The Company accounts for its leases in accordance with ASU 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 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. The fair value of the right of use asset on March 31, 2025, was estimated under the income approach using a discounted cash flow technique, including assumptions for future sublease rental income and an appropriate discount rate. This technique involves estimates and uncertainties and actual results could differ. The impairment charge is included within

operating income in the Consolidated Statements of Income and Comprehensive Income under right-of-use asset impairment. The remaining carrying value of the ROU asset related to the Mexicali lease was $13.5 million at June 30, 2025.

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 were as follows:


Fiscal year	June 30, 2025			June 30, 2024
(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	9,698		$	9,502

Cash received from subleasing of operating lease:
Operating cash flows received from subleasing of operating lease	$	594		$	2,744

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

Weighted-average remaining lease term (in years):
Operating leases		7.2			8.2

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

Fiscal year				June 30, 2025
(in thousands)
Payments in FY2026				$	10,003
FY2027					10,166
FY2028					9,896
FY2029					8,817
FY2030					8,694
Thereafter					20,400
Total future minimum lease payments				$	67,976
Less imputed interest					8,606
Lease liability				$	59,370