ETHAN ALLEN INTERIORS INC - Quarter Report: 2020 March (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

(Mark One)

 

☒     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2020

 

or

 

☐     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Commission File Number: 1-11692

 

 

Ethan Allen Interiors Inc.

(Exact name of registrant as specified in its charter)

 

Delaware		06-1275288
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

 

25 Lake Avenue Ext., Danbury, Connecticut		06811-5286
(Address of principal executive offices)		(Zip Code)

 

(203) 743-8000

(Registrant's telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Common Stock $0.01 par value per share		New York Stock Exchange		ETH
(Title of each class)		(Name of each exchange on which registered)		(Trading symbol)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     ☒ Yes     ☐ No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   ☒ Yes ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐	Accelerated filer                    ☒
Non-accelerated filer     ☐	Smaller reporting company  ☐
Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      ☐ Yes     ☒ No

 

The number of shares outstanding of the registrant’s common stock, $0.01 par value, as of May 8, 2020 was 25,053,082.

 

 

 

Ethan Allen Interiors Inc.

Form 10-Q Third Quarter of Fiscal 2020

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements			2
Consolidated Balance Sheets (Unaudited)			2
Consolidated Statements of Comprehensive Income (Unaudited)			3
Consolidated Statements of Cash Flows (Unaudited)			4
Consolidated Statements of Shareholders’ Equity (Unaudited)			5
Notes to Consolidated Financial Statements (Unaudited)			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3. Quantitative and Qualitative Disclosures About Market Risk			34
Item 4. Controls and Procedures			35
PART II - OTHER INFORMATION
Item 1. Legal Proceedings			36
Item 1A. Risk Factors			36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			38
Item 3. Defaults Upon Senior Securities			38
Item 4. Mine Safety Disclosures			38
Item 5. Other Information			38
Item 6. Exhibits			39
SIGNATURES			39

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

		March 31, 2020				June 30, 2019
ASSETS
Current assets:
Cash and cash equivalents		$	116,868			$	20,824
Accounts receivable, net			10,482				14,247
Inventories, net			138,774				162,389
Prepaid expenses and other current assets			21,204				18,830
Total current assets			287,328				216,290
Property, plant and equipment, net			242,490				245,246
Goodwill			25,388				25,388
Intangible assets			19,740				19,740
Operating lease right-of-use assets			124,636				-
Deferred income taxes			2,044				2,108
Other assets			1,478				1,579
Total ASSETS		$	703,104			$	510,351
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses		$	30,997			$	34,166
Customer deposits and deferred revenue			52,410				56,714
Accrued compensation and benefits			20,065				22,646
Short-term debt			-				550
Current operating lease liabilities			34,005				-
Other current liabilities			9,386				8,750
Total current liabilities			146,863				122,826
Long-term debt			100,000				516
Operating lease liabilities, long-term			112,515				-
Deferred income taxes			1,534				1,069
Other long-term liabilities			2,946				22,011
Total LIABILITIES		$	363,858			$	146,422
Commitments and contingencies (see Note 15)
Shareholders' equity:
Preferred stock, $0.01 par value; 1,055 shares authorized; none issued		$	-			$	-
Common stock, $0.01 par value, 150,000 shares authorized, 49,054 and 49,049 shares issued; 25,053 and 26,587 shares outstanding at March 31, 2020 and June 30, 2019, respectively			491				491
Additional paid-in capital			378,166				377,913
Treasury stock, at cost: 24,001 and 22,462 shares at March 31, 2020 and June 30, 2019, respectively			(680,916	)			(656,597	)
Retained earnings			650,701				647,710
Accumulated other comprehensive loss			(9,218	)			(5,651	)
Total Ethan Allen Interiors Inc. shareholders' equity			339,224				363,866
Noncontrolling interests			22				63
Total shareholders' equity			339,246				363,929
Total LIABILITIES AND SHAREHOLDERS' EQUITY		$	703,104			$	510,351

 

		Three months ended								Nine months ended
		March 31,								March 31,
		2020				2019				2020				2019
Net sales		$	149,774			$	177,829			$	498,269			$	562,766
Cost of sales			65,825				79,435				223,005				254,062
Gross profit			83,949				98,394				275,264				308,704
Selling, general and administrative expenses			83,841				87,504				258,346				269,824
Restructuring and other impairment charges, net of gains (note 10)			862				221				(10,173	)			284
Operating income (loss)			(754	)			10,669				27,091				38,596
Interest income, net of interest (expense)			213				(62	)			295				63
Income (loss) before income taxes			(541	)			10,607				27,386				38,659
Income tax expense (benefit)			(318	)			2,629				6,417				9,651
Net income (loss)		$	(223	)		$	7,978			$	20,969			$	29,008
Per share data
Basic earnings per common share:
Net income (loss) per basic share		$	(0.01	)		$	0.30			$	0.80			$	1.09
Basic weighted average common shares			25,703				26,705				26,332				26,690
Diluted earnings per common share:
Net income (loss) per diluted share		$	(0.01	)		$	0.30			$	0.80			$	1.08
Diluted weighted average common shares			25,703				26,751				26,362				26,749
Comprehensive income (loss)
Net income (loss)		$	(223	)		$	7,978			$	20,969			$	29,008
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments			(3,841	)			303				(3,567	)			355
Other			(15	)			(20	)			(41	)			(65	)
Other comprehensive income (loss), net of tax			(3,856	)			283				(3,608	)			290
Comprehensive income (loss)		$	(4,079	)		$	8,261			$	17,361			$	29,298

 

		Nine months ended
		March 31,
		2020				2019
Cash Flows from Operating Activities
Net income		$	20,969			$	29,008
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			12,845				14,742
Share-based compensation expense			200				986
Non-cash operating lease cost			24,369				-
Deferred income taxes			1,077				(390	)
Restructuring and other impairment charges, net of gains			(5,647	)			284
Restructuring payments			(5,574	)			(177	)
Loss on disposal of property, plant and equipment			191				134
Other			(13	)			(16	)
Change in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable, net			3,630				(3,474	)
Inventories, net			21,567				(1,613	)
Prepaid expenses and other current assets			(1,980	)			(1,290	)
Customer deposits and deferred revenue			(4,914	)			1,145
Accounts payable and accrued expenses			(3,428	)			(510	)
Accrued compensation and benefits			429				4,414
Operating lease liabilities			(24,411	)			-
Other assets and liabilities			(626	)			1,064
Net cash provided by operating activities			38,684				44,307
Cash Flows from Investing Activities
Proceeds from disposal of property, plant and equipment			12,423				1
Capital expenditures			(12,457	)			(6,990	)
Acquisitions, net of cash acquired			(1,350	)			-
Other investing activities			20				124
Net cash used in investing activities			(1,364	)			(6,865	)
Cash Flows from Financing Activities
Borrowings on revolving credit facility			100,000				16,000
Payments on borrowings			-				(8,000	)
Payment of cash dividends			(16,181	)			(41,916	)
Repurchases of common stock			(24,319	)			-
Other financing activities			(369	)			(190	)
Net cash provided by (used in) financing activities			59,131				(34,106	)
Effect of exchange rate changes on cash and cash equivalents			(407	)			43
Net increase in cash and cash equivalents			96,044				3,379
Cash and cash equivalents at beginning of period			20,824				22,363
Cash and cash equivalents at end of period		$	116,868			$	25,742

 

																						Accumulated
										Additional												Other								Non-
		Common Stock								Paid-in				Treasury Stock								Comprehensive				Retained				Controlling				Total
		Shares				Par Value				Capital				Shares				Amount				Loss				Earnings				Interests				Equity
Balance at June 30, 2019			49,049			$	491			$	377,913				22,462			$	(656,597	)		$	(5,651	)		$	647,710			$	63			$	363,929
Net income			-				-				-				-				-				-				14,106				-				14,106
Common stock issued on share-based awards			1				-				18				-				-				-				-				-				18
Share-based compensation expense			-				-				151				-				-				-				-				-				151
Impact of ASU 2016-02 adoption, net of tax			-				-				-				-				-				-				(1,585	)			-				(1,585	)
Cash dividends declared			-				-				-				-				-				-				(5,610	)			-				(5,610	)
Other comprehensive income (loss)			-
Balance at September 30, 2019			49,050			$	491			$	378,082				22,462			$	(656,597	)		$	(6,150	)		$	654,621			$	56			$	370,503
Net income			-				-				-				-				-				-				7,086				-				7,086
Common stock issued on share-based awards			4				-				35				-				-				-				-				-				35
Share-based compensation expense			-				-				(28	)			-				-				-				-				-				(28	)
Cash dividends declared			-				-				-				-				-				-				(5,496	)			-				(5,496	)
Repurchase of common stock			-				-				-				546				(10,029	)			-				-				-				(10,029	)
Other comprehensive income (loss)			-
Balance at December 31, 2019			49,054			$	491			$	378,089				23,008			$	(666,626	)		$	(5,377	)		$	656,211			$	37			$	362,825
Net loss			-				-				-				-				-				-				(223	)			-				(223	)
Share-based compensation expense			-				-				77				-				-				-				-				-				77
Cash dividends declared			-				-				-				-				-				-				(5,287	)			-				(5,287	)
Repurchase of common stock			-				-				-				993				(14,290	)			-				-				-				(14,290	)
Other comprehensive income (loss)			-				-				-				-				-				(3,841	)			-				(15	)			(3,856	)
Balance at March 31, 2020			49,054			$	491			$	378,166				24,001			$	(680,916	)		$	(9,218	)		$	650,701			$	22			$	339,246

																						Accumulated
										Additional												Other								Non-
		Common Stock								Paid-in				Treasury Stock								Comprehensive				Retained				Controlling				Total
		Shares				Par Value				Capital				Shares				Amount				Loss				Earnings				Interests				Equity
Balance at June 30, 2018			48,989			$	490			$	376,950				22,460			$	(656,551	)		$	(6,171	)		$	669,013			$	139			$	383,870
Net income			-				-				-				-				-				-				8,840				-				8,840
Common stock issued on share-based awards			40				-				637				-				-				-				-				-				637
Share-based compensation expense			-				-				491				-				-				-				-				-				491
Cash dividends declared			-				-				-				-				-				-				(5,072	)			-				(5,072	)
Other comprehensive income (loss)			-
Balance at September 30, 2018			49,029			$	490			$	378,078				22,460			$	(656,551	)		$	(4,924	)		$	672,781			$	113			$	389,987
Net income			-				-				-				-				-				-				12,190				-				12,190
Common stock issued on share-based awards			9				-				164				-				-				-				-				-				164
Share-based compensation expense			-				-				316				-				-				-				-				-				316
Cash dividends declared			-				-				-				-				-				-				(31,778	)			-				(31,778	)
Other comprehensive income (loss)			-
Balance at December 31, 2018			49,038			$	490			$	378,558				22,460			$	(656,551	)		$	(6,119	)		$	653,193			$	94			$	369,665
Net income			-				-				-				-				-				-				7,978				-				7,978
Common stock issued on share-based awards			2				-				19				-				-				-				-				-				19
Share-based compensation expense			-				-				179				-				-				-				-				-				179
Cash dividends declared			-				-				-				-				-				-				(5,075	)			-				(5,075	)
Other comprehensive income (loss)			-				-				-				-				-				303				-				(20	)			283
Balance at March 31, 2019			49,039			$	490			$	378,756				22,460			$	(656,551	)		$	(5,816	)		$	656,096			$	74			$	373,049

 

(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 customers 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. Our Company operates retail design centers located in the United States and Canada. The independently operated design centers are located in the United States, Asia, the Middle East and Europe. We also own and operate nine manufacturing facilities including six manufacturing plants in the United States, two manufacturing plants in Mexico and one manufacturing plant in Honduras.

 

(2)	Interim Basis of Presentation

 

Use of Estimates. We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the United States (“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 reserves, tax valuation allowances, the evaluation of uncertain tax positions and other loss reserves.

 

Principles of Consolidation. We conduct business globally and have strategically aligned our 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. All intercompany activity and balances have been eliminated from the consolidated financial statements. In our opinion, all adjustments, consisting only of normal recurring adjustments necessary for fair presentation, have been included in the consolidated financial statements. The results of operations for the three and nine months ended March 31, 2020 are not necessarily indicative of results that may be expected for the entire fiscal year. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our fiscal 2019 Annual Report on Form 10-K (the “2019 Annual Report on Form 10-K”).

 

Reclassifications. Certain reclassifications have been made to the amounts in prior periods in order to conform to the current period’s presentation. These changes were made for disclosure purposes only and did not have any impact on previously reported results.

 

(3)	Recent Accounting Pronouncements

 

New Accounting Standards or Updates Recently Adopted

 

Leases – In February 2016, the FASB issued accounting standards update (“ASU”) 2016-02, Leases (Topic 842), an update related to accounting for leases. This standard requires an entity to recognize lease liabilities and a right-of-use asset for all leases on the balance sheet and to disclose key information about the entity's leasing arrangements. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with earlier adoption permitted. In July 2018, the FASB approved an amendment to the new guidance that allows companies the option of using the effective date of the new standard as the initial application (at the beginning of the period in which it is adopted, rather than at the beginning of the earliest comparative period) and to recognize the effects of applying the new ASU as a cumulative effect adjustment to the opening balance sheet or retained earnings.

 

We adopted ASU 2016-02 as of July 1, 2019 using the modified retrospective method and have not restated comparative periods. We elected the package of practical expedients upon adoption, which permits us (i) to not reassess whether any expired or existing contracts are or contain leases, (ii) to not reassess lease classification for any expired or existing leases, and (iii) to not reassess treatment of initial direct costs, if any, for any expired or existing leases. In addition, we elected not to separate lease and non-lease components when determining the ROU asset and lease liability for our design center real estate leases and did not elect the hindsight practical expedient, which would have allowed us to use hindsight when determining the remaining lease term as of the adoption date on July 1, 2019. Lastly, we elected the short-term lease exception policy for all leases, permitting us to exclude the recognition requirements of this standard from leases with initial terms of 12 months or less.

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

Upon adoption we recognized operating lease assets of $129.7 million and operating lease liabilities of $149.7 million on our consolidated balance sheet. In addition, $20.0 million of deferred rent and various lease incentives, which were reflected as other long-term liabilities as of June 30, 2019, were reclassified as a component of the right-of-use assets upon adoption. The Company also recognized a cumulative adjustment as of July 1, 2019, which decreased opening retained earnings by $1.6 million due to the impairment of certain right-of-use assets. The adoption of the new standard did not have a material impact on our consolidated statements of operations or cash flows. See Note 7 for further details on new disclosures required under ASU 2016-02.

 

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. The Company early adopted ASU 2017-04 during fiscal 2020.

 

Recent Accounting Standards or Updates Not Yet Effective

 

Credit Losses of Financial Instruments – In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, an update that requires measurement and recognition of expected credit losses for financial assets held based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. 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.

 

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 a client’s 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. 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.

 

Simplifying the Accounting for Income Taxes – In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, an update intended to simplify various aspects related to accounting for income taxes. This guidance removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This accounting standards update will be effective for us beginning in the first quarter of fiscal 2022, 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.

 

Reference Rate Reform on Financial Reporting – In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, an update that provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This accounting standards update is intended to ease the process of migrating away from LIBOR to new reference rates and will be effective for us beginning in the first quarter of fiscal 2021. 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 March 31, 2020 have had or are expected to have an impact on our consolidated financial statements.

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

(4)	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. 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 as we believe that we will receive payment from the customer within one year of when we transfer control of the related goods.

 

Estimated refunds for sales returns and allowances are based on our historical return patterns. We record these estimated refunds 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 sheets. At March 31, 2020 and June 30, 2019, these amounts were immaterial.

 

We capitalize commission fees paid to our associates as contract assets within Prepaid expenses and other current assets on our consolidated balance sheets. These prepaid commissions are subsequently recognized as a selling expense upon delivery (when we have transferred control of our product to our customer). At March 31, 2020, we had prepaid commissions of $7.1 million, which we expect to recognize to selling expense in the next six months. Prepaid commissions totaled $8.0 million at June 30, 2019.

 

In many cases we receive deposits from customers before we have transferred control of our product to our customers, resulting in contract liabilities. These customer deposits are reported as a current liability in Customer deposits and deferred revenue on our consolidated balance sheets. At June 30, 2019 we had customer deposits of $56.7 million, of which we recognized $1.1 million and $54.7 million, respectively, as net sales upon delivery to the customer during the three and nine months ended March 31, 2020. Customer deposits totaled $50.2 million at March 31, 2020.

 

During October 2019 we introduced the Ethan Allen Member Program, which for a $100 annual fee, offers special members-only pricing, free shipping and white glove in-home delivery, and in our United States design centers, access to preferred financing plans. New membership fees are recorded as deferred revenue when collected from customers and recognized as revenue on a straight-line basis over the membership period of one year. These non-refundable fees are initially reported as a current liability in Customer deposits and deferred revenue on our consolidated balance sheet while recognized revenue is reported within Net sales on our consolidated statement of comprehensive income. Revenue recognized from annual membership fees is reported as a part of other revenue in the disaggregated revenue tables below.

 

The following table disaggregates net sales by product category by segment for the three months ended March 31, 2020 (in thousands):

 

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

The following table disaggregates net sales by product category by segment for the nine months ended March 31, 2020 (in thousands):

 

 

(1)

Upholstery furniture includes fabric-covered items such as sleepers, recliners and other motion furniture, chairs, ottomans, custom pillows, sofas, loveseats, cut fabrics and leather.

 

(2)

Case goods furniture includes items such as beds, dressers, armoires, tables, chairs, buffets, entertainment units, home office furniture, and wooden accents.

 

(3)

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.

 

(4)

Other includes membership revenue, product delivery sales, the Ethan Allen Hotel room rentals and banquets, sales of third-party furniture protection plans and other miscellaneous product sales less prompt payment discounts, sales allowances and other incentives.

 

(5)

Represents the elimination of all intercompany wholesale segment sales to the retail segment during the period presented.

 

(5)	Inventories

 

Inventories are stated at the lower of cost (on a 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.

 

Inventories at March 31, 2020 and June 30, 2019 are summarized as follows (in thousands):

 

 

 

(6)	Goodwill and Other Intangible Assets

 

Our goodwill and intangible assets are comprised 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. Both goodwill and indefinite-lived intangible assets are not amortized as they are estimated to have an indefinite life.

 

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.

 

In the fiscal third quarter ended March 31, 2020, wholesale net sales declined 14.1% and there was a meaningful decline (46.4%) in our stock price from the fiscal second quarter to the third quarter (from $19.06 to $10.22). This decline coupled with the significant adverse changes in the business climate from the COVID-19 health crisis, led us to determine that an impairment triggering event occurred, which required an interim quantitative impairment assessment of goodwill and intangible assets. Based on the Company’s interim quantitative assessment performed as of March 31, 2020, the fair value of the wholesale reporting unit exceeded its related carrying value by approximately 25%, thus no impairment of goodwill as of March 31, 2020.

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

The fair value of our trade name, which is the Company’s only indefinite-lived intangible asset other than goodwill, was also reviewed as of March 31, 2020 for impairment. We performed the interim trade name impairment test and concluded that its fair value substantially exceeded the carrying value as of March 31, 2020, thus no impairment.

 

As of March 31, 2020, the goodwill balance was $25.4 million, while other indefinite-lived intangible assets totaled $19.7 million. If the market valuation of our common shares or operating results within the wholesale reporting unit significantly decline beyond current levels, we may again need to conduct an evaluation of the fair value of our goodwill and trade name, which may result in an impairment charge.  

 

(7)

Leases

 

During the first quarter of fiscal 2020, we adopted ASU 2016-02 and all related amendments. The guidance requires lessees to recognize substantially all leases on their balance sheet as a right-of-use (“ROU”) asset and a lease liability.

 

Lease Accounting Policy

 

We have operating leases for many of our design centers that expire at various dates through fiscal 2040. In addition, we also lease certain tangible assets, including computer equipment and vehicles with lease terms ranging from three to five years. We determine if a contract contains a lease at inception based on our right to control the use of an identified asset and our right to obtain substantially all of the economic benefits from the use of that identified asset. Certain operating leases have renewal options and rent escalation clauses as well as various purchase options. We assess these options to determine if we are reasonably certain of exercising these options based on all relevant economic and financial factors. Any options that meet these criteria are included in the lease term at lease commencement.

 

Lease right-of-use assets represent the right to use an underlying asset pursuant to the lease for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. Lease right-of-use assets and lease liabilities are recognized at the commencement of an arrangement where it is determined at inception that a lease exists. These assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using our incremental borrowing rate generally applicable to the location of the lease right-of-use asset, unless an implicit rate is readily determinable. We combine lease and certain non-lease components for our design center real estate leases in determining the lease payments subject to the initial present value calculation. Lease right-of-use assets include upfront lease payments and exclude lease incentives, where applicable. Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised.

 

Lease expense for operating leases consists of both fixed and variable components. Expense related to fixed lease payments are recognized on a straight-line basis over the lease term. Variable lease payments are generally expensed as incurred, where applicable, and include certain index-based changes in rent, certain non-lease components, such as maintenance and other services provided by the lessor, and other charges included in the lease. Leases with an initial term of twelve months or less are not recorded on the balance sheet. In addition, certain of our equipment lease agreements include variable lease payments, which are based on the usage of the underlying asset. The variable portion of payments are not included in the initial measurement of the asset or lease liability due to uncertainty of the payment amount and are recorded as lease expense in the period incurred.

 

We have elected the short-term lease exemption, whereby leases with initial terms of one year or less are not capitalized and instead expensed on a straight-line basis over the lease term.

 

Key Estimates and Judgments

 

Key estimates and judgments in applying ASU 2016-02 relate to how the Company determines the discount rate to discount the unpaid lease payments to present value and the lease term.

 

ASC 842 requires companies to use the rate implicit in the lease whenever that rate is readily determinable and if the interest rate is not readily determinable, then a lessee may use its incremental borrowing rate. Most of our leases do not have an interest rate implicit in the lease. As a result, for purposes of measuring our ROU asset and lease liability, we determined our incremental borrowing rate by computing the rate of interest that we would have to pay to (i) borrow on a collateralized basis (ii) over a similar term (iii) at an amount equal to the total lease payments and (iv) in a similar economic environment. As we do not have any outstanding public debt, we estimated the incremental borrowing rate based on our estimated credit rating and available market information. We used the incremental borrowing rates we determined as of July 1, 2019 for operating leases that commenced prior to that date. The incremental borrowing rate is subsequently reassessed upon a modification to the lease agreement. In the case an interest rate is implicit in a lease we will use that rate as the discount rate for that lease. The lease term for all of our lease arrangements include the noncancelable period of the lease plus, if applicable, any additional periods covered by an option to extend the lease that is reasonably certain to be exercised by the Company. Our leases generally do not include termination options for either party to the lease or restrictive financial or other covenants. Some of our leases contain variable lease payments based on a Consumer Price Index or percentage of sales, which are excluded from the measurement of the lease liability.

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

The Company's lease terms and discount rates are as follows:

 

 

The following table discloses the location and amount of our operating and financing lease costs within our consolidated statements of comprehensive income (in thousands):

 

 

(1)

Variable lease payments include index-based changes in rent, maintenance, real estate taxes, insurance and other charges included in the lease.

 

Operating lease rent expense during the three months ended March 31, 2019, as reported within SG&A, was $8.2 million, net of sublease rental income of $0.5 million. For the nine months ended March 31, 2019, operating lease rent expense was $24.2 million, net of sublease rental income of $1.5 million.

 

The following table discloses the operating and financing lease assets and liabilities recognized within our consolidated balance sheet as of March 31, 2020 (in thousands):

 

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

The ROU assets by segment are as follows as of March 31, 2020 (in thousands):

 

 

The table below reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under noncancelable leases with terms of more than one year to the total lease liabilities recognized on the condensed consolidated balance sheets as of March 31, 2020 (in thousands):

 

 

As of March 31, 2020, we have entered into one additional operating lease for a design center relocation, which has not yet commenced and is therefore not part of the table above nor included in the lease right-of-use assets and liabilities. The lease will commence when we obtain possession of the underlying leased asset which is expected to be during the first half of fiscal 2021. The lease is for a period of ten years and has aggregate undiscounted future rent payments of $3.2 million.

 

At March 31, 2020, we did not have any financing leases that had not commenced.

 

Other information for our leases is as follows (in thousands):

 

At the beginning of fiscal 2020, we adopted ASU 2016-02, and as required, the following disclosure is provided for periods prior to adoption. As of June 30, 2019, future minimum payments under non-cancelable leases were as follows (in thousands):

 

 

(1)

As of June 30, 2019, our capital lease obligations were $1.1 million of which the current and long-term portions were included within short-term debt and long-term debt, respectively, in the consolidated balance sheet. Monthly minimum lease payments were accounted for as principal and interest payments.

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES 

 

(8)	Income Taxes

 

We review our expected annual effective income tax rates and makes changes on a quarterly basis as necessary based on certain factors such as changes in forecasted annual operating income; changes to actual or forecasted permanent book to tax differences; impacts from future tax audits with state, federal or foreign tax authorities; impacts from tax law changes; or change in judgment as to the realizability of deferred tax assets. We identify items which are non-recurring in nature and treats these as discrete events. The tax effect of such items is recorded in the quarter in which the related events occur. Due to the volatility of these factors, our consolidated effective income tax rate can change significantly quarter over quarter.

 

We conduct business globally and, as a result, we file income tax returns in the United States and in various state and foreign jurisdictions. In the normal course of business, we are subject to periodic examination in such domestic and foreign jurisdictions by tax authorities. We are currently under audit in the United States for fiscal 2016 through fiscal 2018. While the amount of uncertain tax impacts 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. It is reasonably possible that some of these audits may be completed during the next twelve months and that various issues relating to uncertain tax impacts will be resolved within the next twelve months as exams are completed or as statutes expire and will impact the effective tax rate.

 

Our consolidated effective tax rate was 58.8% and 23.4% respectively, for the three and nine months ended March 31, 2020 compared with 24.8% and 25.0% in the prior year periods. Our effective tax rate varies from the 21% federal statutory rate due to state taxes and other nonrecurring events that may not be predictable.

 

(9)

Debt

 

Total debt obligations at March 31, 2020 and June 30, 2019 consist of the following (in thousands):

 

 

 

(1)

Capital leases were previously reported as debt as of June 30, 2019. Upon the adoption of the new leasing standard, the Company reclassified its capital lease obligations from short and long-term debt to other current liabilities and other long-term liabilities, respectively. Refer to Note 7 for further details regarding capital lease obligations.

 

Credit Agreement

 

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 “Credit Agreement”) with JPMorgan Chase Bank, N.A. as administrative agent and syndication agent and Capital One, National Association, as documentation agent. The Credit Agreement provides for a $165 million revolving credit facility (the “Facility”), subject to borrowing base availability, with the maturity date of December 21, 2023. We incurred financing costs of $0.6 million, 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

 

On March 23, 2020, we provided notice to the administrative agent under the Credit Agreement to borrow a principal amount of $80 million under the Facility. Subsequently, on March 30, 2020, we borrowed an additional $20 million, bringing our aggregate borrowings to $100 million under the Facility as of March 31, 2020. Prior to such notice, there were no borrowings outstanding under the Facility. The borrowings bear a weighted average interest rate equal to the one-month LIBOR rate of 0.95% plus a spread using a debt leverage pricing grid, currently at 1.50%. Interest on the borrowings outstanding is payable monthly in arrears and the principal balance is payable on the maturity date of December 21, 2023. We elected to draw down on the Facility to increase our cash position as a precautionary measure and to preserve financial flexibility in consideration of the disruption and uncertainty surrounding the ongoing COVID-19 pandemic.

 

The outstanding borrowings of $100 million are reported as Long-term debt within the consolidated balance sheet at March 31, 2020. For the nine months ended March 31, 2020 and 2019, we recorded interest expense of $0.2 million and $0.3 million, respectively, on our outstanding debt.

 

The fair value of our long-term debt was $100 million as of March 31, 2020, which we believe approximates the carrying amount as the terms and interest rate approximate market rates given its floating interest rate basis.

 

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 falls below $18.5 million. The FCCR Covenant ratio is set at 1.0 and measured on a trailing twelve-month basis.

 

At March 31, 2020 and June 30, 2019, there was $5.8 million and $6.1 million, respectively, of standby letters of credit outstanding under the Facility. Total borrowing base availability under the Facility was $23.9 million at March 31, 2020 and $158.9 million at June 30, 2019. At both March 31, 2020 and June 30, 2019, we were in compliance with all the covenants under the Facility.

 

(10)	Restructuring and Other Impairment Activities

 

Summary of Restructuring, Impairments and Other related charges (gains)

 

Restructuring, impairment and other related costs incurred during the three and nine months ended March 31, 2020 were as follows (in thousands):

 

 

(1)	Manufacturing overhead costs and inventory write-downs are reported within Cost of Sales in the consolidated statements of comprehensive income.

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

Restructuring and Other Related Charges Rollforward

 

The Company’s restructuring activity is summarized in the table below (in thousands):

 

 

(1)

The previously recorded vacant space liability was reclassified from Accounts payable and accrued expenses and Other long-term liabilities to Operating lease right-of-use assets upon the adoption of ASU 2016-02, which requires all right-of-use assets to be measured net of any Topic 420 lease liabilities.

 

(2)	The remaining balance from the other charges (income) as of March 31, 2020 is recorded within Accounts payable and accrued expenses.

 

Optimization of Manufacturing and Logistics

 

During the fourth quarter of fiscal 2019, we initiated restructuring plans to consolidate our manufacturing and logistics operations as part of an overall strategy to maximize production efficiencies and maintain our competitive advantage. As of June 30, 2019, we permanently discontinued operations at our Passaic, New Jersey property and ceased using most of our Old Fort, North Carolina case goods manufacturing operations, which we transferred to our other existing case goods operations.

 

We completed this optimization project in fiscal 2020 as we converted the Old Fort facility into a distribution center and expanded our existing Maiden, North Carolina manufacturing campus while finalizing severance and other exit costs. In connection with these initiatives, we recorded pre-tax restructuring and other exit charges totaling $2.1 million, consisting of $1.3 million in abnormal manufacturing variances associated with the Passaic and Old Fort facilities, $0.8 million in employee severance and other payroll and benefit costs and $0.7 million in other exit costs partially offset by $0.7 million in gains from the sale of property, plant and equipment held at our Old Fort facility. The abnormal manufacturing overhead variances of $1.3 million were recorded within Cost of Sales with the remaining recorded within the line item Restructuring and other impairment charges, net of gains in the consolidated statements of comprehensive income.

 

As part of our optimization plans, we also completed the sale of our Passaic property in September 2019 to an independent third party and received $12.4 million in cash less certain adjustments, including $0.9 million in selling and other closing costs. As a result of the sale, the Company recognized a pre-tax gain of $11.5 million in the first quarter of fiscal 2020, which was recorded within the line item Restructuring and other impairment charges, net of gains in the consolidated statements of comprehensive income.

 

Inventory Write-downs

 

During the first half of fiscal 2020 we recorded a non-cash charge of $3.2 million related to the write-down and disposal of certain slow moving and discontinued inventory items, which was due to actual demand and forecasted market conditions for these inventory items being less favorable than originally estimated. Of the total inventory write-down, $2.6 million related to slow moving finished goods with the remaining $0.6 million consisting of raw materials that were disposed. The non-cash inventory write-down was recorded in the consolidated statement of comprehensive income within the line item Cost of Sales.

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES 

 

(11)	Share-Based Compensation

 

During the nine months ended March 31, 2020 and 2019, we recognized total share-based compensation expense of $0.2 million and $1.0 million, respectively. These amounts have been included in the consolidated statements of comprehensive income within selling, general and administrative expenses. As of March 31, 2020, $1.2 million of total unrecognized compensation expense related to non-vested equity awards is expected to be recognized over a weighted average period of 2.8 years. There was no share-based compensation capitalized for the nine months ended March 31, 2020 and 2019, respectively.

 

At March 31, 2020, there were 1,394,808 shares of common stock available for future issuance pursuant to the Ethan Allen Interiors Inc. Stock Incentive Plan. Stock options are 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. Grants to independent directors have a three-year service vesting condition.

 

Stock Option Activity

 

A summary of stock option activity during the nine months ended March 31, 2020 is presented below.

 

 

Stock options granted to employees during fiscal 2020 were valued using the Black-Scholes option pricing model with the following weighted average assumptions. There were no stock option awards granted to employees during fiscal 2019.

 

 

Non-employee (independent) directors were granted stock options during the first quarter of each fiscal year presented and valued using the Black-Scholes option pricing model with the following assumptions.

 

 

Restricted Stock Unit Activity

 

A summary of restricted stock unit activity during the nine months ended March 31, 2020 is presented below.

 

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

During the third quarter of fiscal 2020, we granted 57,000 non-performance based restricted stock units ("RSUs"), with a weighted average grant date fair value of $9.15. The RSUs granted to employees entitle the holder to receive the underlying shares of common stock as the unit vests over the relevant vesting period. The RSUs do not entitle the holder to receive dividends declared on the underlying shares while the RSUs remain unvested. We account for these RSUs as equity-based awards because when they vest, they will be settled in shares of our common stock. The grant date fair value of RSUs is measured by reducing the grant date price of the Company's common stock by the present value of the dividends expected to be paid on the underlying stock during the requisite service period, discounted at the appropriate risk-free interest rate. The RSUs vest 25% annually on the anniversary date of grant and become fully vested after four years. There were no RSUs granted to employees during fiscal 2019.

 

Performance Stock Units

 

A summary of performance units activity during the nine months ended March 31, 2020 is presented below.

 

 

During the first quarter of fiscal 2020, we granted 99,405 performance-based units. Payout of these units 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 public companies (20%) over a specific performance period of three years. 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 the Chaffe model. The weighted average assumptions used for the stock units granted during fiscal 2020 and 2019, respectively, is presented below.

 

 

 

(12)	Earnings Per Share

 

Basic and diluted earnings per share (“EPS”) are calculated using the following weighted average share data (in thousands):

 

 

Dilutive potential common shares consist of stock options, restricted stock units and performance units. 

 

As of March 31, 2020 and 2019, stock options and restricted stock unit awards of 467,104 and 260,571, respectively, were excluded from the diluted EPS calculations because their inclusion would have been anti-dilutive.

 

As of March 31, 2020 and 2019, the number of performance units excluded from the calculation of diluted EPS was 287,287 and 269,138, respectively. Performance units are excluded from the calculation of diluted EPS unless the performance criteria are probable of being achieved as of the balance sheet date.

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

Share Repurchase Program

 

On January 13, 2020, the Company’s Board of Directors authorized an increase in the aggregate share repurchase authorization under the Company’s existing multi-year share repurchase program (the “Share Repurchase Program”) to 3,000,000 shares. We repurchased 992,636 shares for $14.3 million during the third quarter of fiscal 2020. There were no share repurchases in the year ago third quarter. As of March 31, 2020, 2,007,364 remains available under the current authorization for future share repurchases. The timing and amount of any future share repurchases in the open market and through privately negotiated transactions will be determined by the Company’s officers at their discretion and based on a number of factors, including an evaluation of market and economic conditions. The Share Repurchase Program was temporarily suspended on April 1, 2020 as part of the Company’s action plan in response to COVID-19.

 

(13)	Accumulated Other Comprehensive Income (Loss)

 

Accumulated other comprehensive income (loss) consists of foreign currency translation adjustments which are the result of changes in foreign currency exchange rates related to our operations outside the United States. 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. The following table sets forth the activity in accumulated other comprehensive loss for the fiscal year-to-date period ended March 31, 2020 and 2019 (in thousands).

 

 

(14)	Segment Information

 

Our operating segments are aligned with how the Company, including its chief operating decision maker, 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 March 31, 2020, the Company operated 144 design centers (our retail segment) and our independent retailers operated 159 design centers. Our wholesale segment net sales include sales to our retail segment, which are eliminated in consolidation, and sales to our independent retailers and other third parties. Our retail segment net sales accounted for 79% of our consolidated net sales in the nine months ended March 31, 2020. Our wholesale segment net sales accounted for the remaining 21%.

 

Segment information for the three and nine months ended March 31, 2020 and 2019 is provided below (in thousands):

 

 

(a)

Represents the change in wholesale profit contained in the retail segment inventory at the end of the period.

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

 

(a)

Represents 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.

 

(15)      Commitments and Contingencies     

 

We accrue non-income tax liabilities for contingencies when management believes that a loss is probable, and the amounts can be reasonably estimated, while contingent gains are recognized only when realized. We are routinely party to various legal proceedings, claims and litigation that have arisen in the ordinary course of business, including employment matters, commercial and intellectual property disputes and environmental items. For more information on how we determine whether to accrue for potential losses resulting from litigation, see Note 20 to our consolidated financial statements included in our 2019 Annual Report on Form 10-K. Environmental items typically involve investigations and proceedings concerning air emissions, hazardous waste discharges, and/or management of solid and hazardous wastes. Under applicable environmental laws and regulations, we and/or our subsidiaries are, or may be, required to remove or mitigate the effects on the environment due to the disposal or release of certain hazardous materials. We believe that our facilities are in material compliance with all such applicable laws and regulations.

 

The outcome of any matters pending against us is subject to future resolution, including the uncertainties of litigation. Based on information available at March 31, 2020, management believes that the ultimate outcome of these unresolved matters against the Company, individually or in the aggregate, will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

 

(16)	Subsequent Event

 

COVID-19 Update

 

On March 11, 2020, the World Health Organization declared the current COVID-19 outbreak to be a global pandemic. In response to this declaration and the rapid spread of COVID-19 within the United States, federal, state and local governments throughout the country have imposed varying degrees of restrictions on social and commercial activity to promote social distancing in an effort to slow the spread of the virus. These measures have begun to have a significant adverse impact on many sectors of the economy, including non-essential retail commerce.

 

On April 1, 2020 we announced our action plan in response to the COVID-19 health crisis including, among other things, the continued temporary closure of the Company’s design centers and most of our manufacturing facilities, the furlough of approximately 70% of our global workforce, the decision by the Company’s CEO to temporarily forego his salary through June 30, 2020, a temporary up to 40% reduction in salaries for all senior management and up to 20% for other salaried employees through June 30, 2020, a temporary reduction of 50% in cash compensation of the Company’s directors, the elimination of all non-essential operating expenses, a delay in discretionary capital expenditures and the temporary halt of the share repurchase program. We paid our furloughed associates through April 2, 2020 and impacted employees will continue to receive enrolled benefits for up to two months. Recently, at the quarterly Board of Directors meeting held on April 28, 2020, our Board temporarily suspended the Company’s regular quarterly cash dividend.

 

Customers can schedule appointments with our design consultants and interact with them through Live Chat online at www.ethanallen.com. Design consultants work remotely utilizing technology, including the Ethan Allen inHome augmented reality app, the 3D room planner tool, Skype and FaceTime. We continue to operate our www.ethanallen.com website and distribution centers to deliver products to our customers.

 

We continue to assess the situation on a daily basis; however, as of the date of this filing, we are unable to predict when and how quickly we will be able to resume full retail and manufacturing operations. We began reopening design centers in a number of U.S. states since May 1, 2020 and to increase production in some of our North American manufacturing plants. We look forward to reopening all of our design centers but expect that this situation will have a significant adverse effect on our reported results for fiscal 2020, including our fourth fiscal quarter, and possibly beyond.

 

While we expect the effects of COVID-19 to negatively impact our results of operations, cash flows and financial position, the current level of uncertainty over the economic and operational impacts of COVID-19 means the related financial impact cannot be reasonably estimated at this time. Our consolidated financial statements reflect estimates and assumptions made by management 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 reported amounts of revenue and expenses during the reporting periods presented. Such estimates and assumptions affect, among other things, long-lived asset and indefinite-lived intangible asset valuation; inventory valuation; valuation of deferred income taxes; and income tax contingencies. Events and changes in circumstances arising after March 31, 2020, including those resulting from the impacts of COVID-19, will be reflected in management’s estimates for future periods.