Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP.
Our internal control over financial reporting includes those policies and procedures that:
Management has assessed the effectiveness of our internal control over financial reporting based on the framework in “
Internal Control – Integrated Framework (2013)
” issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on the above evaluation, management has concluded that our internal control over financial reporting was effective as of June 30, 2019 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external reporting purposes in accordance with U.S. GAAP. The effectiveness of our internal control over financial reporting as of June 30, 2019 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report, which is included herein.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(1)
|
Organization and Nature of Business
|
Founded in 1932 and incorporated in Delaware in 1989, Ethan Allen Interiors Inc., through its wholly-owned subsidiary, Ethan Allen Global, Inc., and Ethan Allen Global, Inc.’s subsidiaries (collectively, “we,” “us,” “our,” “Ethan Allen” or the “Company”), is a leading interior design company, manufacturer and retailer in the home furnishings marketplace. Today we are a global luxury international home fashion brand that is vertically integrated from design through delivery, which affords our clientele a value proposition of style, quality and price. We provide complimentary interior design service to our customers and sell a full range of furniture products and decorative accents through a retail network of approximately 300 design centers in the United States and abroad as well as online at
ethanallen.com
. The design centers represent a mix of independent licensees and Company-owned and operated locations. Nearly all our Company operated retail design centers are located in the United States , with the remaining Company operated design centers located in Canada. The majority of the independently operated design centers are in Asia, with the remaining independently operated design centers located throughout the United States, the Middle East and Europe. We also own and operate six manufacturing facilities, including three manufacturing plants and one sawmill in the United States and one manufacturing plant in Mexico and one in Honduras.
(2)
|
Basis of Presentation
|
Principles of Consolidation.
Ethan Allen conducts business globally and has strategically aligned its business into two reportable segments: Wholesale and Retail. These two segments represent strategic business areas of our vertically integrated enterprise that operate separately and provide their own distinctive services. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Our consolidated financial statements also include the accounts of an entity in which we are a majority shareholder with the power to direct the activities that most significantly impact the entity’s performance. Noncontrolling interest amounts in the entity are immaterial and included in the Consolidated Statements of Comprehensive Income within interest and other income, net. All intercompany activity and balances have been eliminated from the consolidated financial statements.
Use of Estimates.
We prepare our consolidated financial statements in accordance with U.S. GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of net sales and expenses during the reporting period. Due to the inherent uncertainty involved in making those estimates, actual results could differ from those estimates. Areas in which significant estimates have been made include, but are not limited to, goodwill and indefinite-lived intangible asset impairment analyses, useful lives for property, plant and equipment, inventory obsolescence, business insurance retention reserves, tax valuation allowances and the evaluation of uncertain tax positions.
Reclassifications.
Certain reclassifications have been made to prior years’ financial statements to conform to the current year’s presentation. These changes were made for disclosure purposes only and did not have any impact on previously reported results.
The Company has evaluated subsequent events through the date that the financial statements were issued.
(3)
|
Summary of Significant Accounting Policies
|
The significant accounting policies of the Company and its subsidiaries are summarized below.
Cash
and Cash
Equivalents
Cash and short-term, highly liquid investments with original maturities of three months or less are considered cash and cash equivalents and are reported at fair value. Our corporate money market funds are readily convertible into cash and the net asset value of each fund on the last day of the month is used to determine its fair value. We invest excess cash in money market accounts and short-term commercial paper. As of June 30, 2019 and 2018, we had no restricted cash on hand.
Accounts Receivable
Accounts receivable arise from the sale of products on trade credit terms and is presented net of allowance for doubtful accounts. We maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. The allowance for doubtful accounts is based on a review of specifically identified accounts in addition to an overall aging analysis. Judgments are made with respect to the collectability of accounts receivable based on historical experience and current economic trends. On a monthly basis, we review all significant accounts as to their past due balances, as well as collectability of the outstanding trade accounts receivable for possible write-off. It is our policy to write-off the accounts receivable against the allowance account when we deem the receivable to be uncollectible. Additionally, we review orders from retailers that are significantly past due, and we ship product only when our ability to collect payment from our customer for the new order is probable. At June 30, 2019 and 2018, the allowance for doubtful accounts was immaterial, respectively.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Inventories
Inventories are stated at the lower of cost (on first-in, first-out basis) or net realizable value. Cost is determined based solely on those charges incurred in the acquisition and production of the related inventory (i.e. material, labor and manufacturing overhead costs).
Property, Plant and Equipment
Property, plant and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation of property, plant and equipment is provided over the estimated useful lives of the respective assets on a straight-line basis. Estimated useful lives of the respective assets typically range from twenty to forty years for buildings and improvements and from three to twenty years for machinery and equipment. Capitalized computer software costs include internal and external costs incurred during the software's development stage and are depreciated over three to five years. Leasehold improvements are amortized over the shorter of the underlying lease term or the estimated useful life. Repairs and maintenance expenditures, which are not considered leasehold improvements and do not extend the useful life of the property and equipment, are expensed as incurred.
Retirement or dispositions of long-lived assets are recorded based on carrying value and proceeds received. Any resulting gains or losses are recorded as a component of selling, general and administrative expenses.
Property, plant and equipment is reviewed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. For further discussion regarding impairments refer to the
Impairment of Long-Lived Assets
accounting policy below.
Assets Held for Sale
An asset is considered to be held for sale when all of the following criteria are met: (i) management commits to a plan to sell the property; (ii) it is unlikely that the disposal plan will be significantly modified or discontinued; (iii) the property is available for immediate sale in its present condition; (iv) actions required to complete the sale of the property have been initiated; (v) sale of the asset is probable and the completed sale is expected to occur within one year; and (vi) the property is actively being marketed for sale at a price that is reasonable given its current market value.
Upon designation as an asset held for sale, the carrying value of the asset is recorded at the lower of its carrying value or its estimated fair value less estimated costs to sell, and the Company ceases depreciating the asset. As of June 30, 2019 and 2018, we did not have any assets held for sale.
Impairment of Long-Lived Assets
We review the carrying value of our long-lived assets for impairment at least annually or whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Our assessment of recoverability is based on our best estimates using either quoted market prices or an analysis of the undiscounted projected future cash flows by asset groups in order to determine if there is any indicator of impairment requiring us to further assess the fair value of our long-lived assets. If the sum of the estimated undiscounted future cash flows related to the asset is less than the carrying value, we recognize a loss equal to the difference between the carrying value and the fair value, usually determined by the estimated discounted cash flow analysis of the assets. Our asset groups consist of our operating segments in our Wholesale reportable segment, each of our retail design centers and other corporate assets. The asset group is defined as the lowest level for which identifiable cash flows are available and largely independent of the cash flows of other groups of assets, which for our retail segment is the individual retail design center and for our wholesale segment is the manufacturing plant level. We estimate future cash flows based on design center-level historical results, current trends, and operating and cash flow projections. Our estimates are subject to uncertainty and may be affected by a number of factors outside its control, including general economic conditions and the competitive environment. While we believe our estimates and judgments about future cash flows are reasonable, future impairment charges may be required if the expected cash flow estimates, as projected, do not occur or if events change requiring us to revise its estimates. During fiscal 2019, our retail segment recorded a $9.9 million impairment for long-lived assets at the retail design center level. There were no impairments during fiscal 2018 or 2017. Refer to Note 10,
Restructuring and Impairment Activities,
for further disclosure on the long-lived asset impairment.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Goodwill and Other Indefinite-Lived Intangible Assets
Our goodwill and intangible assets are comprised primarily of goodwill, which represents the excess of cost over the fair value of net assets acquired, and our Ethan Allen trade name and related trademarks. We determined these assets have indefinite useful lives, and are therefore not amortized.
We are required to test goodwill and indefinite-lived intangibles at the reporting level for potential impairment annually, or more frequently if impairment indicators occur. Goodwill and other indefinite-lived intangible assets are evaluated for impairment on an annual basis during the fourth quarter of each fiscal year, and between annual tests whenever events or circumstances indicate that the carrying value of the goodwill or other intangible asset may exceed its fair value.
Goodwill.
When testing goodwill for impairment, we may assess qualitative factors for some or all of our reporting units to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill. Alternatively, we may bypass this qualitative assessment for some or all of our reporting units and determine whether the carrying value exceeds the fair value using a quantitative assessment, as described below. We have two reporting units; wholesale and retail, which are consistent with our reportable operating segments. Only our wholesale reporting unit has goodwill remaining at June 30, 2019. We performed our annual qualitative goodwill impairment test during the fourth quarter of fiscal 2019, consistent with the timing of previous years, and concluded that there was no impairment.
Other Indefinite-Lived Intangible Assets (t
rade name).
The fair value of our trade name, which is the Company’s only indefinite-lived intangible asset other than goodwill, is qualitatively assessed annually in the fourth quarter and may be reviewed more frequently if indicators of impairment are present. Conditions that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate that could affect the value of an asset, a product recall or an adverse action or assessment by a regulator. We performed our annual trade name impairment test during the fourth quarter of fiscal 2019, consistent with the timing of previous years, and concluded that there was no impairment.
Fair Valu
e of
Financial Instruments
Because of their short-term nature, the carrying value of our cash and cash equivalents, receivables and payables, short-term debt and customer deposit liabilities approximates fair value. At June 30, 2019 and 2018, our total debt consisted of capital leases obligations. The estimated fair value is equal to the carrying value on those dates.
Income
Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance must be established for deferred tax assets when it is more likely than not that the assets will not be realized.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. Most of the unrecognized tax benefits, if recognized, would be recorded as a benefit to income tax expense. The liability associated with an unrecognized tax benefit is classified as a long-term liability except for the amount for which a cash payment is expected to be made or tax positions settled within one year. We recognize interest and penalties related to income tax matters as a component of income tax expense.
Revenue Recognition
Our reported revenue (net sales) consist substantially of product sales. We report product sales net of discounts and recognize them at the point in time when control transfers to the customer. For sales to our customers in our wholesale segment, control typically transfers when the product is shipped. For sales in our retail segment, control generally transfers upon delivery to the customer.
Estimated refunds for returns and allowances are recorded using our historical return patterns. We record estimated refunds for sales returns on a gross basis rather than on a net basis and have recorded an asset for product we expect to receive back from customers in
Prepaid expenses and other current assets
and a corresponding refund liability in
Other Current Liabilities
on our consolidated balance sheet. At June 30, 2019 and 2018, these amounts were immaterial.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Refer to Note 4,
Revenue Recognition,
for additional information regarding revenue.
Cost of Sales
Our cost of sales consist primarily of the cost to manufacture or purchase our merchandise (i.e. direct material, labor and overhead costs) as well as inspection, internal transfer, in-bound freight and warehousing costs.
Selling, General and Administrative Expenses
(“SG&A”)
SG&A expenses include the costs of selling our products and other general and administrative costs. Selling expenses are primarily composed of shipping and handling costs, commissions, advertising, warranty, and compensation and benefits of employees performing various sales functions. Occupancy costs, depreciation, compensation and benefit costs for administration employees and other administrative costs are included in SG&A.
Shipping and Handling Costs
Our practice has been to sell our products at the same delivered cost to all retailers and customers nationwide, regardless of shipping point. Costs incurred by the Company to deliver finished goods are expensed and recorded in selling, general and administrative expenses. Shipping and handling costs amounted to $75.6 million in fiscal year 2019, $73.6 million for fiscal 2018 and $71.3 million in fiscal 2017.
Advertising Costs
Advertising costs are expensed when first aired or distributed. Our total advertising costs were $30.5 million in fiscal year 2019, $43.3 million in fiscal year 2018 and $39.7 million in fiscal year 2017. These amounts include advertising media expenses, outside and inside agency expenses, certain website related fees and photo and video production. Prepaid advertising costs were immaterial at June 30, 2019 and 2018, respectively.
De
ferred Financing Fees
Deferred financing fees related to our revolving credit facility are included in non-current assets on the consolidated balance sheets and amortized utilizing the effective interest method. Such amortization is included in interest expense, net on the consolidated statements of comprehensive income.
Operating Leases
The Company leases retail design centers, distribution facilities, office space and, less significantly, certain equipment. We classify leases at the inception of the lease as a capital or an operating lease. In a capital or an operating lease, the expected lease term begins with the date that we take possession of the equipment or the leased space for construction and other purposes. The expected lease term may also include the exercise of renewal options if the exercise of the option is determined to be reasonably assured. The expected term is also used in the determination of whether a design center is a capital or operating lease. We record expense for operating leases on a straight-line basis, beginning on the date that we take possession or control of the property. Several of our operating lease agreements contain provisions for tenant improvement allowances, rent holidays, rent concessions, and/or rent escalations.
Incentive payments received from landlords are recorded as deferred lease incentives and are amortized over the underlying lease term on a straight-line basis as a reduction of rent expense. When the terms of an operating lease provide for periods of free rent, rent concessions, and/or rent escalations, we establish a deferred rent liability for the difference between the scheduled rent payment and the straight-line rent expense recognized. This deferred rent liability is also amortized over the underlying lease term on a straight-line basis as a reduction of rent expense.
Acquisitions
From time to time we acquire design centers from our independent retailers in arms-length transactions. We record these acquisitions using the acquisition method of accounting. All of the assets acquired, liabilities assumed, contractual contingencies and contingent consideration are recognized at their fair value on the acquisition date. Cash paid to acquire design centers during fiscal 2019, 2018 and 2017 was $0.5 million, $6.3 million and $0.7 million, respectively. Acquisition-related expenses are recognized separately and expensed as incurred.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Share-Based Compensation
Share-based compensation expense is included within selling, general and administrative expenses. Tax benefits associated with our share-based compensation arrangements are included within income tax expense.
We estimate, as of the date of grant, the fair value of stock options awarded using the Black-Scholes option pricing model. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs, including anticipated changes in the underlying stock price (i.e. expected volatility) and option exercise activity (i.e. expected life). Expected volatility is based on the historical volatility of our stock and other contributing factors. The expected life of options granted, which represents the period of time that the options are expected to be outstanding, is based, primarily, on historical data.
We estimate, as of the date of grant, the fair value of restricted stock units awarded using a discounted cash flow model, which requires management to make certain assumptions with respect to model inputs including anticipated future dividends not paid during the restriction period, and a discount for lack of marketability for a one-year holding period after vesting.
As share-based compensation expense recognized is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based primarily on historical experience. Windfall tax benefits, defined as tax deductions that exceed recorded share-based compensation, are classified as cash inflows from financing activities.
Performance-based stock units require management to make assumptions regarding the likelihood of achieving Company performance targets on a quarterly basis. The number of performance-based options that vest will be predicated on the Company achieving certain performance levels. A change in the financial performance levels the Company achieves could result in changes to our current estimate of the vesting percentage and related share-based compensation.
Earnings Per Share
We compute basic earnings per share (“EPS”) by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS is calculated similarly, except that the weighted average outstanding shares are adjusted to include the effects of converting all potentially dilutive share-based awards issued under our employee stock plans. The number of potential common shares outstanding are determined in accordance with the treasury stock method to the extent they are dilutive. For the purpose of calculating EPS, common shares outstanding include common shares issuable upon the exercise of outstanding share-based compensation awards, including employee stock options and restricted stock. Under the treasury stock method, the exercise price paid by the optionee and future share-based compensation expense that the Company has not yet recognized are assumed to be used to repurchase shares.
Foreig
n Currency Translation
The functional currency of each Company operated foreign location is the respective local currency. Assets and liabilities are translated into U.S. dollars using the current period-end exchange rate and income and expense amounts are translated using the average exchange rate for the period in which the transaction occurred. Resulting translation adjustments are reported as a component of accumulated other comprehensive income (loss) within shareholders’ equity.
Treasury Stock
The Company accounts for repurchased common stock under the cost method and includes such treasury stock as a component of its shareholders’ equity. We account for the formal retirement of treasury stock by deducting its par value from common stock, reducing additional paid-in capital (“APIC”) by the average amount recorded in APIC when the stock was originally issued and any remaining excess of cost deducted from retained earnings.
Recent
Accounting Pronouncements
As of the beginning of fiscal 2019, we implemented all applicable new accounting standards and updates issued by the Financial Accounting Standards Board (“FASB”) that were in effect. There were no new standards or updates adopted during fiscal 2019 that had a material impact on our consolidated financial statements.
New
Accounting
Standards or
Updates Adopted in fiscal 2019
Revenue Recognition
.
In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers
(Accounting Standards Codification Topic 606 (“ASC 606”)), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new standard supersedes virtually all existing authoritative accounting guidance on revenue recognition and requires additional disclosures and greater use of estimates and judgments. We adopted the new standard in the first quarter of fiscal 2019. We reviewed substantially all of our contracts and revenue streams and determined that while the application of the new standard did not have a material change in the amount of or timing for recognizing revenue, it did impact our financial statement disclosures related to net sales and related accounts. See Note 4 for further details on these new disclosures.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Cash Flow Simplification.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flow (Topic 230): Classification of
Certain Cash Receipts and Cash Payments.
The new guidance is intended to reduce the diversity in practice around how certain transactions are classified in the statement of cash flows. This includes revised guidance on the cash flow classification of debt prepayments and debt extinguishment costs, contingent consideration payments made after a business combination and distributions received from equity method investments. We adopted the provisions of this guidance in the first quarter of fiscal 2019 with retrospective application. The adoption of this guidance did not have a material impact on our consolidated financial statements.
Restricted Cash
.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash,
which is intended to reduce diversity in the presentation of restricted cash and restricted cash equivalents in the cash flow statement. The statement requires that restricted cash and restricted cash equivalents be included as components of total cash and cash equivalents as presented on the statement of cash flows. The Company had not previously included restricted cash as a component of cash and cash equivalents as presented on its consolidated statement of cash flows. We adopted the new standard in the first quarter of fiscal 2019, under the retrospective adoption method, and prior year restricted cash has been reclassified to conform to current year presentation. See Note 5 for further details.
Share-Based Payments
.
In May 2017, the FASB issued ASU 2017-09,
Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting
, which amended the scope of modification accounting for share-based payment arrangements. The guidance focused on changes to the terms or conditions of share-based payment awards that would require the application of modification accounting and specifies that an entity would not apply modification accounting if the fair value, vesting conditions and classification of the awards are the same immediately before and after the modification. We adopted ASU 2017-09 in the first quarter of fiscal 2019. The adoption of this standard had no impact on our consolidated financial statements.
Recent
Accounting
Standards or Updates Not Yet Effective
Leases
.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, an update related to accounting for leases. The standard introduces a lessee model that will require lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases with terms of more than twelve months. Lessors will remain largely unchanged from current GAAP. In addition, ASU 2016-02 will require disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. We are required to adopt ASU 2016-02 in the first quarter of fiscal 2020 and expect to apply the modified retrospective approach, which allows for a cumulative-effect adjustment at the beginning of the period of adoption and does not require application of the guidance to comparative periods. We plan to elect certain practical expedients permitted under the transition guidance, including the package of practical expedients, which allows the Company to not reassess whether existing contracts contain leases, the lease classification of existing leases, or initial direct costs for existing leases. We also plan to elect not to separate lease and non-lease components and not to recognize a right-of-use asset and a lease liability for leases with an initial term of twelve months or less. In addition, we plan to not elect the hindsight practical expedient. A complete population of contracts that meet the definition of a lease under ASU 2016-02 has been identified. We have reviewed this inventory of leases and are in the final stage of implementing a third-party lease accounting software system and finalizing our control framework in preparation for the adoption of this standard in the first quarter of fiscal 2020. We currently expect the adoption to have a material impact to our consolidated balance sheet in order to recognize the right of use assets and related liabilities, including enhanced disclosures. However, we do not expect the adoption to have a material impact on our consolidated statements of comprehensive income or cash flows.
Goodwill Impairment Test
.
In January 2017, the FASB issued ASU 2017-04,
Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,
which removes the requirement for companies to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This accounting standards update will be effective for us beginning in the first quarter of fiscal 2021 and we do not expect the adoption to have a material impact on our consolidated financial statements.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Implementation Costs in a Cloud Computing Arrangement -
In August 2018, the FASB issued ASU 2018-15,
Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
, an update related to accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. This guidance aligns the requirements for capitalizing implementation costs in a cloud computing service contract with the guidance for capitalizing implementation costs to develop or obtain internal-use software. Capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. This accounting standards update will be effective for us beginning in the first quarter of fiscal 2021, with early adoption permitted. We are currently evaluating the impact of this accounting standards update, but do not expect the adoption to have a material impact on our consolidated financial statements.
No other new accounting pronouncements issued or effective as of June 30, 2019 have had or are expected to have an impact on our consolidated financial statements.
We adopted ASC 606 using the cumulative effect approach, which required us to apply the new guidance retrospectively to revenue transactions completed on or after July 1, 2018.
Upon adoption of ASC 606, we have elected the following accounting policies and practical expedients:
|
●
|
We recognize shipping and handling expense as fulfillment activities (rather than as a promised good or service) when the activities are performed even if those activities are performed after the control of the good has been transferred. Accordingly, we record the expenses for shipping and handling activities at the same time we recognize net sales.
|
|
●
|
We exclude from the measurement of the transaction price all taxes imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer, including sales, use, excise, value-added, and franchise taxes (collectively referred to as sales taxes).
|
|
●
|
We do not adjust net sales for the effects of financing components if the contract has a duration of one year or less, as we believe that we will receive payment from the customer within one year of when we transfer control of the related goods.
|
Our reported revenue (net sales) consist substantially of product sales. We report product sales net of discounts and recognize them at the point in time when control transfers to the customer. For sales to our customers in our wholesale segment, control typically transfers when the product is shipped. For sales in our retail segment, control generally transfers upon delivery to the customer.
Estimated refunds for returns and allowances are recorded using our historical return patterns. Under ASC 606, we record estimated refunds for sales returns on a gross basis rather than on a net basis and have recorded an asset for product we expect to receive back from customers in
Prepaid expenses and other current assets
and a corresponding refund liability in
Accounts
p
ayable and
a
ccrued
e
xpenses
on our consolidated balance sheets. At June 30, 2019 and 2018, these amounts were immaterial.
In many cases we receive deposits from customers before we have transferred control of our product to our customers, resulting in contract liabilities. These contract liabilities are reported as a current liability in
Customer Deposits
on our consolidated balance sheets. At June 30, 2018 we had customer deposits of $61.2 million, which were subsequently recognized as net sales upon delivery to the customer during fiscal 2019. Customer deposits totaled $56.7 million at June 30, 2019.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
The following table disaggregates our net sales by product category by segment for the fiscal year ended June 30, 2019:
(Amounts in thousands)
|
|
Wholesale
|
|
|
Retail
|
|
|
Total
|
|
Upholstery furniture
|
|
$
|
216,460
|
|
|
$
|
263,744
|
|
|
$
|
480,204
|
|
Case goods furniture
|
|
|
151,999
|
|
|
|
172,293
|
|
|
|
324,292
|
|
Home accents
|
|
|
77,978
|
|
|
|
130,325
|
|
|
|
208,303
|
|
Other
|
|
|
(4,886
|
)
|
|
|
23,467
|
|
|
|
18,581
|
|
Total before intercompany eliminations
|
|
$
|
441,551
|
|
|
$
|
589,829
|
|
|
|
1,031,380
|
|
Eliminations
|
|
|
|
|
|
|
|
|
|
|
(284,696
|
)
|
Consolidated Net Sales
|
|
|
|
|
|
|
|
|
|
$
|
746,684
|
|
|
●
|
Upholstery furniture includes fabric-covered items such as sleepers, recliners and other motion furniture, chairs, ottomans, custom pillows, sofas, loveseats, cut fabrics and leather.
|
|
●
|
Case goods furniture includes items such as beds, dressers, armoires, tables, chairs, buffets, entertainment units, home office furniture, and wooden accents.
|
|
●
|
Home accents includes items such as window treatments and drapery hardware, wall décor, florals, lighting, clocks, mattresses, bedspreads, throws, pillows, decorative accents, area rugs, wall coverings and home and garden furnishings.
|
|
●
|
Other includes net sales for product delivery, the Ethan Allen Hotel room rentals and banquets, our net share of third-party furniture protection plans, non-inventoried parts, and consulting and other fees, net of discounts, allowances and other sales incentives.
|
We did not hold any restricted cash at June 30, 2019 or 2018. At June 30, 2017 we held $7.3 million of restricted cash in lieu of providing letters of credit for the benefit of the provider of our workmen’s compensation and other insurance liabilities. By June 30, 2018, this obligation had been reduced to $5.9 million, which was then exchanged for a letter of credit for the benefit of this provider, and the restricted cash balance was reduced to zero. As such, we did not hold any restricted cash at June 30, 2019 or 2018.
(6)
|
F
air Value Measure
ment
|
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, the use of various valuation methodologies, including market, income and cost approaches is permissible. We consider the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability.
Fair Value Hierarchy
.
The accounting guidance for fair value measurements establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value based on the reliability of inputs. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect their placement within the fair value hierarchy levels. We have categorized our cash equivalents as Level 1 assets within the fair value hierarchy as there are quoted prices in active markets for identical assets or liabilities. There were no Level 2 or Level 3 assets or liabilities held by the Company as of June 30, 2019 and 2018.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
.
We measure certain assets at fair value on a non-recurring basis. These assets are recognized at fair value when they are deemed to be other-than-temporarily impaired. With the exception of the $9.9 million retail design center asset impairment charge, we did not record any additional other-than-temporary impairments on those assets required to be measured at fair value on a non-recurring basis during fiscal 2019. In addition, we did not hold any available-for-sale securities during fiscal 2019 and 2018, thus no fair value measurements were required. Refer to Note 10,
Restructuring and Impairment Activities,
for further disclosure of the retail design center asset impairment charge.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Inventories at June 30, 2019 and 2018 are summarized as follows (in thousands):
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
128,047
|
|
|
$
|
124,640
|
|
Work in process
|
|
|
9,185
|
|
|
|
12,057
|
|
Raw materials
|
|
|
26,661
|
|
|
|
27,947
|
|
Inventory reserve
|
|
|
(1,504
|
)
|
|
|
(1,632
|
)
|
Inventories, net
|
|
$
|
162,389
|
|
|
$
|
163,012
|
|
(8)
|
Property, Plant and Equipment
|
Property, plant and equipment at June 30, 2019 and 2018 are summarized as follows (in thousands):
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Land and improvements
|
|
$
|
83,343
|
|
|
$
|
82,899
|
|
Building and improvements
|
|
|
384,641
|
|
|
|
404,522
|
|
Machinery and equipment
|
|
|
123,396
|
|
|
|
123,606
|
|
Property, plant and equipment, gross
|
|
|
591,380
|
|
|
|
611,027
|
|
Less: accumulated depreciation and amortization
|
|
|
(346,134
|
)
|
|
|
(343,124
|
)
|
Property, plant and equipment, net
|
|
$
|
245,246
|
|
|
$
|
267,903
|
|
We recorded depreciation expense of $19.6 million, $19.8 million and $20.1 million in fiscal 2019, fiscal 2018 and fiscal 2017, respectively.
(9)
|
Goodwill and Other Intangible Assets
|
At both June 30, 2019 and 2018, we had $25.4 million of goodwill and $19.7 million of other indefinite-lived intangible assets consisting of Ethan Allen trade names, all of which is in our wholesale segment.
Both goodwill and indefinite-lived intangible assets are not amortized as they are estimated to have an indefinite life. We used a qualitative approach for our wholesale segment goodwill impairment test in fiscal 2019 due to the relative fair value of our reporting unit significantly exceeding the carrying value of the goodwill, as well as the operating performance of that respective reporting unit. Based on this qualitative assessment, we concluded that it is more likely than not that the fair value of our wholesale goodwill exceeded its carrying value.
We also used a qualitative approach for our trade names impairment test in fiscal 2019 and concluded that it is more likely than not that the fair value of our trade name exceeded its carrying value.
(10)
|
Restructuring and Impairment
Activities
|
Optimization of Manufacturing and Logistics
During fiscal 2019, we began to execute plans to consolidate our manufacturing and logistics operations as part of an overall strategy to maximize production efficiencies and maintain our competitive advantage. In April 2019, the following changes to our operations were announced as we continue to improve the vertical integration of our business operations.
|
●
|
Our 550,000 square foot Old Fort, North Carolina case goods manufacturing plant, while maintaining a lumber processing facility, will be converted into a state-of-the-art distribution center to support our national distribution structure and growing GSA contract business.
|
|
●
|
Consolidating approximately half of the case goods manufacturing from our Old Fort plant into our case goods plants in Orleans and Beecher Falls, Vermont, with the balance to be consolidated into our other manufacturing facilities.
|
|
●
|
Expansion of our Maiden, North Carolina campus with the addition of 80,000 square feet of operating space.
|
|
●
|
Distribution operations and art framing production at our Passaic, New Jersey facility will be discontinued with the distribution operations moved to our operations in North Carolina and the art framing operations outsourced.
|
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
As of June 30, 2019, we have permanently ceased operations at our Passaic, New Jersey facility and, for the most part, transferred our Old Fort case goods manufacturing operations to other existing operations. As a result, approximately 325 of our associates in Old Fort and 55 associates in Passaic were terminated. We plan to continue with the optimization project during fiscal 2020 as we convert Old Fort into a distribution center and expand our existing Maiden, North Carolina campus.
For these fourth quarter of fiscal 2019 actions, we recorded pre-tax restructuring, impairment, and other related charges totaling $8.3 million, consisting of $3.1 million in impairments of long-lived assets, $2.8 million in employee severance and other payroll and benefit costs, $2.0 million in inventory write-downs and manufacturing variances and $0.4 million of other associated costs, including freight and relocation expenses. The inventory write-downs and abnormal manufacturing overhead variances of $2.0 million were recorded within
Cost of Sales
with the remaining $6.3 million recorded within the line item
Restructuring and Impairment
Charges
in the consolidated statement of comprehensive income.
Retail Design Center
Long-Lived Assets
Impairment
During the fourth quarter of fiscal 2019, we recorded a non-cash impairment charge of $9.9 million related to the impairment of long-lived assets held at certain retail design center locations. Due to retail segment operating losses and a recent organizational realignment, we identified this as a fiscal 2019 triggering event requiring assessment of recoverability. The asset group used in the impairment analysis, which represented the lowest level for which identifiable cash flows were available and largely independent of the cash flows of other groups of assets, was the individual retail design center. We estimated future cash flows based on design center-level historical results, current trends, and operating and cash flow projections. The impairment charge of $9.9 million was recorded in the consolidated statement of comprehensive income within the line item
Restructuring and Impairment Charges.
Lease Exit Costs
and Other Charges
During the fourth quarter of fiscal 2019 we recorded $2.1 million of charges primarily related to remaining contractual obligations under leased retail design center space for which we ceased using as of June 30, 2019. The amount of the charge was equal to all costs that will continue to be incurred under our lease for its remaining term without economic benefit and measured at fair value when we ceased using the right conveyed by the contract. The pre-tax charge was recorded in the consolidated statement of comprehensive income within the line item
Restructuring and Impairment Charges.
Summary of Restructuring, Impairments and Other related charges
Restructuring, impairment and other related fiscal 2019 charges are summarized in the table below (in thousands):
|
|
Fiscal 2019
|
|
|
|
Charges
|
|
Optimization of manufacturing and logistics
|
|
$
|
6,330
|
|
Impairment of long-lived assets at retail design centers
|
|
|
9,913
|
|
Lease exit costs (remaining lease rentals)
|
|
|
2,662
|
|
Other charges (income)
|
|
|
(525
|
)
|
Total Restructuring, Impairments and other charges
|
|
$
|
18,380
|
|
|
|
|
|
|
Inventory write-downs and manufacturing overhead costs
|
|
|
1,994
|
(1)
|
Total
|
|
$
|
20,374
|
|
(1)
|
Inventory write-downs and manufacturing overhead costs are reported within
Cost of Sales
in the consolidated statements of comprehensive income.
|
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Restructuring, Impairments and Other Related Charges Rollforward
Activity in the Company’s restructuring reserves is summarized in the table below (in thousands):
|
|
Balance
|
|
|
Fiscal 2019 Activity
|
|
|
Balance
|
|
Optimization of Manufacturing and Logistics
|
|
June 30, 2018
|
|
|
New Charges
|
|
|
Non-Cash
|
|
|
Payments
|
|
|
June 30, 2019
|
|
Employee severance, other payroll and benefit costs
|
|
$
|
-
|
|
|
$
|
2,837
|
|
|
$
|
-
|
|
|
$
|
(1,123
|
)
|
|
$
|
1,714
|
(1)
|
Accelerated depreciation of long-lived assets
|
|
|
-
|
|
|
|
3,112
|
|
|
|
3,112
|
|
|
|
-
|
|
|
|
-
|
|
Inventory write-downs and manufacturing overhead costs
|
|
|
-
|
|
|
|
1,994
|
|
|
|
1,128
|
|
|
|
(866
|
)
|
|
|
-
|
|
Other exit and relocation costs
|
|
|
-
|
|
|
|
381
|
|
|
|
283
|
|
|
|
(98
|
)
|
|
|
-
|
|
Sub-total
|
|
|
-
|
|
|
|
8,324
|
|
|
|
4,523
|
|
|
|
(2,087
|
)
|
|
|
1,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Design Center Impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of long-lived assets
|
|
|
-
|
|
|
|
9,913
|
|
|
|
9,913
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Restructuring and Impairment Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease exit costs (remaining lease rentals)
|
|
|
-
|
|
|
|
2,662
|
|
|
|
(483
|
)
|
|
|
-
|
|
|
|
3,145
|
(2)
|
Other charges (income)
|
|
|
958
|
|
|
|
(525
|
)
|
|
|
-
|
|
|
|
(209
|
)
|
|
|
224
|
(3)
|
Sub-total
|
|
|
958
|
|
|
|
2,137
|
|
|
|
(483
|
)
|
|
|
(209
|
)
|
|
|
3,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Restructuring, Impairments and other exit costs
|
|
$
|
958
|
|
|
$
|
20,374
|
|
|
$
|
13,953
|
|
|
$
|
(2,296
|
)
|
|
$
|
5,083
|
|
(1)
|
Remaining severance expected to be paid during the first quarter of fiscal 2020. The balance of $1.7 million is reported within
Acc
rued compensation and benefit
s
in our consolidated balance sheet as of June 30, 2019.
|
(2)
|
The current portion of the remaining lease rentals as of June 30, 2019 is recorded within
A
ccounts payable and accrued expenses
and totaled $1.1 million while the non-current portion of $2.1 million is reflected in
O
ther long-term liabilities.
|
(3)
|
The remaining balance from the other charges (income) as of June 30, 2019 is recorded within
A
ccounts payable and accrued expenses
.
|
Total debt obligations at June 30, 2019 and 2018 consist of the following (in thousands):
|
|
2019
|
|
|
2018
|
|
Borrowings under revolving credit facility
|
|
$
|
-
|
|
|
$
|
-
|
|
Capital leases
|
|
|
1,066
|
|
|
|
1,680
|
|
Total debt
|
|
|
1,066
|
|
|
|
1,680
|
|
Less current maturities
|
|
|
550
|
|
|
|
584
|
|
Total long-term debt
|
|
$
|
516
|
|
|
$
|
1,096
|
|
Capital Leases
Certain of our property and equipment are held under capital leases and have maturities ranging from fiscal 2020 to fiscal 2023. Interest rates on our capital leases range from 3.8% to 5.1%.
Revolving Credit Facility
On December 21, 2018, the Company and most of its domestic subsidiaries (the “Loan Parties”) entered into a Second Amended and Restated Credit Agreement (the “Facility”). The Facility amends and restates the existing Amended and Restated Credit Agreement, dated as of October 21, 2014, as amended. The Facility provides a revolving credit line of up to $165 million, subject to borrowing base availability, and extends the maturity of the Facility to December 21, 2023. We incurred financing costs of $0.6 million under the Facility, which are being amortized over the remaining life of the Facility using the effective interest method.
At the Company’s option, revolving loans under the Facility bear interest, based on the average availability, at an annual rate of either (a) the London Interbank Offered rate (“LIBOR”) plus 1.5% to 2.0%, or (b) the higher of (i) the prime rate, (ii) the federal funds effective rate plus 0.5%, or (iii) LIBOR plus 1.0% plus in each case 0.5% to 1.0%.
The availability of credit at any given time under the Facility will be constrained by the terms and conditions of the Facility, including the amount of collateral available, a borrowing base formula based upon numerous factors including the value of eligible inventory and eligible accounts receivable, and other restrictions contained in the Facility. All obligations under the Facility are secured by assets of the Loan Parties including inventory, receivables and certain types of intellectual property.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Borrowings under the Facility
To fund a portion of the special cash dividend paid to shareholders in January 2019, we borrowed $16.0 million from the Facility having a maturity date of December 21, 2023. By June 30, 2019, we had repaid all of the borrowed amount using cash generated from operating activities. As of June 30, 2019 and 2018, we had no borrowings outstanding under the Facility.
During fiscal years 2019, 2018 and 2017, we recorded interest expense of $0.2 million, $0.1 million and $0.8 million, respectively, on our outstanding debt amounts.
Debt Obligations
During fiscal 2019, 2018 and 2017, the weighted-average interest rates applicable under our outstanding debt obligations were 4.2%, 3.3% and 2.4%, respectively.
The following table summarizes, as of June 30, 2019, the timing of cash payments related to our outstanding long-term debt (capital lease) obligations for each of the five fiscal years subsequent to June 30, 2019, and thereafter (in thousands).
Fiscal Years Ended June 30,
|
|
|
|
|
2020
|
|
$
|
550
|
|
2021
|
|
|
437
|
|
2022
|
|
|
60
|
|
2023
|
|
|
19
|
|
2024
|
|
|
-
|
|
2025 and thereafter
|
|
|
-
|
|
Total scheduled debt payments
|
|
$
|
1,066
|
|
Covenants and Other Ratios
The Facility contains various restrictive and affirmative covenants, including required financial reporting, limitations on the ability to grant liens, make loans or other investments, incur additional debt, issue additional equity, merge or consolidate with or into another person, sell assets, pay dividends or make other distributions or enter into transactions with affiliates, along with other restrictions and limitations similar to those frequently found in credit agreements of this type and size. Loans under the Facility may become immediately due and payable upon certain events of default (including failure to comply with covenants, change of control or cross-defaults) as set forth in the Facility.
The Facility does not contain any significant financial ratio covenants or coverage ratio covenants other than a fixed charge coverage ratio covenant based on the ratio of (a) EBITDA, plus cash Rentals, minus Unfinanced Capital Expenditures to (b) Fixed Charges, as such terms are defined in the Facility (the “FCCR Covenant”). The FCCR Covenant only applies in certain limited circumstances, including when the unused availability under the Facility drops below $18.5 million. The FCCR Covenant ratio is set at 1.0 and measured on a trailing twelve-month basis.
At both June 30, 2019 and 2018, there was $6.1 million and $6.2 million, respectively, of standby letters of credit outstanding under the Facility. Total availability under the Facility was $158.9 million at June 30, 2019 and $108.8 million at June 30, 2018. At both June 30, 2019 and June 30, 2018, we were in compliance with all the covenants under the Facility.
(12)
|
Other Long-term Liabilities
|
The following table summarizes the nature of the amounts within other long-term liabilities at June 30, 2019 and 2018 (in thousands):
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Deferred rent
|
|
$
|
17,130
|
|
|
$
|
18,020
|
|
Unrecognized tax benefits (non-current)
|
|
|
1,616
|
|
|
|
1,840
|
|
Accrued lease exit costs
|
|
|
2,089
|
|
|
|
-
|
|
Other long-term liabilities
|
|
|
1,176
|
|
|
|
187
|
|
Other long-term liabilities
|
|
$
|
22,011
|
|
|
$
|
20,047
|
|
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Income tax expense attributable to income before income taxes consists of the following for the fiscal years ended June 30 (in thousands):
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
10,133
|
|
|
$
|
10,289
|
|
|
$
|
15,265
|
|
State
|
|
|
1,237
|
|
|
|
1,689
|
|
|
|
1,585
|
|
Foreign
|
|
|
304
|
|
|
|
824
|
|
|
|
445
|
|
Total current
|
|
|
11,674
|
|
|
|
12,802
|
|
|
|
17,295
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(3,092
|
)
|
|
|
174
|
|
|
|
3,413
|
|
State
|
|
|
(381
|
)
|
|
|
(124
|
)
|
|
|
85
|
|
Foreign
|
|
|
(39
|
)
|
|
|
(156
|
)
|
|
|
8
|
|
Total deferred
|
|
|
(3,512
|
)
|
|
|
(106
|
)
|
|
|
3,506
|
|
Income tax expense
|
|
$
|
8,162
|
|
|
$
|
12,696
|
|
|
$
|
20,801
|
|
The following is a reconciliation of expected income tax expense (benefit) (computed by applying the federal statutory income tax rate to income before taxes) to actual income tax expense (benefit) (in thousands):
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected income tax expense
|
|
$
|
7,111
|
|
|
|
21.0
|
%
|
|
$
|
13,739
|
|
|
|
28.0
|
%
|
|
$
|
19,947
|
|
|
|
35.0
|
%
|
State income taxes, net of federal income tax
|
|
|
737
|
|
|
|
2.2
|
%
|
|
|
1,263
|
|
|
|
2.6
|
%
|
|
|
1,403
|
|
|
|
2.5
|
%
|
Valuation allowance
|
|
|
602
|
|
|
|
1.8
|
%
|
|
|
42
|
|
|
|
0.1
|
%
|
|
|
329
|
|
|
|
0.6
|
%
|
Re-measurement of deferred taxes
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
(2,651
|
)
|
|
|
-5.4
|
%
|
|
|
-
|
|
|
|
-
|
|
Section 199 Qualified Production Activities deduction
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
(678
|
)
|
|
|
-1.4
|
%
|
|
|
(999
|
)
|
|
|
-1.8
|
%
|
Section 250 Foreign Derived Intangible Income deduction
|
|
|
(161
|
)
|
|
|
-0.5
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Unrecognized tax expense (benefit)
|
|
|
26
|
|
|
|
0.1
|
%
|
|
|
55
|
|
|
|
0.1
|
%
|
|
|
(48
|
)
|
|
|
-0.1
|
%
|
Stock-based compensation - forfeitures and exercises
|
|
|
184
|
|
|
|
0.5
|
%
|
|
|
570
|
|
|
|
1.2
|
%
|
|
|
-
|
|
|
|
-
|
|
Other, net
|
|
|
(337
|
)
|
|
|
-1.0
|
%
|
|
|
356
|
|
|
|
0.7
|
%
|
|
|
169
|
|
|
|
0.3
|
%
|
Actual income tax expense
|
|
$
|
8,162
|
|
|
|
24.1
|
%
|
|
$
|
12,696
|
|
|
|
25.9
|
%
|
|
$
|
20,801
|
|
|
|
36.5
|
%
|
The significant components of deferred tax assets recorded within the consolidated balance sheet were as follows (in thousands):
|
|
2019
|
|
|
2018
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Employee compensation accruals
|
|
$
|
2,697
|
|
|
$
|
2,729
|
|
Stock-based compensation
|
|
|
715
|
|
|
|
933
|
|
Deferred rent credits
|
|
|
4,184
|
|
|
|
4,407
|
|
Net operating loss carryforwards
|
|
|
4,259
|
|
|
|
3,959
|
|
Property, plant and equipment
|
|
|
1,021
|
|
|
|
-
|
|
Goodwill
|
|
|
77
|
|
|
|
328
|
|
Reserves
|
|
|
863
|
|
|
|
247
|
|
Other, net
|
|
|
1,401
|
|
|
|
1,460
|
|
Subtotal deferred tax assets
|
|
|
15,217
|
|
|
|
14,063
|
|
Less: Valuation allowance
|
|
|
(3,197
|
)
|
|
|
(2,527
|
)
|
Total net deferred tax assets
|
|
$
|
12,020
|
|
|
$
|
11,536
|
|
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
The significant components of deferred tax liabilities recorded within the consolidated balance sheet were as follows (in thousands)
|
|
2019
|
|
|
2018
|
|
Property, plant and equipment
|
|
$
|
-
|
|
|
$
|
2,827
|
|
Intangible assets other than goodwill
|
|
|
9,007
|
|
|
|
8,951
|
|
Commissions
|
|
|
1,974
|
|
|
|
2,230
|
|
Total deferred tax liability
|
|
$
|
10,981
|
|
|
$
|
14,008
|
|
The deferred tax balances are classified in the consolidated balance sheets as follows at June 30 (in thousands):
|
|
2019
|
|
|
2018
|
|
Non-current assets
|
|
$
|
2,108
|
|
|
$
|
1,688
|
|
Non-current liabilities
|
|
|
1,069
|
|
|
|
4,160
|
|
Total net deferred tax asset (liability)
|
|
$
|
1,039
|
|
|
$
|
(2,472
|
)
|
Commencing with fiscal 2018 the Company is prospectively reporting its deferred tax assets and liabilities as non-current in conformance with ASU 2015-17,
Balance Sheet Classification of Deferred Tax Assets
. Prior to that, current deferred tax assets and liabilities and non-current deferred tax assets and liabilities were presented net in the consolidated balance sheets.
We evaluate our deferred tax assets to determine if the “more likely than
not
”
standard of evidence has
not
been met thereby supporting the need for a valuation allowance. A valuation allowance must be established for deferred tax assets when it is not more likely than not that assets will be realized. At June 30, 2019, such an allowance was in place against the Belgian and Canadian foreign tax assets, and totaled $3.2 million compared to $2.5 million at June 30, 2018.
The Company’s deferred income tax assets at June 30, 2019 with respect to the net operating losses expire as follows (in thousands):
|
|
Deferred Income
|
|
|
Net Operating Loss
|
|
|
|
Tax Assets
|
|
|
Carryforwards
|
|
United States (federal and state), expiring between 2023 and 2032
|
|
$
|
1,168
|
|
|
$
|
20,662
|
|
Foreign, expiring between 2034 and 2039
|
|
$
|
3,091
|
|
|
$
|
9,566
|
|
Deferred federal income taxes were previously
not provided for unremitted foreign earnings of our foreign subsidiaries because we expected those earnings to be indefinitely reinvested. As part of the Tax Act, the Company reported the Deemed Repatriation Transition Tax (the “Transition Tax”) on previously untaxed accumulated earnings and profits (“E&P”) of certain of our foreign subsidiaries. To determine the amount of the Transition Tax, we determined, in addition to other factors, the amount of post- 1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. We reported a Transition Tax obligation of $0.1 million for the fiscal year ended June 30, 2018.
On December 22, 2017, the Tax Act was enacted. Among the significant changes to the United States Internal Revenue Code, the Tax Act lowered the United States federal corporate income tax rate (“Federal Tax Rate”) from 35% to 21% effective January 1, 2018, introduced a limitation on the deduction of certain interest expenses, introduced a deduction for certain business capital expenditures and introduced a system of taxing foreign-sourced income from multinational corporations. The Company computed its income tax expense for the 2018 fiscal year using a blended Federal Tax Rate of 28%. The 21% Federal Tax Rate applies to fiscal years ending June 30, 2019 and each year thereafter. The Company re-measured its net deferred tax assets and liabilities using the Federal Tax Rate that would apply when these amounts were expected to reverse. At June 30, 2018, the Company’s re-measurement of its deferred tax assets and liabilities resulted in a discrete tax benefit $2.7 million, which lowered the effective tax rate by 5.4% for that fiscal year.
Uncertain Tax Positions
We recognize interest and penalties related to income tax matters as a component of income tax expense. If the $2.2 million of unrecognized tax benefits and related interest and penalties as of June 30, 2019 were recognized, approximately $1.7 million would be recorded as a benefit to income tax expense.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
A reconciliation of the beginning and ending amount of unrecognized tax benefits including related interest and penalties as of June 30, 2019 and 2018 is as follows (in thousands):
|
|
2019
|
|
|
2018
|
|
Beginning balance
|
|
$
|
2,187
|
|
|
$
|
2,106
|
|
Additions for tax positions taken during the current year
|
|
|
329
|
|
|
|
360
|
|
Additions for tax positions taken during the prior year
|
|
|
143
|
|
|
|
107
|
|
Reductions for tax positions taken in prior years
|
|
|
(450
|
)
|
|
|
(386
|
)
|
Decreases related to settlements with taxing authorities
|
|
|
-
|
|
|
|
-
|
|
Ending balance
|
|
$
|
2,209
|
|
|
$
|
2,187
|
|
It is reasonably possible that various issues relating to approximately $0.6 million of the total gross unrecognized tax benefits as of June 30, 2019 will be resolved within the next twelve months as exams are completed or statutes expire. If recognized, approximately $0.6 million of unrecognized tax benefits would reduce our tax expense in the period realized. However, actual results could differ from those currently anticipated.
The Company conducts business globally and, as a result, the Company or
one or more of its subsidiaries files income tax returns in the United States, various state, and foreign jurisdictions. In the normal course of business, the Company is subject to examination by the taxing authorities in such major jurisdictions as the United States, Canada, Mexico, Belgium and Honduras. As of June 30, 2019, the Company and certain subsidiaries are currently under audit from 2015 through 2017 in the United States. While the amount of uncertain tax benefits with respect to the entities and years under audit may change within the next
twelve months, it is
not anticipated that any of the changes will be significant.
(14)
|
Shareholders’ Equity
|
Shares Authorized for Issuance
Our authorized capital stock consists of 150,000,000 shares of common stock, par value $0.01 per share, and 1,055,000 shares of Preferred Stock, par value $0.01 per share. The Board of Directors may provide for the issuance of all or any shares of Preferred Stock in one or more classes or series, and to fix for each such class or series such voting powers, full or limited, or no voting powers, and such distinctive designations, preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions adopted by the Board of Directors providing for the issuance of such class or series and as may be permitted by the General Corporation Law of the State of Delaware. As of June 30, 2019 and 2018, there were no shares of Preferred Stock issued or outstanding.
Share Repurchase Program
At June 30, 2019, we had a remaining Board authorization to repurchase 2,518,046 shares of our common stock pursuant to our program. There is no expiration date on the repurchase authorization and the amount and timing of future share repurchases, if any, will be determined as market and business conditions warrant.
During the past three fiscal years, we repurchased the following shares of our common stock (trade date basis) under our existing share repurchase program:
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Common shares repurchased
|
|
|
-
|
|
|
|
950,484
|
|
|
|
357,363
|
|
Cost to repurchase common shares
|
|
$
|
-
|
|
|
$
|
22,019,381
|
|
|
$
|
10,246,302
|
|
Average price per share
|
|
$
|
-
|
|
|
$
|
23.17
|
|
|
$
|
28.67
|
|
For the fiscal years presented above, we funded our purchases of treasury stock with existing cash on hand, cash generated through current period operations and our credit facility. All our common stock repurchases are recorded as treasury stock and result in a reduction of shareholders’ equity.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Basic and diluted earnings per share are calculated using the following weighted average share data (in thousands):
|
|
Years ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Weighted average shares outstanding for basic calculation
|
|
|
26,695
|
|
|
|
27,321
|
|
|
|
27,679
|
|
Dilutive effect of stock options and other share-based awards
|
|
|
56
|
|
|
|
304
|
|
|
|
279
|
|
Weighted average shares outstanding adjusted for dilution calculation
|
|
|
26,751
|
|
|
|
27,625
|
|
|
|
27,958
|
|
Dilutive potential common shares consist of stock options and unvested restricted stock awards. In fiscal 2019, 2018 and 2017, stock options to purchase 231,717, 195,318, and 379,350 common shares, respectively, were excluded from the diluted EPS calculations because their inclusion would have been anti-dilutive.
As of June 30, 2019, 2018 and 2017, the number of performance-based equity award grants excluded from the calculation of diluted EPS was 187,882, 210,836 and 215,613, respectively
.
Performance-based awards are excluded from the calculation of diluted EPS unless the performance criteria are probable of being achieved as of the balance sheet date.
(16)
|
Accumulated Other Comprehensive Income (Loss)
|
The following table sets forth the activity in accumulated other comprehensive loss (in thousands):
|
|
Years ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Beginning balance at July 1
|
|
$
|
(6,171
|
)
|
|
$
|
(4,131
|
)
|
Changes before reclassifications
|
|
|
520
|
|
|
|
(2,040
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
Current period other comprehensive income (loss)
|
|
|
520
|
|
|
|
(2,040
|
)
|
Ending balance at June 30
|
|
$
|
(5,651
|
)
|
|
$
|
(6,171
|
)
|
Accumulated other comprehensive income consists of foreign currency translation adjustments which are the result of changes in foreign currency exchange rates related to our operations in Canada, Belgium, Honduras, and Mexico, and exclude income taxes given that the earnings of non-U.S. subsidiaries are deemed to be indefinitely reinvested.
(17)
|
Share-Bas
ed Compensation
|
Share-based compensation expense totaled $0.1 million, $1.0 million, and $1.3 million in fiscal 2019, 2018 and 2017, respectively. These amounts have been included in the consolidated statements of comprehensive income within selling, general and administrative expenses. During fiscal 2019, 2018, and 2017, we recognized related tax benefits associated with our share-based compensation arrangements totaling $0.1 million, $0.5 million, and $0.5 million, respectively (before valuation allowances). Such amounts have been included in the consolidated statements of comprehensive income within income tax expense. There was no stock-based compensation capitalized as of June 30, 2019 and 2018, respectively.
At June 30, 2019, we had 1,586,906 shares of common stock available for future issuance pursuant to the Ethan Allen Interiors Inc. Stock Incentive Plan (the “Plan”). Under this Plan, the aggregate number of shares of common stock that may be issued through awards of any form is 6,487,867 shares. The Plan provides for the grant of non-compensatory stock options to eligible employees and non-employee directors. Stock options under the Plan are non-qualified under section 422 of the Internal Revenue Code and allow for the purchase of shares of our common stock. The Plan also provides for the issuance of stock appreciation rights (“SARs”) on issued options, however no SARs have been issued to date. The option awards are approved by the Compensation Committee of the Board of Directors after consideration of recommendations proposed by the Chief Executive Officer. Options are generally granted with an exercise price equal to the market price of our common stock at the date of grant, vest ratably over a specified service period, and have a contractual term of 10 years. Equity awards can also include performance vesting conditions. Company policy further requires an additional one year holding period beyond the service vest date for certain executives. Beginning January 31, 2014, grants to employees include both company performance and service vesting conditions (as further described below). Grants to independent directors have a three year service vesting condition. The following is a description of equity grants made under the Plan.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Stock Option Awards
A summary of stock option activity during the fiscal year ended June 30, 2019 is presented below.
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic Value
|
|
|
|
Options
|
|
|
Price
|
|
|
Term (yrs)
|
|
|
($ in thousands)
|
|
Outstanding - June 30, 2018
|
|
|
561,595
|
|
|
$
|
21.70
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
25,590
|
|
|
$
|
23.45
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(52,250
|
)
|
|
$
|
15.73
|
|
|
|
|
|
|
|
|
|
Canceled (forfeited/expired)
|
|
|
(156,024
|
)
|
|
$
|
23.36
|
|
|
|
|
|
|
|
|
|
Outstanding - June 30, 2019
|
|
|
378,911
|
|
|
$
|
21.95
|
|
|
|
4.4
|
|
|
$
|
990
|
|
Exercisable - June 30, 2019
|
|
|
319,024
|
|
|
$
|
21.04
|
|
|
|
3.7
|
|
|
$
|
990
|
|
The aggregate intrinsic value of options exercised during fiscal 2019, 2018 and 2017 was $0.3 million, $0.1 million, and $0.8 million, respectively.
As of June 30, 2019, $0.2 million of total unrecognized compensation expense related to non-vested stock options is expected to be recognized over a weighted average period of 1.5 years. A summary of the nonvested shares as of June 30, 2019 and changes during the year then ended is presented below.
|
|
|
|
|
|
Weighted Average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
Nonvested June 30, 2018
|
|
|
108,172
|
|
|
$
|
27.74
|
|
Granted
|
|
|
25,590
|
|
|
$
|
23.45
|
|
Vested
|
|
|
(63,436
|
)
|
|
$
|
27.16
|
|
Canceled (forfeited/expired)
|
|
|
(10,439
|
)
|
|
$
|
25.95
|
|
Nonvested at June 30, 2019
|
|
|
59,887
|
|
|
$
|
26.84
|
|
We estimate, as of the date of grant, the fair value of stock options awarded using the Black-Scholes option pricing model. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs, including anticipated changes in the underlying stock price (i.e. expected volatility) and option exercise activity (i.e. expected life). Expected volatility is based on the historical volatility of our stock. The risk-free rate of return is based on the United States Treasury bill rate extrapolated to the term matching the expected life of the grant. The dividend yield is based on the annualized dividend rate at the grant date relative to the grant date stock price. The expected life of options granted, which represents the period of time that the options are expected to be outstanding, is based, primarily, on historical data.
There were no stock option awards granted to employees during each of the past three fiscal years. Non-employee (independent) directors were granted stock options each year and valued using the Black-Scholes option pricing model with the following weighted average assumptions:
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Volatility
|
|
|
31.3
|
%
|
|
|
31.5
|
%
|
|
|
36.8
|
%
|
Risk-free rate of return
|
|
|
2.80
|
%
|
|
|
1.76
|
%
|
|
|
1.03
|
%
|
Dividend yield
|
|
|
3.24
|
%
|
|
|
2.47
|
%
|
|
|
1.96
|
%
|
Expected average life (years)
|
|
|
5.0
|
|
|
|
4.6
|
|
|
|
5.0
|
|
Grant date fair value ($)
|
|
$
|
5.30
|
|
|
$
|
6.93
|
|
|
$
|
8.30
|
|
Fair value as a % of exercise price
|
|
|
22.6
|
%
|
|
|
22.5
|
%
|
|
|
23.9
|
%
|
Stock Unit Awards
Under the Plan, the Compensation Committee of the Board of Directors was authorized to award common shares to certain employees based on the attainment of certain financial goals over a given performance period. The awards are offered at no cost to the employees. In the event of an employee's termination during the vesting period, the potential right to earn shares under this program is generally forfeited.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Payout of these grants depends on our financial performance (80%) and a market-based condition based on the total return our shareholders receive on their investment in our stock relative to returns earned through investments in other peer companies (20%). The performance award opportunity ranges from 50% of the employee's target award if minimum performance requirements are met to a maximum of 125% of the target award based on the attainment of certain financial and shareholder-return goals over a specific performance period, which is generally three fiscal years. The number of awards that will vest, as well as unearned and canceled awards, depend on the achievement of certain financial and shareholder-return goals over the three-year performance periods, and will be settled in shares if service conditions are met, requiring employees to remain employed with us through the end of the three-year performance periods. We account for stock unit awards as equity-based awards because upon vesting, they will be settled in common shares. We expense as compensation cost the fair value of the shares as of the grant date and amortize expense ratably over the total performance and time vest period, considering the probability that we will satisfy the performance goals.
The following table summarizes the performance-based stock units’ activity during fiscal 2019 at the maximum award amounts based upon the respective performance share agreements:
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Units
|
|
|
Fair Value
|
|
Outstanding at June 30, 2018
|
|
|
330,369
|
|
|
$
|
26.15
|
|
Granted
|
|
|
105,644
|
|
|
$
|
18.33
|
|
Vested
|
|
|
(7,654
|
)
|
|
$
|
26.79
|
|
Canceled (forfeited/expired)
|
|
|
(114,477
|
)
|
|
$
|
28.02
|
|
Outstanding at June 30, 2019
|
|
|
313,882
|
|
|
$
|
22.82
|
|
We estimate, as of the date of grant, the fair value of Performance Units with a discounted cash flow model, using as model inputs the risk-free rate of return as the discount rate, dividend yield for dividends not paid during the restriction period, and a discount for lack of marketability for a one-year post-vest holding period. The lack of marketability discount used is the present value of a future put option using Monte-Carlo and Black-Scholes pricing models. The weighted average assumptions used for the fiscal years ended June 30 are noted in the following table.
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Volatility
|
|
|
32.1
|
%
|
|
|
32.9
|
%
|
|
|
30.8
|
%
|
Risk-free rate of return
|
|
|
2.72
|
%
|
|
|
1.41
|
%
|
|
|
0.92
|
%
|
Dividend yield
|
|
|
3.24
|
%
|
|
|
2.47
|
%
|
|
|
1.97
|
%
|
Expected average life (years)
|
|
|
3.0
|
|
|
|
1.9
|
|
|
|
2.0
|
|
Share-based compensation expenses related to performance-based shares recognized in our consolidated statements of comprehensive income are presented in the following table for the fiscal years ended June 30 (in thousands).
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Fiscal 2016 grants
|
|
$
|
5
|
|
|
$
|
92
|
|
|
$
|
794
|
|
Fiscal 2017 grants
|
|
|
-
|
|
|
|
(12
|
)
|
|
|
12
|
|
Fiscal 2018 grants
|
|
|
(457
|
)
|
|
|
457
|
|
|
|
-
|
|
Fiscal 2019 grants
|
|
|
321
|
|
|
|
-
|
|
|
|
-
|
|
Total expense
|
|
$
|
(131
|
)
|
|
$
|
537
|
|
|
$
|
806
|
|
As of June 30, 2019, we estimate $0.7 million of total unrecognized compensation cost related to outstanding stock units granted under the Plan. That cost is expected to be recognized over a weighted average period of 2.0 years.
Restricted Stock Awards
There was no restricted stock award activity during fiscal 2019. As of June 30, 2019 or 2018, there were no restricted stock awards outstanding, respectively.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
(18)
|
Employee
Retirement
Programs
|
The Ethan Allen Retirement Savings Plan
(the “401(k) Plan”)
The Company established its 401(k) Plan in 1994. The 401(k) Plan is a defined contribution plan covering all full-time, United States employees and is subject to the provisions of the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code of 1986 (“IRC”). All United States employees of the Company are eligible to participate in the 401(k) Plan on the first day of any subsequent April, July, October or January coincident with or next following the three-month anniversary of their date of hire. Each year, participants may contribute up to 100% of their eligible annual compensation, subject to annual limitations established by the IRC. We may, at our discretion, make a matching and profit sharing contribution to the 401(k) Plan on behalf of each eligible participant, which vests immediately. The Company contributed $3.4 million, $3.4 million and $3.5 million in matching and profit sharing contributions to employee 401(k) accounts during fiscal 2019, 2018 and 2017, respectively.
Other Retirement Plans and Benefits
Ethan Allen provides additional benefits to selected members of management in the form of previously entered deferred compensation arrangements and a management cash bonus and other incentive programs. The total cost of these benefits was $0.7 million, $0.1 million, and $1.0 million in fiscal 2019, 2018 and 2017, respectively.
Operating segments are defined as (i) components of an enterprise that engage in business activities from which they may earn revenue and incur expense, (ii) have operating results that are regularly reviewed by the enterprise’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and (iii) for which discrete financial information is available. The Company’s Chief Executive Officer is its chief operating decision maker (“CODM”) and reviews financial information at the operating segment level and is responsible for making decisions about resources allocated amongst the operating segments based on actual results. Our operating segments are aligned with how the Company, including its CODM, manages the business. As such, our reportable operating segments are the Wholesale segment and the Retail segment.
Our wholesale and retail operating segments represent strategic business areas of our vertically integrated enterprise that operate separately and provide their own distinctive services. This vertical structure enables us to offer our complete line of home furnishings and accents more effectively while controlling quality and cost. We evaluate performance of the respective segments based upon revenues and operating income. Inter-segment transactions result, primarily, from the wholesale sale of inventory to the retail segment, including the related profit margin.
As of June 30, 2019, the Company operated 144 design centers (our retail segment) and our independent retailers operated 158 design centers. Our wholesale segment net sales include sales to our retail segment, which are eliminated in consolidation, and sales to our independent retailers. Our retail segment net sales accounted for 79% of our consolidated net sales in fiscal 2019. Our wholesale segment net sales to independent retailers and other third parties accounted for the remaining 21%. Our ten largest customers were all within our wholesale segment and represent 12.4% of our consolidated net sales in fiscal 2019. These customers are the GSA and nine independent retailers who operate 116 design centers.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Information for each of the last three fiscal years ended June 30 is provided below (in thousands):
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale segment
|
|
$
|
441,551
|
|
|
$
|
475,731
|
|
|
$
|
453,326
|
|
Retail segment
|
|
|
589,829
|
|
|
|
587,502
|
|
|
|
603,677
|
|
Elimination of inter-company sales
|
|
|
(284,696
|
)
|
|
|
(296,449
|
)
|
|
|
(293,618
|
)
|
Consolidated Total
|
|
$
|
746,684
|
|
|
$
|
766,784
|
|
|
$
|
763,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale segment
|
|
$
|
42,481
|
|
|
$
|
48,499
|
|
|
$
|
53,505
|
|
Retail segment
|
|
|
(10,529
|
)
|
|
|
(1,738
|
)
|
|
|
1,198
|
|
Adjustment of intercompany profit
(1)
|
|
|
1,995
|
|
|
|
2,106
|
|
|
|
3,247
|
|
Consolidated Total
|
|
$
|
33,947
|
|
|
$
|
48,867
|
|
|
$
|
57,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale segment
|
|
$
|
7,560
|
|
|
$
|
7,752
|
|
|
$
|
7,550
|
|
Retail segment
|
|
|
12,077
|
|
|
|
12,079
|
|
|
|
12,565
|
|
Consolidated Total
|
|
$
|
19,637
|
|
|
$
|
19,831
|
|
|
$
|
20,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale segment
|
|
$
|
3,340
|
|
|
$
|
4,286
|
|
|
$
|
8,589
|
|
Retail segment
|
|
|
5,780
|
|
|
|
8,200
|
|
|
|
9,056
|
|
Consolidated Total
|
|
$
|
9,120
|
|
|
$
|
12,486
|
|
|
$
|
17,645
|
|
(1)
|
Represents the change in wholesale profit contained in Company-owned design center inventory at the end of the period.
|
|
|
June 30,
|
|
($ in thousands)
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Total Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale segment
|
|
$
|
237,354
|
|
|
$
|
241,616
|
|
|
$
|
279,364
|
|
Retail segment
|
|
|
299,125
|
|
|
|
317,590
|
|
|
|
319,341
|
|
Inventory profit elimination
(1)
|
|
|
(26,128
|
)
|
|
|
(28,773
|
)
|
|
|
(30,483
|
)
|
Consolidated Total
|
|
$
|
510,351
|
|
|
$
|
530,433
|
|
|
$
|
568,222
|
|
(1)
|
The wholesale profit contained in the retail segment inventory that has not yet been realized. These profits are realized when the related inventory is sold.
|
Geographic Information
Our international net sales are comprised of our wholesale segment sales to independent retailers and our retail segment sales to consumers through the Company operated design centers.
The number of international design centers and the related net sales as a percent of our consolidated net sales is shown in the following table.
|
|
Fiscal Year Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Independent design centers
|
|
|
118
|
|
|
|
104
|
|
|
|
107
|
|
Company operated design centers
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
Total international design centers
|
|
|
124
|
|
|
|
110
|
|
|
|
113
|
|
% of total design centers international
|
|
|
41.1
|
%
|
|
|
37.2
|
%
|
|
|
37.3
|
%
|
% of consolidated net sales
|
|
|
6.8
|
%
|
|
|
10.2
|
%
|
|
|
10.0
|
%
|
Sales by Country
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
United States
|
|
|
93.2
|
%
|
|
|
89.8
|
%
|
|
|
90.0
|
%
|
All Others
|
|
|
6.8
|
%
|
|
|
10.2
|
%
|
|
|
10.0
|
%
|
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
The following table sets forth long-lived assets by geographic area at June 30 (in thousands):
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
United States
|
|
$
|
218,034
|
|
|
$
|
239,567
|
|
|
$
|
239,885
|
|
Mexico
|
|
|
18,144
|
|
|
|
18,323
|
|
|
|
20,142
|
|
Honduras
|
|
|
8,057
|
|
|
|
8,637
|
|
|
|
9,011
|
|
Canada
|
|
|
1,011
|
|
|
|
1,376
|
|
|
|
1,160
|
|
Total long-lived assets
(1)
|
|
$
|
245,246
|
|
|
$
|
267,903
|
|
|
$
|
270,198
|
|
(1)
|
Long-lived assets consist of property, plant and equipment, net of accumulated depreciation and amortization and exclude goodwill, intangible assets, deferred taxes and other assets.
|
(20)
|
Commitments and Contingencies
|
Commitments represent obligations, such as those for future purchases of goods or services that are not yet recorded on the balance sheet as liabilities. We record liabilities for commitments when incurred (i.e., when the goods or services are received).
Lease Commitments
We lease real property and equipment under various operating lease agreements expiring at various times through 2039. Of the 144 Company operated retail design centers, 94 of the properties were leased as of June 30, 2019. Leases covering these retail design center locations and other equipment may require, in addition to stated minimums, contingent rentals based on retail sales or equipment usage. Generally, the leases provide for renewal for various periods at stipulated rates.
Total minimum rental payments associated with our leases are recorded as rent expense (a component of
Selling, General & Administrative
expense
s
) on a straight-line basis over the periods of the respective non-cancelable lease terms. Future minimum lease payments under non-cancelable operating leases for each of the five fiscal years subsequent to June 30, 2019, and thereafter are shown in the table below. Also shown are minimum future rentals from subleases, which will partially offset lease payments in the aggregate (in thousands):
|
|
Future Minimum
|
|
|
Future Minimum
|
|
Fiscal Year Ended June 30,
|
|
Lease Payments
|
|
|
Sublease Rentals
|
|
2020
|
|
$
|
33,761
|
|
|
$
|
1,800
|
|
2021
|
|
|
30,534
|
|
|
|
1,611
|
|
2022
|
|
|
26,443
|
|
|
|
1,491
|
|
2023
|
|
|
20,276
|
|
|
|
1,055
|
|
2024
|
|
|
15,345
|
|
|
|
403
|
|
2025 and thereafter
|
|
|
43,500
|
|
|
|
721
|
|
Total
|
|
$
|
169,859
|
|
|
$
|
7,081
|
|
Total rent expense for each of the past three fiscal years ended June 30 was as follows (in thousands):
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Basic rentals under operating leases
|
|
$
|
34,378
|
|
|
$
|
33,734
|
|
|
$
|
33,033
|
|
Contingent rentals under operating leases
|
|
|
76
|
|
|
|
133
|
|
|
|
142
|
|
Basic and contingent rentals
|
|
|
34,454
|
|
|
|
33,867
|
|
|
|
33,175
|
|
Less: sublease rent
|
|
|
(2,060
|
)
|
|
|
(1,853
|
)
|
|
|
(1,824
|
)
|
Total rent expense
|
|
$
|
32,394
|
|
|
$
|
32,014
|
|
|
$
|
31,351
|
|
Deferred rent credits and deferred lease incentives are reflected in the consolidated balance sheets under the caption
O
ther long-term liabilities
, and are amortized over the respective underlying lease terms on a straight-line basis as a reduction of rent expense. Amounts recorded at June 30 are as follows (in thousands):
|
|
2019
|
|
|
2018
|
|
Deferred rent credits
|
|
$
|
11,987
|
|
|
$
|
13,488
|
|
Deferred lease incentives
|
|
|
5,143
|
|
|
|
4,532
|
|
|
|
$
|
17,130
|
|
|
$
|
18,020
|
|
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Purchase Commitments with Suppliers
Purchase obligations are defined as agreements that are enforceable and legally binding that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. We do, in the normal course of business, regularly initiate purchase orders for the procurement of (i) selected finished goods sourced from third-party suppliers, (ii) lumber, fabric, leather and other raw materials used in production, and (iii) certain outsourced services. All purchase orders are based on current needs and are fulfilled by suppliers within short time periods. At June 30, 2019, our open purchase orders with respect to such goods and services totaled $23.9 million and are to be paid in less than one year. Other purchase commitments included within this table represent payment due for other services such as telecommunication, computer-related software, royalties, web development, insurance and other maintenance contracts. There were no material changes in our purchase commitments with suppliers during fiscal 2019.
Legal Matters
We are routinely party to various legal proceedings, including investigations or as a defendant in litigation, in the ordinary course of business. We are also subject to various federal, state and local environmental protection laws and regulations and are involved, from time to time, in investigations and proceedings regarding environmental matters. Such investigations and proceedings typically concern air emissions, water discharges, and/or management of solid and hazardous wastes. Under these laws, we and/or our subsidiaries are, or may be, required to remove or mitigate the effects on the environment of the disposal or release of certain hazardous materials.
Regulations issued under the Clean Air Act Amendments of 1990 required the industry to reformulate certain furniture finishes or institute process changes to reduce emissions of volatile organic compounds. Compliance with many of these requirements has been facilitated through the introduction of high solids coating technology and alternative formulations. In addition, we have instituted a variety of technical and procedural controls, including reformulation of finishing materials to reduce toxicity, implementation of high velocity low pressure spray systems, development of storm water protection plans and controls, and further development of related inspection/audit teams, all of which have served to reduce emissions per unit of production. We remain committed to implementing new waste minimization programs and/or enhancing existing programs with the objective of (i) reducing the total volume of waste, (ii) limiting the liability associated with waste disposal, and (iii) continuously improving environmental and job safety programs on the factory floor which serve to minimize emissions and safety risks for employees. To reduce the use of hazardous materials in the manufacturing process, we will continue to evaluate the most appropriate, cost-effective control technologies for finishing operations and production methods. We believe that our facilities are in material compliance with all such applicable laws and regulations. Our currently anticipated capital expenditures for environmental control facility matters are not material.
On a quarterly basis, we review our litigation activities and determine if an unfavorable outcome to us is considered “remote”, “reasonably possible” or “probable” as defined by ASC 450,
Contingencies.
Where we determine an unfavorable outcome is probable and is reasonably estimable, we accrue for potential litigation losses. The liability we may ultimately incur with respect to such litigation matters, in the event of a negative outcome, may be in excess of amounts currently accrued, if any; however, we do not expect that the reasonably possible outcome of these litigation matters would, individually or in the aggregate, have a material adverse effect on our financial condition, results of operations or cash flows. Where we determine an unfavorable outcome is not probable or reasonably estimable, we do not accrue for any potential litigation loss.
Although the outcome of the various claims and proceedings against us cannot be predicted with certainty, management believes that the likelihood is remote that any existing claims or proceedings, individually or in the aggregate, will have a material adverse effect on our financial position, results of operations or cash flows.
Indemnifications
As permitted or required under Delaware law and to the maximum extent allowable under that law, the Company has certain obligations to indemnify its current and former officers and directors for certain events or occurrences while the officer or director is, or was serving, at our request in such capacity. These indemnification obligations are valid as long as the director or officer acted in good faith and in a manner the person reasonably believed to be in, or not opposed to, the best interests of the Company, and with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The maximum potential amount of future payments Ethan Allen could be required to make under these indemnification obligations is unlimited; however, the Company has a director and officer insurance policy that it believes mitigates our exposure and may enable us to recover a portion of any future amounts paid. We believe the estimated fair value of these indemnification obligations is immaterial.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
(21)
|
Quarterly F
inancial Data (Unaudited)
|
The following table presents selected unaudited financial information for each of the quarterly periods in the years ended June 30, 2019 and 2018. The results for any quarter are not necessarily indicative of future quarterly results and, accordingly, period-to-period comparisons should not be relied upon as an indication of future performance (in thousands, except per share data):
|
|
Quarter Ended
|
|
Fiscal 2019
|
|
September 30 (Q1)
|
|
|
December 31 (Q2)
|
|
|
March 31 (Q3)
|
|
|
June 30 (Q4)
|
|
Net sales
|
|
$
|
187,785
|
|
|
$
|
197,152
|
|
|
$
|
177,829
|
|
|
$
|
183,918
|
|
Gross profit
|
|
$
|
101,450
|
|
|
$
|
108,860
|
|
|
$
|
98,394
|
|
|
$
|
100,787
|
|
Operating income (loss)
|
|
$
|
11,799
|
|
|
$
|
16,128
|
|
|
$
|
10,669
|
|
|
$
|
(4,649
|
)
|
Net Income (loss)
|
|
$
|
8,840
|
|
|
$
|
12,190
|
|
|
$
|
7,978
|
|
|
$
|
(3,310
|
)
|
Earnings (loss) per basic share
|
|
$
|
0.33
|
|
|
$
|
0.46
|
|
|
$
|
0.30
|
|
|
$
|
(0.12
|
)
|
Earnings (loss) per diluted share
|
|
$
|
0.33
|
|
|
$
|
0.45
|
|
|
$
|
0.30
|
|
|
$
|
(0.12
|
)
|
Diluted weighted average common shares
|
|
|
26,940
|
|
|
|
26,923
|
|
|
|
26,751
|
|
|
|
26,758
|
|
Dividends declared per common share
|
|
$
|
0.19
|
|
|
$
|
1.19
|
|
|
$
|
0.19
|
|
|
$
|
0.19
|
|
|
|
Quarter Ended
|
|
Fiscal 2018
|
|
September 30 (Q1)
|
|
|
December 31 (Q2)
|
|
|
March 31 (Q3)
|
|
|
June 30 (Q4)
|
|
Net sales
|
|
$
|
181,302
|
|
|
$
|
198,481
|
|
|
$
|
181,419
|
|
|
$
|
205,582
|
|
Gross profit
|
|
$
|
100,323
|
|
|
$
|
107,791
|
|
|
$
|
96,708
|
|
|
$
|
111,142
|
|
Operating income
|
|
$
|
11,549
|
|
|
$
|
17,538
|
|
|
$
|
3,873
|
|
|
$
|
15,907
|
|
Net Income
|
|
$
|
7,415
|
|
|
$
|
14,862
|
|
|
$
|
2,616
|
|
|
$
|
11,478
|
|
Earnings per basic share
|
|
$
|
0.27
|
|
|
$
|
0.54
|
|
|
$
|
0.10
|
|
|
$
|
0.43
|
|
Earnings per diluted share
|
|
$
|
0.27
|
|
|
$
|
0.54
|
|
|
$
|
0.09
|
|
|
$
|
0.42
|
|
Diluted weighted average common shares
|
|
|
27,756
|
|
|
|
27,728
|
|
|
|
27,692
|
|
|
|
27,323
|
|
Dividends declared per common share
|
|
$
|
0.19
|
|
|
$
|
0.50
|
|
|
$
|
0.19
|
|
|
$
|
0.19
|
|
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES