Flexsteel Reports Second Quarter Results

DUBUQUE, Iowa–(BUSINESS WIRE)–Flexsteel Industries, Inc. (NASDAQ:FLXS) today reported second quarter
and fiscal year-to-date financial results.

Financial Highlights:

• Net sales were $129.4 million, up 9.2%, a record quarter;
• Net sales were $249.2 million for the current six months, an increase
  of 8.1%; and
• Net income for six months increased $0.27 per share, including gain on
  facility sale and tax reform impact.

Net sales were $129.4 million for the quarter compared to net sales of
$118.5 million in the prior year quarter, an increase of 9.2%. Net sales
were $249.2 million for the six months ended December 31, 2017, an
increase of 8.1%. For both the quarter and the six-month period, higher
residential net sales are primarily due to increased volume and to a
lesser extent new customers. Higher contract net sales are primarily due
to increased volume offset by the previously disclosed intentional
decrease in sales to certain customers.

Gross margin as a percent of net sales for the quarter ended December
31, 2017 was 21.2%, compared to 22.6% for the prior year quarter. For
the six months ended December 31, 2017, gross margin as a percent of net
sales was 21.5%, compared to 23.1% for the prior year period. The
decrease in gross margin as a percentage of net sales is primarily due
to increased labor and raw material costs partially offset by volume
leverage on fixed costs. In response to margin pressure, the Company
implemented select sales price increases late in the fiscal quarter.

Selling, general and administrative (SG&A) expenses were 15.2% of net
sales in the current year quarter, compared to 15.5% of net sales in the
prior year quarter. For the six months ended December 31, 2017, SG&A
expenses decreased to 15.2% compared to 16.1% in the prior year period
primarily due to improved fixed cost leverage.

During the current fiscal year, the Company completed a $6.5 million
sale of a facility and recognized a pre-tax gain of $1.8 million. On an
after-tax basis, the gain represents $1.3 million or $0.16 per share.

The effective tax rate for the current year quarter was 21.1% compared
to 36.7% in the prior year quarter. For the six months ended December
31, 2017, the effective tax rate was 30.2% compared to 37.7% in the
prior year period. The current year quarter and fiscal year-to-date
rates were positively impacted by the passage of the Tax Cuts and Jobs
Act (Tax Reform) resulting in a $0.16 per share increase in net income.
Beginning in fiscal year 2019, the Company expects the effective tax
rate to be between 25% and 27%.

The above factors resulted in net income of $6.2 million or $0.78 per
share for the quarter ended December 31, 2017, compared to $5.3 million
or $0.68 per share in the prior year quarter. For the six months ended
December 31, 2017, net income was $12.4 million or $1.56 per share
compared to $10.1 million or $1.29 per share in the prior year period.

Working capital (current assets less current liabilities) at December
31, 2017 was $163 million compared to $158 million at June 30, 2017.
Changes in working capital include increases of $11 million in
inventory, $5 million in accounts receivable, $2 million in investments
and $2 million in accounts payable; and a decrease of $11 million in
cash and cash equivalents. Accounts receivable increased due to
increased sales volume. Inventory increased to improve service levels.

For the six months ended December 31, 2017, capital expenditures were
$12.9 million including $6.8 million invested to upgrade the business
information system and $3.7 million for the construction of a new
manufacturing facility.

All earnings per share amounts are on a diluted basis.

Outlook

During the remainder of fiscal year 2018, the Company expects high
single digit revenue growth including the previously disclosed
intentional decrease in sales to certain contract customers. The Company
expects continued inflationary pressure on certain raw materials and
moderating labor cost increases. The Company is focused on gross margin
expansion through targeted sales price increases, enhanced service
levels and driving operational efficiencies.

For the balance of the fiscal year, the Company expects to capitalize $2
million related to business information system software and development,
$10 million for the construction of a manufacturing facility and $2
million for operations. The Company believes it has adequate working
capital and borrowing capabilities to meet these requirements.

The Company remains committed to its core strategies, which include
providing a wide range of quality product offerings and price points to
the residential and contract markets, combined with a conservative
approach to business. The Company will maintain its focus on a strong
balance sheet through emphasis on cash flow and increasing
profitability. The Company believes these core strategies are in the
best interest of its shareholders.

About Flexsteel

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 and contract upholstered and
wooden furniture products in the United States. 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, hotel, healthcare and other
contract applications. A featured 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.

Forward-Looking Statements

Statements, including those in this release, 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, supply
chain disruptions, litigation, the effectiveness of new product
introductions and distribution channels, the product mix of sales,
pricing pressures, the cost of raw materials and fuel, retention and
recruitment of key employees, actions by governments including laws,
regulations, taxes and tariffs, the amount of sales generated and the
profit margins thereon, competition (both U.S. and foreign), credit
exposure with customers, participation in multi-employer pension plans
and general economic conditions. For further information regarding these
risks and uncertainties, see the “Risk Factors” section in Item 1A of
our most recent Annual Report on Form 10-K.

For more information, visit our web site at http://www.flexsteel.com.

Contacts

Flexsteel Industries, Inc., Dubuque, IA
Marcus D. Hamilton,
563-585-8122
Chief Financial Officer