10-Q 1 flxs-20231231.htm 10-Q 10-Q
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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 December 31, 2023

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 the State of Minnesota

42-0442319

(State or other Jurisdiction of

(I.R.S. Identification No.)

Incorporation or Organization)

 

385 BELL STREET

DUBUQUE, IA 52001-7004

(Address of Principal Executive Offices) (Zip Code)

 

(563) 556-7730

(Registrant’s Telephone Number, Including Area Code)

______________________________________

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

FLXS

The Nasdaq Stock Market, LLC

 

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. Yes No

 

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). Yes No

 

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 Accelerated Filer Non-Accelerated Filer Smaller Reporting Company Emerging Growth Company

 

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

 

Common Stock - $1.00 Par Value

 

Shares Outstanding as of February 7, 2024

5,150,222

 

 


Table of Contents

 

FLEXSTEEL INDUSTRIES, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED December 31, 2023

 

 

 

Page

Part I – Financial Information

Item 1.

Financial Statements

3

 

Consolidated Balance Sheets as of December 31, 2023, and June 30, 2023 (Unaudited)

3

 

Consolidated Statements of Income and Comprehensive Income for three and six months ended December 31, 2023, and December 31, 2022 (Unaudited)

4

 

Consolidated Statements of Changes in Shareholders’ Equity for the three and six months ended December 31, 2023, and December 31, 2022 (Unaudited)

5

 

Consolidated Statements of Cash Flows for the six months ended December 31, 2023, and December 31, 2022 (Unaudited)

6

 

Notes to Consolidated Financial Statements (Unaudited)

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

14

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

16

Item 4.

Controls and Procedures

17

Part II – Other Information

Item 1A.

Risk Factors

17

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

17

Item 6.

Exhibits

18

Signatures

 

19

 

 

2


Table of Contents

 

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

 

FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Amounts in thousands)

 

 

 

December 31,

 

 

June 30,

 

 

 

2023

 

 

2023

 

ASSETS

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,312

 

 

$

3,365

 

Trade receivables - less allowances: December 31, 2023, $2,460, June 30, 2023, $2,600

 

 

31,401

 

 

 

38,168

 

Inventories

 

 

105,238

 

 

 

122,076

 

Other

 

 

8,545

 

 

 

6,417

 

Assets held for sale

 

 

616

 

 

 

616

 

Total current assets

 

 

149,112

 

 

 

170,642

 

NONCURRENT ASSETS:

 

 

 

 

 

 

Property, plant and equipment, net

 

 

39,848

 

 

 

38,652

 

Operating lease right-of-use assets

 

 

65,341

 

 

 

68,294

 

Deferred income taxes

 

 

7,070

 

 

 

7,154

 

Other assets

 

 

11,105

 

 

 

5,808

 

TOTAL ASSETS

 

$

272,476

 

 

$

290,550

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

Accounts payable - trade

 

$

19,825

 

 

$

24,745

 

Current portion of operating lease liabilities

 

 

7,565

 

 

 

7,179

 

Accrued liabilities:

 

 

 

 

 

 

Payroll and related items

 

 

7,382

 

 

 

9,955

 

Insurance

 

 

1,989

 

 

 

1,920

 

Sales and advertising related items

 

 

5,427

 

 

 

5,358

 

Other

 

 

6,401

 

 

 

5,948

 

Total current liabilities

 

 

48,589

 

 

 

55,105

 

LONG-TERM LIABILITIES:

 

 

 

 

 

 

Operating lease liabilities, less current maturities

 

 

61,813

 

 

 

64,974

 

Line of credit

 

 

17,898

 

 

 

28,273

 

Other liabilities

 

 

643

 

 

 

577

 

Total liabilities

 

 

128,943

 

 

 

148,929

 

 

 

 

 

 

 

SHAREHOLDERS' EQUITY:

 

 

 

 

 

 

Common stock - $1 par value; authorized 15,000 shares; 8,357 shares issued and
5,163 outstanding as of December 31, 2023; 8,292 shares issued and
5,174 outstanding as of June 30, 2023

 

 

8,357

 

 

 

8,292

 

Additional paid-in capital

 

 

37,697

 

 

 

36,605

 

Treasury stock, at cost; 3,194 shares, and 3,118 shares as of December 31, 2023, and
June 30, 2023, respectively

 

 

(71,499

)

 

 

(70,072

)

Retained earnings

 

 

168,978

 

 

 

166,796

 

Total shareholders' equity

 

 

143,533

 

 

 

141,621

 

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

 

$

272,476

 

 

$

290,550

 

 

See accompanying Notes to Consolidated Financial Statements (Unaudited).

 

3


Table of Contents

 

FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)

(Amounts in thousands, except per share data)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Net sales

 

$

100,108

 

 

$

93,137

 

 

$

194,711

 

 

$

188,821

 

Cost of goods sold

 

 

78,158

 

 

 

77,299

 

 

 

154,351

 

 

 

157,634

 

Gross profit

 

 

21,950

 

 

 

15,838

 

 

 

40,360

 

 

 

31,187

 

Selling, general and administrative expenses

 

 

17,366

 

 

 

14,864

 

 

 

33,858

 

 

 

29,438

 

Environmental remediation

 

 

 

 

 

(2,788

)

 

 

 

 

 

(2,788

)

Other expense

 

 

 

 

 

 

 

 

 

 

 

347

 

Operating income

 

 

4,584

 

 

 

3,762

 

 

 

6,502

 

 

 

4,190

 

Interest expense

 

 

489

 

 

 

316

 

 

 

1,059

 

 

 

637

 

Other (income) expense

 

 

 

 

 

(1

)

 

 

 

 

 

1

 

Income before income taxes

 

 

4,095

 

 

 

3,447

 

 

 

5,443

 

 

 

3,552

 

Income tax provision

 

 

1,044

 

 

 

594

 

 

 

1,640

 

 

 

410

 

Net income and comprehensive income

 

$

3,051

 

 

$

2,853

 

 

$

3,803

 

 

$

3,142

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

5,184

 

 

 

5,259

 

 

 

5,183

 

 

 

5,285

 

Diluted

 

 

5,324

 

 

 

5,339

 

 

 

5,360

 

 

 

5,436

 

Earnings per share of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.59

 

 

$

0.54

 

 

$

0.73

 

 

$

0.59

 

Diluted

 

$

0.57

 

 

$

0.53

 

 

$

0.71

 

 

$

0.58

 

 

 

 

See accompanying Notes to Consolidated Financial Statements (Unaudited).

 

4


Table of Contents

 

FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

(Amounts in thousands)

 

 

 

Six Months Ended December 31, 2023

 

 

 

Total Par

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Value of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Paid-In

 

 

Treasury

 

 

Retained

 

 

 

 

 

 

($1 Par)

 

 

Capital

 

 

Stock

 

 

Earnings

 

 

Total

 

Balance on June 30, 2023

 

$

8,292

 

 

$

36,605

 

 

$

(70,072

)

 

$

166,796

 

 

$

141,621

 

Stock-based compensation

 

 

8

 

 

 

903

 

 

 

 

 

 

 

 

 

911

 

Vesting of restricted stock units and restricted shares

 

 

44

 

 

 

(691

)

 

 

 

 

 

 

 

 

(647

)

Treasury stock purchases

 

 

 

 

 

 

 

 

(455

)

 

 

 

 

 

(455

)

Cash dividends declared

 

 

 

 

 

 

 

 

 

 

 

(815

)

 

 

(815

)

Net income

 

 

 

 

 

 

 

 

 

 

 

752

 

 

 

752

 

Balance on September 30, 2023

 

$

8,344

 

 

$

36,817

 

 

$

(70,527

)

 

$

166,733

 

 

$

141,367

 

Stock-based compensation

 

 

9

 

 

 

925

 

 

 

 

 

 

 

 

 

934

 

Vesting of restricted stock units and restricted shares

 

 

4

 

 

 

(45

)

 

 

 

 

 

 

 

 

(41

)

Treasury stock purchases

 

 

 

 

 

 

 

 

(972

)

 

 

 

 

 

(972

)

Cash dividends declared

 

 

 

 

 

 

 

 

 

 

 

(806

)

 

 

(806

)

Net income

 

 

 

 

 

 

 

 

 

 

 

3,051

 

 

 

3,051

 

Balance on December 31, 2023

 

$

8,357

 

 

$

37,697

 

 

$

(71,499

)

 

$

168,978

 

 

$

143,533

 

 

 

 

Six Months Ended December 31, 2022

 

 

 

Total Par

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Value of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Paid-In

 

 

Treasury

 

 

Retained

 

 

 

 

 

 

($1 Par)

 

 

Capital

 

 

Stock

 

 

Earnings

 

 

Total

 

Balance on June 30, 2022

 

$

8,190

 

 

$

34,467

 

 

$

(66,372

)

 

$

155,275

 

 

$

131,560

 

Stock-based compensation

 

 

8

 

 

 

817

 

 

 

 

 

 

 

 

 

825

 

Vesting of restricted stock units and restricted shares

 

 

28

 

 

 

(378

)

 

 

 

 

 

 

 

 

(350

)

Treasury stock purchases

 

 

 

 

 

 

 

 

(403

)

 

 

 

 

 

(403

)

Cash dividends declared

 

 

 

 

 

 

 

 

 

 

 

(833

)

 

 

(833

)

Net income

 

 

 

 

 

 

 

 

 

 

 

289

 

 

 

289

 

Balance on September 30, 2022

 

$

8,226

 

 

$

34,906

 

 

$

(66,775

)

 

$

154,731

 

 

$

131,088

 

Stock-based compensation

 

 

10

 

 

 

835

 

 

 

 

 

 

 

 

 

845

 

Vesting of restricted stock units and restricted shares

 

 

3

 

 

 

(60

)

 

 

 

 

 

 

 

 

(57

)

Treasury stock purchases

 

 

 

 

 

 

 

 

(1,823

)

 

 

 

 

 

(1,823

)

Cash dividends declared

 

 

 

 

 

 

 

 

 

 

 

(819

)

 

 

(819

)

Net income

 

 

 

 

 

 

 

 

 

 

 

2,853

 

 

 

2,853

 

Balance on December 31, 2022

 

$

8,239

 

 

$

35,681

 

 

$

(68,598

)

 

$

156,765

 

 

$

132,087

 

 

See accompanying Notes to Consolidated Financial Statements (Unaudited).

 

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FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Amounts in thousands)

 

 

 

Six Months Ended

 

 

 

December 31,

 

 

 

2023

 

 

2022

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income

 

$

3,803

 

 

$

3,142

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation

 

 

1,899

 

 

 

2,277

 

Deferred income taxes

 

 

84

 

 

 

 

Stock-based compensation expense

 

 

1,845

 

 

 

1,670

 

Change in provision for losses on accounts receivable

 

 

(140

)

 

 

(100

)

Loss on disposal of assets

 

 

34

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Trade receivables

 

 

6,907

 

 

 

8,541

 

Inventories

 

 

16,838

 

 

 

30,387

 

Other current assets

 

 

(2,128

)

 

 

(1,958

)

Other assets

 

 

(5,297

)

 

 

 

Accounts payable - trade

 

 

(4,991

)

 

 

(14,132

)

Accrued liabilities

 

 

(1,751

)

 

 

(4,914

)

Other long-term liabilities

 

 

63

 

 

 

(271

)

Net cash provided by operating activities

 

 

17,166

 

 

 

24,642

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

Capital expenditures

 

 

(3,058

)

 

 

(2,176

)

Net cash (used in) investing activities

 

 

(3,058

)

 

 

(2,176

)

FINANCING ACTIVITIES:

 

 

 

 

 

 

Dividends paid

 

 

(1,671

)

 

 

(1,678

)

Treasury stock purchases

 

 

(1,427

)

 

 

(2,226

)

Proceeds from line of credit

 

 

180,524

 

 

 

166,933

 

Payments on line of credit

 

 

(190,899

)

 

 

(185,498

)

Shares withheld for tax payments on vested restricted shares

 

 

(688

)

 

 

(407

)

Net cash (used in) financing activities

 

 

(14,161

)

 

 

(22,876

)

(Decrease) in cash and cash equivalents

 

 

(53

)

 

 

(410

)

Cash and cash equivalents at beginning of the period

 

 

3,365

 

 

 

2,184

 

Cash and cash equivalents at end of the period

 

$

3,312

 

 

$

1,774

 

 

 

 

 

 

 

 

SUPPLEMENTAL INFORMATION

 

 

 

 

 

 

Interest paid

 

 

1,104

 

 

 

823

 

Cash paid for income taxes, net

 

 

1,724

 

 

 

1,993

 

Capital expenditures in accounts payable

 

 

382

 

 

 

15

 

 

See accompanying Notes to Consolidated Financial Statements (Unaudited).

 

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FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE PERIOD ENDED December 31, 2023

1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS

DESCRIPTION OF BUSINESS – Flexsteel Industries, Inc. and Subsidiaries (the “Company” or “Flexsteel” or “Our”) is one of the largest manufacturers, importers, and marketers of furniture products in the United States. Product offerings include a wide variety of furniture such as sofas, loveseats, chairs, reclining rocking chairs, swivel rockers, sofa beds, convertible bedding units, occasional tables, desks, dining tables and chairs, kitchen storage, bedroom furniture, and outdoor furniture. A featured component in most of the upholstered furniture is a unique steel drop-in seat spring from which the name “Flexsteel” is derived. The Company distributes its products throughout the United States through its e-commerce channel and direct sales force.

BASIS OF PRESENTATION – The unaudited Consolidated Financial Statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The information contained in the Consolidated Financial Statements includes normal recurring adjustments and reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of such Consolidated Financial Statements. Operating results for the three and six months ended December 31, 2023, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2024. Certain information and footnote disclosures normally included in the Consolidated Financial Statements prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. Except to the extent updated or described below, the significant accounting policies in Note 1 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended June 30, 2023, appropriately represent, in all material respects, the current status of accounting policies.

2. INVENTORIES

A comparison of inventories is as follows:

 

 

December 31,

 

 

June 30,

 

(in thousands)

 

2023

 

 

2023

 

Raw materials

 

$

16,841

 

 

$

18,616

 

Work in process and finished parts

 

 

3,621

 

 

 

3,741

 

Finished goods

 

 

84,776

 

 

 

99,719

 

Total

 

$

105,238

 

 

$

122,076

 

 

3. ASSETS HELD FOR SALE

During the fiscal year 2020, the Company committed to a plan to sell assets located at the Company’s Starkville, Mississippi location as part of a restructuring plan. As of December 31, 2023, the Company continues to actively market the assets in Starkville, Mississippi. A summary of the assets held for sale as of December 31, 2023, is included in the table below.

 

 

 

 

 

 

 

Accumulated

 

 

Net Book

 

Location

Asset Category

 

Cost

 

 

Depreciation

 

 

Value

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

Starkville, Mississippi

Building & building improvements

 

$

4,615

 

 

$

(4,254

)

 

$

361

 

Land & land improvements

 

 

694

 

 

 

(439

)

 

 

255

 

Total assets held for sale

 

$

5,309

 

 

$

(4,693

)

 

$

616

 

 

 

4. LEASES

The Company accounts for its leases in accordance with ASU No. 2016-02, Leases (Topic 842) (“ASC 842”). ASC 842 requires lessees to (i) recognize a right-of-use asset (“ROU asset”) and a lease liability that is measured at the present value of the remaining lease payments on the Consolidated Balance Sheets, (ii) recognize a single lease cost, calculated over the lease term on a straight-line basis and (iii) classify lease-related cash payments within operating and financing activities. The Company made an accounting policy election to not recognize short-term leases on the Consolidated Balance Sheets and all non-lease components, such as common area maintenance, were excluded. At any given time during the lease term, the lease liability represents the present value of the remaining lease payments,

 

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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 507,830 square foot manufacturing facility in Mexicali, Mexico. The lease commencement date under ASC 842 guidance was July 1, 2022, the date the lessor made the building available for use by the Company for purposes of completing any leasehold improvements required by the Company prior to beginning operations. The 12-year lease ends on June 30, 2034, with options for two five-year extensions. Annual base rent under the lease is $3.2 million plus taxes, insurance and common area maintenance costs. As of December 31, 2023, the Company has not begun operations in the Mexicali facility. On May 3, 2023, the Company entered into a sublease with a third party for 105,000 square feet of the Mexicali facility with a term of 12 months. Annual rent net of broker's fees under the sublease is $1 million, plus a proportionate share of taxes, insurance, and common area maintenance. On October 2, 2023, the Company entered into a sublease with a third party for 339,413 square feet of the facility with an initial term of 12 months with four 6 month extensions. Annual rent net of broker's fees under the sublease is $2.2 million, plus a proportionate share of taxes, insurance, and common area maintenance.

At December 31, 2023, the Company determined that no impairment indicators exist with regard to the Mexicali lease given the current and expected sublease tenants and plans for future operations in the facility. At December 31, 2023, the right-of-use asset associated specifically with the Mexicali lease is $31.1 million and associated lease liability is $32.6 million. Sublease income net of broker's fees received from the sub-tenant is offset against operating lease expense in the Company’s Consolidated Statements of Income.

The components of the Company’s leases reflected on the Company’s Consolidated Statements of Income were as follows:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

 

 

December 31,

 

(in thousands)

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Operating lease expense

 

$

2,384

 

 

$

2,700

 

 

$

4,808

 

 

$

5,366

 

Variable lease expense

 

 

524

 

 

 

490

 

 

 

970

 

 

 

908

 

Total lease expense

 

$

2,908

 

 

$

3,190

 

 

$

5,778

 

 

$

6,274

 

Other information related to leases and future minimum lease payments under non-cancelable operating leases were as follows:

 

 

 

Six Months Ended

 

 

 

December 31, 2023

 

 

December 31, 2022

 

(in thousands)

 

 

 

 

 

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

Operating cash flows paid for operating leases

 

$

4,663

 

 

$

4,224

 

 

 

 

 

 

 

 

Cash received from subleasing of operating lease:

 

 

 

 

 

 

Operating cash flows received from subleasing of operating lease

 

$

1,119

 

 

$

 

 

 

 

 

 

 

 

Right-of-use assets obtained in exchange for lease liabilities:

 

 

 

 

 

 

Operating leases

 

$

797

 

 

$

35,305

 

 

 

 

 

 

 

 

Weighted-average remaining lease term (in years):

 

 

 

 

 

 

Operating leases

 

 

8.6

 

 

 

4.9

 

 

 

 

 

 

 

 

Weighted-average discount rate:

 

 

 

 

 

 

Operating leases

 

 

3.1

%

 

 

3.3

%

 

 

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Future minimum lease payments under non-cancelable operating leases were as follows:

 

 

 

December 31, 2023

 

Remaining payments in FY2024

 

$

4,838

 

FY2025

 

 

9,418

 

FY2026

 

 

9,208

 

FY2027

 

 

9,378

 

FY2028

 

 

9,144

 

Thereafter

 

 

37,040

 

Total future minimum lease payments

 

$

79,026

 

Less imputed interest

 

 

9,648

 

Lease liability

 

$

69,378

 

 

5. CREDIT ARRANGEMENTS

On September 8, 2021, the Company, as the borrower, entered into a credit agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association (the “Lender”), and the other lenders party thereto. The Credit Agreement has a five-year term and provides for up to an $85 million revolving line of credit. Subject to certain conditions, the Credit Agreement also provides for the issuance of letters of credit in an aggregate amount up to $5 million which, upon issuance, would be deemed advances under the revolving line of credit. Proceeds of borrowings were used to refinance all indebtedness owed to a prior lender and for working capital purposes. The Company’s obligations under the Credit Agreement are secured by substantially all its assets, excluding real property. The Credit Agreement contains customary representations, warranties, and covenants, including a financial covenant to maintain a fixed coverage ratio of not less than 1.00 to 1.00. In addition, the Loan Agreement places restrictions on the Company’s ability to incur additional indebtedness, to create liens or other encumbrances, to sell or otherwise dispose of assets, and to merge or consolidate with other entities. As of December 31, 2023, management believes the Company was in compliance with all covenants.

On April 18, 2022, the Company, as the borrower, entered into a first amendment to the September 8, 2021, Credit Agreement (“First Amendment to the Credit Agreement”), with the Lender and the lenders thereto. The amendment to the Credit Agreement changed the definition of the term ‘Payment Conditions’ and further defined default or event of default and the calculation of the Fixed Charge Coverage Ratio.

Subject to certain conditions, borrowings under the Credit Agreement initially bore interest at LIBOR plus 1.25% or 1.50% per annum. On May 24, 2023, the Company entered into a second amendment to the Credit Agreement ("Second Amendment to the Credit Agreement") with the Lender to transition the applicable interest rate from LIBOR to Secured Overnight Financing Rate ("SOFR"). Effective as of the date of the Second Amendment to the Credit Agreement, borrowings under the amended Credit Agreement bear interest at SOFR plus 1.36% to 1.61%, or an effective interest rate of 6.75%, on December 31, 2023.

As of December 31, 2023, there was $17.9 million outstanding under the Credit Agreement, exclusive of fees and letters of credit.

Letters of credit outstanding with the Lender as of December 31, 2023, totaled $1.1 million.

 

6. INCOME TAXES

The provision for income taxes for the interim periods is based on an estimate of the Company’s annual effective tax rate adjusted to reflect the impact of discrete items. Management judgment is required in projecting ordinary income to estimate the Company’s annual effective tax rate. The Company’s effective tax rate for the three months ended December 31, 2023, and December 31, 2022, was 25.5% and 17.2%, respectively. The Company's effective tax rate for the six months ended December 31, 2023 and 2022, was 30.1% and 11.5%, respectively. For the three and six months ended December 31, 2023, the effective tax rate differs from the statutory tax rate of 21% due to nondeductible stock compensation, state taxes, the impacts associated with uncertain tax positions, and impact of foreign operations. For the three and six months ended December 31, 2022, the effective tax rate differs from the statutory tax rate of 21% due to nondeductible stock compensation, state taxes, the impacts associated with uncertain tax positions, as well as impacts arising from the reversal of the valuation allowance associated with movements in certain deferred tax assets.

 

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7. STOCK-BASED COMPENSATION

The Company accounts for its stock-based compensation plans in accordance with ASC 718, Stock Compensation, which requires the Company to measure all share-based payments at grant date fair value and recognize the cost over the requisite service period. Restricted shares and restricted stock units (“RSUs”) generally vest over 1 to 3 years. Stock options are granted at an exercise price equal to the fair value of the Company’s common stock price at the grant date and are exercisable for up to 10 years upon vesting. Stock-based compensation is included in selling, general and administrative expenses on the Consolidated Statements of Income and Comprehensive Income. Forfeitures are recognized as incurred.

The following table is a summary of total stock-based compensation expenses for the three and six months ended December 31, 2023 and 2022.

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

 

 

December 31,

 

(in thousands)

 

2023

 

 

 

2022

 

 

2023

 

 

2022

 

Total stock-based compensation expense

 

$

934

 

 

 

$

845

 

 

$

1,845

 

 

$

1,670

 

On December 14, 2022, the Company’s shareholders approved the Flexsteel Industries, Inc. 2022 Equity Incentive Plan (“2022 Plan”).

The 2022 Plan replaced the Long-Term Incentive Compensation Plan (“LTIP”) and the 2013 Omnibus Stock Plan (collectively, the “Prior Plans”). No further awards will be made under either of the Prior Plans, but these Prior Plans will continue to govern awards previously granted under them.

(1)
2022 Equity Incentive Plan

The 2022 Plan is a long-term incentive plan pursuant to which awards may be granted to certain employees, independent contractors and directors of the Company, in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, performance shares or other stock-based awards. For periods beginning on or after July 1, 2023, restricted stock units ("RSUs") and performance stock units ("PSUs") granted to officers and key employees as part of long-term compensation programs are issued from the 2022 Plan. RSUs and PSUs awarded from the 2022 Plan are included in the Long-Term Incentive Compensation or Restricted Share and RSUs tables below.

(2)
Long-Term Incentive Compensation Plan

The LTIP provided for PSUs to be awarded to officers and key employees based on performance goals set by the Compensation Committee of the Board of Directors (the “Committee”). In conjunction with each grant of PSUs, the Committee granted RSUs under the 2013 Omnibus Stock Plan that vested at the end of three years. No further awards will be issued under this plan.

(3)
2013 Omnibus Stock Plan

The 2013 Omnibus Stock Plan was for key employees, officers and directors and provided for the granting of incentive and nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights, and performance units. No further awards will be issued under this plan.

Long-Term Incentive Compensation

The table below sets forth, as of December 31, 2023, the number of unvested PSUs granted at the target performance level for the 2022-2024, 2023-2025, and 2024-2026 performance periods under the 2022 Plan and LTIP (as applicable) and the number of unvested RSUs granted in conjunction with the PSUs. For PSUs awarded for the three year performance period ending June 30, 2024 participants may earn the award based on a cumulative three year performance goal. For PSUs awarded for the three year performance periods ending June 30, 2025 and 2026, participants may earn one-third of the award in each of the three years based on meeting performance goals for

 

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Table of Contents

 

that year. The Committee selected Adjusted Earnings Before Interest and Tax based on a defined percentage growth as the performance metric for the performance periods ending June 30, 2024, 2025, and 2026.

 

 

 

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, 2023

 

 

79

 

 

$

24.56

 

 

 

211

 

 

$

19.19

 

 

 

290

 

 

$

20.65

 

Granted

 

 

66

 

 

 

18.91

 

 

 

99

 

 

 

18.91

 

 

 

165

 

 

 

18.91

 

Vested

 

 

 

 

 

 

 

 

(75

)

 

 

12.15

 

 

 

(75

)

 

 

12.15

 

Forfeited

 

 

(1

)

 

 

21.59

 

 

 

(19

)

 

 

14.80

 

 

 

(20

)

 

 

15.14

 

Unvested as of December 31, 2023

 

 

144

 

 

$

21.99

 

 

 

216

 

 

$

21.89

 

 

 

360

 

 

$

21.93

 

Total unrecognized stock-based compensation related to the unvested PSUs at the target performance level and the related unvested RSUs was $3.8 million as of December 31, 2023, which is expected to be recognized over a weighted-average period of 1.8 years.

Restricted Shares and RSUs

A summary of the activity in the Company’s unvested restricted shares and unvested RSUs (not granted in conjunction with PSUs) during the three and six months ended December 31, 2023, is as follows:

 

 

 

 

 

 

Weighted Average

 

 

 

Shares

 

 

Fair Value

 

 

 

(in thousands)

 

 

Per Share

 

Unvested as of June 30, 2023

 

 

74

 

 

$

21.67

 

Granted

 

 

4

 

 

 

20.06

 

Vested

 

 

(8

)

 

 

28.66

 

Unvested as of December 31, 2023

 

 

70

 

 

$

20.78

 

Total unrecognized stock-based compensation related to unvested restricted shares and unvested RSUs (not granted in conjunction with the PSUs) was $0.5 million as of December 31, 2023, which is expected to be recognized over a weighted-average period of 0.9 year.

Options

A summary of the activity of the Company’s stock option plans as of December 31, 2023, is presented below:

 

 

 

 

 

 

Weighted

 

 

 

Shares

 

 

Average

 

 

 

(in thousands)

 

 

Exercise Price

 

Outstanding at June 30, 2023

 

 

202

 

 

$

20.98

 

Canceled

 

 

(18

)

 

 

27.40

 

Outstanding at December 31, 2023

 

 

184

 

 

$

20.34

 

The following table summarizes information for options outstanding at December 31, 2023:

 

 

 

 

Options

 

 

Weighted Average

 

Range of

 

Outstanding

 

 

Remaining

 

 

Exercise

 

Prices

 

(in thousands)

 

 

Life (Years)

 

 

Price

 

$

9.97 - 15.14

 

 

97

 

 

 

6.2

 

 

$

12.64

 

18.30 - 19.72

 

 

6

 

 

 

7.4

 

 

 

18.30

 

21.96 - 27.57

 

 

39

 

 

 

5.0

 

 

 

22.64

 

31.06 - 32.80

 

 

29

 

 

 

2.3

 

 

 

32.27

 

43.09 - 47.45

 

 

13

 

 

 

2.7

 

 

 

45.28

 

$

9.97 - 47.45

 

 

184

 

 

 

5.1

 

 

$

20.34

 

There is no unrecognized stock-based compensation expense related to these options as of December 31, 2023.

 

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Stock-based compensation granted outside a plan

During the quarter ended June 30, 2020, the Company awarded its Chief Financial Officer/Chief Operating Officer 79,000 options outside of any Company stock plans. All 79,000 options remain outstanding as of December 31, 2023, with an exercise price of $9.97 and a remaining life of 6.3 years. There is no remaining unrecognized stock-based compensation expense related to these options.

During the quarter ended December 31, 2018, the Company awarded its Chief Executive Officer 55,000 options outside of any Company stock plans. All 55,000 options remain outstanding as of December 31, 2023, with an exercise price of $21.96 and a remaining life of 5.0 years. There is no remaining unrecognized stock-based compensation expense related to these options.

8. EARNINGS PER SHARE

Basic earnings per share (EPS) of common stock are based on the weighted-average number of common shares outstanding during each period. Diluted earnings per share of common stock include the dilutive effect of potential common shares outstanding. The Company’s potential common shares outstanding are stock options, shares associated with the long-term incentive compensation plans, and non-vested restricted stock units. The Company calculates the dilutive effect of outstanding options and restricted stock units using the treasury stock method. Anti-dilutive options are not included in the computation of diluted EPS when their exercise price is greater than the average closing market price of the common shares.

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

 

 

December 31,

 

(in thousands)

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Basic shares

 

 

5,184

 

 

 

5,259

 

 

 

5,183

 

 

 

5,285

 

Potential common shares:

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

66

 

 

 

45

 

 

 

74

 

 

 

52

 

Non-vested restricted stock units and restricted shares

 

 

74

 

 

 

35

 

 

 

103

 

 

 

99

 

Diluted shares

 

 

5,324

 

 

 

5,339

 

 

 

5,360

 

 

 

5,436

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Anti-dilutive shares

 

 

136

 

 

 

161

 

 

 

136

 

 

 

161

 

Cash dividends declared per common share were $0.15 and $0.30 for the three and six months ended December 31, 2023, respectively, and were $0.15 and $0.30 for the three and six months ended December 31, 2022, respectively.

9. COMMITMENTS AND CONTINGENCIES

Environmental Matters – In March 2016, the Company received a General Notice Letter for the Lane Street Groundwater Superfund Site (the “Lane Street Site”) located in Elkhart, Indiana from the U.S. Environmental Protection Agency (EPA). In April 2016, the EPA issued their proposed clean-up plan for groundwater pollution and request for public comment. The Company responded to the request for public comment in May 2016. The EPA issued a Record of Decision selecting a remedy in August 2016 and estimated total costs to remediate of $3.6 million. In July 2017, the EPA issued a Special Notice Letter to the Company demanding that the Company perform the remedy selected and pay for the remediation cost and past response costs of $5.5 million. On October 12, 2017, the Company, after consultation with its insurance carriers, offered an amount, fully reimbursable by insurance coverage, to the EPA to resolve this matter. On November 6, 2017, the settlement offer extended on October 12, 2017, was rejected.

In April 2018, the EPA issued a Unilateral Administrative Order for Remedial Design and Remedial Action (the “Order”) against the Company. The Order was issued under Section 106(a) of the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), 42 U.S.C. §9606(a). The Order directed the Company to perform remedial design and remedial action for the Lane Street Site. The Order was to be effective May 29, 2018. To ensure completion of the remediation work, the EPA required the Company to secure financial assurance in the initial amount of $3.6 million, which as noted above, was the estimated cost of remedial work. The Company believed that financial assurance was not required because it met the relevant financial test criteria as provided in the Order. In May 2018, the EPA agreed to suspend enforcement of the Order so that the Company could conduct environmental testing upgradient to its former manufacturing location pursuant to an Administrative Order on Consent (AOC). On April 24, 2019, the Company signed an AOC with the EPA to conduct the upgradient investigation. The Company negotiated site access to the upgradient property over a period of months in 2019, followed by completion of sampling activities on that property on September 28-29, 2019. Following multiple exchanges from November 2019 through early 2020, the Company submitted a final and supplemental report to the EPA regarding the results of the upgradient investigation on June 17, 2020.

Despite the Company’s position that it did not cause or contribute to the contamination, the Company reached a settlement with the EPA and the State of Indiana, which was filed as a consent decree in the U.S. District Court for the Northern District of Indiana on October 24, 2022. The consent decree required Flexsteel to pay $9.8 million in resolution of the matter. Flexsteel also reached agreements with

 

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its insurance carriers for partial reimbursement of the settlement. During the quarter ended December 31, 2022, the Company made full payment in accordance with the settlement agreement and as a result of insurance proceeds received, the Company recorded income of $2.8 million for the quarter ended December 31, 2022.

Other Proceedings – From time to time, the Company is subject to various other legal proceedings, including lawsuits, which arise out of, and are incidental to, the conduct of the Company’s business. The Company does not consider any of such other proceedings that are currently pending, individually or in the aggregate, to be material to its business or likely to result in a material effect on its consolidated operating results, financial condition, or cash flows.

10. SUBSEQUENT EVENTS

On February 5, 2024 the Company announced its decision to close its manufacturing facility in Dublin, Georgia as part of a strategic plan to streamline its North American manufacturing operations. Closure of the facility is expected to occur by the end of our fourth quarter of fiscal 2024. As part of the transition, the company expects to incur pre-tax restructuring and related expenses between $2.5 million and $3.2 million. The one-time costs include approximately $2.0 million to $2.5 million for employee separations and $0.5 million to $0.7 million for other expenses directly related to the closure. Substantially all of these expenses are expected to result in future cash expenditures primarily during the third and fourth quarters of fiscal year 2024. The Dublin, GA facility will be listed for sale upon closure and the company anticipates a future one-time gain in excess of the carrying value of the asset. The Dublin facility supports less than 5% of annual sales and the Company expects to retain the majority of these sales through this transition.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

GENERAL

The following analysis of the results of operations and financial condition of the Company should be read in conjunction with the Consolidated Financial Statements and related notes included elsewhere in this quarterly report on Form 10-Q.

CRITICAL ACCOUNTING POLICIES:

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", included in our 2023 annual report on Form 10-K.

Overview

The following table has been prepared as an aid in understanding the Company’s results of operations on a comparative basis for the three and six months ended December 31, 2023 and 2022. The amounts presented are percentages of the Company’s net sales.

 

 

 

Three Months Ended

 

Six Months Ended

 

 

December 31,

 

December 31,

 

 

2023

 

2022

 

2023

 

2022

Net sales

 

 

100.0

 

%

 

 

100.0

 

%

 

 

100.0

 

%

 

 

100.0

 

%

Cost of goods sold

 

 

78.1

 

 

 

 

83.0

 

 

 

 

79.3

 

 

 

 

83.5

 

 

Gross margin

 

 

21.9

 

 

 

 

17.0

 

 

 

 

20.7

 

 

 

 

16.5

 

 

Selling, general and administrative expenses

 

 

17.3

 

 

 

 

16.0

 

 

 

 

17.4

 

 

 

 

15.6

 

 

Environmental remediation

 

 

 

 

 

 

(3.0

)

 

 

 

 

 

 

 

(1.5

)

 

Other expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.2

 

 

Operating income

 

 

4.6

 

 

 

 

4.0

 

 

 

 

3.3

 

 

 

 

2.2

 

 

Interest expense

 

 

0.5

 

 

 

 

0.3

 

 

 

 

0.5

 

 

 

 

0.3

 

 

Income before income taxes

 

 

4.1

 

 

 

 

3.7

 

 

 

 

2.8

 

 

 

 

1.9

 

 

Income tax provision

 

 

1.1

 

 

 

 

0.6

 

 

 

 

0.8

 

 

 

 

0.2

 

 

Net income and comprehensive income

 

 

3.0

 

%

 

 

3.1

 

%

 

 

2.0

 

%

 

 

1.7

 

%

 

Results of Operations for the Quarter Ended December 31, 2023 vs. 2022

Net sales were $100.1 million for the quarter ended December 31, 2023, compared to net sales of $93.1 million in the prior year quarter, an increase of 7.5%. The increase was driven by higher sales in home furnishings products sold through retail stores of $9.9 million, or 12.5%, led by unit volume increases and product mix. Sales of products sold through e-commerce channels decreased by ($2.9) million, or (20.3%), compared to the second quarter of the prior year. Lower sales in the e-commerce channel were driven by softer consumer demand and less promotional activity to improve overall profitability.

Retail home furnishings backlog was $55 million as of the quarter ended December 31, 2023, a decrease of (9.8%) compared to $61 million home furnishings backlog in the prior year quarter, mainly due to the Company’s focus on reducing manufactured backlog down to 3-5 week lead times.

Gross margin as a percent of net sales for the quarter ended December 31, 2023, was 21.9%, compared to 17.0% for the prior year quarter, an increase of 490 basis points (“bps”). The 490-bps increase was primarily due to supply chain cost saving initiatives and fixed cost leverage on higher sales volume.

Selling, general and administrative (“SG&A”) expenses increased $2.5 million or 16.8% to $17.4 million in the second quarter ended December 31, 2023, as compared to $14.9 million in the prior year quarter. As a percentage of net sales, SG&A was 17.3% in the quarter ended December 31, 2023 compared to 16.0% of net sales in the prior year quarter. The 130-bps increase primarily was due to investments to support growth and higher incentive compensation for the quarter ended December 31, 2023.

Income tax expense was $1.0 million, or an effective rate of 25.5% for the quarter ended December 31, 2023, compared to an income tax expense of $0.6 million, or an effective rate of 17.2% during the quarter ended December 31, 2022. For the quarter ended December 31, 2023, the effective tax rate differs from the statutory tax rate of 21% due to nondeductible stock compensation, state taxes, the impacts associated with uncertain tax positions, and the impact of foreign operations.

 

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Net income was $3.1 million, or $0.57 per diluted share for the quarter ended December 31, 2023, compared to net income of $2.9 million, or $0.53 per diluted share in the prior year quarter.

Results of Operations for the Six Months Ended December 31, 2023 vs. 2022

Net sales were $194.7 million for the six months ended December 31, 2023, compared to net sales of $188.8 million in the prior-year six-month period, an increase of 3.1%. The increase in sales of $5.9 million was driven by a $7.6 million increase related to home furnishing products sold through retailers and a decrease of ($1.7) million for home furnishing products sold through e-commerce channels.

Gross margin as a percent of net sales for the six months ended December 31, 2023, was 20.7%, compared to 16.5% for the prior-year six-month period, an increase of 420 bps. The 420-bps increase was primarily driven by the same factors discussed above for the quarter ended December 31, 2023.

Selling, general and administrative expenses increased $4.5 million in the six months ended December 31, 2023, compared to the prior-year six-month period. SG&A was 17.4% in the six months ended December 31, 2023, compared to the prior-year six-month period of 15.6%. The 180-bps increase was primarily due to investments in growth initiatives and higher incentive compensation for the six months ended December 31, 2023.

During the six months ended December 31, 2022, the Company recorded income of $2.8 million related to the settlement of the environmental remediation liability. See Note 10, Commitments and Contingencies, of the Notes to Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q for more information.

Income tax expense was $1.6 million, or an effective rate of 30.1%, during the six months ended December 31, 2023, compared to income tax expense of $0.4 million in the prior-year six-month period, or an effective tax rate of 11.5%. The effective tax rate for the six months ended December 31, 2023, was primarily impacted by nondeductible stock compensation, state taxes, the impacts associated with uncertain tax positions, and the impact of foreign operations.

Net income was $3.8 million, or $0.71 per diluted share for the six months ended December 31, 2023, compared to net income of $3.1 million, or $0.58 per diluted share in the prior-year six-month period.

Liquidity and Capital Resources

Working capital (current assets less current liabilities) on December 31, 2023, was $100.5 million compared to $115.5 million on June 30, 2023. The ($15.0) million decrease in working capital was primarily due to a decrease in inventory of ($16.8) million, a decrease in net trade receivables of ($6.8) million, and an increase of operating lease liabilities of $0.4 million, partially offset by a decrease in accounts payable of ($4.9) million, an increase in other current assets of $2.1 million, and a decrease in other current liabilities of ($2.0) million. Refer to discussion of working capital changes below, under Net cash provided by operating activities. Capital expenditures were $3.1 million during the six months ended December 31, 2023.

A summary of operating, investing, and financing cash flow is shown in the following table:

 

 

 

Six Months Ended

 

 

 

December 31,

 

(in thousands)

 

2023

 

 

2022

 

Net cash provided by operating activities

 

$

17,166

 

 

$

24,642

 

Net cash (used in) investing activities

 

 

(3,058

)

 

 

(2,176

)

Net cash (used in) financing activities

 

 

(14,161

)

 

 

(22,876

)

(Decrease) in cash and cash equivalents

 

$

(53

)

 

$

(410

)

Net cash provided by operating activities

For the six months ended December 31, 2023, net cash provided by operating activities was $17.2 million, primarily due to a decrease in inventory of $16.8 million, a decrease in trade receivables of $6.9 million, net income of $3.8 million, and adjustments for non-cash items including depreciation of $1.9 million, stock-based compensation of $1.8 million, and deferred income taxes of $0.1 million partially offset by an increase in other assets of $5.3 million, a decrease in accounts payable of $5.0 million, an increase in other current assets of $2.1 million, and a decrease in accrued liabilities of $1.7 million.

For the six months ended December 31, 2022, net cash provided by operating activities was $24.6 million, which primarily consisted of net income of $3.1 million, adjusted for non-cash items including depreciation of $2.3 million, and stock-based compensation of $1.7

 

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million. Net cash provided by operating assets and liabilities was $17.7 million and was primarily due to a decrease in inventories of $30.4 million, and a decrease in trade receivables of $8.5 million, partially offset by a decrease in accrued liabilities of $4.9 million, a decrease in payables of $14.1 million, an increase in other current assets of $2.0 million, and a decrease in other long-term liabilities of $0.3 million. Sales volume declines drove the decrease in trade receivables, as well as decreased inventory purchases driving declines in inventory and payables. Accrued liabilities declined primarily due to the environmental remediation settlement.

Net cash (used in) investing activities

For the six months ended December 31, 2023, net cash used in investing activities was $3.1 million due to capital expenditures.

For the six months ended December 31, 2022, net cash used in investing activities was $2.2 million due to capital expenditures.

Net cash (used in) financing activities

For the six months ended December 31, 2023, net cash used in financing activities was $14.2 million, due to payments on the line of credit of $190.9 million partially offset by proceeds from the line of credit of $180.5 million, dividends paid of $1.7 million, $1.4 million paid for purchases of company stock, and $0.7 million paid for tax payments on employee vested restricted shares netted with proceeds from the issuance of common stock.

For the six months ended December 31, 2022, net cash used in financing activities was $22.9 million, primarily due to payments on lines of credit of $185.5 million, partially offset by proceeds from lines of credit of $166.9 million. In addition to the line of credit activity, net cash used in financing activities was also due to $2.2 million for treasury stock purchases, dividends paid of $1.7 million, and $0.4 million for tax payments on employee vested restricted shares netted with proceeds from the issuance of common stock.

Line of Credit

On September 8, 2021, the Company, as the borrower, entered into a credit agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association (the “Lender”), and the other lenders party thereto. The Credit Agreement has a five-year term and provides for up to an $85 million revolving line of credit. Subject to certain conditions, the Credit Agreement also provides for the issuance of letters of credit in an aggregate amount up to $5 million which, upon issuance, would be deemed advances under the revolving line of credit. Proceeds of borrowings were used to refinance all indebtedness owed to a prior lender and for working capital purposes. The Company’s obligations under the Credit Agreement are secured by substantially all its assets, excluding real property. The Credit Agreement contains customary representations, warranties, and covenants, including a financial covenant to maintain a fixed coverage ratio of not less than 1.00 to 1.00. In addition, the Loan Agreement places restrictions on the Company’s ability to incur additional indebtedness, to create liens or other encumbrances, to sell or otherwise dispose of assets, and to merge or consolidate with other entities. As of December 31, 2023, management believes the Company was in compliance with all covenants.

On April 18, 2022, the Company, as the borrower, entered into a first amendment to the September 8, 2021, Credit Agreement (“First Amendment to the Credit Agreement”), with the Lender and the lenders thereto. The amendment to the Credit Agreement changed the definition of the term ‘Payment Conditions’ and further defined default or event of default and the calculation of the Fixed Charge Coverage Ratio.

Subject to certain conditions, borrowings under the Credit Agreement initially bore interest at LIBOR plus 1.25% or 1.50% per annum. On May 24, 2023, the Company entered into a second amendment to the Credit Agreement ("Second Amendment to the Credit Agreement") with the Lender to transition the applicable interest rate from LIBOR to Secured Overnight Financing Rate ("SOFR"). Effective as of the date of the Second Amendment to the Credit Agreement, borrowings under the amended Credit Agreement bear interest at SOFR plus 1.36% to 1.61%, or an effective interest rate of 6.75%, on December 31, 2023.

As of December 31, 2023, there was $17.9 million outstanding under the Credit Agreement, exclusive of fees and letters of credit.

Letters of credit outstanding with the Lender as of December 31, 2023, totaled $1.1 million.

Contractual Obligations

As of December 31, 2023, there have been no material changes to our contractual obligations presented in our Annual Report on Form 10-K for the year ended June 30, 2023.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

General – Market risk represents the risk of changes in the value of a financial instrument, derivative or non-derivative, caused by fluctuations in interest rates, foreign exchange rates and equity prices. As discussed below, management of the Company does not

 

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believe that changes in these factors could cause material fluctuations in the Company’s results of operations or cash flows. The ability to import furniture products can be adversely affected by political issues in the countries where suppliers are located, as well as disruptions associated with shipping distances and negotiations with port employees. Other risks related to furniture product importation include government imposition of regulations and/or quotas; duties, taxes or tariffs on imports; and significant fluctuation in the value of the U.S. dollar against foreign currencies. Any of these factors could interrupt supply, increase costs, and decrease earnings.

Foreign Currency Risk – During the quarters ended December 31, 2023 and 2022, the Company did not have sales but did have purchases and other expenses denominated in foreign currencies, primarily the Mexican Peso. The wages of our employees and certain other employee benefits and indirect costs related to our operations in Mexico are made in Pesos and subject to foreign currency fluctuation with the U.S. dollar. The Company does not employ any foreign currency hedges against this exposure. A negative shift in the value of the U.S. dollar against the Peso could increase the cost of our manufactured product. See “Risk Factors” in Item 1A in the most recent Annual Report on Form 10-K for further discussion.

Interest Rate Risk – The Company’s primary market risk exposure regarding financial instruments is changes in interest rates. On December 31, 2023, the Company had $17.9 million outstanding on its line of credit, exclusive of fees and letters of credit.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures. Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective as of December 31, 2023.

(b) Changes in internal control over financial reporting. During the quarter ended December 31, 2023, there were no significant changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended) that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

Cautionary Statement Relevant to Forward-Looking Information for “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995

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

Statements, including those in this Quarterly Report on Form 10-Q, which are not historical or current facts, are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.There are certain important factors that could cause the Company’s results to differ materially from those anticipated by some of the statements made herein. Investors are cautioned that all forward-looking statements involve risk and uncertainty. Some of the factors that could affect results are the cyclical nature of the furniture industry, supply chain disruptions, litigation, restructurings, the effectiveness of new product introductions and distribution channels, the product mix of sales, pricing pressures, the cost of raw materials and fuel, changes in foreign currency values, retention and recruitment of key employees, actions by governments including laws, regulations, taxes and tariffs, the amount of sales generated and the profit margins thereon, competition (both U.S. and foreign), credit exposure with customers, participation in multi-employer pension plans, disruptions or security breaches to business information systems, the impact of any future pandemic, and general economic conditions. For further information regarding these risks and uncertainties, see the “Risk Factors” section in Item 1A of our most recent Annual Report on Form 10-K.

The Company specifically declines to undertake any obligation to publicly revise any forward-looking statements that have been made to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

PART II OTHER INFORMATION

Item 1A. Risk Factors

There has been no material change in the risk factors set forth under Part 1, Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2023.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On January 20, 2022, the Board of Directors approved a share repurchase program authorizing the Company to purchase up to $30 million of the Company’s common stock through January 19, 2025. All purchases were made in the open market.

 

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The following table summarizes the activity of the common stock repurchases made during the three months ended December 31, 2023.

 

 

 

Total Number

 

 

Average

 

 

Total Number
of Shares

 

 

Approximate Dollar
Value of Shares

 

 

 

of Shares

 

 

Price Paid

 

 

Purchased

 

 

that May Yet

 

Period

 

Purchased

 

 

per Share

 

 

as Part of Plan

 

 

Be Purchased

 

October 1, 2023, to October 31, 2023

 

 

5,315

 

 

$

19.78

 

 

 

1,424,774

 

 

$

3,218,216

 

November 1, 2023, to November 30, 2023

 

 

28,047

 

 

 

17.82

 

 

 

1,452,821

 

 

 

2,717,029

 

December 1, 2023, to December 31, 2023

 

 

20,026

 

 

 

18.34

 

 

 

1,472,847

 

 

 

2,348,851

 

Three months ended December 31, 2023

 

 

53,388

 

 

$

18.21

 

 

 

1,472,847

 

 

$

2,348,851

 

 

Item 6. Exhibits

 

Exhibit No.

 

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.*

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.*

32

Certification of 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

Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents

104.Cover Page

Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*

Filed herewith

**

In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be “furnished” and not “filed.”

 

 

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SIGNATURES

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

 

 

 

 

 

 

 

 

FLEXSTEEL INDUSTRIES, INC.

 

 

 

 

 

 

 

 

Date:

February 7, 2024

By:

/s/ Michael J. Ressler

 

 

 

 

Michael J. Ressler

 

 

 

 

Chief Financial Officer

 

 

 

 

(Principal Financial & Accounting Officer)

 

 

 

 

19