1745-annual report 2008 cover:Layout 1 9/22/08 9:44 AM Page 1
Photography used by permission of Newmar Corp. / Kountry Aire
Photography used by permission of Jumeirah Essex House
P. O. Box 877 (cid:129) Dubuque IA 52004-0877
PRST STD
U.S. Postage Paid
Permit # 477
Dubuque, IA
1745-annual report 2008 cover:Layout 1 9/22/08 9:44 AM Page 2
Financial Highlights
net sales
$450
400
350
300
250
200
150
100
50
dollars
1998 ’99
’00
’01
’02
’03
’04
’05
’06
’07 2008
earnings per share
$ 2.00
1.80
1.60
1.40
1.20
1.00
.80
.60
.40
.20
dollars
1998
’99
’00
’01
’02
’03
’04
’05
’06
’07
2008
return on shareholders’ equity
book value per share
$ 18
16
14
12
10
8
6
4
2
dollars
14
12
10
8
6
4
2
percen t
1998
’99
’00
’01
’02
’03
’04
’05
’06
’07 2008
1998
’99
’00
’01
’02
’03
’04
’05
’06
’07 2008
(Amounts in thousands, except per share data)
For the years ended June 30,
2008
2007
2006
Net sales . . . . . . . . . . . . . . . . . . . . . . . $ 405,655
7,596
Operating income . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . .
Average common shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends per share . . . . . . . . . . $
At June 30, . . . . . . . . . . . . . . . . . . . . .
6,596
4,236
6,574
6,611
0.64
0.64
0.52
$ 425,400
$ 426,408
14,699
14,484
9,334
6,568
6,583
8,561
7,778
4,718
6,558
6,577
$
$
1.42
1.42
0.52
$
$
0.72
0.72
0.52
Working capital . . . . . . . . . . . . . . . . $ 100,920
26,372
Property, plant & equipment (net) . . .
Total assets . . . . . . . . . . . . . . . . . . . .
179,906
Long-term debt . . . . . . . . . . . . . . . .
20,811
Shareholders’ equity . . . . . . . . . . . . .
112,752
$ 97,902
$ 95,551
28,168
185,014
21,336
112,678
24,158
184,176
21,846
106,066
Cover: Building on our tradition of excellence, Flexsteel
is diversified into a wide range of seating products,
specialized for the residential, commercial hospitality
and recreational vehicle seating markets.
Ronald J. Klosterman
President and Chief Executive Officer
L. Bruce Boylen
Chairman of the Board
Locations
Flexsteel Industries, Inc.*
Dubuque, Iowa 52001
(563) 556-7730
J. E. Gilbertson, General Manager
Flexsteel Industries, Inc.
Dublin, Georgia 31040
(478) 272-6911
M.C. Dixon, General Manager
Flexsteel Industries, Inc.
Lancaster, Pennsylvania 17604
(717) 392-4161
R. C. Adams, General Manager
* Executive Offices
Directors & Officers
L. Bruce Boylen
Chairman of the Board of Directors
Retired Vice President
Fleetwood Enterprises, Inc.
Ronald J. Klosterman
President & Chief Executive Officer
Director
Jeffrey T. Bertsch
Senior Vice President, Corporate Services
Director
Mary C. Bottie
Director
Retired Vice President
Marketing and Operations
Motorola, Inc.
Patrick M. Crahan
Senior Vice President, Commercial Seating
Director
Lynn J. Davis
Director
Retired President and Chief Operating Officer
August Technology
Audit and Ethics Committee
Thomas E. Holloran, Chairman
Mary C. Bottie
Lynn J. Davis
Robert E. Deignan
Eric S. Rangen
Nominating and Compensation
Committee
Robert E. Deignan, Chairman
Mary C. Bottie
Lynn J. Davis
Thomas E. Holloran
Eric S. Rangen
Transfer Agent and Registrar
Wells Fargo Shareowner Services
P. O. Box 64854
South St. Paul, Minnesota 55164-0854
General Counsels
Gray, Plant, Mooty, Mooty & Bennett, P. A.
Minneapolis, Minnesota
O’Connor and Thomas, P.C.
Dubuque, Iowa
Flexsteel Industries, Inc.
Riverside, California 92504
(951) 354-2440
D. J. Bashor, General Manager
Flexsteel Industries, Inc.
New Paris, Indiana 46553
(574) 831-4050
G. A. Ummel, General Manager
Flexsteel Industries, Inc.
Harrison, Arkansas 72601
(870) 743-1101
M. J. Feldman, General Manager
Robert E. Deignan
Director
Attorney at Law
Baker & McKenzie LLP
Thomas E. Holloran
Director
Professor Emeritus,
College of Business
Senior Distinguished Fellow
School of Law
University of St. Thomas
St. Paul, Minnesota
Eric S. Rangen
Director
Senior Vice President and
Chief Accounting Officer
United Health Group
James R. Richardson
Senior Vice President, Sales and Marketing
Director
Carolyn T. B. Bleile
Vice President, Merchandising
NASDAQ Global Market
NASDAQ Symbol
FLXS
Annual Meeting
December 8, 2008, 2:00 p.m.
Hilton Minneapolis
1001 Marquette Avenue
Minneapolis, Minnesota 55403
Permanent Showrooms
High Point, North Carolina
Las Vegas, Nevada
Internet
www.flexsteel.com
www.flexsteelhospitality.com
www.dmifurniture.com
Flexsteel Industries, Inc.
Commercial Seating Division
Starkville, Mississippi 39760
(662) 323-5481
R. W. McLeod, Director of Operations
Vancouver Distribution Center
Vancouver, Washington 98668
(206) 696-9955
D. J. Bashor, General Manager
DMI Furniture, Inc.
Louisville, Kentucky 40223
(502) 426-4351
D. D. Dreher, President & CEO
Thomas D. Burkart
Senior Vice President, Vehicle Seating
Kevin F. Crahan
Vice President, Commercial Seating Sales
Donald D. Dreher
Senior Vice President
President & CEO, DMI Furniture
Lee D. Fautsch
Vice President, Residential Sales
James E. Gilbertson
Vice President, Vehicle Seating
Timothy E. Hall
Vice President , Finance
Chief Financial Officer
Secretary
Michael A. Santillo
Vice President, Vehicle Seating Marketing
AFFIRMATIVE ACTION POLICY
It is the policy of Flexsteel Industries, Inc. that all
employees and potential employees shall be judged
on the basis of qualifications and ability, without
regard to age, sex, race, creed, color or national origin
in all personnel actions. No employee or applicant
for employment shall receive discriminatory treatment
because of physical or mental disability in regard to
any position for which the employee or applicant for
employment is qualified. Employment opportunities,
and job advancement opportunities will be provided
for qualified disabled veterans and veterans of the
Vietnam era. This policy is consistent with the Company’s
plan for “Affirmative Action” in implementing the
intent and provisions of the various laws relating to
employment and non-discrimination.
ANNUAL REPORT ON FORM 10-K AVAILABLE
A copy of the Company’s annual report on Form 10-K,
as filed with the Securities and Exchange Commission,
can be obtained without charge by writing to:
Office of the Secretary
Flexsteel Industries, Inc.
P. O. Box 877
Dubuque, Iowa 52004-0877
© 2007 Flexsteel Industries, Inc.
1745-annual report 2008 text 2up:Layout 1 9/22/08 11:43 AM Page 1
Photography used by permission of Carver Yacht
Flexsteel’s Latitudes Collection of fine seating and DMI’s
Wynwood brand of dining and bedroom furniture are
globally sourced to provide
high-quality craftsmanship
and exceptional value.
Whether you drive on land, water, or both Flexsteel
vehicle seating will enhance your comfort, as shown
in Carver Yacht’s 56 Voyager SE.
Photography used by permission of Global Electric Motorcars
Charisma accent chairs, and many other wood products
benefit from our global sourcing capabilities. Expert
carving and beautiful finishes create the heirloom-quality
and fashion-forward furniture that will capture future
consumer interest.
To Our Shareholders:
In the midst of some of the worst economic and financial
news in decades, Flexsteel remains confident.
During our 115-year history, we’ve lived through many
economic downturns, from mild recessions to outright
panics. In that time we’ve grown from a regional company
into a national maker and marketer of fine furniture
products serving many markets.
Over those 115 years we have developed abiding traditions
and a corporate culture of success. You will see in this
report how we protect your investment by responding to
this challenging market with our traditional vitality, quality,
flexibility, innovation, responsibility, and stability.
Fiscal year 2008 began with slowing general economic
conditions that deteriorated as the year progressed. We have
weathered declines in the housing market, the mortgage
crisis, double-digit stock market valuation decreases,
$4.00 per gallon gasoline and $5.00 per gallon diesel fuel.
Consumer confidence hit its lowest level since 1981.
In spite of this economic scenario, our net revenue during
the first two quarters was flat with the prior year, while our
net income increased to $3.1 million from $2.0 million in
the year earlier period. During the last six months, both
our revenue and net income were negatively impacted by
the economic factors noted above along with significant
cost increases for materials, especially components with
steel or petrochemical content. For the full fiscal year, net
sales were $406 million, down from $425 million in the
prior year. Residential net sales were $258 million compared
to $260 million last year. Commercial net sales were $92
million, a decrease of 8% from the prior year. Vehicle
Seating net sales declined 15% to $56 million in FY2008.
Net income for the fiscal year ended June 30, 2008 was $4.2
million or $0.64 per share compared to $9.3 million or $1.42
per share in the prior fiscal year. Results for the prior fiscal
year include three non-recurring items which resulted in
gains of approximately $3.2 million, or $0.49 per share
after tax. Excluding these three items, net income for the year
ended June 30, 2007 was $6.1 million or $0.93 per share.
The new fiscal year is beginning with a carryover of the
difficult economic conditions that faced us at the end of
fiscal year 2008. While we expect that these conditions
will likely persist for much or all of FY2009, we remain
confident in our strategies. During this coming year we
will focus on cost control and work to maintain and increase
share in each of our markets. This strategy, along with our
strong financial position, will allow us to experience growth
and success when the economy improves.
Traditional Vitality
A visitor to the International Home Furnishings Market
at High Point, N.C., asked what he liked best at the spring
market and singled out our Flexsteel Gallery program. He
called it “exciting,” adding, “they (Flexsteel) are doing what
they do best.”
It was exciting. We project a vivacious lifestyle image
through inspired gallery collections and sleek national
advertising. Some of our newest designs reflect uptown
urban chic, while in all our divisions we are seeing a
Flexsteel | 1
2 | Flexsteel
Photography used by
permission of Polaris
Industries
Photography used by permission of Bruno Independent Living Aides
Emerging vehicle seating markets present new
opportunities for Flexsteel. We designed dependable,
safe seating for the GEM® (Global Electric Motorcars),
a Neighorhood Electric Vehicle (NEV) marketed by
a Chrysler company and rugged sports vehicles for
Polaris. For those with limited mobility, cars seats
that turn out are offered by Bruno Independent
Living Aids.
national trend toward transitional styling. Both in residential
and office furniture, the trend is toward cleaner lines and
softer silhouettes. In bedroom and dining room furniture,
darker wood finishes are now preferred over lighter finishes.
Transitional designs are clearly a favorite, but we have
something for everyone, offering silhouettes appropriate
for a large suburban home, an urban loft, a western lodge,
or a simple coastal cottage. In marine, automotive, or motor
home seating, we can offer the sophisticated high-end styling
that spells luxury.
The Latitudes® collection of home seating continues to be
an outstanding success. Mostly leather and highly popular,
it is made in Asia with all of our traditional quality, including
the Flexsteel seat spring. An even newer collection is the
South Haven sofa line, an entry-level line with defined
sofas and fabrics. Attractively designed and priced, it has
drawn much support from Flexsteel Gallery dealers and
dominant regional retailers. These collections are popular
with retailers because they offer the consumer traditional
Flexsteel quality at a competitive price.
1745-annual report 2008 text 2up:Layout 1 9/22/08 11:43 AM Page 1
Photography used by permission of Carver Yacht
Flexsteel’s Latitudes Collection of fine seating and DMI’s
Wynwood brand of dining and bedroom furniture are
globally sourced to provide
high-quality craftsmanship
and exceptional value.
Whether you drive on land, water, or both Flexsteel
vehicle seating will enhance your comfort, as shown
in Carver Yacht’s 56 Voyager SE.
Photography used by permission of Global Electric Motorcars
Charisma accent chairs, and many other wood products
benefit from our global sourcing capabilities. Expert
carving and beautiful finishes create the heirloom-quality
and fashion-forward furniture that will capture future
consumer interest.
To Our Shareholders:
In the midst of some of the worst economic and financial
news in decades, Flexsteel remains confident.
During our 115-year history, we’ve lived through many
economic downturns, from mild recessions to outright
panics. In that time we’ve grown from a regional company
into a national maker and marketer of fine furniture
products serving many markets.
Over those 115 years we have developed abiding traditions
and a corporate culture of success. You will see in this
report how we protect your investment by responding to
this challenging market with our traditional vitality, quality,
flexibility, innovation, responsibility, and stability.
Fiscal year 2008 began with slowing general economic
conditions that deteriorated as the year progressed. We have
weathered declines in the housing market, the mortgage
crisis, double-digit stock market valuation decreases,
$4.00 per gallon gasoline and $5.00 per gallon diesel fuel.
Consumer confidence hit its lowest level since 1981.
In spite of this economic scenario, our net revenue during
the first two quarters was flat with the prior year, while our
net income increased to $3.1 million from $2.0 million in
the year earlier period. During the last six months, both
our revenue and net income were negatively impacted by
the economic factors noted above along with significant
cost increases for materials, especially components with
steel or petrochemical content. For the full fiscal year, net
sales were $406 million, down from $425 million in the
prior year. Residential net sales were $258 million compared
to $260 million last year. Commercial net sales were $92
million, a decrease of 8% from the prior year. Vehicle
Seating net sales declined 15% to $56 million in FY2008.
Net income for the fiscal year ended June 30, 2008 was $4.2
million or $0.64 per share compared to $9.3 million or $1.42
per share in the prior fiscal year. Results for the prior fiscal
year include three non-recurring items which resulted in
gains of approximately $3.2 million, or $0.49 per share
after tax. Excluding these three items, net income for the year
ended June 30, 2007 was $6.1 million or $0.93 per share.
The new fiscal year is beginning with a carryover of the
difficult economic conditions that faced us at the end of
fiscal year 2008. While we expect that these conditions
will likely persist for much or all of FY2009, we remain
confident in our strategies. During this coming year we
will focus on cost control and work to maintain and increase
share in each of our markets. This strategy, along with our
strong financial position, will allow us to experience growth
and success when the economy improves.
Traditional Vitality
A visitor to the International Home Furnishings Market
at High Point, N.C., asked what he liked best at the spring
market and singled out our Flexsteel Gallery program. He
called it “exciting,” adding, “they (Flexsteel) are doing what
they do best.”
It was exciting. We project a vivacious lifestyle image
through inspired gallery collections and sleek national
advertising. Some of our newest designs reflect uptown
urban chic, while in all our divisions we are seeing a
Flexsteel | 1
2 | Flexsteel
Photography used by
permission of Polaris
Industries
Photography used by permission of Bruno Independent Living Aides
Emerging vehicle seating markets present new
opportunities for Flexsteel. We designed dependable,
safe seating for the GEM® (Global Electric Motorcars),
a Neighorhood Electric Vehicle (NEV) marketed by
a Chrysler company and rugged sports vehicles for
Polaris. For those with limited mobility, cars seats
that turn out are offered by Bruno Independent
Living Aids.
national trend toward transitional styling. Both in residential
and office furniture, the trend is toward cleaner lines and
softer silhouettes. In bedroom and dining room furniture,
darker wood finishes are now preferred over lighter finishes.
Transitional designs are clearly a favorite, but we have
something for everyone, offering silhouettes appropriate
for a large suburban home, an urban loft, a western lodge,
or a simple coastal cottage. In marine, automotive, or motor
home seating, we can offer the sophisticated high-end styling
that spells luxury.
The Latitudes® collection of home seating continues to be
an outstanding success. Mostly leather and highly popular,
it is made in Asia with all of our traditional quality, including
the Flexsteel seat spring. An even newer collection is the
South Haven sofa line, an entry-level line with defined
sofas and fabrics. Attractively designed and priced, it has
drawn much support from Flexsteel Gallery dealers and
dominant regional retailers. These collections are popular
with retailers because they offer the consumer traditional
Flexsteel quality at a competitive price.
1745-annual report 2008 text 2up:Layout 1 9/22/08 11:44 AM Page 2
Photography used by permission of Jayco
Photography used by permission of Fleetwood Enterprises
The standard of comfort and safety in motor
coach seating is Flexsteel, a feature of the
American Allegiance, Fleetwood Enterprises’
first new product in its American Coach line
in a decade.
Flexsteel vehicle seating
products successfully
combine furniture fashion
with weight, safety and
storage requirements.
Flexsteel on their captain’s chairs. They have found that
their buyers recognize the name as promising quality,
safety, and comfort.
Traditional Flexibility
Because consumer tastes in design typically change over a
period of time, designers, manufacturers and retailers usually
have time to tailor their responses. On the other hand, as
the current conditions illustrate, the economy can sometimes
change with dramatic suddenness requiring the fast response
that only a versatile team, with solid financial backing,
can do. The current housing crisis and the credit crunch
pose real problems for some retailers, made worse by
declining consumer confidence. Our long experience in
serving retailers means we understand their economics
and needs. We can often ease their cash-flow problems
through our ability to time our production and shipments
to fit their inventory requirements.
Another competitive advantage derived from our unique
history is our crossover capability. Years of making our
seat spring gave us metal-working experience that,
Flexsteel | 3
Take your ATV or motorcycles with
you. The Jayco Seneca ZX Toy
Hauler has luxurious full-featured
motor home comfort and a 90 by
96 inch power lift tailgate.
Many consumers describe their style
preferences as eclectic; these smart buyers choose to put
their own stamp on their homes. Many of them shop on-
line to find the perfect selection or roomful of furniture,
using the Sneak Preview program on the web. They can
preview frame and fabric selections on our Web site, and
then be referred to the nearest dealer where they can
finalize their custom-selected furniture for their home.
Traditional Quality
Over the years we have continued to improve the blue
steel seat spring that made our upholstered furniture famous
for its durability in the home seating market. It is guaranteed
for life, as are many other components, providing comfortable
assurance for the furniture buyer. Our retailers know how
to show their customers the details that are typical Flexsteel
quality. More and more consumers now know the Flexsteel
name, and believe it’s worth spending a few extra dollars
to get this demonstrable quality in their homes.
We’re also known to the RVing public. In their advertising
materials, the makers of motor homes highlight the name
The luxurious Jumeirah Essex House, overlooking Central Park in New
York City, selected Flexsteel Hospitality sofas, chairs, sleepers and task
chairs for its $90 million refurbishing project.
Photography used by permission of Jumeirah Essex House
As America ages, Flexsteel Senior Living
products combine the look and feel of
home with the durability and safety
requirements of Assisted Living and
other institutional care facilities.
combined with our furniture experience, led us into the
recreational vehicle seating market, which in turn has led
to making marine seating. Our engineering and design
experience give us a competitive advantage also in the
commercial or contract seating business, which has
developed into a strong part of our business.
By being flexible in marketing, we have developed our
current blended strategy, which means we buy overseas
when we can achieve Flexsteel quality there. Production
quality is assured through the oversight of knowledgeable
associates, while technology allows real-time control.
Traditional Innovation
Maintaining our traditions means keeping up with the
times, which means taking full advantage of technology.
Technology lets us stay in touch with our customers: this
past year, more than 50,000 orders came in electronically.
We keep tabs by video on our overseas production, so we
can address, in real time, problems that may arise thousands
of miles way. Technology also smoothes the shipments
from abroad by keeping track of containers, port arrival,
4 | Flexsteel
and transport status as well as handling brokerage invoices
and customs. This system is of tremendous help in bringing
in finished goods and those materials we import, such as
wooden legs and other parts, and frames for our extensive
line of exposed-wood chairs. This year, as a corporation,
we have imported 8,000 containers of finished goods and
75 containers of materials. Our information systems staff of
programmers and support specialists keeps the corporate
network humming.
We are innovative, too, in our approaches to markets.
People are not buying recreational vehicles and that seating
market has plunged. However, several years ago our
Recreational Vehicle Seating division began making strides
in the marine market for both above- and below-deck
seating for recreational watercraft. We have developed for
these markets a longer sleep sofa and a new, all-in-one U-
shaped multi-purpose lounger for eating and sleeping. We
are also exploring possibilities in ATVs, buses, vans, electric
cars, and after-market products for all these segments.
1745-annual report 2008 text 2up:Layout 1 9/22/08 11:44 AM Page 2
Photography used by permission of Jayco
Photography used by permission of Fleetwood Enterprises
The standard of comfort and safety in motor
coach seating is Flexsteel, a feature of the
American Allegiance, Fleetwood Enterprises’
first new product in its American Coach line
in a decade.
Flexsteel vehicle seating
products successfully
combine furniture fashion
with weight, safety and
storage requirements.
Flexsteel on their captain’s chairs. They have found that
their buyers recognize the name as promising quality,
safety, and comfort.
Traditional Flexibility
Because consumer tastes in design typically change over a
period of time, designers, manufacturers and retailers usually
have time to tailor their responses. On the other hand, as
the current conditions illustrate, the economy can sometimes
change with dramatic suddenness requiring the fast response
that only a versatile team, with solid financial backing,
can do. The current housing crisis and the credit crunch
pose real problems for some retailers, made worse by
declining consumer confidence. Our long experience in
serving retailers means we understand their economics
and needs. We can often ease their cash-flow problems
through our ability to time our production and shipments
to fit their inventory requirements.
Another competitive advantage derived from our unique
history is our crossover capability. Years of making our
seat spring gave us metal-working experience that,
Flexsteel | 3
Take your ATV or motorcycles with
you. The Jayco Seneca ZX Toy
Hauler has luxurious full-featured
motor home comfort and a 90 by
96 inch power lift tailgate.
Many consumers describe their style
preferences as eclectic; these smart buyers choose to put
their own stamp on their homes. Many of them shop on-
line to find the perfect selection or roomful of furniture,
using the Sneak Preview program on the web. They can
preview frame and fabric selections on our Web site, and
then be referred to the nearest dealer where they can
finalize their custom-selected furniture for their home.
Traditional Quality
Over the years we have continued to improve the blue
steel seat spring that made our upholstered furniture famous
for its durability in the home seating market. It is guaranteed
for life, as are many other components, providing comfortable
assurance for the furniture buyer. Our retailers know how
to show their customers the details that are typical Flexsteel
quality. More and more consumers now know the Flexsteel
name, and believe it’s worth spending a few extra dollars
to get this demonstrable quality in their homes.
We’re also known to the RVing public. In their advertising
materials, the makers of motor homes highlight the name
The luxurious Jumeirah Essex House, overlooking Central Park in New
York City, selected Flexsteel Hospitality sofas, chairs, sleepers and task
chairs for its $90 million refurbishing project.
Photography used by permission of Jumeirah Essex House
As America ages, Flexsteel Senior Living
products combine the look and feel of
home with the durability and safety
requirements of Assisted Living and
other institutional care facilities.
combined with our furniture experience, led us into the
recreational vehicle seating market, which in turn has led
to making marine seating. Our engineering and design
experience give us a competitive advantage also in the
commercial or contract seating business, which has
developed into a strong part of our business.
By being flexible in marketing, we have developed our
current blended strategy, which means we buy overseas
when we can achieve Flexsteel quality there. Production
quality is assured through the oversight of knowledgeable
associates, while technology allows real-time control.
Traditional Innovation
Maintaining our traditions means keeping up with the
times, which means taking full advantage of technology.
Technology lets us stay in touch with our customers: this
past year, more than 50,000 orders came in electronically.
We keep tabs by video on our overseas production, so we
can address, in real time, problems that may arise thousands
of miles way. Technology also smoothes the shipments
from abroad by keeping track of containers, port arrival,
4 | Flexsteel
and transport status as well as handling brokerage invoices
and customs. This system is of tremendous help in bringing
in finished goods and those materials we import, such as
wooden legs and other parts, and frames for our extensive
line of exposed-wood chairs. This year, as a corporation,
we have imported 8,000 containers of finished goods and
75 containers of materials. Our information systems staff of
programmers and support specialists keeps the corporate
network humming.
We are innovative, too, in our approaches to markets.
People are not buying recreational vehicles and that seating
market has plunged. However, several years ago our
Recreational Vehicle Seating division began making strides
in the marine market for both above- and below-deck
seating for recreational watercraft. We have developed for
these markets a longer sleep sofa and a new, all-in-one U-
shaped multi-purpose lounger for eating and sleeping. We
are also exploring possibilities in ATVs, buses, vans, electric
cars, and after-market products for all these segments.
1745-annual report 2008 text 2up:Layout 1 9/22/08 11:44 AM Page 3
Our depth in commercial furniture
is illustrated in the seating for this
children’s entertaiment center in
the American Bank & Trust,
Dubuque, Iowa, and in DMI
executive office furniture.
Restaurant and lounge seating is an
important component of the commercial
hospitality package. Expertise in finishing
wood complements our tradition of fine
upholstery craftsmanship.
Photography used by permission of Ken Smith / Design Photography
The DMI division has introduced media chests for flat-panel
TVs. Every Wynwood bedroom collection now features
such a chest, which is replacing the once-popular bedroom
armoire. Our DMI office furniture now includes office
groups, flat-packed for ease in shipping, that can be easily
and quickly assembled by the dealer or end user. The Home
Styles group will add, to its line of KD home office and
entertainment line, a Cabana Banana line of woven banana-
leaf chairs and sofas that can be shipped via UPS.
The Commercial Seating division, serving the hospitality
markets and commercial interior designers, offers an advanced
Quick Ship program that lets the designer see her fabric
selections on Flexsteel frames. We also have software that
can not only give the buyer a complete, three-dimensional
view of the product, but also allow real-time changes
electronically. This is a competitive advantage, one that can
speed the approval process of custom-built hospitality items.
Traditional Responsibility
Recognizing that natural resources are not infinite, Flexsteel’s
corporate philosophy emphasizes sustainability. Already,
we recycle our foam and cardboard from production.
We use low-VOC finishes on our furniture. Low-VOC
(volatile organic compounds) provide easy cleanup, reduce
allergenic toxins and, especially important for our planet,
reduce contaminant concentrations in landfill, groundwater,
and the ozone layer.
Our metalworking plant in Dubuque has invested in a
new degreasing/phosphatizing system, which gives us the
same quality painted steel for our springs and frames in
a cleaner environment.
We recently started an effort towards attaining American
Home Furnishings Association's Enhancing Furniture's
Environmental Culture (EFEC) and Sustainable by Design
(SBD) standards. A company-wide initiative, it will gain us
recognition for our efforts in sustainability practices. These
programs, created by the AHFA, will certify our commitment
to be environmentally and socially responsible. As we go
forward, we will continue to examine, explore and invest
into becoming a more environmentally conscious organization.
Traditional Stability
One of Flexsteel’s greatest assets continues to be our strong
financial condition, one that has helped us weather many
economic storms over the past century. Our financial
strength and reliability are greatly reassuring both to our
independent retailers and to the major chains who have
had problems with weaker companies, whose ability to
meet their commitments may be unpredictable.
We have the resources to develop and market new products
to meet the demands of the markets we serve. We will be
well positioned and prepared for the changes that will
take place as the economy recovers.
Building on Tradition
Due to current economic conditions and consumer confidence
levels, we are faced with many challenges during the remaining
calendar year. The recreational vehicle market has changed
substantially and perhaps permanently, but we are expanding
our presence into more areas.
The residential furniture market is off markedly overall, but
we continue to enjoy substantial sales by tailoring our offerings
Flexsteel | 5
6 | Flexsteel
Completing our furnishings for the home is the extensive line of DMI.
It includes beautifully finished dining and bedroom furniture, notably
the handsome new entertainment centers designed for LCD and
plasma screens. DMI also designs and sells fine furnitue for home
and commercial offices.
to the market’s needs. The close, long-term relationships
we have built with many of our customers will be beneficial
both to us and to them.
Our commercial seating market is largely driven by the
hospitality market, which itself is affected by the downturn
in travel, but here, too, we are exploring such new opportunities
as higher-education seating, a natural fit for us as seating
specialists. There are also opportunities in the extended-stay
segment of the hospitality market and mid-scale hotels, both
of which tend to be more recession-proof. We also expect
accelerated growth in the market for senior living facilities.
Our Flexsteel traditions are based on time-honored American
principles: quality in our products, sound fiscal policies, and
dependability in our relationships. These traditions have
helped Flexsteel grow steadily for over a century. With the
help of dedicated associates, skilled artisans and our dependable
vendors, we fully expect this growth to continue.
Ronald J. Klosterman
President and Chief Executive Officer
L. Bruce Boylen
Chairman of the Board
1745-annual report 2008 text 2up:Layout 1 9/22/08 11:44 AM Page 3
Our depth in commercial furniture
is illustrated in the seating for this
children’s entertaiment center in
the American Bank & Trust,
Dubuque, Iowa, and in DMI
executive office furniture.
Restaurant and lounge seating is an
important component of the commercial
hospitality package. Expertise in finishing
wood complements our tradition of fine
upholstery craftsmanship.
Photography used by permission of Ken Smith / Design Photography
The DMI division has introduced media chests for flat-panel
TVs. Every Wynwood bedroom collection now features
such a chest, which is replacing the once-popular bedroom
armoire. Our DMI office furniture now includes office
groups, flat-packed for ease in shipping, that can be easily
and quickly assembled by the dealer or end user. The Home
Styles group will add, to its line of KD home office and
entertainment line, a Cabana Banana line of woven banana-
leaf chairs and sofas that can be shipped via UPS.
The Commercial Seating division, serving the hospitality
markets and commercial interior designers, offers an advanced
Quick Ship program that lets the designer see her fabric
selections on Flexsteel frames. We also have software that
can not only give the buyer a complete, three-dimensional
view of the product, but also allow real-time changes
electronically. This is a competitive advantage, one that can
speed the approval process of custom-built hospitality items.
Traditional Responsibility
Recognizing that natural resources are not infinite, Flexsteel’s
corporate philosophy emphasizes sustainability. Already,
we recycle our foam and cardboard from production.
We use low-VOC finishes on our furniture. Low-VOC
(volatile organic compounds) provide easy cleanup, reduce
allergenic toxins and, especially important for our planet,
reduce contaminant concentrations in landfill, groundwater,
and the ozone layer.
Our metalworking plant in Dubuque has invested in a
new degreasing/phosphatizing system, which gives us the
same quality painted steel for our springs and frames in
a cleaner environment.
We recently started an effort towards attaining American
Home Furnishings Association's Enhancing Furniture's
Environmental Culture (EFEC) and Sustainable by Design
(SBD) standards. A company-wide initiative, it will gain us
recognition for our efforts in sustainability practices. These
programs, created by the AHFA, will certify our commitment
to be environmentally and socially responsible. As we go
forward, we will continue to examine, explore and invest
into becoming a more environmentally conscious organization.
Traditional Stability
One of Flexsteel’s greatest assets continues to be our strong
financial condition, one that has helped us weather many
economic storms over the past century. Our financial
strength and reliability are greatly reassuring both to our
independent retailers and to the major chains who have
had problems with weaker companies, whose ability to
meet their commitments may be unpredictable.
We have the resources to develop and market new products
to meet the demands of the markets we serve. We will be
well positioned and prepared for the changes that will
take place as the economy recovers.
Building on Tradition
Due to current economic conditions and consumer confidence
levels, we are faced with many challenges during the remaining
calendar year. The recreational vehicle market has changed
substantially and perhaps permanently, but we are expanding
our presence into more areas.
The residential furniture market is off markedly overall, but
we continue to enjoy substantial sales by tailoring our offerings
Flexsteel | 5
6 | Flexsteel
Completing our furnishings for the home is the extensive line of DMI.
It includes beautifully finished dining and bedroom furniture, notably
the handsome new entertainment centers designed for LCD and
plasma screens. DMI also designs and sells fine furnitue for home
and commercial offices.
to the market’s needs. The close, long-term relationships
we have built with many of our customers will be beneficial
both to us and to them.
Our commercial seating market is largely driven by the
hospitality market, which itself is affected by the downturn
in travel, but here, too, we are exploring such new opportunities
as higher-education seating, a natural fit for us as seating
specialists. There are also opportunities in the extended-stay
segment of the hospitality market and mid-scale hotels, both
of which tend to be more recession-proof. We also expect
accelerated growth in the market for senior living facilities.
Our Flexsteel traditions are based on time-honored American
principles: quality in our products, sound fiscal policies, and
dependability in our relationships. These traditions have
helped Flexsteel grow steadily for over a century. With the
help of dedicated associates, skilled artisans and our dependable
vendors, we fully expect this growth to continue.
Ronald J. Klosterman
President and Chief Executive Officer
L. Bruce Boylen
Chairman of the Board
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[ (cid:1) ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended June 30, 2008
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)
Minnesota 42-0442319
(State or other jurisdiction of incorporation or organization)
3400 Jackson Street, Dubuque, Iowa
(Address of principal executive offices)
(I.R.S. Employer Identification No.)
52004-0877
(Zip Code)
Registrant’s telephone number, including area code:
(563) 556-7730
_______________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $1.00 Par Value
Name of each exchange on which registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
_______________________________________________
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [(cid:1) ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [(cid:1)]
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 [(cid:1)] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. [(cid:1) ]
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 definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act (check one).
Large accelerated filer
Smaller reporting company
Non-accelerated filer
Accelerated filer
X
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [ (cid:1)]
The aggregate market value of the voting stock held by non-affiliates, computed by reference to the last sales price on December
29, 2007 (which was the last business day of the registrant’s most recently completed second quarter) was $49,984,743.
Indicate the number of shares outstanding of each of the registrant’s classes of Common Stock, as of the latest practicable date.
6,575,633 Common Shares ($1 par value) as of September 9, 2008.
DOCUMENTS INCORPORATED BY REFERENCE
In Part III, portions of the registrant’s 2008 Proxy Statement to be filed with the Securities and Exchange Commission within 120
days of the Registrant’s fiscal year end.
1
EXPLANATORY NOTE
As discussed in Note 19 to the accompanying Consolidated Financial Statements in this Annual Report on
Form 10-K, Flexsteel Industries, Inc. and Subsidiaries, (the “Company”) has restated the consolidated financial
statements for the fiscal years ended June 30, 2007 and 2006 and the condensed consolidated financial statements for
the quarters in the previously mentioned fiscal years and for the quarters ended March 31, 2008, December 31, 2007
and September 30, 2007. This Form 10-K also reflects the effects of the restatements within “Selected Financial Data”
in Item 6, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Item 7 and
“Controls and Procedures” in Item 9A.
Background of Restatement
During the 2008 fiscal year-end closing process the Company identified unsupported reconciling amounts
that reduced the accounts payable balances at a material consolidated subsidiary. After completing analysis of these
unsupported reconciling amounts, it was determined that they principally related to the historical accounting at the
subsidiary for the capitalization of inventory costs and the clearing of accruals from accounts payable relating to
transactions occurring in fiscal years 2004 and 2005. The historical subsidiary inventory standard costing system,
established prior to the warehousing of inventory in China, did not appropriately differentiate the costing of inventory
balances warehoused in China versus the United States. The warehoused inventories in China inappropriately
included freight-in costs for shipments to the United States that had not been incurred. During fiscal year 2006, the
Company modified the subsidiary’s inventory costing process which rectified the costing error in inventory on a
prospective basis but resulted in the reclassification of the historical error in inventory freight costs as a reduction to
accounts payable with the erroneous belief that the reduction to accounts payable would offset future freight invoices.
As a result of this error, the $2.287 million reduction within accounts payable remained until identified during the
fiscal year 2008 closing process.
2
PART I
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 Annual Report on Form 10-K, 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, the
effectiveness of new product introductions and distribution channels, the product mix of sales, pricing pressures, the
cost of raw materials and fuel, foreign currency valuations, actions by governments including taxes and tariffs,
inflation, the amount of sales generated and the profit margins thereon, competition (both foreign and domestic),
changes in interest rates, credit exposure with customers and general economic conditions. For further information
regarding these risks and uncertainties, see the “Risk Factors” section in Item 1A of this 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.
Item 1.
Business
General
Flexsteel Industries, Inc. and Subsidiaries (the “Company”) was incorporated in 1929 and is one of the oldest
and largest manufacturers, importers and marketers of residential, recreational vehicle and commercial upholstered and
wooden furniture products in the country. 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, motor home, travel trailer, yacht, pontoon, health care and hotel applications. Featured as a
basic 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 to furniture dealers, department stores, recreational vehicle
manufacturers, catalogs and hospitality and healthcare facilities. The Company’s products are also sold to several
national and regional chains, some of which sell on a private label basis.
The Company has one active wholly-owned subsidiary: DMI Furniture, Inc. (“DMI”), acquired effective
September 17, 2003, which is a Louisville, Kentucky-based, manufacturer, importer and marketer of residential and
commercial office furniture with manufacturing plants and warehouses in Indiana and manufacturing sources in Asia;
DMI’s divisions are WYNWOOD, Homestyles and DMI Commercial Office Furniture. The Company has two
inactive wholly-owned subsidiaries: (1) Desert Dreams, Inc., which owned and leased a commercial building to an
unrelated entity until it was sold in June, 2007 and (2) Four Seasons, Inc.
The Company operates in one reportable operating segment, furniture products. Our furniture products
business involves the distribution of manufactured and imported products consisting of a broad line of upholstered and
wooden furniture for residential, recreational vehicle, and commercial markets. The Company makes minimal export
sales. No single customer accounted for more than 10% of net sales.
3
The Company’s furniture products have three primary areas of application – residential, recreational vehicle
and commercial. Set forth below is information for the past three fiscal years showing the Company’s net sales
attributable to each of the areas of application (in thousands):
Residential ........................................ $
FOR THE YEARS ENDED JUNE 30,
2007
259,710
2008
258,084
2006
267,714
$
$
Recreational Vehicle .......................
56,090
Commercial ......................................
91,481
66,165
99,525
71,981
86,713
$
405,655
$
425,400
$
426,408
Manufacturing and Offshore Sourcing
There has been a significant change in recent years in the manner by which we acquire products to be
introduced to the market. We have traditionally been a furniture manufacturer, however our blended strategy now
combines offshore sourcing of finished and component parts with our manufactured finished products and component
parts.
We operate manufacturing facilities that are located in Arkansas, California, Georgia, Indiana, Iowa,
Mississippi, and Pennsylvania. These manufacturing operations are integral to our product offerings and distribution
strategy by offering smaller and more frequent product runs of a wider product selection. We identify and eliminate
manufacturing inefficiencies and adjust manufacturing schedules on a daily basis to meet customer requirements. We
have established relationships with key suppliers to ensure prompt delivery of quality component parts. Our
production includes the use of selected offshore component parts to enhance our product quality and value in the
marketplace.
We integrate our manufactured products with finished products acquired from offshore suppliers who can
meet our quality specification and scheduling requirements. We will continue to pursue and refine this blended
strategy, offering customers manufactured goods, products manufactured utilizing imported component parts, and
ready-to-deliver imported products. The Company believes that it best serves customers by offering products from
each of these categories to assist customers in reaching specific consumers with varied price points, styles and product
categories. This blended focus on products allows the Company to provide a wide range of options to satisfy customer
requirements.
Competition
The furniture industry is highly competitive and includes a large number of domestic and foreign
manufacturers, none of which dominates the market. The competition has significantly increased from foreign
manufacturers, in countries such as China, which have lower production costs. The markets in which we compete
include a large number of relatively small manufacturers; however, certain competitors have substantially greater sales
volumes and financial resources compared to us. Our products compete based on style, quality, price, delivery, service
and durability. We believe that our manufacturing capabilities and facility locations, our commitment to our
customers, our product quality and value and experienced production, marketing and management teams, now aided
by offshore sourced finished product, are our competitive advantages.
Seasonality
The Company’s business is not considered seasonal.
Foreign Operations
The Company makes minimal export sales. At June 30, 2008, the Company had approximately 100
employees located in Asia to inspect and coordinate the delivery of purchased products.
Customer Backlog
The approximate backlog of customer orders believed to be firm as of the end of the current fiscal year and
the prior two fiscal years were as follows (in thousands):
June 30, 2008
$ 45,700
June 30, 2007
$ 50,900
June 30, 2006
$ 50,600
4
Raw Materials
The Company’s manufactured furniture products utilize various types of wood, fabrics, leathers, upholstered
filling material, high carbon spring steel, bar and wire stock, polyurethane and other raw materials in manufacturing
furniture. While the Company purchases these materials from numerous outside suppliers, both domestic and
offshore, it is not dependent upon any single source of supply. The costs of certain raw materials fluctuate, but all
continue to be readily available.
Industry Factors
The Company has exposure to actions by governments, including tariffs. Tariffs are a possibility on any
imported or exported products.
Government Regulations
The Company is subject to various local, state, and federal laws, regulations and agencies that affect
businesses generally. These include regulations promulgated by federal and state environmental and health agencies,
the federal Occupational Safety and Health Administration, and laws pertaining to the hiring, treatment, safety, and
discharge of employees.
Environmental Matters
The Company is subject to environmental laws and regulations with respect to product content and industrial
waste. Compliance with these laws and regulations has not had a material impact on our capital expenditures,
earnings, or competitive position.
Trademarks, Patents and Licenses
The Company owns the American and Canadian improvement patents to its Flexsteel seat spring, as well as
patents on convertible beds and various other recreational vehicle seating products. The Company owns certain
trademarks in connection with its furniture products, which trademarks are due to expire on dates ranging from 2008 to
2023. The Company does not consider its trademarks, patents and licenses material to its business.
It is not common in the furniture industry to obtain a patent for a furniture design. If a particular design of a
furniture manufacturer is well accepted in the marketplace, it is common for other manufacturers to imitate the same
design without recourse by the furniture manufacturer who initially introduced the design. Furniture products are
designed by the Company’s own design staff and through the services of independent designers. New models and
designs of furniture, as well as new fabrics, are introduced continuously. In the last three fiscal years, these design
activities involved the following expenditures (in thousands):
Fiscal Year Ended June 30,
2008
2007
2006
Expenditures
$3,130
$3,270
$2,990
Employees
The Company had approximately 2,000 employees as of June 30, 2008 including approximately 600
employees that are covered by collective bargaining agreements. Management believes it has good relations with
employees.
Website and Available Information
Our website is located at www.flexsteel.com. Information on the website does not constitute part of this
Annual Report on Form 10-K.
A copy of the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange
Commission (“SEC”), other SEC reports filed or furnished and our Guidelines for Business Conduct are available,
without charge, on the Company’s website at www.flexsteel.com or by writing to the Office of the Secretary, Flexsteel
Industries, Inc., P. O. Box 877, Dubuque, IA 52004-0877.
5
Item 1A – Risk Factors
Our business is subject to a variety of risks. You should carefully consider the risk factors detailed below in
conjunction with the other information contained in this Annual Report on Form 10-K. Should any of these risks
actually materialize, our business, financial condition, and future prospects could be negatively impacted. These risks
are not the only ones we face. There may be additional factors that are presently unknown to us or that we currently
believe to be immaterial that could affect our business.
We may lose market share due to competition, which would decrease our future sales and earnings.
The furniture industry is very competitive and fragmented. We compete with many domestic and foreign
manufacturers. Some competitors have greater financial resources than we have and some often offer extensively
advertised, well-recognized, branded products. Additionally, competition from foreign producers has increased
dramatically in the past few years. These foreign producers typically have lower selling prices due to their lower
operating costs. As a result, we may not be able to maintain or to raise the prices of our products in response to such
competitive pressures or increasing costs. Also, due to the large number of competitors and their wide range of
product offerings, we may not be able to differentiate our products (through styling, finish and other construction
techniques) from those of our competitors. Large retail furniture dealers have the ability to obtain offshore sourcing
on their own. As a result, we are continually subject to the risk of losing market share, which may lower our sales and
earnings.
We have been increasing our offshore capabilities to provide flexibility in product offerings and
pricing to meet competitive pressures, but this approach may adversely affect our ability to service customers,
which could lower future sales and earnings.
Our sourcing vendors may not supply goods that meet our manufacturing, quality or safety specifications,
in a timely manner and at an acceptable price. We may reject goods that do not meet our specifications and either
manufacture or find alternative vendors potentially at a higher cost, or may be forced to discontinue the product. Also,
delivery of goods from our foreign sourcing vendors may be delayed for reasons not typically encountered with
domestic manufacturing or sourcing, such as shipment delays caused by customs or labor issues.
Changes in political, economic, and social conditions, as well as laws and regulations in the other countries
from which we source products could adversely affect us. This could make it more difficult for us to service our
customers. International trade policies of the United States and countries from which we source products could
adversely affect us. Imposition of trade sanctions relating to imports, taxes, import duties and other charges on imports
could increase our costs and decrease our earnings. Also, significant fluctuations of foreign exchange rates against the
value of the U.S. dollar could increase costs and decrease earnings.
Efforts to realign manufacturing could decrease our near-term earnings.
We continually review our manufacturing operations and offshore sourcing capabilities. As a result, we
sometimes realign those operations and capabilities and institute cost savings programs. These programs can include
the consolidation and integration of facilities, functions, systems and procedures. We also may shift certain products
to or from domestic manufacturing to offshore sourcing. These realignments and cost savings programs generally
involve some initial cost and can result in decreases in our near-term earnings until we achieve the expected cost
reductions. We may not always accomplish these actions as quickly as anticipated, and we may not fully achieve the
expected cost reductions.
An economic downturn could adversely affect our business and decrease our sales and earnings.
Economic downturns could affect consumer-spending habits by decreasing the overall demand for home
furnishings, recreational vehicles and commercial products and adversely affect our business. Interest rates, consumer
confidence, fuel costs, housing starts, and geopolitical factors that affect many other businesses are particularly
significant to us because our products are consumer goods.
6
If we experience fluctuations in the price, availability and quality of raw materials, this could cause
manufacturing delays, adversely affect our ability to provide goods to our customers and increase our costs, any
of which could decrease our sales and earnings.
We use various types of wood, fabrics, leathers, upholstered filling material, high carbon spring steel, bar
and wire stock and other raw materials in manufacturing furniture. Because we are dependent on outside suppliers for
all of our raw material needs, we must obtain sufficient quantities of quality raw materials from our suppliers at
acceptable prices and in a timely manner. We have no long-term supply contracts with our suppliers. Unfavorable
fluctuations in the price, quality and availability of these raw materials could negatively affect our ability to meet
demands of our customers. The inability to meet our customers' demands could result in the loss of future sales, and
we may not always be able to pass along price increases to our customers due to competitive and marketing pressures.
Our failure to anticipate or respond to changes in consumer tastes and fashions in a timely manner
could adversely affect our business and decrease our sales and earnings.
Furniture is a styled product and is subject to rapidly changing consumer trends and tastes. If we are
unable to predict or respond to changes in these trends and tastes in a timely manner, we may lose sales and have to
sell excess inventory at reduced prices. This could lower our sales and earnings.
If we experience the loss of large customers through business failures (or for other reasons), any
extended business interruptions at our manufacturing facilities, or problems with our fabric suppliers, this
could decrease our future sales and earnings.
Although we have no customers that individually represent 10% or more of our net sales, the possibility of
business failures by, or the loss of, large customers could decrease our future sales and earnings. Lost sales may be
difficult to replace and any amounts owed to us may become uncollectible. Our inability to fill customer orders during
an extended business interruption could negatively impact existing customer relationships resulting in market share
decreases.
Upholstered furniture is highly fashion oriented, and if we are not able to acquire sufficient fabric variety,
or if we are unable to predict or respond to changes in fashion trends, we may lose sales and have to sell excess
inventory at reduced prices.
At times it is necessary we discontinue certain relationships with customers (retailers, O.E.M.
manufacturers and others) who do not meet our growth, credit or profitability standards. Until realignment is
established, there can be a decrease in near-term sales and earnings. We continually review relationships with our
customers and future realignments are possible based upon such ongoing reviews.
We are, and may in the future be, a party to legal proceedings and claims, including those involving
product liability or environmental matters, some of which claim significant damages and could adversely affect
our business, operating results and financial condition.
We face the business risk of exposure to product liability claims in the event that the use of any of our
products results in personal injury or property damage. In the event any of our products prove to be defective, we may
be required to recall or redesign such products. We maintain insurance against product liability claims, but there can
be no assurance such coverage will continue to be available on terms acceptable to us or that such coverage will be
adequate for liabilities actually incurred.
Given the inherent uncertainty of litigation, we can offer no assurance future litigation will not have a
material adverse impact on our business, operating results or financial condition. We are also subject to various laws
and regulations relating to environmental protection and the discharge of materials into the environment and we could
incur substantial costs as a result of the noncompliance with, or liability for cleanup or other costs or damages under,
environmental laws.
We may become subject to litigation or other contingent liabilities, downgrades in our credit ratings,
or potential additional cash and noncash charges because of our error corrections in our Consolidated
Financial Statements which could have a material adverse effect on the Company.
As described in the Explanatory Note immediately preceding Part I, Item 1, and in Note 19 “Error Corrections” of the
Notes to Consolidated Financial Statements in this Annual Report on Form 10-K, we identified certain errors in the
7
reconciliation of accounts payable at June 30, 2008. As a result of these errors, we restated, in this Annual Report on
Form 10-K, certain of our previously filed financial statements. We could be subject to litigation or other contingent
liabilities, credit rating downgrades, or cash or non-cash charges due to these errors, any or all of which could have a
material adverse effect on us.
We may engage in acquisitions and investments in businesses, which could dilute our earnings per
share and decrease the value of our common stock.
As part of our business strategy, we may make acquisitions and investments in businesses that offer
complementary products. Risks commonly encountered in acquisitions include the possibility that we pay more than
the acquired company or assets are worth, the difficulty of assimilating the operations and personnel of the acquired
business, the potential disruption of our ongoing business and the distraction of our management from ongoing
business. Consideration paid for future acquisitions could be in the form of cash or stock or a combination thereof.
Dilution to existing stockholders and to earnings per share may result in connection with any such future acquisition.
We may experience impairment of our long-lived assets, which would decrease our earnings and net
worth.
Accounting rules require that long-lived assets be tested for impairment whenever events or changes in
circumstances indicate that its carrying amount may not be recoverable. We have substantial long-lived assets,
consisting primarily of property, plant and equipment, which based upon such events or changes in circumstances
there could be a write-down of all or a portion of these assets negatively impacting earnings.
Restrictive covenants in our existing credit facilities may restrict our ability to pursue our business
strategies.
Our existing credit facilities limit our ability, among other things, to: incur additional indebtedness; make
investments; consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and create liens.
The restrictions contained in our credit facilities could: limit our ability to plan for or react to market
conditions or meet capital needs or otherwise restrict our activities or business plans; and adversely affect our ability to
finance our operations, strategic acquisitions, investments or alliances or other capital needs or to engage in other
business activities that would be in our best interest.
A breach of any of these restrictive covenants or our inability to comply with the required financial ratios
could result in a default under our credit facilities. If a default occurs, the lender under our credit agreement may elect
to declare all borrowings outstanding, together with accrued interest and other fees, to be immediately due and payable
which would result in an event of default under our outstanding notes. The lender will also have the right in these
circumstances to terminate any commitments they have to provide further borrowings. If we are unable to repay
outstanding borrowings when due, the lender will also have the right to initiate collection proceedings against us. If
the indebtedness under our credit facilities were to be accelerated, we cannot assure you that our assets would be
sufficient to repay in full the indebtedness under the credit facilities and our other indebtedness.
Terms of collective bargaining agreements and labor disruptions could adversely impact our results
of operations.
We employ approximately 2,000 people, 30% of whom are covered by union contracts. Where a
significant portion of our workers are unionized, our ability to implement productivity improvements and effect
savings with respect to health care, pension and other retirement costs is more restricted than in many nonunion
operations as a result of various restrictions specified in our collective bargaining agreements. Terms of collective
bargaining agreements that prevent us from competing effectively could adversely affect our financial condition,
results of operations and cash flows. We are committed to working with those groups to resolve conflicts as they
arise. However, there can be no assurance that these efforts will be successful.
We may have material weaknesses in our internal control over financial reporting and the existence
of material weaknesses, if any, may have an adverse impact on our stock price.
Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect
that our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the
8
benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control
systems, no evaluations of controls can provide absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected. Our internal control over financial reporting, however, is designed to provide
reasonable assurance that the objectives of internal control over financial reporting are met. The existence of material
weaknesses in our internal control over financial reporting may have an adverse impact on our stock price.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Properties
The Company owns the following facilities as of June 30, 2008:
Location
Dubuque, Iowa
Lancaster, Pennsylvania *
Riverside, California
Dublin, Georgia
Harrison, Arkansas
Starkville, Mississippi
New Paris, Indiana *
Huntingburg, Indiana
Approximate
Size (square feet)
Principal Operations
853,000
Warehouse – Recreational Vehicle – Metal
216,000
305,000
300,000
221,000
349,000
168,000
691,000
Working and Corporate Offices
Upholstered Furniture
Upholstered Furniture – Recreational Vehicle –
Warehouse and Distribution
Upholstered Furniture
Upholstered Furniture – Woodworking
Upholstered Furniture – Woodworking
Recreational Vehicle – Metal Working
Case Goods Production and Assembly –
Woodworking – Warehouse
Ferdinand, Indiana
32,000
Woodworking
* See Note 18 to the Consolidated Financial Statements included in this Annual Report on Form 10-K.
The Company leases the following facilities as of June 30, 2008:
Location
Vancouver, Washington
Louisville, Kentucky
Ferdinand, Indiana
Jasper, Indiana
Shenzhen, China
Bangkok, Thailand
Approximate
Size (square feet)
Principal Operations
16,000
15,000
158,000
27,000
2,000
1,900
Warehouse and Distribution
Administrative Offices
Warehouse and Distribution
Warehouse and Distribution
Office
Office
The Company’s operating plants are well suited for their manufacturing purposes and have been updated and
expanded from time to time as conditions warrant. Management believes there is adequate production capacity at the
Company’s facilities to meet present market demands.
The Company leases showrooms for displaying its products in the furniture markets in High Point, North
Carolina and Las Vegas, Nevada.
Item 3.
Legal Proceedings
From time to time, the Company is subject to various 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
proceedings that are currently pending, individually or in the aggregate, to be material to its business or likely to result
in a material adverse effect on its consolidated operating results, financial condition, or cash flows.
9
Item 4.
Submission of Matters to a Vote of Security Holders
During the quarter ended June 30, 2008 no matter was submitted to a vote of security holders.
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Share Investment Performance
The following graph is based upon the SIC Code #251 Household Furniture Index as a peer group. It shows
changes over the past five-year period in the value of $100 invested in: (1) Flexsteel’s common stock; (2) The
NASDAQ Global Market; and (3) an industry peer group of the following: Bassett Furniture Ind., Chromcraft
Revington Inc., Ethan Allen Interiors, Furniture Brands Intl., Hooker Furniture Corp., Interface Inc., Kimball
International, Natuzzi S.P.A., La-Z-Boy Inc., and Stanley Furniture Inc.
Flexsteel
Peer Group
NASDAQ
2003
100.00
100.00
100.00
2004
146.06
106.94
126.19
2005
91.75
96.27
126.75
2006
86.56
105.22
133.85
2007
100.25
100.73
160.42
2008
81.05
71.11
141.30
The NASDAQ Global Market is the principal market on which the Company’s common stock is traded.
Sale Price of Common Stock *
Fiscal 2008
Fiscal 2007
High
Low
High
Low
$
First Quarter ............
Second Quarter........
Third Quarter ..........
Fourth Quarter.........
14.75
14.86
14.50
13.98
$
$
12.92
11.60
11.00
11.01
13.59 $
13.26
15.47
15.94
12.02 $
11.55
12.51
12.71
* Reflects the market price as reported on The NASDAQ Global Market.
Cash Dividends
Per Share
Fiscal
2008
0.13
0.13
0.13
0.13
$
Fiscal
2007
0.13
0.13
0.13
0.13
The Company estimates there were approximately 1,900 holders of common stock of the Company as of June
30, 2008.
There were no repurchases of the Company’s common stock during the quarter ended June 30, 2008.
10
Item 6.
Selected Financial Data
The selected financial data presented below should be read in conjunction with the Company’s consolidated
financial statements and notes thereto included in Item 8 of this Annual Report on Form 10-K and with
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of this
Annual Report on Form 10-K. The selected consolidated statement of operations data of the Company is derived from
the Company’s consolidated financial statements.
Five-Year Review
(Amounts in thousands, except per share data)
2008
2007
2006
2005
2004 (6)
FOR THE YEARS ENDED JUNE 30,
405,655 $
327,165
7,596
469
1,468
6,596
2,360
4,236
0.52
0.64
0.64
SUMMARY OF OPERATIONS
Net sales ....................................... $
Cost of goods sold .......................
Operating income.........................
Interest and other income ............
Interest expense............................
Income before income taxes........
Provision for income taxes (5) ....
Net income (2) (3) (4) (5)............
Earnings per common share:
(2) (3) (4) (5)
Basic ..........................................
Diluted .......................................
Cash dividends declared per
$
common share ...........................
SELECTED DATA AS OF JUNE 30
Average common shares
outstanding:
Basic ..........................................
Diluted .......................................
CONSOLIDATED BALANCE SHEET DATA
Total assets ................................... $
Property, plant and equipment,
net ..............................................
Capital expenditures ....................
Long-term debt.............................
Working capital (current assets
less current liabilities) ..............
Shareholders’ equity .................... $
SELECTED RATIOS
Net income as percent of sales....
Current ratio .................................
Return on ending shareholders’
equity .........................................
Return on beginning
shareholders’ equity..................
Average number of employees ...
1.0%
3.5 to 1
3.8%
6,574
6,611
179,906 $
26,372
1,228
20,811
100,920
112,752 $
3.8%
2,140
425,400
344,177
14,699
1,277
1,491
14,484
5,150
9,334
$
426,408
345,068
8,561
775
1,557
7,778
3,060
4,718
$
410,023
334,978 (1)
7,258 (1)
628
990
6,896 (1)
1,990 (1)
4,906 (1)
$
401,222
318,526 (1)
16,123 (1)
977
839
16,261 (1)
6,430 (1)
9,831 (1)
1.42
1.42
0.72
0.72
0.75 (1)
0.74 (1)
1.53 (1)
1.51 (1)
$
0.52
$
0.52
$
0.52
$
0.52
6,568
6,583
6,558
6,577
6,531
6,601
6,440
6,530
185,014 (1) $ 184,176 (1) $ 165,221 (1) $ 169,220 (1)
28,168
10,839
21,336
24,158
3,411
21,846
26,141
3,347
12,800
30,327
6,030
17,583
97,902 (1)
83,054 (1)
112,679 (1) $ 106,066 (1) $ 103,361 (1) $ 101,313 (1)
95,551 (1)
83,952 (1)
2.2%
3.2 to 1 (1)
8.3% (1)
1.1%
2.9 to 1 (1)
4.5% (1)
1.2% (1)
3.0 to 1 (1)
4.8% (1)
2.5% (1)
2.9 to 1 (1)
9.7% (1)
8.8% (1)
2,290
4.6% (1)
2,400
4.8% (1)
2,460
10.5% (1)
2,610
(1) Indicates an item that has been restated as described in Note 19 to the Consolidated Financial Statements or recalculated
to reflect the restatement based on information provided in Note 19 to the Consolidated Financial Statements included in
this Annual Report on Form 10-K.
(2) Fiscal 2007 net income and per share amounts reflect the net gain (after tax) on sale of building of approximately $2.5
million or $0.37 per share, the gain on life insurance of $0.6 million or $0.08 per share and the net gain (after tax) on the
sale of vacant land of approximately $0.2 million or $0.04 per share.
11
(3) Fiscal 2008, 2007 and 2006 net income and per share amounts reflect the recording of stock-based compensation expense,
as required by Statement of Financial Accounting Standard No. 123 (Revised), of $0.1 million, $0.2 million and $0.4
million (after tax), respectively, or $0.02 per share, $0.04 per share and $0.06 per share, respectively.
(4) Fiscal 2005 net income and per share amounts reflect a net gain (after tax) on the sale of facilities of approximately $0.5
million or $0.08 per share.
(5) During Fiscal 2005, an examination by the Internal Revenue Service of the Company’s federal income tax returns for the
fiscal years ended June 30, 2004 and 2005 was completed. Due to the favorable settlement results, the Company reduced
its estimate of accrued tax liabilities by $0.7 million. The decrease resulted in an income tax rate of 30.6% for the fiscal
year ended June 30, 2005.
(6) The Company acquired DMI Furniture, Inc. (“DMI”) in a business combination accounted for as a purchase on
September 17, 2003. The amounts herein include the operations of DMI since that date.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
All of the financial information presented in this Item 7 has been revised to reflect the impact of the
restatement of the Company’s Consolidated Financial Statements, which is more fully described in Note 19, “Error
Corrections” of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K. The cumulative
impact of the unreconciled accounts payable was an increase to accounts payable of $2.3 million, an increase to
deferred income taxes-current of $0.9 million and a reduction to Shareholder’s Equity of $1.4 million, as of July 1,
2005.
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 Annual Report on
Form 10-K.
Critical Accounting Policies
The discussion and analysis of the Company’s consolidated financial statements and results of operations are based on
consolidated financial statements prepared in accordance with accounting principles generally accepted in the United
States of America. Preparation of these consolidated financial statements requires the use of estimates and judgments
that affect the reported results. The Company uses estimates based on the best information available in recording
transactions and balances resulting from business operations. Estimates are used for such items as collectibility of
trade accounts receivable, inventory valuation, depreciable lives, self-insurance programs, warranty costs and income
taxes. Ultimate results may differ from these estimates under different assumptions or conditions.
Allowance for doubtful accounts – the Company establishes an allowance for doubtful accounts through review of
open accounts, and historical collection and allowances amounts. The allowance for doubtful accounts is intended to
reduce trade accounts receivable to the amount that reasonably approximates their net realizable fair value due to their
short-term nature. The amount ultimately realized from trade accounts receivable may differ from the amount
estimated in the consolidated financial statements based on collection experience and actual returns and allowances.
Inventories – the Company values inventory at the lower of cost or market. A large portion of our finished goods
inventory is made to order and many of our raw material parts are interchangeable between products. Historically
inventory write-downs to market have been in fabric, wood frame and trim, and sourced products purchased for
inventory. Management assesses the inventory on hand versus estimated future usage and estimated selling prices and
if necessary writes down the obsolete or excess inventory to market. Although, we believe that inventory valuations
are reasonable, unexpected changes in sales volume due to economic or competitive conditions may impact inventory
valuations. Raw steel, lumber and wood frame parts are valued on the last-in, first-out (“LIFO”) method. Other
inventories are valued on the first-in, first-out (“FIFO”) method. Changes in the market conditions could require a
write down of inventory.
Self-insurance programs – the Company is self-insured for health care and most workers’ compensation up to
predetermined amounts above which third party insurance applies. The Company purchases specific stop-loss
insurance for individual health care claims in excess of $150,000 per plan year, with a $1.0 million individual lifetime
maximum. For workers’ compensation the Company retains the first $350,000 per claim and purchases excess
coverage up to the statutory limits for amounts in excess of the retention limit. The Company is contingently liable to
insurance carriers under its comprehensive general, product, and vehicle liability policies, as well as some workers’
12
compensation. Losses are accrued based upon the Company’s estimates of the aggregate liability of claims incurred
using certain actuarial assumptions followed in the insurance industry and based on Company experience. The actual
claims experience could differ from the estimates made by the Company based on actual experience.
Income taxes – the Company accounts for income taxes in accordance with the provisions of Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. In the preparation of the Company’s
consolidated financial statements, management calculates income taxes. This includes estimating the Company’s
current tax liability as well as assessing temporary differences resulting from different treatment of items for tax and
book accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded on the
balance sheet. These assets and liabilities are analyzed regularly and management assesses the likelihood that deferred
tax assets will be realized from future taxable income. We make judgments regarding the potential tax effects of
various transactions including a liability for uncertain tax positions in accordance with FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109 (“FIN 48”).
Revenue recognition – is upon delivery of product to our customer and when collectibility is reasonably assured.
Delivery of product to our customer is evidenced through the shipping terms indicating when title and risk of loss is
transferred. Our ordering process creates persuasive evidence of the sale arrangement and the sales amount is
determined. The delivery of the goods to our customer completes the earnings process. Net sales consist of product
sales and related delivery charge revenue, net of adjustments for returns and allowances. Shipping and handling costs
are included in cost of goods sold.
Recently Issued Accounting Pronouncements
See Item 8. Note 1 to the Company’s Consolidated Financial Statements.
Results of Operations
The following table has been prepared as an aid in understanding the Company’s results of operations on a comparative
basis for the fiscal years ended June 30, 2008, 2007 and 2006. Amounts presented are percentages of the Company’s
net sales.
Net sales ...........................................................
Cost of goods sold ...........................................
Gross margin....................................................
Selling, general and administrative ................
Gain on sale of land and building...................
Operating income ............................................
Other expense, net ...........................................
Income before income taxes ...........................
Provision for income taxes .............................
Net income .......................................................
FOR THE YEARS ENDED JUNE 30,
2007
100.0%
(80.9)
19.1
(16.7)
1.0
3.4
0.0
3.4
(1.2)
2.2%
2008
100.0%
(80.7)
19.3
(17.5)
–
1.8
(0.2)
1.6
(0.6)
1.0%
2006
100.0%
(80.9)
19.1
(17.1)
–
2.0
(0.2)
1.8
(0.7)
1.1%
Fiscal 2008 Compared to Fiscal 2007
Net sales for the fiscal year ended June 30, 2008 were $405.7 million compared to $425.4 million in the prior fiscal
year, a decrease of 4.6%. Residential net sales were $258.1 million compared to $259.7 million in the fiscal year
ended June 30, 2007, a decrease of 0.6%. Commercial net sales were $91.5 million for the fiscal year ended June 30,
2008, a decrease of 8.1% from the fiscal year ended June 30, 2007. Recreational vehicle net sales were $56.1 million
for the fiscal year ended June 30, 2008, a decrease of 15.2% from the fiscal year ended June 30, 2007. The fiscal year
decline in all net sales categories is due to a generally soft market environment.
Net income for the fiscal year ended June 30, 2008 was $4.2 million or $0.64 per share compared to $9.3 million or
$1.42 per share in the fiscal year ended June 30, 2007. Results for the fiscal year ended June 30, 2007 were favorably
impacted by three significant non-recurring events. The Company sold a commercial property, which resulted in a
pre-tax gain of approximately $4.0 million, or $0.37 per share after tax. The Company recognized a pre-tax gain on
the sale of vacant land of approximately $0.4 million or $0.04 per share after tax. These gains are reported as “Gain
13
on sale of capital assets” in the Consolidated Statements of Income. The Company also realized a non-taxable gain on
life insurance of $0.6 million, or $0.08 per share. This gain is included in “Interest and other income” in the
Consolidated Statements of Income.
Gross margin for the fiscal years ended June 30, 2008 and 2007 was 19.3% and 19.1%, respectively.
Selling, general and administrative expenses were 17.5 % and 16.7% of net sales for the fiscal years ended June 30,
2008 and 2007, respectively. The percentage increase in selling, general and administrative costs compared to the
prior fiscal year is due primarily to higher marketing and sales support expenses and higher bad debt expense of $1.1
million on reduced revenues on a year over year basis.
The effective income tax rate for the fiscal year ended June 30, 2008 was 35.8%, reflecting lower net income
compared to the prior year. The effective income tax rate was 35.6% for the fiscal year ended June 30, 2007. The
2007 rate was reduced by approximately 1.4% due to the non-taxable life insurance gain.
The above factors resulted in net income for the fiscal year ended June 30, 2008 of $4.2 million or $0.64 per share
compared to $9.3 million or $1.42 per share for the fiscal year ended June 30, 2007.
All earnings per share amounts are on a diluted basis.
Fiscal 2007 Compared to Fiscal 2006
Net sales for the fiscal year ended June 30, 2007 were $425.4 million compared to $426.4 million in the prior fiscal
year. Residential net sales were $259.7 million, a decrease of 3% from the fiscal year ended June 30, 2006.
Commercial net sales were $99.5 million for the fiscal year ended June 30, 2007, an increase of 15% from the fiscal
year ended June 30, 2006. This increase in commercial net sales for the fiscal year ended June 30, 2007 is primarily
due to expanded commercial office product offerings and improved industry performance of hospitality products.
Recreational vehicle net sales were $66.2 million for the fiscal year ended June 30, 2007, a decrease of 8% from the
fiscal year ended June 30, 2006. The fiscal year decline in recreational vehicle net sales is due to a generally soft
wholesale market environment for recreational vehicles.
Net income for the fiscal year ended June 30, 2007 was $9.3 million or $1.42 per share. Results for the fiscal year
ended June 30, 2007 were favorably impacted by three significant non-recurring events. The Company sold a
commercial property, which resulted in a pre-tax gain of approximately $4.0 million, or $0.37 per share after tax. The
Company recognized a pre-tax gain on the sale of vacant land of approximately $0.4 million or $0.04 per share after
tax. These gains are reported as “Gain on sale of capital assets” in the Consolidated Statements of Income. The
Company also realized a non-taxable gain on life insurance of $0.6 million, or $0.08 per share. This gain is included in
“Interest and other income” in the Consolidated Statements of Income.
Gross margin for the fiscal years ended June 30, 2007 and 2006 was 19.1%.
Selling, general and administrative expenses were 16.7% and 17.1% of net sales for the fiscal year ended June 30,
2007 and 2006, respectively. The decrease in selling, general and administrative costs of approximately $1.9 million
compared to the prior fiscal year is due primarily to lower marketing and sales support expenses and lower bad debt
expense of $0.8 million.
The effective income tax rate for the fiscal year ended June 30, 2007 was 35.6%. The rate was reduced by
approximately 1.4% due to the non-taxable life insurance gain. The effective income tax rate was 39.3% for the fiscal
year ended June 30, 2006.
The above factors resulted in net income for the fiscal year ended June 30, 2007 of $9.3 million or $1.42 per share
compared to $4.7 million or $0.72 per share for the fiscal year ended June 30, 2006.
All earnings per share amounts are on a diluted basis.
Liquidity and Capital Resources
Net cash provided by operating activities was $8.7 million in fiscal year 2008 compared to $10.3 million in fiscal year
2007. Significant working capital changes from June 30, 2007 to June 30, 2008 included: decreased accounts
14
receivables of $12.5 million, increased inventory levels of $7.0 million and decreased accounts payable of $1.3
million. The decrease in receivables is related to timing of shipments and related payment terms, collection efforts and
lower net sales. The increase in inventory is due primarily to timing of inventory purchases to meet our forecasted
customer demands especially sourced products where there are longer lead times for international shipments. The
decrease in accounts payable is due to the timing of payments. The Company expects that due to the nature of our
operations that there will continue to be significant fluctuations in inventory levels, the related accounts payable, and
cash flows from operations due to the following: we purchase a significant amount of inventory in large orders from
overseas suppliers with significant lead times and depending on the timing of those large orders inventory levels can
be significantly impacted, we have various large customers that purchase significant quantities of inventory at a time
and the timing of those purchases can significantly impact inventory levels, accounts receivable, accounts payable and
short-term borrowings. As discussed below the Company believes it has adequate financing arrangements and access
to capital to absorb these fluctuations in operating cash flow.
Net cash used in investing activities was $1.0 million in fiscal year 2008 compared to $5.1 million in fiscal year 2007.
The significant change in investing activities is related to the large amount of capital expenditures made in 2007
somewhat offset by a sale of land and commercial property. Capital expenditures were $1.2 million, $10.8 million and
$3.4 million (of which $2.6 million was a non-cash purchase of equipment by assumption of a note payable) in fiscal
years 2008, 2007 and 2006, respectively. Fiscal 2008 expenditures were primarily for manufacturing equipment.
Depreciation and amortization expense was $4.4 million and $5.3 million for the fiscal years ended June 30, 2008 and
2007, respectively. The Company expects that capital expenditures will be approximately $3.0 million in fiscal year
2009. The significant fiscal year 2007 capital expenditure cash outflows were offset by a significant sale of
commercial property resulting in total cash proceeds of $5.5 million and a sale of vacant land of approximately $0.4
million. The commercial property was previously leased to a non-related third party and used as retail space. Neither
the sale of the commercial property or vacant land is expected to significantly impact future operations.
Net cash used in financing activities was $5.8 million in fiscal year 2008 compared to $6.3 million in fiscal year 2007.
For fiscal years 2008 and 2007, repayment of debt and the payment of dividends were the primary financing activities
utilizing cash. For fiscal year 2006, borrowings were used to pay for the expansion of inventory programs and
accounts receivable and the payment of dividends. Cash dividends were $3.4 million in 2008 and in 2007.
Management believes that the Company has adequate cash, cash equivalents, and credit arrangements to meet its
operating and capital requirements for fiscal year 2009. In the opinion of management, the Company’s liquidity and
credit resources provide it with the ability to react to opportunities as they arise, the ability to pay quarterly dividends
to its shareholders, and ensures that productive capital assets that enhance safety and improve operations are purchased
as needed.
The following table summarizes the Company’s contractual obligations at June 30, 2008 and the effect these
obligations are expected to have on the Company’s liquidity and cash flow in the future (in thousands):
Long-term debt obligations ........................... $
Interest on long-term debt obligations..........
Operating lease obligations ...........................
Total contractual cash obligations ................ $
Total
25,954
3,252
6,244
35,450
Less than
1 Year
5,143
1,030
2,601
8,774
$
$
$
$
1 - 3
Years
811 $
2,060
3,359
6,230 $
3 - 5
Years
20,000
162
284
20,446
$
$
More than
5 Years
–
–
–
–
Contractual obligations associated with the Company’s deferred compensation plans were excluded from the table
above as the Company cannot predict when the events that trigger payment will occur. Total accumulated deferred
compensation liabilities were $5.3 million at June 30, 2008. At June 30, 2008 the Company had no capital lease
obligations, and no purchase obligations for raw materials or finished goods. The purchase price on all open purchase
orders was fixed and denominated in U.S. dollars. Additionally, the Company has excluded the FIN 48 reserve from
the above table as the timing of any payments cannot be reasonably estimated.
See Note 7 to the Consolidated Financial Statements on page 28 of this Annual Report on Form 10-K.
Financing Arrangements
15
Outlook
The fiscal year ended June 30, 2008 began well with the first two quarters showing improved earnings over fiscal year
2007 on only slightly lower net sales. Beginning in the third fiscal quarter net sales dropped more rapidly, and
although net earnings were only about 55% of the prior year quarterly amount, our net income for the nine-months was
still ahead of the prior year nine-month total. The fourth quarter 12% decrease in net sales hampered the ability to
absorb fixed costs and that, combined with additional bad debt and selling expenses, contributed negatively to fiscal
year 2008 results. Normally, at least one of the markets in which we sell products is doing well. However, residential
net sales were off 1%, commercial net sales were down 8%, and recreational vehicle seating net sales were down 15%.
We do not believe that we are losing market share in these categories.
The U.S. economy, where most of our products are sold, has been greatly impacted by the credit crisis in the home
mortgage sector, a fall in the value of the U.S. dollar versus most other major currencies, volatile high-cost fuel,
increasing food prices and a changing political landscape. These factors have contributed to the lowest consumer
confidence levels since 1981.
We have been negatively impacted by price increases in the raw materials and component parts, such as steel, poly
foam and fabrics, as well as increases in the cost to transport those materials to our manufacturing facilities and
products to our customers. Our overseas manufacturers have also increased prices and the cost to transport those
products to the U.S. has increased with the price of fuel. We see no near term improvement in macro-economic
operating conditions.
This year Flexsteel Industries, Inc. will complete its 115th year doing business in the furniture industry. While we have
seen challenging business conditions before, they are never comfortable or reassuring to our shareholders. In response
to these challenges, we have:
•
•
implemented price increases to offset cost increases where possible,
commenced the closing of two manufacturing operations, Lancaster, PA and New Paris, IN, to more
closely match our manufacturing capacity with our expected demand for residential and recreational
vehicle seating products and we anticipate annual pre-tax savings in the range of $3.5 million to $4.0
million from this manufacturing consolidation,
focused attention on our credit risk exposure,
•
• maintained a close relationship with our customers to offer products and services they need to operate
effectively and profitability, and
continued to focus on profitability and cash flow over top line growth to maintain a strong balance sheet.
•
While we expect that current business conditions will persist for most, if not all, of fiscal year 2009, we remain
optimistic that our strategy of a wide range of quality product offerings and price points to the residential, recreational
vehicle and commercial markets combined with our conservative approach to business will be rewarded over the
longer-term.
16
Item 7A. 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.
Impairment of long-lived assets – Accounting rules require that long-lived assets be evaluated for impairment
whenever events or changes in circumstances indicate that its carrying value may not be recoverable. We have
substantial long-lived assets, consisting mainly of property, plant and equipment, which based upon such events or
changes in circumstances, there could be a write-down of all or a portion of these assets and a corresponding reduction
in our earnings and net worth. At June 30, 2008, no impairment of long-lived assets has been identified.
Foreign Currency Risk – During fiscal years 2008, 2007 and 2006, the Company did not have sales,
purchases, or other expenses denominated in foreign currencies. As such, the Company is not exposed to market risk
associated with currency exchange rates and prices.
Interest Rate Risk – The Company’s primary market risk exposure with regard to financial instruments is
changes in interest rates. At June 30, 2008, a hypothetical 100 basis point increase in short-term interest rates would
decrease annual pre-tax earnings by approximately $150,000, assuming no change in the volume or composition of
debt. As of June 30, 2008, the Company has effectively fixed the interest rates at 4.5% on approximately $15.0 million
of its long-term debt through the use of interest rate swaps, and the above estimated earnings reduction takes these
swaps into account. On July 31, 2008, a $5.0 million swap matured. As of the date of this Annual Report on Form 10-
K, the Company has effectively fixed its interest rate at 5.0% on approximately $10.0 million of it long-term debt
through the use of interest rate swaps. As of June 30, 2008, the fair value of these swaps is a liability of approximately
$0.3 million and is included in other liabilities. As of June 30, 2007, the fair value of these swaps were an asset of
approximately $0.1 million and was included in other assets.
Tariffs – The Company has exposure to actions by governments, including tariffs. Tariffs are a possibility on
any imported or exported products.
Inflation – Increased operating costs are reflected in product or services pricing with any limitations on price
increases determined by the marketplace. The impact of inflation on the Company has not been significant during the
past three years because of the relatively low rates of inflation experienced in the United States. Raw material costs,
labor costs and interest rates are important components of costs for the Company. Inflation or other pricing pressures
could impact any or all of these components, with a possible adverse effect on our profitability, especially where
increases in these costs exceed price increases on finished products. In recent years, the Company has faced strong
inflationary and other pricing pressures with respect to steel, fuel and health care costs, which have been partially
mitigated by pricing adjustments.
17
Item 8.
Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm .........................................................................
Consolidated Balance Sheets at June 30, 2008 and 2007 (As Restated).......................................................
Consolidated Statements of Income for the Years Ended June 30, 2008, 2007, and 2006..........................
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended June 30, 2008,
2007 (As Restated), and 2006 (As Restated) ..................................................................................................
Consolidated Statements of Cash Flows for the Years Ended June 30, 2008, 2007, and 2006 (As Restated) .......
Notes to Consolidated Financial Statements ..................................................................................................
Page(s)
19
20
21
22
23
24
18
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of Flexsteel Industries, Inc.
We have audited the accompanying consolidated balance sheets of Flexsteel Industries, Inc. and subsidiaries (the
"Company") as of June 30, 2008 and 2007, and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for each of the three years in the period ended June 30, 2008. Our audits also included the
financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of
Flexsteel Industries, Inc. and subsidiaries at June 30, 2008 and June 30, 2007, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 2008, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
As discussed in Note 19 to the consolidated financial statements, the accompanying consolidated financial statements
have been restated.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the Company's internal control over financial reporting as of June 30, 2008, based on the criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated September 10, 2008 expressed an adverse opinion on the Company's internal control
over financial reporting because of a material weakness.
DELOITTE & TOUCHE LLP
Minneapolis, Minnnesota
September 10, 2008
19
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................................. $
Investments.....................................................................................
Trade receivables – less allowance for doubtful
accounts: 2008, $2,110,000; 2007, $2,090,000 .........................
Inventories ......................................................................................
Deferred income taxes ...................................................................
Other ...............................................................................................
Total current assets ...................................................................
NONCURRENT ASSETS:
Property, plant and equipment, net ...............................................
Deferred income taxes ...................................................................
Other assets.....................................................................................
TOTAL................................................................................ $
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable – trade............................................................... $
Notes payable and current maturities on long-term debt.............
Accrued liabilities:
Payroll and related items .............................................................
Insurance.......................................................................................
Other .............................................................................................
Total current liabilities...............................................................
LONG-TERM LIABILITIES:
Long-term debt...............................................................................
Deferred compensation ..................................................................
Other liabilities...............................................................................
Total liabilities ...........................................................................
COMMITMENTS AND CONTINGENCIES (Note 14)
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 2008, 6,575,633 shares; 2007, 6,570,467 shares...
Additional paid-in capital ..............................................................
Retained earnings...........................................................................
Accumulated other comprehensive income .................................
Total shareholders’ equity ........................................................
TOTAL................................................................................ $
JUNE 30,
2008
2007
(As Restated)
2,841,323
1,160,066
$
900,326
976,180
43,783,224
85,791,400
4,210,000
2,853,634
140,639,647
26,372,392
1,392,187
11,501,992
179,906,218
14,580,275
5,142,945
6,759,941
7,176,799
6,059,575
39,719,535
20,810,597
5,343,545
1,280,154
67,153,831
6,575,633
4,255,996
101,692,431
228,327
112,752,387
179,906,218
56,273,874
78,756,985
4,700,000
1,759,045
143,366,410
28,168,244
1,270,000
12,209,528
185,014,182
15,893,964
7,030,059
7,530,083
7,615,532
7,394,448
45,464,086
21,336,352
5,535,113
–
72,335,551
6,570,467
4,013,456
100,984,577
1,110,131
112,678,631
185,014,182
$
$
$
See accompanying Notes to Consolidated Financial Statements.
20
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
FOR THE YEARS ENDED JUNE 30,
2007
2006
2008
NET SALES ........................................................................................ $
COST OF GOODS SOLD..................................................................
GROSS MARGIN...............................................................................
SELLING, GENERAL AND ADMINISTRATIVE ........................
GAIN ON SALE OF CAPITAL ASSETS ........................................
OPERATING INCOME .....................................................................
OTHER INCOME (EXPENSE):
Interest and other income..................................................................
Interest expense .................................................................................
Total..........................................................................................
INCOME BEFORE INCOME TAXES.............................................
PROVISION FOR INCOME TAXES...............................................
NET INCOME .................................................................................... $
405,654,829
(327,165,396)
78,489,433
(70,893,485)
–
7,595,948
468,933
(1,468,476)
(999,543)
6,596,405
(2,360,000)
4,236,405
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
Basic................................................................................................
Diluted ............................................................................................
EARNINGS PER SHARE OF COMMON STOCK:
Basic................................................................................................ $
Diluted ............................................................................................ $
CASH DIVIDENDS DECLARED PER COMMON SHARE ........ $
6,573,999
6,611,136
0.64
0.64
0.52
$
$
$
$
$
425,399,951
(344,176,763)
81,223,188
(70,895,260)
4,370,712
14,698,640
$
426,407,585
(345,068,305)
81,339,280
(72,778,577)
–
8,560,703
1,276,857
(1,491,510)
(214,653)
14,483,987
(5,150,000)
9,333,987
6,567,522
6,582,558
1.42
1.42
0.52
$
$
$
$
774,783
(1,557,303)
(782,520)
7,778,183
(3,060,000)
4,718,183
6,558,440
6,577,278
0.72
0.72
0.52
See accompanying Notes to Consolidated Financial Statements.
21
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders’ Equity
Balance at June 30, 2005 (as
previously reported).........................
Restatement adjustment (see
Note 19)............................................
Balance at July 1, 2005 (as
restated) ...........................................
Issuance of common stock: ....
Stock options exercised, net......
401(k) plan and management
incentive shares ......................
Unrealized loss on available
for sale investments, net of tax....
Stock-based compensation ............
Interest rate swaps valuation
adjustment, net of tax ................
Minimum pension liability
adjustment, net of tax ................
Cash dividends declared................
Net income .....................................
Balance at June 30, 2006 (as
restated) ............................................
Issuance of common stock: ....
Stock options exercised, net......
401(k) plan shares......................
Unrealized gain on available
for sale investments, net of tax....
Stock-based compensation
Interest rate swaps valuation
adjustment, net of tax ................
SFAS No. 87 minimum
pension liability ..........................
SFAS No. 158 transition
adjustment ...................................
Cash dividends declared................
Net income .....................................
Balance at June 30, 2007 (as
restated) ............................................
Adoption of FIN 48…………...
Issuance of common stock: ....
Stock options exercised, net......
401(k) plan shares......................
Unrealized loss on available
for sale investments, net of tax....
Stock-based compensation ............
Interest rate swaps valuation
adjustment, net of tax ................
Minimum pension liability
adjustment, net of tax .................
Cash dividends declared................
Net income .....................................
Balance at June 30, 2008.................
Total Par
Value of
Common
Shares ($1 Par)
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Total
$
6,541,436
$
2,954,398
$
95,196,022
$
105,864
$ 104,797,720
–
–
(1,436,479)
–
(1,436,479)
6,541,436
2,000
20,314
–
–
–
–
–
–
6,563,750
1,566
5,151
–
–
–
–
–
–
–
6,570,467
1,642
3,524
–
–
–
–
–
–
6,575,633
$
.
2,954,398
20,500
268,254
–
427,000
–
–
–
–
3,670,152
10,891
58,413
–
274,000
–
–
–
–
–
4,013,456
13,314
43,226
–
186,000
–
–
–
–
$
4,255,996 $
93,759,543
105,864
103,361,241
–
–
–
–
–
–
(3,411,894)
4,718,183
95,065,832
–
–
–
–
–
–
–
(3,415,242)
9,333,987
100,984,577
(110,000)
–
–
–
–
–
–
(3,418,551)
4,236,405
101,692,43
1
$
–
–
(221)
–
116,910
543,559
–
–
766,112
–
–
301,611
–
22,500
288,568
(221)
427,000
116,910
543,559
(3,411,894)
4,718,183
106,065,846
12,457
63,564
301,611
274,000
(168,137)
(168,137)
254,638
254,638
(44,093)
–
–
1,110,131
–
–
(84,342)
–
(44,093)
(3,415,242)
9,333,987
112,678,631
(110,000)
14,956
46,750
(84,342)
186,000
(273,062)
(273,062)
(524,400)
–
–
228,327
(524,400)
(3,418,551)
4,236,405
$ 112,752,387
See accompanying Notes to Consolidated Financial Statements.
22
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
FOR THE YEARS ENDED JUNE 30,
2006
(As Restated)
2007
2008
4,236,405 $
9,333,987
$
4,718,183
OPERATING ACTIVITIES:
Net income........................................................................................... $
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization .........................................................
Deferred income taxes ......................................................................
Stock-based compensation expense .................................................
Other non-cash, net ...........................................................................
Gain on disposition of capital assets ................................................
Changes in operating assets and liabilities:
Trade receivables ............................................................................
Inventories .......................................................................................
Other current assets.........................................................................
Other assets......................................................................................
Accounts payable – trade................................................................
Accrued liabilities ...........................................................................
Other long-term liabilities ..............................................................
Deferred compensation ...................................................................
Net cash provided by (used in) operating activities ..........................
4,437,903
349,294
186,000
(88,309)
(49,180)
12,490,650
(7,034,415)
(655,486)
(292,485)
(2,188,444)
(2,272,811)
(197,497)
(191,568)
8,730,057
5,270,651
1,464,664
274,000
–
(4,407,682)
(5,094,083)
6,012,987
255,076
57,919
(2,160,950)
(631,804)
(411,588)
327,938
10,291,115
INVESTING ACTIVITIES:
Purchases of investments..................................................................
Proceeds from sales of investments .................................................
Proceeds from sale of capital assets.................................................
Capital expenditures..........................................................................
Net cash used in investing activities ..................................................
(631,704)
762,783
73,847
(1,227,863)
(1,022,937)
(774,964)
476,840
6,039,946
(10,839,479)
(5,097,657)
FINANCING ACTIVITIES:
(Repayments of) proceeds from short-term borrowings, net .........
Repayment of long-term borrowings...............................................
Proceeds from long-term borrowings..............................................
Dividends paid ..................................................................................
Proceeds from issuance of common stock ......................................
Net cash (used in) provided by financing activities..........................
(1,912,683)
(500,186)
–
(3,414,960)
61,706
(5,766,123)
(2,470,729)
(475,889)
–
(3,414,369)
82,087
(6,278,900)
5,485,884
(948,000)
427,000
–
(55,504)
(2,824,721)
(12,538,093)
(162,251)
(582,112)
(2,777,949)
3,076,331
(1,218,862)
145,225
(7,254,869)
(1,118,446)
1,773,698
89,786
(850,444)
(105,406)
4,000,000
(247,441)
7,200,000
(3,408,994)
95,894
7,639,459
Increase (decrease) in cash and cash equivalents .............................
Cash and cash equivalents at beginning of year ...............................
Cash and cash equivalents at end of year .......................................... $
1,940,997
900,326
2,841,323 $
(1,085,442)
1,985,768
900,326
$
279,184
1,706,584
1,985,768
SUPPLEMENTAL INFORMATION
CASH PAID DURING THE PERIOD FOR:
Interest .............................................................................................. $
Income taxes ..................................................................................... $
1,473,000 $
3,205,000 $
1,517,000
3,551,000
$
$
1,598,000
3,244,000
FOR THE YEARS ENDED JUNE 30,
2006
2007
2008
See accompanying Notes to Consolidated Financial Statements.
23
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS – Flexsteel Industries, Inc. and subsidiaries (the “Company”) is one of the oldest and
largest manufacturers, importers and marketers of residential, recreational vehicle and commercial upholstered and
wooden furniture products in the country. The Company’s furniture products include a broad line of quality upholstered
and wooden furniture for residential, recreational vehicle and commercial use. 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, bedroom furniture and home and
commercial office furniture. The Company has one active wholly-owned subsidiary: DMI Furniture, Inc. (“DMI”),
acquired effective September 17, 2003, which is a Louisville, Kentucky-based, manufacturer, importer and marketer of
residential and commercial office furniture with manufacturing plants and warehouses in Indiana and manufacturing
sources in Asia; DMI’s divisions are WYNWOOD, Homestyles and DMI Commercial Office Furniture. The Company
has two inactive wholly owned subsidiaries: (1) Desert Dreams, Inc., which owned and leased a commercial building to
an unrelated entity until it was sold in June 2007 and (2) Four Seasons, Inc.
PRINCIPLES OF CONSOLIDATION – the consolidated financial statements include the accounts of Flexsteel
Industries, Inc. and its wholly owned subsidiaries. All intercompany transactions and accounts have been eliminated in
consolidation.
USE OF ESTIMATES – the preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and assumptions that affect
the amounts reported in the consolidated financial statements and accompanying notes. Ultimate results could differ
from those estimates.
FAIR VALUE – the Company’s cash, investments, accounts receivable, other assets, accounts payable, accrued
liabilities, notes payable, interest rate swaps and other liabilities are carried at amounts, which reasonably approximate
their fair value due to their short-term nature. The Company’s notes payable are at variable interest rates that
approximate market. Fair values of investments in debt and equity securities are disclosed in Note 2.
CASH EQUIVALENTS – the Company considers highly liquid investments with original maturities of three months
or less as the equivalent of cash.
ALLOWANCE FOR DOUBTFUL ACCOUNTS – the Company establishes an allowance for doubtful accounts
through review of open accounts, and historical collection and allowances amounts. The allowance for doubtful
accounts is intended to reduce trade accounts receivable to the amount that reasonably approximates their net realizable
fair value due to their short-term nature. The amount ultimately realized from trade accounts receivable may differ from
the amount estimated in the consolidated financial statements based on collection experience and actual returns and
allowances.
INVENTORIES – are stated at the lower of cost or market. Raw steel, lumber and wood frame parts are valued on the
last-in, first-out (“LIFO”) method. Other inventories are valued on the first-in, first-out (“FIFO”) method.
PROPERTY, PLANT AND EQUIPMENT – is stated at cost and depreciated using the straight-line method over the
estimated useful lives of the assets. For internal use software, the Company’s policy is to capitalize external direct costs
of materials and services, directly related internal payroll and payroll-related costs, and interest costs. These costs are
amortized using the straight-line method over the useful lives.
VALUATION OF LONG–LIVED ASSETS – the Company periodically reviews the carrying value of long-lived
assets and estimated depreciable or amortizable lives for continued appropriateness. This review is based upon
projections of anticipated future cash flows and is performed whenever events or changes in circumstances indicate that
asset carrying values may not be recoverable or that the estimated depreciable or amortizable lives may have changed.
These evaluations could result in a change in estimated useful lives in future periods. No impairments or changes
occurred during the fiscal year ended June 30, 2008.
24
WARRANTY – the Company estimates the amount of warranty claims on sold product that may be incurred based on
current and historical data. The actual warranty expense could differ from the estimates made by the Company based on
product performance.
REVENUE RECOGNITION – is upon delivery of product to the Company’s customer and collectibiity is reasonably
assured. The Company’s ordering process creates persuasive evidence of the sale arrangement and the sales amount is
determined. The delivery of the goods to the customer completes the earnings process. Net sales consist of product sales
and related delivery charge revenue, net of adjustments for returns and allowances. Shipping and handling costs are
included in cost of goods sold.
ADVERTISING COSTS – are charged to selling, general and administrative expense in the periods incurred. The
Company conducts no direct-response advertising programs and there are no assets related to advertising recorded on the
consolidated balance sheet. Advertising expenditures, primarily shared customer advertising in which an identifiable
benefit is received and national trade-advertising programs, were approximately $4.6 million, $4.6 million and $4.4
million in fiscal 2008, 2007 and 2006, respectively.
DESIGN, RESEARCH AND DEVELOPMENT COSTS – are charged to selling, general and administrative
expense in the periods incurred. Expenditures for design, research and development costs were approximately $3.1
million, $3.3 million and $3.0 million in fiscal 2008, 2007 and 2006, respectively.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES – the Company utilizes interest rate swaps to
hedge against adverse changes in interest rates relative to its variable rate debt. The notional principal amounts of the
outstanding interest rate swaps totaled $15.0 million with a weighted average fixed rate of 4.5% at June 30, 2008. On
July 31, 2008, a $5.0 million swap matured. Excluding the subsequently matured swap, the Company has effectively
fixed its interest rate at 5.0% on approximately $10.0 million of its variable rate debt. The interest rate swaps are not
utilized to take speculative positions. The Board of Directors established the Company’s policies with regards to
activities involving derivative instruments. Management, along with the Board of Directors, periodically reviews those
policies, along with the actual derivative related results. The Company recorded the fair market value of its interest rate
swaps as cash flow hedges on its balance sheet and has marked them to fair value through other comprehensive income.
The cumulative fair value of the swaps was a liability of approximately $0.3 million as of June 30, 2008 and is reflected
as other liabilities on the accompanying consolidated balance sheet. At each reporting period, the Company performs an
assessment of hedge effectiveness by verifying and documenting whether the critical terms of the derivative instruments
and the hedged items have changed during the period in review. All of the derivatives used by the Company in its risk
management are highly effective hedges because all of the critical terms of the derivative instruments match those of the
hedged item. The Company does not hold these derivative instruments for trade and does not plan to sell the instruments.
INSURANCE – the Company is self-insured for health care and most workers’ compensation up to predetermined
amounts above which third party insurance applies. The Company purchases specific stop-loss insurance for individual
health care claims in excess of $150,000 per plan year, with a $1.0 million individual lifetime maximum. For workers’
compensation the Company retains the first $350,000 per claim and purchases excess coverage up to the statutory limits
for amounts in excess of the retention limit. Losses are accrued based upon the Company’s estimates of the aggregate
liability for claims incurred using certain actuarial assumptions followed in the insurance industry and based on
Company experience. The Company records these insurance accruals within the accrued liabilities insurance account on
the balance sheet.
INCOME TAXES – the Company accounts for income taxes in accordance with the provisions SFAS No. 109,
Accounting for Income Taxes and evaluates uncertainties in income taxes in accordance with FIN 48, Accounting for
Uncertainty in Income Taxes. In the preparation of the Company’s consolidated financial statements, management
calculates income taxes. This includes estimating the Company’s current tax liability as well as assessing temporary
differences resulting from different treatment of items for tax and book accounting purposes. These differences result in
deferred tax assets and liabilities, which are recorded on the balance sheet. These assets and liabilities are analyzed
regularly and management assesses the likelihood that deferred tax assets will be realized from future taxable income.
The Company adopted the provisions of FIN 48 on July 1, 2007. The impact of the adoption was not significant and is
discussed in Note 8, Income Taxes.
EARNINGS PER SHARE – basic earnings per share of common stock is based on the weighted-average number of
common shares outstanding during each fiscal year. Diluted earnings per share of common stock includes the dilutive
effect of potential common shares outstanding. The Company’s only potential common shares outstanding are stock
options, which resulted in a dilutive effect of 37,137 shares, 15,036 shares and 18,838 shares in fiscal 2008, 2007 and
2006, respectively. The Company calculates the dilutive effect of outstanding options using the treasury stock method.
25
Options to purchase 567,411 shares, 572,200 shares and 420,201 shares of common stock were outstanding in fiscal
2008, 2007 and 2006, respectively, but were not included in the computation of diluted earnings per share as their
exercise prices were greater than the average market price of the common shares.
STOCK–BASED COMPENSATION –The Company utilizes the fair value recognition provisions of SFAS No. 123
“Accounting for Stock-Based Compensation” (revised 2004), “Share-Based Payment” (123(R)), requiring the Company
to recognize expense related to the fair value of stock-based compensation. The modified prospective transition method
was used as allowed under SFAS No. 123(R). Under this method, the stock-based compensation expense includes: (a)
compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of July 1, 2005,
based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, “Accounting for
Stock-Based Compensation”; and (b) compensation expense for all stock-based compensation awards granted subsequent
to July 1, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). See
Note 9 Stock-Based Compensation.
ACCOUNTING DEVELOPMENTS – In July 2006, the Financial Accounting Standards Board (“FASB”) issued
FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes– an interpretation of FASB Statement No. 109
(“FIN 48”), which clarifies the accounting for uncertainty in tax positions. FIN 48 requires that the Company recognize
in its consolidated financial statements, the impact of a tax position, if that position is more likely than not of being
sustained on audit, based on the technical merits of the position. The provisions of FIN 48 were effective as of the
beginning of the Company’s 2008 fiscal year, with the cumulative effect of the change in accounting principle recorded
as an adjustment to opening retained earnings. The Company recognized an adjustment in the liability for unrecognized
income tax benefit of $0.1 million, which is reported as an adjustment to the beginning balance of retained earnings. See
Note 8, Income Taxes.
In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value
Measurements, which defines fair value, establishes a framework for measuring the fair value of assets and liabilities.
This framework is intended to provide increased consistency in how fair value determinations are made under various
existing accounting standards, which permit, or in some cases require, estimates of fair market value. The provisions of
SFAS No. 157 are effective as of the beginning of the Company’s 2009 fiscal year. In February 2008, the FASB issued
FSP No. FAS 157-1, Application of SFAS No. 157 to SFAS No. 13 and Other Accounting Pronouncements That Address
Fair Value Measurements for Purposes of Lease Classification or Measurement under SFAS No. 13, and FSP No. 157-2,
Effective Date of SFAS No. 157. Collectively, the FSPs defer the effective date of SFAS No. 157 to fiscal years beginning
after December 15, 2008, for non-financial assets and non-financial liabilities except for items that are recognized or
disclosed at fair value on a recurring basis at least annually, and amend the scope of SFAS 157. The Company is currently
evaluating the impact of adopting SFAS No. 157 on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities
(“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial assets and financial liabilities at
fair value. Unrealized gains and losses on items for which the fair value option has been elected will be reported in
earnings. The provisions of SFAS No. 159 are effective as of the beginning of the Company’s 2009 fiscal year. The
Company is currently evaluating the impact of adopting SFAS No. 159 on its consolidated statements.
2. INVESTMENTS
Debt and equity securities are included in Investments and in Other Assets (for those investments designated for deferred
compensation plans), at fair value based on quoted market prices, and are classified as available-for-sale. Available-for-
sale securities consist of debt and equity securities that will be held for indefinite periods of time, including securities
that may be sold in response to changes in market interest or prepayment rates, needs for liquidity, or changes in the
availability or yield of alternative investments. These securities are valued at current market value, with the resulting
unrealized holding gains and losses excluded from earnings and reported, net of tax, as a separate component of
shareholders’ equity until realized. Available-for-sale securities are included in current assets if they are available to
fund current operations. Investments designated for deferred compensation are included within long-term other assets.
26
Realized gains on the sale of securities were approximately $0.2 million, $0.3 million, and $0.1 million at June 30, 2008,
June 30, 2007, and June 30, 2006, respectively. A summary of the carrying values and fair values of the Company’s
investments is as follows (in thousands):
Cost
Basis
2,198
2,619
4,817
$
$
Cost
Basis
2,292
2,656
4,948
$
$
June 30, 2008
Gross Unrealized
Gains
27
1,545
1,572
$
$
Losses
–
–
–
June 30, 2007
Gross Unrealized
Gains
–
1,741
1,741
$
$
Losses
(30)
–
(30)
$
$
$
$
Fair
Value
2,225
4,164
6,389
Fair
Value
2,262
4,397
6,659
June 30, 2008
June 30, 2007
Investments
–
1,160
1,160
$
Other Assets
$
2,225
3,004
5,229
Investments
–
976
976
$
$
$
Other Assets
$
2,262
3,421
5,683
Debt securities
Equity securities
Debt securities
Equity securities
Debt securities
Equity securities
$
$
$
$
$
$
As of June 30, 2008, all debt securities mature within one year.
3. INVENTORIES
Inventories valued on the LIFO method would have been approximately $3.3 million and $3.7 million higher at June 30,
2008 and 2007, respectively, if they had been valued on the FIFO method. At June 30, 2008 and 2007 the total value of
LIFO inventory was $2.7 million and $3.1 million, respectively. A comparison of inventories is as follows (in
thousands):
Raw materials ........................................................................ $
Work in process and finished parts ......................................
Finished goods.......................................................................
Total .................................................................................. $
June 30,
2008
15,272
8,082
62,437
85,791
$
$
2007
16,389
7,589
54,779
78,757
4. PROPERTY, PLANT AND EQUIPMENT
(in thousands)
Land .........................................................
Buildings and improvements ..................
Machinery and equipment ......................
Delivery equipment .................................
Furniture and fixtures..............................
Total ....................................................
Less accumulated depreciation...............
Net .......................................................
Estimated
Life (Years)
3-39
3-20
3-10
3-5
June 30,
2008
4,049
41,138
31,322
19,103
4,251
99,863
(73,491)
26,372
$
$
2007
4,049
40,242
34,010
19,711
4,564
102,576
(74,408)
28,168
$
$
27
5. OTHER ASSETS
(in thousands)
Cash value of life insurance.................................................. $
Investments designated for deferred compensation plans ..
Other.......................................................................................
Total .................................................................................. $
June 30,
2008
6,232
5,229
41
11,502
$
$
2007
5,940
5,683
587
12,210
6. ACCRUED LIABILITIES – OTHER
(in thousands)
Dividends .........................................................
Advertising .......................................................
Warranty ...........................................................
Income taxes payable * ...................................
Other .................................................................
Total.............................................................
$
$
June 30,
2008
855
1,309
1,090
–
2,806
6,060
$
$
2007
854
1,327
1,040
987
3,186
7,394
* At June 30, 2008, the Company has an income tax receivable that is included in the balance sheet within our other
current assets.
7. BORROWINGS AND CREDIT ARRANGEMENTS
At June 30, 2008, borrowings and credit arrangements consisted of the following (in thousands):
Current:
Current maturities of long-term debt .......................................................... $
Overnight borrowing interest rate at prime minus 1%; unsecured ...........
$12.0 million working capital line of credit through June 30, 2009;
interest rate at LIBOR + 0. 75%; unsecured .............................................
Long-Term:
$20.0 million revolving note; expires September 30, 2012;
interest rate at LIBOR + 0.75%; unsecured ..............................................
$2.6 million fixed rate note; requiring payments through December
2010; interest rate at 4.99%; secured by certain delivery equipment; net
of current portion .........................................................................................
Total .................................................................................................................. $
526
1,079
3,538
20,000
811
25,954
The Company had unsecured credit facilities of $32.1 million with a bank, with borrowings at differing rates based on
the date and type of financing utilized. The unsecured credit facilities provided $12.0 million short-term (renewed
annually), $20.0 million long-term (expires September 30, 2012) and $0.1 million in letters of credit that are used
primarily for international inventory purchases. The credit facilities provided for interest selected at the option of the
Company at prime or LIBOR plus an add-on percentage, based on a rolling four-quarter leverage ratio calculation. The
short-term facility expired on June 30, 2008.
The short-term portion of the credit facility provides working capital financing up to $12.0 million, of which $3.5 million
was outstanding at June 30, 2008, with interest selected at the option of the Company at prime (5% at June 30, 2008) or
LIBOR (2.5% at June 30, 2008) plus 0.75%. The short-term portion also provides overnight credit when required for
operations at prime minus 1.0%. At June 30, 2008, no amount was outstanding related to overnight credit. The long-
term portion of the credit facility provides up to $20.0 million, of which $20.0 million was outstanding at June 30, 2008.
Variable interest is set monthly at the option of the Company at prime or LIBOR plus 0.75%. The credit facility also
provides $0.1 million to support letters of credit issued by the Company of which no amount was outstanding as of June
30, 2008. All interest rates are adjusted monthly, except for the overnight portion of the short-term line of credit, which
varies daily at the prime rate minus 1.0%. As of June 30, 2008, the Company has effectively fixed the interest rates at
28
4.5% on approximately $15.0 million of its long-term debt through the use of interest rate swaps. On July 31, 2008, a
$5.0 million swap matured. As of the date of this filing, the Company has effectively fixed its interest rate at 5.0% on
approximately $10.0 million.
The credit agreement contains certain restrictive covenants that require the Company, among other things, to maintain an
interest coverage ratio, leverage ratio, and limitations on capital disposals, all as defined in the credit agreement. At June
30, 2008, the Company was in compliance with all financial covenants contained in the credit agreement.
An officer of the Company is a director at a bank where the Company maintains a $4.0 million line of credit, cumulative
letter of credit facilities of $5.2 million and where its routine daily banking transactions are processed. The Company is
contingently liable to insurance carriers under its comprehensive general, product, and vehicle liability policies, as well
as some workers’ compensation, and has provided letters of credit in the amount of $5.2 million. The Company receives
no special services or pricing on the services performed by the bank due to the directorship of this officer. At June 30,
2008, $1.1 million was outstanding on the line of credit at prime minus 1 %.
8. INCOME TAXES
In determining the provision for income taxes, the Company uses an estimated annual effective tax rate that is based on
the annual income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the
Company operates. This includes recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or tax returns to the extent pervasive evidence
exists that they will be realized in future periods. The deferred tax balances are adjusted to reflect tax rates by tax
jurisdiction, based on currently enacted tax laws, which are expected to be in effect in the years in which the temporary
differences are expected to reverse. In accordance with the Company’s income tax policy, significant or unusual items
are separately recognized when they occur.
The Company adopted the provisions of FIN 48 on July 1, 2007. As a result of the implementation of FIN 48, the
Company recognized an adjustment in the liability for unrecognized income tax benefits of $0.1 million, which is
reported as a cumulative effect of a change in accounting principle and is reported as an adjustment to the beginning
balance of retained earnings as of July 1, 2007. At the adoption date of July 1, 2007, the Company had approximately
$0.8 million of gross liabilities related to unrecognized tax benefits (composed of $0.6 million of gross unrecognized tax
benefits and accrued interest and penalties of $0.2 million) and related deferred tax assets of approximately $0.2 million.
At June 30, 2008, the Company had approximately $0.7 million of gross liabilities related to unrecognized tax benefits
(composed of $0.5 million of gross unrecognized tax benefits and accrued interest and penalties of $0.2 million) and
related deferred tax assets of approximately $0.2 million, all of which would affect our effective tax rate if recognized.
The Company does not expect that there will be any positions for which it is reasonably possible that the total amounts
of unrecognized tax benefits will significantly increase or decrease within the next twelve months. A reconciliation of the
beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
Balance at July 1, 2007.........................................................................................
Additions (reductions) based on tax positions related to the current year ........
Balance at June 30, 2008 ......................................................................................
$ 617
(68)
$ 549
Consistent with prior periods and upon adoption of FIN 48 the Company records interest and penalties related to income
taxes as income tax expense in the Consolidated Statements of Income. As of July 1, 2007 and June 30, 2008, the
Company had approximately $0.2 million of accrued interest and penalties related to uncertain tax positions. The total
income tax provision in fiscal years 2008, 2007 and 2006 was 35.8%, 35.6% and 39.3%, respectively, of income before
income taxes. The rate increased by approximately 0.2% from fiscal year 2007 to 2008 due primarily to the decrease in
nontaxable life insurance proceeds received in the current year compared to the prior year.
The provision for income taxes is as follows for the years ended June 30 (in thousands):
Federal – current .......................
State – current ...........................
Deferred .....................................
Total......................................
$
$
2008
1,510
270
580
2,360
$
$
2007
6,045
570
(1,465)
5,150
$
$
2006
1,762
350
948
3,060
29
A reconciliation between the U.S. federal statutory tax rate and the effective tax rate is as follows for the years ended
June 30:
Federal statutory tax rate ..................
State taxes, net of federal effect.......
Other ..................................................
Effective tax rate..........................
2008
34.0%
2.7
(0.9)
35.8%
2007
35.0%
2.6
(2.0)
35.6%
2006
34.0%
2.8
2.5
39.3%
The primary components of deferred tax assets and (liabilities) are as follows (in thousands):
Investments................................................... $
Accounts receivable.....................................
Inventory ......................................................
Self insurance ...............................................
Employee benefits........................................
Accrued expenses ........................................
Property, plant and equipment ....................
Deferred compensation................................
Other .............................................................
Total......................................................... $
June 30, 2008
June 30, 2007
Current
(580)
780
1,730
1,040
540
700
–
–
–
4,210
$
$
Long-term
Current
Long-term
–
–
–
–
–
–
(940)
2,030
302
1,392
$
$
(650) $
800
1,590
1,165
760
1,035
–
–
–
4,700 $
–
–
–
–
–
–
(900)
2,130
40
1,270
The Company is subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions.
Generally, tax years 2004–2007 remain open to examination by the Internal Revenue Service or other taxing jurisdictions
to which we are subject.
9. STOCK-BASED COMPENSATION
The Company has three stock-based compensation methods available when determining employee compensation. The
Company’s shareholders have approved all stock-based compensation and stock option plans.
(1) Management Incentive Plan – This plan provides for shares of common stock to be awarded to key employee based
on targeted rate of earnings to common equity as established by the Board of Directors. Shares awarded to
employees are subject to the restriction of continued employment, with one-third of the stock received by the
employee on the award date and the remaining shares vested after one and two years. Under the plan no shares
were awarded during the fiscal years ended June 30, 2008, 2007 or 2006. There were no shares forfeited in the
fiscal years ended June 30, 2008, 2007 and 2006. This plan expired on June 30, 2008, there are no awards
outstanding and all prior year awards are fully vested.
(2) 2007 Long-Term Management Incentive Compensation Plan – The plan provides for shares of common stock and
cash to be awarded to officers and key employees based on performance targets set by the Nominating and
Compensation Committee of the Board of Directors (the “Committee”). The Committee has selected consolidated
operating results for organic net sales growth and fully-diluted earnings per share for the two-year transition period
beginning July 1, 2007 and ending on June 30, 2009 and the three-year performance periods beginning July 1, 2007
and ending on June 30, 2010 and beginning July 1, 2008 and ending on June 30, 2011. The Committee has also
specified that payouts, if any, for awards earned under the 2007-2009, 2007-2010 and 2008-2011 performance
periods will be 60% stock and 40% cash. Awards will be paid to participants as soon as practicable following the
end of the performance periods, verification of results, and subject to the negative discretion of the Committee. As
the payouts of these awards are subject to the negative discretion of the Committee the grant date is not established
until the awards are paid. Accordingly, compensation cost is re-measured based on the award's estimated fair value
at the end of each reporting period prior to the grant date to the extent service has been rendered in comparison to
the total requisite service period. Further, the accrual of compensation cost is based on the probable outcomes of
the performance conditions. The portion of the accrued award payable in stock is classified within equity and the
portion of the accrued award payable in cash is classified within liabilities.
The fair value of the equity portion of the award is estimated each period based on the market value of the
Company’s common shares reduced by the present value of expected dividends to be paid prior to the service
period, discounted using a risk-free interest rate. In the period the grant date occurs, cumulative compensation cost
30
will be adjusted to reflect the cumulative effect of measuring compensation cost based on the fair value at the grant
date. Under the plan the aggregate number of shares and cash that could be awarded to key executives if the target
and maximum performance goals are met are as follows:
Performance Period
July 1, 2007 – June 30, 2009
July 1, 2007 – June 30, 2010
July 1, 2008 – June 30, 2011
At Target
Stock
22,212
33,330
44,621
Cash
210,567
315,881
334,714
$
$
$
At Maximum
Stock
35,544
53,329
71,398
Cash
336,820
505,395
535,573
$
$
$
No compensation costs were accrued at June 30, 2008. If the target performance goals would be achieved the total
amount of stock compensation cost recognized over the requisite service periods would be $0.6 million per year
based on the estimated fair values at June 30, 2008. At June 30, 2008, 500,000 shares were available for awards.
(3) Stock Options Plans – The stock option plans for key employees and directors provide for the granting of incentive
and nonqualified stock options. Under the plans, options are granted at an exercise price equal to the fair market
value of the underlying common stock at the date of grant, and may be exercisable for up to 10 years. All options
are exercisable when granted.
In fiscal years 2008, 2007 and 2006, the Company issued options for 120,000, 135,000 and 159,500 common
shares at an exercise price of $12.40, $12.63 and $14.40 (the fair market value on the date of grant), respectively.
The options were immediately available for exercise and may be exercised for a period of 10 years. In accordance
with the provisions of SFAS No. 123(R) the Company recorded compensation expense of $0.2 million, $0.3
million and $0.4 million, respectively. The Company also recorded a reduction of its income tax expense of
$28,000, $43,000 and $63,000, respectively, related to the issuance of these options. The assumptions used in
determining the compensation expense and related income tax impacts are discussed below.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for grants in fiscal 2008, 2007 and 2006, respectively;
dividend yield of 4.2%, 4.1% and 3.6%; expected volatility of 19.5%, 21.6% and 23.3%; risk-free interest rate of
3.3%, 4.5% and 4.5%; and an expected life of 5, 6 and 6 years, respectively. The expected volatility and expected
life are determined based on historical data.
The weighted-average grant date fair value of stock options granted during the fiscal years ended June 30, 2008,
2007 and 2006, was $1.55, $2.03 and $2.68, respectively. The cash proceeds, income tax benefit and aggregate
intrinsic value of options (the amount by which the market price of the stock on the date of exercise exceeded the
market price of stock on the date of grant) exercised during the fiscal years ended June 30, 2008, 2007 and 2006,
respectively, was not material.
At June 30, 2008, 381,700 shares were available for future grants. 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
exercise of options. These shares received as payment are retired upon receipt.
31
A summary of the status of the Company’s stock option plans as of June 30, 2007, 2006 and 2005 and the changes
during the years then ended is presented below:
Outstanding and exercisable at July 1, 2005 .........
Granted ..................................................................
Exercised ...............................................................
Canceled ................................................................
Outstanding and exercisable at June 30, 2006 ......
Granted ..................................................................
Exercised ...............................................................
Canceled ................................................................
Outstanding and exercisable at June 30, 2007 ......
Granted ..................................................................
Exercised ...............................................................
Canceled ................................................................
Outstanding and exercisable at June 30, 2008 ......
Shares
503,601
159,500
(2,000)
–
661,101
135,000
(4,427)
(9,500)
782,174
120,000
(3,400)
(5,790)
892,984
Weighted Average
Exercise Price
16.50
14.40
11.25
–
16.01
12.63
12.60
15.60
15.45
12.40
11.80
16.07
15.05
$
$
$
$
$
$
$
$
Aggregate
Intrinsic Value
(in millions)
0.2
0.1
0.4
0.0
The following table summarizes information for options outstanding and exercisable at June 30, 2008:
Range of
Prices
10.30 – 10.75
12.35 – 13.59
14.40 – 16.52
19.21 – 20.27
10.30 – 20.27
$
$
Options
Outstanding
23,800
301,773
423,016
144,395
892,984
Weighted Average
Remaining
Life (Years)
2.9
7.6
6.3
5.4
6.5
Exercise
Price
10.57
12.64
15.56
19.33
15.05
$
$
10. ACCRUED WARRANTY COSTS
The following table presents the changes in the Company’s product warranty liability for the fiscal years ended June 30
(in thousands):
Accrued warranty costs at beginning of year ............
Payments made for warranty and related costs .........
Accrual for product warranty and related costs.........
Accrued warranty costs at end of year .......................
$
$
2008
1,040
(3,331)
3,381
1,090
$
$
2007
1,140
(3,558)
3,458
1,040
11. BENEFIT AND RETIREMENT PLANS
The Company sponsors various defined contribution pension and retirement plans, which cover substantially all
employees, other than employees covered by multi-employer pension plans under collective bargaining agreements. It
is the Company’s policy to fund all pension costs accrued. Total pension and retirement plan expense was $2.0 million
in each of the fiscal years 2008, 2007, and 2006. The amounts include $0.5 million in each of the fiscal years 2008,
2007 and 2006, for the Company’s matching contribution to retirement savings plans. The Company’s cost for pension
plans is generally determined as 2% - 6% of each covered employee’s wages. The Company’s matching contribution
for the retirement savings plans is generally 25% - 50% of employee contributions (up to 4% of employee earnings). In
addition to the above, amounts charged to pension expense and contributed to multi-employer defined benefit pension
plans administered by others under collective bargaining agreements were $0.8 million, $0.9 million and $1.0 million in
fiscal 2008, 2007 and 2006, respectively. The cumulative cost to exit the Company’s multi-employer plans was
approximately $3.5 million on June 30, 2008.
The Company has unfunded post-retirement benefit and deferred compensation plans with executive officers. The
plans require various annual contributions for the participants based upon compensation levels and age. All participants
are fully vested. For fiscal 2008, 2007 and 2006, the benefit obligation was increased by interest expense of $0.3 million,
$0.2 million and $0.2 million, service costs of $0.3 million, $0.5 million and $0.3 million, and decreased by payments of
$0.8 million, $0.5 million and $0.4 million, respectively. For fiscal 2008, 2007 and 2006, the discount rate was 6.10%,
32
6.25%, 6.25%, respectively and the rate of return on assets was 8.25%, 8.25%, and 8.25%, respectively. At June 30,
2008, the benefit obligation was $5.3 million, including $0.3 million for defined benefits.
Under provisions of the Company’s Voluntary Deferred Compensation Plan, executive officers may defer common
stock awards received as participants of the Management Incentive Plan until retirement. Under the plan, no shares
were deferred during the fiscal years ended June 30, 2008 and 2007. At June 30, 2008 and 2007, 53,575 shares and
60,853 shares with an award date value of $0.8 million and $0.9 million, respectively, had been deferred and are being
held on behalf of the employees. Under the plan, 7,278 shares were distributed in fiscal years 2008 and 2007,
respectively.
The Company’s defined benefit pension plan covers 78 active hourly production employees of DMI. There are a total
of 484 participants in the plan. Retirement benefits are based on years of credited service multiplied by a dollar amount
negotiated under collective bargaining agreements. The Company’s policy is to fund normal costs and amortization of
prior service costs at a level that is equal to or greater than the minimum required under the Employee Retirement
Income Security Act of 1974 (ERISA). According to an agreement reached with the collective bargaining unit, all
benefits and participants are fixed. Future benefits will accrue to current participants; however, new participants cannot
be added to the plan. As of June 30, 2008, the Company recorded an accrued benefit liability related to the funded
status of the defined benefit pension plan recognized on the Company’s balance sheet of $0.3 million and as of June 30,
2007 an accrued asset was recorded on the Company’s consolidated balance sheet of $0.4 million. The accumulated
benefit obligation was $5.2 million and $4.9 million at fiscal years ended June 30, 2008 and 2007, respectively.
12. COMPREHENSIVE INCOME
The components of comprehensive income, net of income taxes, for the years ended June 30, were as follows (in
thousands):
Net income.................................................................. $
Other comprehensive income (OCI):
Change in fair value of derivatives, net of
income taxes of $176, $70 and $(73),
respectively ............................................................
Change in fair value of available-for-sale,
Securities, net of income taxes of $54, $(205),
$–, respectively
Change in minimum pension liability,
net of income taxes of $321, $(140) and $(305),
respectively.............................................................
Total other comprehensive income ...........................
Total comprehensive income..................................... $
2008
2007
4,236
$
9,334
$
2006
4,718
(273)
(168)
117
(84)
301
–
(524)
(881)
3,355
$
255
388
9,722
$
543
660
5,378
The components of accumulated other comprehensive income, net of income taxes, are as follows (in thousands):
Available-for-sale securities .......................................... $
Interest rate swaps...........................................................
Pension and other post-retirement benefit
adjustments...............................................................
Total accumulated other comprehensive income.......... $
June 30,
$
2008
975
(178)
(569)
2007
1,059
95
(44)
228
$
1,110
13. LITIGATION
From time to time, the Company is subject to various 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 proceedings that are
currently pending, individually or in the aggregate, to be material to its business or likely to result in a material adverse
effect on its consolidated operating results, financial condition, or cash flows.
33
14. COMMITMENTS AND CONTINGENCIES
FACILITY LEASES – the Company leases certain facilities and equipment under various operating leases. These
leases require the Company to pay the lease cost, operating costs, including property taxes, insurance, and maintenance.
Total lease expense related to the various operating leases was approximately $4.0 million, $3.6 million and $3.4
million in fiscal 2008, 2007 and 2006, respectively.
Expected future minimum commitments under operating leases as of June 30, 2008 were as follows (in thousands):
Fiscal Year Ended June 30
2009
2010
2011
2012
2013
2,601
1,748
983
628
284
6,244
$
As described in Note 19, the Company identified certain errors in the reconciliation of accounts payable during its 2008
closing period. As a result of these errors, the Company restated, in this Annual Report on Form 10-K, certain of its
previously filed financial statements. The Company could be subject to litigation or other contingent liabilities, which
may result in cash and noncash charges, any or all of which could have a material adverse effect on the consolidated
financial statements.
15. SUPPLEMENTAL CASH FLOW INFORMATION
Non-Cash Financing Activities – During fiscal year 2006, the Company purchased delivery equipment of $2.6 million
financed by a note payable. During fiscal year 2006, the Company issued shares with an award date value of $0.2
million in settlement of management incentive compensation plan liabilities.
16. SEGMENTS
The Company operates in one reportable operating segment, furniture products. Our operations involve the distribution
of manufactured and imported products consisting of a broad line 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 for residential, recreational vehicle, and commercial
markets. The Company’s furniture products are sold primarily throughout the United States by the Company’s internal
sales force and various independent representatives. The Company makes minimal export sales. No single customer
accounted for more than 10% of net sales. The Company has no foreign manufacturing operations and all of our long-
lived assets are located within the United States.
Set forth below is information for the past three fiscal years showing the Company’s net sales attributable to each of the
areas of application (in thousands):
Residential ........................................ $
FOR THE YEARS ENDED JUNE 30,
2007
259,710
2008
258,084
2006
267,714
$
$
Recreational Vehicle .......................
56,090
Commercial ......................................
91,481
66,165
99,525
71,981
86,713
$
405,655
$
425,400
$
426,408
34
17. SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION – UNAUDITED
The previously issued condensed consolidated balance sheets as of March 31, 2008, December 31, 2007, September 30,
2007, March 31, 2007, December 31, 2006 and September 30, 2006 contained an error as discussed in Note 19. The
effect of the restatement on certain of the Company’s previously reported quarterly financial statements on Form 10-Q
are as follows (amounts in thousands):
Consolidated Balance Sheets
Deferred income taxes
Total current assets
Total assets
Accounts payable
Total current liabilities
Total liabilities
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
Consolidated Balance Sheets
Deferred income taxes
Total current assets
Total assets
Accounts payable
Total current liabilities
Total liabilities
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
Consolidated Balance Sheets
Deferred income taxes
Total current assets
Total assets
Accounts payable
Total current liabilities
Total liabilities
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
Consolidated Balance Sheets
Deferred income taxes
Total current assets
Total assets
Accounts payable
Total current liabilities
Total liabilities
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
$
$
$
$
35
As Reported
3,420
135,358
174,767
Quarter Ended March 31, 2008
Adjustment
850
850
850
As Restated
4,270
$
136,208
175,617
$
9,672
32,010
59,670
103,648
115,097
174,767
2,287
2,287
2,287
(1,437)
(1,437)
850
11,959
34,297
61,957
102,211
113,660
175,617
Quarter Ended December 31, 2007
Adjustment
850
850
850
As Restated
4,520
$
145,320
185,643
As Reported
3,670
144,470
184,793
$
12,752
41,740
69,290
103,653
115,503
184,793
2,287
2,287
2,287
(1,437)
(1,437)
850
15,039
44,027
71,577
102,216
114,066
185,643
Quarter Ended September 30, 2007
Adjustment
850
850
850
As Restated
4,570
$
143,341
184,141
As Reported
3,720
142,491
183,291
$
11,904
41,617
68,956
102,640
114,335
183,291
2,287
2,287
2,287
(1,437)
(1,437)
850
14,191
43,904
71,243
101,203
112,898
184,141
As Reported
4,190
134,554
179,532
Quarter Ended March 31, 2007
Adjustment
850
850
850
As Restated
5,040
$
135,404
180,382
$
13,851
43,518
70,689
97,435
108,843
179,532
2,287
2,287
2,287
(1,437)
(1,437)
850
16,138
45,805
72,976
95,998
107,406
180,382
$
$
Consolidated Balance Sheets
Deferred income taxes
Total current assets
Total assets
Accounts payable
Total current liabilities
Total liabilities
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
Consolidated Balance Sheets
Deferred income taxes
Total current assets
Total assets
Accounts payable
Total current liabilities
Total liabilities
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
(in thousands, except per share amounts)
Quarter Ended December 31, 2006
Adjustment
850
850
850
As Restated
5,330
$
138,064
176,715
As Reported
4,480
137,214
175,865
$
16,256
40,418
67,717
96,767
108,148
175,865
2,287
2,287
2,287
(1,437)
(1,437)
850
18,543
42,705
70,004
95,330
106,711
176,715
Quarter Ended September 30, 2006
Adjustment
850
850
850
As Restated
5,070
$
142,977
179,942
As Reported
4,220
142,127
179,092
$
15,131
44,604
71,904
96,212
107,188
179,092
2,287
2,287
2,287
(1,437)
(1,437)
850
17,418
46,891
74,191
94,775
105,751
179,942
FOR THE QUARTER ENDED
September 30
December 31
March 31
June 30
Fiscal 2008:
Net sales ................................... $
Gross margin............................
Net income (1) (2) (3) .............
Earnings per share:
Basic....................................
Diluted ................................
(in thousands, except per share amounts)
100,900
19,763
1,183
0.18
0.18
105,986
22,070
1,868
0.28
0.28
98,138
18,019
849
0.13
0.13
100,630
18,637
336
0.05
0.05
FOR THE QUARTER ENDED
September 30
December 31
March 31
June 30
Fiscal 2007:
Net sales ................................... $
Gross margin............................
Net income (4) .........................
Earnings per share:
Basic....................................
Diluted ................................
101,340
18,405
563
0.09
0.09
$
$
105,700
19,774
1,409
0.21
0.21
$
104,071
20,478
1,522
0.23
0.23
114,289
22,566
5,841
0.89
0.89
The sum of the per share amounts for the quarters may not equal the total for the year due to the treasury stock
method.
(1) The quarter ended December 31, 2007 includes the recording of stock-based compensation expense of $0.2
million (after tax) for stock options under SFAS No. 123 (R) or $0.03 per share.
(2) The quarter ended December 31, 2006 includes the recording of stock-based compensation expense of $0.2
million (after tax) for stock options under SFAS No. 123 (R) or $0.04 per share.
(3) The quarter ended March 31, 2007 includes a $0.4 million pre-tax gain from the sale of vacant land or $0.06 per
share.
(4) The quarter ended June 30, 2007 includes a $0.6 million non-taxable gain on life insurance ($0.08 per share)
and $2.5 million (after tax) gain from the sale of a property ($0.37 per share).
36
18. SUBSEQUENT EVENT – UNAUDITED
On September 8, 2008, the Board of Directors approved the closure of its New Paris, Indiana. recreational vehicle seating
manufacturing facility and the end of manufacturing operations at its Lancaster, Pennsylvania. facility. The Company
announced the closures on September 10, 2008. The Company expects manufacturing at both locations to cease
November 9, 2008. The Company intends to continue its warehousing and shipping operations in Lancaster.
Approximately 250 employees will be affected by this consolidation of manufacturing operations over the next two to
three months. The Company estimates the manufacturing consolidation and transition will be completed by December
31, 2008 and anticipates pre-tax restructuring and impairment charges in the first half of fiscal year 2009 to be in the
range of $2.0 million to $2.5 million.
19. ERROR CORRECTIONS
The Company has restated the consolidated financial statements as of and for the fiscal years ended June 30, 2007 and
2006.
During the 2008 fiscal year-end closing process the Company identified unsupported reconciling amounts that reduced
accounts payable balances at a material consolidated subsidiary. After completing analysis of these unsupported
reconciling amounts, it was determined that they principally related to the historical accounting at the subsidiary for the
capitalization of inventory costs and the clearing of accruals from the accounts payable relating to transactions occurring
in fiscal years 2004 and 2005. The historical subsidiary inventory standard costing system, established prior to the
warehousing of inventory in China, did not appropriately differentiate the costing of inventory balances warehoused in
China versus the United States. The warehoused inventories in China inappropriately included freight-in costs for
shipments to the United States that had not been incurred. During fiscal year 2006, the Company modified the
subsidiary’s inventory costing process which rectified the costing error in inventory on a prospective basis but resulted in
the reclassification of the historical error in inventory freight costs as a reduction to accounts payable with the erroneous
belief that the reduction to accounts payable would offset future freight invoices. As a result of this error, the $2.287
million reduction within accounts payable remained until identified during the fiscal year 2008 closing process.
The effect of the restatement on the Company’s previously reported consolidated financial statements are as follows
(amounts in thousands, except per share data):
Consolidated Statements of Changes in Shareholders’ Equity
As Reported
96,502
107,502
Fiscal Year Ended June 30, 2006
Adjustment
(1,437)
(1,437)
As Restated
95,065
$
106,065
$
As Reported
Fiscal Year Ended June 30, 2006
Adjustment
As Restated
(14,825)
(492)
$
2,287
(2,287)
$
(12,538)
(2,779)
As Reported
3,850
142,516
184,164
Fiscal Year Ended June 30, 2007
Adjustment
850
850
850
As Restated
4,700
$
143,366
185,014
$
13,607
43,177
70,049
102,421
114,115
184,164
2,287
2,287
2,287
(1,437)
(1,437)
850
15,894
45,464
72,336
100,984
112,678
185,014
Retained earnings
Total shareholders’ equity
Consolidated Statements of Cash Flows
OPERATING ACTIVITIES:
Changes in operating assets and liabilities:
Inventories
Accounts payable
Consolidated Balance Sheets
Deferred income taxes
Total current assets
Total assets
Accounts payable
Total current liabilities
Total liabilities
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
$
$
$
37
Consolidated Statements of Changes in Shareholders’ Equity
Retained earnings
Total shareholders’ equity
$
As Reported
102,421
114,115
Fiscal Year Ended June 30, 2007
Adjustment
(1,437)
(1,437)
$
$
As Restated
100,984
112,678
In addition, the opening retained earnings restatement adjustment $1,437 thousand was comprised of $1,138 thousand
and $299 thousand for the fiscal years ended June 30, 2005 and 2004, respectively.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of disclosure controls and procedures – Based on their evaluation as of the end of the period covered by
this Annual Report on Form 10-K, the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”)
have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e)) under
the Securities Act of 1934, as amended) were not effective as of June 30, 2008 because of a material weakness in our internal
control over financial reporting.
Changes in internal control over financial reporting – During the quarter ended June 30, 2008, there was no change
in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of
1934) that has materially affected, or is reasonably likely to materially affect the Company’s internal control over financial
reporting.
Management’s Annual Report on Internal Control Over Financial Reporting – Management is responsible for
establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) or
15d-15(f) of the Securities Exchange Act of 1934, as amended. We performed an evaluation under the supervision and with
the participation of our management, including the CEO and CFO, to assess the effectiveness of the design and operation of
our disclosure controls and procedures under the Exchange Act as of June 30, 2008. In making this assessment, we used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control —
Integrated Framework. Based on that criteria, the material weakness described below has caused our management to
conclude we did not maintain effective internal control over financial reporting as of June 30, 2008.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial
statements will not be prevented or detected on a timely basis.
As a result of their assessment, the Company’s CEO and CFO identified a material weakness in the Company’s
internal control over financial reporting. The material weakness is related to the design and operating effectiveness of controls
over the Company’s material consolidated subsidiary’s reconciliation of accounts payable records to the general ledger.
Specifically, the subsidiary maintained an overly complex accounts payable account structure, which when combined with the
processing of a large volume of transactions led to the subsidiary’s inability to perform adequate review procedures to timely
identify reconciling amounts and the related reversals. This deficiency obscured the existence of unsupported reconciling
amounts resulting in the untimely identification of the errors in the restatement discussed in Note 19 to the Consolidated
Financial Statements in this Annual Report on Form 10-K.
The Company’s management is committed to continuing efforts aimed at improving the design adequacy and
operational effectiveness of its system of internal control and intends to take all necessary steps to address this material
weakness. Subsequent to June 30, 2008, the Company began taking the following measures to address the material weakness
identified above and to enhance internal control over monthly, quarterly and year-end financial reporting:
•
•
•
simplifying the account structure surrounding the accounts payable transactions by reducing the number of
general ledger accounts used to record accounts payable,
improving the accounts payable reconciliation process by revising the automatic postings to accounts payable,
and
enhancing the review and approval of the accounts payable reconciliation process with our subsidiary associates.
38
The Company believes that these remediation actions, once they are fully implemented and operating for a sufficient
period of time, will improve the Company’s internal controls over financial reporting and are sufficient to remediate the
material weakness described above. While steps have been taken to remediate the material weakness, additional measures
may be required. Management will assess the effectiveness of the remediation efforts in connection with management’s tests
of internal control over financial reporting during fiscal year 2009.
Deloitte & Touche LLP, the independent registered public accounting firm that has audited our consolidated
financial statements included in this Annual Report on Form 10-K, has issued their attestation report on our internal control
over financial reporting, a copy of which is included in this Annual Report on Form 10-K.
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of Flexsteel Industries, Inc.
We have audited Flexsteel Industries, Inc. and subsidiaries (the "Company's") internal control over financial reporting as of June 30,
2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Annual Report on Internal Controls over Financial Reporting. Our responsibility is to express an
opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on that risk, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal
executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors,
management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial
statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.
Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject
to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or
detected on a timely basis. The following material weakness has been identified and included in management's assessment: the
design and operating effectiveness of controls over the Company’s material consolidated subsidiary’s reconciliation of accounts
payable records to the general ledger were not effective. This matter represents a design and operating deficiency, and, based upon
misstatements requiring correction to the consolidated financial statements that impacted accounts payable, retained earnings, and
deferred income tax accounts, constitutes a material weakness. This material weakness was considered in determining the nature,
timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended June 30,
2008, of the Company and this report does not affect our report on such financial statements and financial statement schedule.
In our opinion, because of the effect of the material weakness identified above on the achievement of the objectives of the control
criteria, the Company has not maintained effective internal control over financial reporting as of June 30, 2008, based on the criteria
established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We do not express an opinion on any other form of assurance on management’ statements regarding the measures taken to address
the material weakness identified in Management’s Annual Report over Financial Reporting, and the statements made by
management regarding the remediation efforts.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement schedules as of and for the year ended June 30, 2008, of the Company and
our report dated September 10, 2008 expressed an unqualified opinion on those financial statements and financial statement
schedule.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
September 10, 2008
40
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information identifying directors of the Company, the Audit and Ethics Committee, the Audit and Ethics
Committee Expert and Section 16(a) beneficial ownership reporting compliance, will be contained in the Company’s fiscal
2008 definitive proxy statement to be filed with the Securities and Exchange Commission under the sections captioned
“Proposal 1 Election of Directors,” “Corporate Governance – Audit and Ethics Committee of the Board of Directors” and
“Compliance with Section 16(a) of the Securities Exchange Act of 1934” and are incorporated herein by reference.
The Company has adopted a code of ethics called the Guidelines for Business Conduct that applies to the
Company’s employees, including the principal executive officer, principal financial officer, principal accounting officer or
controller, and persons performing similar functions. A copy of the code of ethics is posted on our website at
www.flexsteel.com.
The executive officers of the Company, their ages, positions (in each case as of June 30, 2008), and the month and
year they were first elected or appointed an officer of the registrant, are as follows:
Name (age)
Ronald J. Klosterman (60)
James R. Richardson (64)
Thomas D. Burkart (65)
Patrick M. Crahan (60)
Jeffrey T. Bertsch (53)
Donald D. Dreher (59)
James E. Gilbertson (58)
Timothy E. Hall (50)
Position (date first became officer)
President & Chief Executive Officer (June 1989)
Senior Vice President of Residential Sales and Marketing (November 1979)
Senior Vice President of Vehicle Seating (February 1984)
Senior Vice President of Commercial Seating (June 1989)
Senior Vice President of Corporate Services (June 1989)
Senior Vice President, President & CEO of DMI Furniture, Inc. (December 2004)
Vice President of Vehicle Seating (June 1989)
Vice President-Finance, Chief Financial Officer & Secretary (December 2000)
Each named executive officer has held the same office or an executive or management position with the Company
for at least five years except Mr. Dreher who has served as President and CEO of DMI Furniture, Inc. from 1986 to present.
Item 11. Executive Compensation
The information identifying executive compensation will be contained in the Company’s fiscal year 2008 definitive
proxy statement to be filed with the Securities and Exchange Commission under the sections captioned “Executive
Compensation,” “Director Compensation,“ and “Corporate Governance - Compensation Committee Interlocks and Insider
Participation” and are incorporated herein by reference.
Item 12.
Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
The information identifying beneficial ownership of stock and supplementary data will be contained in the
Company’s fiscal year 2008 definitive proxy statement to be filed with the Securities and Exchange Commission under the
sections captioned “Ownership of Stock By Directors and Executive Officers,” “Ownership of Stock by Certain Beneficial
Owners,” and “Equity Compensation Plan Information” and are incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
This information will be contained under the heading “Interest of Management and Others in Certain Transactions”
and “Corporate Governance – Board of Directors” in the Company’s fiscal year 2008 definitive proxy statement to be filed
with the Securities and Exchange Commission and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
Deloitte & Touche LLP was the Company’s independent registered public accounting firm in fiscal 2008. In
addition to performing the audit of the Company's consolidated financial statements, Deloitte & Touche LLP provided
various audit-related services during fiscal 2008.
41
The Audit and Ethics Committee pre-approves both the type of services to be provided by Deloitte & Touche LLP
and the estimated fees related to these services. The Audit and Ethics Committee reviewed professional services and the
possible effect on Deloitte & Touche LLP’s independence was considered. The Audit and Ethics Committee has considered
and found the provision of services for non-audit services compatible with maintaining Deloitte & Touche LLP’s
independence. All services provided by Deloitte & Touche LLP during fiscal 2008 were pre-approved by the Audit and
Ethics Committee.
The aggregate fees billed for each of the past two fiscal years ended June 30 for each of the following categories of
services are set forth below:
Audit Fees (1) .................................................... $
Audit Related Fees (2) ......................................
Tax Fees (3) .......................................................
All Other Fees (4)..............................................
Total.................................................................. $
2008
578,000 $
38,000
22,000
–
638,000 $
2007
409,000
50,000
–
–
459,000
(1) Professional fees and expenses for audit of financial statements and internal control over financial reporting services for
fiscal 2008 and 2007 and consisted of (i) audit of the Company’s annual consolidated financial statements; (ii) reviews of
the Company’s quarterly consolidated financial statements; (iii) consents and other services related to Securities and
Exchange Commission matters; and (iv) consultations on financial accounting and reporting matters arising during the
course of the audit and reviews.
(2) Professional fees and expenses for audit-related services billed in fiscal 2008 and 2007 consisted of employee benefit plan
audits, $38,000 and $31,000, respectively, and $19,000 in fiscal 2007 for other SEC-related matters.
(3) Professional fees and expenses for tax services billed in fiscal 2008 consisted of tax planning and advice services totaling
$22,000 and consisted of (i) tax advice related to structuring certain proposed transactions; and (ii) general tax planning
matters.
(4) No other professional services were provided during fiscal 2008 and 2007.
PART IV
Item 15.
Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)
(1)
Financial Statements
The financial statements of the Company are set forth above in Item 8.
(2)
Schedules
The following financial statement schedules for the years ended June 30, 2008, 2007 and 2006 are submitted
herewith:
SCHEDULE II
RESERVES
For the Years Ended June 30, 2008, 2007 and 2006
Description
Allowance for
Doubtful Accounts:
2008..............................
2007..............................
2006..............................
Balance at
Beginning
of Year
Additions
Charged to
Income
Deductions
from
Reserves
Balance at
End of Year
1,050,000
$
(1,030,000)
$
2,110,000
–
$
(730,000)
$
2,090,000
850,000
$
(1,090,000)
$
2,820,000
$
$
$
2,090,000
2,820,000
3,060,000
$
$
$
42
Other schedules are omitted because they are not required or are not applicable or because the required
information is included in the financial statements.
(3)
Exhibit No.
3.1
The 1983 Restated Articles of Incorporation of the Company, as amended through February 14, 2007
(incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30,
2007).
3.2
3.3
By-Laws of the Company (incorporated by reference to the Company’s Annual Report on Form 10-K for
the fiscal year ended June 30, 1993).
Amendments to Restated By-Laws of the Company (incorporated by reference to Exhibit 3.1 to the
Company’s Form 8-K filed on June 8, 2007).
10.1 1995 Stock Option Plan incorporated by reference from the 1995 Flexsteel definitive proxy statement. *
10.2 Management Incentive Plan incorporated by reference from the 1980 Flexsteel definitive proxy statement -
commission file #0-5151.*
10.3 1999 Stock Option Plan incorporated by reference from the 1999 Flexsteel definitive proxy statement.*
10.4 Flexsteel Industries, Inc. Voluntary Deferred Compensation Plan incorporated by reference to Exhibit No.
10.5 to the Annual Report on Form 10-K for the fiscal year ended June 30, 2001. *
10.5
Flexsteel Industries, Inc. Restoration Retirement Plan incorporated by reference to Exhibit No. 10.6 to the
Annual Report on Form 10-K for the fiscal year ended June 30, 2001. *
10.6
Flexsteel Industries, Inc. Senior Officer Supplemental Retirement Plan incorporated by reference to Exhibit
No. 10.7 to the Annual Report on Form 10-K for the fiscal year ended June 30, 2001. *
10.7 2002 Stock Option Plan incorporated by reference to Appendix A from the 2002 Flexsteel definitive proxy
statement. *
10.8
Agreement and Plan of Merger, dated as of August 12, 2003, by and among Flexsteel, Churchill Acquisition
Corp. and DMI (incorporated by reference to Exhibit 99(d)(1) of Flexsteel Industries, Inc.’s Tender Offer
Statement on Schedule TO filed with the Securities and Exchange Commission on August 20, 2003)
incorporated by reference to Form 8-K and Amendments No. 1 to Form 8-K, as filed with Securities and
Exchange Commission on October 2, 2003.
10.9
Credit Facility Agreement dated June 30, 2004 as amended or modified on June 10, 2005, August 19, 2005,
December 23, 2005, January 3, 2006, and May 19, 2006 incorporated by reference to Exhibit 10.9 to
Flexsteel Industries, Inc. Annual Report on Form 10-K for the fiscal year ended June 30, 2006.
10.10 Flexsteel Industries, Inc. 2006 Stock Option Plan incorporated by reference to Appendix C from the 2006
Flexsteel Proxy Statement filed with the Securities, and Exchange Commission on October 31, 2006.
10.11 Note Modification Agreement date June 25, 2007 (long-term facility) between Flexsteel Industries, Inc. and
JPMorgan Chase Bank, N.A. incorporated by reference to Exhibit 10.1 to Flexsteel’s Form 8-K filed with
the Securities and Exchange Commission on June 26, 2007.
10.12 Note Modification Agreement date June 25, 2007 (short-term facility) between Flexsteel Industries, Inc.
and JPMorgan Chase Bank, N.A. incorporated by reference to Exhibit 10.1 to Flexsteel’s Form 8-K filed
with the Securities and Exchange Commission on June 26, 2007.
10.13 Credit Agreement date June 25, 2007 between Flexsteel Industries, Inc. and JPMorgan Chase Bank, N.A.
incorporated by reference to Exhibit 10.3 to Flexsteel’s Form 8-K filed with the Securities and Exchange
Commission on June 26, 2007.
43
10.14 Employment Agreement dated October 1, 2006 between Flexsteel Industries, Inc. and Donald D. Dreher
incorporated by reference to Exhibit 10.1 to Flexsteel’s Form 8-K filed with the Securities and Exchange
Commission on October 5, 2006. *
10.15 Note Modification Agreement dated June 26, 2008 (short-term facility) between Flexsteel Industries, Inc.
and JPMorgan Chase Bank, N.A. incorporated by reference to Exhibit 10.1 to Flexsteel’s Form 8-K filed
with the Securities and Exchange Commission on June 27, 2008.
10.16 Credit Agreement dated June 26, 2008 between Flexsteel Industries, Inc. and JPMorgan Chase Bank, N.A.
incorporated by reference to Exhibit 10.2 to Flexsteel’s Form 8-K filed with the Securities and Exchange
Commission on June 27, 2008.
10.17 Amendment to Employment Agreement dated June 27, 2008 between Flexsteel Industries, Inc. and Donald
D. Dreher incorporated by reference to Exhibit 10.3 to Flexsteel’s Form 8-K filed with the Securities and
Exchange Commission on June 27, 2008.*
10.18 Flexsteel Industries, Inc. 2007 Long-Term Management Compensation Plan (incorporated by reference to
Appendix C to the Definitive Proxy Statement on Schedule 14A filed with the Commission on November 1,
2007). *
21.1
Subsidiaries of the Company. Filed herewith.
23
Consent of Independent Registered Public Accounting Firm. Filed herewith.
31.1
Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
31.2
Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
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. Filed herewith.
*Management contracts, compensatory plans and arrangements required to be filed as an exhibit to this
report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: September 15, 2008
FLEXSTEEL INDUSTRIES, INC.
By:
Ronald J. Klosterman
/S/ Ronald J. Klosterman
Chief Executive Officer
and
Principal Executive Officer
By:
/S/ Timothy E. Hall
Timothy E. Hall
Chief Financial Officer
and
Principal Financial Officer
44
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Date:
September 15, 2008
/S/ L. Bruce Boylen
L. Bruce Boylen
Chairman of the Board of Directors
Date:
September 15, 2008
Date:
September 15, 2008
Date:
September 15, 2008
Date:
September 15, 2008
Date:
September 15, 2008
Date:
September 15, 2008
Date:
September 15, 2008
Date:
September 15, 2008
Date:
September 15, 2008
/S/ Ronald J. Klosterman
Ronald J. Klosterman
Director
/S/ Jeffrey T. Bertsch
Jeffrey T. Bertsch
Director
/S/ Mary C. Bottie
Mary C. Bottie
Director
/S/ Patrick M. Crahan
Patrick M. Crahan
Director
/S/ Lynn J. Davis
Lynn J. Davis
Director
/S/ Robert E. Deignan
Robert E. Deignan
Director
/S/ Thomas E. Holloran
Thomas E. Holloran
Director
/S/ Eric S. Rangen
Eric S. Rangen
Director
/S/ James R. Richardson
James R. Richardson
Director
45
Exhibit 21.1
Subsidiaries of Flexsteel Industries, Inc.
DMI Furniture, Inc
DMI Management, Inc. *
DMI Sourcing Company, LLC *
DMI Business Consulting Company (Shenzhen) Co. Ltd.*
Home Styles Furniture Co., Ltd (Thailand) (99.99% interest) *
Vietnam Representative Office *
Desert Dreams, Inc. **
Four Seasons Inc. **
*
**
Subsidiaries of DMI Furniture, Inc.
Inactive subsidiaries
46
EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements Nos. 33-1836, 33-26267, 333-
109374, 333-140811, 333-1413, 333-45768, 333-105951, and 333-151865 on Form S-8 of our reports
dated September 10, 2008, relating to the consolidated financial statements and financial statement
schedule of Flexsteel Industries, Inc. and Subsidiaries (the “Company”) (which report expresses an
unqualified opinion and includes an explanatory paragraph relating to restatement of the consolidated
financial statements as discussed in Note 19 to the consolidated financial statements), and the effectiveness
of the Company’s internal control over financial reporting (which report expresses an adverse opinion on
the effectiveness of the Company’s internal control over financial reporting) appearing in the Annual
Report on Form 10-K of the Company for the year ended June 30, 2008.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
September 10, 2008
47
CERTIFICATION BY CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.1
I, Ronald J. Klosterman, certify that:
1.
I have reviewed this annual report on Form 10-K of Flexsteel Industries, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the Registrant as
of, and for, the periods presented in this report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d) disclosed in this report any changes in the Registrant’s internal control over financial reporting that
occurred during the Registrant’s most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Registrant’s internal control over financial reporting; and
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the Registrant’s auditors and the Audit and Ethics Committee of the
Registrant’s Board of Directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal controls over
financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant
role in the Registrant’s internal control over financial reporting.
Date: September 15, 2008
By:
/S/ Ronald J. Klosterman
Ronald J. Klosterman
Chief Executive Officer
48
CERTIFICATION BY CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.2
I, Timothy E. Hall, certify that:
1.
I have reviewed this annual report on Form 10-K of Flexsteel Industries, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the Registrant as
of, and for, the periods presented in this report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d) disclosed in this report any changes in the Registrant’s internal control over financial reporting that
occurred during the Registrant’s most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Registrant’s internal control over financial reporting; and
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the Registrant’s auditors and the Audit and Ethics Committee of the
Registrant’s Board of Directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal controls over
financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant
role in the Registrant’s internal control over financial reporting.
Date: September 15, 2008
By:
/S/ Timothy E. Hall
Timothy E. Hall
Chief Financial Officer
49
EXHIBIT 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
In connection with the Annual Report of Flexsteel Industries, Inc. (the “Company”) on Form 10-K for the fiscal year
ended June 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Ronald J.
Klosterman, Chief Executive Officer, and Timothy E. Hall, Chief Financial Officer, of the Company, certify, pursuant to 18
U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934, and;
The information contained in the Report fairly presents, in all material respects, the consolidated financial
condition and results of operations of the Company.
Date: September 15, 2008
By:
/S/Ronald J. Klosterman
Ronald J. Klosterman
Chief Executive Officer
By:
/S/ Timothy E. Hall
Timothy E. Hall
Chief Financial Officer
50
1745-annual report 2008 cover:Layout 1 9/22/08 9:44 AM Page 2
Financial Highlights
net sales
$450
400
350
300
250
200
150
100
50
dollars
1998 ’99
’00
’01
’02
’03
’04
’05
’06
’07 2008
earnings per share
$ 2.00
1.80
1.60
1.40
1.20
1.00
.80
.60
.40
.20
dollars
1998
’99
’00
’01
’02
’03
’04
’05
’06
’07
2008
return on shareholders’ equity
book value per share
$ 18
16
14
12
10
8
6
4
2
dollars
14
12
10
8
6
4
2
percen t
1998
’99
’00
’01
’02
’03
’04
’05
’06
’07 2008
1998
’99
’00
’01
’02
’03
’04
’05
’06
’07 2008
(Amounts in thousands, except per share data)
For the years ended June 30,
2008
2007
2006
Net sales . . . . . . . . . . . . . . . . . . . . . . . $ 405,655
7,596
Operating income . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . .
Average common shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends per share . . . . . . . . . . $
At June 30, . . . . . . . . . . . . . . . . . . . . .
6,596
4,236
6,574
6,611
0.64
0.64
0.52
$ 425,400
$ 426,408
14,699
14,484
9,334
6,568
6,583
8,561
7,778
4,718
6,558
6,577
$
$
1.42
1.42
0.52
$
$
0.72
0.72
0.52
Working capital . . . . . . . . . . . . . . . . $ 100,920
26,372
Property, plant & equipment (net) . . .
Total assets . . . . . . . . . . . . . . . . . . . .
179,906
Long-term debt . . . . . . . . . . . . . . . .
20,811
Shareholders’ equity . . . . . . . . . . . . .
112,752
$ 97,902
$ 95,551
28,168
185,014
21,336
112,678
24,158
184,176
21,846
106,066
Cover: Building on our tradition of excellence, Flexsteel
is diversified into a wide range of seating products,
specialized for the residential, commercial hospitality
and recreational vehicle seating markets.
Ronald J. Klosterman
President and Chief Executive Officer
L. Bruce Boylen
Chairman of the Board
Locations
Flexsteel Industries, Inc.*
Dubuque, Iowa 52001
(563) 556-7730
J. E. Gilbertson, General Manager
Flexsteel Industries, Inc.
Dublin, Georgia 31040
(478) 272-6911
M.C. Dixon, General Manager
Flexsteel Industries, Inc.
Lancaster, Pennsylvania 17604
(717) 392-4161
R. C. Adams, General Manager
* Executive Offices
Directors & Officers
L. Bruce Boylen
Chairman of the Board of Directors
Retired Vice President
Fleetwood Enterprises, Inc.
Ronald J. Klosterman
President & Chief Executive Officer
Director
Jeffrey T. Bertsch
Senior Vice President, Corporate Services
Director
Mary C. Bottie
Director
Retired Vice President
Marketing and Operations
Motorola, Inc.
Patrick M. Crahan
Senior Vice President, Commercial Seating
Director
Lynn J. Davis
Director
Retired President and Chief Operating Officer
August Technology
Audit and Ethics Committee
Thomas E. Holloran, Chairman
Mary C. Bottie
Lynn J. Davis
Robert E. Deignan
Eric S. Rangen
Nominating and Compensation
Committee
Robert E. Deignan, Chairman
Mary C. Bottie
Lynn J. Davis
Thomas E. Holloran
Eric S. Rangen
Transfer Agent and Registrar
Wells Fargo Shareowner Services
P. O. Box 64854
South St. Paul, Minnesota 55164-0854
General Counsels
Gray, Plant, Mooty, Mooty & Bennett, P. A.
Minneapolis, Minnesota
O’Connor and Thomas, P.C.
Dubuque, Iowa
Flexsteel Industries, Inc.
Riverside, California 92504
(951) 354-2440
D. J. Bashor, General Manager
Flexsteel Industries, Inc.
New Paris, Indiana 46553
(574) 831-4050
G. A. Ummel, General Manager
Flexsteel Industries, Inc.
Harrison, Arkansas 72601
(870) 743-1101
M. J. Feldman, General Manager
Robert E. Deignan
Director
Attorney at Law
Baker & McKenzie LLP
Thomas E. Holloran
Director
Professor Emeritus,
College of Business
Senior Distinguished Fellow
School of Law
University of St. Thomas
St. Paul, Minnesota
Eric S. Rangen
Director
Senior Vice President and
Chief Accounting Officer
United Health Group
James R. Richardson
Senior Vice President, Sales and Marketing
Director
Carolyn T. B. Bleile
Vice President, Merchandising
NASDAQ Global Market
NASDAQ Symbol
FLXS
Annual Meeting
December 8, 2008, 2:00 p.m.
Hilton Minneapolis
1001 Marquette Avenue
Minneapolis, Minnesota 55403
Permanent Showrooms
High Point, North Carolina
Las Vegas, Nevada
Internet
www.flexsteel.com
www.flexsteelhospitality.com
www.dmifurniture.com
Flexsteel Industries, Inc.
Commercial Seating Division
Starkville, Mississippi 39760
(662) 323-5481
R. W. McLeod, Director of Operations
Vancouver Distribution Center
Vancouver, Washington 98668
(206) 696-9955
D. J. Bashor, General Manager
DMI Furniture, Inc.
Louisville, Kentucky 40223
(502) 426-4351
D. D. Dreher, President & CEO
Thomas D. Burkart
Senior Vice President, Vehicle Seating
Kevin F. Crahan
Vice President, Commercial Seating Sales
Donald D. Dreher
Senior Vice President
President & CEO, DMI Furniture
Lee D. Fautsch
Vice President, Residential Sales
James E. Gilbertson
Vice President, Vehicle Seating
Timothy E. Hall
Vice President , Finance
Chief Financial Officer
Secretary
Michael A. Santillo
Vice President, Vehicle Seating Marketing
AFFIRMATIVE ACTION POLICY
It is the policy of Flexsteel Industries, Inc. that all
employees and potential employees shall be judged
on the basis of qualifications and ability, without
regard to age, sex, race, creed, color or national origin
in all personnel actions. No employee or applicant
for employment shall receive discriminatory treatment
because of physical or mental disability in regard to
any position for which the employee or applicant for
employment is qualified. Employment opportunities,
and job advancement opportunities will be provided
for qualified disabled veterans and veterans of the
Vietnam era. This policy is consistent with the Company’s
plan for “Affirmative Action” in implementing the
intent and provisions of the various laws relating to
employment and non-discrimination.
ANNUAL REPORT ON FORM 10-K AVAILABLE
A copy of the Company’s annual report on Form 10-K,
as filed with the Securities and Exchange Commission,
can be obtained without charge by writing to:
Office of the Secretary
Flexsteel Industries, Inc.
P. O. Box 877
Dubuque, Iowa 52004-0877
© 2007 Flexsteel Industries, Inc.
1745-annual report 2008 cover:Layout 1 9/22/08 9:44 AM Page 1
Photography used by permission of Newmar Corp. / Kountry Aire
Photography used by permission of Jumeirah Essex House
P. O. Box 877 (cid:129) Dubuque IA 52004-0877
PRST STD
U.S. Postage Paid
Permit # 477
Dubuque, IA