What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-08-26 compared with 2021-09-08 · 135 added, 143 removed, 572 unchanged (33% of the section changed)

1 unchanged sentence

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm PCAOB ID 34

Report of Independent Registered Public Accounting Firm – Internal Control Over Financial Reporting

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

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").

and subsidiaries (the "Company") as of June 30, 2022 and 2021, the related consolidated statements of income, comprehensive income, shareholders'

equity, and cash flows, for each of the three years in the period ended June 30, 2022, and 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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2022, 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, 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.

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, 2022, 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 26, 2022, 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.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate 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 separate opinions on the critical audit matter or on the accounts or disclosures to which they relate.

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

16 unchanged sentences

Minneapolis, MN

September 8, 2021

August 26, 2022

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, 2022, 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, 2021, of the Company and our report dated September 8, 2021 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, 2022, of the Company and our report dated August 26, 2022, expressed an unqualified opinion on those financial statements.

Basis for Opinion

16 unchanged sentences

Minneapolis, MN

September 8, 2021

August 26, 2022

FLEXSTEEL INDUSTRIES, INC.

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Operating lease right-of-use assets

Deferred income taxes

LIABILITIES AND SHAREHOLDERS'

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authorized 15,000 shares;

8,133 shares issued and 6,848 shares outstanding as of June 30, 2021 and 8,008 shares issued and 7,876 outstanding as of June 30, 2020

8,190 shares issued and 5,300 shares outstanding as of June 30, 2022, and 8,133 shares issued and 6,848 shares outstanding as of June 30, 2021

Additional paid-in capital

12 unchanged sentences

Restructuring expense

ERP impairment

(Gain) on disposal of assets

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Interest (expense)

Total other income

Total other (expense) income

Income (loss) before income taxes

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Net unrealized (losses) gains on securities

Minimum pension liability

Income tax expense related to minimum pension liability

Net minimum pension asset

Other comprehensive income (loss), net of tax

Comprehensive income (loss)

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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

1 unchanged sentence

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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Stock-based compensation expense

Changes in provision for losses on accounts receivable

Changes in provision for (recoveries) losses on accounts receivable

Change in reserve for VAT receivable

1 unchanged sentence

Right-of-use asset impairment

ERP impairment

(Gain) on disposition of capital assets

Defined benefit plan termination

Changes in operating assets and liabilities:

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Other long-term liabilities

Net cash (used in) provided by operating activities

Net cash provided by (used in) operating activities

INVESTING ACTIVITIES:

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Capital expenditures

Net cash provided by (used in) investing activities

Net cash (used in) provided by investing activities

FINANCING ACTIVITIES:

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Net cash (used in) financing activities

(Decrease) increase in cash and cash equivalents

Increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of year

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Interest paid

Income taxes (refunded) paid

Income taxes (refunded)

Capital expenditures in accounts payable

4 unchanged sentences

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS – Flexsteel Industries, Inc.

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

DESCRIPTION OF BUSINESS – Flexsteel Industries, Inc., and Subsidiaries (the “Company” or “Flexsteel” or “Our”) is one of the largest manufacturers, importers, and online marketers of furniture products in the United States.

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.

COVID-19 – in March 2020, a novel strain of coronavirus (“COVID-19”) was declared a global pandemic by the World Health Organization.

This pandemic has negatively affected the U.S.

and global economies, disrupted global supply chains and financial markets, led to significant travel and transportation restrictions, including mandatory business closures and orders to shelter in place.

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

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.

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 distributes its products throughout the United States through its e-commerce channel and dealer sales force.

PRINCIPLES OF CONSOLIDATION – The consolidated financial statements include the accounts of Flexsteel Industries, Inc.

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The Company has not changed its valuation techniques in measuring the fair value of any financial assets and liabilities during the period.

ACCOUNTS RECEIVABLE ALLOWANCES – the Company establishes accounts receivable allowances to reduce trade accounts receivable to an amount that reasonably approximates their net realizable value.

The Company’s accounts receivable allowances consist of an allowance for doubtful accounts which is established through review of open accounts, historical collection, and historical write-off amounts.

ALLOWANCE FOR CREDIT LOSSES – The Company establishes an allowance for credit losses to reduce trade accounts receivable to an amount that reasonably approximates their net realizable value.

The Company’s allowance for credit losses is established through review of open accounts, historical collection, and historical write-off amounts.

The amount ultimately realized from trade accounts receivable may differ from the amount estimated in the consolidated financial statements.

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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.

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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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 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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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.

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

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

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A good is transferred when the customer obtains control of that good and risk of loss transfers at a point in time.

Provisions for customer volume rebates, product returns, discounts and allowances are variable consideration and are recorded as a reduction of revenue in the same period the related sales are recorded.

Provisions for customer volume rebates, product returns, discounts, and allowances are variable considerations and are recorded as a reduction of revenue in the same period the related sales are recorded.

Such provisions are calculated based upon historical data and discount percentages, set with each customer.

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As of June 30, 2021, the Company had $ 0.16 million of customer deposits.

Upon adoption of ASC 606, the Company elected the following practical expedients and policy elections:

 The Company did not adjust contract prices for the effects of a significant financing component, as it expects the period when the goods or services are transferred to the customer and when the customer pays for those goods and services to be less than a year.

 Costs for shipping and handling activities that occur before the customer obtains control of the product are accounted for as fulfillment activities.

The Company follows the following practical expedients and policy elections:

 The Company does not adjust contract prices for the effects of a significant financing component, as it expects the period when the goods or services are transferred to the customer and when the customer pays for those goods and services to be less than a year.

 Costs for outbound shipping and handling activities that occur after the product is received in the Company’s distribution centers, but before the customer obtains control of the product are accounted for as fulfillment activities.

Accordingly, these expenses are recorded at the same time the Company recognizes revenue.

Inbound shipping and handling activities incurred to transport product to the Company’s distribution centers is expensed when the product is received by the Company, unless there are revenue surcharges to recover such costs, in which case these expenses are recorded at the same time the Company recognizes revenue.

 Incremental costs of obtaining a contract, specifically commissions, are recorded as an SG&A expense when incurred.

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(in thousands)

ADVERTISING COSTS – are charged to selling, general and administrative expense in the periods incurred.

ADVERTISING COSTS – are charged to selling, general and administrative expenses in the periods incurred.

The Company conducts no direct-response advertising programs and there are no assets related to advertising recorded on the consolidated balance sheets.

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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.

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

Expenditures for design, research, and development costs were approximately $ 2.9 million, $ 1.9 million, and $ 4.0 million in fiscal years 2022, 2021, and 2020, respectively.

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The Company recognizes in its financial statements the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.

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.

The amendments in ASU 2019 - 12 eliminate certain exceptions related to the approach for interim period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences.

EARNINGS PER SHARE (EPS) – Basic EPS of common stock is based on the weighted-average number of common shares outstanding during each fiscal year.

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The Company recognizes long-term incentive compensation plan expenses during the three-year performance periods;

stock awards are issued following the end of the performance periods and are subject to verification of results and Compensation Committee of the Board of Directors approval.

stock awards are issued following the end of the performance periods and are subject to verification of results and the Compensation Committee of the Board of Directors approval.

See Note 11, Stock-Based Compensation .

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

On January 20, 2022, the Board of Directors approved a new repurchase program authorizing the Company to purchase up to an additional $ 30 million of the Company’s common stock through January 19, 2025.

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 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.

The amendments in ASU 2019 - 12 eliminate certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences.

ASU 2019 - 12 also clarifies and simplifies other aspects of the accounting for income taxes.

The amendments in this guidance are effective for fiscal years beginning after December 15, 2020, with early adoption permitted.

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

The Company completed the share repurchases of the October 22, 2020, plan in February 2022.

As of June 30, 2022, the Company has purchased a total of 2,890,453 shares at a cost of $ 66.4 million under the four programs and has $ 7.5 million remaining in the January 2022, $ 30 million share repurchase program.

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

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

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 was on July 1, 2022, the date the lessor made 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 began on August 1, 2022, and ends on June 30, 2034, with options for two five -year extensions .

Annual base rent under the lease is $ 3.2 million plus taxes, insurance, and common area maintenance costs.

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

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Less accumulated depreciation

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

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.

The Company recorded these assets as held for sale as of June 30, 2020, see Note 6 Assets held for Sale for more information.

The $ 21.3 million impairment charge in fiscal 2019 was primarily due to reassessment of the Company’s future deployment related to its SAP implementation and is reflected in the ERP impairment of the Company’s consolidated statements of income.

The Company recognized no impairment charges for fiscal years 2022 and 2021, and $ 17.5 million for fiscal year 2020.

RESTRUCTURING

On May 15, 2019, the Company announced its plans to exit the Commercial Office and custom-designed Hospitality product lines which represent approximately 7 % of its revenue, and subsequently closed its Riverside, California manufacturing facility.

On September 26, 2019, the Company closed on the sale of the Riverside property resulting in net proceeds to the Company of $ 19.6 million after customary closing costs, prorations, and sales commissions and the Company recorded a pre-tax gain of $ 18.9 million and is reflected in the Gain (loss) on disposal assets of the Company’s consolidated statements of income.

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.

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

On May 15, 2019, the Company announced its plans to exit the Commercial Office and custom-designed Hospitality product lines.

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

On June 18, 2019, the Company announced that it completed the analysis and the 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 the workforce.

The Company has substantially completed the portion of the restructuring activities related to the exit of the Commercial Office and custom-designed Hospitality product lines.

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 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 remaining properties listed for sale as part of the footprint optimization are included in Note 6, Assets Held for Sale .

The Company substantially completed 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, which are substantially complete for the fiscal year ended June 30, 2022, the Company planned to incur pre-tax restructuring and related expenses of approximately $ 60 million over this two-year timeframe.

Total cumulative restructuring and related costs incurred as of June 30, 2022, were $ 59.4 million.

The following is a summary of restructuring costs:

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Operating expenses

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.

One-time employee termination benefits include costs for employee separation benefits.

During the year ended June 30, 2022, the Company recorded a decrease in a pension plan liability that resulted in an expense reduction of $ 0.2 million and recorded a net settlement agreement of $ 0.4 million.

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

The roll forward of the accrued restructuring costs is as follows, for the years ended June 30, 2022, 2021, and 2020:

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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 .

The Company completed the sale of the Dubuque, Iowa and one Harrison, Arkansas location during the year ended June 30, 2021.

The Company completed the sale of the remaining Harrison, Arkansas facility during the year ended June 30, 2022.

As of June 30, 2022, the Company continues to actively market the assets in Starkville, Mississippi.

A summary of the assets held for sale is included in the table below as of June 30, 2022.

1 unchanged sentence

(in thousands)

Harrison, Arkansas

Building & building improvements

Land & land improvements

Machinery & equipment

Starkville, Mississippi

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(in thousands)

Purchase commitments

CREDIT ARRANGEMENTS

The Company had an unsecured credit agreement with Wells Fargo Bank N.A.

(“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 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 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 August 28, 2020, the Company entered a two -year secured $ 25.0 million revolving line of credit with Dubuque Bank and Trust Company, with an interest rate of 1.50 % plus LIBOR, subject to a floor of 3.00 %.

The revolving line of credit was secured by essentially all the Company’s assets, excluding real property, and required the Company to maintain compliance with certain financial and non-financial covenants.

This line of credit was subsequently canceled in the first quarter of the fiscal year 2022.

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 party thereto.

The Credit Agreement has a five -year term and provides 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.

The Company’s $ 1.2 million letters of credit previously issued by the Lender are being treated as outstanding under the Credit Agreement and reduce the amount of available borrowings under the revolving line of credit.

Proceeds of borrowings were used to refinance all indebtedness owed to Dubuque Bank & Trust and for working capital purposes.

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

Subject to certain conditions, borrowings under the Credit Agreement bear interest at LIBOR plus 1.25 % or 1.50 % per annum, or an effective interest rate of 3.04 % on June 30, 2022.

When 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 to1.00.

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 April 18, 2022, the Company, as the borrower, entered into a first amendment to the September 8, 2021, 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 defines “default” or “event of default” and the calculation of the Fixed Charge Coverage Ratio.

As of June 30, 2022, there was $ 37.7 million outstanding under the Credit Agreement, exclusive of fees and letters of credit.

Letters of credit outstanding at the Lender as of June 30, 2022, totaled $ 1.1 million.

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.

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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.

The Company evaluated the impact of the CARES Act during the year ended June 30, 2020, and recorded an income tax receivable of $ 4.5 million for the benefit of carrying back the fiscal year 2020 NOL and an income tax receivable of $ 8.2 M for the benefit of carryback the fiscal year 2019 NOL.

The Company evaluated the impact of the CARES Act during the year ended June 30, 2020, and recorded an income tax receivable of $ 4.5 million for the benefit of carrying back the fiscal year 2020 NOL and an income tax receivable of $ 8.2 million for the benefit of carryback the fiscal year 2019 NOL.

As the Company is carrying the losses back to years beginning before January 1, 2018, the receivables were recorded at the previous 35 % federal tax rate rather than the current statutory rate of 21 %.

These refunds have been received.

The Company recognizes deferred tax assets to the extent that they believe the assets are more likely than not to be realized.

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Foreign rate differential

Uncertain tax positions

Stock based compensation

Section 162(m)

Foreign adjustments

Deferred adjustments

Remeasurement of deferred tax assets and valuation

Beginning of year true ups

Stock FMV over Award

Amended return impacts

State rate change

Tax rate change on net operating loss carryback

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Balance at July 1

Reductions for tax positions of the prior year

Additions based on tax positions related to the current year

Reductions for tax positions of prior years

Lapse of Statute of Limitations

Addition for tax positions of the prior year

Balance at June 30

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

The Company records interest expenses and penalties related to income taxes as income tax expenses 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.

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Lease liabilities

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.

On June 30, 2022, certain state tax attribute carryforwards of $ 2.4 million were available, with $ 0.3 million of credits expiring between 2022 and 2029, $ 1.6 million of credits with an indefinite carryforward period, and $ 0.5 million of state NOLs carryforward.

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

As of June 30, 2022, 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.

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

Therefore, the Company has recorded a valuation allowance against its U.S federal deferred tax assets for $ 9.8 million.

The Company is subject to U.S.

federal income tax as well as income tax of multiple state and foreign jurisdictions.

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

Generally, tax years 2018 through 2022 remain open to examination by the Internal Revenue Service or other taxing jurisdictions to which the Company is subject.

STOCK-BASED COMPENSATION

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(1) Long-Term Incentive Compensation Plan (“LTICP”)

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 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:

The LTIP provides for performance stock units (“PSUs”) to be awarded to officers and key employees based on performance goals set by the Compensation Committee of the Board of Directors (the “Committee”).

For awards under the LTIP for the three years ending June 30, 2022, 2023, and 2024, participants may earn one -third of the award in each of the three years based on meeting performance goals for that year.

T he Committee selected Adjusted Earnings Before Interest and Tax with a defined percentage growth in fiscal years 2022, 2023, and 2024 as the performance metric.

In conjunction with each grant of PSUs, the Committee grants RSUs under the 2013 Omnibus Stock Plan that vest at the end of three years .

The table below sets forth, as of June 30, 2022, the number of unvested PSUs granted at the target performance level for the 2020-2022, 2021-2023, and 2022-2024 performance periods under the LTIP and the number of unvested RSUs granted in conjunction with the PSUs:

Time Based Vest

7 unchanged sentences

Unvested as of June 30, 2022

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.

Total unrecognized stock-based compensation related to the unvested PSUs at the target performance level and the related unvested RSUs was $ 1.3 million as of June 30, 2022, which is expected to be recognized over a period of 1.1 years.

(2) 2013 Omnibus Stock Plan and 2009 Stock Option Plan

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Restricted shares and RSUs

A summary of the activity in the Company’s unvested restricted shares and unvested RSUs as June 30, 2021, is presented below:

A summary of the activity in the Company’s unvested restricted shares and unvested RSUs, not granted in conjunction with PSUs, as of June 30, 2022, is presented below:

Weighted average

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Unvested as of June 20, 2022

Total unrecognized stock-based compensation related to unvested restricted shares and unvested RSUs was $ 0.7 million as of June 30, 2021, which is expected to be recognized over a weighted average period of 1.5 years.

The weighted average grant date fair value of stock options granted during fiscal years 2021, 2020, and 2019 were $ 6.77 , $ 1.77 , and $ 5.85 , respectively.

Total unrecognized stock-based compensation related to unvested restricted shares and unvested RSUs (not granted in conjunction with the PSUs) was $ 0.35 million as of June 30, 2022, which is expected to be recognized over a weighted average period of 0.9 years.

The weighted average grant date fair value of stock options granted during fiscal years 2022, 2021, and 2020 were none, $ 6.77 , and $ 1.77 , respectively.

The weighted average assumptions used to estimate these fair values were as follows:

22 unchanged sentences

Stock-based compensation granted outside a plan

During the quarter ended December 31, 2018, the Company awarded its Chief Executive Officer 55,000 options outside of any Company stock plans.

During the quarter ended June 30, 2020, the Company awarded its Chief Financial Officer/Chief Operating Officer 79,000 options outside of any Company stock plans.

6 unchanged sentences

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.

The Company’s participation in the current and previously defined benefit pension plans for the annual period ended June 30, 2022, is outlined in the following table.

Unless otherwise noted, the most recent Pension Protection Act zone status available in 2022 and 2021 is for the plan’s year-end on December 31, 2021, and 2020, respectively.

The zone status is based on information that the Company received from the plan and is certified by the plan’s actuary.

11 unchanged sentences

Not applicable

Central Pension Fund

Not applicable

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, 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.

As of June 30, 2022, the Company has withdrawn from the Steelworkers Pension Trust and paid the previously recorded withdrawal liability of $ 1.2 million and recorded an expense reduction of $ 0.2 million for the year ended June 30, 2022, see Note 5 Restructuring .

COMMITMENTS AND CONTINGENCIES

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The Order was to be effective May 29, 2018.

To ensure completion of the remediation work, the EPA required the Company to secure financial assurance in the initial amount a $ 3.6 million, which as noted above, is the estimated cost of remedial work.

To ensure completion of the remediation work, the EPA required the Company to secure financial assurance in the initial amount of $ 3.6 million, which as noted above, is the estimated cost of remedial work.

The Company believes that financial assurance is not required because it meets the relevant financial test criteria as provided in the Order.

3 unchanged sentences

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.

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) .

The Company continues to evaluate the Order, its legal options and insurance coverages to assert its defense and recovery of current and future expenses related to this matter.

Employment Matters – The lawsuit entitled Juan Hernandez, et al.

Flexsteel Industries, Inc .

(“ Hernandez I ”), was filed on February 21, 2019, in the Superior Court for the County of Riverside by former employees Juan Hernandez and Richard Diaz (together, “Plaintiffs”).

On April 29, 2019, Plaintiffs filed a second similarly titled lawsuit in the Superior Court for the County of Riverside (“ Hernandez II ”).

Hernandez II is brought by the same attorneys as Hernandez I and features a single cause of action for civil penalties under the Private Attorneys General Act (“PAGA”).

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 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.

In April 2021, the Company offered to settle the claim with the EPA for $ 8.5 million.

On August 3, 2021, the EPA rejected the offer and then demanded that the Company perform remediation and pay the vast majority of the EPA’s past costs.

On September 1, 2021, the Company extended two settlement options to the EPA.

The first option is an $ 9.8 million cash out and the second option is estimated to be approximately $ 10.1 million and includes performance of the remedy and full site release.

On October 31, 2021, the EPA expressed that the Company’s inclusion of a full site release in our settlement terms was unacceptable because of their need to include standard reopeners.

Through an agreement with the EPA, the statute of limitations for potential claims by the EPA was extended through September 30, 2022.

Note, 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 as of June 30, 2022, in accordance with FASB issued Asset Retirement and Environmental Obligations (ASC 410-30) .

Employment Matters - On March 22, 2021, the Company received notice of a class action lawsuit filed against Flexsteel Industries, Inc., and J.K.

Dittmer and D.P.

Schmidt as individuals, by a number of employees who had worked at the Dubuque Operations and Starkville plants prior to the closure of the locations due to the impact of COVID-19 on the business at that period of time.

The allegations with the claim include failure to pay employee benefits as required by an ERISA-governed severance plan, failure of J.K.

Dittmer and D.P.

Schmidt to act with respect to the ERISA-governed severance plan, and failure to provide 60-days’ notice or the equivalent amount of pay to the employees required by the WARN Act when the Company closed the Dubuque and Starkville locations.

Flexsteel secured outside counsel for the defense of the claims.

With outside counsel’s guidance, a motion to dismiss the ERISA claims against Flexsteel and J.K.

Dittmer and D.P.

Schmidt was filed with the court on May 3, 2021 and denied by the court on August 5, 2021.

The parties participated in a lengthy mediation and on December 3, 2021, agreed to resolve the matter for $ 1.3 million.

The Company expects full resolution of this matter after October 2022, and has a net liability on June 30, 2022, of $ 1.3 million, see Note 5 Restructuring.

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.

3 unchanged sentences

For the Quarter Ended

Operating income

Earnings per share:

For the Quarter Ended

Operating income (loss)

1 unchanged sentence

Earnings (loss) per share:

For the Quarter Ended

Operating income

Earnings per share:

SUBSEQUENT EVENTS

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.

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.

There are no subsequent events as of August 26, 2022.

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