Flexsteel Industries Inc: Form 10-Q for the period ended Dec 31, 2025

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 six months ended December 31, 2025 and 2024. The amounts presented are percentages of the Company’s net sales.

Results of Operations for the Quarter Ended December 31, 2025 vs. 2024

Net sales were $118.2 million for the quarter ended December 31, 2025, compared to net sales of $108.5 million in the prior year quarter, an increase of 9.0%. The increase 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.

Sales order backlog, inclusive of estimated tariff surcharges, was $82.4 million as of the quarter ended December 31, 2025, an increase of 6.5% compared to $77.3 million in the prior year quarter.

Gross margin as a percent of net sales for the quarter ended December 31, 2025, was 22.7%, compared to 21.0% for the prior year quarter, an increase of 170 basis points (“bps”). The 170-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 (“SG&A”) expenses increased $1.7 million to $17.8 million in the quarter ended December 31, 2025, as compared to $16.1 million in the prior year quarter. As a percentage of net sales, SG&A was 15.1% in the quarter ended December 31, 2025 compared to 14.9% of net sales in the prior year quarter. The 20-bps increase was mainly due to investments in growth initiatives.

Income tax expense was $2.7 million, or an effective rate of 28.9% for the quarter ended December 31, 2025, compared to income tax expense of $2.6 million, or an effective rate of 22.4% for the quarter ended December 31, 2024. For the quarter ended December 31, 2025, the effective tax rate differs from the statutory tax rate of 21% primarily due to the impact of foreign operations, state taxes and non-deductible compensation offset by credits for research and development and the impact associated with uncertain tax positions.

Net income was $6.6 million, or $1.18 per diluted share for the quarter ended December 31, 2025, compared to net income of $9.1 million, or $1.62 per diluted share in the prior year quarter. During the three-month period ended December 31, 2024, the Company recorded a gain on the sale of its Dublin, Georgia facility.

Results of Operations for the six months ended December 31, 2025 and 2024

Net sales were $228.7 million for the six months ended December 31, 2025, compared to net sales of $212.5 million in the prior-year six-month period, an increase of 7.6%. The increase in sales of $16.2 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 six months ended December 31, 2025, was 23.1%, compared to 21.3% for the prior-year six-month period, an increase of 180 bps. The 180-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 $2.3 million in the six months ended December 31, 2025, compared to the prior-year six-month period. SG&A as a percentage of sales was 15.2% in the six months ended December 31, 2025, compared to the prior-year six-month period of 15.3%. The 10-bps decrease was primarily due to fixed cost leverage on higher sales, offset by investments in growth initiatives for the six months ended December 31, 2025.

Income tax expense was $4.8 million, or an effective rate of 25.4%, during the six months ended December 31, 2025, compared to income tax expense of $4.5 million in the prior-year six-month period, or an effective tax rate of 25.3%. The effective tax rate for the six months ended December 31, 2025, was primarily impacted by state taxes, the impact of foreign operations and nondeductible compensation, offset by credits for research and development.

Net income was $14.0 million, or $2.49 per diluted share for the six months ended December 31, 2025, compared to net income of $13.2 million, or $2.38 per diluted share in the prior-year six-month period.

Liquidity and Capital Resources

Working capital (current assets less current liabilities) on December 31, 2025, was $126.0 million compared to $110.4 million on June 30, 2025. The $15.6 million increase in working capital was primarily due to an increase in other current assets of $6.9 million, an increase in trade receivables of $6.6 million, an increase in inventories of $6.0 million, and a decrease in other current liabilities of $2.9 million partially offset by a decrease in cash of $3.2 million, an increase in accounts payable of $3.3 million, and an increase in operating lease of $0.3 million. Refer to discussion of working capital changes below, under Net cash provided by operating activities. Capital expenditures were $3.1 million during the six months ended December 31, 2025.

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

(in thousands)

Net cash provided by operating activities

For the six months ended December 31, 2025, net cash provided by operating activities was $5.1 million, primarily due to net income of $14 million, an increase in accounts payable of $3.6 million, a decrease in other assets of $3.4 million, and adjustments for non-cash items including deferred income taxes $3.4 million, stock-based compensation of $2.3 million, depreciation of $1.7 million, provision for credit losses of $0.1 million partially offset by an increase in other current assets of $6.9 million, an increase in trade receivables of $6.7 million, an increase in inventories of $6.0 million, a decrease in accrued liabilities of $3.7 million and a decrease in other long-term liabilities of $0.1 million.

For the six months ended December 31, 2024, net cash provided by operating activities was $9.1 million, primarily due to an increase in net income of $13.2 million, adjustments for non-cash items including a pre-tax gain on sale of assets of $5 million, stock-based compensation of $2.1 million, depreciation of $1.9 million, and a decrease in inventory of $5.5 million offset by an increase in trade receivables of $7.9 million, an increase in accrued liabilities of $4.9 million, a decrease in other current assets of $3.6 million, an increase in accounts payable of $5.4 million and a decrease of other assets and liabilities of $0.2 million.

Net cash (used in) provided by investing activities

For the six months ended December 31, 2025, net cash used in investing activities was $3.1 million due to capital expenditures.

For the six months ended December 31, 2024, net cash provided by investing activities was $6.5 million due to proceeds from the sale of the Dublin, Georgia facility of $6.7 million, and corporate owned life insurance proceeds of $1.1 million, offset by capital expenditures of $1.3 million.

Net cash (used in) financing activities

For the six months ended December 31, 2025, net cash used in financing activities was $5.3 million, primarily due to dividends paid of $2.2 million, shares withheld for tax payments on vested shares and options exercised of $1.9 million and treasury stock purchases of $1.1 million.

For the six months ended December 31, 2024, net cash used in financing activities was $8.6 million, due to payments on the line of credit of $207.1 million partially offset by proceeds from the line of credit of $202 million, shares withheld for tax payments on vested shares and options exercised of $2.1 million, dividends paid of $1.8 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 entities. As of December 31, 2025, management believes the Company was in compliance with all covenants.

On April 18, 2022, the Company entered into a first amendment to the Credit Agreement (“First Amendment to the Credit Agreement”), with the Lender, and the lenders thereto. The amendment to the Credit Agreement changed the definition of the term "Payment Conditions" and further defined default or event of default and the calculation of the Fixed Charge Coverage Ratio.

Subject to certain conditions, borrowings under the Credit Agreement initially bore interest at LIBOR plus 1.25% or 1.50% per annum. On May 24, 2023, the Company entered into a second amendment to the Credit Agreement (“Second Amendment to the Credit Agreement”) with the Lender to transition the applicable interest rate from LIBOR to Secured Overnight Financing Rate (“SOFR”). Effective as of the date of the Second Amendment to the Credit Agreement, borrowings under the amended Credit Agreement bear interest at SOFR plus 1.36% to 1.61%, or an effective interest rate of 5.13%, on December 31, 2025.

On June 3, 2025, the Company entered into a third amendment to its Credit Agreement ("Third Amendment to the Credit Agreement") with Wells Fargo Bank, NA. The amendment reduced the maximum revolving line of credit amount to $55 million and modified certain definitions in the Credit Agreement which include dollar figures derived from the maximum revolver amount. The reduction in the maximum revolving line of credit amount was initiated by the Company to better align with current and projected borrowing availability under the terms of the Credit Agreement.

As of December 31, 2025, there were no outstanding borrowings under the Credit Agreement, exclusive of fees and letters of credit.

Letters of credit outstanding with the Lender as of December 31, 2025, totaled $0.9 million.

Contractual Obligations

As of December 31, 2025, there have been no material changes to our contractual obligations presented in our Annual Report on Form 10-K for the year ended June 30, 2025.

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, as well as disruptions associated with shipping distances and negotiations with port employees. Other risks related to furniture product importation include government imposition of regulations and/or quotas; duties, taxes or tariffs 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, decrease demand, and decrease earnings.

Foreign Currency Risk – During the quarters ended December 31, 2025 and 2024, the Company did not have sales but had purchases and other expenses denominated in foreign currencies, primarily the Mexican Peso. The wages of our employees and certain other employee benefits and indirect costs related to our operations in Mexico are made in Pesos and subject to foreign currency fluctuation with the U.S. dollar. The Company does not employ any foreign currency hedges against this operating expense exposure. A negative shift in the value of the U.S. dollar against the Peso could increase the cost of our manufactured product. In addition, the Company has certain asset and liabilities related to our manufacturing operations which are denominated in pesos, primarily our VAT receivable for recoverable VAT paid in Mexico. A negative shift in the value of the Peso against the U.S. dollar could result in the value of our receivable decreasing which may impact our earnings. The Company does not currently hedge this foreign currency risk. See “Risk Factors” in Item 1A in the most recent Annual Report on Form 10-K for further discussion.

Interest Rate Risk – The Company’s primary market risk exposure regarding financial instruments is changes in interest rates. On December 31, 2025, the Company had no outstanding borrowings on its line of credit, exclusive of fees and letters of credit.

(a) Evaluation of disclosure controls and procedures. Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective as of December 31, 2025.

(b) Changes in internal control over financial reporting. During the quarter ended December 31, 2025, there were no significant changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended) that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

Cautionary Statement Relevant to Forward-Looking Information for “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995

The Company and its representatives may from time to time make written or oral forward-looking statements concerning long-term goals or anticipated results of the Company, including statements contained in the Company’s filings with the Securities and Exchange Commission and its reports to stockholders.

Statements, including those in this Quarterly Report on Form 10-Q, 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 the Company’s 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, changes in foreign currency values, 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, disruptions or security breaches to business information systems, the impact of any future pandemic, 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.

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.

There has been no material change in the risk factors set forth under Part 1, Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2025.