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

3 Months Ended

Sep. 30, 2021

Notes to Financial Statements

Lessee, Leases [Text Block]

(6)

Leases

We have operating leases for many of our design centers that expire at various dates through fiscal 2040. In addition, 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. 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,
	2021			2020
Weighted average remaining lease term (in years)
Operating leases		6.0			6.4
Financing leases		2.4			1.6
Weighted average discount rate
Operating leases		4.2	%		4.2	%
Financing leases		2.2	%		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):

		Three months ended September 30,
	Statement of Comprehensive Income Location	2021			2020
Operating lease cost⁽¹⁾	Selling, general and administrative (“SG&A”) expenses	$	7,473		$	7,492
Financing lease cost
Depreciation of property	SG&A expenses		126			151
Interest on lease liabilities	Interest and other financing costs		7			5
Short-term lease cost⁽²⁾	SG&A expenses		308			159
Variable lease cost⁽³⁾	SG&A expenses		2,313			2,262
Less: Sublease income	SG&A expenses		(414	)		(438	)
Total lease expense		$	9,813		$	9,631

(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, 2021 (in thousands):

Fiscal Year	Operating Leases			Financing Leases
2022 (remaining nine months)	$	24,497		$	391
2023		25,850			490
2024		20,922			320
2025		17,334			8
2026		13,780			-
Thereafter		31,698			-
Total undiscounted future minimum lease payments		134,081			1,209
Less: imputed interest		(16,700	)		(30	)
Total present value of lease obligations⁽¹⁾	$	117,381		$	1,179

(1)

Excludes future commitments under short-term operating lease agreements of $0.5 million as of September 30, 2021.

As of September 30, 2021, we have entered into two additional operating leases for retail design centers, which have not yet commenced and are therefore not part of the tables above nor included 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 be within the next three months. The two operating leases are for a period of seven and ten years, respectively, and have aggregate undiscounted future rent payments of $4.4 million. As of September 30, 2021, 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,
	2021			2020
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	8,521		$	8,390
Operating cash flows from financing leases	$	132		$	148
Operating lease assets obtained in exchange for operating lease liabilities	$	(624	)	$	4,477

There were no non-cash financing lease obligations obtained in exchange for new financing lease assets during the three months ended September 30, 2021 and 2020, respectively.