What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2021-09-08 compared with 2020-08-31 · 133 added, 138 removed, 582 unchanged (32% of the section changed)

14 unchanged sentences

We have audited the accompanying consolidated balance sheets of Flexsteel Industries, Inc.

and Subsidiaries (the "Company") as of June 30, 2020 and 2019, the related consolidated statements of income , comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended June 30, 2020, the related notes to consolidated financial statements, and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements").

and Subsidiaries (the "Company") as of June 30, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended June 30, 2021, the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2021, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of June 30, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 28, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of June 30, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 8, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Inventories— Refer to Notes 1 and 3 to the financial statements

Critical Audit Matter Description

The Company has inventories of $161.1 million as of June 30, 2021.

The Company records inventories at the lower of cost or net realizable value utilizing the first-in, first-out (“FIFO”) method.

The Company’s inventory valuation reflects markdowns for the excess of the cost over the amount expected to be realized.

Markdowns establish a new cost basis for the Company’s inventories.

Subsequent changes in facts or circumstances do not result in the reversal of previously recorded markdowns or an increase in that newly established cost basis.

Given the quantitative and qualitative materiality of the balance, coupled with the judgments and subjectivity involved to estimate the markdowns to the net realizable value of inventories, auditing management’s estimates of net realizable value required subjective auditor judgment .

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to estimated net realizable value of manufactured inventories included the following, among others:

 We tested the design and operating effectiveness of internal controls over the inventory valuation process, including controls over the inputs that are used in management’s inventory markdown for the excess of the cost over the amount expected to be realized.

 We tested management's process to determine the inventory markdowns and net realizable value of inventory through inquiries of management, and evaluation of accounting policies and process documentation.

 We tested the accuracy and completeness of the Company’s measurement of inventory markdowns using a sampling approach.

We evaluated the appropriateness of methodologies and assumptions used by management to estimate markdown reserves including inventory quantities on-hand, historical sales activity, and other assumptions used by management.

 We evaluated management’s measurement of the inventory markdowns and net realizable value by testing the mathematical accuracy of the Company’s calculation.

 We performed retrospective reviews of actual products sold in the current year against prior year inventory markdowns to net realizable value.

/s/ Deloitte & Touche LLP

Minneapolis, MN

August 28, 2020

September 8, 2021

We have served as the Company's auditor since 1965.

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In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements and financial statement schedule as of and for the year ended June 30, 2020, of the Company and our report dated August 28, 2020 expressed an unqualified opinion on those financial statements.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements and financial statement schedule as of and for the year ended June 30, 2021, of the Company and our report dated September 8, 2021 expressed an unqualified opinion on those financial statements.

Basis for Opinion

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Minneapolis, MN

August 28, 2020

September 8, 2021

FLEXSTEEL INDUSTRIES, INC.

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2021, $ 3,240 ;

2020, $ 1,770

Assets held for sale

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Operating lease liabilities, less current maturities

Line of Credit

Other liabilities

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Retained earnings

Accumulated other comprehensive income

Total shareholders'

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Restructuring expense

Environmental remediation

ERP impairment

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Income (loss) before income taxes

Income tax benefit (provision)

Income tax provision (benefit)

Net income (loss)

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Stock options exercised, net

Unrealized loss on available for sale investments, net of tax

Unrealized gain on available for sale investments, net of tax

Long-term incentive compensation

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Cash dividends declared

ASU 2018-02 adoption

Balance at June 30, 2019

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Stock-based compensation

Minimum pension liability adjustment, net of tax

Treasury stock purchases

Cash dividends declared

ASU 2016-02 adoption

Balance at June 30, 2020

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Stock options exercised, net

Unrealized gain on available for sale investments, net of tax

Long-term incentive compensation

2 unchanged sentences

Cash dividends declared

ASU 2016-02 adoption

Balance at June 30, 2021

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OPERATING ACTIVITIES:

Net (loss) income

Net income (loss)

Adjustments to reconcile net income to net cash provided by operating activities:

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Other long-term liabilities

Net cash provided by operating activities

Net cash (used in) provided by operating activities

INVESTING ACTIVITIES:

Purchases of investments

Proceeds from investments

Proceeds from sale of investments

Proceeds from sale of capital assets

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Treasury stock purchases

Proceeds from line of credits

Payments on line of credits

Proceeds from lines of credit

Payments on lines of credit

Proceeds from issuance of common stock

Shares withheld for tax payments on vested restricted shares

Shares withheld for tax payments on vested shares

and options exercised

Net cash (used in) financing activities

Increase (decrease) in cash and cash equivalents

(Decrease) increase in cash and cash equivalents

Cash and cash equivalents at beginning of year

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SUPPLEMENTAL INFORMATION

Cash paid for amounts included in lease liabilities

Right-of-use assets exchanged for lease liabilities

Interest paid

Income taxes (refunded) paid

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and Subsidiaries (the “Company”) is one of the largest manufacturers, importers and online marketers of residential furniture and products in the United States.

Product offerings include a wide variety of upholstered 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.

A featured component in most of the upholstered furniture is a unique steel drop-in seat spring from which the name “Flexsteel” is derived.

Product offerings include a wide variety of 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.

A featured component in most of the furniture is a unique steel drop-in seat spring from which the name “Flexsteel” is derived.

The Company distributes its products throughout the United States through its e-commerce channel and dealer network.

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The Company’s business operations and financial performance for the fiscal year 2020 were impacted by COVID-19.

These impacts are discussed within these notes to the condensed consolidated financial statements.

During the year ended June 30, 2021, the Company has seen improvement in our business conditions as retailers have reopened and orders have increased, however, we continue to see supply chain challenges faced by the furniture industry due to limited availability of ocean containers and significant increases in ocean container rates, limited availability and inflationary pressures in key materials, and labor shortages both in Asia and the United States.

The COVID-19 pandemic remains fluid and the extent of the impact to our business may be significant, however, we are unable to predict the extent or nature of these impacts at this time.

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All intercompany transactions and accounts have been eliminated in consolidation.

The Company’s consolidated financial statements and results of operations are based on consolidated financial statements prepared in accordance with GAAP in the United States of America.

USE OF ESTIMATES – the preparation of consolidated financial statements in conformity with Generally Accepted Accounting Principles (GAAP) in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.

The Company’s consolidated financial statements and results of operations are based on consolidated financial statements prepared in accordance with Generally Accepted Accounting Principles (GAAP) in the United States of America.

USE OF ESTIMATES – the preparation of consolidated financial statements in conformity with GAAP in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.

Ultimate results could differ from those estimates.

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For assets held for sale, if the net book value of the asset is greater than its estimated fair value less cost to sell, an impairment is recorded for the excess of net book value over estimated fair value less cost to sell.

ASSETS HELD FOR SALE – Assets held for sale represent land, buildings, machinery and equipment for locations that have met the criteria of “held for sale” accounting, as specified by Accounting Standards Codification (“ASC”) 360, “Property, Plant, and Equipment.” Once an asset is classified as held for sale, the Company ceases deprecating the asset.

Equipment.” Once an asset is classified as held for sale, the Company ceases deprecating the asset.

The assets held for sale are being marketed for sale and it is the Company’s intention to complete the sale of the assets within the upcoming year.

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Any inventory impairment costs as a result of restructuring activities are accounted for as cost of goods sold.

LEASES – On July 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No.

2016-02, Leases (Topic 842) (“ASC 842”) and the related amendments.

ASC 842 requires lessees to (i) recognize a right of use asset and a lease liability that is measured at the present value of the remaining lease payments, on the consolidated balance sheets, (ii) recognize a single lease cost, calculated over the lease term on a straight-line basis and (iii) classify lease related cash payments within operating and financing activities.

The Company adopted ASC 842 utilizing the optional transition method, which allows guidance to be initially applied at the adoption date with a cumulative-effect adjustment to the opening balance of retained earnings.

The Company elected the package of practical expedients, which allows the Company to forgo reassessing prior conclusions on lease definition, classification and initial direct costs related to existing leases as of the adoption date.

LEASES – The Company accounts for its leases in accordance with Accounting Standards Update (“ASU”) No.

2016-02, Leases (Topic 842) (“ASC 842”).

ASC 842 requires lessees to (i) recognize a right of use asset (“ROU asset”) and a lease liability that is measured at the present value of the remaining lease payments, on the consolidated balance sheets, (ii) recognize a single lease cost, calculated over the lease term on a straight-line basis and (iii) classify lease related cash payments within operating and financing activities.

The Company has made an accounting policy election to not recognize short-term leases on the consolidated balance sheets and all non-lease components, such as common area maintenance, were excluded.

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REVENUE RECOGNITION – Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services.

We generate revenue primarily by manufacturing and delivering upholstered and wooden furniture products to independent furniture retailers in the United States.

We generate 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.

We satisfy our performance obligations when control of our product is passed to our customer, which is the point in time that are customers are able to direct the use of and obtain substantially all of the remaining economic benefit of the goods or services.

We satisfy our performance obligations when control of our product is passed to our customer, which is the point in time that our customers are able to direct the use of and obtain substantially all of the remaining economic benefit of the goods or services.

Net sales consist of product sales and shipping and handling charges, net of adjustments for returns and allowances.

Shipping and handling costs are included in cost of goods sold.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASC 2014-09, Revenue from Contracts with Customers (Topic 606) , which provides a framework for the recognition of revenue, with the objective that recognized revenues properly reflect amounts an entity is entitled to receive in exchange for goods and services.

The guidance is effective for annual reporting periods beginning after December 15, 2017, the Company’s fiscal year 2019.

The guidance permits two methods of adoption:

retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method).

The Company adopted the modified retrospective method on July 1, 2018.

The adoption of this standard did not have a material impact on the Company’s consolidated financial statements as revenue is recognized when product ownership and risk of loss is transferred to the customer, collectability is probable and the Company has no remaining performance obligations.

Thus, the timing of revenue recognition is not impacted by the new standard.

The Company’s revenues result from the sale of goods and reflect the consideration to which the Company expects to be entitled.

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 All taxes imposed on and concurrent with revenue-producing transactions and collected by the Company from a customer, including sales, use, excise, and franchise taxes are excluded from the measurement of the transaction price.

Adoption of this standard did not result in significant changes to the Company’s accounting policies, business processes, systems or controls, or have a material impact on financial position, results from operations and cash flows or related disclosures.

The following table disaggregates the Company’s net sales by product category:

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Advertising expenditures, primarily shared customer advertising in which an identifiable benefit is received and national trade-advertising programs, were approximately $ 3.9 million, $ 3.4 million, and $ 4.3 million in fiscal years 2021, 2020 and 2019, respectively.

CREDIT LOSSES – In June 2016, the Financial Accounting Standards Board (“FASB“) issued ASU 2016-13 “Financial Instruments - Credit Losses (“Topic 326”)” and also issued subsequent amendments to the initial guidance under ASU 2018-19, ASU 2019-04 and ASU 2019-05 (collectively Topic 326).

Topic 326 requires the measurement and recognition of expected credit losses for financial assets held at amortized cost.

This replaces the existing incurred loss model with an expected loss model and requires the use of forward-looking information to calculate credit loss estimates.

Topic 326 must be adopted by applying a cumulative effect adjustment to retained earnings.

Effective July 1, 2020, the Company adopted Topic 326 and there was no impact to the Company’s financial statements.

DESIGN, RESEARCH AND DEVELOPMENT COSTS – are charged to selling, general and administrative expense in the periods incurred.

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The Company calculates the dilutive effect of shares related to the long-term management incentive compensation plan and non-vested shares based on the number of shares, if any, that would be issuable if the end of the fiscal year were the end of the contingency period.

In computing EPS for the fiscal years 2020, 2019 and 2018, net income as reported for each respective period is divided by the fully diluted weighted average number of shares outstanding:

In computing EPS, net income as reported for each respective period is divided by the fully diluted weighted average number of shares outstanding:

(in thousands)

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On June 1, 2020, the Company’s Board of Directors authorized a $ 6 million share repurchase program through June 9, 2021.

As of June 30, 2020, the Company purchased a total of 132 thousand shares at a cost of $1.6 million.

Subsequent to June 30, 2020, on August 21, 2020, the Company’s Board of Directors authorized a new share repurchase program authorizing the Company to purchase up to an aggregate of $ 8 million of the Company’s common stock.

On August 20, 2020, the Company’s Board of Directors authorized an additional $ 8 million share repurchase program to begin on September 4, 2020, through September 3, 2021.

On October 22, 2020, the Company’s Board of Directors authorized another $ 30 million share repurchase program through October 29, 2023.

As of October 31, 2020, the $ 6 million and $ 8 million repurchase programs were completed.

As of June 30, 2021, the Company has purchased a total of 1,283,785 shares at a cost of $ 31.3 million under the three programs and has $ 12.6 million remaining in the $ 30 million share repurchase program.

Unadopted Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13 “Financial Instruments - Credit Losses (Topic 326)” and also issued subsequent amendments to the initial guidance under ASU 2018-19, ASU 2019-04 and ASU 2019-05 (collectively Topic 326).

Topic 326 requires the measurement and recognition of expected credit losses for financial assets held at amortized cost.

This replaces the existing incurred loss model with an expected loss model and requires the use of forward-looking information to calculate credit loss estimates.

The amendments in this guidance are effective for fiscal years beginning after December 15, 2019, with early adoption permitted for certain amendments.

Topic 326 must be adopted by applying a cumulative effect adjustment to retained earnings.

The Company does not expect adoption of the new guidance to have a significant impact on its financial statements.

In December 2019, the FASB issued ASU 2019 - 12 “Income Taxes Simplifying the Accounting for Income Taxes (Topic 740)” as part of its initiative to reduce complexity in the accounting standards.

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The Company does not expect adoption of the new guidance to have a significant impact on its financial statements.

Effective July 1, 2019, the Company adopted ASC 842, which resulted in a recognition of right-of-use (“ROU”) assets and lease liabilities on the Company’s consolidated balance sheets.

ROU assets represent the right to use an underlying asset for the lease term and lease liabilities reflect the obligation to make lease payments arising from the lease.

The Company accounts for its leases in accordance with ASU No.

2016-02, Leases (Topic 842) (“ASC 842”).

The Company has made an accounting policy election to not recognize short-term leases on the consolidated balance sheets and all non-lease components, such as common area maintenance, were excluded.

At any given time during the lease term, the lease liability represents the present value of the remaining lease payments, and the ROU asset is measured as the amount of the lease liability, adjusted for pre-paid rent, unamortized initial direct costs and the remaining balance of lease incentives received.

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At the lease inception date, the Company determines if an arrangement is, or contains a lease.

Some of the Company’s leases include options to renew at

similar terms.

Some of the Company’s leases include options to renew at similar terms.

The Company assesses these options to determine if the Company is reasonably certain of exercising these options based on relevant economic and financial factors.

Options that meet these criteria are included in the lease term at the lease commencement date.

The Company does not record leases with a term of 12 months or less on the Company’s consolidated balance sheets.

For purposes of measuring the Company’s ROU asset and lease liability, the discount rate utilized by the Company was based on the average interest rates effective for the Company’s two $ 10.0 million lines of credit.

Some of the Company’s leases contain variable rent payments, including common area maintenance and utilities.

Due to the variable nature of these costs, they are not included in the measurement of the ROU asset and lease liability.

During the fourth quarter of fiscal 2020, as part of the Company’s strategic SKU rationalization initiative, the Company exited two showroom space leases.

In conjunction with the exit, the Company impaired the ROU assets to their fair value as of June 30, 2020.

The total amount of the write-off was $ 2.9 million and is included in selling, general and administrative expenses on the Company’s consolidated statements of income for the fiscal year ended June 30, 2020.

The components of the Company’s leases reflected on the Company’s consolidated statements of income were as follows:

1 unchanged sentence

June 30, 2021

June 30, 2020

Operating lease expense

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June 30, 2021

June 30, 2020

(in thousands)

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Operating leases

June 30, 2021

June 30, 2020

(in thousands)

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Lease liability

Prior to the adoption of ASU 842, future minimum lease payments under non-cancellable operating leases based on accounting standards applicable as of June 30, 2019 were as follows:

(in thousands)

Total future minimum lease payments

A comparison of inventories is as follows:

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The Company recognized impairment charges of $ 0 , $ 17.5 million, and $ 21.3 million in fiscal 2021, 2020 and 2019, respectively.

No impairment charge was recorded in fiscal 2018.

The $ 17.5 million impairment charge in fiscal 2020 primarily resulted from the previously announced exit of the Company’s Vehicle Seating and remaining Hospitality product lines, which resulted in the closure of the Company’s Dubuque, Iowa and Starkville, Mississippi manufacturing facilities, and is recorded in restructuring expense on the Company’s consolidated statements of income.

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These changes were initial outcomes driven from customer and product line profitability and footprint utilization analyses in the fourth quarter of fiscal 2019.

On June 18, 2019, the Company announced it completed the analysis and planning process and set forth the comprehensive transformation program to be

executed over a two-year period, which includes previously announced restructuring activities on May 15, 2019.

On June 18, 2019, the Company announced it completed the analysis and planning process and set forth the comprehensive transformation program to be executed over a two-year period, which includes previously announced restructuring activities on May 15, 2019.

The transformation program includes activities such as business simplification, process improvement, exiting of non-core businesses, facility closures, and reductions in work force.

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On April 28, 2020, the Company announced it will exit the Vehicle Seating and the remainder of the Hospitality product lines, and subsequently closed its Dubuque, Iowa and Starkville, Mississippi manufacturing facilities.

The Company expects to complete the restructuring activities related to the exit of the Vehicle Seating and the remainder of the Hospitality product lines during fiscal 2021.

As a result of these planned actions, the Company expects to incur pre-tax restructuring and related expenses of approximately $ 56 to $ 58 million over this two-year timeframe of which $ 25 to $ 26 million will be cash and $ 31 - $ 32 million non-cash.

In addition, the Company plans to list several properties for sale when the footprint optimization is completed.

Total cumulative restructuring and related costs incurred as of June 30, 2020 were $ 55.2 million.

The Company has completed substantially all the restructuring activities related to the exit of the Vehicle Seating and the remainder of the Hospitality product lines during fiscal 2021.

As a result of these planned actions, the Company planned to incur pre-tax restructuring and related expenses of approximately $ 56 to $ 58 million over this two-year timeframe and listed several properties for sale.

Total cumulative restructuring and related costs incurred as of June 30, 2021, was $ 58.7 million.

The following is a summary of restructuring costs:

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One-time employee termination benefits

Contract termination costs

Contract (recoveries) termination costs

Fixed asset impairments

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Other associated costs include legal and professional fees, stock-based compensation expense for retention restricted stock units in connection with the Company’s restructuring plan, on-going facilities and transition costs.

The rollfoward of the accrued restructuring costs is as follows, for the years ended June 30, 2020, 2019, and 2018:

The roll forward of the accrued restructuring costs is as follows, for the years ended June 30, 2021, 2020, and 2019:

(in thousands)

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ASSETS HELD FOR SALE

During the fiscal year 2020, the Company committed to a plan to sell assets located at the Company’s Harrison, Arkansas, Dubuque, Iowa, and Starkville, Mississippi locations as part of the Company’s restructuring plan, see Note 5 Restructuring .

The Company had previously included assets at its Huntingburg, Indiana location as assets held for sale for the quarter ended March 31, 2020.

During the quarter ended June 30, 2020, the Company has reclassified the Huntingburg, Indiana assets out of assets held for sale, since the Company is currently using the warehouse to store inventory.

As of June 30, 2020, the Company reclassified a net book value of $ 51 thousand for the Huntingburg, Indiana assets to property, plant and equipment.

During fiscal year 2020, the Company committed to a plan to sell assets located at the Company’s Harrison, Arkansas, Dubuque, Iowa, and Starkville, Mississippi locations as part of the Company’s restructuring plan, see Note 5 Restructuring .

A summary of the assets held for sale is included in the table below as of June 30, 2021.

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Machinery & equipment

Dubuque, Iowa

Building & building improvements

Land & land improvements

Machinery & equipment

Starkville, Mississippi

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Land & land improvements

Machinery & equipment

The Company has two facilities in Harrison, Arkansas and one of the facility has been sold subsequent to June 30, 2020.

See Note 16 Subsequent Events , for further discussion.

OTHER NONCURRENT ASSETS

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(“Wells”) that provided short-term capital financing up to $ 10.0 million with interest of LIBOR plus 1 %.

The credit agreement expired on June 30, 2020 and there were no balance outstanding as June 30, 2020.

Letters of credit outstanding at Wells as of June 30, 2020, totaled $ 1.2 million, of which $ 1.3 million of the Company’s cash held at Wells is pledged as collateral.

The Company had an additional unsecured $ 10.0 million line of credit with MidwestOne Bank, with interest at prime minus 2 %, subject to a floor of 3.75 %.

The credit agreement expired on June 30, 2020 and there were no balance outstanding as of June 30, 2020.

On August 28, 2020, the Company entered into a secured $ 25.0 million credi t facility with Dubuque Bank & Trust Company, with a two year term and interest of 1.50 % plus LIBOR, subject to a floor of 3.0 %.

The credit agreement expired on June 30, 2020 and there was no balance outstanding as June 30, 2020.

Letters of credit outstanding at Wells as of June 30, 2020, totaled $ 1.2 million, of which $ 1.3 million of the Company’s cash held at Wells was pledged as collateral.

On August 28, 2020, the Company entered into a secured $ 25.0 million credi t facility with Dubuque Bank & Trust Company, with a two-year term and interest of 1.50 % plus LIBOR, subject to a floor of 3.0 %, which floor was in effect on June 30, 2021.

If LIBOR is redefined or becomes unavailable, the Bank has sole discretion to substitute another index and adjust the rate spread, however it cannot materially change the total interest cost without the Company’s advance written consent.

The credit facility expires on August 28, 2022 .

The credit facility is secured by essentially all of the Company’s assets, excluding real property and requires the Company maintain compliance with certain financial and non-financial covenants.

No borrowings have been made on the $ 25.0 million credit facility.

The credit facility is secured by essentially all the Company’s assets, excluding real property and requires the Company maintain compliance with certain financial and non-financial covenants.

The balance of borrowings at June 30, 2021 was $ 3.5 million.

Letters of credit outstanding at Wells Fargo Bank N.A.

(“Wells”) as of June 30, 2021, totaled $ 1.1 million, of which $ 1.2 million of the Company’s cash held at Wells is pledged as collateral.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted and signed into law in response to the COVID-19 global pandemic.

Certain provisions of the CARES Act impacted the current fiscal year 2020.

Certain provisions of the CARES Act impacted the fiscal year 2020.

The CARES Act permits net operating losses (“NOLs”) incurred in tax years 2018, 2019, and 2020, (the Company’s fiscal years 2019, 2020 and 2021) to offset 100% of taxable income and be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes.

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In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, and results of recent operations.

As of June 30, 2020, it was determined the Company has not reached a more likely than not position that the Company will realize all of its deferred tax assets.

As of June 30, 2021, it was determined the Company has not reached a more likely than not position that the Company will realize all its deferred tax assets.

Therefore, the Company has recorded a valuation allowance against the federal and state deferred tax assets of $ 7.3 million.

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State taxes, net of federal effect

Valuation allowance

CARES Act legislation

Foreign rate differential

Remeasurement of deferred tax assets and valuation

Beginning of year true ups

Stock FMV over Award

Tax rate change on net operating loss carryback

related to CARES Act

Effective tax rate

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The Company records interest expense and penalties related to income taxes as income tax expense in the consolidated statements of income.

The Company does not expect that there will be any positions for which it is reasonably possible that the total amounts of

unrecognized tax benefits will significantly increase or decrease within the next twelve months.

The Company does not expect that there will be any positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next twelve months.

The amount of unrecognized tax benefits as of June 30, 2021, and 2020 that if recognized, would affect the effective tax rate was $ 0.6 million and $ 0.5 million respectively.

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Lease liabilities

At June 30, 2020, certain state tax attribute carryforwards of $ 3.2 million were available, with $ 0.6 million of credits expiring between 2021 and 2029, $ 1.6 million of credits with an indefinite carryforward period, and $ 1.0 million of state NOL carryforward.

Some of the state NOL carryforward will have an indefinite carryforward and some will expire in varying amounts between 2025 and 2040.

At June 30, 2021, certain state tax attribute carryforwards of $ 2.5 million were available, with $ 0.6 million of credits expiring between 2021 and 2029, $ 1.6 million of credits with an indefinite carryforward period, and $ 4 million of state NOLs carryforward.

Some of the state NOLs carryforward will have an indefinite carryforward and some will expire in varying amounts between 2025 and 2040.

As of June 30, 2021, it was determined the Company has not reached a more likely than not position the Company will realize any portion of the state attribute carryforwards.

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federal deferred tax assets.

As a result of the CARES Act, the Company is able to realize a portion of its U.S.

federal deferred tax assets, however, it will not realize the remainder.

Therefore, the Company has a recorded a valuation allowance against its U.S federal deferred tax assets for $ 7.3 million.

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Generally, tax years 2017-2020 remain open to examination by the Internal Revenue Service or other taxing jurisdictions to which the Company is subject.

As of June 30, 2020, there is an ongoing federal income tax audit for tax years 2018-2019.

STOCK-BASED COMPENSATION

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The LTICP provides for RSUs to be awarded to officers and key employees based on performance targets set by the Compensation Committee of the Board of Directors (the “Committee”).

The Company selected fully-diluted earnings per share and total shareholder return as the performance goal for the three year performance periods from July 1, 2017 – June 30, 2020 (“2018-2020”) and July 1, 2018 – June 30, 2021 (“2019-2021”).

As of June 30, 2019, both the performance period 2018-2020 and 2019-2021 are no longer attainable.

For the July 1, 2019 – June 30, 2022 (“2020-2022”) three year performance period, the Committee selected Adjusted Earnings Before Interest and Tax with a defined percentage growth in fiscal year 2021 and 2022.

Since the 2018-2020 and 2019-2021 performance periods are no longer attainable, only RSU’s granted for the 2020-2022 performance period are included in the table below for the Company’s unvested LTICP RSUs during the year ended June 30, 2020:

The Company selected fully-diluted earnings per share and total shareholder return as the performance goal for the three-year performance period July 1, 2018 – June 30, 2021 (“2019-2021”).

As of June 30, 2019, the performance period 2019-2021 was no longer attainable.

For the July 1, 2019 – June 30, 2022 (“2020-2022”) and the July 1, 2020 – June 30, 2023 (“2021-2023”) three-year performance periods, the Committee selected Adjusted Earnings Before Interest and Tax with a defined percentage growth in fiscal year 2021 and 2022 as the performance goal.

Since the 2019-2021 performance period is no longer attainable, only RSU’s granted for the 2020-2022 and 2021-2023 performance periods are included in the table below for the Company’s unvested LTICP RSUs during the year ended June 30, 2021:

Time Based Vest

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Unvested as of June 30, 2020

Unvested as of June 30, 2021

Total unrecognized stock-based compensation related to the unvested LTICP RSUs was $ 1.6 million as of June 30, 2021, which is expected to be recognized over a period of 1.6 years.

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Multi-employer Pension Plans

The Company contributes to three multi-employer defined benefit pension plans under the terms of collective-bargaining agreements that cover its union-represented employees.

The risks of participating in these multi-employer plans are different from single-employer plans in the following aspects:

 Assets contributed to the multi-employer plan by one employer may be used to provide benefits to employees of other participating employers.

 If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be shared by the remaining participating employers.

 If a participating employer chooses to stop participating in some of its multi-employer plans, the employer may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability.

The Company’s participation in these plans for the annual period ended June 30, 2020, is outlined in the following table.

The Company contributes to one multi-employer defined benefit pension plan under the terms of collective-bargaining agreements that cover its union-represented employees.

The Company’s participation in the current and previous defined benefit pension plans for the annual period ended June 30, 2021, is outlined in the following table.

Unless otherwise noted, the most recent Pension Protection Act zone status available in 2021 and 2020 is for the plan’s year-end at December 31, 2020 and 2019, respectively.

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With the closure of the Company’s Dubuque, Iowa and Starkville, Mississippi manufacturing facilities, the collective bargaining agreements for the Steelworkers Pension Trust and Central Pension Fund was terminated as of June 30, 2020.

As of June 30, 2020, the Company intends to exit the Steelworkers Pension Trust and has recorded a withdrawal liability of $ 1.4 million as restructuring and related expenses, see Note 5 Restructuring .

The estimated cumulative cost to exit the Company’s Central States SE and SW Areas Pension Fund and Central Pension Fund multi-employer plans was approximately $ 17.1 million on June 30, 2020.

No liability has been recorded as of June 30, 2020, as the Company intends to continue to contribute to these two plans.

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

(in thousands)

Pension and other post-retirement benefit adjustments, net of tax (1)

Adoption of ASU 2018-02

Available-for-sale securities, net of tax (2)

Total accumulated other comprehensive income (loss)

(1) T he tax effect on the pension and other post-retirement benefit adjustments is a tax benefit of $ 0.0 million, $ 0.0 million and $ 0.7 million at June 30, 2020, 2019 and 2018, respectively.

(2) The t ax effect on the available-for-sale securities is a tax benefit $ 0.0 million at June 30, 2020, 2019 and 2018.

As of June 30, 2021, the Company has withdrawn from the Steelworkers Pension Trust and has recorded a withdrawal liability of $ 1.4 million for the years ending June 30, 2021, and June 30, 2020, as restructuring and related expenses, see Note 5 Restructuring .

The estimated cumulative cost to exit the Company’s Central States SE and SW Areas Pension Fund multi-employer plan was approximately $ 20.0 million on June 30, 2021.

No liability has been recorded as of June 30, 2021, as the Company intends to continue to contribute to this plan.

COMMITMENTS AND CONTINGENCIES

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Following multiple exchanges from November 2019 through early 2020, the Company submitted a final and supplemental report to the EPA regarding the results of the upgradient investigation on June 17, 2020.

On July 13, 2020, the Company further entered in to a Second Amended

Tolling Agreement that tolls the statute of limitations for potential claims by the EPA through February 24, 2021.

The Company reflected a $3.6 million liability in the consolidated balance sheets for the fiscal year ended June 30, 2018.

Through agreement with the EPA the statute of limitations for potential claims by the EPA was extended through September 30, 2021.The Company reflected a $3.6 million liability in the consolidated balance sheets for the fiscal year ended June 30, 2018.

Despite the Company’s position that it did not cause nor contribute to the contamination, the Company continues to reflect this liability in the consolidated balance sheets for the fiscal year ended June 30, 2021, in accordance with FASB issued Asset Retirement and Environmental Obligations (ASC 410-30) .

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The Company agreed to resolve both Hernandez I and Hernandez II in principle and on a class-wide basis for $ 0.5 million.

That settlement will serve to resolve the claims of the two Plaintiffs, as well as the approximately 270 remaining members of the class unless an individual class member asks to be excluded.

At present, the material terms of the settlement are captured in a Long-Form Settlement Agreement.

The Company anticipates that obtaining final approval of the parties’ settlement from the court will take at least six months and potentially longer, such that any settlement payments will not be made until the fiscal year ended June 30, 2021.

The settlement amount of $ 0.5 million, has been accrued in other current liabilities during the fiscal year ended June 30, 2019 and continues to reflect this liability in the consolidated balance sheets for the fiscal year ended June 30, 2020.

That settlement served to resolve the claims of the two Plaintiffs, as well as the approximately 270 remaining members of the class unless an individual class member asked to be excluded.

The material terms of the settlement were captured in a Long-Form Settlement Agreement.

The court granted final approval of the parties’ settlement in February 2021.

The Company paid the final settlement amount of $ 0.5 million, in February 2021 and no accrued amounts remain in the consolidated balance sheets as of June 30, 2021.

Other Proceedings – From time to time, the Company is subject to various other legal proceedings, including lawsuits, which arise out of, and are incidental to, the conduct of the Company’s business.

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For the Quarter Ended

Operating income (loss)

Net income (loss)

Earnings (loss) per share:

Operating income

Earnings per share:

For the Quarter Ended

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SUBSEQUENT EVENTS

On June 26, 2020, the Company entered into a Purchase and Sale Agreement to sell one of its Harrison, Arkansas facilities for $ 0.7 million.

The transaction closed on August 14, 2020.

The Company has one facility remaining after the sale.

On August 28, 2020, the Company entered into a new credit facility with Dubuque Bank & Trust Company, see Note 9 Credit Arrangements for more information.

Subsequent to June 30, 2020, the Company’s Lancaster, Pennsylvania property was placed for sale.

The total net book value of the Lancaster property was $ 0.8 million as of June 30, 2020.

The Company expects the sale to be completed during the first quarter of fiscal 2021.

On September 8, 2021, the Company, as borrower, entered into a credit agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association (the “Lender”) and the other lenders party thereto.

The Credit Agreement has a five-year term and provides for up to a $ 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 $ 5,000,000 which, upon issuance, would be deemed advances under the revolving line of credit.

The Company’s $ 1.2 million of letters of credit previously issued by Lender will be treated as outstanding under the Credit Agreement.

Proceeds of borrowings shall be used to refinance all indebtedness owing to Dubuque Bank & Trust and for working capital purposes.

The Company’s obligations under the Credit Agreement are secured by substantially all of its assets, excluding real property.

Subject to certain conditions, borrowings under the Credit Agreement bear interest at 1.25 % or 1.50 % per annum plus LIBOR.

If LIBOR becomes unavailable, the replacement rate will be determined pursuant to the terms of the Credit Agreement.

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 :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.

On August 20, 2021, Flexsteel entered into a lease agreement for the construction of a 507,830 square foot manufacturing facility in Mexicali, Mexico.

The lease commencement date under ASC842 guidance will be April 1, 2022, the date the lessor makes the

building available for use by the Company for purposes of completing any leasehold improvements required by the Company prior to beginning operations.

The 12-year lease term begins on June 1, 2022, and ends on May 31, 2034, with options for two five-year extensions.

Annual base rent under the lease is $ 3.1 million plus taxes, insurance, and common area maintenance costs.

On July 27, 2021, the Company entered into a Purchase and Sale Agreement for the sale of its Harrison, Arkansas facility (see note 6 Assets held for sale).

Completion of the sale is dependent upon Buyer financing and completion of a Phase 1 environmental study.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data