The Company accounts for its leases in accordance with ASC 842, Leases. 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 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, the remaining balance of lease incentives received, and any impairment. Both the lease ROU asset and lease 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.

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.

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


	Three Months Ended				Nine Months Ended
	March 31,				March 31,
(in thousands)	2025		2024		2025		2024
Operating lease expense	$	2,495	$	2,394	$	7,482	$	7,202
Variable lease expense		484		518		1,396		1,488
Total lease expense	$	2,979	$	2,912	$	8,878	$	8,690

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


	Nine Months Ended
	March 31,
(in thousands)	2025			2024
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows paid for operating leases	$	7,381		$	7,069

Cash received from subleasing of operating lease:
Operating cash flows received from subleasing of operating lease	$	594		$	1,975

Right-of-use assets obtained in exchange for lease liabilities:
Operating leases	$	4,119		$	797

Weighted-average remaining lease term (in years):
Operating leases		7.4			8.4

Weighted-average discount rate:
Operating leases		4.0	%		3.1	%

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


	March 31, 2025
Remaining payments in FY2025	$	2,455
FY2026		9,960
FY2027		10,130
FY2028		9,896
FY2029		8,817
Thereafter		29,094
Total future minimum lease payments	$	70,352
Less imputed interest		9,200
Lease liability	$	61,152