INCOME TAXES ......................................... 1,030,000 700,000
OTHER ASSETS .................................................. 8,661,071 8,739,940
------------- -------------
TOTAL ......................................................... $ 121,797,755 $ 118,749,758
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade ...................................... $ 4,778,334 $ 4,876,260
Accrued liabilities:
Payroll and related items ................................ 6,564,345 5,958,505
Insurance ................................................ 7,752,739 6,562,144
Restructuring ............................................ 1,377,834 1,700,609
Other .................................................... 5,087,785 6,775,889
Industrial revenue bonds payable .............................. 650,000
------------- -------------
Total current liabilities ..................................... 25,561,037 26,523,407
DEFERRED COMPENSATION ......................................... 4,723,075 4,509,782
------------- -------------
Total liabilities ............................................. 30,284,112 31,033,189
------------- -------------
SHAREHOLDERS' EQUITY:
Cumulative preferred stock - $50 par value:
authorized 60,000 shares: outstanding - none
Undesignated (subordinated) stock - $1 par value:
authorized 700,000 shares: outstanding - none
Common stock - $1 par value; authorized 15,000,000 shares;
outstanding March 31, 2003, 6,277,378 shares;
outstanding June 30, 2002, 6,198,551 shares ......... 6,277,378 6,198,551
Additional paid-in capital ............................... 1,319,317 492,223
Retained earnings ........................................ 83,982,937 80,756,107
Accumulated other comprehensive income (loss) ............ (65,989) 269,688
------------- -------------
Total shareholders' equity .................................... 91,513,643 87,716,569
------------- -------------
TOTAL ......................................................... $ 121,797,755 $ 118,749,758
============= =============
See accompanying Notes to Consolidated Financial Statements (Unaudited).
- --------------------------------------------------------------------------------
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------- -------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
NET SALES .................................. $ 73,461,304 $ 73,742,322 $ 217,060,741 $ 202,776,664
COST OF GOODS SOLD ......................... (58,007,914) (57,212,434) (168,949,503) (160,259,481)
------------- ------------- ------------- -------------
GROSS MARGIN ............................... 15,453,390 16,529,888 48,111,238 42,517,183
SELLING, GENERAL AND
ADMINISTRATIVE ........................... (13,182,685) (13,504,961) (39,867,515) (38,513,767)
GAIN ON SALE OF LAND ....................... 403,065
------------- ------------- ------------- -------------
OPERATING INCOME ........................... 2,270,705 3,024,927 8,646,788 4,003,416
------------- ------------- ------------- -------------
OTHER:
Interest and other income ............. 265,467 264,382 872,535 747,837
Interest expense ...................... (95,187) (4,491) (101,235) (18,784)
------------- ------------- ------------- -------------
Total ...................................... 170,280 259,891 771,300 729,053
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES ................. 2,440,985 3,284,818 9,418,088 4,732,469
PROVISION FOR INCOME TAXES ................. (1,020,000) (1,270,000) (3,750,000) (1,810,000)
------------- ------------- ------------- -------------
NET INCOME ................................. $ 1,420,985 $ 2,014,818 $ 5,668,088 $ 2,922,469
============= ============= ============= =============
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
BASIC ............................... 6,275,729 6,077,766 6,245,384 6,069,493
============= ============= ============= =============
DILUTED ............................. 6,394,339 6,151,621 6,358,686 6,128,240
============= ============= ============= =============
EARNINGS PER SHARE OF COMMON
STOCK:
BASIC ............................... $ 0.23 $ 0.33 $ 0.91 $ 0.48
============= ============= ============= =============
DILUTED ............................. $ 0.22 $ 0.33 $ 0.89 $ 0.48
============= ============= ============= =============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------- -------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
NET INCOME ................................. $ 1,420,985 $ 2,014,818 $ 5,668,088 $ 2,922,469
------------- ------------- ------------- -------------
OTHER COMPREHENSIVE INCOME
(LOSS), BEFORE TAX:
Unrealized losses on securities
arising during period ............. (82,810) (136,401) (541,518) (299,993)
Reclassification adjustment for losses
(gains) included in net income .... 4,240 4,500 (4,853) (11,669)
------------- ------------- ------------- -------------
Other comprehensive loss, before tax ....... (78,570) (131,901) (546,371) (311,662)
------------- ------------- ------------- -------------
INCOME TAX BENEFIT (EXPENSE):
Income tax benefit related to securities
losses arising during period ............ 33,396 52,051 208,801 106,377
Income tax benefit (expense) related to
securities reclassification adjustment .. (1,654) (1,665) 1,893 4,516
------------- ------------- ------------- -------------
Income tax benefit related to other
comprehensive income (loss) ............. 31,742 50,386 210,694 110,893
------------- ------------- ------------- -------------
OTHER COMPREHENSIVE INCOME
(LOSS), NET OF TAX ...................... (46,828) (81,515) (335,677) (200,769)
------------- ------------- ------------- -------------
COMPREHENSIVE INCOME ....................... $ 1,374,157 $ 1,933,303 $ 5,332,411 $ 2,721,700
============= ============= ============= =============
See accompanying Notes to Consolidated Financial Statements (Unaudited).
- --------------------------------------------------------------------------------
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
Nine Months Ended
March 31,
-----------------------------
2003 2002
------------ ------------
OPERATING ACTIVITIES:
Net income ............................................. $ 5,668,088 $ 2,922,469
Adjustments to reconcile net income to net cash
provided by operating activities ...................
Depreciation ....................................... 3,593,532 3,894,335
Restructuring charges .............................. 45,207 890,000
(Gain) loss on disposition of capital assets ....... (414,693) 48,091
Changes in operating assets and liabilities:
Trade receivables .............................. 2,270,733 (4,413,411)
Inventories .................................... (1,057,673) 2,527,738
Other current assets ........................... (1,124,614) 443,847
Other assets ................................... (152,253) (152,143)
Accounts payable - trade ....................... (97,926) (2,012,130)
Accrued liabilities ............................ 255,093 3,418,929
Deferred compensation .......................... 213,293 496,015
------------ ------------
Net cash provided by operating activities .............. 9,198,787 8,063,740
------------ ------------
INVESTING ACTIVITIES:
Purchases of investments ........................... (18,791,159) (11,858,958)
Proceeds from sales of investments ................. 22,247,544 4,805,786
Payments received from customers on notes receivable 328,987 284,097
Proceeds from sales of capital assets .............. 624,171 46,352
Capital expenditures ............................... (3,996,582) (539,133)
------------ ------------
Net cash provided by (used in) investing activities .... 412,961 (7,261,856)
------------ ------------
FINANCING ACTIVITIES:
Repayment of borrowings ............................ (650,000)
Dividends paid ..................................... (2,430,983) (3,156,161)
Proceeds from issuance of common stock ............. 407,930 146,590
------------ ------------
Net cash used in financing activities .................. (2,673,053) (3,009,571)
------------ ------------
Increase (decrease) in cash and cash equivalents ....... 6,938,695 (2,207,687)
Cash and cash equivalents at beginning of period ....... 5,375,683 10,048,562
------------ ------------
Cash and cash equivalents at end of period ............. $ 12,314,378 $ 7,840,875
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest .......................................... $ 102,000 $ 20,000
Income taxes ...................................... $ 6,175,000 $ 1,729,000
See accompanying Notes to Consolidated Financial Statements (Unaudited).
- --------------------------------------------------------------------------------
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. These consolidated financial statements do not include certain information
and footnotes required by accounting principles generally accepted in the
United States of America for complete financial statements. However, in the
opinion of management, all adjustments considered necessary for a fair
presentation have been included and are of a normal recurring nature.
Operating results for the nine-month period ended March 31, 2003 are not
necessarily indicative of the results that may be expected for the fiscal
year ending June 30, 2003.
DESCRIPTION OF BUSINESS - Flexsteel Industries, Inc. (the Company)
manufactures a broad line of upholstered furniture for residential,
recreational vehicle and commercial seating use. Products include sofas,
love seats, chairs, reclining and rocker-reclining chairs, swivel rockers,
sofa beds, and convertible bedding units. The Company has two wholly owned
subsidiaries: (1) Desert Dreams, Inc. owns and leases a commercial building
to an unrelated entity, and (2) Four Seasons, Inc. operates two retail
furniture stores. All significant intercompany accounts and transactions
have been eliminated.
2. Inventories were categorized as follows:
March 31, June 30,
2003 2002
------------ ------------
Raw materials ......................... $ 13,988,623 $ 15,623,962
Work in process and finished parts .... 8,007,249 8,092,398
Finished goods ........................ 9,384,089 6,605,928
------------ ------------
Total ............ $ 31,379,961 $ 30,322,288
============ ============
3. EARNINGS PER SHARE - Basic earnings per share of common stock is based on
the weighted average number of common shares outstanding during each
period. Diluted earnings per share of common stock takes into effect the
dilutive effect of potential common shares outstanding. The Company's only
potential common shares outstanding are stock options, which resulted in a
dilutive effect of 118,610 shares and 73,855 shares in the quarters ended,
and 113,302 and 58,747 shares in the nine months ended March 31, 2003 and
2002, respectively. The Company calculates the dilutive effect of
outstanding options using the treasury stock method. Options to purchase
163,050 and 136,000 shares of common stock were outstanding during the
three and nine months ended March 31, 2003 and 2002, respectively, but were
not included in the computation of diluted earnings per share as their
exercise prices were greater than the average market price of the common
shares.
4. ACCOUNTING DEVELOPMENTS - In August 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS. SFAS No. 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and supersedes SFAS No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF, along with certain other reporting standards.
SFAS No. 144 was effective for the Company on July 1, 2002. The adoption of
SFAS No. 144 did not have a material impact on the Company's financial
position or results of operations.
In April 2002, the FASB issued SFAS No. 145, RESCISSION OF FASB STATEMENTS
NO. 4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL
CORRECTIONS. SFAS No. 145 was effective for the Company on July 1, 2002.
The adoption of the technical corrections contained in SFAS No. 145 did not
have a material impact on the Company's financial position or results of
operations.
In June 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED
WITH EXIT OR DISPOSAL ACTIVITIES. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER
COSTS TO EXIT AN ACTIVITY (INCLUDING CERTAIN COSTS INCURRED IN A
RESTRUCTURING). SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF 94-3, a liability for an exit cost was
recognized at the date of an entity's commitment to an exit plan. SFAS No.
146 is effective for exit or disposal activities that are initiated by the
Company after December 31, 2002.
In November 2002, the FASB issued FASB Interpretation No. 45, GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS OF OTHERS (FIN 45). FIN 45 clarifies the
requirements for a guarantor's accounting for and disclosure of certain
guarantees issued and outstanding. The initial recognition and initial
measurement provisions of FIN 45 are applicable to guarantees issued or
modified after December 31, 2002. The disclosure requirements of FIN 45 are
effective for financial statements of interim or annual periods ending
after December 15, 2002.
In December 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION-TRANSITION AND DISCLOSURE, which amends SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION. SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. In addition, SFAS No.
148 amends the disclosure requirement of SFAS No. 123 to require more
prominent and more frequent disclosures in financial statements of the
effects of stock-based compensation. The transition guidance and annual
disclosure provisions of SFAS No. 148 are effective for fiscal years ending
after December 15, 2002. The interim disclosure provisions are effective
for financial reports containing condensed financial statements for interim
periods beginning after December 15, 2002. The Company has elected to
continue to apply Accounting Principles Board (APB) Opinion No. 25 and
related interpretations in accounting for its stock option plans, as
permitted under SFAS No. 123 and SFAS No. 148. Accordingly, no compensation
cost has been recognized for its stock option plans (see Note 5).
5. STOCK OPTIONS - The Company has stock option plans for key employees and
directors that provide for the granting of incentive and nonqualified stock
options. Under the plans, options are granted at an exercise price equal to
the fair market value of the underlying common stock at the date of grant,
and may be exercisable for up to 10 years. All options are exercisable when
granted. At March 31, 2003, 593,400 shares were available for future
grants. The Company applies APB Opinion No. 25 and related interpretations
in accounting for its stock option plans, as permitted under SFAS No. 123
and SFAS No. 148. Accordingly, no compensation cost has been recognized for
its stock option plans. Had the compensation cost for the Company's
incentive stock option plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the fair-value
methodology of SFAS No. 123, the Company's net income and earnings per
share would have been reduced to the following pro forma amounts:
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net income, as reported ........... $ 1,420,985 $ 2,014,818 $ 5,668,088 $ 2,922,469
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all
awards, net of tax ............ (291,000) (162,000)
------------ ------------ ------------ ------------
Pro forma net income .............. $ 1,420,985 $ 2,014,818 $ 5,377,088 $ 2,760,469
============ ============ ============ ============
Earnings per share:
Basic - as reported .......... $ 0.23 $ 0.33 $ 0.91 0.48
Basic - pro forma ............ 0.23 0.33 0.86 0.45
Diluted - as reported ........ $ 0.22 $ 0.33 $ 0.89 0.48
Diluted - pro forma .......... 0.22 0.33 0.85 0.45
The fair value of each option grant is estimated on the date of grant using
the Black-Sholes option-pricing model with the following weighted-average
assumptions used for grants in fiscal 2003 and 2002, respectively; dividend
yield of 3.3% and 5.0%; expected volatility of 25.3% and 24.8%; risk-free
interest rates of 4.1% and 6.5%; and an expected life of 10 years on all
options. The Company does not anticipate that additional options will be
granted during the remainder of fiscal 2003.
6. ACCRUED WARRANTY COSTS - The Company estimates the amount of warranty
claims on sold product that may be incurred based on current and historical
data. The actual warranty expense could differ from the estimates made by
the Company based on product performance. The following table presents the
changes in the Company's product warranty liability:
Accrued warranty costs at June 30, 2002 ..... $ 500,000
Payments made for warranty costs ............ (2,420,337)
Accrual for product warranty ................ 2,420,337
------------
Accrued warranty costs at March 31, 2003 .... $ 500,000
============
7. RESTRUCTURING - The Company established an accrual for restructuring
liabilities in fiscal 2002 for estimated employee separation costs and
facility closing costs related to the closure of (1) the Elkhart, Indiana
manufacturing facility and (2) a retail store. The accrual includes
estimated employee severance, inventory write-offs, and lease commitments
with no future benefit to the Company. Utilization of the accrual may
differ from the initial restructuring charge as amounts are paid and become
known to the Company.
The following table summarizes the activity related to the restructuring
charges during the nine months ended March 31, 2003:
Employee Facility
Separation Closing
Costs Costs Total
----------- ----------- -----------
Accrued restructuring costs at June 30, 2002 ............... $ 431,793 $ 1,268,816 $ 1,700,609
Restructuring (income) charges for the period ended
March 31, 2003 .......................................... (431,793) 477,000 45,207
Recovery (utilization) for the period ended
March 31, 2003 .......................................... (367,982) (367,982)
----------- ----------- -----------
Accrued restructuring costs at March 31, 2003 .............. $ 0 $ 1,377,834 $ 1,377,834
=========== =========== ===========
8. SEGMENTS - The Company operates in two reportable operating segments: (1)
Seating Products and (2) Retail Stores. The Seating Products segment
involves the manufacturing of a broad line of upholstered furniture for
residential, recreational vehicle, and commercial seating markets. The
Company's products are sold primarily throughout the United States by the
Company's internal sales force and various independent representatives. The
Retail Stores segment involves the operation of two retail furniture stores
that offer the Company's residential seating products for sale directly to
consumers. No single customer accounted for more than 10% of sales in
either of the Company's two segments.
Segment operating income is based on profit or loss from operations before
interest income and expense, other income and income taxes.
Segment information for the three-month periods ended March 31 was as
follows:
March 31, 2003 March 31, 2002
---------------------------------------------- ----------------------------------------------
Seating Retail Seating Retail
Products Stores Total Products Stores Total
----------- ----------- ----------- ----------- ----------- -----------
Net sales ............. $72,321,954 $ 1,139,350 $73,461,304 $71,595,505 $ 2,146,817 $73,742,322
Operating income (loss) 2,542,469 (271,764) 2,270,705 3,419,614 (394,687) 3,024,927
Depreciation .......... 1,144,224 26,822 1,171,046 1,049,039 49,710 1,098,749
Capital expenditures .. 554,360 554,360 281,899 52,395 334,294
Segment information for the nine-month periods ended March 31 was as
follows:
March 31, 2003 March 31, 2002
----------------------------------------------- -----------------------------------------------
Seating Retail Seating Retail
Products Stores Total Products Stores Total
------------ ------------ ------------ ------------ ------------ ------------
Net sales ............. $212,915,918 $ 4,144,823 $217,060,741 $197,280,051 $ 5,496,613 $202,776,664
Operating income (loss) 9,721,994 (1,075,206) 8,646,788 5,591,618 (1,588,202) 4,003,416
Depreciation .......... 3,506,259 87,273 3,593,532 3,751,315 143,020 3,894,335
Capital expenditures .. 3,996,582 3,996,582 443,918 95,215 539,133
Assets ................ 120,415,155 1,382,600 121,797,755 109,916,680 2,311,683 112,228,363
9. RECLASSIFICATIONS - Certain prior year amounts have been reclassified to
conform to the current period presentation. These reclassifications had no
impact on net income or shareholders' equity as previously reported.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations:
- ----------------------
GENERAL:
The following analysis of the results of operations and financial condition of
Flexsteel Industries, Inc. (the Company) should be read in conjunction with the
consolidated financial statements and related notes included elsewhere in this
document.
CRITICAL ACCOUNTING POLICIES:
The discussion and analysis of the Company's consolidated financial statements
and results of operations are based on consolidated financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America. Preparation of these consolidated financial statements
requires the use of estimates and judgments that affect the reported results.
Actual results may differ from these estimates under different assumptions or
conditions.
USE OF ESTIMATES - the Company uses estimates based on the best information
available in recording transactions and balances resulting from business
operations. Estimates are used for such items as collectability of trade
accounts receivable, inventory valuation, depreciable lives, self-insurance
programs, restructuring costs, warranties, income taxes and revenue.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - the Company establishes an allowance for
doubtful accounts through review of open accounts, and historical collection and
allowances amounts. The allowance for doubtful accounts is intended to reduce
trade accounts receivable to the amount that reasonably approximates their fair
value due to their short-term nature. The amount ultimately realized from trade
accounts receivable may differ from the amount estimated in the financial
statements based on collection experience and actual returns and allowances.
INVENTORIES - the Company values inventory at the lower of cost or market. Raw
steel, lumber and wood frame parts are valued on the last-in, first out (LIFO)
method. Other inventories are valued on the first-in, first-out (FIFO) method.
Changes in the market conditions could require a write down of inventory.
SELF-INSURANCE PROGRAMS - the Company is self-insured for health care and most
workers' compensation up to predetermined amounts above which third party
insurance applies. The Company is contingently liable to insurance carriers
under its comprehensive general, product, and vehicle liability policies, as
well as some workers' compensation. Losses are accrued based upon the Company's
estimates of the aggregate liability of claims incurred using certain actuarial
assumptions followed in the insurance industry and based on Company experience.
The actual claims experience could differ from the estimates made by the
Company.
RESTRUCTURING - the Company established an accrual for restructuring liabilities
in fiscal 2002 for estimated employee separation costs and facility closing
costs related to the closure of (1) the Elkhart, Indiana manufacturing facility
and (2) a retail store. The accrual includes estimated employee severance,
inventory write-offs, and lease commitments with no future benefit to the
Company. Utilization of the accrual may differ from the initial restructuring
charge as amounts are paid and become known to the Company.
WARRANTY EXPENSE - the Company estimates the amount of warranty claims on sold
product that may be incurred based on current and historical data. The actual
warranty expense could differ from the estimates made by the Company based on
product performance.
INCOME TAXES - deferred income taxes result from temporary differences between
the tax basis of an asset or liability and its reported amount in the financial
statements.
REVENUE RECOGNITION - is upon delivery of product. Net sales consist of product
sales and related delivery charge revenue, net of adjustments for returns and
allowances. The actual amounts for returns and allowances could differ from the
estimated amounts.
The following table has been prepared as an aid in understanding the Company's
results of operations on a comparative basis for the fiscal third quarter and
nine-month periods ended March 31, 2003 and 2002. Amounts presented are
percentages of the Company's net sales.
Third Quarter Ended Nine Months Ended
March 31, March 31,
---------------- ----------------
2003 2002 2003 2002
----- ----- ----- -----
Net sales ......................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ................ (79.0%) (77.6%) (77.8%) (79.0%)
----- ----- ----- -----
Gross margin ...................... 21.0% 22.4% 22.2% 21.0%
Selling, general and administrative (17.9%) (18.3%) (18.4%) (19.0%)
Gain on sale of land .............. 0.2%
----- ----- ----- -----
Operating income .................. 3.1% 4.1% 4.0% 2.0%
Other income, net ................. 0.2% 0.4% 0.3% 0.4%
----- ----- ----- -----
Income before income taxes ........ 3.3% 4.5% 4.3% 2.4%
Provision for income taxes ........ (1.4%) (1.8%) (1.7%) (0.9%)
----- ----- ----- -----
Net income ........................ 1.9% 2.7% 2.6% 1.5%
===== ===== ===== =====
RESULTS OF OPERATIONS FOR THE QUARTER - Net sales for the quarter ended March
31, 2003 decreased by $0.3 million compared to the prior year quarter.
Residential seating sales volume decreased $3.2 million or 6%. Recreational
vehicle seating sales increased $1.5 million or 8%. Commercial seating sales
increased $1.5 million or 38%.
Gross margin decreased $1.0 million to $15.5 million or 21.0% of net sales in
the current quarter, from $16.5 million or 22.4% in the prior year quarter. The
lower gross margin in the current quarter resulted from raw material price
increases, changes in product mix, higher delivery expenses related to higher
fuel costs, and weather related expenses. The weather conditions resulted in
increased utility costs, manufacturing interruptions at our eastern Pennsylvania
location and product delivery inefficiencies in the eastern third of the country
during February and early March.
Selling, general and administrative expenses as a percentage of net sales were
17.9% and 18.3% for the current quarter and prior year quarter, respectively.
During the current quarter, the Company settled federal income tax audits for
its latest three fiscal years. The Company has recorded additional income tax
expense and interest expense of $0.1 million each that resulted from the audits.
The above factors resulted in current fiscal quarter net income of $1.4 million
or $0.22 per share compared to $2.0 million or $0.33 per share in the prior year
quarter, a net decrease of $0.6 million or $0.11 per share.
All earnings per share amounts are on a diluted basis.
RESULTS OF OPERATIONS FOR THE LAST NINE MONTHS - Net sales for the nine-months
ended March 31, 2003 increased by $14.3 million or 7% compared to the prior year
nine-month period. Residential seating sales volume increased $4.1 million or
3%. Recreational vehicle seating sales increased $8.5 million or 18%. Commercial
seating sales increased $1.7 million or 13%. The increase in net sales reflects
improved industry performance for vehicle seating products and modest market
share gains for residential products.
During the quarter ended December 31, 2001, the Company recorded a charge of
$0.9 million to cost of goods sold for estimated facility closing costs. Because
the Company was able to lease the facility to a third party that has employed
most of the former employees, the Company recorded a credit to cost of goods
sold of $0.4 million during the quarter ended December 31, 2002.
Gross margin increased $5.6 million to $48.1 million or 22.2% of sales in the
current period from $42.5 million or 21.0% of sales in the prior year period.
The gross margin improvement was due to higher production volume and improved
fixed cost absorption in the first six months offset by the third quarter issues
described above. In addition, the prior year gross margin was reduced by a
charge of $0.9 million for facility closing costs.
Selling, general and administrative expenses as a percentage of sales were 18.4%
and 19.0% for the current year and prior year, respectively. The cost percentage
decrease was primarily due to improved fixed cost absorption on the higher net
sales.
During the first quarter of fiscal 2003, the Company sold land adjacent to the
Lancaster, Pennsylvania factory at a net gain (after tax) of $0.2 million or
$0.04 per share.
During the third quarter of fiscal 2003, the Company settled federal income tax
audits for its latest three fiscal years. The Company has recorded additional
income tax expense and interest expense of $0.1 million each that resulted from
the audits.
The above factors resulted in current fiscal year to date net income of $5.7
million or $0.89 per share compared to $2.9 million or $0.48 per share in the
prior year period, an increase of $2.8 million or $0.41 per share from the prior
year nine-month period.
All earnings per share amounts are on a diluted basis.
Liquidity and Capital Resources:
- --------------------------------
Working capital at March 31, 2003 was $65.8 million, which includes cash, cash
equivalents and investments of $24.5 million. Working capital increased by $3.6
million or 6% from June 30, 2002.
During the nine-month period ended March 31, 2003, cash, cash equivalents, and
investments increased by $3.3 million. Operating activities provided $9.2
million in cash that was primarily used to invest $4.0 million for capital
assets and to pay dividends of $2.4 million.
The Company has adequate cash, cash equivalents and short-term investment to
meet its operating requirements. The Company's liquidity and capital resources
provide it with the ability to react to opportunities as they arise, the ability
to pay quarterly dividends to its shareholders, and ensures that productive
capital assets that enhance safety and improve operations are purchased as
needed.
Item 3. Quantitative and Qualitative Information About Market Risk.
Not applicable
Item 4. Controls and Procedures
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on their evaluation
as of a date within 90 days of the filing date of this Quarterly Report on Form
10-Q, the Company's chief executive officer and chief financial officer have
concluded that the Company's disclosure controls and procedures (as defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as
amended) were effective as of the date of such evaluation to ensure that
information we are required to disclose in reports that we file or submit under
the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms.
(b) CHANGES IN INTERNAL CONTROLS. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation, nor were there any
significant deficiencies or material weaknesses in the Company's internal
controls. As a result, no corrective actions were required or undertaken.
CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION FOR THE
PURPOSE OF "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
The Company and its representatives may from time-to-time make written or oral
forward-looking statements with respect to long-term goals of the Company,
including statements contained in the Company's filings with the Securities and
Exchange Commission and in its reports to stockholders.
Statements, including those in this report, which are not historical or current
facts are "forward-looking statements" made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. There are
certain important factors that could cause results to differ materially from
those anticipated by some of the statements made herein. Investors are cautioned
that all forward-looking statements involve risk and uncertainty. Some of the
factors that could affect results are the cyclical nature of the furniture
industry, the effectiveness of new product introductions, the product mix of our
sales, the cost of raw materials, the amount of sales generated and the profit
margins thereon, competition, both foreign and domestic, credit exposure to our
customers, and general economic conditions.
The Company specifically declines to undertake any obligation to publicly revise
any forward-looking statements that have been made to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
The registrant filed the following reports on Form 8-K:
o Press Release dated March 18, 2003 - Flexsteel Announces Lower
Earnings Outlook for Third and Fourth Fiscal Quarters.
o Press Release dated April 15, 2003 - Flexsteel Announces Third Quarter
and Year-To-Date Operating Results.
Exhibits:
- ---------
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on by its behalf by the
undersigned officer there unto duly authorized.
FLEXSTEEL INDUSTRIES, INC.
Date: April 17, 2003 By: /s/ R. J. Klosterman
-------------- -------------------------------
R. J. Klosterman
Financial Vice President &
Principal Financial Officer
CERTIFICATION BY CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, K. Bruce Lauritsen, Chief Executive Officer of Flexsteel Industries, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Flexsteel
Industries, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: April 17, 2003
--------------
By: /S/ K. BRUCE LAURITSEN
--------------------------
K. Bruce Lauritsen
Chief Executive Officer
CERTIFICATION BY CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Ronald J. Klosterman, Chief Financial Officer of Flexsteel Industries, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Flexsteel
Industries, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: April 17, 2003
--------------
By: /S/ R. J. KLOSTERMAN
------------------------
Ronald J. Klosterman
Chief Financial Officer
EXHIBIT 99.1
CERTIFICATION 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
Issurer) on Form 10-Q for the quarter ended March 31, 2003 as filed with the
Securities and Exchange Commission (the Report), we, K. Bruce Lauritsen, Chief
Executive Officer, and Ronald J. Klosterman, Chief Financial Officer, of the
Issurer, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.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 Issurer.
Date: April 17, 2003
--------------
By: /S/ K. BRUCE LAURITSEN
--------------------------
K. Bruce Lauritsen
Chief Executive Officer
/S/ R. J. KLOSTERMAN
------------------------
Ronald J. Klosterman
Chief Financial Officer