Ethan Allen Interiors Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Note 6 - Leases

Note 6 - Leases

9 Months Ended

Mar. 31, 2023

Notes to Financial Statements

Lessee, Leases [Text Block]

(6)

Leases

We recognize substantially all leases on our 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:

	March 31,
	2023			2022
Weighted average remaining lease term (in years)
Operating leases		6.0			5.9
Financing leases		2.2			1.9
Weighted average discount rate
Operating leases		5.4	%		4.1	%
Financing leases		3.3	%		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 March 31,						Nine months ended March 31,
	Statements of Comprehensive Income Location	2023			2022			2023			2022
Operating lease cost⁽¹⁾	Selling, general and administrative (“SG&A”) expenses	$	7,573		$	7,557		$	22,557		$	22,505
Financing lease cost
Depreciation of property	SG&A expenses		124			119			379			371
Interest on lease liabilities	Interest and other financing costs		6			5			21			18
Short-term lease cost⁽²⁾	SG&A expenses		307			361			887			978
Variable lease cost⁽³⁾	SG&A expenses		2,427			2,417			6,940			7,101
Less: Sublease income	SG&A expenses		(288	)		(292	)		(874	)		(1,091	)
Total lease expense		$	10,149		$	10,167		$	29,910		$	29,882

(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 March 31, 2023 (in thousands):

Fiscal Year	Operating Leases			Financing Leases
2023 (remaining three months)	$	7,747		$	136
2024		31,658			392
2025		28,839			80
2026		24,758			72
2027		18,372			66
Thereafter		44,917			-
Total undiscounted future minimum lease payments		156,291			746
Less: imputed interest		(23,897	)		(34	)
Total present value of lease obligations⁽¹⁾	$	132,394		$	712

(1)

Excludes future commitments under short-term operating lease agreements of $0.2 million as of March 31, 2023.

As of March 31, 2023, we have one operating lease for a new retail design center, which has not yet commenced. This operating lease is not part of the tables above nor in the lease right-of-use assets and liabilities. This lease will commence when we obtain possession of the underlying leased asset, which occurred in April 2023, our fiscal 2023 fourth quarter. The operating lease is for a period of five years and has aggregate undiscounted future lease payments of $0.5 million. As of March 31, 2023, we did not have any financing leases that had not commenced.

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

	Nine months ended March 31,
	2023		2022
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	23,355	$	25,027
Operating cash flows from financing leases	$	395	$	389
Operating lease assets obtained in exchange for operating lease liabilities	$	36,375	$	13,508

There were no non-cash financing lease obligations obtained in exchange for new financing lease assets during the nine months ended March 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 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. For the nine months ended March 31, 2023, we amortized an additional $1.7 million of this deferred liability as a gain within Restructuring and other impairment charges, net of gains. As of March 31, 2023, the deferred liability balance was $3.5million, with $2.6 million in Other current liabilities and $0.9 million in Other long-term liabilities on our consolidated balance sheet.