The significant accounting policies of the Company and its subsidiaries are summarized below.

 

 

Cash and short-term, highly liquid investments with original maturities of 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 and we had restricted cash on hand.

 

 

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 and the allowance for doubtful accounts was immaterial, respectively.

 

 

Inventories are stated at the lower of cost (on -in, -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 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 to years for buildings and improvements and from to 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 to years. Leasehold improvements are amortized over the shorter of the underlying lease term or the estimated useful life. Repairs and maintenance expenditures, which are considered leasehold improvements and do 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 be recoverable. For further discussion regarding impairments refer to the accounting policy below.

 

 

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 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 and we did have any assets held for sale.

 

 

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 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 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 be required if the expected cash flow estimates, as projected, do occur or if events change requiring us to revise its estimates. During fiscal our retail segment recorded a million impairment for long-lived assets at the retail design center level. There were impairments during fiscal or Refer to Note for further disclosure on the long-lived asset impairment.

 

 

 

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  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 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 exceed its fair value.

 

When testing goodwill for impairment, we assess qualitative factors for some or all of our reporting units to determine whether it is more likely than (that is, a likelihood of more than percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill. Alternatively, we 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 reporting units; wholesale and retail, which are consistent with our reportable operating segments. Only our wholesale reporting unit has goodwill remaining at We performed our annual qualitative goodwill impairment test during the quarter of fiscal consistent with the timing of previous years, and concluded that there was impairment.

 

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 quarter and be reviewed more frequently if indicators of impairment are present. Conditions that indicate impairment include, but are 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 quarter of fiscal consistent with the timing of previous years, and concluded that there was impairment.

 

 

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 and our total debt consisted of capital leases obligations. The estimated fair value is equal to the carrying value on those dates.

 

 

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 that the assets will be realized.

 

We recognize the tax benefit from an uncertain tax position only if it is more likely than 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 year. We recognize interest and penalties related to income tax matters as a component of income tax expense.

 

 

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  and a corresponding refund liability in  on our consolidated balance sheet. At and these amounts were immaterial.

 

Refer to Note for additional information regarding revenue.

 

 

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.

 

 

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.

 

 

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 million in fiscal year million for fiscal and million in fiscal

 

 

Advertising costs are expensed when aired or distributed. Our total advertising costs were million in fiscal year million in fiscal year and million in fiscal year 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 and respectively.

 

 

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.

 

 

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 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.

 

 

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 and was million, million and million, respectively. Acquisition-related expenses are recognized separately and expensed as incurred.

 

 

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 paid during the restriction period, and a discount for lack of marketability for a -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.

 

 

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 yet recognized are assumed to be used to repurchase shares.

 

 

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.

 

 

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.

 

 

As of the beginning of fiscal we implemented all applicable new accounting standards and updates issued by the Financial Accounting Standards Board (“FASB”) that were in effect. There were new standards or updates adopted during fiscal that had a material impact on our consolidated financial statements.

 

 

In the FASB issued Accounting Standards Update (“ASU”) - (Accounting Standards Codification Topic (“ASC )), 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 quarter of fiscal We reviewed substantially all of our contracts and revenue streams and determined that while the application of the new standard did 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 for further details on these new disclosures.

 

In the FASB issued ASU - 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 quarter of fiscal with retrospective application. The adoption of this guidance did have a material impact on our consolidated financial statements.

 

In the FASB issued ASU - 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 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 quarter of fiscal under the retrospective adoption method, and prior year restricted cash has been reclassified to conform to current year presentation. See Note for further details.

 

In the FASB issued ASU - , 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 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 - in the quarter of fiscal The adoption of this standard had impact on our consolidated financial statements.

 

 

In the FASB issued ASU - , 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 months. Lessors will remain largely unchanged from current GAAP. In addition, ASU - 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 - in the quarter of fiscal 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 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 reassess whether existing contracts contain leases, the lease classification of existing leases, or initial direct costs for existing leases. We also plan to elect to separate lease and non-lease components and to recognize a right-of-use asset and a lease liability for leases with an initial term of months or less. In addition, we plan to elect the hindsight practical expedient. A complete population of contracts that meet the definition of a lease under ASU - has been identified. We have reviewed this inventory of leases and are in the final stage of implementing a -party lease accounting software system and finalizing our control framework in preparation for the adoption of this standard in the quarter of fiscal 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 expect the adoption to have a material impact on our consolidated statements of comprehensive income or cash flows.

 

 In the FASB issued ASU - which removes the requirement for companies to compare the implied fair value of goodwill with its carrying amount as part of step 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, to exceed the carrying amount of goodwill. This accounting standards update will be effective for us beginning in the quarter of fiscal and we do expect the adoption to have a material impact on our consolidated financial statements.

 

In the FASB issued ASU - , 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 quarter of fiscal with early adoption permitted. We are currently evaluating the impact of this accounting standards update, but do expect the adoption to have a material impact on our consolidated financial statements.

 

other new accounting pronouncements issued or effective as of have had or are expected to have an impact on our consolidated financial statements.