FLEXSTEEL INDUSTRIES INC 10-K

Item 8. Financial Statements and Supplementary Data Index to Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm PCAOB ID 34 17 Report of Independent Registered Public Accounting Firm – Internal Control Over Financial Reporting 19 Consolidated Balance Sheets at June 30, 2023 and 20 22 20 Consolidated Statements of Income for the Years Ended June 30, 2023, 2022 and 202 1 21 Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended June 30, 2023, 2022 and 202 1 22 Consolidated Statements of Cash Flows for the Years Ended June 30, 2023, 2022 and 202 1 23 Notes to Consolidated Financial Statements 24 - 37 Schedule II Valuation and Qualifying Accounts 39 ‎ 16 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of Flexsteel Industries, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Flexsteel Industries, Inc. and subsidiaries (the "Company") as of June 30, 2023 and 2022, 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, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2023, 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, 2023, 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 25, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. 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 $122.1 million as of June 30, 2023. 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. 17 Table of Contents How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to estimated net realizable value of 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 inventory markdowns 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 25, 2023 We have served as the Company's auditor since 1965. ‎ 18 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of Flexsteel Industries, Inc. Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Flexsteel Industries, Inc. and subsidiaries (the “Company”) as of June 30, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2023, 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, 2023, of the Company and our report dated August 25, 2023, expressed an unqualified opinion on those financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Deloitte & Touche LLP Minneapolis, MN August 25, 2023 ‎ 19 Table of Contents FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Amounts in thousands) June 30, 2023 2022 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 3,365 $ 2,184 Trade receivables - less allowances: 2023, $ 2,600 ; 2022, $ 2,980 38,168 41,106 Inventories 122,076 141,212 Other 6,417 4,950 Assets held for sale 616 616 Total current assets 170,642 190,068 NONCURRENT ASSETS: Property, plant and equipment, net 38,652 38,543 Operating lease right-of-use assets 68,294 38,189 Deferred income taxes 7,154 — Other assets 5,808 1,941 TOTAL $ 290,550 $ 268,741 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable - trade $ 24,745 $ 32,147 Current portion of operating lease liabilities 7,179 6,361 Accrued liabilities: Payroll and related items 9,955 6,385 Insurance 1,920 2,158 Restructuring costs — 1,290 Advertising 5,358 4,052 Environmental remediation — 3,570 Other 5,948 8,664 Total current liabilities 55,105 64,627 LONG-TERM LIABILITIES: Operating lease liabilities, less current maturities 64,974 33,992 Line of credit 28,273 37,739 Other liabilities 577 823 Total liabilities 148,929 137,181 COMMITMENTS AND CONTINGENCIES (Note 13) SHAREHOLDERS' EQUITY: Common stock - $ 1 par value; authorized 15,000 shares; 8,292 shares issued and 5,174 sh ares outstanding as of June 30, 2023, and 8,190 shares issued and 5,300 shares outstanding as of June 30, 2022 8,292 8,190 Additional paid-in capital 36,605 34,467 Treasury stock, at cost; 3,118 shares and 2,890 shares as of June 30, 2023 and 2022, respectively ( 70,072 ) ( 66,372 ) Retained earnings 166,796 155,275 Total shareholders' equity 141,621 131,560 TOTAL $ 290,550 $ 268,741 See accompanying Notes to Consolidated Financial Statements. ‎ 20 Table of Contents FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES Consolidated Statements of Income AND COMPREHENSIVE INCOME (Amounts in thousands, except per share data) For the years ended June 30, 2023 2022 2021 Net sales $ 393,692 $ 544,282 $ 478,925 Cost of goods sold 322,745 471,602 382,195 Gross margin 70,947 72,680 96,730 Selling, general and administrative 62,846 66,733 67,977 Restructuring expense — 730 3,422 Environmental remediation ( 2,788 ) — — (Gain) on disposal of assets — ( 1,400 ) ( 5,881 ) Other expense 347 — — Litigation settlement costs — — 12 Operating income 10,542 6,617 31,200 Other income (expense): Other income 18 121 277 Interest (expense) ( 1,341 ) ( 835 ) ( 10 ) Total other (expense) income ( 1,323 ) ( 714 ) 267 Income before income taxes 9,219 5,903 31,467 Income tax (benefit) expense ( 5,559 ) 4,050 8,419 Net income $ 14,778 $ 1,853 $ 23,048 Weighted average number of common shares outstanding: Basic 5,225 6,329 7,200 Diluted 5,385 6,503 7,468 Earnings per share of common stock Basic $ 2.83 $ 0.29 $ 3.20 Diluted $ 2.74 $ 0.28 $ 3.09 ‎ 21 Table of Contents FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES Consolidated Statements of Changes in Shareholders’ Equity (Amounts in thousands) Total Par Value of Additional Common Paid-In Treasury Retained Shares ($ 1 Par) Capital Stock Earnings Total Balance at June 30, 2020 $ 8,008 $ 31,748 $ ( 1,563 ) $ 137,312 $ 175,505 Issuance of common stock: Stock options exercised, net 13 ( 30 ) — — ( 17 ) Long-term incentive compensation — 2,321 — — 2,321 Stock-based compensation 112 ( 24 ) — — 88 Treasury stock purchases — — ( 29,757 ) — ( 29,757 ) Cash dividends declared — — — ( 3,220 ) ( 3,220 ) Net income — — — 23,048 23,048 Balance at June 30, 2021 $ 8,133 $ 34,015 $ ( 31,320 ) $ 157,140 $ 167,968 Issuance of common stock: Stock options exercised, net 7 110 — — 117 Long-term incentive compensation — 51 — — 51 Stock-based compensation 50 291 — — 341 Treasury stock purchases — — ( 35,052 ) — ( 35,052 ) Cash dividends declared — — — ( 3,718 ) ( 3,718 ) Net income — — — 1,853 1,853 Balance at June 30, 2022 $ 8,190 $ 34,467 $ ( 66,372 ) $ 155,275 $ 131,560 Issuance of common stock: Long-term incentive compensation — 1,813 — — 1,813 Stock-based compensation 102 325 — — 427 Treasury stock purchases — — ( 3,700 ) — ( 3,700 ) Cash dividends declared — — — ( 3,257 ) ( 3,257 ) Net income — — — 14,778 14,778 Balance at June 30, 2023 $ 8,292 $ 36,605 $ ( 70,072 ) $ 166,796 $ 141,621 Cash dividends declared per common share were $ 0.60 , $ 0.60 , and $ 0.45 for the fiscal years ended June 30, 2023, 2022, and 2021, respectively. See accompanying Notes to Consolidated Financial Statements . ‎ 22 Table of Contents FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Amounts in thousands) For the years ended June 30, 2023 2022 2021 OPERATING ACTIVITIES: Net income $ 14,778 $ 1,853 $ 23,048 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 4,572 5,171 5,210 Deferred income taxes ( 7,154 ) — 2,111 Stock-based compensation expense 3,191 1,020 3,738 Changes in (recoveries) provision for losses on accounts receivable ( 380 ) ( 260 ) 1,470 Change in reserve for VAT receivable — — ( 237 ) (Gain) on disposition of capital assets ( 313 ) ( 1,782 ) ( 5,948 ) Changes in operating assets and liabilities: Trade receivables 3,318 15,140 ( 25,239 ) Inventories 19,136 19,913 ( 90,560 ) Other current assets ( 1,467 ) 4,470 9,351 Other assets ( 3,865 ) ( 542 ) ( 90 ) Accounts payable - trade ( 7,320 ) ( 35,809 ) 39,893 Accrued liabilities ( 1,270 ) ( 769 ) 3,957 Other long-term liabilities ( 237 ) ( 412 ) 604 Net cash provided by (used in) operating activities 22,989 7,993 ( 32,692 ) INVESTING ACTIVITIES: Purchases of investments — — ( 47 ) Proceeds from sale of investments — — 46 Proceeds from sale of capital assets 340 1,937 18,643 Capital expenditures ( 4,790 ) ( 3,853 ) ( 2,580 ) Net cash (used in) provided by investing activities ( 4,450 ) ( 1,916 ) 16,062 FINANCING ACTIVITIES: Dividends paid ( 3,241 ) ( 3,911 ) ( 2,622 ) Treasury stock purchases ( 3,700 ) ( 35,052 ) ( 29,757 ) Proceeds from lines of credit 363,805 265,093 8,500 Payments on lines of credit ( 373,271 ) ( 230,854 ) ( 5,000 ) Proceeds from issuance of common stock — 117 94 Shares withheld for tax payments on vested shares ‎ and options exercised ( 951 ) ( 628 ) ( 1,440 ) Net cash (used in) financing activities ( 17,358 ) ( 5,235 ) ( 30,225 ) Increase (decrease) in cash and cash equivalents 1,181 842 ( 46,855 ) Cash and cash equivalents at beginning of year 2,184 1,342 48,197 Cash and cash equivalents at end of year $ 3,365 $ 2,184 $ 1,342 SUPPLEMENTAL INFORMATION Right-of-use assets exchanged for lease liabilities $ 38,775 $ 16,814 $ 22,770 Interest paid $ 1,069 $ 743 $ 10 Income taxes (refunded) $ 4,104 $ ( 823 ) $ ( 5,556 ) Capital expenditures in accounts payable $ 311 $ 183 $ 133 See accompanying Notes to Consolidated Financial Statements. 23 Table of Contents FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS – Flexsteel Industries, Inc., and Subsidiaries (the “Company” or “Flexsteel” or “Our”) is one of the largest manufacturers, importers, and marketers of furniture products in the United States. Product offerings include a wide variety of furniture such as sofas, loveseats, chairs, reclining rocking chairs, swivel rockers, sofa beds, convertible bedding units, occasional tables, desks, dining tables and chairs, kitchen storage, bedroom furniture, and outdoor furniture. A featured component in most of the upholstered furniture is a unique steel drop-in seat spring from which the name “Flexsteel” is derived. The Company 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. and its wholly owned subsidiaries. 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 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. FAIR VALUE – The Company’s cash and cash equivalents, investments, accounts receivable, other current assets, accounts payable and certain accrued liabilities are carried at amounts which reasonably approximate their fair value due to their short-term nature. GAAP on fair value measurement for certain financial assets and liabilities require that each asset and liability carried at fair value be classified into one of the following categories: Level 1: Quoted market prices in active markets for identical assets and liabilities; Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data; or Level 3: Unobservable inputs that are not corroborated by market data. The Company has not changed its valuation techniques in measuring the fair value of any financial assets and liabilities during the period. 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. INVENTORIES – Inventories are stated at the lower of cost or net realizable value utilizing the first - in - first - out (“FIFO”) method. Our inventory valuation reflects markdowns for the excess of the cost over the amount expected to be realized and considers obsolete and excess inventory. Markdowns establish a new cost basis for the Company’s inventory. 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. PROPERTY, PLANT AND EQUIPMENT – Property, plant and equipment is stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets. VALUATION OF LONG–LIVED ASSETS – The Company periodically reviews the carrying value of long-lived assets and estimated depreciable or amortizable lives for continued appropriateness. This review is based upon projections of anticipated future cash flows and is performed whenever events or changes in circumstances indicate that asset carrying values may not be recoverable or that the estimated depreciable or amortizable lives may have changed. 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. RESTRUCTURING COSTS - The Company groups exit or disposal cost obligations into three categories: Involuntary employee termination benefits, costs to terminate contracts, and other associated costs. Involuntary employee termination benefits must be a one-time benefit, and this element of restructuring cost is recognized as incurred upon communication of the plan to the identified employees. Costs to terminate contracts are recognized upon termination agreement with the provider. Other associated restructuring costs are expensed as incurred. Any inventory impairment costs as a result of restructuring activities are accounted for as cost of goods sold. 24 Table of Contents 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. See Note 2, Leases , for the Company’s lease disclosures. WARRANTY – The Company estimates the amount of warranty claims on sold product that may be incurred based on current and historical data. The actual warranty expense could differ from the estimates made by the Company based on product performance. 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 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 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 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. The Company’s revenues result from the sale of goods and reflect the consideration to which the Company expects to be entitled. Revenue is reduced by appropriate allowances, estimated returns, price concessions, or similar adjustments as applicable. The Company records revenue based on a five-step model in accordance with ASC 2014-09, Revenue from Contracts with Customers ( Topic 606 ). For its customer contracts, typically purchase orders, the Company identifies the performance obligations (goods), determines the transaction price, allocates the contract transaction price to the performance obligations, and recognizes the revenue when the performance obligation is transferred to the customer. 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 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. Consideration given to customers for cooperative advertising is recognized as a reduction of revenue except to the extent there is a distinct good or service and evidence of the fair value of the advertising, in which case the expense is classified as selling, general and administrative expense (SG&A). The Company has a limited lifetime warranty on all products. The Company does not offer the option to purchase warranties. The Company accounts for warranties under ASC 460, Guarantees , and not as variable consideration related to revenue. Occasionally, the Company receives deposits from customers before it has transferred control of the product to customers, resulting in contract liabilities. These contract liabilities are reported within “Accounts payable - trade” in the consolidated balance sheets. As of June 30, 2023, the Company had $ 0.07 million of customer deposits. As of June 30, 2022, the Company had $ 0.09 million of customer deposits. 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.  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. 25 Table of Contents The following table disaggregates the Company’s net sales by product category: For the years ended June 30, (in thousands) 2023 2022 2021 Residential $ 393,692 $ 543,447 $ 476,519 Contract — 835 2,406 $ 393,692 $ 544,282 $ 478,925 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. Advertising expenditures, primarily shared customer advertising in which an identifiable benefit is received and national trade-advertising programs, were approximately $ 5.1 million, $ 5.8 million, and $ 3.9 million in fiscal years 2023, 2022, and 2021, respectively. 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 $ 2.1 million, $ 2.9 million, and $ 1.9 million in fiscal years 2023, 2022, and 2021, respectively. INSURANCE – The Company is self-insured for health care and most workers’ compensation up to predetermined amounts above which third-party insurance applies. The Company purchases specific stop-loss insurance for individual health care claims in excess of $ 175,000 per plan year. For workers’ compensation, the Company retains the first $ 250,000 per claim and purchases excess coverage up to the statutory limits for amounts in excess of the retention limit. Losses are accrued based upon the Company’s estimates of the aggregate liability for claims incurred using certain actuarial assumptions followed in the insurance industry and based on Company experience. The Company records these insurance accruals within “Accrued liabilities – insurance” on the consolidated balance sheets. INCOME TAXES – The Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. 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. Diluted EPS of common stock includes the dilutive effect of potential common shares outstanding. The Company’s potential common shares outstanding are stock options, shares associated with the long-term management incentive compensation plan and non-vested restricted shares. The Company calculates the dilutive effect of outstanding options using the treasury stock method; all options are anti-dilutive when there is a loss. Anti-dilutive shares are not included in the computation of diluted EPS when their exercise price was greater than the average closing market price of the common shares. 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, net income as reported for each respective period is divided by the fully diluted weighted average number of shares outstanding: June 30, (in thousands) 2023 2022 2021 Basic shares 5,225 6,329 7,200 Potential common shares: Stock options 62 113 151 Long-term incentive plan 98 61 117 160 174 268 Diluted shares 5,385 6,503 7,468 Anti-dilutive shares 161 67 671 STOCK–BASED COMPENSATION – The Company recognizes compensation expense related to the cost of employee services received in exchange for Company equity interests based on the award’s fair value at the date of grant. The Company recognizes long-term incentive compensation plan expenses during the three-year performance periods; stock awards are issued following the end of the 26 Table of Contents 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 . SEGMENT REPORTING – The Company operates in one reportable segment, furniture products. The Company’s operations involve the distribution of manufactured and imported furniture for residential and contract markets. The Company’s furniture products are sold primarily throughout the United States and Canada by the Company’s internal sales force and various independent representatives. The Company makes minimal export sales. No single customer accounted for more than 10% of net sales. TREASURY STOCK – Treasury stock purchases are stated at cost and presented as a reduction of equity on the consolidated balance sheets. On June 1, 2020, the Company’s Board of Directors authorized a $ 6 million share repurchase program through June 9, 2021. 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. 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. The Company completed the share repurchases of the October 22, 2020 plan in February 2022. As of June 30, 2023, the Company has purchased a total of 3,117,930 shares at a cost of $ 70.1 million under the four programs and has $ 3.8 million remaining in the January 2022, $ 30 million share repurchase program. 2. LEASES The Company accounts for its leases in accordance with 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. 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. Both the lease ROU asset and liability are reduced to zero at the end of the lease term. The Company leases distribution centers and warehouses, manufacturing facilities, showrooms, and office space. 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. 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. 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 line 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. 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 ASC 842 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 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. As of June 30, 2023, the Company has not begun operations in the Mexicali facility. On May 3 rd , 2023 the Company entered into a sublease with a third party for 105,000 square feet of the Mexicali with a term of 12 months. Annual rent under the sublease is $ 1 million, plus a proportionate share of taxes, insurance and common areas maintenance. The Company also expects to sublease substantially all of the remaining portions of the facility until the capacity is required. At June 30, 2023 the Company determined that no impairment indicators exist with regard to the Mexicali lease given the current and expected sublease tenants and plans for future operations in the facility. At June 30, 2023 the right of use asset associated specifically with the Mexicali lease is $ 32.4 million and associated lease liability is $ 33.7 million. Sublease income received from the sub-tenant is offset against operating lease expense in the Company’s consolidated statements of income. ‎ 27 Table of Contents The components of the Company’s leases reflected on the Company’s consolidated statements of income were as follows: (in thousands) June 30, 2023 June 30, 2022 Operating lease expense $ 10,814 $ 6,804 Variable lease expense 1,799 1,069 Total lease expense $ 12,613 $ 7,873 Other information related to leases and future minimum lease payments under non-cancellable operating leases as were as follows: Fiscal year June 30, 2023 June 30, 2022 (in thousands) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 9,119 $ 6,612 Right-of-use assets obtained in exchange for lease liabilities: Operating leases $ 38,775 $ 16,814 Weighted-average remaining lease term (in years): Operating leases 9.1 5.2 Weighted-average discount rate: Operating leases 2.9 % 3.2 % Fiscal year June 30, 2023 (in thousands) Payments in FY2024 $ 9,391 FY2025 9,225 FY2026 9,008 FY2027 9,073 FY2028 9,009 Thereafter 37,040 Total future minimum lease payments $ 82,746 Less imputed interest 10,593 Lease liability $ 72,153 3. INVENTORIES A comparison of inventories is as follows: June 30, (in thousands) 2023 2022 Raw materials $ 18,616 $ 16,405 Work in process and finished parts 3,741 5,534 Finished goods 99,719 119,273 Total $ 122,076 $ 141,212 28 Table of Contents 4. PROPERTY, PLANT AND EQUIPMENT Estimated June 30, (in thousands) Life (Years) 2023 2022 Land $ 3,457 $ 3,457 Buildings and improvements 5 - 39 49,131 49,114 Machinery and equipment 3 - 7 19,824 17,684 Delivery equipment 3 - 5 2,962 2,979 Furniture and fixtures 3 - 7 3,558 3,599 Computer software and hardware 3 - 7 8,919 8,717 Construction in progress 4,231 3,023 Total 92,082 88,573 Less accumulated depreciation ( 53,430 ) ( 50,030 ) Net $ 38,652 $ 38,543 The Company recognized no impairment charges for fiscal years 2023, 2022, and 2021. 5. RESTRUCTURING 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 included previously announced restructuring activities on May 15, 2019. The transformation program included activities such as business simplification, process improvement, exiting of non-core businesses, facility closures, and reductions in the workforce. The Company has 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 that 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 remaining properties listed for sale as part of the footprint optimization are included in Note 6, Assets Held for Sale . The Company 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 were complete as of the fiscal year ended June 30, 2022, the Company had 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. There were no costs related to the restructuring activities in the fiscal year ended June 30, 2023. The following is a summary of restructuring costs: For the years ended June 30, (in thousands) 2023 2022 2021 Inventory impairment $ — $ — $ 45 One-time employee termination benefits — ( 211 ) 433 Other associated costs — 941 2,989 Total restructuring and related expenses $ — $ 730 $ 3,467 Reported as: Cost of goods sold $ — $ — $ 45 Operating expenses $ — $ 730 $ 3,422 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. 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 29 Table of Contents 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. The parties participated in a lengthy mediation and on December 3, 2021, agreed to resolve the matter for $ 1.3 million. The matter was dismissed with prejudice on September 1, 2022. The Company paid $ 1.3 million in the year ended June 30, 2023 . During the quarter ended September 30, 2022, the Company paid all remaining costs associated with the restructuring program. The roll forward of the accrued restructuring costs is as follows, for the years ended June 30, 2023, 2022, and 2021: One-time Employee Other Termination Associated (in thousands) Benefits Costs Total Accrual balance at June 30, 2021 $ 1,502 $ 20 $ 1,522 Costs incurred ( 211 ) 941 730 Expenses paid ( 16 ) ( 946 ) ( 962 ) Accrual balance at June 30, 2022 $ 1,275 $ 15 $ 1,290 Expenses paid ( 1,275 ) ( 15 ) ( 1,290 ) Accrual balance at June 30, 2023 $ — $ — $ — 6. ASSETS HELD FOR SALE 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, 2023, 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, 2023. Accumulated Net Book Location Asset Category Cost Depreciation Value (in thousands) Starkville, Mississippi Building & building improvements $ 4,615 $ ( 4,254 ) $ 361 Land & land improvements 694 ( 439 ) 255 $ 5,309 $ ( 4,693 ) $ 616 7. OTHER NONCURRENT ASSETS June 30, (in thousands) 2023 2022 Cash value of life insurance $ 1,063 $ 1,052 VAT receivable 3,865 — Other 880 889 Total $ 5,808 $ 1,941 8. ACCRUED LIABILITIES – OTHER June 30, (in thousands) 2023 2022 Dividends $ 988 $ 972 Warranty 1,057 1,047 Purchase commitments — 1,734 Income taxes — 1,513 Other 3,903 3,398 Total $ 5,948 $ 8,664 30 Table of Contents 9. CREDIT ARRANGEMENTS 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. Proceeds of borrowings were used to refinance all indebtedness owed to Dubuque Bank and Trust and for working capital purposes. The Company’s obligations under the Credit Agreement are secured by substantially all its assets, excluding real property. The Credit Agreement contains customary representations, warranties, and covenants, including a financial covenant to maintain a fixed coverage ratio of not less than 1.00 to 1.00. In addition, the Loan Agreement places restrictions on the Company’s ability to incur additional indebtedness, to create liens or other encumbrances, to sell or otherwise dispose of assets, and to merge or consolidate with other entities. On April 18, 2022, the Company, as the borrower, entered a first amendment to the September 8, 2021, Credit Agreement (“First Amendment to the Credit Agreement”), with the Lender, and the lenders party thereto. The first 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. Subject to certain conditions, borrowings under the Credit Agreement initially bore interest at LIBOR plus 1.25 % or 1.50 % per annum. On May 24, 2023, the Company entered into a second amendment to the Credit Agreement (“Second Amendment to the Credit Agreement”) with the lender to transition the applicable interest rate from LIBOR to Secured Overnight Financing Rate (“SOFR”). Effective as of the date of the Second Amendment to the Credit Agreement, borrowings under the amended Credit Agreement bear interest at SOFR plus 1.36 % to 1.61 % or an effective interest rate of 6.42 % on June 30, 2023 . As of June 30, 2023, there was $ 28.3 million outstanding under the Credit Agreement, exclusive of fees and letters of credit. Letters of credit outstanding at the Lender as of June 30, 2023, totaled $ 1.1 million. 10. INCOME TAXES The Company recognizes deferred tax assets to the extent that they believe the assets are more likely than not to be realized. 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, 2023, it was determined the Company has reached a more-likely- than-not position that the Company will realize the entirety of its deferred tax assets. Therefore, the Company has reversed the valuation allowance against the federal and state deferred tax assets recorded as of June 30, 2022 of $ 9.8 million. Income tax expense was calculated based upon the following components of income (loss) before income taxes for the years ended June 30: (in thousands) 2023 2022 2021 United States $ 6,680 $ 2,150 $ 33,353 Outside the United States 2,539 3,752 ( 1,886 ) Income before income taxes $ 9,219 $ 5,902 $ 31,467 The income tax benefit (provision) is as follows for the years ended June 30: (in thousands) 2023 2022 2021 Federal - current $ ( 799 ) $ ( 2,966 ) $ ( 5,480 ) State and other - current ( 796 ) ( 1,084 ) ( 828 ) Deferred 7,154 — ( 2,111 ) Total $ 5,559 $ ( 4,050 ) $ ( 8,419 ) ‎ 31 Table of Contents Reconciliation between the U.S. federal statutory tax rate and the effective tax rate is as follows for the years ended June 30: 2023 2022 2021 Federal statutory tax rate 21.0 % 21.0 % 21.0 % State taxes, net of federal effect 5.2 ( 0.7 ) 4.0 Foreign rate differential 2.8 5.7 2.8 Uncertain tax positions ( 2.1 ) ( 2.6 ) — Stock based compensation ( 0.5 ) ( 1.0 ) ( 1.4 ) Section 162(m) 2.5 1.9 — Foreign adjustments ( 0.1 ) ( 8.9 ) — Deferred adjustments 0.7 — 4.0 Expired state credits 17.1 — — Remeasurement of deferred tax assets and valuation ‎ allowance ( 106.7 ) 42.8 ( 3.7 ) Amended return impacts — 7.8 — State rate change ( 0.5 ) 2.7 — Other 0.3 ( 0.1 ) 0.1 Effective tax rate ( 60.3 ) % 68.6 % 26.8 % The components of the gross liabilities related to unrecognized tax benefits and the related deferred tax assets are as follows: June 30, (in thousands) 2023 2022 Gross unrecognized tax benefits $ 424 $ 604 Accrued interest and penalties 132 189 Gross liabilities related to unrecognized tax benefits $ 556 $ 793 Deferred tax assets 38 84 Valuation allowance — ( 84 ) Net deferred tax assets $ 38 $ — A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: (in thousands) 2023 2022 2021 Balance at July 1 $ 604 $ 640 $ 380 Reductions for tax positions of the prior year — ( 72 ) — Additions based on tax positions related to the current year 10 70 260 Lapse of statute of limitations ( 190 ) ( 188 ) — Addition for tax positions of the prior year — 154 — Balance at June 30 $ 424 $ 604 $ 640 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. The amount of unrecognized tax benefits as of June 30, 2023, and 2022 that if recognized, would affect the effective tax rate was $ 0.3 million and $ 0.4 million respectively. 32 Table of Contents The primary components of deferred tax assets and (liabilities) are as follows: June 30, (in thousands) 2023 2022 Accounts receivable $ 654 $ 739 Inventory 1,490 2,448 Self-insurance 25 34 Payroll and related 938 740 Accrued liabilities 633 2,003 Property, plant, and equipment 1,202 742 Investment tax credit 303 1,894 Valuation allowance — ( 9,838 ) Net operating loss carryover 361 494 Lease assets ( 17,158 ) ( 10,468 ) Lease liabilities 18,129 11,067 Other 577 145 Total $ 7,154 $ — On June 30, 2023, certain state tax attribute carryforwards of $ 0.7 million were available, with $ 0.3 million of credits expiring beginning in fiscal years 2024 through 2029, and $ 0.4 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, 2023, it was determined that the Company has reached a more likely than not position that the Company will realize the entirety of its state attribute carryforwards and its U.S. federal deferred tax assets. Therefore, the Company has reversed the valuation allowance against the state attribute carryforward and the entirety of the deferred tax asset balance. The Company is subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. Generally, fiscal years 2019 through 2023 remain open to examination by the Internal Revenue Service or other taxing jurisdictions to which the Company is subject. 11. STOCK-BASED COMPENSATION The Company accounts for its stock-based compensation plans in accordance with ASC 718, Stock Compensation , which requires the Company to measure all share-based payments at the fair value as of grant date and recognize the cost over the requisite service period. Restricted shares and restricted stock units (“RSUs”) generally vest over 1 to 3 years. Stock options are granted at an exercise price equal to the fair value of the Company’s common stock price at the grant date and are exercisable for up to 10 years. Stock-based compensation is included in selling, general and administrative, and restructuring expenses on the consolidated statements of income. The stock-based compensation expense included in restructuring expense were for retention RSUs in connection with the Company’s restructuring plan. Forfeitures are recognized as incurred. Total stock-based compensation expense was $ 3.2 million, $ 1.0 million and $ 3.7 million for fiscal years 2023, 2022 and 2021, respectively. On December 14, 2022, the Company’s shareholders approved the Flexsteel Industries, Inc. 2022 Equity Incentive Plan (“2022 Plan”). The 2022 Plan replaces the Long-Term Incentive Compensation Plan (“LTIP”) and the 2013 Omnibus Stock Plan (collectively, the “Prior Plans”) and no further awards will be made under either of the Prior Plans, but these Prior Plans will continue to govern awards previously granted under them. (1) 2022 Equity Incentive Plan The 2022 Plan is a long-term incentive plan pursuant to which awards may be granted to certain employees, independent contractors and directors of the Company, in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, performance shares or other stock-based awards. Awards for 10,925 shares were granted under the 2022 Plan in the year ended June 30, 2023 with a fair value per share of $ 19.95 . These shares remain unvested and have no forfeitures as of June 30, 2023. These shares are included in the Restricted Shares and RSUs table below. (2) Long-Term Incentive Compensation Plan (“LTIP”) 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 year performance periods ending June 30, 2023, 2024, and 2025, participants may earn one-third of the award in each of 33 Table of Contents the three years based on meeting performance goals for that year. T he Committee selected Adjusted Earnings Before Interest and Tax based on a defined percentage growth as the performance metric for the performance periods ending June 30, 2023, 2024, and 2025. In conjunction with each grant of PSUs, the Committee granted RSUs under the 2013 Omnibus Stock Plan that vest at the end of three years . The table below sets forth, as of June 30, 2023, the number of unvested PSUs granted at the target performance level for the 2021-2023, 2022-2024, and 2023-2025 performance periods under the LTIP and the number of unvested RSUs granted in conjunction with the PSUs: Time Based Vest Performance Based Vest Total Weighted average Weighted average Weighted average fair value fair value fair value (shares in thousands) Shares per share Shares per share Shares per share Unvested as of June 30, 2021 107 $ 13.89 142 $ 13.36 249 $ 13.59 Granted 27 42.35 41 42.35 68 42.35 Vested ( 42 ) 17.23 — — ( 42 ) 17.23 Forfeited ( 6 ) 38.62 ( 9 ) 38.61 ( 15 ) 38.61 Unvested as of June 30, 2022 86 $ 19.53 174 $ 18.87 260 $ 19.09 Granted 62 19.27 91 19.27 153 19.27 Vested ( 63 ) 12.64 ( 44 ) 17.23 ( 107 ) 14.53 Forfeited ( 6 ) 23.02 ( 10 ) 23.02 ( 16 ) 23.02 Unvested as of June 30, 2023 79 $ 24.56 211 $ 19.19 290 $ 20.65 Total unrecognized stock-based compensation related to the unvested PSUs at the target performance level and the related unvested RSUs was $ 2.2 million as of June 30, 2023, which is expected to be recognized over a period of 1.2 years. (3) 2013 Omnibus Stock Plan, and 2009 Stock Option Plan The 2013 Omnibus Stock Plan and 2009 Stock Option Plan were for key employees, officers and directors and provides for the granting of incentive and nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights and performance units. No further stock units will be granted under the 2013 Omnibus Stock Plan and the 2009 stock option plan. Restricted Shares and RSUs 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, 2023, is presented below: Weighted average Shares fair value (in thousands) per share Unvested as of June 30, 2021 56 $ 26.81 Granted 5 33.78 Vested ( 20 ) 29.46 Forfeited ( 6 ) 24.12 Unvested as of June 20, 2022 35 $ 26.72 Granted 66 19.30 Vested ( 21 ) 23.58 Forfeited ( 6 ) 18.41 Unvested as of June 20, 2023 74 $ 21.67 Total unrecognized stock-based compensation related to unvested restricted shares and unvested RSUs (not granted in conjunction with the PSUs) was $ 0.8 million as of June 30, 2023, which is expected to be recognized over a weighted average period of 1.2 years. 34 Table of Contents Options The weighted average grant date fair value of stock options granted during fiscal years 2023, 2022, and 2021 were none , none , and $ 6.77 , respectively. The weighted average assumptions used to estimate these fair values were as follows: For the years ended June 30, 2023 2022 2021 Dividend yield — — 3.4 % Expected volatility — — 43.2 % Risk-free interest rate — — 0.6 % Expected life (in years) — — 5 The expected volatility and expected life are determined based on historical data. The interest rate is based on U.S. Treasury risk-free rate in affect at the date of grant for the periods corresponding with the expected term of options. A summary of the activity of the Company’s stock option plans during the years ended June 30, 2023, 2022, and 2021, is presented below: Weighted Shares Average (in thousands) Exercise Price Outstanding at June 30, 2021 232 $ 21.91 Granted — — Exercised ( 8 ) 15.75 Cancelled ( 9 ) 36.58 Outstanding at June 30, 2022 215 $ 21.50 Granted — — Exercised — — Cancelled ( 13 ) 30.20 Outstanding at June 30, 2023 202 $ 20.98 The following table summarizes information for options outstanding at June 30, 2023: Options Weighted Average Range of Outstanding Remaining Exercise Prices (in thousands) Life (Years) Price $ 9.97 - 15.14 97 6.7 $ 12.64 18.30 - 19.72 6 7.9 18.30 21.96 - 27.57 57 3.9 24.18 31.06 - 32.80 29 2.8 32.27 43.09 - 47.45 13 3.2 45.28 $ 9.97 - 47.45 202 5.1 $ 20.98 The Company does no t have any unrecognized stock-based compensation expense related to options. Stock-based compensation granted outside a plan 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. All 79,000 options remain outstanding as of June 30, 2023, with an exercise price of $ 9.97 and a remaining life of 6.8 years. There is no remaining unrecognized stock-based compensation expense related to these options. During the quarter ended December 31, 2018, the Company awarded its Chief Executive Officer 55,000 options outside of any Company stock plans. All 55,000 options remain outstanding as of March 31, 2023, with an exercise price of $ 21.96 and a remaining life of 5.5 years. There is no remaining unrecognized stock-based compensation expense related to these options. 35 Table of Contents 12. BENEFIT AND RETIREMENT PLANS Defined Contribution and Retirement Plans The Company sponsors a defined contribution retirement plan, which covers substantially all employees. The Company’s total matching contribution expense was $ 1.6 million, $ 2.0 million, and $ 1.0 million in fiscal years 2023, 2022, and 2021, respectively. Multi-employer Pension Plans 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, 2023, is outlined in the following table. Unless otherwise noted, the most recent Pension Protection Act zone status available in 2023 and 2022 is for the plan’s year-end on December 31, 2022, and 2021, respectively. The zone status is based on information that the Company received from the plan and is certified by the plan’s actuary. Among other factors, plans in the red zone are generally less than 65 percent funded, plans in the yellow zone are between 65 percent and 80 percent funded, and plans in the green zone are at least 80 percent funded. Pension Protection Expiration Date Number of Act Zone Status Company Contributions of Collective Company EIN/Pension June 30, Rehabilitation (in thousands) Surcharge Bargaining Employees Pension Fund Plan Number 2023 2022 Plan Status 2023 2022 2021 Imposed Agreement in Plan Central States SE and ‎ SW Areas Pension Fund 366044243 Red Red Implemented $ 115 $ 127 $ 150 No 3/31/2025 6 Steelworkers Pension Trust 236648508 Green Green Not applicable — — — No Not applicable — $ 115 $ 127 $ 150 With the closure of the Company’s Dubuque, Iowa manufacturing facility, the collective bargaining agreement for the Steelworkers Pension Trust was terminated as of June 30, 2020. As of June 30, 2022, the Company had 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 . 13. COMMITMENTS AND CONTINGENCIES Environmental Matters – In March 2016, the Company received a General Notice Letter for the Lane Street Groundwater Superfund Site (the “Lane Street Site”) located in Elkhart, Indiana from the U.S. Environmental Protection Agency (EPA). In April 2016, the EPA issued their proposed clean-up plan for groundwater pollution and request for public comment. The Company responded to the request for public comment in May 2016. The EPA issued a Record of Decision selecting a remedy in August 2016 and estimated total costs to remediate of $ 3.6 million. In July 2017, the EPA issued a Special Notice Letter to the Company demanding that the Company perform the remedy selected and pay for the remediation cost and past response costs of $ 5.5 million. On October 12, 2017, the Company, after consultation with its insurance carriers, offered an amount, fully reimbursable by insurance coverage, to the EPA to resolve this matter. On November 6, 2017, the settlement offer extended on October 12, 2017, was rejected. In April 2018, the EPA issued a Unilateral Administrative Order for Remedial Design and Remedial Action (the “Order”) against the Company. The Order was issued under Section 106(a) of the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), 42 U.S.C. §9606(a). The Order directed the Company to perform remedial design and remedial action for the Lane Street Site. 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 of $ 3.6 million, which as noted above, was the estimated cost of remedial work. The Company believed that financial assurance was not required because it met the relevant financial test criteria as provided in the Order. In May 2018, the EPA agreed to suspend enforcement of the Order so that the Company could conduct environmental testing upgradient to its former manufacturing location pursuant to an Administrative Order on Consent (AOC). On April 24, 2019, the Company signed an AOC with the EPA to conduct the upgradient investigation. The Company negotiated site access to the upgradient property over a period of months in 2019, followed by completion of sampling activities on that property on September 28-29, 2019. 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. Despite the Company’s position that it did not cause or contribute to the contamination, the Company reached a settlement with the EPA and the State of Indiana, which was filed as a consent decree in the U.S. District Court for the Northern District of Indiana on October 36 Table of Contents 24, 2022. The consent decree required Flexsteel to pay $ 9.8 million in resolution of the matter. Flexsteel also reached agreements with its insurance carriers for partial reimbursement of the settlement. During the quarter ended December 31, 2022, the Company made full payment in accordance with the settlement agreement and as a result of insurance proceeds received, the Company recorded income of $ 2.8 million for the quarter ended December 31, 2022, which is included in environmental remediation on the Consolidated Statements of Income and Comprehensive Income. 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. The Company does not consider any of such other proceedings that are currently pending, individually or in the aggregate, to be material to its business or likely to result in a material effect on its consolidated operating results, financial condition, or cash flows. 14. QUARTERLY FINANCIAL INFORMATION – UNAUDITED (in thousands, except per share amounts) For the Quarter Ended September 30 December 31 (a) March 31 June 30 (b) Fiscal 2023: Net sales $ 95,684 $ 93,137 $ 99,052 $ 105,819 Gross margin 15,349 15,838 18,645 21,115 Operating income 428 3,762 2,116 4,236 Net income 289 2,853 1,475 10,161 Earnings per share: Basic $ 0.05 $ 0.54 $ 0.28 $ 1.97 Diluted $ 0.05 $ 0.53 $ 0.28 $ 1.91 (a) During the quarter ended December 31, 2022, the Company recorded income of $ 2.8 million as a result of insurance proceeds received related to the settlement of the environmental remediation liability. See Note 13 Commitments and Contingencies , of the Notes to Consolidated Financial Statements, included in this Annual Report on Form 10-K for more information. (b) During the quarter June 30, 2023, it was determined the Company has reached a more-likely- than-not position that the Company will realize the entirety of its deferred tax assets. Therefore, the Company has reversed the valuation allowance against the federal and state deferred tax assets recorded as of June 30, 2022 of $ 9.8 million. See Note 10 Income Taxes, included in this Annual Report on Form 10-K for more information. For the Quarter Ended September 30 December 31 March 31 June 30 Fiscal 2022: Net sales $ 137,689 $ 141,668 $ 140,408 $ 124,517 Gross margin 23,410 9,527 22,071 17,672 Operating income (loss) 5,873 ( 8,636 ) 5,814 3,566 Net income (loss) 4,353 ( 7,545 ) 5,316 ( 271 ) Earnings (loss) per share: Basic $ 0.64 $ ( 1.13 ) $ 0.84 $ ( 0.05 ) Diluted $ 0.61 $ ( 1.13 ) $ 0.82 $ ( 0.05 ) 15. SUBSEQUENT EVENTS There are no subsequent events as of August 25, 2023. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.