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Note 6 - Leases | 3 Months Ended
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Dec. 31, 2023
Notes to Financial Statements |
Lessee, Leases [Text Block] |
(6) | Leases
We recognize substantially all leases on our balance sheet as a right-of-use (“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. 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. The Company's lease terms and discount rates are as follows:
|  | December 31, |
|  | 2023 |  |  | 2022 |
Weighted average remaining lease term (in years) |  |  |  |  |  |  |  |
Operating leases |  |  | 5.7 |  |  |  | 6.1 |
Financing leases |  |  | 2.5 |  |  |  | 2.3 |
Weighted average discount rate |  |  |  |  |  |  |  |
Operating leases |  |  | 5.7 | % |  |  | 5.0 | %
Financing leases |  |  | 4.4 | % |  |  | 3.2 | %
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 December 31, |  |  | Six months ended December 31, |
| Statements of Comprehensive Income Location |  | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
Operating lease cost(1) | SG&A expenses |  | $ | 7,893 |  |  | $ | 7,182 |  |  | $ | 15,818 |  |  | $ | 14,984 |
Financing lease cost |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Depreciation of property | SG&A expenses |  |  | 124 |  |  |  | 127 |  |  |  | 248 |  |  |  | 256 |
Interest on lease liabilities | Interest and other financing costs |  |  | 4 |  |  |  | 7 |  |  |  | 8 |  |  |  | 15 |
Short-term lease cost(2) | SG&A expenses |  |  | 2 |  |  |  | 325 |  |  |  | 59 |  |  |  | 580 |
Variable lease cost(3) | SG&A expenses |  |  | 2,365 |  |  |  | 2,303 |  |  |  | 4,791 |  |  |  | 4,513 |
Less: Sublease income | SG&A expenses |  |  | (288 | ) |  |  | (293 | ) |  |  | (575 | ) |  |  | (587 | )
Total lease expense |  | $ | 10,100 |  |  | $ | 9,651 |  |  | $ | 20,349 |  |  | $ | 19,761 |
| (1) | Operating lease costs include costs associated with fixed lease payments and index-based variable payments that qualified for lease accounting under ASC 842, Leases and complied with the practical expedients we elected. 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 costs include costs that were not fixed at the lease commencement date and are not dependent on an index or rate. Variable lease payments are generally expensed as incurred, where applicable, and include certain non-lease components, such as maintenance, utilities, 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 following table 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 December 31, 2023 (in thousands):
Fiscal Year |  | Operating Leases |  |  | Financing Leases |
2024 (remaining six months) |  | $ | 16,742 |  |  | $ | 120 |
2025 |  |  | 31,805 |  |  |  | 80 |
2026 |  |  | 27,654 |  |  |  | 72 |
2027 |  |  | 21,191 |  |  |  | 66 |
2028 |  |  | 18,560 |  |  |  | - |
Thereafter |  |  | 34,609 |  |  |  | - |
Total undiscounted future minimum lease payments |  |  | 150,561 |  |  |  | 338 |
Less: imputed interest |  |  | (22,598 | ) |  |  | (20 | )
Total present value of lease obligations(1) |  | $ | 127,963 |  |  | $ | 318 |
(1) | There were no future commitments under short-term operating lease agreements as of December 31, 2023.
We have one operating lease for a new retail service center which had not yet commenced as of December 31, 2023. This operating lease is not part of the tables above nor in the lease ROU assets and liabilities. This lease will commence when we obtain possession of the underlying leased asset, which is expected to occur during the third quarter of fiscal 2024. The operating lease is for a period of 62 months and has aggregate undiscounted future lease payments of $1.8 million. As of December 31, 2023, we did not have any financing leases that had not yet commenced. Other supplemental information for our leases is as follows (in thousands):
|  | Six months ended December 31, |
|  | 2023 |  |  | 2022 |
Cash paid for amounts included in the measurement of lease liabilities |  |  |  |  |  |  |  |
Operating cash flows from operating leases |  | $ | 16,071 |  |  | $ | 15,710 |
Operating cash flows from financing leases |  | $ | 263 |  |  | $ | 265 |
Operating lease assets obtained in exchange for operating lease liabilities |  | $ | 10,092 |  |  | $ | 15,765 |
There were no financing lease obligations obtained in exchange for new financing lease assets during the six months ended December 31, 2023 or 2022. 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 charges, net of gains and $5.2 million deferred as a liability to be amortized to Restructuring and other charges, net of gains over the term of the related lease. For the six months ended December 31, 2023, we amortized an additional $1.3 million of this deferred liability as a gain within Restructuring and other charges, net of gains. As of December 31, 2023, the deferred liability balance was $1.5 million recorded in Other current liabilities on our consolidated balance sheet.

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