Notes to Consolidated Financial Statements (Unaudited)
(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. As of December 31, 2020, our Company operates 144 retail design centers, with 138 located in the United States and the remaining six 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 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.
COVID-19 Update
The COVID-19 crisis has challenged our operations, but our associates continue to persevere through these challenges. Our primary focus has been to operate in a safe manner, for our associates and clients. As our design centers began to reopen, we implemented various mitigating and safety protocols recommended by the United States Center for Disease Control (“CDC”) guidelines for operating businesses safely. We established logistics for the supply of hand sanitizer and related dispensers, disinfectant cleaning supplies, masks and nitrile gloves, and have increased the cleaning frequency of our design centers and other facilities. For the safety of our associates in our design centers we require all associates and clients to wear masks.
In our initial response to the COVID-19 health crisis, we took immediate action and made adjustments to our business operations, including temporary design center and manufacturing plant closings, a reduction in headcount, curtailing certain operating expenses, suspension of our dividend and share repurchases and delaying investments and capital expenditures. Our approach to the crisis continues to evolve as business trends substantially improved during the first half of fiscal 2021. Given the positive trends in cash flows, we repaid the remaining $50.0 million in outstanding debt, previously borrowed under our credit facility in March 2020. We also resumed production in our North American manufacturing plants to work through existing order backlog and have ramped up to near pre-COVID-19 production levels. The temporary salary reductions were lifted, effective June 30, 2020, as planned and we have brought back many of our associates previously furloughed in April 2020. Further, on August 4, 2020, our Board of Directors reinstated the regular quarterly cash dividend.
We have seen a significant improvement in business conditions, which has increased our profitability and generated strong positive cash flow during fiscal 2021. Substantially all of our design centers that were temporarily closed have reopened and written orders taken at both the retail and wholesale segments exceeded levels from a year ago. Tempering these improvements are the continuing logistical challenges faced by the entire home furnishings industry resulting from COVID-19-related labor shortages and supply chain disruptions creating significant delays in order fulfillment and increasing backlogs. Inventory and supply chain management remain our areas of focus as we balance the need to maintain supply chain flexibility to help ensure competitive lead times with the risk of inventory shortage and obsolescence. We continue to produce about 75% of our products in our North American manufacturing facilities. The other 25% is sourced primarily from Southeast Asia and China. The receipt of inventory and raw materials imported from these areas has been slowed or disrupted. In addition, ocean freight capacity issues continue to persist worldwide due to the ongoing global COVID-19 pandemic, which has resulted in recent price increases per shipping container. While we continue to manage and evaluate our logistics providers, there is no indication that ocean freight container rates will return to pre-COVID-19 levels in the near-term and these increases could have an adverse effect on our consolidated results of operations.
Whereas some state and local governments have eased restrictions on commercial retail activity, it is possible that a resurgence in COVID-19 cases could prompt a return to tighter restrictions in certain areas. Furthermore, while the home furnishings industry has fared better during the pandemic than certain other sectors of the economy, continued economic weakness may eventually have an adverse impact upon our business. While we continue to serve our customers and operate our business while managing the ongoing COVID-19 health crisis, there can be no assurance that future COVID-19 related developments will not have an impact on our business, results of operations or financial condition since the extent and duration of the health crisis remains highly uncertain. We will continue to make decisions regarding the sources and uses of capital in our business to reflect and adapt to changes in market conditions, including any lasting effects of COVID-19. Future adverse developments in connection with the ongoing COVID-19 crisis, including additional waves of COVID-19 outbreaks, evolving international, federal, state and local restrictions and safety regulations in response to COVID-19, changes in consumer behavior, health concerns, the pace of economic activity in the wake of the COVID-19 crisis, or other similar issues could adversely affect our business, results of operations or financial condition in the future, or including our financial results and business performance for fiscal 2021.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
(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, lease accounting, 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 six months ended December 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 2020 Annual Report on Form 10-K (the “2020 Annual Report on Form 10-K”).
Reclassifications
The Company reclassified in the Consolidated Statement of Comprehensive Income certain prior year comparative figures from Interest income, net of interest (expense) to Interest and other financing costs and Other income (expense), net to conform to the current year’s presentation. In addition, the Company reclassified in the Consolidated Statement of Cash Flows certain prior year comparative figures from Other financing activities to Proceeds from employee stock plans within Net cash used in financing activities to conform to the current year's presentation. These changes were made for disclosure purposes only and did not have any impact on previously reported results.
The Company has evaluated subsequent events through the date that the consolidated financial statements were issued.
(3)
|
Recent Accounting Pronouncements
|
New Accounting Standards or Updates Recently Adopted
Credit Losses of Financial Instruments – In June 2016, the Financial Accounting Standards Board (“FASB”) issued accounting standards update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent amendments to the initial guidance through ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10, ASU 2019-11, ASU 2020-02 and ASU 2020-03 (collectively, the “ASUs”). The ASUs 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. The guidance applies to financial assets measured at amortized cost basis, such as receivables that result from revenue transactions. Accounts receivable is presented net of allowance for doubtful accounts as a result of the assessment of the collectability of customer accounts, which is recorded based on an overall aging analysis and a review of specifically identified accounts, which considers factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay. We adopted the ASUs as of July 1, 2020 using a modified retrospective transition method, which requires a cumulative-effect adjustment, if any, to the opening balance of retained earnings. We did not recognize a cumulative-effect adjustment upon adoption as the adoption of the ASUs did not have a material effect on our consolidated financial statements.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
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 (and hosting arrangements that include an internal-use software license). 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. We adopted the new guidance as of July 1, 2020 using a prospective method. We capitalize implementation costs related to hosted arrangements, which typically include multi-year service terms with additional renewal periods generally ranging from one to three years. The related assets are recorded within Prepaid expenses and other current assets (for service terms less than one year) or Other assets (for service terms greater than one year) on our consolidated balance sheets, net of accumulated amortization for assets placed in service. The amortization of assets placed in service is recorded in selling, general and administrative expenses, consistent with the costs of the hosting arrangement, on the consolidated statements of comprehensive income on a straight-line basis over the term of the hosting arrangement, which includes reasonably certain renewal periods. The adoption of the accounting standard update did not 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. ASU 2020-04 was adopted in the first quarter of fiscal 2021, but did not have a material impact on our accounting policies or our consolidated financial statements.
Recent Accounting Standards or Updates Not Yet Effective
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. 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 December 31, 2020 have had or are expected to have a material impact on our consolidated financial statements.
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. The majority of our shipping agreements are freight-on-board shipping point and risk of loss transfers to our wholesale customer once the product is out of our control. Accordingly, revenue is recognized for product shipments on third-party carriers at the point in time that our product is loaded onto the third-party container or truck. For sales in our retail segment, control generally transfers upon delivery to the customer. We recognize the promised amount of consideration without adjusting for the effects of a significant financing component if the contract has a duration of one year or less. As our contracts typically are less than one year in length and do not have significant financing components, we have not adjusted consideration.
Our practice has been to sell our products at the same delivered cost to all retailers and customers nationwide, regardless of shipping point. Costs incurred by the Company to deliver finished goods are expensed and recorded in selling, general and administrative expenses. 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). Sales taxes collected is not recognized as revenue but is included in Accounts payable and accrued expenses on the consolidated balance sheets as it is ultimately remitted to governmental authorities.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Estimated refunds for returns and allowances are based on our historical return patterns. We record these estimated sales 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 December 31, 2020 and June 30, 2020, 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 December 31, 2020, we had prepaid commissions of $14.6 million, which we expect to recognize to selling expense in the next six months.
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, 2020 we had customer deposits of $62.6 million, of which we recognized $12.0 million and $57.9 million, respectively, as net sales upon delivery to the customer during the three and six months ended December 31, 2020. Customer deposits totaled $90.0 million at December 31, 2020.
The following table disaggregates our net sales by product category by segment for the three months ended December 31, 2020 (in thousands):
|
|
Wholesale
|
|
|
Retail
|
|
|
Total
|
|
Upholstery(1)
|
|
$
|
53,573
|
|
|
$
|
74,087
|
|
|
$
|
127,660
|
|
Case goods(2)
|
|
|
30,984
|
|
|
|
38,743
|
|
|
|
69,727
|
|
Accents(3)
|
|
|
18,803
|
|
|
|
29,441
|
|
|
|
48,244
|
|
Other(4)
|
|
|
(1,810
|
)
|
|
|
2,547
|
|
|
|
737
|
|
Total before intercompany eliminations
|
|
$
|
101,550
|
|
|
$
|
144,818
|
|
|
|
246,368
|
|
Intercompany eliminations(5)
|
|
|
|
|
|
|
|
|
|
|
(67,542
|
)
|
Consolidated net sales
|
|
|
|
|
|
|
|
|
|
$
|
178,826
|
|
The following table disaggregates our net sales by product category by segment for the six months ended December 31, 2020 (in thousands):
|
|
Wholesale
|
|
|
Retail
|
|
|
Total
|
|
Upholstery(1)
|
|
$
|
106,308
|
|
|
$
|
131,772
|
|
|
$
|
238,080
|
|
Case goods(2)
|
|
|
59,723
|
|
|
|
71,661
|
|
|
|
131,384
|
|
Accents(3)
|
|
|
35,999
|
|
|
|
53,754
|
|
|
|
89,753
|
|
Other(4)
|
|
|
(3,146
|
)
|
|
|
5,712
|
|
|
|
2,566
|
|
Total before intercompany eliminations
|
|
$
|
198,884
|
|
|
$
|
262,899
|
|
|
|
461,783
|
|
Intercompany eliminations(5)
|
|
|
|
|
|
|
|
|
|
|
(131,899
|
)
|
Consolidated net sales
|
|
|
|
|
|
|
|
|
|
$
|
329,884
|
|
The following table disaggregates our net sales by product category by segment for the three months ended December 31, 2019 (in thousands):
|
|
Wholesale
|
|
|
Retail
|
|
|
Total
|
|
Upholstery(1)
|
|
$
|
44,329
|
|
|
$
|
63,696
|
|
|
$
|
108,025
|
|
Case goods(2)
|
|
|
31,797
|
|
|
|
39,883
|
|
|
|
71,680
|
|
Accents(3)
|
|
|
16,170
|
|
|
|
30,247
|
|
|
|
46,417
|
|
Other(4)
|
|
|
(407
|
)
|
|
|
5,275
|
|
|
|
4,868
|
|
Total before intercompany eliminations
|
|
$
|
91,889
|
|
|
$
|
139,101
|
|
|
|
230,990
|
|
Intercompany eliminations(5)
|
|
|
|
|
|
|
|
|
|
|
(56,416
|
)
|
Consolidated net sales
|
|
|
|
|
|
|
|
|
|
$
|
174,574
|
|
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
The following table disaggregates our net sales by product category by segment for the six months ended December 31, 2019 (in thousands):
|
|
Wholesale
|
|
|
Retail
|
|
|
Total
|
|
Upholstery(1)
|
|
$
|
94,349
|
|
|
$
|
126,932
|
|
|
$
|
221,281
|
|
Case goods(2)
|
|
|
65,826
|
|
|
|
78,643
|
|
|
|
144,469
|
|
Accents(3)
|
|
|
34,167
|
|
|
|
60,229
|
|
|
|
94,396
|
|
Other(4)
|
|
|
(1,124
|
)
|
|
|
10,563
|
|
|
|
9,439
|
|
Total before intercompany eliminations
|
|
$
|
193,218
|
|
|
$
|
276,367
|
|
|
|
469,585
|
|
Intercompany eliminations(5)
|
|
|
|
|
|
|
|
|
|
|
(121,090
|
)
|
Consolidated net sales
|
|
|
|
|
|
|
|
|
|
$
|
348,495
|
|
|
(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)
|
Intercompany eliminations represent the elimination of all intercompany wholesale segment sales to the retail segment during the period presented.
|
(5)
|
Fair Value Measurements
|
We have categorized our cash equivalents as Level 1 assets within the fair value hierarchy as there are quoted prices in active markets for identical assets or liabilities. As of December 31, 2020, we did not have any outstanding debt. The fair value of our long-term debt at June 30, 2020 was $50.0 million, which approximated its carrying amount given the application of a floating interest rate equal to the monthly LIBOR rate plus a spread using a debt leverage pricing grid. As the interest rate on our long-term debt is a variable rate, adjusted based on market conditions, it approximates the current market-rate for similar instruments available to companies with comparable credit quality and maturity, and therefore, our long-term debt was categorized as a Level 2 liability in the fair value hierarchy as of June 30, 2020. There were no Level 3 assets or liabilities held by the Company as of December 31, 2020 and June 30, 2020.
With the exception of the $0.6 million retail asset impairment charge, we did not record any additional other-than-temporary impairments on those assets required to be measured at fair value on a non-recurring basis during fiscal 2021.
Inventories are summarized as follows (in thousands):
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2020
|
|
Finished goods
|
|
$
|
97,391
|
|
|
$
|
97,718
|
|
Work in process
|
|
|
9,389
|
|
|
|
9,589
|
|
Raw materials
|
|
|
22,892
|
|
|
|
21,343
|
|
Inventory reserves
|
|
|
(2,924
|
)
|
|
|
(2,549
|
)
|
Inventories, net
|
|
$
|
126,748
|
|
|
$
|
126,101
|
|
(7)
|
Goodwill and 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. As of December 31, 2020, the goodwill balance was $25.4 million, while other indefinite-lived intangible assets totaled $19.7 million, consistent with the balances as of June 30, 2020.
Both goodwill and indefinite-lived intangible assets are not amortized as they are estimated to have an indefinite life. We evaluate goodwill and other indefinite-lived intangible assets 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 may exceed fair value.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
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 initial 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.
The Company's lease terms and discount rates are as follows:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Weighted-average remaining lease term (in years)
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
6.6
|
|
|
|
6.7
|
|
Financing leases
|
|
|
1.7
|
|
|
|
1.9
|
|
Weighted-average discount rate
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
4.3
|
%
|
|
|
3.7
|
%
|
Financing leases
|
|
|
4.3
|
%
|
|
|
4.4
|
%
|
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.
The following table discloses the location and amount of our operating and financing lease costs within our consolidated statements of comprehensive income (in thousands):
|
|
|
Three months ended
December 31,
|
|
|
Statement of Comprehensive Income Location
|
|
2020
|
|
|
2019
|
|
Operating lease cost(1)
|
Selling, general and administrative (“SG&A”)
|
|
$
|
7,461
|
|
|
$
|
8,169
|
|
Financing lease cost
|
|
|
|
|
|
|
|
|
|
Depreciation of property
|
SG&A
|
|
|
144
|
|
|
|
146
|
|
Interest on lease liabilities
|
Interest and other financing costs
|
|
|
3
|
|
|
|
8
|
|
Short-term lease cost(2)
|
SG&A
|
|
|
240
|
|
|
|
355
|
|
Variable lease cost(3)
|
SG&A
|
|
|
2,351
|
|
|
|
2,373
|
|
Less: Sublease income
|
SG&A
|
|
|
(454
|
)
|
|
|
(596
|
)
|
Total lease expense
|
|
$
|
9,745
|
|
|
$
|
10,455
|
|
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
The following table discloses the location and amount of our operating and financing lease costs within our consolidated statements of comprehensive income (in thousands):
|
|
|
Six months ended
December 31,
|
|
|
Statement of Comprehensive Income Location
|
|
2020
|
|
|
2019
|
|
Operating lease cost(1)
|
SG&A
|
|
$
|
14,953
|
|
|
$
|
16,191
|
|
Financing lease cost
|
|
|
|
|
|
|
|
|
|
Depreciation of property
|
SG&A
|
|
|
295
|
|
|
|
293
|
|
Interest on lease liabilities
|
Interest and other financing costs
|
|
|
8
|
|
|
|
17
|
|
Short-term lease cost(2)
|
SG&A
|
|
|
480
|
|
|
|
742
|
|
Variable lease cost(3)
|
SG&A
|
|
|
4,613
|
|
|
|
4,836
|
|
Less: Sublease income
|
SG&A
|
|
|
(892
|
)
|
|
|
(1,102
|
)
|
Total lease expense
|
|
$
|
19,457
|
|
|
$
|
20,977
|
|
|
(1)
|
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.
|
|
(2)
|
Leases with initial terms of one year or less are not capitalized and instead expensed on a straight-line basis over the lease term.
|
|
(3)
|
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, real estate taxes, insurance and other services provided by the lessor, and other charges included in the lease.
|
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 consolidated balance sheets as of December 31, 2020 (in thousands):
Fiscal Year
|
|
Operating Leases
|
|
|
Financing Leases
|
|
2021 (remaining six months)
|
|
$
|
16,408
|
|
|
$
|
160
|
|
2022
|
|
|
29,552
|
|
|
|
78
|
|
2023
|
|
|
23,147
|
|
|
|
39
|
|
2024
|
|
|
18,374
|
|
|
|
19
|
|
2025
|
|
|
14,961
|
|
|
|
8
|
|
Thereafter
|
|
|
45,640
|
|
|
|
-
|
|
Total undiscounted future minimum lease payments(1)(2)
|
|
|
148,082
|
|
|
|
304
|
|
Less: imputed interest(3)
|
|
|
(20,541
|
)
|
|
|
(9
|
)
|
Total present value of lease obligations
|
|
$
|
127,541
|
|
|
$
|
295
|
|
|
(1)
|
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.
|
|
(2)
|
Excludes future commitments under short-term lease agreements of $0.3 million as of December 31, 2020 as leases with an initial term of twelve months or less are not recorded on the balance sheet.
|
|
(3)
|
Calculated using the incremental borrowing rate for each lease at lease commencement.
|
As of December 31, 2020, we have entered into two additional financing leases for computer equipment, which have not yet commenced and are therefore not part of the tables above nor included in the consolidated balance sheet as property, plant and equipment (assets) and other current and non-current liabilities. The leases commence when we obtain possession of the underlying leased assets which were in January 2021. The leases are for a period of three years and have aggregate undiscounted future rent payments of $1.4 million.
As of December 31, 2020, we did not have any operating leases that had not commenced.
Other supplemental information for our leases is as follows (in thousands):
|
|
Six months ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
16,706
|
|
|
$
|
16,037
|
|
Operating cash flows from financing leases
|
|
$
|
290
|
|
|
$
|
278
|
|
Operating lease assets obtained in exchange for operating lease liabilities
|
|
$
|
12,102
|
|
|
$
|
14,326
|
|
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
We recorded income tax expense of $5.3 million and $7.2 million, respectively, for the three and six months ended December 31, 2020 compared with $2.2 million and $6.7 million in the prior year comparable periods. Our consolidated effective tax rate was 23.9% and 21.5% for the three and six months ended December 31, 2020 compared with 23.5% and 24.1% in the prior year comparable 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. The decrease in the effective tax rate during the first half of fiscal 2021 compared with a year ago was due to a $0.9 million reduction in our valuation allowance on deferred tax assets.
As of December 31, 2020, we had $2.2 million of unrecognized tax benefits, of which $2.0 million would reduce our income tax expense and the effective tax rate, if recognized. As of December 31, 2020, we had $0.5 million of unrecognized tax benefits that are expected to decrease in the next 12 months.
Total debt obligations consist of the following (in thousands):
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
Borrowings under revolving credit facility
|
|
$
|
-
|
|
|
$
|
50,000
|
|
Less current maturities
|
|
|
-
|
|
|
|
-
|
|
Total long-term debt
|
|
$
|
-
|
|
|
$
|
50,000
|
|
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 as interest expense 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.
Borrowings under the Facility
We borrowed $100.0 million under the Facility in March 2020 and repaid $50.0 million in June 2020 and the remaining $50.0 million in September 2020 using available cash on hand. The borrowings had a weighted average interest rate equal to the one-month LIBOR rate plus a spread using a debt leverage pricing grid. For the six months ended December 31, 2020 we recorded interest expense of $0.4 million on our outstanding debt. Interest expense was $0.1 million for the six months ended December 31, 2019.
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.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
At December 31, 2020 and June 30, 2020, there was $5.0 million and $5.8 million, respectively, of standby letters of credit outstanding under the Facility. Total borrowing base availability under the Facility was $85.3 million at December 31, 2020 and $58.9 million at June 30, 2020. At both December 31, 2020 and June 30, 2020, we were in compliance with all the covenants under the Facility.
(11)
|
Restructuring and Other Impairment Activities
|
Restructuring and other impairment charges, net of gains, were as follows (in thousands):
|
|
Three months ended
December 31,
|
|
|
Six months ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Loss (gain) on sale of property, plant and equipment(1)
|
|
$
|
273
|
|
|
$
|
-
|
|
|
$
|
273
|
|
|
$
|
(11,497
|
)
|
Employee severance costs
|
|
|
150
|
|
|
|
-
|
|
|
|
150
|
|
|
|
-
|
|
Impairment of long-lived assets(2)
|
|
|
-
|
|
|
|
-
|
|
|
|
623
|
|
|
|
-
|
|
Optimization of manufacturing and logistics
|
|
|
-
|
|
|
|
(178
|
)
|
|
|
-
|
|
|
|
462
|
|
Total Restructuring and other impairment charges, net of gains
|
|
$
|
423
|
|
|
$
|
(178
|
)
|
|
$
|
1,046
|
|
|
$
|
(11,035
|
)
|
Manufacturing overhead costs(3)
|
|
|
-
|
|
|
|
270
|
|
|
|
-
|
|
|
|
1,323
|
|
Inventory reserves and write-downs(3)(4)
|
|
|
389
|
|
|
|
119
|
|
|
|
389
|
|
|
|
3,209
|
|
Total
|
|
$
|
812
|
|
|
$
|
211
|
|
|
$
|
1,435
|
|
|
$
|
(6,503
|
)
|
(1)
|
We completed the sale of a previously closed retail property to an independent third party in December 2020 and received $1.3 million in cash less certain adjustments, including $0.1 million in selling and other closing costs. As a result of the sale, the Company recognized a pre-tax loss of $0.3 million in the second quarter of fiscal 2021, which was recorded within the line item Restructuring and other impairment charges, net of gains in the consolidated statements of comprehensive income.
|
(2)
|
We recorded a non-cash impairment charge of $0.6 million during the first quarter of fiscal 2021 related to the impairment of long-lived assets held in the retail segment. The asset group used in the impairment analysis, which represented the lowest level for which identifiable cash flows were available and largely independent of the cash flows of other groups of assets, was the individual retail design center. We estimated future cash flows based on design center-level historical results, current trends, and operating and cash flow projections. The impairment charge of $0.6 million was recorded in the consolidated statement of comprehensive income within the line item Restructuring and other impairment charges, net of gains.
|
(3)
|
Manufacturing overhead costs and inventory reserves and write-downs are reported within Cost of Sales in the consolidated statements of comprehensive income.
|
(4)
|
Based on actual demand and the most current forecasted market conditions, we recorded a non-cash charge of $0.4 million during the second quarter of fiscal 2021 to increase our finished goods inventory obsolescence reserve for certain slow moving and discontinued inventory items. The non-cash inventory write-down was recorded in the consolidated statement of comprehensive income within the line item Cost of Sales.
|
We compute basic earnings per share (“EPS”) by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS is calculated similarly, except that the weighted average outstanding shares are adjusted to include the effects of converting all potentially dilutive share-based awards issued under our employee stock plans. The number of potential common shares outstanding are determined in accordance with the treasury stock method to the extent they are dilutive.
Basic and diluted EPS are calculated using the following weighted average share data (in thousands):
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Weighted average shares outstanding for basic calculation
|
|
|
25,239
|
|
|
|
26,580
|
|
|
|
25,209
|
|
|
|
26,646
|
|
Dilutive effect of stock options and other share-based awards
|
|
|
70
|
|
|
|
32
|
|
|
|
48
|
|
|
|
35
|
|
Weighted average shares outstanding adjusted for dilution calculation
|
|
|
25,309
|
|
|
|
26,612
|
|
|
|
25,257
|
|
|
|
26,681
|
|
Dilutive potential common shares consist of stock options, restricted stock units and performance units.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
As of December 31, 2020 and 2019, total share-based awards of 270,108 and 280,437, respectively, were excluded from the diluted EPS calculations because their inclusion would have been anti-dilutive.
As of December 31, 2020 and 2019, the number of performance units excluded from the calculation of diluted EPS was 316,445 and 287,287, respectively. Contingently issuable shares with performance conditions are evaluated for inclusion in diluted EPS if, at the end of current period, conditions would be satisfied as if it were the end of the contingency period.
(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 in Canada, Honduras and Mexico. 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 (in thousands).
|
|
2020
|
|
|
2019
|
|
Beginning balance at July 1
|
|
$
|
(8,441
|
)
|
|
$
|
(5,651
|
)
|
Other comprehensive income (loss), net of tax
|
|
|
2,532
|
|
|
|
248
|
|
Less AOCI attributable to noncontrolling interests
|
|
|
14
|
|
|
|
26
|
|
Ending balance at December 31
|
|
$
|
(5,895
|
)
|
|
$
|
(5,377
|
)
|
(14)
|
Share-Based Compensation
|
During the six months ended December 31, 2020 and 2019, we recognized total share-based compensation expense of $0.7 million and $0.1 million, respectively. These amounts have been included in the consolidated statements of comprehensive income within selling, general and administrative expenses. There was no share-based compensation capitalized for the six months ended December 31, 2020 and 2019, respectively.
At December 31, 2020, there were 1,303,638 shares of common stock available for future issuance pursuant to the Ethan Allen Interiors Inc. Stock Incentive Plan (the “Plan”), which provides for the grant of stock options, restricted stock and stock units.
Stock Option Activity
There were no stock option awards granted to employees during the first half of fiscal 2021. In the prior year period, we granted 15,000 stock options with a weighted average exercise price of $18.44 to existing employees of the Company. These stock option awards vest 25% annually on the anniversary date of the grant and are fully vested after four years, expiring ten years from the date of grant.
The Plan also provides for the grant of share-based awards, including stock options, to non-employee directors of the Company. During fiscal 2021, we granted 37,008 stock options at an exercise price of $12.97 to our existing non-employee Directors. In the prior year period, we granted 34,188 stock options at an exercise price of $17.55. These stock options vest in three equal annual installments commencing on the first anniversary of the date of grant so long as the director continues to serve on our Board. All options granted to directors have an exercise price equal to the fair market value of our common stock on the date of grant and remain exercisable for a period of up to ten years, subject to continuous service on our Board.
As of December 31, 2020, $0.2 million of total unrecognized compensation expense related to non-vested stock options is expected to be recognized over a weighted average remaining period of 2.2 years.
Restricted Stock Unit Activity
During the first half of fiscal 2021, we granted 38,000 non-performance based restricted stock units ("RSUs"), with a weighted average grant date fair value of $9.58. 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 and vest in two equal annual installments on the first and second anniversary date of the date of grant. There were no RSUs granted during the first half of fiscal 2020. As of December 31, 2020, $0.7 million of total unrecognized compensation expense related to non-vested restricted stock units is expected to be recognized over a weighted average remaining period of 2.5 years.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Performance Stock Unit Activity
Under the Plan, the Compensation Committee of the Board of Directors was authorized to award common shares to certain employees based on the attainment of certain financial goals over a given performance period. Payout of these grants 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 peer companies (20%). The performance award opportunity ranges from 50% of the employee's target award if minimum performance requirements are met to a maximum of 125% of the target award based on the attainment of certain financial and shareholder-return goals over a specific performance period, which is generally three fiscal years. The number of awards that will vest, as well as unearned and canceled awards, depends on the achievement of certain financial and shareholder-return goals over the three-year performance periods, and will be settled in shares if service conditions are met, requiring employees to remain employed with us through the end of the three-year performance periods. We account for performance stock unit awards as equity-based awards because upon vesting, they will be settled in common shares. We expense as compensation cost the fair value of the shares as of the grant date and amortize expense ratably over the total performance and time vest period, considering the probability that we will satisfy the performance goals.
During the first half of fiscal 2021 we granted 117,338 PSUs. We estimate, as of the date of grant, the fair value of PSUs 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 PSUs granted during fiscal 2021 and 2020, respectively, is presented below.
|
|
FY 2021
|
|
|
FY 2020
|
|
Volatility
|
|
|
56.0
|
%
|
|
|
30.5
|
%
|
Risk-free rate of return
|
|
|
0.14
|
%
|
|
|
1.72
|
%
|
Dividend yield
|
|
|
3.26
|
%
|
|
|
3.97
|
%
|
Our unrecognized compensation expense as of December 31, 2020, related to PSUs, was $1.2 million based on the current estimates of the number of awards that will vest, and is expected to be recognized over a weighted average remaining period of 2.0 years.
Our operating segments are aligned with how the Company, including our 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 December 31, 2020, the Company operated 144 design centers (our retail segment) and our independent retailers operated 158 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 79.7% of our consolidated net sales for the six months ended December 31, 2020 compared to 79.3% a year ago. Our wholesale segment net sales accounted for the remaining 20.3% during fiscal 2021.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Segment information is provided below (in thousands):
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale segment
|
|
$
|
101,550
|
|
|
$
|
91,889
|
|
|
$
|
198,884
|
|
|
$
|
193,218
|
|
Retail segment
|
|
|
144,818
|
|
|
|
139,101
|
|
|
|
262,899
|
|
|
|
276,367
|
|
Elimination of intercompany sales
|
|
|
(67,542
|
)
|
|
|
(56,416
|
)
|
|
|
(131,899
|
)
|
|
|
(121,090
|
)
|
Consolidated total
|
|
$
|
178,826
|
|
|
$
|
174,574
|
|
|
$
|
329,884
|
|
|
$
|
348,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale segment
|
|
$
|
12,720
|
|
|
$
|
5,730
|
|
|
$
|
25,858
|
|
|
$
|
22,658
|
|
Retail segment
|
|
|
9,909
|
|
|
|
(135
|
)
|
|
|
11,892
|
|
|
|
1,429
|
|
Elimination of intercompany profit (a)
|
|
|
(74
|
)
|
|
|
3,609
|
|
|
|
(3,514
|
)
|
|
|
3,758
|
|
Operating income
|
|
|
22,555
|
|
|
|
9,204
|
|
|
|
34,236
|
|
|
|
27,845
|
|
Other income (expense), including interest, net
|
|
|
(377
|
)
|
|
|
63
|
|
|
|
(817
|
)
|
|
|
82
|
|
Consolidated total
|
|
$
|
22,178
|
|
|
$
|
9,267
|
|
|
$
|
33,419
|
|
|
$
|
27,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale segment
|
|
$
|
1,643
|
|
|
$
|
1,750
|
|
|
$
|
3,347
|
|
|
$
|
3,640
|
|
Retail segment
|
|
|
2,362
|
|
|
|
2,704
|
|
|
|
4,798
|
|
|
|
4,790
|
|
Consolidated total
|
|
$
|
4,005
|
|
|
$
|
4,454
|
|
|
$
|
8,145
|
|
|
$
|
8,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale segment
|
|
$
|
2,082
|
|
|
$
|
1,148
|
|
|
$
|
3,124
|
|
|
$
|
2,311
|
|
Retail segment
|
|
|
1,357
|
|
|
|
3,425
|
|
|
|
2,754
|
|
|
|
5,676
|
|
Consolidated total
|
|
$
|
3,439
|
|
|
$
|
4,573
|
|
|
$
|
5,878
|
|
|
$
|
7,987
|
|
|
(a)
|
Represents the change in wholesale profit contained in the retail segment inventory at the end of the period.
|
(in thousands)
|
|
December 31,
|
|
|
June 30,
|
|
Total Assets
|
|
2020
|
|
|
2020
|
|
Wholesale segment
|
|
$
|
263,365
|
|
|
$
|
255,011
|
|
Retail segment
|
|
|
399,647
|
|
|
|
390,635
|
|
Inventory profit elimination (a)
|
|
|
(26,793
|
)
|
|
|
(22,857
|
)
|
Consolidated total
|
|
$
|
636,219
|
|
|
$
|
622,789
|
|
|
(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.
|
(16) Commitments and Contingencies
Commitments represent obligations, such as those for future purchases of goods or services that are not yet recorded on the balance sheet as liabilities. We record liabilities for commitments when incurred (specifically, when the goods or services are received). As of June 30, 2020, we had total contractual obligations of $233.4 million, of which $149.7 million related to our operating lease commitments, $50.0 million of long-term debt and $32.9 million of purchase obligations. With the exception of the $50.0 million repayment of our long-term debt in September 2020 and lease payments totaling $16.7 million made to our landlords partially offset by $12.1 million in operating lease assets obtained in exchange for operating lease liabilities and $6.3 million in dividends payable as of December 31, 2020, there were no other material changes in our contractual obligations during the first six months of fiscal 2021.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
We are routinely party to various legal proceedings, claims, lawsuits and regulatory examinations that have arisen in the ordinary course of our business, including employment matters, commercial and intellectual property disputes and environmental items. The outcome of litigation and other legal matters is always uncertain. We believe that the Company has valid defenses to the legal matters currently pending against it, is defending itself vigorously and has recorded accruals determined in accordance with GAAP, where appropriate. On a quarterly basis, we review our litigation activities and determine if an unfavorable outcome to us is considered “remote”, “reasonably possible” or “probable” as defined by ASC 450, Contingencies. Where we determine an unfavorable outcome is probable and is reasonably estimable, we accrue for potential litigation losses. The liability we may ultimately incur with respect to such litigation matters, in the event of a negative outcome, may be in excess of amounts currently accrued, if any; however, we do not expect that the reasonably possible outcome of these litigation matters would, individually or in the aggregate, have a material adverse effect on our financial condition, results of operations or cash flows. Where we determine an unfavorable outcome is not probable or reasonably estimable, we do not accrue for any potential litigation loss. Although it is possible that resolution of one or more of the legal matters currently pending or threatened could result in losses material to us, management believes that, based on information available at December 31, 2020, the likelihood is remote that any current pending claims or proceedings, individually or in the aggregate, will have a material adverse effect on our financial position, results of operations or cash flows.
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. Based on the present facts, we believe that our facilities are in material compliance with all such applicable laws and regulations and there will be no material adverse effect on our financial position or future results of operations.