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Flexsteel Fourth Quarter and Fiscal 2005 Operating Results - Lower Sales & Net Income

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Flexsteel Industries, Inc. reported sales and earnings for its fourth quarter and fiscal year ended June 30, 2005. Net sales for the quarter ended June 30, 2005 were $105.8 million compared to the prior year quarter of $108.3 million, a decrease of 2.3%. Net income for the current quarter was $1.5 million or $0.23 per share compared to $2.7 million or $0.41 per share in the prior year quarter, a decrease of 43.2%. Net sales for the fiscal year ended June 30, 2005 were $410.0 million compared to $401.2 million in the prior fiscal year, an increase of 2.2%. The net sales and operating results being reported for the prior year include net sales and operating results for DMI Furniture, Inc. (DMI) for the period September 18, 2003 (date of acquisition) through June 30, 2004. DMI net sales included above were $120.3 million and $92.5 million for the fiscal year ended June 30, 2005 and 2004, respectively. Net income for the fiscal year ended June 30, 2005 was $6.0 million or $0.92 per share compared to $10.1 million or $1.55 per share for the fiscal year ended June 30, 2005, a decrease of 40.3%. For the quarter ended June 30, 2005, residential net sales were $67.7 million, compared to $72.9 million, a decrease of 7.2% from the prior year quarter. Recreational vehicle net sales were $18.4 million, compared to $23.0 million, a decrease of 20.3% from the prior year quarter. Commercial net sales were $19.7 million, compared to $12.4 million in the prior year quarter, an increase of 59.2%. For the fiscal year ended June 30, 2005, residential net sales were $261.9 million, a decrease of 1.6% over the prior fiscal year. Recreational vehicle net sales were $78.8 million, a decrease of 7.7% over the prior fiscal year. Commercial net sales were $69.3 million, an increase of 39.8% over the prior fiscal year. Gross margin for the quarter ended June 30, 2005 was 19.3% compared to 20.2% in the prior year quarter. For the fiscal year ended June 30, 2005, the gross margin was 18.7% compared to 20.7% for the prior fiscal year. Gross margin was adversely affected by cost increases for steel, petroleum based products and poly foam on a quarterly and yearly basis when compared to the fiscal year ended June 30, 2004. During the quarter ended June 30, 2005, LIFO inventory quantities (steel and lumber) were reduced, resulting in a favorable impact on gross margin of 1.1% for the quarter and 0.3% for the fiscal year. Selling, general and administrative expenses were 17.0% and 15.9% of net sales for the quarters ended June 30, 2005 and 2004, respectively. The increase in SG&A expenses is due primarily to increases in professional fees, advertising and selling supplies. For the fiscal year ended June 30, 2005 and 2004, selling, general and administrative expenses were 16.7% and 16.6% of net sales, respectively. During the current fiscal year the Company recorded pre-tax gains of $0.8 million on the sale of former manufacturing facilities. The effective tax rate in fiscal 2005 was 30.6% compared to 39.5% in fiscal 2004. During fiscal year 2005, an examination by the Internal Revenue Service of the Company's federal income tax returns for the fiscal years ended June 30, 2003 and 2004 was completed. Due to the favorable results, the Company has reviewed and reduced its estimate of accrued tax liabilities resulting in a $0.7 million reduction in the tax expenses. The Company expects that the effective income tax rate for future periods will be approximately 37%. All earnings per share amounts are on a diluted basis. Working capital (current assets less current liabilities) at June 30, 2005 was $85.4 million, which includes cash, cash equivalents and investments of $3.2 million. Net cash provided by operating activities was $12.7 million and $7.5 million in fiscal 2005 and 2004, respectively. Fluctuations in net cash provided by operating activities were primarily the result of changes in net income, inventories and accounts payable. The increase in inventories and accounts payable in fiscal 2005 relates primarily to the expansion of import programs. Capital expenditures were $3.3 million and $6.0 million during fiscal 2005 and 2004, respectively. Depreciation and amortization expense was $5.8 million and $5.7 million during fiscal 2005 and 2004, respectively. Outlook For the fiscal year ended June 30, 2005, residential net sales have been weaker than anticipated and we expect that this softness will continue through the first half of fiscal year 2006. Net sales of vehicle seating have fallen off as several manufacturers of recreational vehicles adjust inventory levels of finished units due to weakness in demand for recreational vehicles. We expect that net sales for recreational vehicle seating products will remain relatively stable during the first quarter of fiscal 2006. We expect lower net sales in our second fiscal quarter due to lower demand for recreational vehicles. Additionally, the volatility and high cost of fuel may temper the favorable longer-term demographics that exist within the recreational vehicle industry. Our commercial marketing channels provide an opportunity to expand distribution and increase net sales in the first half of fiscal 2006. Commercial office furniture net sales will benefit from a continued general increase in demand for these products. Hospitality occupancy rates have improved with an increase in business and recreational travel. This improvement has led to increased construction and renovation activity that has led to increased demand for the hospitality products we offer. Margin pressures continued through all of fiscal 2005 and we expect pressures on margins to continue through the first half of fiscal 2006, with the cost of fuel being a key element. The rise in fuel cost continues to negatively impact the cost of bringing raw materials into our factories, as well as the cost of delivering finished products to our customers. Petroleum prices are setting record prices weekly, if not daily, and we anticipate that prices will remain volatile and at record or near record levels for at least the first half of fiscal 2006. The result will be continuing increasing costs and we believe a continuing factor keeping consumer confidence at relative low levels, negatively affecting demand for residential and vehicle seating products. The cost of steel appears to have steadied during the second half of the fiscal year just ended, albeit at relatively high historical prices. The cost of chemicals required in manufacturing poly foam used in our seating products increased throughout fiscal 2005. At this time there are no announced price increases for poly foam. The furniture industry is in an unprecedented period of change. There are increases in the cost of raw materials and fuel accompanied by an increased flow of competing product from all over the world that have added to pricing pressures. The distribution channels are changing and increasingly include such non-traditional customers such as mass merchandisers, wholesale clubs and specialty retail chains in addition to e-commerce opportunities. Flexsteel continues to take actions to address the above concerns including: new product introductions, refining existing product offerings, adjusting selling and delivery prices, adjusting production levels and implementing cost control measures for inventory and capital expenditures. These actions occur regularly regardless of operating performance, but will continue to receive additional attention under current business conditions. Flexsteel is also in a unique position to take advantage of the rapid change that is affecting most of the markets we serve. We have had tremendous success in the introduction of our complete new line of Wrangler Home Collection. We continue to develop products for the marine industry to augment our vehicle seating products. Our commercial office product lineup is strong and expanded to continue to take full advantage as demand for this product increases. Our hospitality team is poised to deliver the needed products as this market expansion continues. We continue to believe that our strategy of providing furniture from a wide selection of domestically manufactured and imported products is sound business practice. This blended sourcing strategy gives Flexsteel the opportunity to successfully participate in all the important avenues of furniture distribution in the United States. About Flexsteel Flexsteel Industries, Inc. is headquartered in Dubuque, Iowa, and was incorporated in 1929. Flexsteel is a designer, manufacturer, importer and marketer of quality upholstered and wood furniture for residential, recreational vehicle, office, hospitality and healthcare markets. All products are distributed nationally. For more information, visit our web site at http://www.flexsteel.com.

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