Flexsteel Industries, Inc. Reports Strong Fiscal Third Quarter 2025 Results

Flexsteel Industries, Inc. (NASDAQ:FLXS) ("Flexsteel" or the "Company"), one of the largest manufacturers, importers, and marketers of residential furniture products in the United States, today reported third quarter fiscal 2025 results.

Key Results for the Third Quarter Ended March 31, 2025

• Net sales for the quarter of $114.0 million compared to $107.2 million in the prior year quarter, an increase of 6.3% and the sixth consecutive quarter of year-over-year sales growth.
• GAAP operating loss of ($5.1) million or (4.4%) of net sales, due to a $14.1 pre-tax impairment charge related to our leased facility in Mexicali, Mexico, compared to GAAP operating income of $3.0 million or 2.8% of net sales in the prior year quarter.
  • Adjusted operating income of $8.3 million or 7.3% of net sales for the third quarter compared to $5.6 million or 5.2% of net sales in the prior year quarter.
• GAAP net loss per diluted share of ($0.71) for the current quarter compared to net income of $0.33 in the prior year quarter.
  • Adjusted net income per diluted share of $1.13 for the quarter compared to $0.67 in the prior year quarter.
• Generated $12.3 million of cash from operations in the quarter resulting in $22.6 million of cash and no line of credit borrowings at March 31, 2025.

GAAP to non-GAAP reconciliations follow the financial statements in this press release

Management Commentary

"We continue to execute well and delivered strong results in the quarter," said Derek Schmidt, President & Chief Executive Officer of Flexsteel Industries, Inc. "Our growth strategies are working and enabling us to continue our solid sales momentum as we delivered sales growth of 6.3% compared to the prior year quarter, which represents our sixth consecutive quarter of mid-single to low-double digit year-over-year growth. The drivers of our growth remain broad-based as we grew in both our core markets, largely due to new products and share gains with strategic accounts, and in our new and expanded market initiatives. I'm also especially pleased with our continued profitability improvement and strong cash generation. Our adjusted operating margin of 7.3% in the quarter represents our eighth consecutive quarter of year-over-year improvement and our second-highest quarterly adjusted operating margin over the past 7 years. Additionally, we delivered operating cash flow of $12.3 million in the quarter and bolstered our ending cash position to $22.6 million. Our strong financial position is a competitive advantage in this period of heightened economic uncertainty."

Mr. Schmidt continues, "We enter our fourth quarter under a very tough economic backdrop with substantial uncertainty following the release of the proposed U.S. reciprocal tariffs on April 2^nd. Although the reciprocal tariffs rates that went into effect on April 9^th were temporarily delayed 90 days for many countries, the 10% baseline tariff rate remains in effect as the U.S. works to negotiate individual trade deals. Prior to these recent tariff announcements, many of our retailer partners noted considerably slower traffic which is likely a reflection of the sharp drop in consumer confidence over the past several months. Many economists now expect significantly higher U.S. inflation for the next year along with slower economic growth, and even a likelihood of a recession if the new proposed tariff rates are implemented and sustained for an extended period. While we remain hopeful the U.S. administration can successfully negotiate with its trading partners to reduce or eliminate the reciprocal tariffs and minimize the impact on the U.S. economy, our near-term outlook for the industry is moderately pessimistic. As such, we are prepared to navigate multiple demand scenarios, and as we've demonstrated over the past few years, we can deliver share gains even in challenging industry conditions."

Mr. Schmidt concludes, "Until there is greater clarity and confidence in the stability of both the outlook for U.S. trade policy and economic growth, we expect the business environment to remain highly dynamic. As a Company, we have two main priorities near term. First, we will remain hyper-focused on continuing to execute our strategies which are working and enabling us to deliver strong sales growth and financial results. While we will prudently manage spending to remain financially nimble in response to changing consumer demand, we will not diminish our commitment to providing an exceptional customer experience and investing in new products, innovation, and marketing, as these are the underpinnings of our strategies and continued success. Second, we will continue to strengthen our supply chain agility and our plans to minimize tariff risks. We have strong relationships throughout our value chain and have confidence that we can work collaboratively with our partners to address the effect of tariffs while minimizing the impact on consumer prices in the short term. In the long term, we remain assured of our ability to reconfigure and optimize our supply chain if required due to permanent changes in global trade policies. The range of our sales and profit outlook for the fourth quarter is broader to reflect the uncertainty in the current environment, but we remain confident in our ability to deliver continued share gains in the coming quarter. Despite these challenging conditions, we see opportunities to strengthen our competitive position and will remain aggressive in investing for future growth while continuing to deliver exceptional value for our customers."

Operating Results for the Third Quarter Ended March 31, 2025

Net sales were $114.0 million for the third quarter compared to net sales of $107.2 million in the prior year quarter, an increase of $6.8 million, or 6.3%. The increase was driven by higher unit volume and to a lesser extent, ocean freight surcharges.

Gross margin for the quarter ended March 31, 2025, was 22.2%, compared to 21.7% for the prior-year quarter, an increase of 50 basis points ("bps"). The 50-bps increase was primarily due to leverage of fixed costs on higher sales and favorable mix, partially offset by lower sub-lease income from our Mexicali facility compared to the prior period.

Selling, general and administrative (SG&A) expenses decreased to 15.0% of net sales in the third quarter of fiscal 2025 compared with 16.5% of net sales in the prior year quarter. The 150-bps decrease was due to leverage on higher sales and cost savings, partially offset by investments in growth initiatives for the quarter ended March 31, 2025.

During the quarter, the Company completed the sale of an ancillary building, formerly part of its Huntingburg, IN distribution center complex. The Company recorded a pre-tax gain of $0.7 million related to the sale. In addition, the Company completed all activities to list for sale a second ancillary building which is part of the Huntingburg, IN distribution center complex. The Company has classified $0.4 million of assets associated with the second building as held-for-sale in its balance sheet at March 31, 2025. The Company has adequate distribution capacity to support our growth as we continue to optimize our distribution and logistics network.

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 have 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 is not fully recoverable and recorded a pre-tax non-cash asset impairment charge of $14.1 million during the quarter ended March 31, 2025.

Operating loss for the quarter ended March 31, 2025, was ($5.1) million compared to income of $3.0 million in the prior-year quarter. Adjusted operating income for the quarter ended March 31, 2025, was $8.3 million when adjusted for the $14.1 million non-cash impairment charge and $0.7 million gain on sale of the Huntingburg, IN building, compared to $5.6 million in the prior year quarter.

Income tax benefit was ($1.2) million, or an effective rate of 24.5%, during the third quarter compared to tax expense of $0.9 million, or an effective rate of 32.2%, in the prior year quarter.

Net loss was ($3.7) million, or ($0.71) per diluted share, for the quarter ended March 31, 2025, compared to net income of $1.8 million, or $0.33 per diluted share, in the prior year quarter. Adjusted net income for the quarter ended March 31, 2025, was $6.3 million or $1.13 per diluted share compared to adjusted net income of $3.6 million or $0.67 per diluted share in the prior year quarter.

Liquidity

The Company ended the quarter with a cash balance of $22.6 million and working capital (current assets less current liabilities) of $103.4 million, and availability of approximately $58.6 million under its secured line of credit.

Capital expenditures for the nine months ended March 31, 2025, were $2.7 million.

Financial Outlook

For the fourth quarter fiscal 2025, the Company expects sales growth of (2.0%) to 5.0% and operating margin of 6.0% to 7.3% compared to the prior year quarter. The impact of global trade policy changes, including tariffs, could materially change our business forecast. Besides tariffs, the most significant drivers of variability in the financial outlook are consumer demand and competitive pricing conditions, which will be shaped by macro-economic factors.

Conference Call and Webcast

The Company will host a conference call and audio webcast with analysts and investors on Tuesday, April 22, 2025, at 8:00 a.m. Central Time to discuss the results and answer questions.

• Live conference call: 833-816-1123 (domestic) or 412-317-0710 (international)
• Conference call replay available through April 29, 2025: 877-344-7529 (domestic) or 412-317-0088 (international)
• Replay access code: 1227864
• Live and archived webcast: ir.flexsteel.com

To pre-register for the earnings conference call and avoid the need to wait for a live operator, investors can visit https://dpregister.com/sreg/10197982/fec2f439e2 and enter their contact information. Investors will then be issued a personalized phone number and pin to dial into the live conference call.

About Flexsteel

Flexsteel Industries, Inc., and Subsidiaries (the "Company") is one of the largest manufacturers, importers, and marketers of residential furniture products in the United States. Product offerings include a wide variety of furniture such as sofas, loveseats, chairs, reclining rocking chairs, swivel rockers, sofa beds, convertible bedding units, occasional tables, desks, dining tables and chairs, kitchen storage, bedroom furniture, and outdoor furniture. A featured component in most of the upholstered furniture is a unique steel drop-in seat spring from which the name "Flexsteel" is derived. The Company distributes its products throughout the United States through its e-commerce channel and direct sales force.

Forward-Looking Statements

Statements, including those in this release, 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, restructurings, the effectiveness of new product introductions and distribution channels, the product mix of sales, pricing pressures, the cost of raw materials and fuel, changes in foreign currency values, retention and recruitment of key employees, actions by governments including laws, regulations, taxes and tariffs, 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, disruptions or security breaches to business information systems, the impact of any future 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.

For more information, visit our website at http://www.flexsteel.com.

NON-GAAP DISCLOSURE (UNAUDITED)

The Company is providing information regarding adjusted operating income, adjusted net income, and adjusted diluted earnings per share of common stock, which are not recognized terms under U.S. Generally Accepted Accounting Principles ("GAAP") and do not purport to be alternatives to operating income, net income, or diluted earnings per share of common stock as a measure of operating performance. A reconciliation of adjusted operating income, adjusted net income, and adjusted diluted earnings per share of common stock is provided below. Management believes the use of these non-GAAP financial measures provides investors useful information to analyze and compare performance across periods excluding the items which are considered by management to be extraordinary or one-time in nature. Because not all companies use identical calculations, these presentations may not be comparable to other similarly titled measures of other companies.

Reconciliation of GAAP operating income to adjusted operating income:

The following table sets forth the reconciliation of the Company's reported GAAP operating income to the calculation of adjusted operating income for the three and nine months ended March 31, 2025 and 2024:

Reconciliation of GAAP net income to adjusted net income:

The following table sets forth the reconciliation of the Company's reported GAAP net income to the calculation of adjusted net income for the three and nine months ended March 31, 2025 and 2024:

Reconciliation of GAAP diluted earnings per share of common stock to adjusted diluted earnings per share of common stock:

The following table sets forth the reconciliation of the Company's reported GAAP diluted earnings per share to the calculation of adjusted diluted earnings per share for the three and nine months ended March 31, 2025 and 2024:

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INVESTOR CONTACT:

Michael Ressler, Flexsteel Industries, Inc.

563-585-8116

[email protected]