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, 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. 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:

	September 30,
	2023			2022
Weighted average remaining lease term (in years)
Operating leases		5.8			6.0
Financing leases		2.2			2.4
Weighted average discount rate
Operating leases		5.7	%		4.5	%
Financing leases		3.8	%		3.1	%

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	2023			2022

Operating lease cost⁽¹⁾	Selling, general and administrative (“SG&A”) expenses	$	7,925		$	7,802
Financing lease cost
Depreciation of property	SG&A expenses		124			128
Interest on lease liabilities	Interest and other financing costs		4			8
Short-term lease cost⁽²⁾	SG&A expenses		58			255
Variable lease cost⁽³⁾	SG&A expenses		2,427			2,210
Less: Sublease income	SG&A expenses		(288	)		(293	)
Total lease expense		$	10,250		$	10,110

(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, 2023 (in thousands):

Fiscal Year	Operating Leases			Financing Leases
2024 (remaining nine months)	$	24,954		$	256
2025		31,161			80
2026		26,980			72
2027		20,524			66
2028		17,897			-
Thereafter		33,955			-
Total undiscounted future minimum lease payments		155,471			474
Less: imputed interest		(23,839	)		(24	)
Total present value of lease obligations⁽¹⁾	$	131,632		$	450

(1)	There were no future commitments under short-term operating lease agreements as of September 30, 2023.

As of September 30, 2023, we did not have any operating or finance leases that have not yet commenced.

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

	Three months ended September 30,
	2023		2022
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	8,200	$	8,230
Operating cash flows from financing leases	$	131	$	133
Operating lease assets obtained in exchange for operating lease liabilities	$	7,680	$	5,510

There were no non-cash financing lease obligations obtained in exchange for new financing lease assets during the three months ended September 30, 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 three months ended September 30, 2023, we amortized an additional $0.7 million of this deferred liability as a gain within Restructuring and other charges, net of gains. As of September 30, 2023, the deferred liability balance was $2.2 million recorded in Other current liabilities on our consolidated balance sheet.