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Flexsteel Announces .4% Decrease In Net Sales For Quarter

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Flexsteel Industries, Inc. reported sales and earnings for its first quarter ended September 30, 2005. Net sales for the quarter ended September 30, 2005 were $97.4 million compared to the prior year quarter of $97.9 million, a decrease of 0.4%. Net income for the current quarter was $1.0 million or $0.15 per share compared to $1.2 million or $0.18 per share in the prior year quarter, a decrease of 17.9%. The prior year quarter included a net gain (after tax) of $0.4 million or $0.06 per share on the sale of a former manufacturing facility. For the quarter ended September 30, 2005, residential net sales were $58.1 million, compared to $59.0 million, a decrease of 1.5% from the prior year quarter. Recreational vehicle net sales were $18.3 million, compared to $21.8 million, a decrease of 16.3% from the prior year quarter. The decline in recreational vehicle net sales is due primarily to a weaker wholesale market environment. Commercial net sales were $21.0 million, compared to $17.1 million in the prior year quarter, an increase of 23.5%. The increase in commercial net sales is primarily due to improved commercial office product offerings and improved industry performance for hospitality products. Gross margin for the quarter ended September 30, 2005 was 19.6% compared to 18.2% in the prior year quarter. The gross margin improvement in comparison to the prior year is a result of changes in product mix and selected price increases implemented to offset increases in raw material and transportation costs incurred during the prior fiscal year. Selling, general and administrative expenses were 17.9% and 16.7% of net sales for the quarters ended September 30, 2005 and 2004, respectively. The increase in selling, general and administrative expenses is due to increases in advertising, selling supplies and professional fees. Working capital (current assets less current liabilities) at September 30, 2005 was $86.6 million, which includes cash, cash equivalents and investments of $3.0 million. Net cash used in operating activities was $6.8 million and $1.8 million at September 30, 2005 and 2004, respectively. Fluctuations in net cash used in operating activities were primarily the result of changes in accounts receivable, inventories and accounts payable. The increase in inventories in fiscal 2006 relates primarily to the expansion of import programs. Capital expenditures were $0.2 million for the first quarter of fiscal 2006. Depreciation and amortization expense was $1.3 million and $1.5 million for the fiscal quarters ended September 30, 2005 and 2004, respectively. The Company expects that capital expenditures will be approximately $4.0 million for the remainder of the fiscal year. All earnings per share amounts are on a diluted basis. Outlook: Flexsteel Industries, Inc., and the furniture industry in general, continue to be impacted by increases in raw material and energy costs, as well as lower consumer confidence and higher interest rates. While the increases in raw material costs were modest during the first quarter ended September 30, 2005, the month of October has been dominated by news of unprecedented cost increases for poly foam and other materials with petrochemical content, which are major components in our seating products, as well as increases or expected increases in other key components such as fabric, steel and plywood. At the same time, the furniture manufacturing industry, including Flexsteel, is faced with competition and pricing pressures from imported products. The Company expects these adverse business conditions to continue to have an impact on its results of operations through the remainder of the fiscal year. In response to the aforementioned challenges, the Company is implementing sell price increases for seating products, and continues to explore cost control opportunities in all facets of its business. The Company believes it has the necessary inventories, product offerings and commitments in place to take advantage of opportunities for expansion of certain markets, such as commercial office and hospitality. The Company believes 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, importer and marketer of quality upholstered and wood furniture for residential, recreational vehicle, office, hospitality and healthcare markets. All products are distributed nationally.

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