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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

______________________________________

FORM 10-Q

______________________________________

þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2020

or

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission file number 0-5151

______________________________________

FLEXSTEEL INDUSTRIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

Incorporated in State of Minnesota

42-0442319

(State or other Jurisdiction of

(I.R.S. Identification No.)

Incorporation or Organization)

385 BELL STREET

DUBUQUE, IA 52001-0877

(Address of Principal Executive Offices) (Zip Code)

(563) 556-7730

(Registrant’s Telephone Number, Including Area Code)

______________________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

FLXS

The Nasdaq Stock Market, LLC

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (check one).

Large Accelerated Filer ¨ Accelerated Filer þ Non-Accelerated Filer ¨ Smaller Reporting Company þ Emerging Growth Company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨ No þ

Common Stock - $1.00 Par Value

Shares Outstanding as of October 27, 2020

7,316,200



Table of Contents

FLEXSTEEL INDUSTRIES, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2020

Page

Part I – Financial Information

Item 1.

Financial Statements

3

Consolidated Balance Sheets as of September 30, 2020 and June 30, 2020 (Unaudited)

3

Consolidated Statements of Income for the three months ended September 30, 2020 and September 30, 2019 (Unaudited)

4

Consolidated Statements of Comprehensive Income for the three months ended September 30, 2020 and September 30, 2019 (Unaudited)

4

Consolidated Statements of Changes in Shareholders’ Equity for the three months ended September 30, 2020 and September 30, 2019 (Unaudited)

5

Consolidated Statements of Cash Flows for the three months ended September 30, 2020 and September 30, 2019 (Unaudited)

6

Notes to Consolidated Financial Statements (Unaudited)

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

14

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

16

Item 4.

Controls and Procedures

16

Part II – Other Information

Item 1A.

Risk Factors

18

Item 2A.

Unregistered Sales of Equity Securities and Use of Proceeds

18

Item 6.

Exhibits

18

Signatures

19


2


Table of Contents

PART I FINANCIAL INFORMATION

Item 1.Financial Statements

FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Amounts in thousands)

September 30,

June 30,

2020

2020

ASSETS

CURRENT ASSETS:

Cash and cash equivalents

$

36,547

$

48,197

Trade receivables - less allowances: September 30, 2020, $1,745; June 30, 2020, $1,770

39,784

32,217

Inventories

75,738

70,565

Other

20,827

18,535

Assets held for sale

13,100

12,329

Total current assets

185,996

181,843

NONCURRENT ASSETS:

Property, plant and equipment, net

41,498

43,312

Operating lease right-of-use assets

10,418

8,683

Deferred income taxes

2,111

Other assets

1,297

1,310

TOTAL ASSETS

$

239,209

$

237,259

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:

Accounts payable - trade

$

28,802

$

27,747

Current portion of operating lease liabilities

4,182

4,408

Accrued liabilities:

Payroll and related items

5,460

3,275

Insurance

3,168

3,787

Restructuring costs

1,527

1,961

Advertising

4,791

3,823

Environmental remediation

3,600

3,600

Other

6,642

4,861

Total current liabilities

58,172

53,462

LONG-TERM LIABILITIES:

Operating lease liabilities, less current maturities

9,485

7,607

Other liabilities

927

685

Total liabilities

68,584

61,754

SHAREHOLDERS' EQUITY:

Common stock - $1 par value; authorized 15,000 shares; 8,065 shares issued and
7,437 outstanding as of September 30, 2020; 8,008 shares issued and
7,876 outstanding as of June 30, 2020

8,065

8,008

Additional paid-in capital

32,315

31,748

Treasury stock, at cost; 628 shares and 132 shares as of September 30, 2020 and
June 30, 2020, respectively

(10,563)

(1,563)

Retained earnings

140,808

137,312

Total shareholders' equity

170,625

175,505

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

$

239,209

$

237,259

See accompanying Notes to Consolidated Financial Statements (Unaudited).

3


Table of Contents

FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Amounts in thousands, except per share data)

Three Months Ended

September 30,

2020

2019

Net sales

$

105,239

$

100,348

Cost of goods sold

82,424

83,127

Gross margin

22,815

17,221

Selling, general and administrative

14,175

17,475

Restructuring expense

1,381

6,004

Gain on disposal of assets due to restructuring

(652)

(18,941)

Operating income

7,911

12,683

Other income

49

86

Income before income taxes

7,960

12,769

Income tax provision

4,081

3,218

Net income

$

3,879

$

9,551

Weighted average number of common shares outstanding:

Basic

7,702

7,928

Diluted

7,908

8,190

Earnings per share of common stock:

Basic

$

0.50

$

1.20

Diluted

$

0.49

$

1.17

See accompanying Notes to Consolidated Financial Statements (Unaudited).

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Amounts in thousands)

Three Months Ended

September 30,

2020

2019

Net income

$

3,879

$

9,551

Other comprehensive loss:

Unrealized loss on securities

(13)

Reclassification of realized loss on securities to

other income

2

Unrealized losses in securities before taxes

(11)

Income tax benefit related to securities losses

3

Net unrealized losses on securities

(8)

Other comprehensive loss, net of tax

(8)

Comprehensive income

$

3,879

$

9,543

See accompanying Notes to Consolidated Financial Statements (Unaudited).


4


Table of Contents

FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

(Amounts in thousands)

Three Months Ended September 30, 2020

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

Stock-based compensation

2

954

956

Vesting of restricted stock units and restricted shares

55

(387)

(332)

Treasury stock purchases

(9,000)

(9,000)

Cash dividends declared

(383)

(383)

Net income

3,879

3,879

Balance at September 30, 2020

$

8,065

$

32,315

$

(10,563)

$

140,808

$

170,625

Three Months Ended September 30, 2019

Total Par

Accumulated

Value of

Additional

Other

Common

Paid-In

Retained

Comprehensive

Shares ($1 Par)

Capital

Earnings

(Loss) Income

Total

Balance at June 30, 2019

$

7,903

$

27,512

$

170,004

$

8

$

205,427

Adoption of ASU 2016-02

(42)

(42)

Unrealized gain on available for sale investments,
  net of tax

(8)

(8)

Stock-based compensation

39

1,310

1,349

Cash dividends declared

(1,754)

(1,754)

Net income

9,551

9,551

Balance at September 30, 2019

$

7,942

$

28,822

$

177,759

$

$

214,523

See accompanying Notes to Consolidated Financial Statements (Unaudited).


5


Table of Contents

FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Amounts in thousands)

Three Months Ended

September 30,

2020

2019

OPERATING ACTIVITIES:

Net income

$

3,879

$

9,551

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

Depreciation

1,360

2,484

Deferred income taxes

2,111

(13)

Stock-based compensation expense

954

1,416

Change in provision for losses on accounts receivable

(25)

(238)

Gain on disposition of capital assets

(637)

(18,941)

Changes in operating assets and liabilities:

Trade receivables

(7,542)

2,070

Inventories

(5,173)

91

Other current assets

(2,293)

7,468

Other assets

13

176

Accounts payable - trade

1,054

(3,809)

Accrued liabilities

3,870

(3,173)

Other long-term liabilities

243

(401)

Net cash used in operating activities

(2,186)

(3,319)

INVESTING ACTIVITIES:

Purchases of investments

(8)

(646)

Proceeds from sales of investments

8

646

Proceeds from sale of capital assets

679

19,625

Capital expenditures

(360)

(512)

Net cash provided by investing activities

319

19,113

FINANCING ACTIVITIES:

Dividends paid

(454)

(1,738)

Treasury stock purchases

(9,000)

Shares withheld for tax payments on vested restricted shares

(329)

(67)

Net cash used in financing activities

(9,783)

(1,805)

(Decrease) Increase in cash and cash equivalents

(11,650)

13,989

Cash and cash equivalents at beginning of period

48,197

22,247

Cash and cash equivalents at end of period

$

36,547

$

36,236

SUPPLEMENTAL INFORMATION

Income taxes paid (refunded), net

$

(388)

$

(4,746)

Capital expenditures in accounts payable

$

$

142

See accompanying Notes to Consolidated Financial Statements (Unaudited).


6


Table of Contents

FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE PERIOD ENDED SEPTEMBER 30, 2020

1.  BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS

DESCRIPTION OF BUSINESS – Flexsteel Industries, Inc. and Subsidiaries (the “Company”) is one of the largest manufacturers, importers and online marketers of furniture products in the United States. Product offerings include a wide variety of upholstered furniture such as sofas, loveseats, chairs, reclining and rocker-reclining chairs, swivel rockers, sofa beds, convertible bedding units, occasional tables, desks, dining tables and chairs and bedroom furniture. A featured component in most of the upholstered furniture is a unique steel drop-in seat spring from which the name “Flexsteel” is derived. 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 three months ended September 30, 2020, we have 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 labor shortages specifically in Asia, limited availability of ocean containers, and inflationary pressures in key materials. 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.

BASIS OF PRESENTATION – The consolidated financial statements included herein have been prepared by Flexsteel Industries, Inc. and Subsidiaries (the “Company” or “Flexsteel”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The information furnished in the consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of such consolidated financial statements. Operating results for the three months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2021. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. Except to the extent updated or described below, the significant accounting policies set forth in Note 1 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended June 30, 2020, appropriately represent, in all material respects, the current status of accounting policies and are incorporated by reference.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS – In June 2016, the FASB issued ASU 2016-13 “Financial Instruments - Credit Losses (“Topic 326”)” and also issued subsequent amendments to the initial guidance under ASU 2018-19, ASU 2019-04 and ASU 2019-05 (collectively Topic 326). Topic 326 requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. This replaces the existing incurred loss model with an expected loss model and requires the use of forward-looking information to calculate credit loss estimates. The amendments in this guidance are effective for fiscal years beginning after December 15, 2019, with early adoption permitted for certain amendments. Topic 326 must be adopted by applying a cumulative effect adjustment to retained earnings. Effective July 1, 2020, the Company adopted Topic 326 and there was no impact to the Company’s financial statements.

 

2.  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. 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.

7


Table of Contents

For purposes of measuring the Company’s lease liability, the discount rate utilized by the Company was based on the Company’s line of credit as well as publicly available data for instruments with similar terms. 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.

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

Three Months Ended

(in thousands)

September 30, 2020

September 30, 2019

Operating lease expense

$

1,074

$

1,173

Variable lease expense

69

65

Total lease expense

$

1,143

$

1,238

Other information related to leases under non-cancellable operating leases were as follows:

Three Months Ended

September 30, 2020

September 30, 2019

(in thousands)

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases

$

1,035

$

646

Right-of-use assets obtained in exchange for lease liabilities:

Operating leases

$

2,741

$

Weighted-average remaining lease term (in years):

Operating leases

1.6

1.9

Weighted-average discount rate:

Operating leases

3.3%

3.5%

Future minimum lease payments under non-cancellable operating leases are as follows as of September 30, 2020:

(in thousands)

Within one year

$

4,601

After one year and within two years

4,327

After two years and within three years

3,159

After three years and within four years

2,189

After four years and within five years

200

After five years

Total future minimum lease payments

$

14,476

Less – Discount

809

Lease liability

$

13,667

 

3.  INVENTORIES

A comparison of inventories is as follows:

September 30,

June 30,

(in thousands)

2020

2020

Raw materials

$

11,684

$

11,119

Work in process and finished parts

3,798

3,925

Finished goods

60,256

55,521

Total

$

75,738

$

70,565

 

4.  RESTRUCTURING

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

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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. 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 the exit of the Vehicle Seating and the remainder of the Hospitality product lines, and subsequently closed its Dubuque, Iowa and Starkville, Mississippi manufacturing facilities. The Company expects to complete the restructuring activities related to the exit of the Vehicle Seating and the remainder of the Hospitality product lines during fiscal 2021.

As a result of these planned actions, the Company expects to incur pre-tax restructuring and related expenses of approximately $56.0 to $58.0 million over this two year timeframe of which $25.0 to $26.0 million will be cash and $31.0 to $32.0 million non-cash. In addition, the Company has listed several properties for sale as part of the footprint optimization. Total cumulative restructuring and related costs incurred as of September 30, 2020 were $56.6 million.

The following is a summary of restructuring costs:

Three Months Ended

(in thousands)

September 30, 2020

September 30, 2019

Inventory impairment

$

$

179

One-time employee termination benefits

179

346

Other associated costs

1,202

5,658

Total restructuring and related expenses

$

1,381

$

6,183

Reported as:

Cost of goods sold

$

$

179

Operating expenses

$

1,381

$

6,004

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

The rollforward of the accrued restructuring costs is as follows:

One-time

Employee

Contract

Other

Termination

Termination

Associated

(in thousands)

Benefits

Costs

Costs

Total

Accrual balance at June 30, 2020

$

1,613

$

110

$

238

$

1,961

Costs incurred

179

1,202

1,381

Expenses paid

(411)

(110)

(1,076)

(1,597)

Non-cash

(218)

(218)

Accrual balance at September 30, 2020

$

1,381

$

$

146

$

1,527

 

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5. ASSETS HELD FOR SALE

During the first quarter of the fiscal year 2021, the Company committed to a plan to sell assets located at its Lancaster, Pennsylvania location. In the prior 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. The commitment to sell these assets are part of the Company’s restructuring plan, see Note 4 Restructuring. A summary of the assets held for sale is included in the table below as of September 30, 2020.

Accumulated

Net Book

Location

Asset Category

Cost

Depreciation

Value

(in thousands)

Dubuque, Iowa

Building & building improvements

$

24,524

$

(16,295)

$

8,229

Land & land improvements

1,497

(6)

1,491

Machinery & equipment

8,018

(6,377)

1,641

Total Dubuque

34,039

(22,678)

11,361

Lancaster, Pennsylvania

Building & building improvements

2,857

(2,053)

804

Land & land improvements

41

41

Total Lancaster

2,898

(2,053)

845

Starkville, Mississippi

Building & building improvements

4,615

(4,254)

361

Land & land improvements

694

(439)

255

Machinery & equipment

5,411

(5,183)

228

Total Starkville

10,720

(9,876)

844

Harrison, Arkansas

Building & building improvements

1,000

(1,000)

Land & land improvements

86

(36)

50

Machinery & equipment

1,330

(1,330)

Total Harrison

2,416

(2,366)

50

Total assets held for sale

$

50,073

$

(36,973)

$

13,100

6.  CREDIT ARRANGEMENTS

On August 28, 2020, the Company entered into a new two year secured $25.0 million revolving line of credit with Dubuque Bank and Trust Company, with interest of 1.50% plus LIBOR, subject to a floor of 3.00%. The revolving line of credit 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 revolving line of credit matures on August 28, 2022. There was no outstanding amount under the revolving line of credit as of September 30, 2020.

Letters of credit outstanding at Wells Fargo Bank N.A. (“Wells”) as of September 30, 2020, totaled $1.2 million, of which $1.3 million of the Company’s cash held at Wells is pledged as collateral.

7.  INCOME TAXES

The provision for income taxes for the interim periods is based on an estimate of the Company’s annual effective tax rate adjusted to reflect the impact of discrete items. Management judgment is required in projecting ordinary income to estimate the Company’s annual effective tax rate. The Company’s effective tax rate for the quarters ended September 30, 2020 and 2019 were 51.3% and 25.2%, respectively. The increase in the Company’s effective tax rate compared to the prior year quarter was primarily due to the Company’s prior expectation during the quarter ended June 30, 2020 that it would generate a net operating loss for tax purposes during the fiscal year ended June 30, 2021, and the net operating loss would be carried back up to 5 preceding taxable years at prior years’ statutory rates as provided by the Coronavirus Aid, Relief, and Economic Security Act. The Company now expects to generate a net operating profit for tax purposes during the fiscal year ended June 30, 2021, so certain deferred tax assets were remeasured to the current statutory rate of 21% while other deferred tax assets are no longer expected to be realizable and, as a result, the Company recorded an additional tax expense of $2.1 million during the quarter. The effective tax rate for the remaining nine months of the fiscal year ending June 30, 2021 is expected to be 25% to 26%.

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8.  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 grant date fair value 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.

The following table is a summary of total stock-based compensation expense for the three months ended September 30, 2020.

Three Months Ended

September 30,

(in thousands)

2020

2019

Total stock-based compensation expense

$

954

$

1,180

The Company has two stock-based compensation plans available for granting awards to employees and directors.

(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 from July 1, 2018 – June 30, 2021 (“2019-2021”). As of June 30, 2019, the performance period 2019-2021 is 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 RSUs 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 three months ended September 30, 2020:

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 June 30, 2020

44

$

16.90

44

$

16.76

88

$

16.83

Granted

64

12.01

99

12.01

163

12.01

Unvested as of September 30, 2020

108

$

13.98

143

$

13.47

251

$

13.69

Total unrecognized stock-based compensation related to the unvested LTICP RSUs at performance target was $2.6 million as of September 30, 2020, which is expected to be recognized over a period of 2.4 years.

(2) 2013 Omnibus Stock Plan

The 2013 Omnibus Stock Plan is 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.

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Restricted shares and RSUs

A summary of the activity in the Company’s unvested restricted shares and unvested RSUs during the three months ended September 30, 2020 is as follows:

Weighted average

Shares

fair value

(in thousands)

per share

Unvested as June 30, 2020

189

$

15.24

Granted

2

12.15

Vested

(86)

16.92

Forfeited

(1)

15.65

Unvested as of September 30, 2020

104

$

17.00

Total unrecognized stock-based compensation related to unvested restricted shares and unvested RSUs was $0.5 million as of September 30, 2020, which is expected to be recognized over a weighted average period of 0.7 years.

Options

A summary of the activity of the Company’s stock option plans as of September 30, 2020, is presented below:

Weighted

Shares

Average

(in thousands)

Exercise Price

Outstanding at June 30, 2020

223

$

23.70

Granted

37

12.77

Outstanding at September 30, 2020

260

$

22.15

The following table summarizes information for options outstanding at September 20, 2020:

Options

Weighted Average

Range of

Outstanding

Remaining

Exercise

Prices

(in thousands)

Life (Years)

Price

$

  8.55 - 15.14

108

8.6

$

12.62

17.23 - 19.77

21

1.5

18.86

20.50 - 27.57

68

5.6

23.81

31.06 - 32.80

37

5.6

32.20

43.09 - 47.45

26

6.0

45.36

$

  8.55 - 47.45

260

6.5

$

22.15

Total unrecognized stock-based compensation expense related to options was $0.04 million as of September 30, 2020, which is expected to be recognized over a period of 1.5 years.

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’s stock plans. Total unrecognized stock-based compensation expense related to options awarded outside a plan was $0.1 million as of September 30, 2020, which is expected to be recognized over a period of 2.2 years.

9.  EARNINGS PER SHARE

Basic earnings per share (EPS) of common stock are based on the weighted-average number of common shares outstanding during each period. Diluted earnings per share of common stock include the dilutive effect of potential common shares outstanding. The Company’s potential common shares outstanding are stock options, shares associated with the Long-Term Incentive Compensation Plan and non-vested restricted stock units and restricted shares. The Company calculates the dilutive effect of outstanding options, restricted stock units and restricted shares using the treasury stock method. Anti-dilutive options are not included in the computation of diluted EPS when their exercise price is greater than the average closing market price of the common shares.

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Three Months Ended

September 30,

(in thousands)

2020

2019

Basic shares

7,702

7,928

Potential common shares:

Stock options

72

4

Non-vested restricted stock units and restricted shares

134

258

206

262

Diluted shares

7,908

8,190

Anti-dilutive shares

200

254

Cash dividends declared per common share were $0.05 and $0.22 for the three months ended September 30, 2020 and 2019, respectively.

 

10.  LITIGATION

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 directs 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 a $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. 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.  On July 13, 2020, the Company further entered in to a Second Amended Tolling Agreement that tolls the statute of limitations for potential claims by the EPA through February 24, 2021. The Company reflected a $3.6 million liability in the consolidated balance sheets for the fiscal year ended June 30, 2018. 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 September 30, 2020 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 MattersThe lawsuit entitled Juan Hernandez, et al. v. 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 will serve to resolve the claims of the two Plaintiffs, as well as the approximately 270 remaining members of the class unless an individual class member asks to be excluded. At present, the material terms of the settlement are captured in a Long-Form Settlement Agreement. The Company anticipates that obtaining final approval of the parties’ settlement from the court will take at least three months and potentially longer, such that any settlement payments will be made during the fiscal year ended June 30, 2021. The settlement amount of $0.5 million, has been accrued in other current liabilities during the fiscal year ended June 30, 2019 and continues to reflect this liability in the consolidated balance sheets as of September 30, 2020.

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

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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.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

GENERAL:

The following analysis of the results of operations and financial condition of the Company should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this quarterly report on Form 10-Q.

Statement Regarding the Impact of the COVID-19 Pandemic

The World Health Organization (“WHO”) on March 11, 2020 declared novel coronavirus 2019 (“COVID-19”) a global pandemic. In response to this declaration, the Company has taken the following actions to maneuver the current economic landscape;

Employees that can perform work outside of the workplace are working from home,

Suspension of the Company’s 401K match effective June 1, 2020 through the end of the calendar year,

Temporary 50% reduction of cash compensation for the Company’s Board of Directors through October 1, 2020,

Temporary 25% reduction of salary compensation for the Company’s Chief Executive Officer and Chief Financial Officer / Chief Operating Officer through October 1, 2020,

Elimination of all non-essential expenses and capital expenditures; and

Negotiated with vendors to extend payment terms.

During the three months ended September 30, 2020, we have 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 labor shortages specifically in Asia, limited availability of ocean containers, and inflationary pressures in key materials. 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.

CRITICAL ACCOUNTING POLICIES:

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", included in our 2020 annual report on Form 10-K.

Overview

The following table has been prepared as an aid in understanding the Company’s results of operations on a comparative basis for the three months ended September 30, 2020 and 2019. Amounts presented are percentages of the Company’s net sales.

Three Months Ended

September 30,

2020

2019

Net sales

100.0

%

100.0

%

Cost of goods sold

78.3

82.8

Gross margin

21.7

17.2

Selling, general and administrative

13.5

17.4

Restructuring expense

1.3

6.0

Gain on disposal of assets due to restructuring

(0.6)

(18.9)

Operating income

7.5

12.7

Other income

0.0

0.1

Income before income taxes

7.6

12.8

Income tax provision

3.9

3.2

Net income

3.7

%

9.6

%

Results of Operations for the Quarter Ended September 30, 2020 vs. 2019

Net sales were $105.2 million for the quarter ended September 30, 2020 compared to net sales of $100.3 million in the prior year quarter, an increase of 4.9%. The increase in sales of $4.9 million was primarily driven by $11.4 million related to home furnishing products sold through retailers and $4.6 million for home furnishing products sold through e-commerce channels due to increased

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demand, partially offset by a decline of $11.1 million primarily due to the exit from our Vehicle Seating and Hospitality product lines during the fourth quarter of fiscal 2020.

Gross margin as a percent of net sales for the quarter ended September 30, 2020 was 21.7%, compared to 17.2% for the prior year quarter, an increase of 450 basis points (“bps”). The 450-bps increase was primarily due to structural cost reductions, operational efficiencies and fixed cost leverage due to higher sales volume as compared to the prior year quarter.

Selling, general and administrative (“SG&A”) expenses decreased $3.3 million in the quarter ended September 30, 2020 compared to the prior year quarter. As a percentage of net sales, SG&A was 13.5% in the quarter ended September 30, 2020 compared to the prior year quarter of 17.4%. The decrease in SG&A was primarily due to a reduction in salaries and wages due to cost saving measures taken during the fourth quarter of fiscal 2020 and continued through the three months ended September 30, 2020 in response to COVID-19 pandemic, coupled with decreased selling and travel expenses.

During the quarter ended September 30, 2020, we incurred $1.4 million of restructuring expenses primarily for facility closures, professional fees, and employee termination costs as part of our previously announced comprehensive transformation program. See Note 4, Restructuring, of the Notes to Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q for more information.

In August 2020, we completed the sale of one of our facilities in Harrison, Arkansas, resulting in net proceeds of $0.7 million and a gain of $0.7 million.

Income tax expense was $4.1 million, or an effective rate of 51.3%, and $3.2 million, or an effective rate of 25.2% during the quarter ended September 30, 2020 and September 30, 2019, respectively. The increase in the Company’s effective tax rate compared to the prior year quarter was primarily due to the Company’s prior expectation during the quarter ended June 30, 2020 that it would generate a net operating loss for tax purposes during the fiscal year ended June 30, 2021, and the net operating loss would be carried back up to five preceding taxable years at prior years’ statutory rates as provided by the Coronavirus Aid, Relief, and Economic Security Act. The Company now expects to generate a net operating profit for tax purposes during the fiscal year ended June 30, 2021, so certain deferred tax assets were remeasured to the current statutory rate of 21% while other deferred tax assets are no longer expected to be realizable and, as a result, the Company recorded an additional tax expense of $2.1 million during the quarter. The effective tax rate for the remaining nine months of the fiscal year ending June 30, 2021 is expected to be 25% to 26%.

Net income was $3.9 million, or $0.49 per diluted share for the quarter ended September 30, 2020, compared to net income of $9.6 million, or $1.17 per diluted share in the prior year quarter.

Liquidity and Capital Resources

Working capital (current assets less current liabilities) at September 30, 2020 was $127.8 million compared to $128.4 million at June 30, 2019. The $0.6 million decrease in working capital was due to a decrease in cash of $11.7 million primarily due $9.0 million share repurchases during the quarter and an increase in trade accounts payable of $1.1 million, partially offset by $5.2 million increase in inventory due to inventory build and a $7.6 million increase in trade receivables. Capital expenditures are estimated to be in the range of $3.0 million to $4.0 million for the fiscal year ending June 30, 2021.

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

Three Months Ended

September 30,

(in thousands)

2020

2019

Net cash used in operating activities

$

(2,186)

$

(3,319)

Net cash provided by investing activities

319

19,113

Net cash used in financing activities

(9,783)

(1,805)

(Decrease) Increase in cash and cash equivalents

$

(11,650)

$

13,989

Net cash used in operating activities

For the quarter ended September 30, 2020, net cash used in operating activities was $2.2 million, which primarily consisted of net income of $3.9 million, adjusted for non-cash depreciation of $1.4 million, gain from the sale of capital assets of $0.6 million, change in deferred income taxes of $2.1 million, and non-cash stock based compensation of $1.0 million. Net cash used in operating assets and liabilities was $9.8 million. The cash used in operating assets and liabilities of $9.8 million, was primarily due to an increase in trade receivables of $7.5 million, an increase in inventory of $5.2 million, and an increase in other current assets of $2.3 million, partially offset by an increase in accrued liabilities of $3.9 million and accounts payable of $1.1 million.

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For the quarter ended September 30, 2019, net cash used in operating activities was $3.3 million, which primarily consisted of net income of $9.6 million, non-cash depreciation of $2.5 million and a gain from the sale of capital assets of $18.9 million, coupled with net cash provided in operating assets and liabilities of $2.4 million. The cash provided in operating assets and liabilities of $2.4 million, was primarily due to a decline in trade receivables of $2.1 million and other current assets of $7.5 million, and a decline in accounts payable and accrued liabilities of $3.8 million and $3.2 million, respectively. The decline in other current assets was primarily driven by a tax refund of $4.6 million.

Net cash provided by investing activities

For the quarter ended September 30, 2020, net cash provided by investing activities was $0.3 million, primarily due to proceeds of $0.7 million for the sale of one of our Harrison, Arkansas facilities, partially offset by capital expenditures of $0.4 million.

Net cash provided by investing activities was $19.1 million for the quarter ended September 30, 2019, primarily due to proceeds of $19.6 million from the sale of our Riverside, California facility, partially offset by capital expenditures of $0.5 million.

Net cash used in financing activities

For the quarter ended September 30, 2020, net cash used in financing activities was $9.8 million, primarily due to $9.0 million for treasury stock purchases and dividends paid of $0.5 million.

For the quarter ended September 30, 2019, net cash used in financing activities was $1.8 million primarily due to dividends paid of $1.7 million.  

Line of Credit

On August 28, 2020, we entered into a new two-year secured $25.0 million revolving line of credit with Dubuque Bank and Trust Company, with interest of 1.50% plus LIBOR, subject to a floor of 3.00%. The revolving line of credit is secured by essentially all of the Company’s assets, excluding real property and requires the Company to maintain compliance with certain financial and non-financial covenants. The revolving line of credit matures on August 28, 2022. There was no outstanding amount under the revolving line of credit as of September 30, 2020.

Letters of credit outstanding at Wells Fargo Bank N.A. (“Wells”) as of September 30, 2020, totaled $1.2 million, of which $1.3 million of the Company’s cash held at Wells is pledged as collateral.

Contractual Obligations

As of September 30, 2020, there have been no material changes to our contractual obligations presented in our Annual Report on Form 10-K for the year ended June 30, 2020.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

General – Market risk represents the risk of changes in the value of a financial instrument, derivative or non-derivative, caused by fluctuations in interest rates, foreign exchange rates and equity prices. As discussed below, management of the Company does not believe that changes in these factors could cause material fluctuations in the Company’s results of operations or cash flows. The ability to import furniture products can be adversely affected by political issues in the countries where suppliers are located, disruptions associated with shipping distances and negotiations with port employees. Other risks related to furniture product importation include government imposition of regulations and/or quotas; duties, tariffs and taxes on imports; and significant fluctuation in the value of the U.S. dollar against foreign currencies. Any of these factors could interrupt supply, decrease sales, increase costs and decrease earnings.

Foreign Currency Risk – During the quarters ended September 30, 2020 and 2019, the Company did not have sales, but has purchases and other expenses denominated in foreign currencies. The market risk associated with currency exchange rates and prices is not considered significant.

Interest Rate Risk – The Company’s primary market risk exposure with regard to financial instruments is changes in interest rates. At September 30, 2020, the Company did not have any debt outstanding.

Item 4.  Controls and Procedures

(a) Evaluation of disclosure controls and procedures. Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and

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procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective as of September 30, 2020.

(b) Changes in internal control over financial reporting. During the quarter ended September 30, 2020, there were no significant changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended) that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

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

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

Statements, including those in this Quarterly Report on Form 10-Q, which are not historical or current facts, are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. There are certain important factors that could cause our results to differ materially from those anticipated by some of the statements made herein. Investors are cautioned that all forward-looking statements involve risk and uncertainty. Some of the factors that could affect results are the cyclical nature of the furniture industry, supply chain disruptions, litigation, the effectiveness of new product introductions and distribution channels, the product mix of sales, pricing pressures, the cost of raw materials and fuel, retention and recruitment of key employees, actions by governments including laws, regulations, taxes and tariffs, inflation, the amount of sales generated and the profit margins thereon, competition (both U.S. and foreign), credit exposure with customers, participation in multi-employer pension plans, timing to implement restructuring, the impact of the COVID-19 pandemic and general economic conditions. For further information regarding these risks and uncertainties, see the “Risk Factors” section in Item 1A of our most recent Annual Report on Form 10-K.

The Company specifically declines to undertake any obligation to publicly revise any forward-looking statements that have been made to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

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PART II OTHER INFORMATION

Item 1A.  Risk Factors

There has been no material change in the risk factors set forth under Part 1, Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

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. The following table summarizes the activity of the common stock repurchases under both the $6 million and $8 million program as of September 30, 2020. As of September 30, 2020, the $6 million repurchase program was completed.

Total Number

Average

Total Number

Approximate Dollar Value

of Shares

Price Paid

of Shares Purchased

of Shares that May Yet

Period

Purchased

per Share

as Part of Plans

Be Purchased

As of June 30, 2020

132,197

$

11.83

132,197

$

4,429,960

July 1, 2020 to July 31, 2020

155,808

14.46

155,808

2,168,981

August 1, 2020 to August 31, 2020

116,562

17.24

116,562

153,690

September 1, 2020 to September 30, 2020

223,905

21.16

223,905

3,405,667

As of September 30, 2020

628,472

$

16.81

628,472

$

3,405,667

Item 6.  Exhibits

Exhibit No.

10.1

Credit Agreement dated August 28, 2020 between Flexsteel Industries, Inc. and Dubuque Bank and Trust Company (incorporated by reference to the Form 8-K filed with the Securities and Exchange Commission on September 1, 2020).

10.2

Revolving Line of Credit Note dated August 28, 2020 between Flexsteel Industries, Inc. and Dubuque Bank and Trust Company (incorporated by reference to the Form 8-K filed with the Securities and Exchange Commission on September 1, 2020).

10.3

Security Agreement dated August 28, 2020 between Flexsteel Industries, Inc. and Dubuque Bank and Trust Company (incorporated by reference to the Form 8-K filed with the Securities and Exchange Commission on September 1, 2020).

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.*

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.*

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Certification of Chief Executive Officer and Chief Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

101.INS

XBRL Instance Document**

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB

XBRL Taxonomy Extension Labels Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

104.Cover Page

Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*

Filed herewith

**

In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be “furnished” and not “filed.”


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

FLEXSTEEL INDUSTRIES, INC.

 

 

 

Date:

October 30, 2020

By:

/S/ Derek P. Schmidt

Derek P. Schmidt

Chief Financial Officer and Chief Operating Officer

(Principal Financial & Accounting Officer)

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