Note 1 - Summary of Significant Accounting Policies
|12 Months Ended|
Jun. 30, 2018
|Notes to Financial Statements|
|Significant Accounting Policies [Text Block]||
Basis of Presentation
The following is a summary of significant accounting policies of Ethan Allen Interiors Inc., and its wholly-owned subsidiaries (collectively "We," "Us," "Our," "Ethan Allen" or the "Company"). All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. Our consolidated financial statements also include the accounts of an entity in which we are a majority shareholder with the power to direct the activites that most significantly impact the entity’s performance. Noncontrolling interest amounts in the entity are immaterial and included in the Consolidated Statement of Comprehensive Income within interest and other income, net.
Nature of Operations
We are a leading manufacturer and retailer of quality home furnishings and accents, offering complimentary interior design service to our clients and sell a full range of furniture products and decorative accents. We sell our products through
oneof the country’s largest home furnishing retail networks and at
June 30, 2018there were a total of
296design centers in our retail network, of which
148are Company operated and
148are independently operated. 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 own and operate
ninemanufacturing facilities including
sixmanufacturing plants and
onesawmill in the United States and
onemanufacturing plant in Mexico and
Use of Estimates
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States, 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 revenues and expenses during the reporting period. Because of 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
notlimited to, revenue recognition, the allowance for doubtful accounts receivable, inventory obsolescence, tax valuation allowances, useful lives and impairment analyses for property, plant and equipment and definite lived intangible assets, goodwill and indefinite lived intangible asset impairment analyses, the evaluation of uncertain tax positions and the fair value of assets acquired and liabilities assumed in business combinations.
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
nothave any impact on previously reported results.
Cash and short-term, highly liquid investments with original maturities of
threemonths or less are considered cash and cash equivalents. We invest excess cash in money market accounts, short-term commercial paper, and U.S. Treasury Bills.
Inventories are stated at the lower of cost (
first-out) and 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, net of 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
fortyyears for buildings and improvements and from
twentyyears for machinery and equipment. Leasehold improvements are amortized over the shorter of the underlying lease term or the estimated useful life.
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.
Goodwill and Other Intangible Assets
Our intangible assets are comprised primarily of goodwill, which represents the excess of cost over the fair value of net assets acquired, and trademarks. We determined these assets have indefinite useful lives, and are therefore
Impairment of Long-Lived Assets and Goodwill
Goodwill and other indefinite-lived intangible assets are evaluated for impairment on an annual basis during the
fourthquarter of each fiscal year, and between annual tests whenever events or circumstances indicate that the carrying value of the goodwill or other intangible asset
mayexceed its fair value. When testing goodwill for impairment, we
mayassess 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
50percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill. Alternatively, we
maybypass 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.
The recoverability of long-lived assets is evaluated for impairment whenever events or changes in circumstances indicate that we
notbe able to recover the carrying amount of an asset or asset group. Our assessment of recoverability determines whether the carrying value will be recovered through the expected undiscounted future cash flows resulting from the use of the asset. In the event the sum of the expected undiscounted future cash flows is less than the carrying value of the asset, an impairment loss equal to the excess of the asset’s carrying value over its fair value is recorded.
The fair value of our trade name, which is the Company’s only indefinite-lived intangible asset other than goodwill, is valued using the relief-from-royalty method. Significant factors used in trade name valuation are rates for royalties, future growth, and a discount factor. Royalty rates are determined using an average of recent comparable values. Future growth rates are based on the Company’s perception of the long-term values in the market in which we compete, and the discount rate is determined using the weighted average cost of capital for companies within our peer group, adjusted for specific company risk premium factors.
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, 2018our debt consists entirely of capital leases, and at
30,2017it consisted of our term loan and capital leases. 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
notthat the assets will
We recognize the tax benefit from an uncertain tax position only if it is more likely than
notthat 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
oneyear. We recognize interest and penalties related to income tax matters as a component of income tax expense.
Revenue is recognized when all the following have occurred: persuasive evidence of a sales arrangement exists (e.g. a wholesale purchase order or retail sales order); the sales arrangement specifies a fixed or determinable sales price; title and risk of ownership has passed to the customer;
nospecific performance obligations remain; product is shipped or services are provided to the customer; collectability is reasonably assured. As such, revenue recognition generally occurs upon the shipment of goods to independent retailers or, in the case of Ethan Allen operated retail design centers, upon delivery to the customer. If shipping is billed to customers, this is included in revenue. Recorded sales provide for estimated returns and allowances. We permit our customers to return defective products and incorrect shipments, and terms we offer are standard for the industry.
Shipping and Handling Costs
Our practice has been to sell our products at the same delivered cost to all retailers 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
$73.6million in fiscal year
$71.3million for fiscal
$71.7million in fiscal
Advertising costs are expensed when
firstaired or distributed. Our total advertising costs were
$43.3million in fiscal year
$39.7million in fiscal year
$34.1million in fiscal year
2016.These amounts include advertising media expenses, outside and inside agency expenses, certain website related fees and photo and video production. Prepaid advertising costs at
June 30, 2018totaled
$1.1million compared to
June 30, 2017.
Earnings Per Share
We compute basic earnings per share by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share 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 (see Notes
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
notpaid during the restriction period, and a discount for lack of marketability for a
one-year holding period after vesting.
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.
All shares of our common stock received in connection with the exercise of share-based awards have been recorded as treasury stock and result in a reduction in shareholders’ equity.
Foreign Currency Translation
The functional currency of each Company operated foreign location is the respective local currency. Assets and liabilities are translated into United States 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 within shareholders’ equity.
July 2015,the FASB issued ASU
Inventory (Topic,” which states that inventory should be measured at the lower of cost and net realizable value. Net realizable value is defined as estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. We adopted effective
330): Simplifying the Measurement of Inventory
July 1, 2017,and the new guidance is being applied prospectively. The adoption did
nothave a material impact on our consolidated financial statements.
November 2015,the FASB issued ASU
Balance Sheet Classification of Deferred Taxes, which requires the Company to present all deferred tax assets and liabilities as noncurrent. We adopted this ASU on
July 1, 2017on a prospective basis. At
June 30, 2017we had net current deferred tax assets of
$3.9million which would have been classified as noncurrent under the new standard.
March 2016,the FASB issued ASU
Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic
718,Stock Compensation. The objective of this amendment is part of the FASB’s Simplification Initiative as it applies to several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. We adopted effective
July 1, 2017.For the fiscal year ended
June 30, 2018,the Company recorded a net tax expense of
$0.6million due to adoption of this ASU. For the fiscal year ended
June 30, 2017,the Company recorded a credit to additional paid in capital of
$0.1million, that under the new standard would have been recognized in income.
The entire disclosure for all significant accounting policies of the reporting entity.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef