The Company accounts for its leases in accordance with ASU No. 2016-02, Leases (Topic 842) (“ASC 842”). ASC 842 requires lessees to (i) recognize a right-of-use asset (“ROU asset”) and a lease liability that is measured at the present value of the remaining lease payments on the Consolidated Balance Sheets, (ii) recognize a single lease cost, calculated over the lease term on a straight-line basis and (iii) classify lease-related cash payments within operating and financing activities. The Company has made an accounting policy election to not recognize short-term leases on the Consolidated Balance Sheets and all non-lease components, such as common area maintenance, were excluded. At any given time during the lease term, the lease liability represents the present value of the remaining lease payments, and the ROU asset is measured as the amount of the lease liability, adjusted for pre-paid rent, unamortized initial direct

costs, and the remaining balance of lease incentives received. Both the lease ROU asset and liability are reduced to zero at the end of the lease term.

The Company leases distribution centers and warehouses, manufacturing facilities, showrooms, and office space. At the lease inception date, the Company determines if an arrangement is, or contains a lease. Some of the Company’s leases include options to renew at similar terms. The Company assesses these options to determine if the Company is reasonably certain of exercising these options based on relevant economic and financial factors. Options that meet these criteria are included in the lease term at the lease commencement date.

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

During the second quarter of fiscal year 2023, Flexsteel entered into a lease agreement for a showroom in Las Vegas, Nevada. The four-year lease term began on October 1, 2022, and ends on September 30, 2026.

On August 20, 2021, Flexsteel entered into a lease agreement for the construction of a 507,830 square foot manufacturing facility in Mexicali, Mexico. The lease commencement date under ASC 842 guidance was on July 1, 2022, the date the lessor made the building available for use by the Company for purposes of completing any leasehold improvements required by the Company prior to beginning operations. The 12-year lease term began on August 1, 2022, and ends on June 30, 2034, with options for two five-year extensions. Annual base rent under the lease is $3.2 million plus taxes, insurance and common area maintenance costs.

The components of the Company’s leases reflected on the Company’s Consolidated Statements of Income were as follows:



	Three Months Ended				Nine Months Ended
	March 31,				March 31,
(in thousands)	2023		2022		2023		2022
Operating lease expense	$	2,700	$	1,805	$	8,066	$	5,015
Variable lease expense		482		177		1,390		719
Total lease expense	$	3,182	$	1,982	$	9,456	$	5,734

Other information related to leases and future minimum lease payments under non-cancellable operating leases were as follows:



	Nine Months Ended
	March 31, 2023		March 31, 2022
(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	6,575	$	4,515

Right-of-use assets obtained in exchange for lease liabilities:
Operating leases	$	35,305	$	16,814

Weighted-average remaining lease term (in years):
Operating leases		9.4		4.4

Weighted-average discount rate:
Operating leases		2.9%		3.2%

Future minimum lease payments under non-cancellable operating leases were as follows:


	March 31, 2023
(in thousands)
Remaining payments in FY2023	$	3,021
FY2024		9,589
FY2025		7,989
FY2026		7,762
FY2027		7,778
Thereafter		44,934
Total future minimum lease payments	$	81,073
Less imputed interest		10,393
Lease liability	$	70,680