The Flexsteel Promise:
Quality | Stability | Capability
Flexsteel Industries, Inc.
Annual Report
fiscal year ended June 30, 2009
We promise.We deliver. Since 1893.
The Flexsteel Promise: Quality | Stability | Capability
Trust our experience.
To our shareholders:
As a respected, diversified company,
Flexsteel Industries, Inc. remains strong
and focused. Despite current economic
conditions, there are bright spots to
showcase, success stories to tell. Indeed,
the reasons to believe in the Flexsteel
Promise are many. We maintain high
standards and provide superior quality
furniture and seating products. We are
a steadfast, stable force in the industry
— financially, stylistically, and ethically.
We remain a capable, “can-do” company
managed by practical, yet forward-looking
leaders. Furthermore, in our century-long
history, we have successfully worked
through many downturns, even the
Great Depression. Flexsteel is stalwart.
We promise.
Demanding Times.
In last year’s annual report, we anticipated
that 2008’s difficult economic conditions
would most likely continue throughout
2009. Unfortunately, our forecast was
correct. The housing market continued
to decline. Stock portfolios lost value.
Unemployment rose across the country.
Banks were not eager to lend money.
Not surprisingly, consumer and business
confidence remained at an all-time low.
All these factors negatively influenced
sales revenue for Flexsteel products at
both the dealer and consumer level.
As the end of the fiscal year approached,
however, evidence indicated the economy
might begin to turn around, according
to furniture industry experts. At Flexsteel,
we believe the industry is near the bottom.
We anticipate a slow recovery beginning
in the second half of our 2010 fiscal year.
Financial Highlights
For the years ended June 30,
2009
2008
2007
Net sales . . . . . . . . . . . . . . . . . . . . . . . . .
$ 324,158
$ 405,655
$ 425,400
Operating income . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . .
(2,272)
(2,579)
(1,509)
Average common shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . .
6,576
6,576
Earnings per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends per share . . . . . . . . . . . .
At June 30,
Working capital . . . . . . . . . . . . . . . . . .
Property, plant & equipment (net) . . . . .
$
$
$
(0.23)
(0.23)
0.36
$
$
78,416
23,298
Total assets . . . . . . . . . . . . . . . . . . . . . .
150,971
Long-term debt . . . . . . . . . . . . . . . . . . .
–––
Shareholders’ equity . . . . . . . . . . . . . . .
106,998
7,596
6,596
4,236
6,574
6,611
0.64
0.64
0.52
14,699
14,484
9,334
6,568
6,583
$
$
1.42
1.42
0.52
$ 100,920
$ 97,902
26,372
179,906
20,811
112,752
28,168
185,014
21,336
112,678
Home Furnishings
When faced with the dramatically
changing economic environment, Flexsteel
responded by instituting significant and
impactful changes to our organization.
We consolidated manufacturing operations
and reduced capacity to align production
with the lower demand for domestically
manufactured product. By expanding
our warehouse and distribution system
in the eastern U.S., we provided improved
delivery service to our residential dealers
in that section of the country. Additionally,
we evaluated staffing levels in all areas
of the company and reduced employee
headcount by approximately thirty percent
during the fiscal year. Inventory levels
were reduced by $12 million and are
now generally in line with current order
levels. Customer credit exposures were
monitored more closely and along with
the lower sales volume, we were able
to realize a $12 million decline in the
amount of outstanding accounts
receivable. Finally, capital expenditures
were minimized and tight controls over
operating expenses were maintained.
Throughout the year, as the economy
deteriorated and consumer confidence
eroded to historic low levels, our objective
was to maintain our strong balance
sheet. To that end, we reduced our bank
borrowings from $26 million on June
30, 2008 to $10 million on June 30,
2009. In December, the Board of
Directors lowered the quarterly dividend
to $0.05 per share. This dividend level
recognizes the importance of the cash
dividend to our shareholders while being
responsive to our cash conservation
efforts during this business downturn.
The actions taken during this past year
have been difficult, especially severing
Above: The motion furniture category
includes recliners and reclining sofas. The
popular Oslo group is shown in Kashmira,
a family-friendly fabric that is highly
stain resistant, with a luxurious touch.
Left: Sourced products, including both
upholstery and wood, are designed by
Flexsteel talent, and built to our exacting
quality standards. This allows Flexsteel
to be competive at a variety of retail
price points.
Below: Pre-coordinated combinations
of fabric and frame offer consumers a
designer look in an easy-to-order package.
Flexsteel | 1
The Flexsteel Promise: Quality | Stability | Capability
relationships with so many long-time,
per share compared to the net income
for that reputation is our distinctive blue
loyal, and valued employees; but these
of $ 4.2 million or $.64 per share in
steel seat spring, a tangible symbol of
steps were necessary and appropriate.
We believe we have adjusted properly
to survive these current conditions while
maintaining our capabilities to grow in
the future.
Financial Overview.
Our financial performance was reflective
of the dramatically changing economic
environment that evolved during the
year. Our sales for the fiscal year 2009
were $324.2 million compared to $405.7
million in the prior year, a decrease of
the prior year.
Strong Foundation.
Across the board, dealers and consumers
know that Flexsteel represents quality
products, made and sold by quality
people. We are in a strong financial
position and can weather this economic
storm. In addition, our dealers remain
optimistic, based in part on our long-
standing relationships with them. They
long-lasting quality and a feature with
a great sales story behind it. Developed
100 years ago, the sturdy yet comfortable
seat spring is visible when a Flexsteel
product is flipped over. Guaranteed for
life, along with other seat components,
the Flexsteel spring is the foundation
for a fashionable, durable product that
consumers perceive as having excellent
quality and value.
trust Flexsteel to deliver quality products
The Flexsteel brand is also respected in
every time.
20.1%. All of our furniture applications
Flexsteel’s leadership and management
experienced double digit sales declines
team provide a wealth of knowledge
this year compared to the prior year.
and experience. Over the years, Flexsteel
Residential sales were $230.7 million,
Industries, Inc., has consistently maintained
a decrease of 10.6%. Commercial sales
fiscal responsibility and a sound balance
were $77.2 million, a decrease of 15.6%.
sheet. Backed by 116 successful years
Recreational vehicle sales experienced
of navigating through economic highs
a 71.1% decrease from $56.1 million
and lows in this industry, we possess
in the fiscal year 2008 to $16.2 million
in the current fiscal year. The decline in
recreational vehicle sales started early in
the year, impacted by higher gasoline
and diesel fuel prices. The decline
accelerated throughout the year as
credit financing at the wholesale and
consumer levels nearly disappeared.
historical perspective and great insight.
Well-positioned.
Flexsteel, with its solid financial strength,
manages more than adequate resources
to design new products and develop
the recreational vehicle seating industry,
where consumers link the name to
quality and comfort and where dealers
proudly highlight the brand on their
captain chairs and in their advertising.
In the commercial arena, the Flexsteel
brand is becoming even more power-
fully associated with fashion, quality,
and dependability.
Steady Steps.
This year, in the residential home furnishings
area, we have pushed hard to gain
market share and increase our retail
square footage. Our diverse product mix
new markets, always a positive attribute
meets the needs and budgets of every
in good economic times as well as
demographic group.
poorer ones. Because of our financial
The company experienced an operating
heft and the reliability and credibility it
loss of $2.3 million in fiscal year 2009
engenders, our customers are reassured
compared to the operating income of
and confident in their business relationships
$7.6 million in the prior year. The fiscal
with us. Both major dealers and smaller
year 2009 operating loss of $2.3 million
independent companies know that
included costs of $2.6 million associated
Flexsteel has the ability to meet commitments.
One of the best-selling product groups
has been motion furniture, in both leather
and fabric. Industry trend-watchers think
people might be opting to stay at home
rather than go out in an effort to save
money. Consumers have purchased
large, flat-screen televisions and are
with the facility and personnel consolidation
actions required during the year.
Consumers are confident about Flexsteel
building their own entertainment complexes
as well. In residential markets, ours is a
at home. They want comfortable seating.
The company reported a net loss for
brand that many people recognize and
And we are happy to provide it: reclining
the fiscal year of $1.5 million or $.23
2 | Flexsteel
associate with high quality. One reason
chairs, sofas and sectionals by Flexsteel
Hospitality Furniture
are bringing fashion and relaxation
into family rooms across the country.
Other bright spots for our residential
group include our domestically produced,
higher-end custom-order fabric business.
This is the type furniture that made
Flexsteel famous and it is a business
model that continues to thrive. Another
strong point is our South Haven program,
highly attractive stationary styles at
affordable price points.
In addition, we have seen positive growth
with our Home Styles line of fashionable,
functional wood RTA (Ready-to-Assemble)
furniture that can be ordered through
major online retailers and shipped almost
anywhere. Home Style’s value-priced
dining has been selling very well, which
can perhaps be attributed to Americans
choosing to eat at home instead of at
restaurants. Our Wynwood division, with
a complete array of style categories for
every room in the house, introduced
several new groups with retail-critical
price points this year and met with success.
Technology has been put to good use
photography courtesy Ken Smith / Design Photography
in all Flexsteel groups, but especially in
residential home furnishings where we
have advanced communication with
our dealers electronically through our
confidential “back room” website. There,
our retailers can review price lists, access
advertising information and online forms,
check product availability and much
more. Both the commercial and vehicle
seating divisions also make use of
this technology.
Likewise, consumers use computer
technology on Flexsteel.com via the Sneak
Preview program, which allows them
to try out different fabrics on different
Above: Flexsteel Hospitality offers
durable beauty to restaurant, lounge
and public spaces, such as the recently
completed Mystique Casino in
Dubuque, Iowa.
Left: As America ages, Flexsteel Senior
Living furniture is designed to combine
the beauty and comfort of home with
cleaning and maintenance needs of the
adult care and assisted living environments.
Below: In the lodging industry, the
durability and comfort of Flexsteel sofas
and sleepers enhance guest room options.
Flexsteel | 3
The Flexsteel Promise: Quality | Stability | Capability
frames and create their own custom
furniture. Then they can locate the
nearest dealer on the website and
go “live” to finalize their purchase.
In our commercial division, highlights
include senior living, which was not
affected as severely by the credit crisis
and we believe is a growth area as “baby
boomers” age and retire. Flexsteel’s
U.S. General Services Administration
(GSA) contracts, which provide seating
for federal properties, are also healthy
and may further benefit from the current
administration’s policies. Franchise mid-
scale and upper-scale hotels accounted
for a significant portion of Flexsteel’s
hospitality shipments for this year.
From an operations standpoint, the
commercial division experienced dramatic
quality improvements, better space
utilization, and lower inventory by
implementing a new lean manufacturing
discipline at the Starkville, Mississippi,
plant. We anticipate greater efficiency
and flexibility in the future based on
these changes.
As mentioned above, the commercial
division also makes use of three-dimension
computer software that lets interior
designers visualize their custom choices
for hospitality furniture. This gives
Flexsteel a competitive advantage in
the marketplace.
In DMI Office, GSA sales were stronger
than in the past and could also increase
with the current administration. This
promising. In addition, DMI Office has
been successful at maintaining core
placements with their valued dealers.
Flexsteel was cited as a cornerstone of
the industry and well-deserving of the
award, according to Furniture Today
While this was not a banner year for our
vehicle and marine seating division
due to economic conditions, the division
continues to diversify and adapt. A new
“Flex-O-Bed” was introduced which will
be popular in motorized and towable
products because of its value and
space-saving features. A high quality
inflatable mattress inside a beautifully
designed compact seating system, the
Flex-O-Bed was created in response to
the popularity of “air sleep” technology.
Flexsteel is a brand leader in vehicle
seating and marketing efforts have
centered on emphasizing Flexsteel
strengths such as engineering, fashion,
manufacturing, and financial stability.
With respect to technology, the division
has employed new laser-cutting equipment
that has become a great asset for the
flexible manufacturing of high-strength
metal parts.
Leading the Industry.
One of the nation’s top-ten home
furnishings manufacturers, Flexsteel is
known in the industry as a superior
company with whom to do business.
Recently, that reputation was confirmed
when Furniture Today magazine named
Flexsteel “Supplier of the Year for 2009.”
The magazine, the foremost home
editor in chief, Ray Allegrezza, who also
calls Flexsteel an “American success story.”
“The company, which makes seating
products for virtually every application,
has more than a 100-year-history as
a credible, reliable, and innovative
supplier,” says Allegrezza.
We are honored to accept this award
and are proud to count this special
designation as one of the high points
of the year.
Environmental
Stewardship.
We are at the forefront in efforts to be
good stewards of the planet. In
September 2008, the Flexsteel Board
of Directors announced an environmental
policy statement, which states, in part,
that our company officers will set the
tone at the top to guide the management
team in their efforts to improve the
environment we directly impact. We
pledge to choose sustainable business
practices and reduce our environmental
footprint through the implementation
of a variety of initiatives.
To that end, we have met the requirements
for the American Home Furnishings
Association’s (AHFA) Enhancing
Furniture’s Environmental Culture (EFEC)
program and are working toward
meeting the next level of its Sustainable
by Design program.
commercial group is working to streamline
furnishing trade publication, announced
We have introduced a new “green”
and enhance product distribution and
add more internet retailers to the mix,
as this channel appears especially
4 | Flexsteel
the award in June. The award will be
officially presented in December during
a conference in Naples, Florida.
product line, called Renew, for the commercial
division. The Renew specifications are
available on a wide variety of our styles
Vehicle Seating
and are created using recycled products,
natural materials, and components with
lower chemical emissions. For example,
all springs are manufactured using
recycled metal scraps, deck pads that
cover the springs are composed of fibers
from mostly recycled textile scraps, and
the resin used to produce plywood in the
frames will not contain formaldehyde.
Environmental Stewardship
In addition, we have partnered with several
suppliers to execute large-scale recycling
plans at our plants and have communicated
our mission to all employees through
brochures and signage. We gather and
recycle many items, including: office and
computer paper, almost all plastics,
bubble wrap, spray can caps, screws,
bolts, copper and brass, wood pallets,
frames and parts, metal, cardboard,
plus fabric and leather, and much more.
We have also begun to implement
energy-efficient changes to our plant
lighting, starting with our Dublin, Georgia,
production facility.
Dedicated to the cause of preserving
our resources and enhancing our
environment, we will reduce, reuse, and
recycle whenever possible. It’s our mission.
Prepared for tomorrow.
Although we faced economic challenges
beyond our control in the last two fiscal
years, we are resolute that Flexsteel is
in an excellent position to remain an
industry-leading company, respected by
our dealers, vendors, and consumers alike.
By reducing costs, right-sizing staff,
being smart about inventory, better
photography courtesy Winnebago Industries
photography courtesy Harris Flotebote
Above: The revolutionary new Winnebago
Via offers full Class A comfort, unparalleled
fuel economy and SmartSpace™ design
elements you won’t find in any other motor
home. It’s the first Class A motor home
built on the versatile Dodge Sprinter chassis,
featuring a Mercedes-Benz® turbo-diesel
engine and automotive drivability with
comfortable Flexsteel seating.
Left: Royal Heritage pontoons from Harris
FloteBote are designed with entertaining
in mind, with deep, curvaceous reclining
seating featuring our patented W-Flex
seat spring unit.
Below: The Flex-O-Bed features a light-
weight mechanism for motor home and
travel trailer installations and options for
an air mattress and storage.
Flexsteel | 5
The Flexsteel Promise:
Quality | Stability | Capability
DMI
balancing domestic and outsourced
many customers for their continued
production, and prudently protecting
confidence in and support of the many
your investment, Flexsteel will prevail.
products and services we provide. We
By attracting and keeping creative artisans,
are grateful to vendors for being our
motivated sales people and executive
partners in providing fashionable,
staff, and by working with dependable
dependable and quality products. Lastly,
vendors, we will continue to flourish.
we are most appreciative for all our
By incorporating “green” products and
practices, meeting the needs of a great
variety of customers and demographic
groups, developing new products and
becoming more adaptive, we will continue
associates who have worked tirelessly
and performed at a higher level to
meet the many challenges that we
face during this period of economic
recession and company consolidation.
to be successful.
The economic environment will improve
Finally, by selling high quality products
through our dedicated dealers, we will
and because of all of you, Flexsteel
will grow and prosper in the future.
remain an award-winning company, a
It’s the Flexsteel Promise:
true American success story.
One reason Flexsteel Industries, Inc.,
maintains this level of success is due
to our many long-term shareholders
who are confident that the Board and
management team will lead us through
this tumultuous time. Their unwavering
belief in our leadership is instrumental
and we thank them. We also thank our
Quality. Stability. Capability.
A promise you can believe.
Ronald J. Klosterman
President and Chief Executive Officer
L. Bruce Boylen
Chairman of the Board
Top: DMI Office is a
leader in the mid-market
commercial office industry.
The Arlington collection
features updated classic
design elements creating
a warm, transitional style
aptly suited for today’s
office environment.
Center: During the past
year, Wynwood has
responded to a challenging
economic environment
by introducing eleven new collections at price points critical to
retail. Bacchus is a collection of bedroom, dining, occasional
and entertainment furniture.
Above: With its RTA line-up, Home Styles is a perfect resource
for the bourgeoning web-based retail marketplace. The Bedford
entertainment credenza features an ebony finish on sustainable
Asian hardwood.
Former President and CEO Bruce Lauritsen Inducted into American Furniture Hall of Fame.
Flexsteel president and
CEO from 1993-2006,
Bruce Lauritsen, was
recently inducted into
the American Furniture
Hall of Fame in High
Point, North Carolina.
Lauritsen, who died in May 2007 at age 64 after
fighting pancreatic cancer, was awarded the
honor posthumously in fall 2008 at the
American Furniture Hall of Fame Foundation’s
6 | Flexsteel
Induction Banquet. At this fall’s annual banquet,
he will again be honored with a video presentation
about his life and career.
as Flexsteel CEO were many, and he served on
the boards of many industry- and community-
related organizations.
Bruce Lauritsen joined Flexsteel as a Sales
Trainee in 1968 and rose through the ranks
to become President in 1989. During his tenure,
he led Flexsteel to increased sales, expanded
markets and enhanced brand recognition.
Lauritsen was a visionary and a dedicated
leader who was well liked throughout the
company and the industry. His accomplishments
Founded in 1990, the American Furniture Hall
of Fame currently has 78 inducted members.
Each year, six or seven industry leaders are
nominated; two are chosen. Individuals are
judged on the five criteria: integrity, leadership,
milestones and success in the industry, service
to industry, and civic, community, and charitable
activities and contributions.
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, 2009
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)
Registrant’s telephone number, including area code:
(I.R.S. Employer Identification No.)
52004-0877
(Zip 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 whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes [ ] No [ ]
Indicate by check mark 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 31, 2008 (which
was the last business day of the registrant’s most recently completed second quarter) was $26,794,561.
Indicate the number of shares outstanding of each of the registrant’s classes of Common Stock, as of the latest practicable date. 6,576,373 Common
Shares ($1 par value) as of August 26, 2009.
DOCUMENTS INCORPORATED BY REFERENCE
In Part III, portions of the registrant’s 2009 Proxy Statement to be filed with the Securities and Exchange Commission within 120 days of the
Registrant’s fiscal year end.
1
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. No single customer accounted for more than
10% of net sales.
The Company has one active wholly-owned subsidiary: DMI Furniture, Inc. (“DMI”), which is a Louisville,
Kentucky-based, manufacturer, importer and marketer of residential and commercial office furniture with
manufacturing and warehouses in Indiana and manufacturing sources in Asia; DMI’s divisions are WYNWOOD,
Homestyles and DMI Commercial Office Furniture.
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. 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):
FOR THE YEARS ENDED JUNE 30,
2008
258,084
56,090
91,481
405,655
2009
230,727
16,197
77,234
324,158
2007
259,710
66,165
99,525
425,400
$
$
$
$
Residential ....................................... $
Recreational Vehicle .......................
Commercial ......................................
$
2
Manufacturing and Offshore Sourcing
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.
We operate manufacturing facilities that are located in Arkansas, California, Georgia, Indiana, Iowa,
Mississippi and Juarez, Mexico. 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.
Competition
The furniture industry is highly competitive and includes a large number of domestic and foreign
manufacturers and distributors, none of which dominates the market. The competition has increased from foreign
manufacturers, in countries such as China, which have lower production costs, and through direct importing by certain
large retailers. 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 than we have. Our products
compete based on style, quality, price, delivery, service and durability. We believe that our manufacturing
capabilities, facility locations, commitment to customers, product quality and value and experienced production,
marketing and management teams, aided by offshore sourced components and 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, 2009, the Company had 76 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, 2009
$ 35,200
June 30, 2008
$ 45,700
June 30, 2007
$ 50,900
Raw Materials
The Company utilizes 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.
Working Capital Practices
For a discussion of the Company’s working capital practices, see “Liquidity and Capital Resources” in Item 7
of this Annual Report on Form 10-K.
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.
3
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 2011 to
2020. 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,
2009
2008
2007
Expenditures
$2,680
$3,130
$3,270
Employees
The Company had approximately 1,400 employees as of June 30, 2009 including approximately 300
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.
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.
The current economic downturn could continue to result in a decrease in our sales and earnings.
The current economic downturn has caused a decrease in our sales and earnings, particularly in recreational
vehicle product applications. This economic downturn has and will likely continue to affect near-term consumer-
spending habits by decreasing the overall demand for home furnishings, recreational vehicles and commercial
products. Interest rates, consumer confidence, fuel costs, credit availability, unemployment levels, housing starts, and
geopolitical factors that affect many other businesses are particularly significant to our business because many of our
products are discretionary consumer goods.
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 and distributors. 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
4
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.
Our offshore capabilities 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.
We acquire a portion of our finished goods and components used in our manufacturing operations from
foreign vendors. These vendors are located primarily in Southeast Asia. The delivery of goods from these vendors may
be delayed for reasons not typically encountered with U.S. suppliers including shipment delays caused by customs,
dockworker labor issues, changes in political, economic and social conditions, laws and regulations. This could make
it more difficult to service our customers resulting in lower sales and 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.
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 do not utilize 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 and have a negative impact on product margin. 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.
If we experience the loss of large customers through business failures (or for other reasons) or any
extended business interruptions at our manufacturing facilities, this could decrease our future sales and
earnings. 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.
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.
Furniture is a styled product and is subject to rapidly changing consumer trends and tastes and 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.
5
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 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.
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; 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.
Terms of collective bargaining agreements and labor disruptions could adversely impact our results
of operations.
We employ approximately 1,400 people, 20% 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.
Item 1B. Unresolved Staff Comments
None.
6
Item 2.
Properties
The Company owns the following facilities as of June 30, 2009:
Location
Dubuque, Iowa
Lancaster, Pennsylvania
Riverside, California
Dublin, Georgia
Harrison, Arkansas
Starkville, Mississippi
New Paris, Indiana
Huntingburg, Indiana
Approximate
Size (square feet)
853,000
216,000
236,000
69,000
300,000
221,000
349,000
168,000
612,000
79,000
Principal Operations
Manufacturing, Warehouse and Corporate Offices
Warehouse
Manufacturing
Warehouse
Manufacturing
Manufacturing
Manufacturing
Held for sale
Warehouse
Manufacturing
The Company leases the following facilities as of June 30, 2009:
Location
Vancouver, Washington
Louisville, Kentucky
Ferdinand, Indiana
Juarez, Mexico
Approximate
Size (square feet)
Principal Operations
16,000
15,000
158,000
48,000
Warehouse
Administrative Offices
Warehouse
Manufacturing
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.
Item 4.
Submission of Matters to a Vote of Security Holders
During the quarter ended June 30, 2009 no matter was submitted to a vote of security holders.
7
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, La-Z-Boy Inc., Natuzzi S.P.A., and Stanley Furniture Inc.
Flexsteel
Peer Group
NASDAQ
2004
100.00
100.00
100.00
2005
62.81
90.14
101.09
2006
59.26
98.61
107.64
2007
68.64
94.53
129.93
2008
55.49
66.96
115.40
2009
43.36
33.43
93.33
The NASDAQ Global Market is the principal market on which the Company’s common stock is traded.
Sale Price of Common Stock *
Fiscal 2009
Fiscal 2008
Cash Dividends
Per Share
First Quarter............
Second Quarter .......
Third Quarter ..........
Fourth Quarter ........
$
$
High
12.18
10.99
7.96
9.00
Low
9.50
6.68
5.11
4.98
$
High
14.75 $
14.86
14.50
13.98
* Reflects the market price as reported on The NASDAQ Global Market.
Low
12.92 $
11.60
11.00
11.01
Fiscal 2009
0.13
0.13
0.05
0.05
Fiscal 2008
$
0.13
0.13
0.13
0.13
The Company estimates there were approximately 1,600 holders of common stock of the Company as of June
30, 2009.
There were no repurchases of the Company’s common stock during the quarter ended June 30, 2009.
8
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 certain
ratios and per share data)
SUMMARY OF OPERATIONS
Net sales .................................................... $
Cost of goods sold ....................................
Operating (loss) income ...........................
Interest and other income .........................
Interest expense.........................................
(Loss) income before income taxes .........
Income tax (benefit) provision (5) .........
$
Net (loss) income (1) (2) (3) (4) (5) .......
(Loss) earnings per common share:
(1) (2) (3) (4) (5)
Basic .......................................................
Diluted ....................................................
Cash dividends declared per
common share ........................................
SELECTED DATA AS OF JUNE 30
Average common shares outstanding:
Basic .......................................................
Diluted ....................................................
Total assets ................................................ $
Property, plant and equipment, net ..........
Capital expenditures .................................
Long-term debt .........................................
Working capital (current assets less
current liabilities)...................................
Shareholders’ equity ................................. $
SELECTED RATIOS
Net (loss) income, as a percent of sales...
Current ratio ..............................................
Return on ending shareholders’ equity,
as a percent of sales...............................
Average number of employees ................
2009
2008
2007
2006
2005
$
$
324,158 $
263,083
(2,272)
661
969
(2,579)
(1,070)
405,655
327,165
7,596
469
1,468
6,596
2,360
425,400
344,177
14,699
1,277
1,491
14,484
5,150
(1,509)
4,236
9,334
426,408
345,068
8,561
775
1,557
7,778
3,060
4,718
$
410,023
334,978
7,258
628
990
6,896
1,990
4,906
(0.23)
(0.23)
0.64
0.64
1.42
1.42
0.72
0.72
0.75
0.74
0.36
$
0.52
$
0.52
$
0.52
$
0.52
6,576
6,576
150,971 $
23,298
1,203
–
6,574
6,611
179,906
26,372
1,228
20,811
$
6,568
6,583
185,014
28,168
10,839
21,336
$
6,558
6,577
184,176
24,158
3,411
21,846
$
6,531
6,601
165,221
26,141
3,347
12,800
78,416
106,998 $
100,920
112,752
$
97,902
112,679
$
95,551
106,066
83,952
103,361
$
(0.5)
3.2 to 1
(1.4)
1,600
1.0
3.5 to 1
2.2
3.2 to 1
3.8
2,140
8.3
2,290
1.1
2.9 to 1
4.5
2,400
1.2
3.0 to 1
4.8
2,460
(1) Fiscal 2009 net loss and per share amounts reflect facility consolidation and other costs (after tax) of $1.5 million or
$(0.23) per share.
(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.
(3) Fiscal 2009, 2008, 2007 and 2006 net (loss) 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,
$0.1 million, $0.2 million and $0.4 million (after tax), respectively, or $0.02 per share, $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.
9
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
The following analysis of the results of operations and financial condition of the Company should be read in
conjunction with the consolidated financial statements and related notes included elsewhere in this 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. Management
assesses the inventory on hand and if necessary writes down the obsolete or excess inventory to market.
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, 2009, 2008 and 2007. Amounts presented are percentages of the
Company’s net sales.
Net sales ...........................................................
Cost of goods sold ...........................................
Gross margin....................................................
Selling, general and administrative ................
Facility consolidation and other charges........
Gain on sale of land and building...................
Operating (loss) income..................................
Other expense, net ...........................................
(Loss) income before income taxes................
Income tax benefit (provision) ......................
Net (loss) income.............................................
10
FOR THE YEARS ENDED JUNE 30,
2008
100.0%
(80.7)
19.3
(17.5)
–
–
1.8
(0.2)
1.6
(0.6)
1.0%
2009
100.0%
(81.2)
18.8
(18.8)
(0.8)
–
(0.8)
0.0
(0.8)
0.3
(0.5)%
2007
100.0%
(80.9)
19.1
(16.7)
–
1.0
3.4
0.0
3.4
(1.2)
2.2%
Fiscal 2009 Compared to Fiscal 2008
Net sales for the fiscal year ended June 30, 2009 were $324.2 million compared to $405.7 million in the prior fiscal
year, a decrease of 20.1%. Residential net sales were $230.7 million compared to $258.1 million in the fiscal year
ended June 30, 2008, a decrease of 10.6%. Commercial net sales were $77.2 million for the fiscal year ended June 30,
2009, a decrease of 15.6% from net sales of $91.5 million for the fiscal year ended June 30, 2008. Recreational
vehicle net sales were $16.2 million for the fiscal year ended June 30, 2009, a decrease of 71.1% from $56.1 million
for the fiscal year ended June 30, 2008.
The recreational vehicle industry continues to be the hardest hit product category with the initial impact of high fuel
costs compounded by credit tightening and lack of consumer confidence in the economy as a whole. Recreational
vehicle industry published data indicates that motor home unit sales, the sector that encompasses the majority of our
sales, are down nearly 80%. The commercial seating product category held up well early in our fiscal year, but fell
considerably as the U. S. economy contracted and credit tightened. We believe that our residential product category
has performed reasonably well in relation to our competition. However, residential furniture remains a deferrable
purchase item and is adversely impacted by tighter consumer credit, higher unemployment and low levels of consumer
confidence.
Gross margin for the fiscal years ended June 30, 2009 and 2008 was 18.8% and 19.3%, respectively. The decrease in
gross margin percentage for the year is primarily due to an approximate $2.0 million adjustment to realizable value on
inventory and to a lesser extent to under-utilization of capacity on significantly lower sales volume. These factors were
partially offset by a LIFO benefit increase of approximately $0.6 million.
Selling, general and administrative expenses were 18.8% and 17.5% of net sales for the fiscal years ended June 30,
2009 and 2008, respectively. The percentage increase in selling, general and administrative costs is primarily due to
under-absorption of fixed costs on the lower sales volume and the lag time in reducing advertising and other sales
support costs to the lower volume.
The Company recorded $2.6 million in facility consolidation and employee separation costs during fiscal year 2009.
These costs related to consolidating manufacturing operations and workforce reductions to bring production capacity
in line with current and expected demand for the Company’s products.
Interest expense decreased $0.5 million to $1.0 million for the fiscal year ended June 30, 2009 due to lower
borrowings and interest rates.
Although the Company’s full year tax rate is typically in the 35% - 39% range, fiscal year ended June 30, 2009 reflects
an effective income tax benefit rate of 41.5% due to losses or low level of earnings in various tax jurisdictions. The
effective income tax expense rate was 35.8% for the fiscal year ended June 30, 2008.
The above factors resulted in net loss for the fiscal year ended June 30, 2009 of $1.5 million or $0.23 per share
compared to net income of $4.2 million or $0.64 per share for the fiscal year ended June 30, 2008.
All earnings per share amounts are on a diluted basis.
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
on sale of capital assets” in the Consolidated Statements of Operations. The Company also realized a non-taxable gain
11
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 Operations.
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.
Liquidity and Capital Resources
Net cash provided by operating activities was $17.3 million for fiscal year 2009 compared to $8.7 million in fiscal year
2008. Cash from operating activities was used primarily to reduce borrowings by $16.0 million and pay dividends of
$2.9 million. Significant changes in working capital from June 30, 2008 to June 30, 2009 included decreased accounts
receivable of $12.5 million, decreased inventory of $11.9 million and decreased accounts payable of $4.8 million. The
decrease in receivables is related to lower shipment volume. Lower customer demand for our products reduced
production levels and finished product purchases which resulted in an inventory decrease. The decrease in accounts
payable related to lower purchase volume based on current demand. The Company expects that due to the nature of
our operations that there will be continuing fluctuations in accounts receivable, inventory, accounts payable, and cash
flows from operations due to the following: (i) we purchase selected inventory items from offshore suppliers with long
lead times and depending on the timing of the delivery of those orders inventory levels can be greatly impacted, and
(ii) we have various customers that purchase large quantities of inventory periodically 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 provided by investing activities was $0.4 million in fiscal year 2009 compared to cash used in investing
activities of $1.0 million in fiscal year 2008. Proceeds from the sale of investments were $1.5 million. Proceeds from
the sale of capital assets were $0.7 million. Capital expenditures were $1.2 million for the fiscal year ended 2009.
Depreciation and amortization expense was $3.7 million and $4.4 million for the fiscal years ended June 30, 2009 and
2008, respectively. The Company expects that capital expenditures will be approximately $2.0 million in fiscal year
2010.
Net cash used in financing activities was $18.8 million in fiscal year 2009 compared to $5.8 million in fiscal year
2008. Cash from operating activities was used to reduce borrowings by $16.0 million and pay dividends of $2.9
million. Borrowings were reduced by $2.4 million and dividends paid were $3.4 million in fiscal year 2008.
Management believes that the Company has adequate cash and credit arrangements to meet its operating and capital
requirements for fiscal year 2010. In the opinion of management, the Company’s liquidity and credit resources
provide it with the ability to react to opportunities as they arise, to pay quarterly dividends to its shareholders, and to
purchase productive capital assets that enhance safety and improve operations. However, should the current economic
conditions continue for an extended period of time or deteriorate significantly, we would further evaluate all uses of
cash and credit facilities, including the payment of dividends and purchase of capital assets.
12
At June 30, 2009, the Company has no long-term debt obligations and therefore, no interest related to long-term debt.
The following table summarizes the Company’s contractual obligations at June 30, 2009 and the effect these
obligations are expected to have on the Company’s liquidity and cash flow in the future (in thousands):
Notes payable ..................................................
Operating lease obligations.............................
Total contractual obligations
$
$
Total
10,000
5,775
15,775
Less than
1 Year
10,000
2,022
12,022
$
$
$
$
1 - 3
Years
–
3,110
3,110
3 - 5
Years
–
643
643
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 $5.0 million at June 30, 2009. At June 30, 2009 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 payments, if any, cannot be reasonably estimated.
See Note 7 to the Consolidated Financial Statements on page 23 of this Annual Report on Form 10-K.
Financing Arrangements
Outlook
We believe that the consolidation of manufacturing operations and workforce reductions that the Company completed
during the fiscal year has brought production capacity and fixed overhead more in line with current and expected
demand for our products. Company wide employment has been reduced approximately 30% over the past year
through plant closures and workforce reductions related to business conditions.
Demand for our products is dependent on factors such as consumer confidence, affordable housing, reasonably
attainable financing and an economy with low levels of unemployment and high levels of disposable income. These
factors remain in depressed positions, and indications are that they will remain that way in the near-term. We are not
anticipating significant improvements in market conditions at this time, and are managing our business on that basis.
While we expect that current business conditions will persist for the remainder of calendar 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 when business
conditions improve. We will maintain our focus on a strong balance sheet during these challenging economic times
through emphasis on cash flow and improving profitability.
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.
Foreign Currency Risk – During fiscal years 2009, 2008 and 2007, 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, 2009, a hypothetical 100 basis point increase in short-term interest rates would
decrease annual pre-tax earnings by approximately $50,000, assuming no change in the volume or composition of
debt. As of June 30, 2009, the Company has effectively fixed the interest rates at 5.0% on approximately $10.0 million
of its debt through the use of interest rate swaps, and the above estimated earnings reduction takes these swaps into
13
account. On July 31, 2009, 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 4.9% on approximately $5.0 million of its debt through the use of
interest rate swaps. As of June 30, 2009 and 2008, the fair value of these swaps is a liability of approximately $0.3
million and is included in other long-term liabilities.
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.
Item 8.
Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm ............................................................................................. 15
Consolidated Balance Sheets at June 30, 2009 and 2008................................................................................................... 16
Consolidated Statements of Operations for the Years Ended June 30, 2009, 2008, and 2007........................................ 17
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended June 30, 2009, 2008, and 2007 ... 18
Consolidated Statements of Cash Flows for the Years Ended June 30, 2009, 2008, and 2007....................................... 19
Notes to Consolidated Financial Statements ...................................................................................................................... 20
Page(s)
14
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, 2009 and 2008, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three years in the period
ended June 30, 2009. 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. The Company is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no such opinion.
An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, 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, 2009 and 2008, and the
results of their operations and their cash flows for each of the three years in the period ended June
30, 2009, 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.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
August 26, 2009
15
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..............................................................
Investments......................................................................................
Trade receivables – less allowance for doubtful
accounts: 2009, $1,760,000; 2008, $2,110,000 ..........................
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 13)
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 2009, 6,576,373 shares; 2008, 6,575,633 shares...
Additional paid-in capital ...............................................................
Retained earnings............................................................................
Accumulated other comprehensive (loss) income ........................
Total shareholders’ equity .........................................................
TOTAL.................................................................................
JUNE 30,
2009
2008
$
1,713,717
–
$
2,841,323
1,160,066
31,282,511
73,844,345
3,960,000
3,912,528
114,713,101
23,297,643
2,145,187
10,815,052
150,970,983
9,744,658
10,000,000
4,937,712
6,519,538
5,095,162
36,297,070
–
4,991,435
2,684,914
43,973,419
6,576,373
4,369,263
97,815,822
(1,763,894)
106,997,564
150,970,983
$
$
$
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
$
$
$
See accompanying Notes to Consolidated Financial Statements.
16
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
FOR THE YEARS ENDED JUNE 30,
2008
2007
2009
NET SALES ..........................................................................................
COST OF GOODS SOLD....................................................................
GROSS MARGIN.................................................................................
SELLING, GENERAL AND ADMINISTRATIVE ..........................
FACILITY CONSOLIDATION AND OTHER CHARGES ............
GAIN ON SALE OF CAPITAL ASSETS ..........................................
OPERATING (LOSS) INCOME.........................................................
OTHER INCOME (EXPENSE):
Interest and other income ...................................................................
Interest expense ...................................................................................
Total............................................................................................
(LOSS) INCOME BEFORE INCOME TAXES.................................
INCOME TAX BENEFIT (PROVISION) .........................................
NET (LOSS) INCOME ........................................................................
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
Basic .................................................................................................
Diluted ..............................................................................................
(LOSS) EARNINGS PER SHARE OF COMMON STOCK:
Basic .................................................................................................
Diluted ..............................................................................................
CASH DIVIDENDS DECLARED PER COMMON SHARE ..........
$
$
$
$
$
324,157,556
(263,083,274)
61,074,282
(60,791,151)
(2,554,771)
–
(2,271,640)
661,058
(968,762)
(307,704)
(2,579,344)
1,070,000
(1,509,344)
6,576,373
6,576,373
(0.23)
(0.23)
0.36
$
$
$
$
$
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
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
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
See accompanying Notes to Consolidated Financial Statements.
17
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders’ Equity
Total Par
Value of
Common
Shares ($1 Par)
Additional
Paid-In
Capital
Accumulated
Other
Retained
Earnings
Comprehensive
(Loss) Income
Total
$
6,563,750
$
3,670,152
$
95,065,832
$
766,112
$
106,065,846
1,566
5,151
–
–
–
–
–
–
–
6,570,467
–
1,642
3,524
–
–
–
–
–
–
6,575,633
10,891
58,413
–
274,000
–
–
–
–
–
4,013,456
–
13,314
43,226
–
186,000
–
–
–
–
4,255,996
–
–
–
–
–
–
–
(3,415,242)
9,333,987
100,984,577
(110,000)
–
–
–
–
–
–
(3,418,551)
4,236,405
101,692,431
740
(733)
–
–
–
–
114,000
–
–
–
–
–
–
–
301,611
–
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
7
(1,022,289)
–
(1,022,289)
114,000
(1,414)
(1,414)
–
–
–
6,576,373
–
–
–
4,369,263
–
(2,367,265)
(1,509,344)
97,815,822
$
$
$
(968,518)
–
–
(1,763,894)
(968,518)
(2,367,265)
(1,509,344)
106,997,564
$
$
Balance at July 1, 2006...................
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................
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................
Issuance of common stock:
Stock options exercised, net.....
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 loss..........................................
Balance at June 30, 2009................
See accompanying Notes to Consolidated Financial Statements.
18
FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
FOR THE YEARS ENDED JUNE 30,
2008
2007
2009
OPERATING ACTIVITIES:
Net (loss) income ........................................................................................... $
Adjustments to reconcile net (loss) 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 ...........................................................
Gain on sale of investments.........................................................................
Impairment of long-lived 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 operating activities.....................................................
INVESTING ACTIVITIES:
Purchases of investments.............................................................................
Proceeds from sales of investments ............................................................
Proceeds from sale of capital assets............................................................
Capital expenditures.....................................................................................
Net cash provided by (used in) investing activities .....................................
(1,509,344) $
4,236,405
$
9,333,987
3,733,353
449,296
114,000
14,048
(251,909)
(462,473)
137,638
12,500,712
11,947,055
(781,872)
(287,869)
(4,848,593)
(2,917,889)
(177,938)
(352,110)
17,306,105
(520,233)
1,460,320
676,016
(1,202,993)
413,110
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
(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:
Proceeds from (repayments of) short-term borrowings, net .....................
Repayment of long-term borrowings..........................................................
Dividends paid .............................................................................................
Proceeds from issuance of common stock .................................................
Net cash used in financing activities ............................................................
4,857,055
(20,810,597)
(2,893,279)
–
(18,846,821)
(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)
(Decrease) increase in cash and cash equivalents........................................
Cash and cash equivalents at beginning of year ..........................................
Cash and cash equivalents at end of year .....................................................
(1,127,606)
2,841,323
1,713,717
$
$
1,940,997
900,326
2,841,323
(1,085,442)
1,985,768
900,326
$
FOR THE YEARS ENDED JUNE 30,
2008
2009
2007
SUPPLEMENTAL INFORMATION
CASH PAID DURING THE PERIOD FOR:
Interest ......................................................................................................... $
Income taxes (refunded) paid ..................................................................... $
979,000
$
(62,000) $
1,473,000
3,205,000
$
$
1,517,000
3,551,000
See accompanying Notes to Consolidated Financial Statements.
19
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”),
which is a Louisville, Kentucky-based, manufacturer, importer and marketer of residential and commercial office
furniture with manufacturing and warehouses in Indiana and manufacturing sources in Asia; DMI’s divisions are
WYNWOOD, Homestyles and DMI Commercial Office Furniture.
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. The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair
Value Measurements, subject to the deferral provisions of FASB Staff Position 157-2, Effect Date of FASB Statement
No. 157, as of July 1, 2008. SFAS 157 established a framework for measuring fair value and expanded disclosures about
fair value measurements. SFAS 157 applies to all assets and liabilities that are measured and reported on a fair value
basis. This enables the reader of the financial statements to assess the inputs used to develop those measurements by
establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. The
statement requires that each asset and liability carried at fair value be classified into one of the following categories:
Level 1: Quoted market prices in active markets for identical assets and liabilities; Level 2: Observable market based
inputs or unobservable inputs that are corroborated by market data; or Level 3: Unobservable inputs that are not
corroborated by market data.
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 is 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.
20
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. During the first six months of fiscal
year 2009, the Company reviewed its long-lived assets in connection with the commencement of facility consolidation
activities and identified $0.1 million of impaired machinery and equipment assets. The asset impairment was recorded in
the “Facility Consolidation and Other Charges” line in the Consolidated Statements of Operations. At June 30, 2009, no
additional impairment of long-lived assets was identified.
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 collectibility 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 $4.5 million, $4.6 million and $4.6
million in fiscal 2009, 2008 and 2007, 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 $2.7
million, $3.1 million and $3.3 million in fiscal 2009, 2008 and 2007, 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 $10.0 million with a weighted average fixed rate of 5.0% at June 30, 2009. On
July 31, 2009, a $5.0 million swap matured. Excluding the subsequently matured swap, the Company has effectively
fixed its interest rate at 4.9% on approximately $5.0 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 (loss)
income. The cumulative fair value of the swaps was a liability of approximately $0.3 million as of June 30, 2009 and
2008 and is reflected as other liabilities on the accompanying consolidated balance sheets. 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. The Company recognizes the fair value of the swap liability as a Level 2 valuation.
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 consolidated balance sheets.
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
21
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.
(LOSS) EARNINGS PER SHARE – basic (loss) 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 and 15,036 shares in fiscal 2008 and
2007, respectively. The Company calculates the dilutive effect of outstanding options using the treasury stock method.
The dilutive effect of 42,539 shares of stock options is excluded in fiscal 2009 because the net loss caused the effect of
the options to be anti-dilutive. Options to purchase 759,689 shares, 567,411 shares and 572,200 shares of common stock
were outstanding in fiscal 2009, 2008 and 2007, 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 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 fair value, and expands disclosures about fair value measurements. The Company adopted SFAS No. 157 on
July 1, 2008 for all assets and liabilities measured at fair value except for nonfinancial assets and nonfinancial liabilities
measured at fair value on a nonrecurring basis, as permitted by FASB Staff Position No. 157-2, Effective Date of FASB
Statement No. 157. The adoption did not have a material impact on the Company’s 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 chose not to adopt SFAS No. 159.
In March 2008, the Financial Accounting Standards Board (“FASB”) issued statement of Financial Accounting
Standards No.161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS No. 161”), which require
additional disclosure related to derivative instruments and hedging activities. The provisions of SFAS No. 161 are
effective as of the beginning of the Company’s 2010 fiscal year. Adoption of SFAS No. 161 will result in enhanced
disclosure regarding the Company’s derivatives.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS No. 165”), which provides guidance on
management’s assessment of subsequent events. SFAS No. 165 clarifies that management must evaluate, as of each
reporting period, events or transactions that occur after the balance sheet date through the date that the financial
statements are issued or are available to be issued. In addition to current disclosure requirements, SFAS No. 165 also
requires disclosure of the date through which subsequent events have been evaluated. For the fiscal year ended June 30,
2009, the Company evaluated subsequent events through August 26, 2009.
2. INVESTMENTS
At June 30, 2008, the Company had available-for-sale securities consisting of equity securities that were sold during
fiscal year 2009. These securities were 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.
22
3. INVENTORIES
Inventories valued on a LIFO basis would have been approximately $2.2 million and $3.3 million higher at June 30,
2009 and 2008, respectively, if they had been valued on a FIFO basis. At June 30, 2009 and 2008 the total value of
LIFO inventory was $1.8 million and $2.7 million, respectively. During the fiscal year 2009, inventory quantities for
steel were reduced. This reduction resulted in a liquidation of LIFO inventory quantities carried at lower costs prevailing
in prior years as compared with the cost of 2009 purchases, the effect of which decreased cost of goods sold by
approximately $0.8 million. There was no material liquidation of LIFO inventory in 2008 or 2007. A comparison of
inventories is as follows (in thousands):
Raw materials ........................................................................ $
Work in process and finished parts ......................................
Finished goods.......................................................................
Total .................................................................................. $
June 30,
2009
9,832
5,124
58,888
73,844
$
$
2008
15,272
8,082
62,437
85,791
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)
5-39
3-7
3-5
3-7
June 30,
2009
3,984
40,857
28,894
18,872
4,095
96,702
(73,404)
23,298
$
$
2008
4,049
41,138
31,322
19,103
4,251
99,863
(73,491)
26,372
$
$
5. OTHER ASSETS
(in thousands)
Cash value of life insurance.................................................. $
Rabbi Trust assets (see Note 10) ..........................................
Other.......................................................................................
Total .................................................................................. $
June 30,
2009
6,520
4,259
36
10,815
$
$
2008
6,232
5,229
41
11,502
6. ACCRUED LIABILITIES – OTHER
(in thousands)
Dividends .........................................................
Advertising and rebates ...................................
Warranty ...........................................................
Other .................................................................
Total.............................................................
$
$
7. BORROWINGS AND CREDIT ARRANGEMENTS
June 30,
2009
329
1,951
850
1,965
5,095
$
$
2008
855
1,982
1,090
2,133
6,060
The Company has lines of credit of $29.0 million with banks, with borrowings at differing rates based on the date and
type of financing utilized.
In March 2009, the Company amended its credit facility agreements with its primary bank reducing its long-term
availability from $20.0 million to $10.0 million, shortening the maturity date to September 30, 2011, increasing its short-
term facility from $12.0 million to $15.0 million, and extending its short-term facility to June 30, 2010. The Company
pledged accounts receivable and inventory as security under the amended credit facility agreements. The amount of
23
credit available to the Company will be based on eligible accounts receivable and inventory as defined in the amended
agreements. At June 30, 2009, the Company had available collateral, as defined by the bank, of $52.5 million with
borrowing availability of $25 million of which $10 million was outstanding.
The amended agreements provide short-term working capital financing up to $15.0 million with interest selected at the
option of the Company at a Commercial Bank Floating Rate (“CBFR”) which is the prime rate subject to a floor
calculation of adjusted one month LIBOR rate (3.25% at June 30, 2009) or LIBOR (0.31% at June 30, 2009) plus 2.25%.
At June 30, 2009, $10 million was outstanding. The short-term portion also provides overnight credit when required for
operations at prime. No amounts were outstanding at June 30, 2009 related to overnight credit. As prescribed by SFAS
157, which is previously discussed in Note 1, the Company recognizes the fair value of the borrowings as a Level 2
valuation.
The long-term portion of the credit facility provides up to $10.0 million and expires September 30, 2011. No amount
was outstanding at June 30, 2009. Variable interest is set monthly at the option of the Company at a CBFR or LIBOR
plus 3.0%. 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.
As of June 30, 2009, the Company has effectively fixed the interest rates at 5.0% on approximately $10.0 million of its
long-term debt through the use of interest rate swaps.
The credit agreement contains financial covenants. The primary covenant is an interest coverage ratio. The ratio is
computed as net (loss) income plus amortization, depreciation, interest expense, income taxes and the aggregate of all
expenses related to stock options (“EBITDA”) divided by interest expense, which will vary by quarter over the term of
the agreement. At June 30, 2009, the Company was in compliance with all of the financial covenants contained in the
credit agreement.
An officer of the Company is a director at a bank where the Company maintains an unsecured $4.0 million line of credit,
cumulative letter of credit facilities and where its routine daily banking transactions are processed. In addition, the
Rabbi Trust assets (Note 10) are administered by this bank’s trust department. 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 $4.9 million. The Company receives no special
services or pricing on the services performed by the bank due to the directorship of this officer. No amount was
outstanding on the line of credit at prime minus 1.0% at June 30, 2009.
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 (loss) 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, 2009, the Company included in other long-term liabilities approximately $0.6 million of gross liabilities
related to unrecognized tax benefits (composed of $0.4 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.
24
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 fiscal year 2008........
Balance at June 30, 2008 ......................................................................................
Additions (reductions) based on tax positions related to the current year ........
Balance at June 30, 2009 ......................................................................................
$ 617
(68)
549
(145)
$ 404
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 Operations. As of June 30, 2009 and 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 2009, 2008 and 2007 was 41.5%, 35.8% and 35.6%, respectively, of (loss) income before
income taxes.
The income tax (benefit) provision is as follows for the years ended June 30 (in thousands):
Federal – current .......................
State – current ...........................
Deferred .....................................
Total......................................
$
$
2009
(1,410)
(110)
450
(1,070)
$
$
2008
1,510
270
580
2,360
$
$
2007
6,045
570
(1,465)
5,150
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..........................
2009
34.0%
2.7
4.8
41.5%
2008
34.0%
2.7
(0.9)
35.8%
2007
35.0%
2.6
(2.0)
35.6%
Although the Company’s effective full year tax expense rate has historically ranged from 35% to 39%, fiscal year ended
June 30, 2009 reflects an effective income tax benefit rate of 41.5% due to losses or low level of earnings in various tax
jurisdictions. The effective income tax expense rate was 35.8% for the fiscal year ended June 30, 2008.
The primary components of deferred tax assets and (liabilities) are as follows (in thousands):
June 30, 2009
June 30, 2008
Long-term
$
Long-term
$
Investments......................................................
Accounts receivable........................................
Inventory .........................................................
Self insurance ..................................................
Employee benefits...........................................
Accrued expenses ...........................................
Property, plant and equipment .......................
Deferred compensation...................................
Other ................................................................
Total............................................................
$
$
Current
30
650
1,180
780
670
650
–
–
–
3,960
–
–
–
–
–
–
(570)
1,900
815
2,145
Current
(580)
780
1,730
1,040
540
700
–
–
–
4,210
$
$
$
$
–
–
–
–
–
–
(940)
2,030
302
1,392
The Company is subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions.
Generally, tax years 2005–2009 remain open to examination by the Internal Revenue Service or other taxing
jurisdictions to which we are subject.
25
9. STOCK-BASED COMPENSATION
The Company has two stock-based compensation methods available when determining employee compensation.
(1)
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 selected consolidated
operating results for organic net sales growth and fully-diluted earnings per share for the two-year transition
period which began on July 1, 2007 and ended on June 30, 2009 and the three-year performance periods
beginning July 1, 2007 and ending on June 30, 2010, beginning July 1, 2008 and ending on June 30, 2011, and
beginning July 1, 2009 and ending on June 30, 2012. The Committee has also specified that payouts, if any, for
awards earned under the fiscal years 2008-2009, 2008-2010, 2009-2011 and 2010-2012 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 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
Fiscal Year 2008 – 2010
Fiscal Year 2009 – 2011
Fiscal Year 2010 – 2012
At Target
Stock
33,330
44,621
58,155
$
$
$
Cash
186,204
249,283
324,893
At Maximum
Stock
53,329
71,398
93,058
$
$
$
Cash
297,931
398,877
519,884
No amounts were earned for the two-year transition period ended June 30, 2009. No compensation costs were
accrued at June 30, 2009 or 2008. If the target performance goals would be achieved the total amount of stock
compensation cost recognized over the requisite service periods would be $0.5 million (2008-2010), $0.6 million
(2009-2011) and $0.8 million (2010-2012) based on the estimated fair values at June 30, 2009. At June 30, 2009,
500,000 shares were available for awards.
(2)
Stock Option 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 December 2008, 2007 and 2006, the Company issued options for 265,000, 120,000 and 135,000 common
shares at weighted average exercise prices of $6.82, $12.40 and $12.63 (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 $
0.1 million, $0.2 million and $0.3 million during the quarters ended December 31, 2008, 2007 and 2006,
respectively. The assumptions used in determining the compensation expense 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 2009, 2008 and 2007, respectively;
dividend yield of 7.6%, 4.2% and 4.1%, expected volatility of 21.8%, 19.5% and 21.6%; risk-free interest rate of
1.6%, 3.3% and 4.5%; and an expected life of 6, 5 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 three months ended December 31,
2008, 2007 and 2006 was $0.45, $1.55 and $2.03, 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
26
exceeded the market price of stock on the date of grant) exercised during the fiscal years ended June 30, 2009,
2008 and 2007, respectively, were not material.
At June 30, 2009, 230,100 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 the
exercise price of options. These shares received as payment are retired upon receipt.
A summary of the status of the Company’s stock option plans as of June 30, 2009, 2008 and 2007 and the changes
during the years then ended is presented below:
Outstanding and exercisable at June 30, 2007 ..........
Granted ......................................................................
Exercised ...................................................................
Canceled ....................................................................
Outstanding and exercisable at June 30, 2008 ..........
Granted ......................................................................
Exercised ...................................................................
Canceled ....................................................................
Outstanding and exercisable at June 30, 2009 .......... 1,020,454 $
Shares
782,174 $
120,000
(3,400)
(5,790)
892,984
265,000
(4,235)
(133,295)
Weighted Average
Exercise Price
15.45
12.40
11.80
16.07
15.05
6.82
6.81
14.93
12.94
Aggregate
Intrinsic Value
(in millions)
0.4
$
0.0
$
0.4
The following table summarizes information for options outstanding and exercisable at June 30, 2009:
Range of
Prices
6.81 – 10.75
12.35 – 13.59
14.40 – 16.52
19.21 – 20.27
6.81 – 20.27
$
$
Options
Outstanding
271,815
268,773
356,266
123,600
1,020,454
Weighted Average
Remaining
Life (Years)
9.1
7.0
5.4
4.4
6.7
Exercise
Price
6.97
12.60
15.54
19.34
12.94
$
$
10. 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.
Total pension and retirement plan expense was $1.8 million in fiscal year 2009 and $2.0 million in each of the fiscal
years 2008 and 2007. The amounts include $0.5 million in each of the fiscal years 2009, 2008 and 2007, 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 $0.5 million, $0.8 million and $0.9 million in fiscal
2009, 2008 and 2007, respectively. The cumulative cost to exit the Company’s multi-employer plans was
approximately $3.9 million on June 30, 2009.
The Company has unfunded 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
2009, 2008 and 2007, the benefit obligation was increased by interest expense of $0.1 million, $0.3 million and $0.2
million, service costs of $0.2 million, $0.3 million and $0.5 million, and decreased by payments of $0.6 million, $0.8
million and $0.5 million, respectively. At June 30, 2009 and 2008, the deferred compensation liability was $5.0
million and $5.3 million, respectively. Funds of the deferred compensation plans are held in a Rabbi Trust. The assets
held in the Rabbi Trust are not available for general corporate purposes. The Rabbi Trust is subject to creditor claims in
the event of insolvency, but otherwise must be used only for purposes of providing benefits under the plans. As of June
30, 2009, the Company’s deferred compensation plan assets, held in the Rabbi Trust, were invested in stock and bond
funds. As of June 30, 2009 and 2008, the fair market value of the assets held in the Rabbi Trust were $4.3 million and
$5.2 million, respectively, and are classified as “Other Assets” in the Consolidated Balance Sheets. These assets are
classified as Level 2 in accordance with SFAS 157 as discussed in Note 1.
27
Under provisions of the Company’s Voluntary Deferred Compensation Plan, executive officers may defer common
stock awards received as participants of the 2007 Long-Term Incentive Plan until retirement. Under the plan, no shares
were deferred during the fiscal years ended June 30, 2009 and 2008. At June 30, 2009 and 2008, 47,322 shares and
53,575 shares with an award date value of $0.7 million and $0.8 million, respectively, had been deferred and are being
held on behalf of the employees. Under the plan, 6,253 shares and 7,278 shares were distributed in fiscal years 2009
and 2008, respectively.
The Company’s defined benefit pension plan covers 59 active hourly production employees of DMI. There are a total
of 463 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, 2009 and 2008, the Company recorded an accrued benefit liability related to the
funded status of the defined benefit pension plan recognized on the Company’s consolidated balance sheets in other
long-term liabilities of $1.8 million and $0.3 million, respectively. The accumulated benefit obligation was $5.7
million and $5.2 million at fiscal years ended June 30, 2009 and 2008, respectively.
11. COMPREHENSIVE (LOSS) INCOME
The components of comprehensive (loss) income, net of income taxes, for the years ended June 30, were as follows (in
thousands):
Net (loss) income......................................................... $
Other comprehensive (loss) income (OCI):
Change in fair value of derivatives, net of
income taxes of $5, $176 and $70,
respectively..............................................................
Change in fair value of available-for-sale,
Securities, net of income taxes of $631, $54,
$(205), respectively
Change in minimum pension liability,
net of income taxes of $595, $321 and $(140),
respectively ..............................................................
Total other comprehensive (loss) income ....................
Total comprehensive (loss) income ............................. $
2009
2008
(1,509)
$
4,236
$
2007
9,334
(1)
(273)
(168)
(1,022)
(84)
301
(969)
(1,992)
(3,501)
$
(524)
(881)
3,355
$
255
388
9,722
The components of accumulated other comprehensive (loss) 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 (loss) income....
$
$
June 30,
2009
(47)
(180)
(1,537)
(1,764)
$
$
2008
975
(178)
(569)
228
12. 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.
13. 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 $4.3 million, $4.0 million and $3.6
million in fiscal 2009, 2008 and 2007, respectively.
28
Expected future minimum commitments under operating leases as of June 30, 2009 were as follows (in thousands):
Fiscal Year Ended June 30
2010
2011
2012
2013
2014
Thereafter
2,022
1,229
1,112
768
482
162
5,775
$
14. FACILITY CONSOLIDATION COSTS
During fiscal year ended June 30, 2009, the Company recorded charges for facility consolidation and related costs of
$2.6 million. The charges represent employee separation costs of $2.0 million and facility closing costs of $0.6 million
with no future benefit to the Company. In the process of recording facility consolidation charges, the company
reviewed the usefulness and/or ability to sell idle assets at these facilities in order to determine their fair value. Based
on this review, the Company recorded an asset impairment of $0.1 million related to machinery and equipment and
included it in the “Facility Consolidation and Other Charges” line in the Consolidated Statements of Operations.
15. 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.
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 ........................................ $
Recreational Vehicle .......................
Commercial ......................................
$
FOR THE YEARS ENDED JUNE 30,
2008
258,084
56,090
91,481
405,655
2009
230,727
16,197
77,234
324,158
2007
259,710
66,165
99,525
425,400
$
$
$
$
16. SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION – UNAUDITED
(in thousands, except per share amounts)
FOR THE QUARTER ENDED
September 30
December 31
March 31
June 30
84,550
16,131
296
0.04
0.04
$
$
$
73,627
12,168
(1,854)
(0.28)
(0.28)
$
$
$
74,564
15,639
798
0.12
0.12
Fiscal 2009:
Net sales ................................... $
Gross margin............................
Net (loss) income (1)...............
(Loss) earnings per share:
Basic.................................... $
Diluted ................................ $
91,417
17,136
(749)
(0.11)
(0.11)
$
$
$
29
(in thousands, except per share amounts)
Fiscal 2008:
Net sales ................................... $
Gross margin............................
Net income...............................
Earnings per share:
Basic.................................... $
Diluted ................................ $
September 30
FOR THE QUARTER ENDED
March 31
December 31
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
$
$
$
June 30
100,630
18,637
336
0.05
0.05
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 quarters ended September 30, 2008, December 31, 2008, March 31, 2009 and June 30, 2009 include facility
consolidation and other charges after-tax of $0.8 million or $0.13 per share, $0.3 million or $0.05 per share,
$0.3 million or $0.05 per share and $0.1 million or $0.02 per share, 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 effective as of June 30, 2009.
Changes in internal control over financial reporting – During fiscal year 2009, the Company completed remediation
of the material weakness in internal control over financial reporting identified during fiscal year 2008, specifically related to
the reconciliation of accounts payable at its material consolidated subsidiary. Remedial measures undertaken during fiscal
2009 included 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. The Company believes that these remediation actions have improved the Company’s
internal controls over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) and are
sufficient to remediate the material weakness described above.
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, 2009. 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, management concluded that the internal control over financial reporting is
effective as of June 30, 2009.
This annual report does not include an attestation report of the Company's registered public accounting firm
regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's
registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission for smaller
reporting companies that permit the Company to provide only management's report in this annual report.
Item 9B.
Other Information
None.
30
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, 2009), and the year they were
first elected or appointed an officer of the registrant, are as follows:
Name (age)
Ronald J. Klosterman (61)
James R. Richardson (65)
Thomas D. Burkart (66)
Patrick M. Crahan (61)
Jeffrey T. Bertsch (54)
Donald D. Dreher (60)
James E. Gilbertson (59)
Timothy E. Hall (51)
Position (date first became officer)
President & Chief Executive Officer (1989)
Senior Vice President of Residential Sales and Marketing (1979)
Senior Vice President of Vehicle Seating (1984)
Senior Vice President of Commercial Seating (1989)
Senior Vice President of Corporate Services (1989)
Senior Vice President (2004), President & CEO of DMI Furniture, Inc. (1986)
Vice President of Vehicle Seating (1989)
Vice President-Finance, Chief Financial Officer & Secretary (2000)
Item 11. Executive Compensation
The information identifying executive compensation will be contained in the Company’s fiscal year 2009 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 2009 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 2009 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 2009. In
addition to performing the audit of the Company's consolidated financial statements, Deloitte & Touche LLP provided
various audit-related services during fiscal 2009.
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
31
independence. All services provided by Deloitte & Touche LLP during fiscal 2009 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) .......................................................
Total.................................................................. $
2009
365,000 $
38,000
–
403,000 $
2008
578,000
38,000
22,000
638,000
(1) Professional fees and expenses for audit of financial statements and internal control over financial reporting services for
fiscal 2009 and 2008, as applicable, 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 2009 and 2008 consisted of employee benefit plan
audits.
(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.
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, 2009, 2008 and 2007 are submitted
herewith:
SCHEDULE II
RESERVES
For the Years Ended June 30, 2009, 2008 and 2007
Description
Balance at
Beginning
of Year
Additions
Charged to
Income
Deductions
from
Reserves
Balance at
End of Year
Allowance for Doubtful Accounts:
2009..............................
2008..............................
2007..............................
$
$
$
2,110,000
2,090,000
2,820,000
$
$
$
1,240,000
1,050,000
–
$
$
$
(1,590,000)
(1,030,000)
(730,000)
$
$
$
1,760,000
2,110,000
2,090,000
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).
32
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 1999 Stock Option Plan incorporated by reference from the 1999 Flexsteel definitive proxy statement. *
10.2
10.3
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. *
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. *
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. *
10.5 2002 Stock Option Plan incorporated by reference to Appendix A from the 2002 Flexsteel definitive proxy
statement. *
10.6
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.
10.7
10.8
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.
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.
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.
10.10 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.
10.11 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.
10.12 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. *
10.13 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.
10.14 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.
10.15 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.*
33
10.16 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). *
10.17 Credit Agreement dated March 27, 2009 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 March 31, 2009.
10.18 Continuing Security Agreement dated March 27, 2009 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 March 31, 2009.
10.19 Line of Credit Note (“Facility A”) dated March 27, 2009 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 March 31, 2009.
10.20 Line of Credit Note (“Facility B”) dated March 27, 2009 between Flexsteel Industries, Inc. and JPMorgan
Chase Bank, N.A. incorporated by reference to Exhibit 10.4 to Flexsteel’s Form 8-K filed with the
Securities and Exchange Commission on March 31, 2009.
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: August 26, 2009
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 and Accounting Officer
34
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:
August 26, 2009
/S/ L. Bruce Boylen
L. Bruce Boylen
Chairman of the Board of Directors
Date:
August 26, 2009
Date:
August 26, 2009
Date:
August 26, 2009
Date:
August 26, 2009
Date:
August 26, 2009
Date:
August 26, 2009
Date:
August 26, 2009
Date:
August 26, 2009
Date:
August 26, 2009
/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
35
Exhibit 21.1
Subsidiaries of Flexsteel Industries, Inc.
• DMI Furniture, Inc
o DMI Management, Inc. *
o DMI Sourcing Company, LLC *
(cid:1) DMI Business Consulting Company (Shenzhen) Co. Ltd. *
(cid:1) Home Styles Furniture Co., Ltd (Thailand) (99.99% interest) *
(cid:1) Vietnam Representative Office *
• Desert Dreams, Inc. **
• Four Seasons Inc. **
*
**
Subsidiaries of DMI Furniture, Inc.
Inactive subsidiaries
36
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-
151865, 333-140811, 333-109374, 333-105951, 333-45768, 333-01413, on Form S-8 of our report dated
August 26, 2009, relating to the consolidated financial statements and financial statement schedule of
Flexsteel Industries, Inc. and Subsidiaries (the “Company”) in the Annual Report on Form 10-K of the
Company for the year ended June 30, 2009.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
August 26, 2009
37
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: August 26, 2009
By:
/S/ Ronald J. Klosterman
Ronald J. Klosterman
Chief Executive Officer
38
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: August 26, 2009
By:
/S/ Timothy E. Hall
Timothy E. Hall
Chief Financial Officer
39
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, 2009 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: August 26, 2009
By:
/S/Ronald J. Klosterman
Ronald J. Klosterman
Chief Executive Officer
By:
/S/ Timothy E. Hall
Timothy E. Hall
Chief Financial Officer
40
Locations
Flexsteel Industries, Inc.*
Dubuque, Iowa 52001
(563) 556-7730
J. E. Gilbertson, General Manager
Dublin, Georgia 31040
(478) 272-6911
M.C. Dixon, General Manager
Lancaster, Pennsylvania 17604
(717) 392-4161
D. Kobie, 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
Eric S. Rangen, Chairman
Mary C. Bottie
Lynn J. Davis
Robert E. Deignan
Thomas E. Holloran
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
Riverside, California 92504
(951) 354-2440
D. J. Bashor, General Manager
Harrison, Arkansas 72601
(870) 743-1101
M. J. Feldman, General Manager
Starkville, Mississippi 39760
(662) 323-5481
R. C. Adams, General Manager
Vancouver, Washington 98668
(206) 696-9955
R. Heying, Manager
DMI Furniture, Inc.
Louisville, Kentucky 40223
(502) 426-4351
D. D. Dreher, President & CEO
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
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
NASDAQ Global Market
NASDAQ Symbol
FLXS
Annual Meeting
December 7, 2009, 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
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
10
contains 10% post-consumer recycled fiber content
© 2009 Flexsteel Industries, Inc.
photography courtesy Ken Smith / Design Photography
photography courtesy Winnebago Industries
P. O. Box 877 (cid:129) Dubuque IA 52004-0877