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Flexsteel Reports Net Income Decrease -Cites Material Cost Increases

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Flexsteel Industries, Inc. reported sales and earnings for its second quarter ended December 31, 2004. Net sales for the fiscal quarter ended December 31, 2004 were $105.0 million compared to the prior year quarter of $109.1 million, a decrease of 3.7%. Net income for the current quarter decreased to $1.6 million or $0.24 per share from the prior year quarter of $3.0 million or $0.46 per share. Net sales for the six months ended December 31, 2004 were $202.9 million compared to $186.0 million in the prior year six months, an increase of 9.1%. Net income for the six months ended December 31, 2004 of $2.8 million or $0.42 per share decreased from net income for the six months ended December 31, 2003 of $4.9 million or $0.75 per share. Flexsteel acquired DMI Furniture, Inc. ("DMI") in a business combination accounted for as a purchase as of September 17, 2003. The net sales and operating results being reported for the prior year includes the net sales and operating results of DMI for the period September 18, 2003 through December 31, 2003. The net sales reported above include $58.0 million and $35.2 million of DMI for the six months ended December 31, 2004 and 2003, respectively. For the quarter ended December 31, 2004, residential net sales were $70.6 million, compared to $75.8 million, a decrease of 6.9% from the prior year quarter. Recreational vehicle net sales were $18.9 million, compared to $20.0 million, a decrease of 5.4% from the prior year quarter. Commercial net sales were $15.5 million, compared to $13.3 million in the prior year quarter, an increase of 16.8%. For the six months ended December 31, 2004, residential net sales were $129.6 million, an increase of 3.5% from the six months ended December 31, 2003. Recreational vehicle net sales were $40.7 million, an increase of 0.8% from the six months ended December 31, 2003. Commercial net sales were $32.6 million, an increase of 60.2% from the six months ended December 31, 2003. The increase in net sales reflects improved industry performance for commercial products in addition to the inclusion of DMI net sales for the entire six months in 2004. Gross margin for the quarter ended December 31, 2004 was 19.4% compared to 21.3% in the prior year quarter. For the six months ended December 31, 2004, the gross margin was 18.9% compared to 21.5% for the prior year six-month period. The decreased gross margin percentage reflects increased costs for materials, especially steel and component parts that have steel content, and petroleum related items, including poly foam and fuel. Selling, general and administrative expenses were 16.8% and 16.9% of net sales for the quarters ended December 31, 2004 and 2003, respectively. For the six months ended December 31, 2004 and 2003, selling, general and administrative expenses were 16.8% and 17.4%, respectively. The decrease in the percentage of selling, general and administrative expenses on a fiscal year-to-date basis is primarily due to the discontinuation of the Company's retail operations in November 2003. During the six months ended December 31, 2004, the Company recorded a gain on the sale of a former manufacturing facility of $0.6 million. Working capital (current assets less current liabilities) at December 31, 2004 was $88.2 million including cash, cash equivalents and investments of $2.7 million. Working capital increased by $4.9 million from June 30, 2004 with operations generating $3.1 million and an increase in long-term borrowings of $1.8 million. Capital expenditures were $2.5 million for the second quarter of fiscal 2005 primarily for delivery and manufacturing equipment. Depreciation and amortization expense was approximately $2.9 million and $2.7 million for the six-month periods ended December 31, 2004 and 2003, respectively. The Company expects that capital expenditures will be approximately $2.0 million for the remainder of the fiscal year. All earnings per share amounts are on a diluted basis. Outlook: Margin pressures that started near the end of calendar year 2003 have continued throughout 2004. The cost of steel and component parts that have steel content and petroleum related items, including fuel and poly foam, have remained high or have continued to increase in cost. The Company initiated actions during the fourth quarter of fiscal year 2004 and first quarter of fiscal year 2005 in response to these cost increases. These actions included a review of the Company's selling prices, margins and production capacity levels resulting in selected price increases and implementation of cost control measures for inventories and capital assets. These actions have contributed to an improved gross margin for the second quarter when compared to the first quarter of the current fiscal year. These actions will continue during the remainder of the fiscal year. The uncertainties in the national and international economic and political fronts appear to have the U. S. consumers taking a wait and see attitude toward furniture purchases. The Company anticipates that these trends may continue through the remainder of the fiscal year. The Company continues to believe that its strategy of providing furniture from a wide selection of domestically manufactured and imported products is sound business practice and will continue. About Flexsteel: Flexsteel Industries, Inc. is headquartered in Dubuque, Iowa, and was incorporated in 1929. Flexsteel is a designer, manufacturer, marketer and importer of quality upholstered and wood furniture. Products are primarily for the residential, recreational vehicle, hospitality and healthcare markets. All products are distributed nationally. For more information, visit http://www.flexsteel.com.

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