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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549




FORM 10-Q




[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [No Fee Required]
For the quarterly period ended December 31, 2004
or
[  ] 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



Incorporated in State of Minnesota        I.R.S. Identification No. 42-0442319

FLEXSTEEL INDUSTRIES, INC.
P. O. BOX 877
DUBUQUE, IOWA 52004-0877

Area code 563 Telephone 556-7730

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, and (2) has been subject to such filing requirements for the past 90 days. Yes X. No     .

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X. No     .



Common Stock - $1.00 Par Value    
Shares Outstanding as of December 31, 2004  6,538,036  


PART I FINANCIAL INFORMATION

Item 1. Financial Statements

FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)

ASSETS December 31,
2004 		June 30,
2004
CURRENT ASSETS:            
    Cash and cash equivalents   $ 1,645,121   $ 2,476,521  
    Investments    1,026,394    1,271,417  
    Trade receivables - less allowance for doubtful accounts:  
        December 31, 2004, $3,250,000;  
        June 30, 2004, $2,820,000    47,060,771    48,169,780  
    Inventories    72,294,872    68,880,118  
    Deferred income taxes    3,780,000    3,760,000  
    Other    1,719,649    2,930,979  
      Total current assets    127,526,807    127,488,815  
NON-CURRENT ASSETS:  
       Property, plant and equipment, net    29,025,492    30,326,505  
       Deferred income taxes    1,270,000    1,350,000  
       Other assets    10,730,368    10,353,391  
               TOTAL   $ 168,552,667   $ 169,518,711  
 
LIABILITIES AND SHAREHOLDERS' EQUITY  
CURRENT LIABILITIES:  
    Accounts payable - trade   $ 13,524,368   $ 12,272,405  
    Notes payable    6,750,000    9,022,090  
    Accrued liabilities:  
       Payroll and related items    6,305,189    10,341,853  
       Insurance    6,316,359    6,428,709  
       Other    6,384,998    6,071,458  
            Total current liabilities    39,280,914    44,136,515  
LONG-TERM LIABILITIES:  
    Long-term debt    19,400,000    17,583,336  
    Deferred compensation    5,090,577    5,023,604  
    Other liabilities    1,182,296    1,163,514  
        Total liabilities    64,953,787    67,906,969  
 
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 December 31, 2004, 6,538,036 shares;  
        outstanding June 30, 2004, 6,494,228 shares    6,538,036    6,494,228  
    Additional paid-in capital    2,831,824    2,111,477  
    Retained earnings    93,657,243    92,552,045  
    Accumulated other comprehensive income    571,777    453,992  
         Total shareholders' equity    103,598,880    101,611,742  
               TOTAL   $ 168,552,667   $ 169,518,711  

See accompanying Notes to Consolidated Financial Statements (Unaudited).

1


FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended
December 31, 		Six Months Ended
December 31,
2004 2003 2004 2003
NET SALES     $ 105,050,826   $ 109,102,095   $ 202,906,383   $ 185,959,134  
COST OF GOODS SOLD    (84,650,206 )  (85,896,001 )  (164,650,909 )  (145,902,843 )
GROSS MARGIN    20,400,620    23,206,094    38,255,474    40,056,291  
SELLING, GENERAL AND  
  ADMINISTRATIVE    (17,670,182 )  (18,370,257 )  (34,010,070 )  (32,328,336 )
GAIN ON SALE OF FACILITY              608,613       
OPERATING INCOME    2,730,438    4,835,837    4,854,017    7,727,955  
OTHER INCOME (EXPENSE):  
     Interest and other income    161,000    301,389    294,686    523,505  
     Interest expense    (266,870 )  (125,826 )  (543,993 )  (170,145 )
          Total    (105,870 )  175,563    (249,307 )  353,360  
INCOME BEFORE INCOME TAXES    2,624,568    5,011,400    4,604,710    8,081,315  
PROVISION FOR INCOME TAXES    (1,020,000 )  (1,995,000 )  (1,800,000 )  (3,200,000 )
NET INCOME   $ 1,604,568   $ 3,016,400   $ 2,804,710   $ 4,881,315  
 
AVERAGE NUMBER OF COMMON  
  SHARES OUTSTANDING:  
       Basic    6,537,071    6,448,814    6,522,729    6,392,624  
       Diluted    6,617,606    6,520,575    6,600,727    6,475,882  
 
EARNINGS PER SHARE OF COMMON  
  STOCK:  
       Basic   $ 0.25   $ 0.47   $ 0.43   $ 0.76  
       Diluted   $ 0.24   $ 0.46   $ 0.42   $ 0.75  

See accompanying Notes to Consolidated Financial Statements (Unaudited).

2


FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Six Months Ended
December 31,
2004 2003
OPERATING ACTIVITIES:            
Net income   $ 2,804,710   $ 4,881,315  
Adjustments to reconcile net income to net cash  
    provided by operating activities:  
    Depreciation and amortization    2,937,938    2,714,097  
    (Gain) loss on disposition of capital assets    (608,513 )  214,425  
    Changes in operating assets and liabilities, net of acquisition:  
        Trade receivables    1,109,010    (4,192,516 )
        Inventories    (3,414,754 )  (1,353,309 )
        Other current assets    1,211,330    1,592,015  
        Other assets    (117,826 )  (37,002 )
        Accounts payable - trade    1,251,964    8,175,152  
        Accrued liabilities    (3,157,983 )  (3,588,944 )
        Other long-term liabilities    (22,790 )  (257,792 )
        Deferred compensation    66,973    202,560  
        Deferred income taxes    60,000    29,000  
Net cash provided by operating activities    2,120,059    8,379,001  
INVESTING ACTIVITIES:  
    Purchases of investments    (206,274 )  (2,911,848 )
    Proceeds from sales of investments    250,504    11,239,470  
    Payments received from customers on notes receivable    172,350  
    Proceeds from sale of capital assets    1,581,575    73,478  
    Capital expenditures    (2,508,987 )  (3,168,662 )
    Acquisition of DMI Furniture, Inc., net of cash acquired    (19,322,174 )
Net cash used in investing activities    (883,182 )  (13,917,386 )
FINANCING ACTIVITIES:  
    Repayment of borrowings    (19,971,176 )  (8,360,829 )
    Proceeds from borrowings    19,515,749    3,684,571  
    Dividends paid    (1,693,817 )  (835,817 )
    Proceeds from issuance of common stock    80,967    517,498  
Net cash used in financing activities    (2,068,277 )  (4,994,577 )
Decrease in cash and cash equivalents    (831,400 )  (10,532,962 )
Cash and cash equivalents at beginning of period    2,476,521    12,811,385  
Cash and cash equivalents at end of period   $ 1,645,121   $ 2,278,423  

See accompanying Notes to Consolidated Financial Statements (Unaudited).

3


FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE PERIOD ENDED DECEMBER 31, 2004

1.

The consolidated financial statements included herein have been prepared by Flexsteel Industries, Inc. (the Company or Flexsteel), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The information furnished in the consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of such consolidated financial statements. Operating results for the six-month period ended December 31, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2005. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements for the year ended June 30, 2004, and the notes thereto, included in Flexsteel’s Annual Report on Form 10-K as filed with the SEC.


  DESCRIPTION OF BUSINESS – The Company was incorporated in 1929 and is one of the oldest and largest manufacturers, importers and marketers of residential, recreational vehicle, office, 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 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, health care and hotel applications. Featured as a basic component in most of the upholstered furniture is a unique drop-in-seat spring.

2.

INVENTORIES – Are stated at the lower of cost or market. Raw steel, lumber and wood frame parts are valued on the last-in, first-out (“LIFO”) method. Other inventories are valued on the first-in, first-out (“FIFO”) method. Inventories valued on the LIFO method would have been approximately $4,359,000 and $3,018,000 higher at December 31, 2004 and June 30, 2004, respectively. A comparison of inventories is as follows (in thousands):


December 31,
2004		 June 30,
2004
Raw materials     $ 20,370   $ 22,663  
Work in process and finished parts    9,527    9,342  
Finished goods    42,398    36,875  
              Total   $ 72,295   $ 68,880  

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3.

BORROWINGS AND CREDIT ARRANGEMENTS – At December 31, 2004, outstanding borrowings consisted of the following (in thousands):


Current        
     $20.0 million working capital line of credit through June 29, 2005;  
     interest rate at LIBOR +0.75%; unsecured   $ 6,750  
Long-Term  
     $20.0 million revolving note; expires September 30, 2007;  
     interest rate at LIBOR +0.75%; unsecured    19,400  
Total   $ 26,150  

  The Company has lines of credit of $50.0 million with banks, borrowings at differing rates based on the date and type of financing utilized. The Company’s primary credit agreement provides for a $47.0 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 $6.8 million was outstanding at December 31, 2004, with the interest rate selected by the Company at prime (5.25% at December 31, 2004) or LIBOR (2.42% at December 31, 2004) plus 0.75%. The short-term portion also provides overnight credit when required for operations at prime, none of which was outstanding at December 31, 2004. The short-term line of credit expires June 29, 2005. The long-term portion of the credit facility provides up to $20.0 million, of which $19.4 million was outstanding at December 31, 2004, 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 $7.0 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 also has a $3.0 million line of credit through October 1, 2005 at prime rate of interest less 0.50%. No amounts were outstanding against this line of credit at December 31, 2004. The Company has effectively fixed the interest rates at 3.9% on approximately $13.1 million of its long-term debt through the use of interest rate swaps.

  The credit agreement contains certain restrictive covenants that require the Company, among other things, to maintain an interest coverage ratio, leverage ratio, and limitations on capital expenditures and disposals, all as defined in the financing agreements. At December 31, 2004, the Company was in compliance with all financial covenants contained in the credit agreement.

4.

DERIVATIVE INSTRUMENTS & HEDGING ACTIVITIES – Related to its variable debt, the Company has interest rate swaps utilized to hedge against adverse changes in interest rates. The notional principal amounts of the outstanding interest rate swaps totaled $13.1 million with a weighted average fixed rate of 3.9% at December 31, 2004. The interest rate swaps are not utilized to take speculative positions. The Board of Directors established the Company’s policies with regards to activities involving derivative instruments. Management, along with the Board of Directors, periodically reviews those policies, along with the actual derivative related results. The Company recorded the fair market value of its interest rate swaps as cash flow hedges on its balance sheet and has marked them to fair value through other comprehensive income. The fair values of the swaps were a liability of $0.1 million as of December 31, 2004 and are reflected as other long-term liabilities on the accompanying consolidated balance sheet.


5.

ACCRUED WARRANTY COSTS – 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. The following table presents the changes in the Company’s product warranty liability for the six months ended December 31, 2004 (in thousands):


Accrued warranty costs at June 30, 2004     $ 1,190  
Payments made for warranty and related costs    (1,771 )
Accrual for product warranty    1,721  
Accrued warranty costs at December 31, 2004   $ 1,140  

5


6.

STOCK OPTIONS – The Company has stock option plans for key employees and directors that 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. At December 31, 2004, 285,700 shares were available for future grants. The Company applies Accounting Principles Board (APB) Opinion No. 25 and related interpretations in accounting for its stock option plans, as permitted under Statement of Financial Accounting Standards (SFAS) No. 123 and SFAS No. 148, also see Note 12. Accordingly, no compensation cost has been recognized for its stock option plans. Had the compensation cost for the Company’s incentive stock option plans been determined based on the fair value at the grant dates for awards under those plans consistent with the fair-value methodology of SFAS No. 123, the Company’s net income and earnings per share would have been reduced to the following pro forma amounts:


Three Months Ended
December 31,		 Six Months Ended
December 31,
2004 2003 2004 2003
Net income, as reported     $ 1,604,568   $ 3,016,400   $ 2,804,710   $ 4,881,315  
Deduct: Total stock-based employee  
    compensation expense determined  
    under fair value method for all  
    awards, net of related tax effects    (301,000 )  (427,000 )  (301,000 )  (427,000 )
Pro forma net income   $ 1,303,568   $ 2,589,400   $ 2,503,710   $ 4,454,315  
Earnings per share:  
     Basic – as reported   $ 0.25   $ 0.47   $ 0.43   $