During the quarter of fiscal we adopted ASU - and all related amendments. The guidance requires lessees to recognize substantially all leases on their 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 In addition, we also lease certain tangible assets, including computer equipment and vehicles with lease terms ranging from to 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.

 

Lease right-of-use assets represent the right to use an underlying asset pursuant to the lease for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. Lease right-of-use assets and lease liabilities are recognized at the commencement of an arrangement where it is determined at inception that a lease exists. These assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using our incremental borrowing rate generally applicable to the location of the lease right-of-use asset, unless an implicit rate is readily determinable. We combine lease and certain non-lease components for our design center real estate leases in determining the lease payments subject to the initial present value calculation. Lease right-of-use assets include upfront lease payments and exclude lease incentives, where applicable. Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised.

 

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. 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 and other services provided by the lessor, and other charges included in the lease. Leases with an initial term of months or less are recorded on the balance sheet. 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 included in the initial measurement of the asset or lease liability due to uncertainty of the payment amount and are recorded as lease expense in the period incurred.

 

We have elected the short-term lease exemption, whereby leases with initial terms of year or less are capitalized and instead expensed on a straight-line basis over the lease term.

 

 

Key estimates and judgments in applying ASU - relate to how the Company determines the discount rate to discount the unpaid lease payments to present value and the lease term.

 

ASC requires companies to use the rate implicit in the lease whenever that rate is readily determinable and if the interest rate is readily determinable, then a lessee use its incremental borrowing rate. Most of our leases do have an interest rate implicit in the lease. As a result, for purposes of measuring our ROU asset and lease liability, we determined 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 have any outstanding public debt, we estimated the incremental borrowing rate based on our estimated credit rating and available market information. We used the incremental borrowing rates we determined as of for operating leases that commenced prior to that date. The incremental borrowing rate is subsequently reassessed upon a modification to the lease agreement. In the case an interest rate is implicit in a lease we will use that rate as the discount rate for that lease. The lease term for all of our lease arrangements include the noncancelable period of the lease plus, if applicable, any additional periods covered by an option to extend the lease that is reasonably certain to be exercised by the Company. Our leases generally do include termination options for either party to the lease or restrictive financial or other covenants. 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:

 

		March 31, 2020
Weighted-average remaining lease term (in years)
Operating leases			6.7
Financing leases			1.7
Weighted-average discount rate
Operating leases			3.8	%
Financing leases			4.4	%

 

The following table discloses the location and amount of our operating and financing lease costs within our consolidated statements of comprehensive income (in thousands):

 

		Statement of Comprehensive Income Location		Three months ended March 31, 2020				Nine months ended March 31, 2020
Operating lease cost		Selling, general and administrative (“SG&A”)		$	8,178			$	24,369
Financing lease cost:
Depreciation of property		SG&A			152				445
Interest on lease liabilities		Interest income, net of interest (expense)			8				25
Short-term lease cost		SG&A			280				1,022
Variable lease cost (1)		SG&A			2,333				7,169
Less: Sublease income		SG&A			(486	)			(1,588	)
Total lease expense				$	10,465			$	31,442

 

 

Operating lease rent expense during the months ended as reported within SG&A, was million, net of sublease rental income of million. For the months ended operating lease rent expense was million, net of sublease rental income of million.

 

The following table discloses the operating and financing lease assets and liabilities recognized within our consolidated balance sheet as of in thousands):

 

	Consolidated Balance Sheet Location		March 31, 2020
Assets
Operating leases	Operating lease right-of-use assets (non-current)		$	124,636
Financing leases	Property, plant and equipment, net			741
Total lease assets			$	125,377
Liabilities
Current:
Operating leases	Current operating lease liabilities		$	34,005
Financing leases	Other current liabilities			604
Noncurrent:
Operating leases	Operating lease liabilities, long-term			112,515
Financing leases	Other long-term liabilities			127
Total lease liabilities			$	147,251

 

The ROU assets by segment are as follows as of in thousands):

 

Retail		$	124,694
Wholesale			683
Total ROU assets		$	125,377

 

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 year to the total lease liabilities recognized on the condensed consolidated balance sheets as of in thousands):

 

Fiscal Year		Operating Leases				Financing Leases
2020 (remaining three months)		$	8,910			$	151
2021			33,424				459
2022			29,082				78
2023			22,936				39
2024			17,875				19
Thereafter			55,783				8
Total undiscounted future minimum lease payments			168,010				754
Less: imputed interest			(21,490	)			(23	)
Total present value of lease obligations		$	146,520			$	731

 

As of we have entered into additional operating lease for a design center relocation, which has yet commenced and is therefore part of the table above nor included in the lease right-of-use assets and liabilities. The lease will commence when we obtain possession of the underlying leased asset which is expected to be during the half of fiscal The lease is for a period of years and has aggregate undiscounted future rent payments of  million.

 

At we did have any financing leases that had commenced.

 

Other information for our leases is as follows (in thousands):

		Nine months ended March 31, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases		$	24,411
Operating cash flows from financing leases		$	422
Operating lease assets obtained in exchange for new operating lease liabilities		$	16,333

 

At the beginning of fiscal we adopted ASU - and as required, the following disclosure is provided for periods prior to adoption. As of future minimum payments under non-cancelable leases were as follows (in thousands):

 

Fiscal Year		Operating Leases				Financing Leases (1)
2020		$	33,761			$	550
2021			30,534				437
2022			26,443				60
2023			20,276				19
2024			15,345				-
Thereafter			43,500				-
Total		$	169,859			$	1,066