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Note 6 - Leases | 3 Months Ended
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Sep. 30, 2022
Notes to Financial Statements |
Lessee, Leases [Text Block] |
(6) | Leases
We recognize substantially all leases on their balance sheet as a ROU asset and a lease liability. We have operating leases for many of our design centers that expire at various dates through fiscal 2040. We also lease certain tangible assets, including computer equipment and vehicles with initial lease terms ranging from three to five years. We determine if a contract contains a lease at inception based on our right to control the use of an identified asset and our right to obtain substantially all of the economic benefits from the use of that identified asset. Certain operating leases have renewal options and rent escalation clauses as well as various purchase options. We assess these options to determine if we are reasonably certain of exercising these options based on all relevant economic and financial factors. Any options that meet these criteria are included in the lease term at lease commencement. Most of our leases do not have an interest rate implicit in the lease. As a result, for purposes of measuring our ROU asset and lease liability, we determine our incremental borrowing rate by computing the rate of interest that we would have to pay to (i) borrow on a collateralized basis (ii) over a similar term (iii) at an amount equal to the total lease payments and (iv) in a similar economic environment. As we do not have any outstanding public debt, we estimated the incremental borrowing rate based on our estimated credit rating and available market information. The incremental borrowing rate is subsequently reassessed upon a modification to the lease agreement. Some of our leases contain variable lease payments based on a consumer price index or percentage of sales, which are excluded from the measurement of the lease liability. The Company's lease terms and discount rates are as follows:
|  | September 30, |
|  | 2022 |  |  | 2021 |
Weighted average remaining lease term (in years) |  |  |  |  |  |  |  |
Operating leases |  |  | 6.0 |  |  |  | 6.0 |
Financing leases |  |  | 2.4 |  |  |  | 2.4 |
Weighted average discount rate |  |  |  |  |  |  |  |
Operating leases |  |  | 4.5 | % |  |  | 4.2 | %
Financing leases |  |  | 3.1 | % |  |  | 2.2 | %
The following table discloses the location and amount of our operating and financing lease costs within our consolidated statements of comprehensive income (in thousands):
|  |  | Three months ended |
|  |  | September 30, |
| Statements of Comprehensive Income Location |  | 2022 |  |  | 2021 |
Operating lease cost(1) | Selling, general and administrative (“SG&A”) expenses |  | $ | 7,802 |  |  | $ | 7,473 |
Financing lease cost |  |  |  |  |  |  |  |  |
Depreciation of property | SG&A expenses |  |  | 128 |  |  |  | 126 |
Interest on lease liabilities | Interest and other financing costs |  |  | 8 |  |  |  | 7 |
Short-term lease cost(2) | SG&A expenses |  |  | 255 |  |  |  | 308 |
Variable lease cost(3) | SG&A expenses |  |  | 2,210 |  |  |  | 2,313 |
Less: Sublease income | SG&A expenses |  |  | (293 | ) |  |  | (414 | )
Total lease expense |  | $ | 10,110 |  |  | $ | 9,813 |
| (1) | Lease expense for operating leases consists of both fixed and variable components. Expense related to fixed lease payments are recognized on a straight-line basis over the lease term.
| (2) | Leases with an initial term of 12 months or less are not recorded on the balance sheet and instead expensed on a straight-line basis over the lease term.
| (3) | Variable lease payments are generally expensed as incurred, where applicable, and include certain index-based changes in rent, certain non-lease components, such as maintenance, real estate taxes, insurance and other services provided by the lessor, and other charges included in the lease. In addition, certain of our equipment lease agreements include variable lease payments, which are based on the usage of the underlying asset. The variable portion of payments are not included in the initial measurement of the asset or lease liability due to uncertainty of the payment amount and are recorded as expense in the period incurred.
The table below reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under noncancelable leases with terms of more than one year to the total lease liabilities recognized on the consolidated balance sheets as of September 30, 2022 (in thousands):
Fiscal Year |  | Operating Leases |  |  | Financing Leases |
2023 (remaining nine months) |  | $ | 22,511 |  |  | $ | 422 |
2024 |  |  | 25,510 |  |  |  | 392 |
2025 |  |  | 21,401 |  |  |  | 80 |
2026 |  |  | 17,739 |  |  |  | 72 |
2027 |  |  | 12,701 |  |  |  | 66 |
Thereafter |  |  | 31,382 |  |  |  | - |
Total undiscounted future minimum lease payments |  |  | 131,244 |  |  |  | 1,032 |
Less: imputed interest |  |  | (17,496 | ) |  |  | (46 | )
Total present value of lease obligations(1) |  | $ | 113,748 |  |  | $ | 986 |
| (1) | Excludes future commitments under short-term operating lease agreements of $0.7 million as of September 30, 2022.
As of September 30, 2022, we have two operating leases for retail design centers, which have not yet commenced. These two operating leases are not part of the tables above nor in the lease right-of-use assets and liabilities. These leases will commence when we obtain possession of the underlying leased asset, which is expected to occur during the second quarter of fiscal 2023. The two operating leases are for a period of five and seven years, respectively, and have aggregate undiscounted future lease payments of $7.8 million. As of September 30, 2022, we did not have any financing leases that had not commenced. Other supplemental information for our leases is as follows (in thousands):
|  | Three months ended |
|  | September 30, |
|  | 2022 |  |  | 2021 |
Cash paid for amounts included in the measurement of lease liabilities |  |  |  |  |  |  |  |
Operating cash flows from operating leases |  | $ | 8,230 |  |  | $ | 8,521 |
Operating cash flows from financing leases |  | $ | 133 |  |  | $ | 132 |
Operating lease assets obtained in exchange for operating lease liabilities |  | $ | 5,510 |  |  | $ | (624 | )
There were no non-cash financing lease obligations obtained in exchange for new financing lease assets during the three months ended September 30, 2022 or 2021. Sale-leaseback transaction. On August 1, 2022, we completed a sale-leaseback transaction with an independent third party for the land, building and related fixed assets of a retail design center. The design center was leased back to Ethan Allen via a multi-year operating lease agreement. As part of the transaction, we received net proceeds of $8.1 million, which resulted in a pre-tax gain of $1.8 million recorded within Restructuring and other impairment charges, net of gains and $5.2 million deferred as a liability to be amortized to Restructuring and other impairment charges, net of gains over the term of the related lease. During the first quarter of fiscal 2023 we recorded two months of amortization of this deferred liability, which increased our restructuring gain to $2.3 million. As of September 30, 2022, the deferred liability balance was $4.8 million, with $2.6 million in Other current liabilities and $2.2 million in Other long-term liabilities on our consolidated balance sheet.

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