FORM 10-K
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required]For the fiscal year ended June 30, 2005or o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required]For the transition period from _______________ to _______________Commission file number 0-5151
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FLEXSTEEL INDUSTRIES, INC. (Exact name of registrant as specified in its charter)
Securities registered pursuant to Section 12(g) of the Act:Common Stock, $1.00 Par Value (Title of Class)
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 x No o
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. x
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o No x
State the aggregate market value of the voting stock held by non-affiliates of the registrant as of August 19, 2005, which is within 60 days prior to the date of filing:
Common Stock, Par Value $1.00 Per Share: $55,843,831
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of August 19, 2005:
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, hospitality and healthcare upholstered and wooden furniture products in the country. The Company’s primary business is the design, manufacture and sale of a broad line of quality upholstered furniture for residential, commercial, and recreational vehicle seating use. Product offerings include a wide variety of wood and upholstered 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, health care and hotel applications. Featured as a basic component in most of the upholstered furniture is a unique drop-in-seat spring. The Company primarily distributes its products throughout the United States through the Company’s sales force to furniture dealers, department stores, recreational vehicle manufacturers, and hospitality and healthcare facilities. The Company’s products are also sold to several national and regional chains, some of which sell on a private label basis.
The Company has two wholly-owned subsidiaries: (1) Desert Dreams, Inc., which owns and leases a commercial building to an unrelated entity, and (2) DMI Furniture, Inc. (“DMI”), acquired effective September 17, 2003, which is a Louisville, Kentucky-based, vertically integrated manufacturer, importer and marketer of residential and commercial office furniture with four manufacturing plants and warehouses in Indiana and manufacturing sources in Asia. DMI’s divisions are WYNWOOD, Homestyles and DMI Commercial Office Furniture. A third wholly-owned subsidiary, Four Seasons, Inc., operated retail furniture stores until their closure in November 2003.
During fiscal 2004 and 2003, the Company operated in two reportable operating segments: (1) Furniture Products (formerly known as Seating Products) and (2) Retail Stores. The Furniture Products segment involves the distribution of manufactured and imported products consisting of a broad line of upholstered and wooden furniture for residential, recreational vehicle, and commercial markets. The Company’s products are sold primarily throughout the United States by the Company’s internal sales force and various independent representatives. The Retail Stores segment involved the operation of retail furniture stores that offered the Company’s residential products for sale directly to consumers. The retail operations were discontinued in November 2003. No single customer accounted for more than 10% of sales in either of the Company’s two segments.
The Company’s furniture products have three primary areas of application — residential, recreational vehicle and commercial. Set forth below is information for the past three fiscal years showing the Company’s net sales attributable to each of the areas of application (in thousands):
Strategy
The Company continues to pursue and refine a “blended” strategy, offering customers fully 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.
Seasonality
The Company’s business is not considered seasonal.
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Foreign Operations
The Company makes minimal export sales. The Company has no foreign manufacturing operations. At June 30, 2005, the Company had approximately 100 employees located in Asia to inspect and coordinate the delivery of purchased products.
Customer Backlog
The approximate backlog of customer orders believed to be firm as of the end of the current fiscal year and the prior two fiscal years were as follows (in thousands):
*This entire amount is expected to be filled in the fiscal year ending June 30, 2006.
Raw Materials
The Company’s furniture products utilize various species of hardwood lumber obtained from Arkansas, Mississippi, Missouri and elsewhere. In addition to hardwood lumber and engineered wood products, principal raw materials utilized in the manufacturing process include finishing materials, bar and wire stock, high carbon spring steel, fabrics, leather and polyurethane. While the Company purchases these materials from outside suppliers, it is not dependent upon any single source of supply. The costs of certain raw materials are increasing, however, all continue to be readily available.
Industry Factors
The Company has exposure to actions by governments, including tariffs. Tariffs are a possibility on any imported or exported products.
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 2005 to 2018. 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. The Company often engages independent designers to work in conjunction with its own personnel in designing furniture products.
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):
Competition
The furniture industry is highly competitive. There are numerous furniture manufactures and importers in the United States. Although the Company is one of the largest manufacturers of furniture in the United States, according to the Company’s best information, it manufactures and sells less than 2% of the furniture sold in the United States. The Company’s principal method of meeting competition is by emphasizing its product performance.
Employees
The Company had approximately 2,400, 2,600 and 2,300 employees as of June 30, 2005, 2004 and 2003, respectively, including approximately 870 employees that are covered by collective bargaining agreements at June 30, 2005. Management believes it has good relations with employees.
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The Company owns the following facilities:
The Company leases the following facilities:
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 marts in High Point, North Carolina and Las Vegas, Nevada.
One of the Company’s wholly-owned subsidiaries, Desert Dreams, Inc., owns and leases a commercial building in Phoenix, Arizona, to an unrelated entity.
The Company has no material legal proceedings pending. All pending litigation is considered to be routine litigation incidental to the business.
During the quarter ended June 30, 2005 no matter was submitted to a vote of security holders.
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The NASDAQ National Market System is the principal market on which the Company’s common stock is traded.
* Reflects the market price as quoted by the National Association of Securities Dealers, Inc.
The Company estimates there were approximately 1,800 and 2,000 holders of common stock of the Company as of June 30, 2005 and 2004, respectively.
A copy of the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (“SEC”), and other SEC filings are available on the Company’s web site at www.flexsteel.com without charge. Copies of SEC filings, and the Guidelines for Business Conduct, can also be obtained, without charge, by writing to Office of the Secretary, Flexsteel Industries, Inc., P. O. Box 877, Dubuque, IA 52004-0877.
(Amounts in thousands, except per share data)
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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.
The Company acquired DMI Furniture, Inc. (“DMI”) in a business combination accounted for as a purchase on September 17, 2003. The amounts herein include the operations of DMI since that date.
Fiscal 2003 net income and per share amounts reflect a net gain (after tax) on the sale of land of approximately $0.2 million or $0.04 per share.
Fiscal 2002 net income and per share amounts reflect a net loss (after tax) related to restructuring costs of approximately $1.3 million or $0.21 per share.
The following analysis of the results of operations and financial condition of Flexsteel Industries, Inc. (the “Company”) should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this document.
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. Actual results may differ from these estimates under different assumptions or conditions.
Use of estimates – 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 collectability of trade accounts receivable, inventory valuation, depreciable lives, self-insurance programs, warranty costs and income taxes.
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 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. Raw steel, lumber and wood frame parts are valued on the last-in, first-out (“LIFO”) method. Other inventories are valued on the first-in, first-out (“FIFO”) method. Changes in the market conditions could require a write down of inventory.
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.
Self-insurance programs – the Company is self-insured for health care and most workers’ compensation up to predetermined amounts above which third party insurance applies. The Company purchases specific stop-loss insurance for individual health care claims in excess of $150,000 per plan year, with a $1.0 million individual lifetime maximum. For workers’ compensation the Company retains the first $350,000 per claim and purchases excess coverage up to the statutory limits for amounts in excess of the retention limit. The Company is contingently liable to insurance carriers under its comprehensive general, product, and vehicle liability policies, as well as some workers’ compensation. Losses are accrued based upon the Company’s estimates of the aggregate liability of claims incurred using certain actuarial assumptions followed in the insurance industry and based on Company experience. The actual claims experience could differ from the estimates made by the Company.
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.
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Income taxes – deferred income taxes result from temporary differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements.
Revenue recognition – is upon delivery of product to our customer. 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.
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (R) (revised 2004), “Share-Based Payment”, which amends SFAS No. 123 and will be effective for the Company in fiscal 2006. The new standard will require the Company to expense employee stock options and other share-based payments. The Company is currently evaluating how it will adopt the standard and evaluating the effect that the adoption of SFAS No. 123(R) will have on its financial position and results of operations.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. This Statement amends the guidance in Accounting Research Bulletin (“ARB”) No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB No. 43, Chapter 4, previously stated that “...under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges...” SFAS No. 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of SFAS No. 151 shall be applied prospectively and are effective for the Company in fiscal 2006. The adoption of SFAS No. 151 is not expected to have a material impact on the Company’s financial position or results of operations.
In December 2004, the FASB staff issued FASB Staff Position (“FSP”) Financial Accounting Standard No. 109-1, “Application of SFAS No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004” (the “FSP”) to provide guidance on the application of SFAS No. 109 to the provision within the American Jobs Creation Act of 2004 (the “Act”) that provides tax relief to U.S. domestic manufacturers. The FSP states that the manufacturers’ deduction provided for under the Act should be accounted for as a special deduction in accordance with SFAS No. 109 and not as a tax rate reduction. A special deduction is accounted for by recording the benefit of the deduction in the year in which it can be taken in the company’s tax return, and by not adjusting deferred tax assets and liabilities in the period of the Act’s enactment (which would have been done if the deduction on qualified production activities were treated as a change in enacted tax rates). The FSP was effective upon issuance. The adoption of the FSP has not had a material impact on the Company’s financial position or results of operations. The Company is currently evaluating the future effects of the FSP.
The following table has been prepared as an aid in understanding the Company’s results of operations on a comparative basis for the years ended June 30, 2005, 2004 and 2003. Amounts presented are percentages of the Company’s net sales.
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The Company acquired DMI Furniture, Inc. (“DMI”) in a business combination accounted for as a purchase as of September 17, 2003. The accompanying discussion of results of operations includes the operations of DMI for the period September 18, 2003 through June 30, 2005.
Net sales for fiscal 2005 increased by $8.8 million or 2.2% compared to fiscal 2004. Residential net sales decreased $4.4 million or 1.6%. Recreational vehicle net sales decreased $6.6 million or 7.7%. Commercial net sales increased $19.7 million or 39.8%. The increase in net sales reflects improved industry performance for commercial products in addition to the inclusion of DMI net sales for the entire fiscal year.
Gross margin decreased $6.3 million to $76.9 million, or 18.7% of net sales, in fiscal 2005, from $83.2 million, or 20.7% of net sales in fiscal 2004. The decreased gross margin percentage in fiscal 2005 reflects increased costs for steel and component parts that have steel content. Costs were also higher for petroleum products and poly foam. The cost of these materials has increased faster than the Company has been able to pass these costs onto consumers through higher selling prices. During fiscal 2005 the quantities of LIFO inventory (steel and lumber) were reduced, resulting in a favorable impact on gross margin of 0.3%.
Selling, general and administrative expenses as a percentage of sales were 16.7% and 16.6% for fiscal 2005 and 2004, respectively. During fiscal 2005, the Company incurred costs in excess of $0.4 million, including approximately 5,700 employee hours related to planning, documenting and performing testing and walkthroughs of internal controls over accounting and information systems in preparation for the fiscal 2005 implementation of Section 404 of the Sarbanes-Oxley Act of 2002. Additionally, the Company expects to incur higher audit and audit-related fees and expenses. These types of expenses, included in selling, general, and administrative expenses in the accompanying consolidated statements of income, are expected to repeat in future fiscal years.
During the current fiscal year the Company recorded pre-tax gains of $0.8 million on the sale of former manufacturing facilities.
The effective tax rate in fiscal 2005 was 30.6% compared to 39.5% in fiscal 2004. During fiscal year 2005, an examination by the Internal Revenue Service of the Company’s federal income tax returns for the fiscal years ended June 30, 2003 and 2004 was completed. Due to the favorable results, the Company has reviewed and reduced its estimate of accrued tax liabilities resulting in a $0.7 million reduction in the tax expenses during that quarter. The Company expects that the effective income tax rate for future periods will be approximately 37%.
The above factors resulted in fiscal 2005 net income of $6.0 million, or $0.92 per share, compared to $10.1 million, or $1.55 per share, in fiscal 2004, a decrease of $4.1 million or $0.63 per share.
All earnings per share amounts are on a diluted basis.
The Company acquired DMI Furniture, Inc. (“DMI”) in a business combination accounted for as a purchase as of September 17, 2003. The accompanying discussion of results of operations includes the operations of DMI for the period September 18, 2003 through June 30, 2004.
Net sales for fiscal 2004 increased by $109.2 million or 37.4% compared to fiscal 2003. Residential net sales increased $72.3 million (includes $67.9 million of DMI) or 37.3%. Recreational vehicle net sales increased $9.8 million or 13.0%. Commercial net sales increased $27.1 million (includes $24.6 million of DMI) or 121.4%. The increase in net sales reflects improved industry performance for recreational vehicle and commercial products in addition to the inclusion of DMI net sales.
Gross margin increased $17.7 million to $83.2 million, or 20.7% of net sales, in fiscal 2004, from $65.5 million, or 22.4% of net sales in fiscal 2003. The decreased gross margin percentage in fiscal 2004 reflects increased costs for steel and component parts that have steel content. Costs were also higher for wood and petroleum products, such as fuel and poly foam. The cost of these materials has increased faster than the Company has been able to pass these costs onto consumers through higher selling prices. In addition, DMI products have a lower gross margin due to their different customer base, further decreasing the Company’s overall gross margin percentage.
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Selling, general and administrative expenses as a percentage of sales were 16.6% and 18.0% for fiscal 2004 and 2003, respectively. The lower percentage of selling, general and administrative expenses in fiscal 2004 is primarily due to the lower percentage of such costs related to DMI net sales and the discontinuation of the Company’s retail stores.
During fiscal 2004, the Company incurred costs in excess of $0.2 million, including approximately 4,400 employee hours related to planning, documenting and performing preliminary testing and walkthroughs of internal controls over accounting and information systems in preparation for the fiscal 2005 implementation of Section 404 of the Sarbanes-Oxley Act of 2002. These types of expenses, included in selling, general, and administrative expenses in the accompanying consolidated statements of income, are expected to repeat in future fiscal years. Additionally, the Company expects to incur higher audit and audit-related fees and expenses.
During November 2003, one of the Company’s wholly-owned subsidiaries, Four Seasons, Inc., closed its two remaining retail furniture stores. The final payments for lease obligations that were included in facility closing costs were paid during the quarter ended March 31, 2004. The Company expects no future expenses related to retail operations.
The effective tax rate in fiscal 2004 was 39.5% compared to 41.8% in fiscal 2003. The higher effective income tax rate in fiscal 2003 was attributable to the Company’s settlement of federal income tax audits for its latest three fiscal years and amended state income tax returns.
The above factors resulted in fiscal 2004 net income of $10.1 million, or $1.55 per share, compared to $8.3 million, or $1.30 per share, in fiscal 2003, an increase of $1.8 million or $0.25 per share.
Working capital at June 30, 2005, was $85.4 million, which includes cash, cash equivalents and investments of $3.2 million.
Net cash provided by operating activities was $12.7 million, $7.5 million and $9.2 million in fiscal 2005, 2004 and 2003, respectively. Fluctuations in net cash provided by operating activities were primarily the result of changes in net income, inventories and accounts payable. The increase in inventories and accounts payable relates primarily to the expansion of import programs.
On September 17, 2003, the Company effectively acquired 100% of the outstanding common stock of DMI for $3.30 per share in cash. The results of DMI’s operations have been included in the consolidated financial statements of the Company since that date. The aggregate purchase price was $54.9 million. The purchase price consisted of $16.7 million in cash paid to the shareholders of DMI, $2.8 million in acquisition costs paid by the Company, and the assumption of all DMI liabilities totaling $35.4 million, including $25.5 million of long-term debt.
Capital expenditures were $3.3 million, $6.0 million and $5.1 million in fiscal 2005, 2004 and 2003, respectively. Fiscal 2005 expenditures were incurred for delivery and manufacturing equipment. Projected capital spending for fiscal 2006 is $6.0 million and will be used for manufacturing and delivery equipment. Cash generated from operations and available lines of credit are expected to provide funds necessary for projected capital expenditures.
Financing activities utilized net cash of $12.0 million, $0.8 million and $4.3 million in fiscal 2005, 2004 and 2003, respectively. For fiscal year 2005 repayment of debt and the payment of dividends were the primary financing activities utilizing cash. In fiscal years 2004 and 2003, the payment of dividends was the primary financing activity utilizing cash.
The Company has adequate cash, cash equivalents, short-term investment and credit arrangements to meet its operating and capital requirements. In the opinion of management, the Company’s liquidity and credit resources provide it with the ability to react to opportunities as they arise, the ability to pay quarterly dividends to its shareholders, and ensures that productive capital assets that enhance safety and improve operations are purchased as needed.
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The Company’s contractual obligations as of June 30, 2005 are as follows (in thousands):
At June 30, 2005 the Company had no capital lease obligations, and no purchase obligations for raw materials or finished goods extending more than six months. The purchase price on all open purchase orders was fixed and denominated in U.S. dollars.
The Company has lines of credit of $41.0 million with banks, borrowings at differing rates based on the date and type of financing utilized.
In June 2005, the Company restructured its primary credit agreement reducing its long-term availability to $13.0 million, extending its existing short-term facility to June 29, 2006 and reducing the letter of credit facility to $5.0 million. The credit agreement provides for a $38.0 million unsecured credit facility and provides the Company with flexibility between long-term and short-term financing. The short-term portion of the credit facility provides working capital financing up to $20.0 million, of which $5.0 million was outstanding at June 30, 2005, with interest selected at the option of the Company at prime (6.3% at June 30, 2005) or LIBOR (3.5% at June 30, 2005) plus 0.5%. The short-term portion also provides overnight credit when required for operations at prime. The short-term line of credit expires June 29, 2006. The long-term portion of the credit facility provides up to $13.0 million, of which $12.8 million was outstanding at June 30, 2005, and expires September 30, 2007. Variable interest is set monthly at the option of the Company at prime or LIBOR plus 0.75%. The credit facility also provides $5.0 million to support letters of credit issued by the Company. 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. The Company has effectively fixed the interest rates at 3.9% on approximately $12.6 million of its long-term debt through the use of interest rate swaps. See Interest Rate Risk below.
The credit agreement contains certain restrictive covenants that require the Company, among other things, to maintain an interest coverage ratio, leverage ratio, consolidated net worth ratio, and limitations on capital disposals, all as defined in the credit agreement. At June 30, 2005, the Company was in compliance with all financial covenants contained in the credit agreement.
For the fiscal year ended June 30, 2005, residential net sales have been weaker than the prior year and we expect that this softness will continue through the first half of fiscal year 2006 due to rising interest rates and higher energy costs that may dampen consumer confidence. Net sales of vehicle seating have fallen off as several manufacturers of recreational vehicles adjust inventory levels of finished units due to weakness in demand for recreational vehicles. We expect that net sales will remain relatively stable during the first quarter of fiscal 2006. We expect lower net sales in our second fiscal quarter due to lower demand for recreational vehicles. Additionally, the volatility and high cost of fuel may temper the favorable longer-term demographics that exist in the recreational vehicle industry. Our commercial marketing channels provide an opportunity to expand distribution and increase net sales in the first half of fiscal 2006. Commercial office furniture net sales will benefit from a continued general increase in demand for these products. Hospitality occupancy rates have improved with an increase in business and recreational travel. This improvement has led to increased construction and renovation activity that has led to increased demand for the hospitality products we offer.
Margin pressures continued through all of fiscal year 2005 and we expect pressures on margins to continue through the first half of fiscal 2006, with the cost of fuel being a key element. The rise in fuel cost continues to negatively impact the cost of bringing raw materials into our factories, as well as the cost of delivering finished products to our customers. Petroleum prices are setting record prices weekly, if not daily, and we anticipate that prices will remain volatile and at record or near record levels for at least the first half of fiscal year 2006. The result will be continuing increasing costs and we believe a factor keeping consumer confidence at relative low levels, negatively affecting demand for residential and vehicle seating products. The cost of steel appears to have steadied during the second half of the fiscal year just ended, albeit at relatively high historical prices. The cost of chemicals required in manufacturing poly foam used in our seating products increased throughout fiscal 2005. At this time there are no announced price increases for poly foam.
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The furniture industry is in an unprecedented period of change. There are increases in the cost of raw materials and fuel accompanied by an increased flow of competing product from all over the world that have added to pricing pressures. The distribution channels are changing and increasingly include such non-traditional customers such as mass merchandisers, wholesale clubs and specialty retail chains in addition to e-commerce opportunities.
Flexsteel continues to take actions to address the above concerns including: new product introductions, refining existing product offerings, adjusting selling and delivery prices, adjusting production levels and implementing cost control measures for inventory and capital expenditures. These actions occur regularly regardless of operating performance, but will continue to receive additional attention under current business conditions.
Flexsteel is also in a unique position to take advantage of the rapid change that is affecting most of the markets we serve. We have had tremendous success in the introduction of our complete new line of Wrangler Home ® Collection. We continue to develop products for the marine industry to augment our vehicle seating products. Our commercial office product lineup is strong and expanded to continue to take full advantage as demand for this product increases. Our hospitality team is poised to deliver the needed products as this market expansion continues.
We continue to believe that our strategy of providing furniture from a wide selection of domestically manufactured and imported products is sound business practice. This blended strategy gives Flexsteel the opportunity to successfully participate in all the important avenues of furniture distribution in the United States.
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 and disruptions associated with shipping distances. 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 2005, 2004 and 2003, the Company did not have sales, purchases, or other expenses denominated in foreign currencies, nor did it have any active subsidiaries located in foreign countries. 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, 2005, 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. The Company has effectively fixed the interest rates at 3.9% on approximately $12.6 million of its long-term debt through the use of interest rate swaps, and the above estimated earnings reduction takes these swaps into account. As of June 30, 2005, the fair value of these swaps is an asset of approximately $28,000 and is included in other assets.
Tariffs– The Company has exposure to actions by governments, including tariffs. Tariffs are a possibility on any imported or exported products.
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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, including statements contained in the Company’s filings with the Securities and Exchange Commission and in its reports to shareholders.
Statements, including those in this report, 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 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, the product mix of sales, the cost of raw materials, foreign currency revaluations, actions by governments including taxes and tariffs, the amount of sales generated and the profit margins thereon, competition (both foreign and domestic), changes in interest rates, credit exposure with customers, the ability to successfully integrate DMI into the Company’s operations and general economic conditions.
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.
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To the Shareholders of Flexsteel Industries, Inc.Dubuque, Iowa
As Flexsteel Industries, Inc.‘s Chief Executive Officer and Chief Financial Officer, we are responsible for the presentation, accuracy, and objectivity of the information contained in our financial statements. Flexsteel Industries, Inc. has enjoyed a long-standing reputation for integrity, candor, and high quality earnings. We intend to protect the reputation. To that end, we employ a formal system of corporate conduct, internal control and audit, external audit, and Board of Directors oversight.
Accordingly, we are confident that the consolidated financial statements in this Annual Report on Form 10-K have been prepared in accordance with generally accepted accounting principles. Financial information elsewhere in this Annual Report on Form 10-K is consistent with the information in the financial statements.
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of management (including ourselves), we conducted an evaluation of the effectiveness of our internal control over financial reporting as of June 30, 2005, based on the criteria established inInternal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under this framework, management concluded that the internal control over financial reporting was effective as of June 30, 2005. Management’s assessment of the effectiveness of our internal control over financial reporting as of June 30, 2005, has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report on the following page.
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We have audited the accompanying consolidated balance sheets of Flexsteel Industries, Inc. and Subsidiaries (the “Company”) as of June 30, 2005 and 2004, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended June 30, 2005. We also have audited management’s assessment, included in the accompanying Management’s Report On Internal Controls Over Financial Reporting that the Company maintained effective internal control over financial reporting as of June 30, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these financial statements, an opinion on management’s assessment, and an opinion on the effectiveness of the Company’s internal control over financial reporting 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 and whether effective internal control over financial reporting was maintained in all material respects. Our audit of financial statements included 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, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2005, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of June 30, 2005, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2005, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
August 29, 2005
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See accompanying Notes to Consolidated Financial Statements.
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As of June 30, 2005, the maturities of debt securities are $2,027,697 within one year, $197,344 in one to five years and $9,360 over five years.
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During fiscal 2005, there were no changes in or disagreements with accountants on accounting procedures or accounting and financial disclosures.
Evaluation of disclosure controls and procedures – Based on their evaluation as of the date of this Annual Report on Form 10-K, the Company’s chief executive officer and chief financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(b) under the Securities Exchange Act of 1934, as amended) were effective as of the date of such evaluation to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
Changes in internal controls – There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, nor were there any significant deficiencies or material weaknesses in the Company’s internal controls. As a result, no corrective actions were required or undertaken.
Management’s Annual Report on Internal Control Over Financial Reporting –The report of management required under this ITEM 9A is contained in ITEM 8 of this Annual Report on Form 10-K under the caption “Management’s Report on Internal Control Over Financial Reporting.”
Attestation Report of Registered Public Accounting Firm –The attestation report required under this ITEM 9A is contained in ITEM 8 of this Annual Report on Form 10-K under the caption “Report of Independent Registered Public Accounting Firm.”
The information identifying directors of the Company, information regarding the Company’s Code of Ethics and Section 16(a) beneficial ownership reporting compliance will be contained in the Company’s fiscal 2005 definitive proxy statement to be filed with the Securities and Exchange Commission and are incorporated herein by reference. The executive officers of the Company, their ages, positions (in each case as of June 30, 2005), and the month and year they were first elected or appointed an officer of the registrant, are as follows:
Each named executive officer has held the same office or an executive or management position with the Company for at least five years except Mr. Dreher who has served as President and CEO of DMI Furniture, Inc. from 1986 to present.
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The information identifying executive compensation and beneficial ownership of stock and supplementary data will be contained in the Company’s fiscal 2005 definitive proxy statement to be filed with the Securities and Exchange Commission and are incorporated herein by reference.
This information will be contained under the heading “Certain Relationships and Related Transactions” in the Company’s fiscal 2005 definitive proxy statement to be filed with the Securities and Exchange Commission and is incorporated herein by reference.
Deloitte & Touche LLP was the Company’s independent registered public accounting firm in fiscal 2005. In addition to performing the audit of the Company’s consolidated financial statements, Deloitte & Touche LLP provided various audit-related and tax services during fiscal 2005.
The Audit and Ethics Committee pre-approves both the type of services to be provided by Deloitte & Touche LLP and the estimated fees related to these services. The Audit and Ethics Committee reviewed professional services and the possible effect on Deloitte & Touche LLP’s independence was considered. The Audit and Ethics Committee has considered and found the provision of services for non-audit services compatible with maintaining Deloitte & Touche LLP’s independence.
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:
Professional fees and expenses for audit of financial statements and internal control over financial reporting services billed in fiscal 2005, 2004 and 2003 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.
Professional fees and expenses for audit-related services billed in fiscal 2005, 2004 and 2003 consisted of (i) Sarbanes-Oxley Act Section 404 advisory services and internal accounting controls related services, $48,000, $43,000 and $0, respectively; (ii) due diligence and consultation on acquisitions or other business transactions, $0 and $103,000 and $0, respectively; and (iii) employee benefit plan audits, $22,000, $24,000 and $57,000, respectively.
Professional fees and expenses for tax services billed in fiscal 2005, 2004 and 2003 consisted of tax compliance and tax planning and advice. Tax compliance services totaled $33,000, $108,000 and $35,000 in fiscal 2005, 2004 and 2003, respectively, and consisted of (i) tax return assistance; (ii) assistance with tax return filings in certain foreign jurisdictions; (iii) assistance with tax audits and appeals; and (iv) preparation of expatriate tax returns. Tax planning and advice services totaled $12,000, $9,000 and $18,000 in fiscal 2005, 2004 and 2003, respectively, and consisted of (i) tax advice related to structuring certain proposed transactions; and (ii) general tax planning matters.
No other professional services were provided during fiscal 2005, 2004 and 2003.
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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.
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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.
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