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Note 10 - Leases

12 Months Ended

Sep. 30, 2023

Note 10—Leases

We lease property and equipment under operating lease arrangements, most of which relate to distribution centers and manufacturing facilities in the U.S., Honduras, El Salvador, and Mexico. We also lease machinery and equipment in the U.S. under finance lease arrangements. We include both the contractual term as well as any renewal option that we are reasonably certain to exercise in the determination of our lease terms. For leases with a term of greater than 12 months, we value lease liabilities and the related assets at the present value of the lease payments over the related term. We apply the short-term lease exception to leases with a term of 12 months or less and exclude such leases from our Condensed Consolidated Balance Sheet. Payments related to these short-term leases are expensed on a straight-line basis over the lease term and are reflected as a component of lease cost within our Condensed Consolidated Statements of Operations. Our operating lease agreements for buildings generally include provisions for the payment of our proportional share of operating costs, property taxes, and other variable payments. These incremental payments are excluded from our calculation of operating lease liabilities and right of use assets. We have elected to use the practical expedient present in ASC 842 to not separate lease and non-lease components for all significant underlying asset classes and instead account for them together as a single lease component in the measurement of our lease liabilities.

Generally, the rate implicit in our operating leases is not readily determinable. Therefore, we discount future lease payments using our estimated incremental borrowing rate at lease commencement. We determine this rate based on a credit-adjusted risk-free rate, which approximates a secured rate over the lease term. The weighted average discount rate for operating leases was 4.6% for September 2023 and September 2022, respectively. We discount our finance lease payments based on the rate implicit and stated in the lease. The weighted average discount rate for finance leases was 6.6% and 5.7% as of September 2023 and September 2022, respectively.

The following table presents the future undiscounted payments due on our operating and finance lease liabilities as well as a reconciliation of those payments to our operating and finance lease liabilities, recorded as of September 2023 (in thousands):

	Operating		Finance
	Leases		Leases
2024	$	11,326	$	9,644
2025		11,269		7,729
2026		9,702		4,865
2027		8,188		2,318
2028		6,781		232
Thereafter		18,821		-
Undiscounted fixed lease payments	$	66,087	$	24,788
Discount due to interest		(9,709)		(2,317)
Total lease liabilities	$	56,378	$	22,471
Less current maturities		(9,124)		(8,442)
Lease liabilities, excluding current maturities	$	47,254	$	14,029

As of September 2023, we have entered into certain operating leases that have not yet commenced, but the annual fixed lease payments are not significant.

Our Ceiba Textiles manufacturing facility is leased under an operating lease arrangement with a Honduran company, of which we own 31% of the outstanding capital stock of such lessor at September 2023. During each of 2023 and 2022, we paid approximately $1.8 million in lease payments under this arrangement.

As of September 2023, and September 2022, we had $55.5 million and $50.3 million, respectively, of operating lease ROU assets which were reflected within Operating lease assets in our Consolidated Balance Sheet,and $27.2 million and $32.1 million, respectively, of finance lease ROU assets, which were reflected within Property, plant, and equipment, net in our Consolidated Balance Sheet.

The weighted average remaining lease terms for our operating leases and finance leases were approximately 7 years and 3 years, respectively, as of September 2023. As of September 2022, the average remaining lease terms were 6 years and 3 years, respectively.

The components of total lease expense were as follows for the period ended September 2023 (in thousands):

Operating lease fixed expense	$	12,254
Operating lease variable cost expense		2,186
Finance lease amortization of ROU assets expense		4,856
Finance lease interest expense		1,600
Total lease expense	$	20,896

Cash outflows for operating lease payments were $12.7 million during 2023 and $12.0 million during 2022. Cash outflows for interest payments on finance leases were $1.6 million and $1.4 million during 2023 and 2022, respectively. These outflows are classified within net cash provided by (used in) operating activities on the Consolidated Statement of Cash Flows. Cash outflows for finance lease payments during 2023 and 2022 were $9.2 million and $7.7 million, respectively, and are classified within net cash (used in) provided by financing activities on the Consolidated Statement of Cash Flows.

ROU assets obtained in exchange for operating lease liabilities during 2023 and 2022 were $15.3 million and $13.9 million, respectively. ROU assets obtained in exchange for finance lease liabilities during 2023 and 2022 were $6.7 million and $10.4 million, respectively.

We do not have significant leasing transactions in which we are the lessor.