Ethan Allen Interiors Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Note 11 - Income Taxes

Note 11 - Income Taxes

12 Months Ended

Jun. 30, 2016

(11) Income Taxes

Income tax expense (benefit) attributable to income from operations consists of the following for the fiscal years ended June 30 (in thousands):

	2016			2015		2014
Current:
Federal	$	27,660		$	15,064	$	20,693
State		2,898			489		1,900
Foreign		88			55		60
Total current		30,646			15,608		22,653
Deferred:
Federal		(237	)		2,979		(941	)
State		207			759		(1,921	)
Foreign		703			195		(320	)
Total deferred		673			3,933		(3,182	)
Income Tax Expense (Benefit)	$	31,319		$	19,541	$	19,471

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

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):

	2016					2015					2014

Expected Income Tax Expense	$	30,785		35.0	%	$	19,839		35.0	%	$	21,841		35.0	%
State income taxes, net of federal income tax		2,514		2.9	%		1,597		2.8	%		2,209		3.5	%
Valuation allowance		339		0.4	%		409		0.7	%		(1,540	)	-2.5	%
Section 199 Qualified Production Activities deduction		(1,513	)	-1.7	%		(998	)	-1.8	%		(1,342	)	-2.2	%
Unrecognized tax expense (benefit)		(479	)	-0.5	%		(641	)	-1.1	%		(904	)	-1.4	%
Other, net		(327	)	-0.4	%		(665	)	-1.2	%		(793	)	-1.3	%
Actual income tax expense (benefit)	$	31,319		35.6	%	$	19,541		34.5	%	$	19,471		31.2	%

The deferred income tax asset and liability balances at June 30 (in thousands) include:

	2016			2015
Deferred tax assets:
Employee compensation accruals		4,343			4,555
Stock based compensation		2,665			2,639
Deferred rent credits		6,705			5,943
Net operating loss carryforwards		3,375			4,059
Goodwill		1,729			2,748
Other, net		2,659			3,241
Total deferred tax assets		21,476			23,185
Less: Valuation allowance		(2,155	)		(1,816	)
Net deferred tax assets	$	19,321		$	21,369

	2016		2015
Deferred tax liabilities:
Property, plant and equipment		654		1,358
Intangible assets other than goodwill		14,260		14,261
Commissions		3,478		3,999
Other, net		-		149
Total deferred tax liability		18,392		19,767
Total net deferred tax asset	$	929	$	1,602

The deferred tax balances are classified in the Consolidated Balance Sheets as follows at June 30 (in thousands):

	2016		2015
Current assets	$	3,174	$	2,301
Non-current assets		3,001		3,932
Current liabilities		-		-
Non-current liabilities		5,246		4,631
Total net deferred tax asset	$	929	$	1,602

Current deferred tax assets and liabilities and non-current deferred tax assets and liabilities have been presented net in the Consolidated Balance Sheets.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

We evaluate our deferred taxes 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 less than 50% likely that assets will be realized. At June 30 of 2016 and 2015, such an allowance was in place against the Belgian foreign tax assets, and at June 30, 2016 this valuation allowance was approximately $2.2 million.

The Company’s deferred income tax assets at June 30, 2016 with respect to the net operating losses expire as follows (in thousands):

	Deferred		Net Operating
	Income		Loss
	Tax Assets		Carryforwards
United States (State), expiring between 2017 and 2032	$	1,086	$	24,130
Foreign, Expiring in 2034		2,289		6,809

Deferred U.S. federal income taxes are not provided for unremitted foreign earnings of our foreign subsidiaries because we expect those earnings will be permanently reinvested.

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, 2016 were recognized, approximately $1.4 million would be recorded as a benefit to income tax expense. A reconciliation of the beginning and ending amount of unrecognized tax benefits including related interest and penalties as of June 30, 2016 and 2015 is as follows (in thousands):

	2016			2015
Beginning balance	$	3,117		$	4,699
Additions for tax positions taken		776			568
Reductions for tax positions taken in prior years		(1,530	)		(1,555	)
Settlements		(193	)		(596	)
Ending balance	$	2,170		$	3,117

It is reasonably possible that various issues relating to approximately $0.4 million of the total gross unrecognized tax benefits as of June 30, 2016 will be resolved within the next twelve months as exams are completed or statutes expire. If recognized, approximately $0.3 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 U.S., 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 U.S. Canada, Mexico, Belgium and Honduras. As of June 30, 2016, the Company and certain subsidiaries are currently under audit from 2010 through 2015 in the U.S. 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.