Annual Report for Fiscal Year Ending June 30, 2026 (Form 10-K)

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 Annual Report on Form 10-K.

Results of Operations

The following table has been prepared as an aid in understanding the Company's results of operations on a comparative basis for the fiscal years ended June 30, 2026, 2025, and 2024. Amounts presented are percentages of the Company's net sales.

Fiscal 2026 Compared to Fiscal 2025

Net sales were $459.2 million for the year ended June 30, 2026, compared to net sales of $441.1 million in the prior year, an increase of $18.1 million or 4.1%. The increase in sales was primarily driven by $28.0 million of growth in soft seating products, partially offset by a $9.0 million decline in homestyles branded ready-to-assemble product sales and $0.9 million decline in Flexsteel branded casegoods.

Gross margin for the year ended June 30, 2026, was 24.7%, compared to 22.2% for the prior fiscal year, an increase of 250 basis points ("bps"). The 250-bps increase was primarily driven by a 200-bps benefit from the International Emergency Economic Powers Act ("IEEPA") Tariff Refunds received and to a lesser extent favorable mix driven by product and customer portfolio optimization initiatives.

Selling, general, and administrative ("SG&A") expenses increased by $4.2 million in the year ended June 30, 2026, compared to the prior fiscal year. As a percentage of net sales, SG&A expense was 15.4% in fiscal year 2026 compared to 15.1% of net sales in the prior fiscal year. The increase of 30-bps is primarily due to a 70-bps benefit from fixed cost leverage on higher sales volume offset by 70-bps increase in investments in consumer insights, new products and marketing to execute our growth strategy and a 30-bps increase from higher incentive compensation expense.

Income tax expense was $10.7 million, or an effective rate of 24.4%, for the year ended June 30, 2026, compared to income tax expense of $6.8 million in the prior year, or an effective tax rate of 25.3%. The current year effective tax rate was primarily impacted by lower non-deductible compensation, effect of state and foreign taxes, partially offset by stock-based compensation and a research and development credit benefit. The prior year tax rate was primarily impacted by the effect of state and foreign taxes, offset by a research and development credit benefit. The Company adjusted its provision for income tax and measurement of deferred tax assets in accordance with the One Big Beautiful Act ("OBBBA"). See Note 10, Income Taxes, of the Notes to Consolidated Financial Statements, included in this Annual Report on Form 10-K for more information.

Net income was $33.1 million, or $6.07 per diluted share for the year ended June 30, 2026, compared to net income of $20.2 million, or $3.55 per diluted share in the prior year.

On July 31, 2025, the President of the United States issued an executive order intended to clarify certain matters related to previously issued executive orders on tariffs. This executive order included, among other things, an increase in the country specific tariff from 10%

to 20% on goods imported from Vietnam. Accordingly, both our seating and case goods products sourced from Vietnam were subject to tariffs under IEEPA during this period. In addition, beginning in October 2025, substantially all of the seating products we source from Vietnam and manufacture in Mexico became subject to a 25% tariff under Section 232 of the Trade Expansion Act of 1962 pursuant to the Presidential Proclamation Adjusting Imports of Timber, Lumber, and their Derivative Products into the United States. For these seating products, the Section 232 tariff superseded the previously applicable IEEPA tariffs. Our case goods products sourced from Vietnam continued to be subject to the applicable IEEPA tariffs until February 2026, when the U.S. Supreme Court held that the tariffs imposed under IEEPA exceeded the authority granted under that statute. Following the Supreme Court's decision, a temporary 10% global import surcharge was imposed under Section 122 of the Trade Act of 1974 and became applicable to our case goods products sourced from Vietnam. On July 24, 2026, the U.S. implemented a new tariff framework under Section 301 of the Trade Act of 1974. The new framework imposes tariffs of either 10% or 12.5% on imports from certain trading partners, including Vietnam. This Section 301 tariff applies to bedroom, dining and occasional casegood products we source from Vietnam. The majority of our seating products sourced from Vietnam and manufactured in Mexico remain subject to the 25% Section 232 tariffs which, under the existing proclamation, is scheduled to increase to 30% effective January 1, 2027, unless modified prior to that date, and are generally not subject to the additional Section 301 tariffs. In addition, as a result of the U.S. Supreme Court's February 2026 decision regarding the IEEPA tariff program, the U.S. Court of International Trade ordered the U.S. government to process refunds of tariffs collected under the IEEPA tariff program. These refunds relate only to tariffs imposed under the IEEPA authority and do not affect the Section 232 tariffs that continue to apply to the majority of the Company's upholstered seating products.

Fiscal 2025 Compared to Fiscal 2024

Net sales were $441.1 million for the year ended June 30, 2025, compared to net sales of $412.8 million in the prior year, an increase of $28.3 million or 6.9%. The increase in sales was primarily driven by unit volume in our soft seating products, offset by a decline in our homestyles ready-to-assemble product line.

Gross margin for the year ended June 30, 2025, was 22.2%, compared to 21.1% for the prior fiscal year, an increase of 110 basis points ("bps"). The 110-bps increase was primarily driven by fixed cost leverage on higher sales, supply chain cost savings, and product portfolio management.

Selling, general, and administrative ("SG&A") expenses decreased by $3.7 million in the year ended June 30, 2025, compared to the prior fiscal year. As a percentage of net sales, SG&A expense was 15.1% in fiscal year 2025 compared to 17.1% of net sales in the prior fiscal year. The decrease of 200-bps is primarily due to fixed cost leverage on higher sales volume and structural cost savings partially offset by investments in growth initiatives. The prior year SG&A expense also included a $1.5 million expense due to CEO transition costs associated with the revaluation of previously awarded equity awards which did not recur in the year ended June 30, 2025.

In July 2022, Flexsteel commenced a 12-year lease for a manufacturing facility in Mexicali, Mexico to support strong demand growth which was elevated due to pandemic-driven buying at that time. Subsequently, U.S. furniture demand reverted to pre-pandemic norms, and the Company's plan for the facility pivoted to subleasing the space short-term while maintaining the option to utilize it longer term to support growth. While the Company secured multiple short-term sublease tenants at the beginning of the lease term, substantial changes in U.S. trade policy in early 2025 created significant uncertainty in US-Mexico trade relations, slowed foreign direct investment in Mexico, and greatly diminished tenant interest in subleasing the Mexicali facility. As a result, management concluded that the right of use asset related to this lease was not fully recoverable and recorded a pre-tax non-cash asset impairment charge of $14.1 million during the quarter ended March 31, 2025. See Note 2, Leases, of the Notes to Consolidated Financial Statements, included in this Annual Report on Form 10-K for more information.

During the year ended June 30, 2025, the Company completed the sale of its Dublin, Georgia facility which had been previously recorded as held for sale. The Company recorded a pre-tax gain of $5.0 million related to the sale. See Note 6, Assets Held For Sale, of the Notes to Consolidated Financial Statements, included in this Annual Report on Form 10-K for more information.

During the year ended June 30, 2025, the Company completed the sale of 2 separate ancillary buildings, formerly part of its Huntingburg, Indiana distribution center complex. The Company received proceeds of $0.8 million and recorded a pre-tax gain of $0.7 million related to the first sale. The Company received proceeds of $4.0 million and recorded a pre-tax gain of $3.7 million related to the second sale. The Company has adequate distribution capacity to support our growth as we continue to optimize our distribution and logistics network. See Note 6, Assets Held For Sale, of the Notes to Consolidated Financial Statements, included in this Annual Report on Form 10-K for more information.

Income tax expense was $6.8 million, or an effective rate of 25.3%, for the year ended June 30, 2025, compared to income tax expense of $5.0 million in the prior year, or an effective tax rate of 32.3%. The current year effective tax rate was primarily impacted by the effect of state and foreign taxes, offset by a research and development credit benefit. The prior year tax rate was impacted by the effect of state taxes, nondeductible stock compensation, and foreign taxes, offset by a research and development credit benefit. See Note 10, Income Taxes, of the Notes to Consolidated Financial Statements, included in this Annual Report on Form 10-K for more information.

Net income was $20.2 million, or $3.55 per diluted share for the year ended June 30, 2025, compared to net income of $5.5 million, or $1.91 per diluted share in the prior year.

Liquidity and Capital Resources

Working capital (current assets less current liabilities) on June 30, 2026, was $82.7 million compared to $110.4 million on June 30, 2025. The $27.7 million decrease in working capital is primarily due to an increase in trade receivables of $7.4 million, an increase in inventories of $1.5 million, an increase in other current assets of $0.4 million, a decrease in other current liabilities of $1.4 million, and a decrease of insurance costs of $0.5 million partially offset by a decrease in cash of $23.3 million, an increase in accounts payable of $10.6 million, an increase in sales and advertising of $2.2 million, an increase in payroll and related items of $2.2 million and an increase in operating lease of $0.6 million. Capital expenditures were $3.9 million for the fiscal year ended June 30, 2026.

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

Net cash provided by operating activities

For the year ended June 30, 2026, cash provided by operating activities was $51.5 million, which primarily consisted of net income of $33.1 million, adjusted for non-cash items including stock-based compensation of $4.6 million, deferred income taxes of $4.5 million, depreciation of $3.8 million and provision for credit losses of $0.2 million. Net cash provided by operating assets and liabilities was $5.3 million and was primarily due to an increase in accounts payable of $10.9 million due to timing of inventory purchases, a decrease in other assets of $3.5 million primarily driven by collections of VAT receivables, partially offset by an increase in trade receivables of $7.6 million due to timing of shipments and an increase in inventories of $1.5 million.

For the year ended June 30, 2025, cash provided by operating activities was $37.0 million, which primarily consisted of net income of $20.2 million, adjusted for non-cash items including an impairment of our Mexicali facility right-of-use asset of $14.1 million, stock-based compensation expense of $3.9 million, and depreciation expense of $3.7 million, offset by gain on disposition of property, plant and equipment of $9.5 million, $3.8 million in deferred income tax benefit, and accounts receivable allowance benefit of $0.2 million. Net cash provided by operating assets and liabilities was $8.7 million and was primarily due to a decrease in trade receivables of $9.3 million and a decrease in inventory of $7.4 million due to inventory optimization initiatives, offset by an increase in other assets of $7.6 million primarily related to our receivable for recoverable VAT paid in Mexico.

Net cash (used in) provided by investing activities

For the year ended June 30, 2026, net cash used in investing activities was $3.9 million, due to capital expenditures.

For the year ended June 30, 2025, net cash provided by investing activities was $9.4 million, primarily due to proceeds of $11.6 million from the sales of property, plant and equipment, and corporate owned life insurance proceeds of $1.2 million, offset by capital expenditures of $3.3 million.

Net cash (used in) financing activities

For the year ended June 30, 2026, net cash used in financing activities was $70.9 million, primarily due to common stock repurchases of $63.7 million, dividends paid of $4.4 million and $2.8 million for tax payments on employee vested restricted shares netted with proceeds from the issuance of common stock.

For the year ended June 30, 2025, net cash used in financing activities was $11.2 million, primarily due to proceeds from lines of credit of $202.3 million, offset by payments on lines of credit of $207.3 million, dividends paid of $3.6 million, and $2.8 million for tax payments on employee vested restricted shares netted with proceeds from the issuance of common stock.

Financing Arrangements

Line of Credit

On September 8, 2021, the Company, as the borrower, entered into a credit agreement (the "Credit Agreement") with Wells Fargo Bank, National Association (the "Lender"), and the other lenders 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 a prior lender and for working capital purposes. The Company's obligations under the Credit Agreement are secured by substantially all its assets, excluding real property. The Credit Agreement contains customary representations, warranties, and covenants, including a financial covenant to maintain a fixed coverage ratio of not less than 1.00 to 1.00. In addition, the Credit Agreement places restrictions on the Company's ability to incur additional indebtedness, to create liens or other encumbrances, to sell or otherwise dispose of assets, and to merge or consolidate with other entities.

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

Subject to certain conditions, borrowings under the Credit Agreement initially bore interest at LIBOR plus 1.25% or 1.50% per annum. On May 24, 2023, the Company entered into a second amendment to the Credit Agreement ("Second Amendment to the Credit Agreement") with the Lender to transition the applicable interest rate from LIBOR to Secured Overnight Financing Rate ("SOFR"). Effective as of the date of the Second Amendment to the Credit Agreement, borrowings under the amended Credit Agreement bear interest at SOFR plus 1.36% to 1.61% or an effective interest rate of 4.98% on June 30, 2026.

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

As of June 30, 2026, there were no outstanding borrowings under the Credit Agreement, exclusive of fees and letters of credit.

Letters of credit outstanding at the Lender as of June 30, 2026, totaled $0.9 million.

Subsequent to fiscal year end, on August 18, 2026 the Company, as the borrower, entered into a new $30.0 million secured revolving credit facility that replaces the Credit Agreement. The new facility reduces the Company's maximum borrowing capacity from $55.0 million to $30.0 million but extends availability with a new maturity date of August 18, 2029 and is expected to better align with current needs and adequately support the Company's anticipated future requirements for working capital and general corporate purposes.

See Note 9, Credit Arrangements, of Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.

Contractual Obligations

The following table summarizes our contractual obligations on June 30, 2026, and the effect these obligations are expected to have on our liquidity and cash flow in the future (in thousands):

Outlook

Our focus for fiscal year 2027 will be to continue to operate with agility, maintain disciplined cost control, protect our financial position, and invest in the capabilities that we believe will drive long-term growth and shareholder value creation.

Critical Accounting Policies

The discussion and analysis of our consolidated financial statements and results of operations are based on our consolidated financial statements prepared in accordance with generally accepted accounting principles (GAAP) in the United States of America. Preparation of these consolidated financial statements requires the use of estimates and judgments that affect the reported results. We use estimates based on the best information available in recording transactions and balances resulting from business operations. Estimates are used

for such items as the collectability of trade accounts receivable and inventory valuation. Ultimate results may differ from these estimates under different assumptions or conditions.

Allowance for Credit Losses - We establish an allowance for expected credit losses to reduce trade accounts receivable to an amount that reasonably approximates their net realizable value. The allowance is established through a 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 - We value inventory at the lower of cost or net realizable value. Cost of manufactured inventory includes materials, labor and overhead. In addition, finished goods inventory includes capitalized freight, import duties, and warehousing costs. 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.

Valuation of Long-Lived Assets - We periodically review 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 long-lived assets, including right-of-use lease assets, 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. We recorded $14.1 million of impairments in the fiscal year 2025 related to our Mexicali facility lease right-of-use asset. See Note 2, Leases, for the Company's lease disclosures. No impairments were recorded in fiscal years 2026 and 2024.

Income Taxes - In determining taxable income for financial statement purposes, we must make certain estimates and judgments. These estimates and judgments affect the calculation of certain tax liabilities and the determination of the recoverability of certain deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating our ability to recover our deferred tax assets we consider all available positive and negative evidence including our past operating results, the existence of cumulative losses in the most recent years, and our forecast of future taxable income. In estimating future taxable income, we develop assumptions including the amount of future pre-tax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses.

At June 30, 2026, the Company determined that based on the weight of available evidence, we will be able to recover our deferred tax assets. The realization of our deferred tax assets is primarily dependent on future taxable income in the appropriate jurisdiction. Any reduction in future taxable income, including but not limited to any future restructuring activities may require that we establish a valuation allowance against our deferred tax assets. Establishing a valuation allowance or an increase in the valuation allowance could result in additional income tax expense in such a period and could have a significant impact on our future earnings. Refer to Note 10, Income Taxes, of Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for more information.