FLEXSTEEL INDUSTRIES INC

Flexsteel Industries, Inc. operates as one of the largest manufacturers, importers, and marketers of residential furniture products in the United States. The furniture industry is highly competitive and includes a large number of U.S. and foreign manufacturers and distributors, none of which dominate the market. The Company competes in markets with a large number of relatively small manufacturers; however, certain competitors have substantially greater sales volumes than the Company. The Company's products compete based on style, quality, comfort, price, delivery, service and durability.

The Company believes its patented, guaranteed-for-life Blue Steel Spring, manufacturing and sourcing capabilities, facility locations, commitment to customers, product quality, delivery, service, value and experienced production, sales, marketing and management teams, are some of its competitive advantages. The Company distributes its products throughout the United States through its e-commerce channel and direct sales force.

The Company generates revenue primarily by manufacturing and delivering furniture products to independent furniture retailers in the United States. Each unit of furniture is a separate performance obligation. Revenue is recognized when control of the promised goods or services is transferred to customers in an amount that reflects the consideration expected in exchange for those goods or services. Net sales consist of product sales and outbound shipping and handling charges for customer deliveries, net of adjustments for returns and allowances. The Company operates in one reportable segment, furniture products.

Product offerings include a wide variety of furniture such as sofas, loveseats, chairs, reclining rocking chairs, swivel rockers, sofa beds, convertible bedding units, occasional tables, desks, dining tables and chairs, kitchen storage, bedroom furniture, and outdoor furniture. A featured component in most of the upholstered furniture is a unique steel drop-in seat spring from which the name 'Flexsteel' is derived. The Company's furniture products business involves the distribution of manufactured and imported products consisting of a broad line of furniture for the residential market.

The Company integrates manufactured products with finished products acquired from offshore suppliers who can meet quality specifications and scheduling requirements. This blended focus on products allows the Company to provide a wide range of price points, styles and product categories to satisfy customer requirements. The Company's production includes the use of selected component parts sourced offshore to enhance value in the marketplace.

During the fiscal year ended June 30, 2025, the Company completed the sale of its Dublin, Georgia facility which had been previously recorded as held for sale, recording a pre-tax gain of $5.0 million ¹. The Company also completed the sale of 2 separate ancillary buildings, formerly part of its Huntingburg, Indiana distribution center complex, receiving proceeds of $0.8 million ² and recording a pre-tax gain of $0.7 million ³ related to the first sale, and receiving proceeds of $4.0 million ⁴ and recording a pre-tax gain of $3.7 million ⁵ related to the second sale. On December 11, 2024, the Board of Directors approved a share repurchase program authorizing the Company to purchase up to $30 million ⁶ of the Company's common stock. On June 3, 2025, the Company entered into a third amendment to its Credit Agreement with Wells Fargo Bank, NA, reducing the maximum revolving line of credit amount to $55 million ⁷. During the quarter ended March 31, 2025, the Company recorded a pre-tax non-cash asset impairment charge of $14.1 million ⁸ related to its leased Mexicali, Mexico facility.

Net sales were $441.1 million ⁹ for the year ended June 30, 2025, compared to net sales of $412.8 million ¹⁰ in the prior year, an increase of $28.3 million ¹¹ or 6.9% ¹². Gross margin for the year ended June 30, 2025, was 22.2% ¹³, compared to 21.1% ¹⁴ for the prior fiscal year, an increase of 110 basis points ¹⁵. Net income was $20.2 million ¹⁶, or $3.55 ¹⁷ per diluted share for the year ended June 30, 2025, compared to net income of $5.5 million ¹⁸, or $1.91 ¹⁹ per diluted share in the prior year.

The Company's focus for fiscal 2026 will be to remain financially agile with strong liquidity, continue building the foundation for profitable long-term growth in both retail and e-commerce sales channels, build global supply chain resiliency, continue focusing on operational excellence, strengthen digital capabilities, re-imagine the customer experience, and build strong culture and talent.

The Company will continue to pursue and refine its blended strategy of offering customers manufactured goods, products manufactured utilizing imported component parts, and ready-to-deliver imported products. This blended focus on products allows the Company to provide a wide range of price points, styles and product categories to satisfy customer requirements. The Company's ongoing manufacturing operation in Juarez, Mexico is integral to the Company's product offerings and distribution strategy by offering smaller and more frequent product runs of a wider product selection.

The Company continues to migrate business and financial processes from legacy ERP systems to SAP. The Company takes great care in the planning and execution of these migrations, however, implementation issues related to the transition could arise and may result in disruption of the Company's domestic and international supply chain, inability to fill customer orders accurately and on a timely basis, negative impact on financial results, inability to fulfill federal, state and local tax filing requirements in a timely and accurate matter, and increased demands of management and associates.

The Company is assessing options to mitigate any potential impact from tariffs, which includes supply chain adjustments, negotiating concessions with current suppliers, and pricing actions. The Company has adequate distribution capacity to support growth as it continues to optimize its distribution and logistics network. The Company identifies and eliminates manufacturing inefficiencies and adjusts manufacturing schedules on a daily basis to meet customer requirements.

Capital expenditures were $3.3 million ²⁰ for the fiscal year ended June 30, 2025. As of June 30, 2025, the Company has $30 million ²¹ remaining in the share repurchase program approved in December 2024. Cash dividends declared per common share were $0.71 ²², $0.60 ²³, and $0.60 ²⁴ for the fiscal years ended June 30, 2025, 2024, and 2023, respectively.

On July 31, 2025, a further executive order was issued clarifying certain matters related to tariffs, including a country specific tariff of 20% ²⁵ on goods from Vietnam. Although the country specific tariffs and the global 10% ²⁶ baseline tariffs do not apply to products imported from Mexico, that status could change at any time. 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. Tariffs or other trade restrictions may lead to continuing uncertainty and volatility in U.S. economic conditions and commodity markets, declining consumer confidence, significant inflation or diminished expectations for the economy, and ultimately reduced demand for products.

Cost inflation including significant increases in ocean container rates, tariffs, raw materials prices, labor rates, and domestic transportation costs have and could continue to impact profitability. The Company's ability to recover these cost increases through price increases may continue to lag the cost increases, resulting in downward pressure on margins. Price increases to offset rising costs could negatively impact demand for products. Economic downturns and prolonged negative economic conditions could affect consumer spending habits by decreasing the overall demand for home furnishing products. A recovery in the Company's sales could lag significantly behind a general economic recovery due to the deferrable nature and relatively significant cost of purchasing home furnishing products.

Changes in global trade policy and tariffs may have a material adverse effect on business and results of operations. On July 31, 2025, a country specific tariff of 20% ²⁷ was imposed on goods from Vietnam, a key sourcing country. Tariffs on imported goods could have a material adverse impact on future net sales, cost of goods sold, profit and cash flow. The Company's participation in a multi-employer pension plan may have exposure under the plan that could extend beyond what its obligations would be with respect to its employees; based on the most recent information available, the present value of actuarially accrued liabilities substantially exceeds the value of the assets held in trust to pay benefits. At June 30, 2025, the Company had $36.2 million ²⁸ in property, plant and equipment and $41.5 million ²⁹ in right of use assets associated with leased facilities, which are subject to impairment testing. The Company recorded a $14.1 million ³⁰ impairment charge in fiscal 2025 related to the Mexicali facility right-of-use asset, and if capacity requirements do not necessitate utilization of that facility and subleasing is unsuccessful, the remaining carrying amount may not be recoverable.

Management's message emphasizes remaining financially agile with strong liquidity, continuing to build the foundation for profitable long-term growth in both retail and e-commerce sales channels, building global supply chain resiliency, continuing focus on operational excellence, strengthening digital capabilities, re-imagining the customer experience, and building strong culture and talent. The Company is assessing options to mitigate any potential impact from tariffs, which includes supply chain adjustments, negotiating concessions with current suppliers, and pricing actions. Management believes the Company was in compliance with all covenants as of June 30, 2025.