UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

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

For the quarterly period ended ~~September 30,~~December 31, 2019

☐ 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, IOWA 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 ☑ 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 ☑ 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 ☑ Non-Accelerated Filer ☐ Smaller Reporting Company ☑ 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 ☑


Common Stock - $1.00 Par Value
Shares Outstanding as of ~~October~~January 29, ~~2019~~2020	~~7,941,762~~7,991,183

Table of Contents

FLEXSTEEL INDUSTRIES, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED ~~September 30,~~December 31, 2019


		Page
Part I – Financial Information
Item 1.	Financial Statements	3
	Consolidated Balance Sheets as of ~~September 30,~~December 31, 2019 and June 30, 2019 (Unaudited)	3
	Consolidated Statements of Income (Loss) for the three and six months ended ~~September 30,~~December 31, 2019 and ~~September 30,~~December 31, 2018 (Unaudited)	4
	Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended ~~September 30,~~December 31, 2019 and ~~September 30,~~December 31, 2018 (Unaudited)	4
	Consolidated Statements of Changes in Shareholders’ Equity for the ~~three~~six months ended ~~September 30,~~December 31, 2019 (Unaudited)	5
	Consolidated Statements of Changes in Shareholders’ Equity for the ~~three~~six months ended ~~September 30,~~December 31, 2018 (Unaudited)	5 6
	Consolidated Statements of Cash Flows for the ~~three~~six months ended ~~September 30,~~December 31, 2019 and ~~September 30,~~December 31, 2018 (Unaudited)	6 7
	Notes to Consolidated Financial Statements (Unaudited)	7 8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13 15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	15 18
Item 4.	Controls and Procedures	15 18
Part II – Other Information
Item 1A.	Risk Factors	17 19
Item 6.	Exhibits	17 19
Signatures		18 20

Table of Contents

PART I FINANCIAL INFORMATION

Item 1.Financial Statements

FLEXSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Amounts in thousands, except share and per share data)



	September 30,		June 30,		December 31,		June 30,
	2019		2019		2019		2019
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	36,236	$	22,247	$	37,334	$	22,247
Trade receivables - less allowances: September 30, 2019, $418; June 30, 2019, $250		36,325		38,157
Trade receivables - less allowances: December 31, 2019, $362; June 30, 2019, $250						41,567		38,157
Inventories		93,568		93,659		86,550		93,659
Other		4,432		11,904		5,703		11,904
Assets held for sale						629		—
Total current assets		170,561		165,967		171,783		165,967
NONCURRENT ASSETS:
Property, plant and equipment, net		76,486		79,238		74,946		79,238
Operating lease right-of-use assets		11,516		—		14,106		—
Deferred income taxes		7,577		7,564		7,577		7,564
Other assets		1,332		1,518		1,322		1,518
TOTAL ASSETS	$	267,472	$	254,287	$	269,734	$	254,287
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade	$	14,506	$	18,414	$	20,397	$	18,414
Current portion of operating lease liabilities		4,373		—		5,112		—
Accrued liabilities:
Payroll and related items		4,335		4,428		4,336		4,428
Insurance		4,443		4,554		4,211		4,554
Restructuring costs		2,619		6,203		1,249		6,203
Advertising		3,118		3,497		3,954		3,497
Environmental remediation		3,600		3,600		3,600		3,600
Other		7,774		7,068		7,913		7,068
Total current liabilities		44,768		47,764		50,772		47,764
LONG-TERM LIABILITIES:
Operating lease liabilities, less current maturities		7,483		—		9,032		—
Other liabilities		698		1,096		689		1,096
Total liabilities		52,949		48,860		60,493		48,860

SHAREHOLDERS' EQUITY:
Common stock - $1 par value; authorized 15,000,000 shares; outstanding September 30, 2019, 7,941,762 shares; outstanding June 30, 2019, 7,902,708 shares		7,942		7,903
Common stock - $1 par value; authorized 15,000,000 shares; outstanding December 31, 2019, 7,949,968 shares; outstanding June 30, 2019, 7,902,708 shares						7,950		7,903
Additional paid-in capital		28,822		27,512		30,732		27,512
Retained earnings		177,759		170,004		170,559		170,004
Accumulated other comprehensive (loss) income		—		8
Accumulated other comprehensive income						—		8
Total shareholders' equity		214,523		205,427		209,241		205,427
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	267,472	$	254,287	$	269,734	$	254,287



	Three Months Ended				Three Months Ended				Six Months Ended
	September 30,				December 31,				December 31,
	2019		2018		2019		2018		2019		2018
Net sales	$	100,348	$	113,487	$	102,949	$	118,352	$	203,297	$	231,839
Cost of goods sold		(83,127)		(91,696)		(86,899)		(96,878)		(170,026)		(188,574)
Gross margin		17,221		21,791		16,050		21,474		33,271		43,265
Selling, general and administrative		(17,475)		(20,196)		(18,088)		(19,371)		(35,563)		(39,567)
Restructuring expense		(6,004)		—		(5,067)		—		(11,071)		—
Gain on sale of facility		18,941		—
Operating income		12,683		1,595
Other income (expense)		86		181
Income before income taxes		12,769		1,776
Income tax provision		(3,218)		(480)
Net income	$	9,551	$	1,296
Gain on disposal of assets						26		—		18,967		—
Operating (loss) income						(7,079)		2,103		5,604		3,698
Other income						107		58		193		239
(Loss) income before income taxes						(6,972)		2,161		5,797		3,937
Income tax benefit (provision)						1,588		(595)		(1,630)		(1,075)
Net (loss) income					$	(5,384)	$	1,566	$	4,167	$	2,862
Weighted average number of common shares outstanding:
Basic		7,928		7,875		7,944		7,885		7,936		7,880
Diluted		8,190		7,921		7,944		7,917		8,146		7,922
Earnings per share of common stock:
(Loss) earnings per share of common stock:
Basic	$	1.20	$	0.16	$	(0.68)	$	0.20	$	0.53	$	0.36
Diluted	$	1.17	$	0.16	$	(0.68)	$	0.20	$	0.51	$	0.36

Three Months Ended

September 30,

2019

2018
Net income

$
9,551

$
1,296
Other comprehensive income:

Unrealized gain (loss) on securities

(13)

18
Reclassification of realized gain (loss) on securities to other income

2

5
Other comprehensive (loss) income before taxes

(11)

23
Income tax benefit (expense) related to securities gain (loss)

3

(6)
Other comprehensive (loss) gain, net of tax

(8)

17
Comprehensive income

$
9,543

$
1,313



	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2019		2018		2019		2018
Net (loss) income	$	(5,384)	$	1,566	$	4,167	$	2,862
Other comprehensive income:
Unrealized gain (loss) on securities		(5)		64		(18)		82
Reclassification of realized gain (loss) on securities to other income		5		(107)		7		(103)
Other comprehensive loss before taxes		—		(43)		(11)		(21)
Income tax benefit related to securities loss		—		11		3		6
Other comprehensive loss, net of tax		—		(32)		(8)		(15)
Comprehensive (loss) income	$	(5,384)	$	1,534	$	4,159	$	2,847



											Six Months Ended December 31, 2019
	Total Par						Accumulated				Total Par						Accumulated
	Value of		Additional				Other				Value of		Additional				Other
	Common		Paid-In		Retained		Comprehensive				Common		Paid-In		Retained		Comprehensive
	Shares ($1 Par)		Capital		Earnings		(Loss) Income		Total		Shares ($1 Par)		Capital		Earnings		(Loss) Income		Total
Balance at June 30, 2019	$	7,903	$	27,512	$	170,004	$	8	$	205,427	$	7,903	$	27,512	$	170,004	$	8	$	205,427
Adoption of ASU 2016-02		—		—		(42)		—		(42)		—		—		(42)		—		(42)
Issuance of common stock:
Unrealized loss on available for sale investments, net of tax		—		—		—		(8)		(8)		—		—		—		(8)		(8)
Long-term incentive compensation		—		109		—		—		109		—		109		—		—		109
Stock-based compensation		39		1,201		—		—		1,240		39		1,201		—		—		1,240
Cash dividends declared		—		—		(1,754)		—		(1,754)		—		—		(1,754)		—		(1,754)
Net income		—		—		9,551		—		9,551		—		—		9,551		—		9,551
Balance at September 30, 2019	$	7,942	$	28,822	$	177,759	$	—	$	214,523	$	7,942	$	28,822	$	177,759	$	—	$	214,523


	Total Par						Accumulated
	Value of		Additional				Other
	Common		Paid-In		Retained		Comprehensive
	Shares ($1 Par)		Capital		Earnings		(Loss) Income		Total
Balance at June 30, 2018	$	7,868	$	26,321	$	209,553	$	(2,044)	$	241,698
Issuance of common stock:
Stock options exercised, net		3		41		—		—		44
Unrealized gain on available for sale investments, net of tax		—		—		—		17		17
Stock options exercised												2		19		—		—		21
Long-term incentive compensation		7		(115)		—		—		(108)		—		104		—		—		104
Stock-based compensation		6		440		—		—		446		6		1,787		—		—		1,793
Cash dividends declared		—		—		(1,734)		—		(1,734)		—		—		(1,816)		—		(1,816)
Net income		—		—		1,296		—		1,296
Balance at September 30, 2018	$	7,884	$	26,687	$	209,115	$	(2,027)	$	241,659
Net loss												—		—		(5,384)		—		(5,384)
Balance at December 31, 2019											$	7,950	$	30,732	$	170,559	$	—	$	209,241


	Six Months Ended December 31, 2018

	Total Par						Accumulated
	Value of		Additional				Other
	Common		Paid-In		Retained		Comprehensive
	Shares ($1 Par)		Capital		Earnings		(Loss) Income		Total
Balance at June 30, 2018	$	7,868	$	26,321	$	209,553	$	(2,044)	$	241,698
Stock options exercised		3		41		—		—		44
Unrealized gain on available for sale investments, net of tax		—		—		—		17		17
Long-term incentive compensation		7		(115)		—		—		(108)
Stock-based compensation		6		440		—		—		446
Cash dividends declared		—		—		(1,734)		—		(1,734)
Net income		—		—		1,296		—		1,296
Balance at September 30, 2018	$	7,884	$	26,687	$	209,115	$	(2,027)	$	241,659
Stock options exercised		1		7		—		—		8
Unrealized loss on available for sale investments, net of tax		—		—		—		(32)		(32)
Stock-based compensation		4		318		—		—		322
Cash dividends declared		—		—		(1,736)		—		(1,736)
Net income		—		—		1,566		—		1,566
Balance at December 31, 2018	$	7,889	$	27,012	$	208,945	$	(2,059)	$	241,787



	Three Months Ended				Six Months Ended
	September 30,				December 31,
	2019		2018		2019		2018
OPERATING ACTIVITIES:
Net income	$	9,551	$	1,296	$	4,167	$	2,862
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		2,484		1,903		4,930		3,734
Deferred income taxes		(13)		(376)		(13)		(35)
Stock-based compensation expense		1,416		549		3,312		871
Change in provision for losses on accounts receivable		(238)		—		(178)		(86)
Change in reserve for VAT receivable						(943)		—
Gain on disposition of capital assets		(18,941)		(33)		(18,967)		(42)
Changes in operating assets and liabilities:
Trade receivables		2,070		(2,325)		(3,232)		(1,346)
Inventories		91		5,919		7,109		2,299
Other current assets		7,468		(2)		7,143		(1,980)
Other assets		176		—		176		—
Accounts payable - trade		(3,809)		2,361		1,849		3,590
Accrued liabilities		(3,173)		563		(4,165)		946
Other long-term liabilities		(401)		43		(409)		117
Net cash (used in) provided by operating activities		(3,319)		9,898
Net cash provided by operating activities						779		10,930
INVESTING ACTIVITIES:
Purchases of investments		(646)		(10,016)		(1,268)		(12,572)
Proceeds from sales of investments		646		8,015		1,269		20,515
Proceeds from sale of capital assets		19,625		33		19,652		42
Capital expenditures		(512)		(10,434)		(1,814)		(17,462)
Net cash provided by (used in) investing activities		19,113		(12,402)		17,839		(9,477)
FINANCING ACTIVITIES:
Dividends paid		(1,738)		(1,729)		(3,485)		(3,463)
Proceeds from issuance of common stock		—		43		21		52
Shares issued to employees, net of shares withheld		(67)		(211)		(67)		(211)
Net cash used in financing activities		(1,805)		(1,897)		(3,531)		(3,622)
Increase (decrease) in cash and cash equivalents		13,989		(4,401)		15,087		(2,169)
Cash and cash equivalents at beginning of period		22,247		27,750		22,247		27,750
Cash and cash equivalents at end of period	$	36,236	$	23,349	$	37,334	$	25,581

SUPPLEMENTAL INFORMATION
Income taxes paid (refunded), net	$	(4,746)	$	—	$	(4,623)	$	1,430
Capital expenditures in accounts payable	$	142	$	4,006	$	135	$	2,244

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 and six months ended ~~September 30,~~December 31, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2020. 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, 2019, appropriately represent, in all material respects, the current status of accounting policies and are incorporated by reference.

DESCRIPTION OF BUSINESS – Flexsteel Industries, Inc. and Subsidiaries ~~(the “Company”)~~ was incorporated in 1929 and is one of the oldest and largest manufacturers, importers and marketers of residential and contract upholstered and wooden furniture products in the United States. Over the generations the Company has built a committed retail and consumer following based on its patented, guaranteed-for-life Blue Steel SpringTM – the all-riveted, high-carbon, steel-banded seating platform that gives upholstered and leather furniture the strength and comfort to last a lifetime. With offerings for use in home, healthcare, and recreational seating, the Company distributes its furniture throughout the United States and Canada through the Company’s sales force and various independent representatives.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS – On July 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASC 842”) and the related amendments. ASC 842 requires lessees to (i) recognize a right of use asset and a lease liability that is measured at the present value of the remaining lease payments, on the consolidated balance sheets, (ii) recognize a single lease cost, calculated over the lease term on a straight-line basis and (iii) classify lease related cash payments within operating and financing activities.

The Company adopted ASC 842 utilizing the optional transition method, which allows guidance to be initially applied at the adoption date with a cumulative-effect adjustment to the opening balance of retained earnings. The Company elected the package of practical expedients, which allows the Company to forgo reassessing prior conclusions on lease definition, classification and initial direct costs related to existing leases as of the adoption date. The Company has made an accounting policy election to not to recognize short-term leases on the consolidated balance sheets and all non-lease components, such as common area maintenance, were excluded.

Effective July 1, 2019, the Company adopted ASC 842, which resulted in a recognition of right-of-use (“ROU”) assets and lease liabilities on the Company’s consolidated balance sheets. ROU assets represent the right to use an underlying asset for the lease term and lease liabilities reflect the obligation to make lease payments arising from the lease. 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 atas 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 our leases include options to renew at similar terms. The Company assesses these options to determine if the Company is reasonably certain of exercising these options based on relevant economic and financial factors. Options that meet these criteria are included in the lease term at the lease commencement date. The Company does not record leases with a term of 12 months or less on the Company’s consolidated balance sheets.

For purposes of measuring the Company’s ROU asset and lease liability, the discount rate utilized by the Company was based on the average interest rates effective for the Company’s two $10.0 million lines of credit. Some of the Company’s leases contain variable rent payments, including common area maintenance and utilities. Due to the variable nature of these costs, they are not included in the measurement of the ROU asset and lease liability.

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

Other information related to leases and future minimum lease payments under non-cancellable operating leases as of December 31, 2019 were as follows:

Future minimum lease payments under non-cancellable operating leases based on accounting standards applicable as of June 30, 2019 were as follows:



	September 30,		June 30,		December 31,		June 30,
(in thousands)	2019		2019		2019		2019
Raw materials	$	13,517	$	14,182	$	13,932	$	14,182
Work in process and finished parts		7,747		6,408		7,080		6,408
Finished goods		72,304		73,069		65,538		73,069
Total	$	93,568	$	93,659	$	86,550	$	93,659

On May 15, 2019, the Company announced its plans to exit the Commercial Office and custom-designed Hospitality product lines which ~~represent~~represented approximately 7% of its revenue, and subsequently permanently closed its Riverside, California manufacturing facility. On September 26, 2019, the Company closed on the sale of the Riverside property resulting in net proceeds to the Company of $19.6 million after customary closing costs, prorations, and sales commissions and the Company recorded a ~~gain of~~pre-tax gain of $18.9 million. These actions were initial outcomes driven from customer and product line profitability and footprint utilization analyses completed in the fourth quarter of fiscal 2019.

On June 18, 2019, the Company announced it completed the analysis and planning process and set forth the comprehensive transformation program to be executed over the next two years, which ~~includes~~included the previously announced restructuring ~~activities.~~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 over the next two years. The activities are designed to increase organizational effectiveness, gain manufacturing efficiencies and provide cost savings that can be invested in growing the business.

As a result of these planned actions, the Company expects to incur pre-tax restructuring and related expenses of approximately $48.0 to $53.0 million over this two-year timeframe of which $36.0 to $40.0 million will be cash and $12.0 to $13.0 million non-cash. In addition, the Company plans to list several properties for sale when the footprint optimization is completed. When sold, the Company expects to generate $45.0 to $55.0 million in proceeds (including the $19.6 million Riverside, California manufacturing facility discussed above) dependent upon market conditions at time of sale. Total cumulative restructuring and related costs incurred as of ~~September 30,~~December 31, 2019 were ~~$23.9~~$29.0 million.

The following is a summary of restructuring costs for the three and six months ended December 31, 2019.



	Accrued								Accrued		Accrued								Accrued
	Restructuring								Restructuring		Restructuring								Restructuring
	June 30,								September 30,		June 30,								December 31,
(in thousands)	2019		Cost Incurred		Expenses Paid		Non-Cash		2019		2019		Cost Incurred		Expenses Paid		Non-Cash		2019
Inventory impairment											$	—	$	206	$	—	$	(206)	$	—
One-time employee termination benefits	$	1,731	$	346	$	(1,238)	$	—	$	839		1,731		469		(1,835)		—		365
Contract termination costs		249		—		(82)		—		167		249		—		(82)		—		167
Other associated costs		4,223		5,658		(7,422)		(846)		1,613		4,223		10,602		(12,093)		(2,015)		717
Total	$	6,203	$	6,004	$	(8,742)	$	(846)	$	2,619	$	6,203	$	11,277	$	(14,010)	$	(2,221)	$	1,249

The Company maintains an unsecured credit agreement that provides short-term working capital financing up to $10.0 million with interest of LIBOR plus 1% ~~(3.02%~~(2.76% at ~~September 30,~~December 31, 2019), including up to $4.0 million of letters of credit. Letters of credit outstanding at ~~September 30,~~December 31, 2019 totaled $1.3 million. Other than the outstanding letters of credit, the Company did not utilize borrowing availability under the credit facility, leaving borrowing availability of $8.7 million as of ~~September 30,~~December 31, 2019. The credit agreement expires June 30, 2020. At ~~September 30,~~December 31, 2019, the Company was in compliance with all of the financial covenants contained in the credit agreement.

The Company maintains an additional unsecured $10.0 million line of credit, with interest at prime minus 2% ~~(3.00%~~, (2.75% at ~~September~~December 31, 2019) that was scheduled to mature on December 31, 2019. Effective December 31, 2019, the Company renewed this unsecured $10.0 million line of credit, with interest at prime minus 2%, subject to a floor of 3.75%, and extended the maturity date to June 30, ~~2019).~~2020. No amount was outstanding on the line of credit at ~~September 30, 2019. This line of credit matures~~ December 31, 2019.

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,~~December 31, 2019 and 2018 were ~~25.2%~~22.8% and ~~27.0%~~27.5%, respectively and for the six months ended December 31, 2019 and 2018 were 28.1% and 27.3%, respectively.

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 one to three 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 and six months ended December 31, 2019 and December 31, 2018.

The Company has two stock-based compensation ~~methods~~plans available ~~when determining employee compensation.~~for granting awards to employees and directors.

The ~~Long-Term Incentive Compensation Plan~~LTICP provides for ~~shares of common stock~~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’s shareholders previously approved 700,000 shares to be issued under the plan. As of September 30, 2019, 102,183 shares have been issued. The Committee~~Company selected fully-diluted earnings per share and total shareholder return as the performance goal for the three-year performance periods from July 1, 2017 – June 30, 2020 ~~(2018-2020)~~(“2018-2020”) and July 1, 2018 – June 30, 2021 ~~(2019-2021)~~(“2019-2021”). As of June 30, 2019, both the performance period 2018-2020 and 2019-2021 are no longer attainable. For the July 1, 2019 – June 30, 2022 ~~(2020-2022)~~(“2020-2022”) three-year performance period, the Committee selected Adjusted Earnings Before Interest and Tax with a defined percentage growth in fiscal year 2021 and 2022. ~~Stock awards will be issued to participants as soon as practicable following~~Since the ~~end of the~~2018-2020 and 2019-2021 performance periods ~~subject to verification~~are no longer attainable, only RSU’s granted for the 2020-2022 performance period are included in the table below for the Company’s unvested LTICP RSUs during the six months ended December 31, 2019:

Total unrecognized stock-based compensation ~~cost~~ related to the ~~number~~unvested LTICP RSUs was $1.2 million as of ~~shares~~December 31, 2019, which is expected to be ~~granted under each performance period is fixed on the grant date, which is the date the performance period begins.~~

During the quarter ended September 30, 2019, the Company increased the provision in the amount of $0.1 million. During the quarter ended September 30, 2018, the Company recorded no plan expense. If the target performance goals for 2018-2020, 2019-2021 and 2020-2022 plans would be achieved, the total amount of compensation cost recognized over ~~the requisite performance periods would be $0.8 million, $0.5 million and $0.3 million, respectively.~~ a period of 2.5 years.

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. ~~The~~No additional stock options can be granted under the 2006 and 2009 stock option plans.

A summary of the activity in the Company’s ~~shareholders previously approved 700,000~~unvested restricted shares and unvested RSUs during the six months ended December 31, 2019 is as follows:

Total unrecognized stock-based compensation related to unvested restricted shares and unvested RSUs was $2.1 million as of December 31, 2019, which is expected to be ~~issued under the plan.~~recognized over a weighted average period of 1.3 years.

~~Under the Omnibus Stock Plan, options are granted at an exercise price equal to the fair market value~~Options

A summary of the ~~underlying common stock at the date of grant and exercisable for up to 10 years. It is the Company’s policy to issue new shares upon exercise of stock options. The Company accepts shares~~activity of the Company’s common stock as payment for the exercise price of options. Shares received as payment are retired upon receipt. During the quarter ended September 30, 2019, the Company issued options for 30,000 common shares to its Chief Executive Officer, in lieu of a cash bonus, which was expensed in the prior year. During the quarter ended September 30, 2018, the Company issued options for 36,095 common shares and recorded expense of $0.3 million related to stock option ~~grants.~~plans as of December 31, 2019, is presented below:

Under the Omnibus Stock Plan, the Company issued 5,425 and 2,590 shares to non-executive directors as compensation and recorded expense of $0.1 million during the quarters ended September 30, 2019 and 2018, respectively.

The following table summarizes information for options outstanding at December 31, 2019:

During the quarter ended September 30, 2019, the Company recorded $0.8 million in restructuring expense for grants of an aggregate 167,760 restricted stock units and 10,382 restricted stock shares under the plan to executives as per their notification of award letters dated July 1, 2019. These restricted stock units and restricted stock shares were granted by the Compensation Committee to serve as a retention incentive for the executives during the restructuring. The restricted stock units vest over an 18-month period. The Company also recorded $0.1 million compensation expense for grants of an aggregate 43,929 restricted stock units under the plan to executives as per their notification of award letters dated July 19, 2019.

During the quarter ended September 30, 2019, the Company recorded $0.1 million compensation expense related to 30,000 restricted stock units, 30,000 options and 3,186 restricted stock shares which were awarded to its Chief Executive Officer as per a notification of award letters dated December 28, 2018.

Total unrecognized stock-based compensation expense related to options was $0.2 million ~~compensation expense for grants~~as of ~~an aggregate 39,666 restricted stock units under the plan~~December 31, 2019, which is expected to ~~four executive officers as per their notification~~be recognized over a period of ~~award letters dated July 1, 2018.~~1.2 years.

~~At September 30, 2019, 184,030 shares were available for future grants under the plan.~~

~~The 2006 and 2009 Stock Option Plans are for key employees, officers and directors and provide for granting incentive and nonqualified stock options. Under the plans, options were~~Stock-based compensation granted at an exercise price equal to the fair market value of the underlying common stock at the date of grant and exercisable for up to 10 years. All options were exercisable when granted. No additional options can be granted under the 2006 and 2009 Stock Option Plans.

During the quarter ended December 31, 2018, the Company awarded its Chief Executive Officer 55,000 options outside of any Company stock ~~plan. The Company recorded $20 thousand~~plans. Total unrecognized stock-based compensation expense related to ~~this grant during the quarter ended September 30, 2019.~~

~~A summary of the status of the Company’s stock option plans~~options awarded outside a plan was $0.1 million as of ~~September 30,~~December 31, 2019, ~~June 30, 2019 and 2018 and the changes during the periods then ended~~which is ~~presented below:~~expected to be recognized over a period of 1.5 years.

~~The following table summarizes information for options outstanding at September 30, 2019:~~

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 ~~shares~~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. The Company calculates the dilutive effect of shares related to the Long-Term 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 period were the end of the contingency period.

~~For~~In computing EPS for the quarter ended ~~September 30, 2018,~~December 31, 2019, there are no dilutive shares as the Company reported a net ~~income~~loss. The reconciliation of the numerator and denominator of the basic and diluted earnings pers share calculation is as ~~reported for each respective period is divided by the fully diluted weighted-average number of shares outstanding:~~follows:



	Three Months Ended				Three Months Ended				Six Months Ended
	September 30,				December 31,				December 31,
(in thousands)	2019		2018		2019		2018		2019		2018
Basic shares		7,928		7,875		7,944		7,885		7,936		7,880
Potential common shares:
Stock options		4		40		—		20		6		33
Non-vested shares		258		6
Non-vested restricted stock units and restricted shares						—		12		204		9
		262		46		—		32		210		42
Diluted shares		8,190		7,921		7,944		7,917		8,146		7,922

Anti-dilutive shares		254		52		—		141		254		115

Cash dividends declared per common share were $0.22 and ~~$0.22~~$0.44 for the ~~quarters~~three months and six months ended ~~September 30,~~December 31, 2019, respectively, and ~~2018.~~$0.22 and $0.44 for the three and six months ended December 31, 2018, respectively.

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 ofa $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 July 5, 2018, the EPA proposed a draft AOC, to which the Company provided revisions. During the latter part of 2018, Flexsteel submitted to the EPA its proposed work plan for the upgradient testing to be conducted pursuant to the draft AOC. The EPA provided comments on that documentation on December 4, 2018. On January 23, 2019, Flexsteel submitted responses to the EPA’s comments and revised work plan documents. On April 24, 2019, the Company signed ~~the finalized~~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. On November 22, 2019, the Company submitted a Data Summary Report with the data from those activities to the EPA. The EPA provided comments on the Data Summary Report on January 14, 2020. Meanwhile, on January 2, 2020, the Company entered into a First Amended Tolling

Agreement with the EPA which extends the statute of limitations potential claims by EPA through August 24, 2020. The Company reflected a $3.6 million liability in the consolidated financial results 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 financials for the quarter ended ~~September 30,~~December 31, 2019 in accordance with FASB issued Asset Retirement and Environmental Obligations (ASC 410-30). The Company continues to evaluate the Order, its legal options and insurance coverages to assert its defense and recovery of current and future expenses related to this matter.

Employment Matters – The lawsuit entitled Juan Hernandez, et al. 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”). Flexsteel 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 Memorandum of ~~Agreement, which will be supplemented in the next 30-to-90 days with a long-form Stipulation of Settlement.~~Agreement. Flexsteel anticipates that obtaining final approval of the parties’ settlement from the court will take at least six months and potentially longer, such that any settlement payments will not be made until ~~calendar~~the fiscal year ~~2020.~~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 financials for the quarter ended ~~September 30,~~December 31, 2019.

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.

During the second quarter of fiscal 2019, the Company committed to a plan to sell assets located at the Company’s Harrison, Arkansas, Huntingburg, Indiana, and Dubuque, Iowa locations as 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 December 31, 2019.

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

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.

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 2019 annual report on Form 10-K, with the exception of adopting the lease standard in the first quarter of fiscal 2020, as described in Note 1 of the Notes to Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q.

The following table has been prepared as an aid in understanding the Company’s results of operations on a comparative basis for the ~~quarters~~three and six months ended ~~September 30,~~December 31, 2019 and 2018. Amounts presented are percentages of the Company’s net sales.



	Three Months Ended				Three Months Ended				Six Months Ended
	September 30,				December 31,				December 31,
	2019		2018		2019		2018		2019		2018
Net sales	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%
Cost of goods sold	(82.8)		(80.8)		(84.4)		(81.9)		(83.6)		(81.3)
Gross margin	17.2		19.2		15.6		18.1		16.4		18.7
Selling, general and administrative	(17.4)		(17.8)		(17.6)		(16.4)		(17.5)		(17.1)
Restructuring expense	(6.0)		—		(4.9)		—		(5.4)		—
Gain on sale of facility	18.9		—		0.0		—		9.3		—
Operating income	12.6		1.4
Other income (expense)	0.1		0.1
Income before income taxes	12.7		1.5
Income tax provision	(3.2)		(0.4)
Net income	9.5	%	1.1	%
Operating (loss) income					(6.9)		1.8		2.8		1.6
Other income					0.1		—		0.1		0.1
(Loss) income before income taxes					(6.8)		1.8		2.9		1.7
Income tax benefit (provision)					1.5		(0.5)		(0.8)		(0.5)
Net (loss) income					(5.2)	%	1.3	%	2.0	%	1.2	%

Results of Operations for the Quarter Ended ~~September 30,~~December 31, 2019 vs. 2018

The following table compares net sales for the quarter ended ~~September:~~December:



	Three Months Ended								Three Months Ended
	September 30,								December 31,
(in thousands)	2019		2018		$ Change		% Change		2019		2018		$ Change		% Change
Residential	$	88,611	$	96,043	$	(7,432)	(7.7)	%	$	94,074	$	99,414	$	(5,340)	(5.4)	%
Contract		11,737		17,444		(5,707)	(32.7)			8,875		18,938		(10,063)	(53.1)
Total	$	100,348	$	113,487	$	(13,139)	(11.6)	%	$	102,949	$	118,352	$	(15,403)	(13.0)	%

Net sales were ~~$100.3~~$102.9 million for the quarter ended ~~September 30,~~December 31, 2019 compared to net sales of ~~$113.5~~$118.4 million in the prior year quarter, a decrease of ~~11.6%~~13.0%. Residential net sales declined ~~7.7%~~5.4% when compared to the prior year quarter. The decline in residential net sales was primarily driven by the implementation of the tariff on furniture imported from China at 10% followed by an increase to 25% ~~drove~~, which triggered significant price increases to the ~~majority~~market place and led to the contraction of ~~the overall contraction in residential net sales. The decline in residential net~~volume. This was partially offset by increased sales ~~was driven by lost sales on products sold~~of our ready to assemble furniture through our ecommerce channel. ~~However, products~~Our ready to assemble furniture line sold primarily through ~~this channel~~ecommerce grew ~~23.5% in fiscal fourth~~30.1% during the quarter ofended December 31, 2019 ~~versus~~compared to the ~~fiscal third~~prior year quarter ~~of 2019~~due to strong holiday sales and ~~increased a further 5.5% in fiscal first quarter of 2020 versus fiscal fourth quarter of 2019.~~promotions. Contract net sales were down ~~$5.7~~$10.1 million, of which ~~$4.3~~$7.3 million was

primarily driven by our decision to exit the commercial office and custom-designed hospitality product lines, coupled with a decline in our healthcare and vehicle products from lower demand.

Gross margin as a percent of net sales for the quarter ended ~~September 30,~~December 31, 2019 was ~~17.2%~~15.6%, compared to ~~19.2%~~18.1% for the prior year quarter, a decline of ~~200~~250 basis points (“bps”). ~~The 200 bps decline was primarily driven by a decline of 220 bps due to lower volume~~Aggressive product pricing across our ecommerce and ~~product mix, a decline of 40 bps due to depreciation for our Dubuque manufacturing plant placed in service~~brick and mortar channels during the ~~prior year, and a decline of 40~~holiday shopping season contracted margins approximately 90 bps in ~~foreign currency exchange, which was partially offset by an increase in labor productivity of 110 bps from~~ the ~~consolidation of our manufacturing plants~~quarter. Additionally, as part of our ~~on-going restructuring plan.~~customer and product profitability initiative, we executed a SKU rationalization process which resulted in an inventory valuation adjustment accounting for

approximately 150 bps of margin contraction. The remaining margin compression was due to increased costs aimed at improving lead times and customer experience of approximately 80 bps, offset by a benefit related to our success in collecting foreign VAT.

Selling, general and administrative (SG&A) expenses decreased ~~$2.7~~$1.3 million in the quarter ended ~~September 30,~~December 31, 2019 compared to the prior year quarter. ~~In the prior year, we incurred $1.3 million for a one-time severance expense related~~The decrease in SG&A expenses was due to the retirement of our former President and Chief Executive Officer. In addition, restructuring actions taken during the fiscal fourth quarter of 2019 drove $0.8 million of savings in the current quarter versus the year ago quarter. As a percentage of net sales, SG&A was 17.4% in the quarter ended September 30, 2019, compared to 17.8% of net salesCEO transition expenses recorded in the prior year, ~~quarter, a decrease of 40 bps. The $1.3 million severance expense for our former President~~volume reductions and ~~Chief Executive Officer, represents 110 bps of the prior year quarter’s SG&A expense~~restructuring savings, which were partially offset by ERP expenses, as ~~a percentage of the prior year’s net sales.~~well as higher incentive compensation.

During the quarter ended ~~September 30,~~December 31, 2019, we incurred ~~$6.0~~$5.1 million of restructuring expenses primarily for facility closures, professional fees and employee termination costs as part of our previously announced comprehensive transformation ~~program to be executed over the next two years.~~program. See Note 4 Restructuring of the Notes to Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q for more information.

Income tax benefit was $1.6 million, or an effective rate of 22.8%, during the quarter ended December 31, 2019 compared to income tax expense of $0.6 million in the prior year quarter, or an effective tax rate of 27.5%.

Net loss was $5.4 million, or $0.68 per diluted share for the quarter ended December 31, 2019, compared to net income of $1.6 million, or $0.20 per diluted share in the prior year quarter.

Net sales were $203.3 million for the six months ended December 31, 2019 compared to net sales of $231.8 million in the prior year six-month period, a decrease of 12.3%. Residential net sales declined 6.5% when compared to the prior year six-month period. The decline in residential net sales are primarily attributable to the same factors discussed above for the quarter ended December 31, 2019 versus December 31, 2018. Contract net sales were down $15.8 million, of which $11.6 million was primarily driven by our decision to exit the commercial office and custom-designed hospitality product lines, coupled with a decline in our healthcare and vehicle seating products due to demand.

Gross margin as a percent of net sales for the six months ended December 31, 2019 was 16.4%, compared to 18.7% for the prior year six-month period, a decline of 230 bps. The 230 bps decline was primarily driven by a decline of 170 bps due to lower volume and product mix. Aggressive product pricing across our ecommerce and brick and mortar channels during the holiday shopping season contracted margins approximately 50 bps in the current six-month period. Additionally, as part of our customer and product profitability initiative, in the second quarter of fiscal 2020, we executed a SKU rationalization process which resulted in an inventory valuation adjustment representing 70 bps of margin contraction in the six-month period. Increased costs to serve customers to improve lead times and customer experience, favorable material and labor costs, and a benefit related to our success in collecting foreign VAT also contributed to margin performance in the six-month period.

Selling, general and administrative expenses decreased $4.0 million in the six months ended December 31, 2019 compared to the prior year six-month period.�� The decline of $4.0 million was primarily due to the CEO transition expenses recorded in the prior year, decreased volume and restructuring savings. These SG&A reductions were partially offset by ERP expenses and higher expenses for incentive compensation.

During the six months ended December 31, 2019, we incurred $11.3 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.

During the ~~quarter~~six months ended ~~September 30,~~December 31, 2019, we completed the sale of our Riverside, California property for a sale price of $20.5 million generating net proceeds of $19.6 million after customary closing costs, prorations and commissions. This resulted in a recognized, pre-tax gain on sale of asset in the amount of $18.9 million.

Income tax expense was ~~$3.2~~$1.6 million, or an effective rate of ~~25.2%~~28.1%, during the ~~quarter~~six months ended ~~September 30,~~December 31, 2019 compared to income tax expense of ~~$0.5~~$1.1 million in the prior year ~~quarter~~six-month period, or an effective tax rate of ~~27.0%~~27.3%.

Net income was ~~$9.6~~$4.2 million, or ~~$1.17~~$0.51 per diluted share for the ~~quarter~~six months ended ~~September 30,~~December 31, 2019, compared to net income of ~~$1.3~~$2.9 million, or ~~$0.16~~$0.36 per diluted share in the ~~prior year quarter.~~

Working capital (current assets less current liabilities) at ~~September 30,~~December 31, 2019 was ~~$125.8~~$121.0 million compared to $118.2 million at June 30, 2019. The increase in working capital was primarily attributable to proceeds from the sale of our Riverside, California facility, which was the main driver behind an increase in cash and cash equivalents of ~~$14.0~~$15.1 million. Trade receivables increased $3.4 million, ~~partially offset by a decline in~~restructuring cost accruals declined $5.0 million, inventory declined $7.1 million due to strong sales, inventory management and SKU rationalization activities and other currents assets ~~and trade receivables of $9.3~~declined $6.2 million, ~~and a decline of $4.0 million in accounts payable~~ primarily due to ~~timing~~the collection of ~~payments compared to year-end.~~an income tax refund. Accounts Payable increased $2.0 million. Capital expenditures are estimated to be a total of ~~$5.0~~$4.0 to ~~$6.0~~$5.0 million in fiscal ~~2020~~2020.

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


	Three Months Ended				Six Months Ended
	September 30,				December 31,
(in thousands)	2019		2018		2019		2018
Net cash (used in) provided by operating activities	$	(3,319)	$	9,898
Net cash provided by operating activities					$	779	$	10,930
Net cash provided by (used in) investing activities		19,113		(12,402)		17,839		(9,477)
Net cash used in financing activities		(1,805)		(1,897)		(3,531)		(3,622)
Increase (decrease) in cash and cash equivalents	$	13,989	$	(4,401)	$	15,087	$	(2,169)

For the ~~quarter~~six months ended ~~September 30,~~December 31, 2019, net cash ~~used in~~provided by operating activities was ~~$3.3~~$0.8 million, which primarily consisted of net income of ~~$9.5~~$4.2 million, adjusted for non-cash depreciation of ~~$2.5~~$4.9 million, ~~and a~~ gain from the sale of capital assets of ~~$18.9~~$19.0 million ~~coupled with net~~and non-cash stock based compensation of $3.3 million. Net cash provided in operating assets and liabilities ~~of $2.4~~was $8.5 million. The cash provided in operating assets and liabilities of ~~$2.4~~$8.5 million, was primarily due to a decline in ~~trade receivables~~inventory of ~~$2.1~~$7.1 million and other current assets of ~~$7.5~~$7.1 million, coupled with an increase in accounts payable of $1.8 million, partially offset by an increase trade receivables of $3.2 million and a ~~decline~~reduction in ~~accounts payable and~~ accrued liabilities of ~~$3.8 million and $3.2 million, respectively.~~$4.2. The decline in other current assets was primarily driven by a tax ~~refund of $4.6 million.~~refund.

For the ~~quarter~~six months ended ~~September 30,~~December 31, 2018, net cash provided by operating activities was ~~$9.9~~$10.9 million, which primarily consisted of net income of ~~$1.3~~$2.9 million, adjusted for non-cash depreciation of ~~$1.9~~$3.7 million, a decrease ofin inventory of ~~$5.9~~$2.3 million, and increases in accounts ~~receivable~~payable of ~~$2.3~~$3.6 million and accounts ~~payable~~receivable of ~~$2.4~~$1.3 million.

For the six months ended December 31, 2019, net cash provided by investing activities was ~~$19.1~~$17.8 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~~$1.8 million. ~~Net~~

For the six months ended December 31, 2018, net cash used in investing activities was ~~$12.4~~$9.5 million. Capital expenditures were $17.5 million, for the quarter ended September 30, 2018, primarily due to capital expenditures of $10.4 million which included $8.4 million for the new Dubuque manufacturing facility and $1.8 million for the business information system. Additionally, there were purchases of investments of $10.0 million andpartially offset by net proceeds from sales of investments ~~were $8.0 million during the quarter ended September 30, 2018.~~of $7.9 million.

For the six months ended December 31, 2019, net cash used in financing activities was ~~$1.8~~$3.5 million, ~~for the quarter ended September 30, 2019~~ primarily due to dividends paid of ~~$1.7~~$3.5 million. ~~Net~~

For the six months ended December 31, 2018, net cash used in financing activities was ~~$1.9~~$3.6 million, ~~for the quarter ended September 30, 2018~~ primarily due to dividends paid of ~~$1.7~~$3.5 million.

The Company maintains a credit agreement which provides unsecured short-term working capital financing up to $10.0 million with interest of LIBOR plus 1% ~~(3.02%~~(2.76% at ~~September 30,~~December 31, 2019), including up to $4.0 million of letters of credit. Letters of credit outstanding at ~~September 30,~~December 31, 2019 totaled $1.3 million, leaving borrowing availability of $8.7 million. The credit agreement expires June 30, 2020.

million line of credit, with interest at prime minus 2%, subject to a floor of 3.75%, and extended the maturity date to June 30, ~~2019).~~2020. No amount was outstanding on the line of credit at ~~September 30, 2019. This line of credit matures~~ December 31, 2019.

Although Management believes that the Company currently has adequate liquidity for normal operations, Management continues to review several financing options to provide additional liquidity through the restructuring and transformation process if required.

As of ~~September 30,~~December 31, 2019, 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, 2019.

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,~~December 31, 2019 and 2018, 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,~~December 31, 2019, the Company did not have any debt outstanding, other than the portion of the $10.0 million credit facility associated with outstanding letters of credit.

(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 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,~~December 31, 2019.

(b) Changes in internal control over financial reporting. During the quarter ended ~~September 30,~~December 31, 2019, 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 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.

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, 2019.

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.



	~~Three~~Six Months Ended
	~~September 30,~~December 31,
	2019
(in thousands)	~~2019~~
Cash paid for amounts included in the measurement of lease liabilities:
Operating ~~lease expense~~cash flows from operating leases	$	~~1,173~~1,990
~~Variable lease expense~~		65
~~Total~~Right-of-use assets obtained in exchange for lease ~~expense~~liabilities:
Operating leases	$	~~1,238~~3,604

Weighted-average remaining lease term (in years):
Operating leases		2.0

Weighted-average discount rate:
Operating leases		3.5%

Fiscal year
(in thousands)
Within one year	$	5,441
After one year and within two years		3,609
After two years and within three years		2,541
After three years and within four years		2,092
After four years and within five years		1,452
After five years		—
Total future minimum lease payments	$	15,135
Less – Discount		991
Lease liability	$	14,144



	Three Months Ended
	September 30,
	2019
(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases		646

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

Weighted-average remaining lease term (in years):
Operating leases		1.9

Weighted-average discount rate:
Operating leases		3.5%

Fiscal year
(in thousands)
2020 (remainder of fiscal year)	$	3,846
2021		3,990
2022		2,229
2023		1,283
2024		1,330
Thereafter		—
Total future minimum lease payments	$	12,678
Less – Discount		822
Lease liability	$	11,856



Fiscal year
(in thousands)
2020	$	4,617
2021		3,990
2022		2,229
2023		1,283
2024		1,330
Thereafter		—
Total future minimum lease payments	$	13,449



		Weighted average
	Shares	fair value
	(in thousands)	per share
Unvested as June 30, 2019	55	$	28.55
Granted	221		16.48
Vested	(12)		31.80
Unvested as of December 31, 2019	264	$	18.33



		Weighted
	Shares	Average
	(in thousands)	Exercise Price
Outstanding at June 30, 2019	225	$	28.37
Granted	30		15.14
Exercised	(2)		8.55
Cancelled	(20)		34.59
Outstanding at December 31, 2019	233	$	26.50

	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, 2019	—	$	—	—	$	—	—	$	—
Granted	44		16.90	66		16.75	110		16.81
Unvested as of December 31, 2019	44	$	16.90	66	$	16.75	110	$	16.81



		Options	Weighted Average
Range of		Outstanding	Remaining	Exercise
Prices		(in thousands)	Life (Years)	Price
$	8.55 - 15.14	41	7.7	$	14.45
	17.23 - 19.77	23	2.4		18.81
	20.50 - 27.57	92	7.3		24.13
	31.06 - 32.80	46	7.0		32.28
	43.09 - 47.45	31	7.0		45.32
$	8.55 - 47.45	233	6.8	$	26.36



				Accumulated		Net Book
Location	Asset Category	Cost		Depreciation		Value
(in thousands)
Dubuque, Iowa	Airplane	$	2,593	$	(2,093)	$	500
Harrison, Arkansas	Building & building improvements		1,382		(1,354)		28
	Land & land improvements		92		(42)		50
	Machinery & equipment		1,391		(1,391)		—
Huntingburg, Indiana	Building		855		(855)		—
	Land		51		—		51
		$	6,364	$	(5,735)	$	629


Exhibit No.
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.*
32	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
*	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.”


		FLEXSTEEL INDUSTRIES, INC.


Date:	~~October~~January 31, ~~2019~~2020	By:	/S/ Marcus D. Hamilton
			Marcus D. Hamilton
			Chief Financial Officer
			(Principal Financial & Accounting Officer)