UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

 

FORM 10-Q

 

 

☒   Quarterly Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2016

 

or

☐   Transition Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

For the transition period from                to

 

Commission file number 0-5151

 

 

FLEXSTEEL INDUSTRIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Incorporated in State of Minnesota		42-0442319
(State or other Jurisdiction of		(I.R.S. Identification No.)
Incorporation or Organization)

 

385 BELL STREET

DUBUQUE, IOWA 52001-0877

(Address of Principal Executive Offices) (Zip Code)

 

(563) 556-7730

(Registrant’s Telephone Number, Including Area Code)

 

 

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 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. Yes ☒. No ☐.

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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).  Yes ☒. No ☐.

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one).

Large accelerated filer ☐                            Accelerated filer ☒                             Non-accelerated filer ☐                            Smaller reporting company ☐

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐. No ☒.

 

Common Stock - $1.00 Par Value
Shares Outstanding as of October 10, 2016	7,774,309

 

 

PART I FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Amounts in thousands, except share and per share data)
		September 30, 2016			June 30, 2016
ASSETS
CURRENT ASSETS:
Cash		$	42,668		$	36,780
Trade receivables – less allowances:
September 30, 2016, $1,200; June 30, 2016, $1,300			42,834			44,618
Inventories			86,699			85,904
Other			7,226			9,141
Total current assets			179,427			176,443
NON-CURRENT ASSETS:
Property, plant and equipment, net			66,552			64,124
Deferred income taxes			2,930			3,660
Other assets			2,843			2,669
TOTAL		$	251,752		$	246,896
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable – trade		$	13,299		$	11,023
Accrued liabilities:
Payroll and related items			4,741			6,986
Insurance			5,712			5,252
Other			10,023			10,096
Total current liabilities			33,775			33,357
LONG-TERM LIABILITIES:
Supplemental retirement plans			922			894
Other liabilities			3,028			2,995
Total liabilities			37,725			37,246
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 September 30, 2016, 7,774,309 shares; outstanding June 30, 2016, 7,700,149 shares			7,774			7,700
Additional paid-in capital			24,314			23,259
Retained earnings			184,116			180,919
Accumulated other comprehensive loss			(2,177	)		(2,228	)
Total shareholders’ equity			214,027			209,650
TOTAL		$	251,752		$	246,896

 

See accompanying Notes to Consolidated Financial Statements (Unaudited).

 

 

FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Amounts in thousands, except per share data)

		Three Months Ended September 30,
		2016			2015
Net sales		$	112,050		$	126,531
Cost of goods sold			(85,420	)		(98,662	)
Gross margin			26,630			27,869
Selling, general and administrative			(18,926	)		(18,490	)
Operating income			7,704			9,379
Interest and other income (expense)			48			(50	)
Interest expense			—			(37	)
Income before income taxes			7,752			9,292
Income tax provision			(3,000	)		(3,530	)
Net income		$	4,752		$	5,762
Weighted average number of common shares outstanding:
Basic			7,725			7,508
Diluted			7,838			7,761
Earnings per share of common stock:
Basic		$	0.62		$	0.77
Diluted		$	0.61		$	0.74
Cash dividends declared per common share		$	0.20		$	0.18

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

 

		Three Months Ended September 30,
		2016				2015
Net income		$	4,752			$	5,762
Other comprehensive income (loss):
Unrealized gain on securities in supplemental retirement plans			61				(268	)
Reclassification of realized loss on supplemental retirement plans to other income			20				92
Other comprehensive income (loss) before taxes			81				(176	)
Income tax (expense) benefit related to supplemental retirement plans loss			(31	)			67
Other comprehensive gain (loss), net of tax			50				(109	)
Comprehensive income		$	4,802			$	5,653

 

See accompanying Notes to Consolidated Financial Statements (Unaudited).

 

 

FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands) 

		Three Months Ended September 30,
		2016			2015
OPERATING ACTIVITIES:
Net income		$	4,752		$	5,762
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation			2,032			1,742
Deferred income taxes			699			(3	)
Stock-based compensation expense			639			171
Excess tax benefit from share-based payments			(1,034	)		(20	)
Change in provision for losses on accounts receivable			(100	)		(50	)
Gain on disposition of capital assets			(63	)		—
Changes in operating assets and liabilities:
Trade receivables			1,884			(1,492	)
Inventories			(794	)		4,970
Other current assets			1,247			846
Other assets			(133	)		—
Accounts payable – trade			2,307			(3,641	)
Accrued liabilities			346			(567	)
Supplemental retirement plans			(580	)		664
Other long-term liabilities			32			126
Net cash provided by operating activities			11,234			8,508
INVESTING ACTIVITIES:
Purchases of investments			(790	)		(149	)
Proceeds from sales of investments			768			94
Proceeds from sale of capital assets			63			—
Capital expenditures			(4,491	)		(2,090	)
Net cash used in investing activities			(4,450	)		(2,145	)
FINANCING ACTIVITIES:
Dividends paid			(1,386	)		(1,347	)
Repayments of current notes payable, net			—			(5,097	)
Proceeds from issuance of common stock			588			644
Shares issued to employees, net of shares withheld			(1,132	)		—
Excess tax benefit from share-based payment			1,034			20
Net cash used in financing activities			(896	)		(5,780	)
Increase in cash			5,888			583
Cash at beginning of period			36,780			1,282
Cash at end of period		$	42,668		$	1,865

 

SUPPLEMENTAL INFORMATION
(Amounts in thousands) 

 

		Three Months Ended
		September 30,
		2016				2015
Income taxes (refund) paid, net		$	(1,224	)		$	150
Capital expenditures in accounts payable			2				142
Interest paid			—				37

 

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, 2016

 

1.

The consolidated financial statements included herein have been prepared by Flexsteel Industries, Inc. and Subsidiaries (the “Company” or “Flexsteel”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The information furnished in the consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of such consolidated financial statements. Operating results for the quarter ended September 30, 2016, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2017. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. Except to the extent updated or described below, the significant accounting policies set forth in Note 1 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended June 30, 2016, appropriately represent, in all material respects, the current status of accounting policies and are incorporated by reference.

 

DESCRIPTION OF BUSINESS – Flexsteel was incorporated in 1929 and is one of the oldest and largest manufacturers, importers and marketers of residential and commercial upholstered and wood furniture products in the United States. Product offerings include a wide variety of upholstered and wood furniture such as sofas, loveseats, chairs, reclining and rocker-reclining chairs, swivel rockers, sofa beds, convertible bedding units, occasional tables, desks, dining tables and chairs and bedroom furniture. The Company’s products are intended for use in home, office, hotel, healthcare and other commercial applications. A featured component in most of the upholstered furniture is a unique steel drop-in seat spring from which our name “Flexsteel” is derived. The Company distributes its products throughout the United States through the Company’s sales force and various independent representatives.

 

2.    INVENTORIES

 

A comparison of inventories is as follows:

 

(in thousands)		September 30, 2016				June 30, 2016
Raw materials		$	12,131			$	12,893
Work in process and finished parts			6,996				5,810
Finished goods			67,572				67,201
Total		$	86,699			$	85,904

 

3.    FAIR VALUE MEASUREMENTS

 

The Company’s cash, accounts receivable, other current assets, accounts payable, notes payable and certain accrued liabilities are carried at amounts which reasonably approximate their fair value due to their short-term nature. Generally accepted accounting principles on fair value measurement for certain financial assets and liabilities require that each asset and liability carried at fair value be classified into one of the following categories: Level 1: Quoted market prices in active markets for identical assets and liabilities; Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data; or Level 3: Unobservable inputs that are not corroborated by market data. The Company has not changed its valuation techniques in measuring the fair value of any financial assets and liabilities during the period.

 

The Company maintains unfunded supplemental retirement plans, collectively referred to as the Supplemental Plan, which provides for additional annual defined contributions toward retirement benefits to certain of the Company’s executive officers. Funds of the Supplemental Plan are held in a Rabbi Trust. The assets held in the Rabbi Trust are not available for general corporate purposes. The Rabbi Trust is subject to creditor claims in the event of insolvency, but otherwise must be used only for purposes of providing benefits under the plans. As of September 30, 2016, the Company’s Supplemental Plan assets, held in the Rabbi Trust, were invested in stock and bond funds and are recorded in the Consolidated Balance Sheets at fair market value. As of September 30, 2016, the Supplemental Plan assets were $1.7 million, with $0.8 million of the Supplemental Plan assets classified as “other current assets” and $0.9 million as “other assets” in the Consolidated Balance Sheets. As of June 30, 2016, the Supplemental Plan assets were $2.3 million, with $1.5 million classified as “other current assets” and $0.8 million classified as “other assets” in the Consolidated Balance Sheets. These assets are classified as Level 2 in accordance with fair value measurements as described above.

 

 

4.    CREDIT ARRANGEMENTS

 

The Company maintains an unsecured credit agreement that provides short-term working capital financing up to $10.0 million with interest of LIBOR plus 1% (1.53% at September 30, 2016), including up to $4.0 million of letters of credit. Letters of credit outstanding at September 30, 2016, totaled $2.3 million. Other than the aforementioned letters of credit, the Company did not utilize borrowing availability under the credit facility, leaving borrowing availability of $7.7 million as of September 30, 2016. The credit agreement expires June 30, 2017. At September 30, 2016, the Company was in compliance with all of the financial covenants contained in the credit agreement.

 

A director of the Company is a director at a bank where the Company maintains an additional unsecured $10.0 million line of credit, with interest at prime minus 2% (1.50% at September 30, 2016), and where its routine banking transactions are processed. No amount was outstanding on the line of credit at September 30, 2016. This line of credit matures December 31, 2016. In addition, the supplemental retirement plan assets, held in a Rabbi Trust, of $1.7 million are administered by this bank’s trust department. The Company receives no special services or pricing on the services performed by the bank due to the directorship of this director.

 

5.    STOCK BASED COMPENSATION

 

The Company has two stock-based compensation methods available when determining employee compensation.

 

(1)      Long-Term Incentive Compensation Plans

 

The long-term incentive compensation plan provides for shares of common stock to be awarded to officers and key employees based on performance targets set by the Compensation Committee of the Board of Directors (the “Committee”). In December 2013, the Company’s shareholders approved 700,000 shares to be issued under the plan. As of September 30, 2016, 61,969 shares have been issued. The Committee selected fully-diluted earnings per share as the performance goal for the three-year performance periods July 1, 2014 – June 30, 2017 (2015-2017) and July 1, 2015 – June 30, 2018 (2016-2018). The Committee selected fully-diluted earnings per share and total shareholder return as the performance goals for the three-year performance period July 1, 2016 – June 30, 2019 (2017-2019). Stock awards will be issued to participants as soon as practicable following the end of the performance periods subject to verification of results and Committee approval. The compensation cost related to the number of shares to be granted under each performance period is fixed on the grant date, which is the date the performance period begins.

 

The Company recorded expense of $0.2 million and $0.3 million for the quarter ended September 30, 2016 and September 30, 2015, respectively. If the target performance goals for 2015-2017, 2016-2018 and 2017-2019 would be achieved, the total amount of compensation cost recognized over the requisite performance periods would be $1.0 million, $1.0 million and $1.1 million, respectively.

 

(2)      Stock Plans

 

Omnibus Stock Plan

 

The 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. In December 2013, the Company’s shareholders approved 700,000 shares to be issued under the plan.

 

Under the plans, options were granted at an exercise price equal to the fair market value of the underlying common stock at the date of grant and exercisable for up to 10 years. All options were exercisable when granted. It is the Company’s policy to issue new shares upon exercise of stock options. The Company accepts shares of the Company’s common stock as payment for the exercise price of options. Shares received as payment are retired upon receipt. During the quarter ended September 30, 2016 and September 30, 2015, $0.3 million and $0.2 million was expensed related to stock option grants, respectively.

 

 

The Company issued 1,778 shares to non-executive directors as compensation and recorded expense of $0.1 million during the quarter ended September 30, 2016. No shares were issued to directors during the quarter ended September 30, 2015.

 

At September 30, 2016, 541,307 shares were available for future grants under the plan.

 

2002, 2006 and 2009 Stock Option Plans

 

The stock option plans were for key employees, officers and directors and provided for granting incentive and nonqualified stock options. Under the plans, options were granted at an exercise price equal to the fair market value of the underlying common stock at the date of grant and exercisable for up to 10 years. All options were exercisable when granted. No additional options can be granted under the 2002, 2006 and 2009 stock option plans.

 

A summary of the status of the Company’s stock plans as of June 30, 2015 and 2016, and September 30, 2016, and the changes during the periods then ended is presented below:

 

		Shares  (in thousands)				Weighted Average  Exercise Price				Aggregate Intrinsic Value  (in thousands)
Outstanding and exercisable at June 30, 2015			457			$	17.02			$	11,916
Granted			26				43.09
Exercised			(207	)			12.68
Canceled			(6	)			22.32
Outstanding and exercisable at June 30, 2016			270				22.85				4,638
Granted			24				47.45
Exercised			(46	)			21.93
Canceled			(1	)			43.09
Outstanding and exercisable at September 30, 2016			247			$	25.25			$	6,546

 

The following table summarizes information for options outstanding and exercisable at September 30, 2016:

 

								Weighted Average
Range of Prices				Options Outstanding and Exercisable (in thousands)				Remaining Life (years)				Exercise Price
$	6.81 – 12.74				40				1.2			$	11.33
	13.75 – 17.23				52				4.7				15.42
	19.72 – 27.57				71				6.6				23.75
	31.06 – 47.45				84				8.8				39.23
$	6.81 – 47.45				247				6.1			$	25.25

 

6.    EARNINGS PER SHARE

 

Basic earnings per share (EPS) of common stock are based on the weighted-average number of common shares outstanding during each period. Diluted earnings per share of common stock include the dilutive effect of potential common shares outstanding. The Company’s potential common shares outstanding are stock options, shares associated with the long-term management incentive compensation plan and non-vested shares. The Company calculates the dilutive effect of outstanding options using the treasury stock method. Anti-dilutive shares 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. The Company calculates the dilutive effect of shares related to the long-term management incentive compensation plan and non-vested shares based on the number of shares, if any, that would be issuable if the end of the fiscal period were the end of the contingency period.

 

 

In computing EPS for the quarter ended September 30, 2016 and 2015, net income as reported for each respective period is divided by the fully diluted weighted-average number of shares outstanding:

 

		Three Months Ended September 30,
(in thousands)		2016				2015
Basic shares			7,725				7,508
Potential common shares:
Stock options			111				212
Long-term incentive plan			—				38
Non-vested shares			2				3
			113				253
Diluted shares			7,838				7,761
Anti-dilutive shares			24				26

 

7.    LITIGATION

 

Indiana Civil Litigation – In December 2013, the Company entered into a confidential agreement to settle the Indiana Civil Litigation. During each of the quarters ended September 30, 2016 and 2015, the Company recorded $0.1 million of legal expenses pursuing insurance coverage. These expenses are included in “selling, general and administrative” (SG&A) expense in the Consolidated Statements of Income.

 

The Company continues to pursue the recovery of defense and settlement costs from insurance carriers. Based on policy language, insurance coverage is in question. Coverage litigation is proceeding against the insurance carriers in Indiana.

 

In March 2016, the Company received a General Notice Letter for the Lane Street Groundwater Superfund Site located in Elkhart, Indiana from the United States Environmental Protection Agency (EPA). The EPA has determined that the Company may be a responsible party under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). The Company continues to believe that it did not cause or contribute to the contamination. 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 in August 2016 and estimated total costs to remediate of $3.6 million. As of September 30, 2016, the EPA has not issued a special notice letter to Flexsteel which would indicate the EPA’s intent to pursue Flexsteel for contribution to the remediation cost. The Company has not recorded a liability in the Consolidated Balance Sheets because it is not possible to reasonably estimate the amount, if any, of the estimated remediation cost as responsible parties have not been named by the EPA.

 

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 2016 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 quarter ended September 30, 2016 and 2015. Amounts presented are percentages of the Company’s net sales.

 

		Three Months Ended September 30,
		2016				2015
Net sales			100.0	%			100.0	%
Cost of goods sold			(76.2	)			(78.0	)
Gross margin			23.8				22.0
Selling, general and administrative			(16.9	)			(14.6	)
Operating income			6.9				7.4
Other (expense) income, net			—				—
Income before income taxes			6.9				7.4
Income tax provision			(2.7	)			(2.8	)
Net income			4.2	%			4.6	%

 

Results of Operations for the Quarter Ended September 30, 2016 vs. 2015

 

The following table compares net sales for the quarter ended September 30, (in millions):

 

			2016				2015				$ Change				% Change
Residential			$	93.7			$	106.3			$	(12.6	)			-11.9	%
Commercial				18.4				20.2				(1.8	)			-8.9	%
Total			$	112.1			$	126.5			$	(14.4	)			-11.4	%

 

Net sales were $112.1 million for the quarter ended September 30, 2016, the second highest first quarter, compared to $126.5 million in the prior year quarter, a decrease of 11.4%. The residential and commercial net sales decreases were substantially due to lower volume in the current quarter. Residential net sales for the quarter-ended September 30, 2015 included approximately $3 million of net sales related to clearing the west coast port congestion. The current year quarter was negatively impacted by approximately $6 million primarily due to discontinuing select leather imports that failed to meet Flexsteel’s quality standards and delayed availability of technology components for new products. Casegoods net sales declined approximately $4 million reflecting continued weak demand at retail.

 

Gross margin as a percent of net sales for the quarter ended September 30, 2016 was 23.8% compared to 22.0% for the prior year quarter. Gross margin improvements were partially offset by lower absorption of fixed costs.

 

Selling, general and administrative (SG&A) expenses were 16.9% of net sales in the current year quarter, compared to 14.6% of net sales in the prior year quarter. SG&A expenses increased $1.1 million or 1.0% of net sales to enhance the consumer brand experience at retail. The Company expended $0.5 million or 0.4% of net sales upgrading its business information system. The increase in SG&A as a percentage of net sales also reflects lower fixed cost leverage on decreased sales volume.

 

The effective income rate was 38.7% and 38.0% for the quarter ended September 30, 2016 and 2015, respectively.

 

The above factors resulted in net income of $4.8 million or $0.61 per share for the quarter ended September 30, 2016, compared to $5.8 million or $0.74 per share in the prior year quarter.

 

All earnings per share amounts are on a diluted basis.

 

 

Liquidity and Capital Resources

 

Working capital (current assets less current liabilities) at September 30, 2016 was $145.7 million compared to $143.1 million at June 30, 2016. Primary changes in working capital include increases in cash of $5.9 million and accounts payable of $2.3 million and decreases in payroll and related items of $2.2 million, other current assets of $1.9 million and accounts receivable of $1.8 million.

 

For the quarter ended September 30, 2016, capital expenditures were $4.5 million including $3.9 million for the upgrade of the Company’s business information system. Dividend payments were $1.4 million for the Company’s 298th consecutive dividend.

 

The Company maintained a credit agreement which provided unsecured short-term working capital financing up to $10.0 million with interest of LIBOR plus 1% (1.53% at September 30, 2016), including up to $4.0 million of letters of credit. Letters of credit outstanding at September 30, 2016 totaled $2.3 million, leaving borrowing availability of $7.7 million. The credit agreement expires June 30, 2017.

 

The Company maintains an additional unsecured $10.0 million line of credit, with interest at prime minus 2% (1.5% at September 30, 2016). No amount was outstanding on the line of credit at September 30, 2016. This line of credit matures December 31, 2016.

 

Net cash provided by operating activities of $11.2 million in the quarter ended September 30, 2016 was comprised primarily of net income of $4.8 million, depreciation of $2.0 million, accounts payable increase of $2.3 million, and decreases in accounts receivable of $1.9 million and other current assets of $1.2 million. Net cash provided by operating activities in the quarter ended September 30, 2015 was $8.5 million.

 

Net cash used in investing activities was $4.5 million and $2.1 million in the quarter ended September 30, 2016 and 2015, respectively. Capital expenditures were $4.5 million and $2.1 million during the quarter ended September 30, 2016 and 2015, respectively.

 

Net cash used in financing activities was $0.9 million in the quarter ended September 30, 2016 primarily due to dividends paid of $1.4 million. Net cash used in financing activities was $5.8 million in the quarter ended September 30, 2015 primarily from repayments of current borrowings of $5.1 million and dividends paid of $1.3 million.

 

Capital expenditures are estimated to be $13 million for the remainder of fiscal 2017. Management believes that the Company has adequate cash flows from operations and credit arrangements to meet its operating and capital requirements for fiscal year 2017. In the opinion of management, the Company’s liquidity and credit resources provide it with the ability to react to opportunities as they arise, to pay quarterly dividends to its shareholders, and to purchase productive capital assets that enhance safety and improve operations.

 

Contractual Obligations

 

As of September 30, 2016, 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, 2016.

 

Outlook

 

The Company believes that demand for furniture products in the United States will continue to be weak due to economic uncertainty for the remainder of the fiscal year. During the first half of fiscal year 2016, the Company reported $6 million increase in net sales related to clearing of west coast port congestion. Net sales for the Company are expected to remain soft for the next fiscal quarter. The Company is focusing on streamlining product introductions to increase sales and controlling discretionary spending.

 

For the remainder of fiscal year 2017, the Company expects to have the following expenditures:

·

$10 million for capital expenditures and $3 million as SG&A expense for upgrading its business information system to better meet market conditions, customer requirements and increase operating efficiency; and

·

$3 million in operating capital expenditures.

 

 

The Company remains committed to its core strategies, which include providing a wide range of quality product offerings and price points to the residential and commercial markets, combined with a conservative approach to business. The Company will maintain its focus on a strong balance sheet through emphasis on cash flow and increasing profitability. The Company believes these core strategies are in the best interest of our shareholders.

 

Item 3.      Quantitative and Qualitative Disclosures About Market Risk

 

General – Market risk represents the risk of changes in the value of a financial instrument, derivative or non-derivative, caused by fluctuations in interest rates, foreign exchange rates and equity prices. As discussed below, management of the Company does not believe that changes in these factors could cause material fluctuations in the Company’s results of operations or cash flows. The ability to import furniture products can be adversely affected by political issues in the countries where suppliers are located, disruptions associated with shipping distances and negotiations with port employees. Other risks related to furniture product importation include government imposition of regulations and/or quotas; duties and taxes on imports; and significant fluctuation in the value of the U.S. dollar against foreign currencies. Any of these factors could interrupt supply, increase costs and decrease earnings.

 

Inflation – Increased operating costs are reflected in product or services pricing with any limitations on price increases determined by the marketplace. Inflation or other pricing pressures could impact raw material costs, labor costs and interest rates which are important components of costs for the Company and could have an adverse effect on our profitability, especially where increases in these costs exceed price increases on finished products.

 

Foreign Currency Risk – During the quarter ended September 30, 2016 and 2015, the Company did not have sales, but has 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 with regard to financial instruments is changes in interest rates. At September 30, 2016, the Company did not have any debt outstanding.

 

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, 2016.

 

(b) Changes in internal control over financial reporting. During the quarter ended September 30, 2016, 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 the Purpose of “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995

 

The Company and its representatives may from time to time make written or oral forward-looking statements with respect to long-term goals or anticipated results of the Company, including statements contained in the Company’s filings with the Securities and Exchange Commission and in its reports to stockholders.

 

Statements, including those in this Quarterly Report on Form 10-Q, which are not historical or current facts, are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. There are certain important factors that could cause our results to differ materially from those anticipated by some of the statements made herein. Investors are cautioned that all forward-looking statements involve risk and uncertainty. Some of the factors that could affect results are the cyclical nature of the furniture industry, 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 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, 2016.

 

Item 6.       Exhibits

 

31.1

Certification

31.2

Certification

32

Certification by Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

			FLEXSTEEL INDUSTRIES, INC.
Date:	October 25, 2016		By:	/S/ Timothy E. Hall
				Timothy E. Hall
				Chief Financial Officer
				(Principal Financial & Accounting Officer)