Note 1 - Summary of Significant Accounting Policies
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12 Months Ended |
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Jun. 30, 2012
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Significant Accounting Policies [Text Block] |
(1) Summary
of Significant Accounting Policies
Basis
of Presentation
Ethan
Allen Interiors Inc. ("Interiors") is a Delaware
corporation incorporated on May 25, 1989. The consolidated
financial statements include the accounts of Interiors, its
wholly-owned subsidiary Ethan Allen Global, Inc.
("Global"), and Global’s subsidiaries (collectively
"We," "Us," "Our," "Ethan Allen" or the "Company"). All
intercompany accounts and transactions have been eliminated
in the consolidated financial statements. All of
Global’s capital stock is owned by Interiors, which
has no assets or operating results other than those
associated with its investment in Global.
Nature
of Operations
We
are a leading manufacturer and retailer of quality home
furnishings and accessories, offering a full complement of
home decorating and design solutions. We sell our products
through one of the country’s largest home furnishing
retail networks with a total of 298 retail design centers,
of which 147 are Company operated and 151 are independently
operated. Nearly all of our Company operated retail design
centers are located in the United States, with the
remaining design centers located in Canada. The majority of
the independently operated design centers are in Asia, with
the remaining design centers located throughout the United
States, Canada and the Middle East. We have eight
manufacturing facilities, one of which includes a separate
sawmill operation, located throughout the United States,
one in Mexico and one in Honduras.
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. 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, revenue recognition, the allowance for doubtful
accounts receivable, inventory obsolescence, tax valuation
allowances, useful lives 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.
Cash
Equivalents
Cash
and short-term, highly-liquid investments with original
maturities of three months 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
Inventories
are stated at the lower of cost (first-in, first-out) or
market. 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).
Marketable
Securities
The
Company’s investments are classified at the time of
purchase as either available-for-sale or held-to-maturity,
and reassessed as of each balance sheet date. Our
marketable securities consist of available-for-sale
securities, and are marked-to-market based on prices
provided by our investment advisors, with unrealized gains
and temporary unrealized losses reported as a component of
other comprehensive income net of tax, until realized. When
realized, the Company recognizes gains and losses on the
sales of the securities on a specific identification method
and includes the realized gains or losses in other income,
net, in the consolidated statements of operations. The
Company includes interest, dividends, and amortization of
premium or discount on securities classified as
available-for-sale in other income, net in the consolidated
statements of operations. We also evaluate our
available-for-sale securities to determine whether a
decline in fair value of a security below the amortized
cost basis is other than temporary. Should the decline be
considered other than temporary, we write down the cost of
the security and include the loss in earnings. In making
this determination we consider such factors as the reason
for and significance of the decline, current economic
conditions, the length of time for which there has been an
unrealized loss, the time to maturity, and other relevant
information. Available-for-sale securities are classified
as either short-term or long-term based on
management’s intention of when to sell the
securities.
Property,
Plant and Equipment
Property,
plant and equipment are stated at cost, net of accumulated
depreciation and amortization. Depreciation of 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.
Leasehold improvements are amortized based on the
underlying lease term, or the asset’s estimated
useful life, whichever is shorter.
Operating
Leases
We
record expense for operating leases by recognizing the
minimum lease payments on a straight-line basis, beginning
on the date that the lessee takes possession or control of
the property. A number 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.
Retail
Design Center Acquisitions
We
account for the acquisition of retail design centers and
related assets with the purchase method. Accounting for
these transactions as purchase business combinations
requires the allocation of purchase price paid to the
assets acquired and liabilities assumed based on their fair
values as of the date of the acquisition. The amount paid
in excess of the fair value of net assets acquired is
accounted for as goodwill.
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 not
amortized.
Impairment
of Long-Lived Assets and Goodwill
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. 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.
The
recoverability of long-lived assets are evaluated for
impairment by determining 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 long-term nature of
these assets requires the estimation of cash inflows and
outflows several years into the future and only takes into
consideration technological advances known at the time of
the impairment test.
To
evaluate goodwill using a quantitative assessment, the
Company determines the current fair value of the Reporting
Units using a combination of “Market” and
“Income” approaches. In the Market approach,
the “Guideline Company” method is used, which
focuses on comparing the Company’s risk profile and
growth prospects to reasonably similar publicly traded
companies. Key assumptions used for the Guideline Company
method are total invested capital (“TIC”)
multiples for revenues and operating cash flows, as well as
consideration of control premiums. The TIC multiples are
determined based on public furniture companies within our
peer group, and if appropriate, recent comparable
transactions are considered. Control premiums are
determined using recent comparable transactions in the open
market. Under the Income approach, a discounted cash flow
method is used, which includes a terminal value, and is
based on external analyst financial projection estimates,
as well as internal financial projection estimates prepared
by management. The long-term terminal growth rate
assumptions reflect our current long-term view of the
market in which we compete. Discount rates use the weighted
average cost of capital for companies within our peer
group, adjusted for specific company risk premium
factors.
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.
Financial
Instruments
Due
to 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. The estimated fair value of our long-term debt,
which is
based on changes, if any, in interest rates and our
creditworthiness subsequent to the date on which the debt
was issued, and which has been determined using quoted
market prices, totaled $155.3 million at June 30, 2012 and
$168.4 million
at June 30, 2011, as compared to a carrying value on those
dates of $153.0 million and $164.8 million,
respectively.
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. As a result of losses we sustained for
fiscal 2010 and 2009, which were brought on by the severe
economic factors which began in fiscal 2009, we recorded a
$34.1 million valuation allowance against deferred tax
assets, with a non-cash charge to earnings in the fourth
quarter of fiscal 2010. At the end of the third quarter of
fiscal 2012, our operations had returned to a position of
cumulative pre-tax operating profits for the most recent 36
month period, we had eight consecutive quarters of pre-tax
operating profits, our written business and backlog had
grown significantly, and our business plan projected
continued profitability. The preponderance of this positive
evidence provides support that our future tax benefits more
likely than not will be realized. Accordingly, at the end
of the third quarter of fiscal 2012, we released all of
United States federal and Canadian valuation allowance
against net deferred tax assets. We recorded a tax benefit
of $21.6 million for the reversal of the valuation
allowance against those assets, with a non-cash benefit to
earnings in the quarter ended March 31, 2012. Previously
unrealized tax benefits of $1.9 million were also realized
during the quarter ended March 31, 2012.
We
retained a valuation allowance against various state and
local deferred tax assets in our retail segment. At June
30, 2012 this valuation allowance was approximately $2.3
million.
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
Revenue
is recognized when all of the following have occurred:
persuasive evidence of a sales arrangement exists (e.g. a
wholesale purchase order or retail sales invoice); the
sales arrangement specifies a fixed or determinable sales
price; title and risk of ownership has passed to the
customer; no specific performance obligations remain;
product is shipped or services are provided to the customer
or a fixed schedule of delivery is agreed upon and in
place; 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. 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
policy is to sell our products at the same delivered cost
to all retailers nationwide, regardless of shipping point.
Costs incurred to deliver finished goods to the consumer
are expensed and recorded in selling, general and
administrative expenses. Shipping and handling costs
amounted to $60.0 million, $57.5 million, and $56.6 million
for fiscal years 2012, 2011 and 2010, respectively.
Advertising
Costs
Advertising
costs are expensed when first aired or distributed. Our
total advertising costs incurred in fiscal years 2012, 2011
and 2010, amounted to $27.5 million, $26.2 million, and
$20.8 million, respectively. These amounts are presented
net of proceeds received by us under our agreement with the
third-party financial institution responsible for
administering our consumer finance programs. Prepaid
advertising costs at June 30, 2012 and 2011 totaled $1.4
million and $1.1 million, respectively.
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 10 and 11). Certain
unvested share-based payment awards are participating
securities because they contain rights to receive
non-forfeitable dividends (if paid), and are included in
the two-class method of computing earnings per
share.
Share-Based
Compensation
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.
Share-based
compensation expense is included in the Consolidated
Statements of Operations within selling, general and
administrative expenses. Tax benefits associated with our
share-based compensation arrangements are included in the
Consolidated Statements of Operations 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.
Recent
Accounting Pronouncements
In
June 2011, the Financial Accounting Standards Board
(“FASB”) issued ASU 2011-05, “Presentation
of Comprehensive Income”. This ASU increases
the prominence of items reported in other comprehensive
income by eliminating the option to present components of
other comprehensive income as part of the statement of
changes in stockholders’ equity. The amendment
requires that all non-owner changes in stockholders’
equity be presented either in a single continuous statement
of comprehensive income or in two separate but consecutive
statements. The amendments do not change the items that
must be reported in other comprehensive income. This ASU is
effective for financial statements for fiscal years, and
interim periods within those years, beginning after
December 15, 2011 (July 1, 2012 for the Company), and must
be applied retrospectively.
In
September 2011, the FASB issued ASU 2011-08, “Testing
Goodwill for Impairment”. This ASU permits an
entity to make a qualitiative assessment of whether it is
more likely than not a reporting unit’s fair value is
less than its carrying amount before applying the two step
goodwill test. If an entity concludes it is more likely
than not that the fair value of a reporting unit is less
than its carrying amount, it need not perform the two step
impairment test as required in FASB ASC topic 350, “Intangibles-Goodwill
and Other”. The Company adopted the provisions
of ASU 2011-08 and performed a qualitative assessment as of
April 1, 2012. The implementation of this pronouncement did
not have an impact on our consolidated financial position,
results of operations or cash flows.
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