FLEXSTEEL INDUSTRIES INC (FLXS)

Item 2. 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 quarterly report on Form 10-Q.

CRITICAL ACCOUNTING POLICIES:

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", included in our 2025 annual report on Form 10-K.

Overview

The following table has been prepared as an aid in understanding the Company’s results of operations on a comparative basis for the three and nine months ended March 31, 2026 and 2025. The amounts presented are percentages of the Company’s net sales.

Results of Operations for the Quarter Ended March 31, 2026 vs. 2025

Net sales were $115.1 million for the quarter ended March 31, 2026, compared to net sales of $114.0 million in the prior year quarter, an increase of 1.0%. The increase was driven by higher pricing from tariff surcharges, offset by lower unit volume, particularly in our made-to-order, ready-to-assemble and case goods categories.

Sales order backlog, inclusive of estimated tariff surcharges, was $79.5 million as of the quarter ended March 31, 2026, an increase of 1.5% compared to $78.3 million in the prior year quarter.

Gross margin as a percent of net sales for the quarter ended March 31, 2026, was 22.6%, compared to 22.2% for the prior year quarter, an increase of 40 basis points (“bps”). The 40-bps increase was primarily driven by favorable sales composition of higher margin products.

Selling, general and administrative (“SG&A”) expenses increased $0.7 million to $17.8 million in the quarter ended March 31, 2026, as compared to $17.1 million in the prior year quarter. As a percentage of net sales, SG&A was 15.5% in the quarter ended March 31, 2026 compared to 15.0% of net sales in the prior year quarter. The 50-bps increase was mainly due to investments in consumer insights, innovation, demand generation, and customer experience.

Income tax expense was $2.1 million, or an effective rate of 24.9% for the quarter ended March 31, 2026, compared to income tax benefit of ($1.2) million, or an effective rate of 24.5% for the quarter ended March 31, 2025. For the quarter ended March 31, 2026, the effective tax rate differs from the statutory tax rate of 21% primarily due to state taxes, the impact of foreign operations, and non-deductible compensation offset by credits for research and development.

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Net income was $6.4 million, or $1.14 per diluted share for the quarter ended March 31, 2026, compared to net loss of ($3.7) million, or $(0.71) per diluted share in the prior year quarter. During the quarter ended March 31, 2025, the Company recorded a right-of-use asset impairment on the manufacturing facility in Mexicali, Mexico.

Results of Operations for the nine months ended March 31, 2026 and 2025

Net sales were $343.8 million for the nine months ended March 31, 2026, compared to net sales of $326.5 million in the prior-year nine-month period, an increase of 5.3%. The increase in sales of $17.3 million was driven by higher unit volume of sourced soft seating products and pricing from tariff surcharges, partially offset by lower unit volume in our made-to-order soft seating products and homestyles branded ready-to-assemble products.

Gross margin as a percent of net sales for the nine months ended March 31, 2026, was 22.9%, compared to 21.6% for the prior-year nine-month period, an increase of 130 bps. The 130-bps increase was primarily driven by favorable sales composition of higher margin products, partially offset by the dilutive impact of tariffs.

Selling, general and administrative expenses increased $3.1 million in the nine months ended March 31, 2026, compared to the prior-year nine-month period. SG&A as a percentage of sales was 15.3% in the nine months ended March 31, 2026, compared to the prior-year nine-month period of 15.2%. The 10-bps increase was mainly due to investments in growth initiatives.

Income tax expense was $6.9 million, or an effective rate of 25.2%, during the nine months ended March 31, 2026, compared to income tax expense of $3.3 million in the prior-year nine-month period, or an effective tax rate of 25.6%. The effective tax rate for the nine months ended March 31, 2026, was primarily impacted by state taxes, the impact of foreign operations and nondeductible compensation, offset by credits for research and development.

Net income was $20.4 million, or $3.63 per diluted share for the nine months ended March 31, 2026, compared to net income of $9.5 million, or $1.70 per diluted share in the prior-year nine-month period. During the nine-month period ended March 31, 2025, the Company recorded a right-of-use asset impairment on the manufacturing facility in Mexicali, Mexico. In addition the Company recorded pre-tax gains related to the sale of its Dublin, Georgia facility and an ancillary building, formerly part of its Huntingburg, IN distribution center.

Liquidity and Capital Resources

Working capital (current assets less current liabilities) on March 31, 2026, was $142.2 million compared to $110.4 million on June 30, 2025. The $31.8 million increase in working capital was primarily due to an increase in cash of $17.3 million, other current assets of $13.2 million, an increase in trade receivables of $6.2 million, and a decrease in accounts payable of $1.7 million, a decrease in other current liabilities of $1.6 million, a decrease in other current liabilities of $0.8 million partially offset by a decrease in inventories of $8.6 million and an increase in operating lease of $0.4. Refer to discussion of working capital changes below, under Net cash provided by operating activities. Capital expenditures were $3.5 million during the nine months ended March 31, 2026.

A summary of operating, investing, and financing cash flow is shown in the following table:

Net cash provided by operating activities

For the nine months ended March 31, 2026, net cash provided by operating activities was $27.2 million, primarily due to net income of $20.4 million, a decrease in inventories of $8.6 million and adjustments for non-cash items including stock-based compensation of $3.4 million, deferred income taxes $3.3 million, depreciation of $2.8 million, provision for credit losses of $0.3 million, partially offset by an increase in trade receivables of $6.5 million, a decrease in accrued liabilities of $3.7 million, a decrease in accounts payable of $1.3 million and an increase in other current assets of $0.1 million.

For the nine months ended March 31, 2025, net cash provided by operating activities was $21.4 million, primarily due to net income of $9.5 million, adjustments for non-cash items including a right-of-use asset impairment of $14.1 million, a pre-tax gain on sale of assets of $5.8 million, deferred income tax of $3.5 million, stock-based compensation of $3.0 million, and depreciation of $2.8 million, as well

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as changes in operating assets and liabilities including, a decrease in inventory of $9.4 million, and a decrease in trade receivables of $5.8 million, offset by an increase in other assets of $5.6 million, a decrease in accounts payable of $3.7 million, a decrease in accrued liabilities of $3.5 million, an increase in other current assets of $1.3 and a decrease in other long-term liabilities of $0.2 million.

Net cash (used in) provided by investing activities

For the nine months ended March 31, 2026, net cash used in investing activities was $3.5 million due to capital expenditures.

For the nine months ended March 31, 2025, net cash provided by investing activities was $6.0 million due to proceeds from the sales of property, plant and equipment of $7.5 million, and corporate owned life insurance proceeds of $1.2 million, offset by capital expenditures of $2.7 million.

Net cash (used in) financing activities

For the nine months ended March 31, 2026, net cash used in financing activities was $6.4 million, primarily due to dividends paid of $3.3 million, shares withheld for tax payments on vested shares and options exercised of $2.0 million and treasury stock purchases of $1.1 million.

For the nine months ended March 31, 2025, net cash used in financing activities was $9.5 million, due to payments on the line of credit of $207.3 million, dividends paid of $2.7 million, and shares withheld for tax payments on vested shares and options exercised of $2.1 million, partially offset by proceeds from the line of credit of $202.3 million and proceeds from issuance of common stock of $0.1 million.

Line of Credit

On September 8, 2021, the Company, as the borrower, entered into a credit agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association (the “Lender”), and the other lenders thereto. The Credit Agreement has a five-year term and provided for up to an $85 million revolving line of credit. Subject to certain conditions, the Credit Agreement also provides for the issuance of letters of credit in an aggregate amount up to $5 million which, upon issuance, would be deemed advances under the revolving line of credit. Proceeds of borrowings were used to refinance all indebtedness owed to a prior lender and for working capital purposes. The Company’s obligations under the Credit Agreement are secured by substantially all its assets, excluding real property. The Credit Agreement contains customary representations, warranties, and covenants, including a financial covenant to maintain a fixed coverage ratio of not less than 1.00 to 1.00. In addition, the Loan Agreement places restrictions on the Company’s ability to incur additional indebtedness, to create liens or other encumbrances, to sell or otherwise dispose of assets, and to merge or consolidate with other entitie

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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.

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, 2025, 2024, and 2023. Amounts presented are percentages of the Company’s net sales.

Fiscal 2025 Compared to Fiscal 2024

Net sales were $441.1 million for the year ended June 30, 2025, compared to net sales of $412.8 million in the prior year, an increase of $28.3 million or 6.9%. The increase in sales was primarily driven by unit volume in our soft seating products, offset by a decline in our homestyles ready-to-assemble product line.

Gross margin for the year ended June 30, 2025, was 22.2%, compared to 21.1% for the prior fiscal year, an increase of 110 basis points (“bps”). The 110-bps increase was primarily driven by fixed cost leverage on higher sales, supply chain cost savings, and product portfolio management.

Selling, general, and administrative (“SG&A”) expenses decreased by $3.7 million in the year ended June 30, 2025, compared to the prior fiscal year. As a percentage of net sales, SG&A expense was 15.1% in fiscal year 2025 compared to 17.1% of net sales in the prior fiscal year. The decrease of 200-bps is primarily due to fixed cost leverage on higher sales volume and structural cost savings partially offset by investments in growth initiatives. The prior year SG&A expense also included a $1.5 million expense due to CEO transition costs associated with the revaluation of previously awarded equity awards which did not recur in the current year.

In July 2022, Flexsteel commenced a 12-year lease for a manufacturing facility in Mexicali, Mexico to support strong demand growth which was elevated due to pandemic-driven buying at that time. Subsequently, U.S. furniture demand reverted to pre-pandemic norms, and the Company’s plan for the facility pivoted to subleasing the space short-term while maintaining the option to utilize it longer term to support growth. While the Company secured multiple short-term sublease tenants at the beginning of the lease term, substantial changes in U.S. trade policy in early 2025 created significant uncertainty in US-Mexico trade relations, slowed foreign direct investment in Mexico, and greatly diminished tenant interest in subleasing the Mexicali facility. As a result, management concluded that the right of use asset related to this lease was not fully recoverable and recorded a pre-tax non-cash asset impairment charge of $14.1 million during the quarter ended March 31, 2025. See Note 2, Leases, of the Notes to Consolidated Financial Statements, included in this Annual Report on Form 10-K for more information.

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During the year ended June 30, 2025, the Company completed the sale of its Dublin, Georgia facility which had been previously recorded as held for sale. The Company recorded a pre-tax gain of $5.0 million related to the sale. See Note 6, Assets Held For Sale, of the Notes to Consolidated Financial Statements, included in this Annual Report on Form 10-K for more information.

During the year ended June 30, 2025, the Company completed the sale of 2 separate ancillary buildings, formerly part of its Huntingburg, Indiana distribution center complex. The Company received proceeds of $0.8 million and recorded a pre-tax gain of $0.7 million related to the first sale. The Company received proceeds of $4.0 million and recorded a pre-tax gain of $3.7 million related to the second sale. The Company has adequate distribution capacity to support our growth as we continue to optimize our distribution and logistics network. See Note 6, Assets Held For Sale, of the Notes to Consolidated Financial Statements, included in this Annual Report on Form 10-K for more information.

Income tax expense was $6.8 million, or an effective rate of 25.3%, for the year ended June 30, 2025, compared to income tax expense of $5.0 million in the prior year, or an effective tax rate of 32.3%. The current year effective tax rate was primarily impacted by the effect of state and foreign taxes, offset by a research & development credit benefit. The prior year tax rate was impacted by the effect of state taxes, nondeductible stock compensation, and foreign taxes, offset by a research & development credit benefit. See Note 10, Income Taxes, of the Notes to Consolidated Financial Statements, included in this Annual Report on Form 10-K for more information.

Net income was $20.2 million, or $3.55 per diluted share for the year ended June 30, 2025, compared to net income of $5.5 million, or $1.91 per diluted share in the prior year.

On July 31, 2025, the President of the United States issued an executive order intended to clarify certain matters related to previously issued executive orders on tariffs. This executive order included, among other things, a country specific tariff of 20% on goods imported from Vietnam. The current situation is dynamic, and it is unknown if the United States and its trade partners will reach an agreement to further pause or adjust the current tariffs. Depending on our ability to mitigate these tariffs, they could have a material impact on our future net sales, cost of goods sold, profit and cash flow. The ultimate effect will be dependent on the magnitude and duration of the tariffs and the countries implicated as well as our ability to successfully mitigate the potential impact. The Company is assessing options to mitigate any potential impact, which includes supply chain adjustments, negotiating concessions with current suppliers, and pricing actions.

On July 4, 2025, the One Big Beautiful Bill Act (“OBBBA”) was enacted in the United States. The OBBBA includes a number of provisions which impact the United States tax code. These regulations impacting the tax code have multiple effective dates ranging from fiscal years beginning January 1, 2025, to fiscal years beginning January 1, 2027. The Company has not adjusted its provision for income tax or measurement of deferred tax assets as of June 30, 2025, based on the changes that may be triggered by the OBBBA due to the law being signed on July 4, 2025. The Company is currently assessing the impact of the OBBBA but does not expect it to have a material impact on our future financial position and results of operations.

Fiscal 2024 Compared to Fiscal 2023

Net sales were $412.8 million for the year ended June 30, 2024, compared to net sales of $393.7 million in the prior year, an increase of $19.1 million or 4.8%. Sales of products sold through retailers increased by $22.9 million or 6.7% primarily driven by growth with strategic customers and new product introductions. Sales of products sold through e-commerce channels decreased by ($3.8) million, or (7.5%) due to a decrease in consumer demand.

Gross margin as a percent of net sales for the year ended June 30, 2024, was 21.1%, compared to 18.0% for the prior fiscal year, an increase of 310-bps. The 310-bps increase was primarily driven by an increase of 240-bps primarily related to cost savings initiatives for materials, labor, and logistics, product portfolio management and disciplined promotional pricing and a 70-bps improvement on volume leverage of fixed cost structure.

SG&A expenses increased by $7.6 million in the year ended June 30, 2024, compared to the prior fiscal year. As a percentage of net sales, SG&A expense was 17.1% in fiscal year 2024 compared to 16.0% of net sales in the prior fiscal year. The increase of 110-bps is primarily due to an increase of 40-bps due to CEO transition costs associated with the revaluation of previously awarded equity awards, an increase of 40-bps due to higher incentive compensation, and an increase of 30-bps driven by investments in growth initiatives partially offset by cost leverage on higher sales volume.

There was $3.0 million in restructuring expenses recorded in the year ended June 30, 2024, associated with the previously announced closure of the Dublin, Georgia manufacturing facility. The $3.0 million primarily consists of $2.6 million in one-time employee termination benefits and other associated costs. All charges related to the restructuring activities were completed in fiscal year 2024. There were no restructuring expenses incurred in the prior fiscal year. See Note 5, Restructuring, of the Notes to Consolidated Financial Statements, included in this Annual Report on Form 10-K for more information.

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During the year ended June 30, 2024, the Company completed the sale of the Starkville, Mississippi location which had been previously recorded as held for sale. The Company recorded a gain of $3.3 million related to the sale in the fiscal year. See Note 6, Assets Held For Sale, of the Notes to Consolidated Financial Statements, included in this Annual Report on Form 10-K for more information.

Income tax expense was $5.0 million, or an effective rate of 32.3%, for the year ended June 30, 2024, compared to income tax benefit of ($5.6) million in the prior year, or an effective tax rate of (60.3%). The effective tax rate was impacted by the effect of state taxes, nondeductible stock compensation and foreign taxes, offset by a research & development credit benefit. The prior year tax rate was negative due to the reversal of a full valuation allowance on deferred tax assets. See Note 10, Income Taxes, of the Notes to Consolidated Financial Statements, included in this Annual Report on Form 10-K for more information.

Net income was $10.5 million, or $1.91 per diluted share for the year ended June 30, 2024, compared to net income of $14.8 million, or $2.74 per diluted share in the prior year.

Liquidity and Capital Resources

Working capital (current assets less current liabilities) on June 30, 2025, was $110.4 million compared to $95.0 million on June 30, 2024. The $15.4 million increase in working capital is primarily due to an increase in cash of $35.2 million offset by a decrease of $9.0 million of trade receivables, a decrease of $7.4 million in inventory, an increase in sales & advertising related accruals of $2.0 million and a decrease of $1.7 million in assets held for sale. Capital expenditures were $3.3 mil

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