Ethan Allen Interiors Inc 10-Q for FY2023 Q2
Ethan Allen Interiors Inc (ETD)
About this 10-Q
Ethan Allen Interiors Inc filed this 10-Q on January 25, 2023, covering the quarter ended December 31, 2022 (FY2023 Q2).
Headline figures
Quarter ended December 31, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $203.16M
- down 2.4% from $208.09M a year earlier
- Net income
- $28.17M
- up 4.7% from net income of $26.89M a year earlier
- Diluted EPS
- $1.10
- up 4.8% from $1.05 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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:
(Exact name of registrant as specified in its charter)
|
|
|
|
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
|
|
|
|
(Address of principal executive offices) |
(Zip Code) |
(
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
|
|
|
|
||
|
(Title of each class) |
(Trading symbol) |
(Name of each exchange on which registered) |
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. ☒
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). ☒
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 ☐ |
|
|
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).
The number of shares outstanding of the registrant’s common stock, $0.01 par value, as of January 18, 2023, was
ETHAN ALLEN INTERIORS INC.
FORM 10-Q SECOND QUARTER OF FISCAL 2023
TABLE OF CONTENTS
| PART I - FINANCIAL INFORMATION | ||
| Item 1.Financial Statements |
2 |
|
| CONSOLIDATED BALANCE SHEETS |
2 |
|
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) |
3 |
|
| CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) |
4 |
|
| CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited) |
5 |
|
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) |
6 |
|
| Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations |
18 |
|
| Item 3.Quantitative and Qualitative Disclosures About Market Risk | 32 | |
| Item 4.Controls and Procedures | 33 | |
| PART II - OTHER INFORMATION | ||
| Item 1.Legal Proceedings | 34 | |
| Item 1A.Risk Factors | 34 | |
| Item 2.Unregistered Sales of Equity Securities and Use of Proceeds | 34 | |
| Item 3.Defaults Upon Senior Securities | 34 | |
| Item 4.Mine Safety Disclosures | 34 | |
| Item 5.Other Information | 34 | |
| Item 6.Exhibits | 35 | |
|
SIGNATURES |
35 | |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
|
December 31, 2022 |
June 30, 2022 |
|||||||
|
ASSETS |
(Unaudited) | |||||||
| Current assets: | ||||||||
|
Cash and cash equivalents |
$ | $ | ||||||
|
Investments |
||||||||
|
Accounts receivable, net |
||||||||
|
Inventories, net |
||||||||
|
Prepaid expenses and other current assets |
||||||||
|
Total current assets |
||||||||
|
Property, plant and equipment, net |
||||||||
|
Goodwill |
||||||||
|
Intangible assets |
||||||||
|
Operating lease right-of-use assets |
||||||||
|
Deferred income taxes |
||||||||
|
Other assets |
||||||||
|
Total ASSETS |
$ | $ | ||||||
| LIABILITIES | ||||||||
| Current liabilities: | ||||||||
|
Accounts payable and accrued expenses |
$ | $ | ||||||
|
Customer deposits |
||||||||
|
Accrued compensation and benefits |
||||||||
|
Current operating lease liabilities |
||||||||
|
Other current liabilities |
||||||||
|
Total current liabilities |
||||||||
|
Operating lease liabilities, long-term |
||||||||
|
Deferred income taxes |
||||||||
|
Other long-term liabilities |
||||||||
|
Total LIABILITIES |
$ | $ | ||||||
| Commitments and contingencies (see Note 18) |
|
|
||||||
| SHAREHOLDERS' EQUITY | ||||||||
|
Preferred stock, $ |
$ | $ | ||||||
|
Common stock, $ |
||||||||
|
Additional paid-in capital |
||||||||
|
Treasury stock, at cost: |
( |
) | ( |
) | ||||
|
Retained earnings |
||||||||
|
Accumulated other comprehensive loss |
( |
) | ( |
) | ||||
|
Total Ethan Allen Interiors Inc. shareholders' equity |
||||||||
|
Noncontrolling interests |
( |
) | ( |
) | ||||
|
Total SHAREHOLDERS' EQUITY |
||||||||
|
Total LIABILITIES AND SHAREHOLDERS' EQUITY |
$ | $ | ||||||
See accompanying notes to consolidated financial statements.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In thousands, except per share data)
|
Three months ended |
Six months ended |
|||||||||||||||
|
December 31, |
December 31, |
|||||||||||||||
|
2022 |
2021 |
2022 |
2021 |
|||||||||||||
|
Net sales |
$ | $ | $ | $ | ||||||||||||
|
Cost of sales |
||||||||||||||||
|
Gross profit |
||||||||||||||||
|
Selling, general and administrative expenses |
||||||||||||||||
|
Restructuring and other impairment charges, net of gains |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
|
Operating income |
||||||||||||||||
|
Interest and other income, net |
( |
) | ||||||||||||||
|
Interest expense and other financing costs |
||||||||||||||||
|
Income before income taxes |
||||||||||||||||
|
Income tax expense |
||||||||||||||||
|
Net income |
$ | $ | $ | $ | ||||||||||||
| Per share data | ||||||||||||||||
| Basic earnings per common share: | ||||||||||||||||
|
Net income per basic share |
$ | $ | $ | $ | ||||||||||||
|
Basic weighted average common shares |
||||||||||||||||
| Diluted earnings per common share: | ||||||||||||||||
|
Net income per diluted share |
$ | $ | $ | $ | ||||||||||||
|
Diluted weighted average common shares |
||||||||||||||||
| Comprehensive income | ||||||||||||||||
|
Net income |
$ | $ | $ | $ | ||||||||||||
| Other comprehensive income (loss), net of tax | ||||||||||||||||
|
Foreign currency translation adjustments |
( |
) | ||||||||||||||
|
Other income (loss) |
( |
) | ( |
) | ||||||||||||
|
Other comprehensive income (loss), net of tax |
( |
) | ||||||||||||||
|
Comprehensive income |
$ | $ | $ | $ | ||||||||||||
See accompanying notes to consolidated financial statements.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
|
Six months ended |
||||||||
|
December 31, |
||||||||
|
Cash Flows from Operating Activities |
2022 |
2021 |
||||||
|
Net income |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
|
Depreciation and amortization |
||||||||
|
Share-based compensation expense |
||||||||
|
Non-cash operating lease cost |
||||||||
|
Deferred income taxes |
( |
) | ||||||
|
Restructuring and other impairment charges, net of gains |
( |
) | ( |
) | ||||
|
Restructuring payments |
( |
) | ( |
) | ||||
|
Loss on disposal of property, plant and equipment |
||||||||
|
Other |
||||||||
| Change in operating assets and liabilities | ||||||||
|
Accounts receivable, net |
||||||||
|
Inventories, net |
( |
) | ||||||
|
Prepaid expenses and other current assets |
( |
) | ||||||
|
Customer deposits |
( |
) | ( |
) | ||||
|
Accounts payable and accrued expenses |
( |
) | ( |
) | ||||
|
Accrued compensation and benefits |
( |
) | ( |
) | ||||
|
Operating lease liabilities |
( |
) | ( |
) | ||||
|
Other assets and liabilities |
( |
) | ( |
) | ||||
|
Net cash provided by operating activities |
||||||||
| Cash Flows from Investing Activities | ||||||||
|
Proceeds from sales of property, plant and equipment |
||||||||
|
Capital expenditures |
( |
) | ( |
) | ||||
|
Purchases of investments |
( |
) | ||||||
|
Proceeds from sales of investments |
||||||||
|
Net cash (used in) provided by investing activities |
( |
) | ||||||
| Cash Flows from Financing Activities | ||||||||
|
Payment of cash dividends |
( |
) | ( |
) | ||||
|
Proceeds from employee stock plans |
||||||||
|
Taxes paid related to net share settlement of equity awards |
( |
) | ( |
) | ||||
|
Payments on financing leases |
( |
) | ( |
) | ||||
|
Other financing costs |
( |
) | ||||||
|
Net cash used in financing activities |
( |
) | ( |
) | ||||
|
Effect of exchange rate changes on cash and cash equivalents |
( |
) | ( |
) | ||||
|
Net (decrease) increase in cash, cash equivalents and restricted cash |
( |
) | ||||||
|
Cash, cash equivalents and restricted cash at beginning of period |
||||||||
|
Cash, cash equivalents and restricted cash at end of period |
$ | $ | ||||||
See accompanying notes to consolidated financial statements.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)
(In thousands)
|
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, 2022 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | $ | |||||||||||||||||||||||
|
Net income |
- | - | ||||||||||||||||||||||||||||||||||
|
Share-based compensation expense |
- | - | ||||||||||||||||||||||||||||||||||
|
Restricted stock vesting |
( |
) | ( |
) | ||||||||||||||||||||||||||||||||
|
Cash dividends declared |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
|
Other comprehensive income (loss) |
- | - | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||
|
Balance at September 30, 2022 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | $ | |||||||||||||||||||||||
|
Net income |
- | - | ||||||||||||||||||||||||||||||||||
|
Common stock issued on share-based awards |
- | |||||||||||||||||||||||||||||||||||
|
Share-based compensation expense |
- | - | ||||||||||||||||||||||||||||||||||
|
Cash dividends declared |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
|
Other comprehensive income (loss) |
- | - | ||||||||||||||||||||||||||||||||||
|
Balance at December 31, 2022 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | $ | |||||||||||||||||||||||
|
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, 2021 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | $ | |||||||||||||||||||||||
|
Net income |
- | - | ||||||||||||||||||||||||||||||||||
|
Share-based compensation expense |
- | - | ||||||||||||||||||||||||||||||||||
|
Restricted stock vesting |
( |
) | ( |
) | ||||||||||||||||||||||||||||||||
|
Cash dividends declared |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
|
Other comprehensive income (loss) |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
|
Balance at September 30, 2021 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | $ | |||||||||||||||||||||||
|
Net income |
- | - | ||||||||||||||||||||||||||||||||||
|
Common stock issued on share-based awards |
||||||||||||||||||||||||||||||||||||
|
Share-based compensation expense |
- | - | ||||||||||||||||||||||||||||||||||
|
Cash dividends declared |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
|
Other comprehensive income (loss) |
- | - | ( |
) | ||||||||||||||||||||||||||||||||
|
Balance at December 31, 2021 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | $ | |||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
(1) |
Organization and Nature of Business |
Organization
Founded in 1932, 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 Delaware corporation and leading interior design company, manufacturer and retailer in the home furnishings marketplace.
Nature of Business
We are a global luxury home fashion brand that is vertically integrated from product design through home delivery, which offers our customers stylish product offerings, artisanal quality and personalized service. We are known for the quality and craftsmanship of our products as well as for the exceptional personal service from design to delivery. We provide interior design service to our clients and sell a full range of home furnishings through a retail network of design centers located throughout the United States and abroad as well as online at ethanallen.com.
Ethan Allen design centers represent a mix of locations operated by independent licensees and Company-operated locations. As of December 31, 2022, the Company operates 139 retail design centers with 135 located in the United States and four in Canada. Our independently operated design centers are located in the United States, Asia, the Middle East and Europe. We also own and operate ten manufacturing facilities, including four manufacturing plants, one sawmill, one rough mill and one kiln dry lumberyard in the United States, two manufacturing plants in Mexico and one manufacturing plant in Honduras. Approximately
|
(2) |
Interim Basis of Presentation |
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Our consolidated financial statements also include the accounts of an entity in which we are a majority shareholder with the power to direct the activities that most significantly impact the entity’s performance. Noncontrolling interest amounts in the entity are immaterial and included in the consolidated statements of comprehensive income within Interest and other income, net.
All intercompany activity and balances, including any related profit on intercompany sales, 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, 2022 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 Annual Report on Form 10-K for the fiscal year ended June 30, 2022 (the “2022 Annual Report on Form 10-K”).
Use of Estimates
We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles (“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, recoverability and useful lives for property, plant and equipment, inventory obsolescence, tax valuation allowances and the evaluation of uncertain tax positions and business insurance reserves.
Restricted Cash
We present restricted cash as a component of total cash and cash equivalents on our consolidated statement of cash flows and within Other Assets on our consolidated balance sheet. As of December 31, 2022 and June 30, 2022, we held $
We have evaluated subsequent events through the date of issuance of the financial statements included in this Quarterly Report on Form 10-Q.
|
(3) |
Recent Accounting Pronouncements |
|
(4) |
Revenue Recognition |
Our reported revenue (net sales) consists 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.
Shipping and Handling. 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 (“SG&A”) 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.
Sales Taxes. 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 tax 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.
Returns and Allowances. 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, 2022 and June 30, 2022, these amounts were immaterial.
Allowance for Doubtful Accounts. Accounts receivable arise from the sale of products on trade credit terms and is presented net of allowance for doubtful accounts. We maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. The allowance for doubtful accounts is based on a review of specifically identified accounts in addition to an overall aging analysis. At December 31, 2022 and June 30, 2022, the allowance for doubtful accounts was immaterial.
Commissions. 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, 2022, we had prepaid commissions of $
Customer Deposits. In most cases we collect deposits from customers on a portion of the total purchase price at the time a written order is placed, but 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 on our consolidated balance sheets. As of December 31, 2022, we had customer deposits of $
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.
The following table disaggregates our net sales by product category by segment (in thousands):
|
Three months ended December 31, 2022 |
Three months ended December 31, 2021 |
|||||||||||||||||||||||||||||||
|
Wholesale |
Retail |
Eliminations(1) |
Total |
Wholesale |
Retail |
Eliminations(1) |
Total |
|||||||||||||||||||||||||
|
Upholstery(2) |
$ | $ | $ | ( |
) | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||||||
|
Case goods(3) |
( |
) | ( |
) | ||||||||||||||||||||||||||||
|
Accents(4) |
( |
) | ( |
) | ||||||||||||||||||||||||||||
|
Other(5) |
( |
) | ( |
) | ||||||||||||||||||||||||||||
|
Total |
$ | $ | $ | ( |
) | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||||||
|
Six months ended December 31, 2022 |
Six months ended December 31, 2021 |
|||||||||||||||||||||||||||||||
|
Wholesale |
Retail |
Eliminations(1) |
Total |
Wholesale |
Retail |
Eliminations(1) |
Total |
|||||||||||||||||||||||||
|
Upholstery(2) |
$ | $ | $ | ( |
) | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||||||
|
Case goods(3) |
( |
) | ( |
) | ||||||||||||||||||||||||||||
|
Accents(4) |
( |
) | ( |
) | ||||||||||||||||||||||||||||
|
Other(5) |
( |
) | ( |
) | ||||||||||||||||||||||||||||
|
Total |
$ | $ | $ | ( |
) | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||||||
|
(1) |
|
|
(2) |
|
|
(3) |
|
|
(4) |
|
|
(5) |
|
|
(5) |
Fair Value Measurements |
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, the use of various valuation methodologies, including market, income and cost approaches is permissible. We consider the principal or most advantageous market in which it would transact and assumptions that market participants would use when pricing the asset or liability.
Fair Value Hierarchy. The accounting guidance for fair value measurements establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value based on the reliability of inputs. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect their placement within the fair value hierarchy levels.
We have categorized our cash equivalents and investments within the fair value hierarchy as follows:
Level 1 – applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities. These Level 1 assets include our corporate money market funds that are classified as cash equivalents. We have categorized our cash equivalents as Level 1 assets as there are quoted prices in active markets for identical assets or liabilities.
Level 2 – applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data. At December 31, 2022 and June 30, 2022, we have categorized our investments as Level 2 assets.
Level 3 – applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities. We held no Level 3 assets or liabilities as of December 31, 2022 or June 30, 2022.
Assets and Liabilities Measured at Fair Value on a Recurring Basis. The following tables show, by level within the fair value hierarchy, our assets and liabilities that are measured at fair value on a recurring basis at December 31, 2022 and June 30, 2022. We did not have any transfers between levels of fair value measurements during the periods presented.
|
Fair Value Measurements at December 31, 2022 |
||||||||||||||||
|
Assets |
Level 1 |
Level 2 |
Level 3 |
Balance |
||||||||||||
|
Corporate money market funds (1) |
$ | $ | $ | $ | ||||||||||||
|
Investments (2) |
||||||||||||||||
|
Total |
$ | $ | $ | $ | ||||||||||||
|
Fair Value Measurements at June 30, 2022 |
||||||||||||||||
|
Assets |
Level 1 |
Level 2 |
Level 3 |
Balance |
||||||||||||
|
Corporate money market funds (1) |
$ | $ | $ | $ | ||||||||||||
|
Investments (2) |
||||||||||||||||
|
Total |
$ | $ | $ | $ | ||||||||||||
|
(1) |
|
|
(2) |
|
As of December 31, 2022 and June 30, 2022, we did not have any outstanding bank borrowings, which we historically have categorized as a Level 2 liability. There were no investments that have been in a continuous loss position for more than one year, and there have been no other-than-temporary impairments recognized.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis. We did not record any other-than-temporary impairments on assets required to be measured at fair value on a non-recurring basis during fiscal 2023 or 2022.
Assets and Liabilities Measured at Fair Value for Disclosure Purposes Only. We had
|
(6) |
Leases |
We recognize substantially all leases on our balance sheet as a ROU asset and a lease liability. We have operating leases for many of our design centers that expire at various dates through fiscal 2040. We also lease certain tangible assets, including computer equipment and vehicles, with initial lease terms ranging from to 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. 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 determine 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. The incremental borrowing rate is subsequently reassessed upon a modification to the lease agreement. 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.
The Company's lease terms and discount rates are as follows:
|
December 31, |
||||||||
|
2022 |
2021 |
|||||||
| Weighted average remaining lease term (in years) | ||||||||
|
Operating leases |
||||||||
|
Financing leases |
||||||||
| Weighted average discount rate | ||||||||
|
Operating leases |
||||||||
|
Financing leases |
||||||||
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, |
Six months ended December 31, |
||||||||||||||||
|
Statements of Comprehensive Income Location |
2022 |
2021 |
2022 |
2021 |
|||||||||||||
|
Operating lease cost(1) |
Selling, general and administrative (“SG&A”) expenses | $ | $ | $ | $ | ||||||||||||
| Financing lease cost | |||||||||||||||||
|
Depreciation of property |
SG&A expenses | ||||||||||||||||
|
Interest on lease liabilities |
Interest and other financing costs | ||||||||||||||||
|
Short-term lease cost(2) |
SG&A expenses | ||||||||||||||||
|
Variable lease cost(3) |
SG&A expenses | ||||||||||||||||
|
Less: Sublease income |
SG&A expenses | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
|
Total lease expense |
$ | $ | $ | $ | |||||||||||||
|
(1) |
|
|
(2) |
|
|
(3) |
|
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, 2022 (in thousands):
|
Fiscal Year |
Operating Leases |
Financing Leases |
||||||
|
2023 (remaining six months) |
$ | $ | ||||||
|
2024 |
||||||||
|
2025 |
||||||||
|
2026 |
||||||||
|
2027 |
||||||||
|
Thereafter |
||||||||
|
Total undiscounted future minimum lease payments |
||||||||
|
Less: imputed interest |
( |
) | ( |
) | ||||
|
Total present value of lease obligations(1) |
$ | $ | ||||||
|
(1) |
|
As of December 31, 2022, we have one operating lease for a retail design center, which has not yet commenced. This operating lease is not part of the tables above nor in the lease right-of-use assets and liabilities. This lease will commence when we obtain possession of the underlying leased asset, which is expected to occur during the third quarter of fiscal 2023. The operating lease is for a period of years and has aggregate undiscounted future lease payments of $
Other supplemental information for our leases is as follows (in thousands):
|
Six months ended |
||||||||
|
2022 |
2021 |
|||||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||||||
|
Operating cash flows from operating leases |
$ | $ | ||||||
|
Operating cash flows from financing leases |
$ | $ | ||||||
|
Operating lease assets obtained in exchange for operating lease liabilities |
$ | $ | ||||||
There were no non-cash financing lease obligations obtained in exchange for new financing lease assets during the six months ended December 31, 2022 or 2021.
Sale-leaseback transaction. On August 1, 2022, we completed a sale-leaseback transaction with an independent third party for the land, building and related fixed assets of a retail design center. The design center was leased back to Ethan Allen via a multi-year operating lease agreement. As part of the transaction, we received net proceeds of $
|
(7) |
Inventories |
Inventories are summarized as follows (in thousands):
|
December 31, |
June 30, |
|||||||
|
2022 |
2022 |
|||||||
|
Finished goods |
$ | $ | ||||||
|
Work in process |
||||||||
|
Raw materials |
||||||||
|
Inventory reserves |
( |
) | ( |
) | ||||
|
Inventories, net |
$ | $ | ||||||
|
(8) |
Property, Plant and Equipment |
Property, plant and equipment are summarized as follows (in thousands):
|
December 31, |
June 30, |
|||||||
|
2022 |
2022 |
|||||||
|
Land and improvements |
$ | $ | ||||||
|
Building and improvements |
||||||||
|
Machinery and equipment |
||||||||
|
Property, plant and equipment, gross |
||||||||
|
Less: accumulated depreciation and amortization |
( |
) | ( |
) | ||||
|
Property, plant and equipment, net |
$ | $ | ||||||
We recorded depreciation expense of $
|
(9) |
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. At December 31, 2022 and June 30, 2022, we had $
Both goodwill and indefinite-lived intangible assets are not amortized as they are estimated to have an indefinite life. We test our wholesale goodwill and indefinite-lived intangibles for impairment on an annual basis in the fourth quarter of each fiscal year, and more frequently if events or changes in circumstances indicate that it might be impaired. We performed our annual goodwill impairment test during the fourth quarter of fiscal 2022, consistent with the timing of prior years. We concluded it was more likely than not that the fair value was greater than the respective carrying value and no impairment charge was required.
|
(10) |
Other Current Liabilities |
The following table summarizes the nature of the amounts within Other current liabilities (in thousands):
|
December 31, |
June 30, |
|||||||
|
2022 |
2022 |
|||||||
|
Income taxes payable |
$ | $ | ||||||
|
Deferred liability, short-term (1) |
||||||||
|
Dividends payable(2) |
||||||||
|
Financing lease liabilities, short-term |
||||||||
|
Other current liabilities |
||||||||
|
Other current liabilities |
$ | $ | ||||||
|
(1) |
|
|
(2) |
|
|
(11) |
Income Taxes |
We recorded income tax expense of $
We recognize interest and penalties related to income tax matters as a component of income tax expense. As of December 31, 2022, we had $
|
(12) |
Credit Agreement |
On January 26, 2022, the Company and most of its domestic subsidiaries (the “Loan Parties”) entered into a Third 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 amends and restates the Second Amended and Restated Credit Agreement, dated as of December 21, 2018, as amended. The Credit Agreement provides for a $
Availability. The availability of credit at any given time under the Facility will be constrained by the terms and conditions of the Credit Agreement, 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. Total borrowing base availability under the Facility was $
Borrowings. At the Company’s option, borrowings under the Facility bear interest, based on the average quarterly availability, at an annual rate of either (a) Adjusted Term SOFR Rate (defined as the Term SOFR Rate for such interest period plus
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 fixed charge coverage ratio covenant, set at
Letters of Credit. At both December 31, 2022 and June 30, 2022, there was $
|
(13) |
Restructuring and Other Impairment Activities |
Restructuring and other impairment charges, net of gains, were as follows (in thousands):
|
Three months ended |
Six months ended |
|||||||||||||||
|
2022 |
2021 |
2022 |
2021 |
|||||||||||||
|
Gain on sale-leaseback transaction(1) |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
|
Gain on sale of property, plant and equipment(2) |
( |
) | ( |
) | ||||||||||||
|
Severance and other charges |
||||||||||||||||
|
Total Restructuring and other impairment charges, net of gains |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
|
(1) |
|
|
(2) |
|
Restructuring payments made by the Company during the first six months of fiscal 2023 were $
|
(14) |
Earnings Per Share |
Basic and diluted earnings per share (“EPS”) are calculated using the following weighted average share data (in thousands):
|
Three months ended |
Six months ended |
|||||||||||||||
|
December 31, |
December 31, |
|||||||||||||||
|
2022 |
2021 |
2022 |
2021 |
|||||||||||||
|
Weighted average shares outstanding for basic calculation |
||||||||||||||||
|
Dilutive effect of stock options and other share-based awards |
||||||||||||||||
|
Weighted average shares outstanding adjusted for dilution calculation |
||||||||||||||||
Dilutive potential common shares consist of stock options, restricted stock units and performance units.
As of December 31, 2022 and 2021, total share-based awards of
As of December 31, 2022 and 2021, the number of performance units excluded from the calculation of diluted EPS were
|
(15) |
Accumulated Other Comprehensive Loss |
Accumulated other comprehensive loss consists of foreign currency translation adjustments and unrealized gains or losses on investments. Foreign currency translation adjustments 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. Our investments consist of U.S. Treasury Bills, municipal bonds, commercial paper and certificates of deposit with maturities of one year or less. All unrealized gains and losses are included in Accumulated Other Comprehensive Loss within the consolidated balance sheets.
The components of accumulated other comprehensive loss are as follows (in thousands):
|
December 31, |
June 30, |
|||||||
|
Accumulated foreign currency translation adjustments |
$ | ( |
) | $ | ( |
) | ||
|
Accumulated unrealized gains (losses) on investments |
( |
) | ||||||
| $ | ( |
) | $ | ( |
) | |||
The following table sets forth the activity in accumulated other comprehensive loss (in thousands).
|
2022 |
2021 |
|||||||
|
Beginning balance at July 1 |
$ | ( |
) | $ | ( |
) | ||
|
Other comprehensive income (loss), net of tax |
( |
) | ||||||
|
Less AOCI attributable to noncontrolling interests |
( |
) | ||||||
|
Ending balance at December 31 |
$ | ( |
) | $ | ( |
) | ||
|
(16) |
Share-Based Compensation |
We recognized total share-based compensation expense of $
At December 31, 2022, there were
Stock Option Activity
Employee Stock Option Grants. There were stock option awards granted to employees during the six months ended December 31, 2022 and 2021.
Non-Employee Stock Option Grants. The Plan also provides for the grant of share-based awards, including stock options, to non-employee directors of the Company. During the first quarter of fiscal 2023, we granted
As of December 31, 2022, $
Restricted Stock Unit Activity
During the first six months of fiscal 2023, we granted
During the first six months of fiscal 2023,
As of December 31, 2022, $
Performance Stock Unit Activity
Payout of performance stock unit (“PSU”) grants depend on the attainment of certain financial and shareholder-return goals over a specific performance period, which is generally fiscal years. The number of awards that will vest, as well as unearned and canceled awards, depend 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.
During the first six months of fiscal 2023 we granted
During the first six months of fiscal 2023,
Unrecognized compensation expense as of December 31, 2022, related to PSUs, was $
|
(17) |
Segment Information |
Ethan Allen conducts business globally and has strategically aligned its 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. Our operating segments are aligned with how the Company, including our chief operating decision maker, manages the business. 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 sales and operating income.
Wholesale Segment. The wholesale segment is principally involved in the development of the Ethan Allen brand and encompasses all aspects of design, manufacturing, sourcing, merchandising, marketing and distribution of our broad range of home furnishings and accents. 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. Wholesale revenue is generated upon the sale and shipment of our products to our retail network of independently operated design centers, Company-operated design centers and other contract customers.
Retail Segment. The retail segment sells home furnishings and accents to clients through a network of Company-operated design centers. Retail revenue is generated upon the retail sale and delivery of our products to our retail customers through our network of retail home delivery centers. Retail profitability reflects (i) the retail gross margin, which represents the difference between the retail net sales price and the cost of goods, purchased from the wholesale segment, and (ii) other operating costs associated with retail segment activities. As of December 31, 2022, the Company operated
Intersegment. We account for intersegment sales transactions between our segments consistent with independent third-party transactions, that is, at current market prices. As a result, the manufacturing profit related to sales to our retail segment is included within our wholesale segment. Operating income realized on intersegment revenue transactions is therefore generally consistent with the operating income realized on our revenue from independent third-party transactions. Segment operating income is based on profit or loss from operations before interest and other financing costs, other income (expense), net and income taxes. Sales are attributed to countries on the basis of the customer's location.
Segment information is provided below (in thousands):
|
Three months ended |
Six months ended |
|||||||||||||||
|
December 31, |
December 31, |
|||||||||||||||
|
2022 |
2021 |
2022 |
2021 |
|||||||||||||
| Net sales | ||||||||||||||||
|
Wholesale segment |
$ | $ | $ | $ | ||||||||||||
|
Less: intersegment sales |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
|
Wholesale sales to external customers |
||||||||||||||||
|
Retail segment |
||||||||||||||||
|
Consolidated total |
$ | $ | $ | $ | ||||||||||||
| Income before income taxes | ||||||||||||||||
|
Wholesale segment |
$ | $ | $ | $ | ||||||||||||
|
Retail segment |
||||||||||||||||
|
Elimination of intercompany profit (a) |
||||||||||||||||
|
Operating income |
||||||||||||||||
|
Interest and other income, net |
( |
) | ||||||||||||||
|
Interest expense and other financing costs |
||||||||||||||||
|
Consolidated total |
$ | $ | $ | $ | ||||||||||||
| Depreciation and amortization | ||||||||||||||||
|
Wholesale segment |
$ | $ | $ | $ | ||||||||||||
|
Retail segment |
||||||||||||||||
|
Consolidated total |
$ | $ | $ | $ | ||||||||||||
| Capital expenditures | ||||||||||||||||
|
Wholesale segment |
$ | $ | $ | $ | ||||||||||||
|
Retail segment |
||||||||||||||||
|
Consolidated total |
$ | $ | $ | $ | ||||||||||||
|
(a) |
|
|
(in thousands) |
December 31, |
June 30, |
||||||
|
Total Assets |
2022 |
2022 |
||||||
|
Wholesale segment |
$ | $ | ||||||
|
Retail segment |
||||||||
|
Inventory profit elimination (a) |
( |
) | ( |
) | ||||
|
Consolidated total |
$ | $ | ||||||
|
(a) |
|
|
(18) |
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).
Material Cash Requirements from Contractual Obligations. As disclosed in our 2022 Annual Report on Form 10-K, as of June 30, 2022, we had total contractual obligations of $
Legal Matters. 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. Although the outcome of the various claims and proceedings against us cannot be predicted with certainty, management believes that, based on information available at December 31, 2022, the likelihood is remote that any existing claims or proceedings, individually or in the aggregate, will have a material adverse effect on our financial position, results of operations or cash flows.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”) is designed to provide a reader of our consolidated financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. The MD&A should be read in conjunction with our 2022 Annual Report on Form 10-K, Current Reports on Form 8-K and other filings with the Securities and Exchange Commission (the “SEC”), and the consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q.
The MD&A is presented in the following sections:
|
- |
Cautionary Note Regarding Forward-Looking Statements |
|
|
- |
Executive Overview |
|
|
- |
Key Operating Metrics |
|
|
- |
Results of Operations |
|
|
- |
Reconciliation of Non-GAAP Financial Measures |
|
|
- |
Liquidity |
|
|
- |
Capital Resources, including Material Cash Requirements |
|
|
- |
Other Arrangements |
|
|
- |
Significant Accounting Policies |
|
|
- |
Critical Accounting Estimates |
|
|
- |
Recent Accounting Pronouncements |
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q, including the MD&A, contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Generally, forward-looking statements represent management’s beliefs and assumptions concerning current expectations, projections or trends relating to results of operations, financial results, financial condition, strategic objectives and plans, expenses, dividends, share repurchases, liquidity, use of cash and cash requirements, investments, future economic performance, business and industry and the effect of the novel coronavirus (“COVID-19”) pandemic on the business operations and financial results. Such forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. These forward-looking statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “continue,” “may,” “will,” “short-term,” “target,” “outlook,” “forecast,” “future,” “strategy,” “opportunity,” “would,” “guidance,” “non-recurring,” “one-time,” “unusual,” “should,” “likely,” “COVID-19 impact,” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. We derive many of our forward-looking statements from operating budgets and forecasts, which are based upon many detailed assumptions. While the Company believes that its assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors and it is impossible for the Company to anticipate all factors that could affect actual results and matters that are identified as “short term,” “non-recurring,” “unusual,” “one-time,” or other words and terms of similar meaning may in fact recur in one or more future financial reporting periods.
Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that are expected. Actual results could differ materially from those anticipated in the forward-looking statements due to a number of risks and uncertainties including, but not limited to the following: a resurgence of COVID-19 and resulting containment measures could negatively impact our ability to fulfill existing order backlog or cause changes in consumer demand; a resurgence of COVID-19 could lead to temporary closures, including our distribution centers; the Company may require additional funding from external sources, which may not be available at the levels required, or may cost more than expected; declines in certain economic conditions, which impact consumer confidence and spending; financial or operational difficulties due to competition in the residential home furnishings industry; a significant shift in consumer preference toward purchasing products online; an overall decline in the health of the economy and consumer spending has in the past and may in the future reduce consumer purchases of discretionary items; inability to maintain and enhance the Ethan Allen brand; failure to successfully anticipate or respond to changes in consumer tastes and trends in a timely manner; inability to maintain current design center locations at current costs; failure to select and secure appropriate retail locations; disruptions in the supply chain and supply chain management; fluctuations in the price, availability and quality of raw materials and imported finished goods resulting in increased costs and production delays, and which could result in a decline in sales; competition from overseas manufacturers and domestic retailers; the number of manufacturing and distribution sites may increase exposure to business disruptions and could result in higher transportation costs; current and former manufacturing and retail operations and products are subject to increasingly stringent environmental, health and safety requirements; product recalls or product safety concerns; significant increased costs or potential liabilities as a result of environmental laws and regulations aimed at combating climate change; risk to reputation and stock price related to future disclosures on Environmental, Social and Governance (“ESG”) matters; extensive reliance on information technology systems to process transactions, summarize results, and manage the business and that of certain independent retailers; disruptions in both primary and back-up systems; cyber-attacks and the ability to maintain adequate cyber-security systems and procedures; loss, corruption and misappropriation of data and information relating to customers; global and local economic uncertainty may materially adversely affect manufacturing operations or sources of merchandise and international operations; changes in United States trade and tax policies; reliance on certain key personnel, loss of key personnel or inability to hire additional qualified personnel; a shortage of qualified labor within our operations and our supply chain; potential future asset impairment charges resulting from changes to estimates or projections used to assess assets’ fair value, financial results that are lower than current estimates or determinations to close underperforming locations; access to consumer credit could be interrupted as a result of external conditions; failure to protect the Company’s intellectual property; hazards and risks which may not be fully covered by insurance; and other factors disclosed in Part I, Item 1A. Risk Factors, in our 2022 Annual Report on Form 10-K, and elsewhere here in this Quarterly Report on Form 10-Q.
All forward-looking statements attributable to the Company, or persons acting on its behalf, are expressly qualified in their entirety by these cautionary statements, as well as other cautionary statements. A reader should evaluate all forward-looking statements made in this Quarterly Report on Form 10-Q in the context of these risks and uncertainties. Given the risks and uncertainties surrounding forward-looking statements, you should not place undue reliance on these statements. Many of these factors are beyond our ability to control or predict. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as otherwise required by law.
Executive Overview
Who We Are. Founded in 1932, Ethan Allen is a leading interior design company, manufacturer and retailer in the home furnishings marketplace. We are a global luxury home fashion brand that is vertically integrated from product design through home delivery, which offers our customers stylish product offerings, artisanal quality and personalized service. We provide interior design service to our clients and sell a full range of home furnishing products through a retail network of design centers located throughout the United States and abroad as well as online at ethanallen.com. Ethan Allen design centers represent a mix of locations operated by independent licensees and Company-operated locations. As of December 31, 2022, the Company operates 139 retail design centers; 135 located in the United States and four in Canada. Our independently operated design centers are located in the United States, Asia, the Middle East and Europe. We also own and operate ten manufacturing facilities, including four manufacturing plants, one sawmill, one rough mill and a kiln dry lumberyard in the United States, two upholstery manufacturing plants in Mexico and one case goods manufacturing plant in Honduras. Approximately 75% of our products are manufactured or assembled in the North American plants. We also contract with various suppliers located in Europe, Asia and other various countries to produce products that support our business.
Business Model. Ethan Allen has a distinct vision of American style, rooted in the kind of substance that we believe differentiates us from our competitors. Our business model is to maintain continued focus on (i) providing relevant product offerings, (ii) capitalizing on the professional and personal service offered to our customers by our interior design professionals, (iii) leveraging the benefits of our vertical integration including a strong manufacturing presence in North America, (iv) regularly investing in new technologies across key aspects of our vertically integrated business, (v) maintaining a strong logistics network, (vi) communicating our messages with strong advertising and marketing campaigns, and (vii) utilizing our website, ethanallen.com, as a key marketing tool to drive traffic to our retail design centers.
Strategy. Our strategy emphasizes the aim to position Ethan Allen as an interior design destination and a preferred brand offering products of superior style, quality, and value to customers with a comprehensive, one-stop shopping solution for their home furnishing and interior design needs. In carrying out our strategy, we seek to constantly reinvent our projection and product offerings through a diverse selection of attractively priced products, designed to complement one another, reflecting current fashion trends in home decorating. We seek to continuously monitor changes in home fashion trends through industry events and fashion shows, internal market research, and regular communication with our retailers and design center design professionals who provide valuable input on consumer trends.
In December 2022 Ethan Allen celebrated 90 years of innovation at its 2022 Virtual Convention, which highlighted the Company’s rich history in classic style with a modern perspective, the service of its vertically integrated manufacturing and logistics networks, the strengthening of the Company’s retail network and the importance of being an interior design destination. Our strategy and focus will be on continuing to position ourselves as a premier interior design destination and strengthening our vertically integrated structure through talent and the use of technology within design centers, on the web, and throughout manufacturing, logistics, and product development.
Talent. Our employees, which we refer to as associates, are dedicated to helping each customer create a place that they will love to come home to everyday. We operate our business with an entrepreneurial attitude, staying focused on long-term growth, and treating our associates, vendors, and customers with dignity and justice, which we believe is critical to remaining both profitable and relevant amidst the constant changes taking place in the world. At December 31, 2022, our employee count totaled 3,943, with 2,863 employees in our wholesale segment and 1,080 in our retail segment. We are pleased in the continued strengthening of our teams and the performance of our associates during fiscal 2023 while at the same time being able to reduce headcount through operational efficiencies. Our employee count decreased 7.0% compared to June 30, 2022, with 120 less associates in retail and 176 less associates in our wholesale segment.
Competitive Advantages. We believe our competitive advantages arise from:
|
● |
being a leading interior design destination offering a wide array of custom made-to-order products across upholstery, case goods, and accent product categories; |
|
● |
having one of the world's largest interior design networks, combining talent with technology; |
|
● |
our North American manufacturing workshops providing customization capabilities and high-quality products of the finest craftsmanship; |
|
● |
our strong retail network, both of Company-operated locations and independent licensees; |
|
● |
our logistics network of national distribution centers and retail home delivery centers providing white-glove home delivery service; and |
|
● |
our continued ability to leverage our vertically integrated structure. |
Fiscal 2023 Second Quarter in Review (1). We are pleased with our second quarter performance, as we seek to continue delivering value to our shareholders, despite operating in a challenging economic environment. We believe that these results highlight the strengths of our vertically integrated enterprise as we produced strong gross and operating margins. While written orders have declined and returned to near pre-pandemic historical levels, our sales surpassed $200 million aided by our commitment to servicing our backlog and bringing it more current. As economic and financial conditions have slowed and become more uncertain, we remain cautiously optimistic that our initiatives have positioned us to maximize our vertically integrated company.
On a year over year basis, our retail written orders were down 16.3%, but were comparable to pre-pandemic levels. Backlogs were significantly reduced in the quarter due to strong delivered sales and softening demand. With that said, our backlog still remains approximately 50% higher than our pre-pandemic levels. Net sales totaled $203.2 million, a decrease of 2.4% compared to the prior year quarter. Both gross and operating margins increased compared to the prior year quarter, with a consolidated gross margin of 61.0% and an adjusted operating margin of 18.1% that led to adjusted diluted earnings per share growth of 15.8% to $1.10. Margin expansion was primarily due to pricing actions taken in last 12 months, product mix, a reduction in inbound freight costs and disciplined cost and expense control measures. Cash generated from operations totaled $2.5 million and we ended the quarter with cash on hand of $85.4 million and short-term investments of $55.0 million. Inventory balances continued to decrease as we sought to reduce our levels of inventory while also ensuring appropriate levels are maintained to service our customer base. Reflecting the continued strength of our balance sheet and strong history of returning capital to shareholders, our Board declared a regular quarterly cash dividend of $0.32 per share, which was paid on January 4, 2023.
|
(1) |
Refer to the Reconciliation of Non-GAAP Financial Measures section within the MD&A for the reconciliation of GAAP to adjusted key financial metrics. |
Key Operating Metrics
A summary of our key operating metrics is presented in the following table (in millions, except per share data).
|
Three months ended |
Six months ended |
||||||||||||||||||||||||||||||||||||||
|
2022 |
% of Sales |
% Chg |
2021 |
% of Sales |
% Chg |
2022 |
% of Sales |
% of Chg |
2021 |
% of Sales |
% of Chg |
||||||||||||||||||||||||||||
|
Net sales |
$ | 203.2 | 100.0 | % | (2.4 | %) | $ | 208.1 | 100.0 | % | 16.4 | % | $ | 417.7 | 100.0 | % | 7.0 | % | $ | 390.4 | 100.0 | % | 18.4 | % | |||||||||||||||
|
Gross profit |
$ | 124.0 | 61.0 | % | 1.4 | % | $ | 122.3 | 58.8 | % | 20.7 | % | $ | 253.6 | 60.7 | % | 9.6 | % | $ | 231.5 | 59.3 | % | 23.7 | % | |||||||||||||||
|
Operating income |
$ | 37.1 | 18.2 | % | 2.1 | % | $ | 36.3 | 17.4 | % | 60.9 | % | $ | 76.7 | 18.4 | % | 20.5 | % | $ | 63.7 | 16.3 | % | 85.9 | % | |||||||||||||||
|
Adjusted operating income(1) |
$ | 36.9 | 18.1 | % | 12.5 | % | $ | 32.8 | 15.7 | % | 40.3 | % | $ | 74.6 | 17.9 | % | 23.2 | % | $ | 60.5 | 15.5 | % | 69.6 | % | |||||||||||||||
|
Net income |
$ | 28.2 | 13.9 | % | 4.7 | % | $ | 26.9 | 12.9 | % | 59.3 | % | $ | 58.0 | 13.9 | % | 23.4 | % | $ | 47.0 | 12.1 | % | 79.3 | % | |||||||||||||||
|
Adjusted net income(1) |
$ | 28.0 | 13.8 | % | 15.5 | % | $ | 24.3 | 11.7 | % | 38.6 | % | $ | 56.4 | 13.5 | % | 26.3 | % | $ | 44.7 | 11.4 | % | 68.9 | % | |||||||||||||||
|
Diluted EPS |
$ | 1.10 | 4.8 | % | $ | 1.05 | 56.7 | % | $ | 2.27 | 0.5 | % | 22.7 | % | $ | 1.85 | 77.9 | % | |||||||||||||||||||||
|
Adjusted diluted EPS(1) |
$ | 1.10 | 15.8 | % | $ | 0.95 | 37.7 | % | $ | 2.21 | 26.3 | % | $ | 1.75 | 66.7 | % | |||||||||||||||||||||||
|
Cash flow from operating activities |
$ | 2.5 | (55.9 | %) | $ | 5.7 | (75.9 | %) | $ | 40.9 | 80.3 | % | $ | 22.7 | (65.6 | %) | |||||||||||||||||||||||
|
Adjusted annualized return on equity(1) |
27.1 | % | 23.8 | % | |||||||||||||||||||||||||||||||||||
|
Wholesale written orders |
(20.2 | %) | 1.7 | % | (12.9 | %) | 5.3 | % | |||||||||||||||||||||||||||||||
|
Retail written orders |
(16.3 | %) | (0.2 | %) | (12.3 | %) | 3.1 | % | |||||||||||||||||||||||||||||||
|
(1) |
Refer to the Reconciliation of Non-GAAP Financial Measures section within the MD&A for the reconciliation of GAAP to adjusted key financial metrics. |
The following table shows our design center information.
|
Fiscal 2023 |
Fiscal 2022 |
|||||||||||||||||||||||
|
Independent |
Company- |
Independent |
Company- |
|||||||||||||||||||||
|
retailers |
operated |
Total |
retailers |
operated |
Total |
|||||||||||||||||||
|
Retail Design Center activity: |
||||||||||||||||||||||||
|
Balance at July 1 |
155 | 141 | 296 | 161 | 141 | 302 | ||||||||||||||||||
|
New locations |
1 | 1 | 2 | 4 | - | 4 | ||||||||||||||||||
|
Closures |
- | (3 | ) | (3 | ) | (4 | ) | - | (4 | ) | ||||||||||||||
|
Transfers |
- | - | - | - | - | - | ||||||||||||||||||
|
Balance at December 31 |
156 | 139 | 295 | 161 | 141 | 302 | ||||||||||||||||||
|
Relocations (in new and closures) |
- | 1 | 1 | - | - | - | ||||||||||||||||||
|
Retail Design Center geographic locations: |
||||||||||||||||||||||||
|
United States |
34 | 135 | 169 | 34 | 136 | 170 | ||||||||||||||||||
|
Canada |
- | 4 | 4 | - | 5 | 5 | ||||||||||||||||||
|
China |
105 | - | 105 | 109 | - | 109 | ||||||||||||||||||
|
Other Asia |
11 | - | 11 | 11 | - | 11 | ||||||||||||||||||
|
Middle East and Europe |
6 | - | 6 | 7 | - | 7 | ||||||||||||||||||
|
Total |
156 | 139 | 295 | 161 | 141 | 302 | ||||||||||||||||||
Results of Operations
For an understanding of the significant factors that influenced our financial performance during the three and six months ended December 31, 2022 and 2021, respectively, the following discussion should be read in conjunction with the consolidated financial statements and related notes presented in this Quarterly Report on Form 10-Q.
|
(in thousands) |
Three months ended |
Six months ended |
||||||||||||||||||||||
|
December 31, |
December 31, |
|||||||||||||||||||||||
|
2022 |
2021 |
% Change |
2022 |
2021 |
% Change |
|||||||||||||||||||
|
Consolidated net sales |
$ | 203,161 | $ | 208,093 | (2.4 | %) | $ | 417,691 | $ | 390,420 | 7.0 | % | ||||||||||||
|
Wholesale net sales |
$ | 106,247 | $ | 115,921 | (8.3 | %) | $ | 220,898 | $ | 225,369 | (2.0 | %) | ||||||||||||
|
Retail net sales |
$ | 171,763 | $ | 179,583 | (4.4 | %) | $ | 355,421 | $ | 334,569 | 6.2 | % | ||||||||||||
|
Consolidated gross profit |
$ | 124,020 | $ | 122,269 | 1.4 | % | $ | 253,636 | $ | 231,461 | 9.6 | % | ||||||||||||
|
Consolidated gross margin |
61.0 | % | 58.8 | % | 60.7 | % | 59.3 | % | ||||||||||||||||
Consolidated Net Sales
Consolidated net sales for the three months ended December 31, 2022 decreased $4.9 million or 2.4% compared to the prior year quarter primarily due to a decline of 8.3% in wholesale net shipments combined with a 4.4% reduction in retail sales through our Company-operated design centers. The prior year second quarter was one of the largest historical second quarter results for net sales. Compared to the second quarter of fiscal 2019, which is pre-pandemic and reflective of historical norms, net sales for the three months ended December 31, 2022 were up 3.0%.
Consolidated net sales for the six months ended December 31, 2022 increased $27.3 million or 7.0% compared to the prior year period due to retail sales growth of 6.2% partially offset by lower wholesale shipments of 2.0%. Previous constraints, including COVID-related shutdowns, labor disruptions, supply chain challenges, shipping delays and raw material availability have eased in the last 12 months allowing us to maintain steady manufacturing productivity and reduce the time to convert written orders to delivered shipments, which helped reduce our existing wholesale order backlog by 36.0% compared to the prior year. Our strategy remains focused on servicing and delivering our existing backlog at December 31, 2022, which is approximately 50% higher than pre-pandemic levels.
Wholesale Net Sales
Wholesale net sales for the three months ended December 31, 2022 decreased $9.7 million or 8.3% compared to the prior year quarter due to a decrease in intersegment sales to our Company-operated design centers, domestic dealers and international sales partially offset by higher contract sales. Excluding intersegment sales to our retail segment, wholesale net sales increased $2.9 million or 10.1% compared to the prior year quarter from higher contract sales, including shipments to the United States government General Services Administration (“GSA”). Our international net sales were down 48.8% compared to the prior year quarter due to a reduction in net sales to China and Southeast Asia as a result of the prolonged COVID-19 concerns within the region.
Wholesale net sales for the six months ended December 31, 2022 decreased $4.5 million or 2.0% compared to the prior year period primarily due to a reduction in intersegment sales to our Company-operated design centers and lower shipments to domestic and international dealers, which was partially offset by higher contract sales. Excluding intersegment sales to our retail segment, wholesale net sales increased 11.5% compared to the prior year period from higher contract sales. Our international net sales were down 44.1% compared to the prior year period due to a reduction in net sales to China and Southeast Asia. Sales to international independent retailers represented 0.9% of total wholesale net sales compared to 1.7% in the prior year period.
Wholesale written orders, which represent orders booked through all of our channels, were down 20.2% in the three months ended December 31, 2022 compared to the prior year second quarter. After the reopening of all our retail design centers in fiscal 2021, we experienced a significant surge in demand leading to a strong, but difficult prior year comparison. As a result of the strong prior year second quarter, our independent North American retail network orders were down 12.3%, international orders were down 43.6% and orders from our Company-operated design centers were down 13.2%. In addition, contract orders were down 87.5% as the prior year second quarter saw strong contract business, driven largely by hospitality customers and the timing of incoming GSA orders.
Wholesale written orders were down 12.9% in the first six months of fiscal 2023 compared with the prior year period. As a result of the strong prior year first half, orders from our Company-operated design centers were down 11.1%, our contract orders declined 18.1%, our independent North American retail network orders were down 11.0% and our international orders, including orders from China, declined 46.2%. When compared to the first six months of fiscal 2019 (pre-pandemic levels), written orders from our Company-operated design centers were down 2.9%. We ended the fiscal 2023 second quarter with wholesale backlog of $78.5 million, down 36.0% from a year ago as we were able to reduce the number of weeks of wholesale backlog as of December 31, 2022 by 34.1% compared to last year, which brought our backlog to be more current. In the near-term, our teams are focused on efforts to effectively manage the business by continuing to work through our higher order backlog and to service our customers.
Retail Net Sales
Net sales from Company-operated design centers for the three months ended December 31, 2022 decreased $7.8 million or 4.4% compared to the prior year quarter. There was a 4.2% decrease in net sales within the United States, while net sales from our Canadian design centers decreased 8.8%. A year ago we experienced a significant surge in demand, which led to a high backlog and higher deliveries making it a difficult prior year comparison. In addition, we saw a decrease in retail shipments year over year due to lower production levels within our Upholstery manufacturing compared to the prior year. Manufacturing production levels still remain above pre-pandemic levels, but have slowed in the past three months as incoming written orders have slowed. These volume decreases were partially offset by the price increases we enacted in the past 12 months, an increase in average ticket price and increased premier home delivery revenue. While retail written orders decreased 16.3% year over year, they are nearing pre-pandemic historical norms and were 1.5% below the second quarter of fiscal 2019 (pre-pandemic levels). Prolonged high inflation, concerns regarding a recession, uncertainty in the macroeconomic environment and higher interest rates, continue to impact consumer behavior and is reflected in written order and traffic decreases year over year.
Retail net sales for the six months ended December 31, 2022 increased 6.2% to $355.4 million compared to the prior year period. There was a 6.9% increase in net sales in the United States, while net sales from our Canadian design centers decreased 16.9%. The retail net sales growth of 6.2% was primarily from high backlog that led to higher deliveries, price increases enacted in the past 12 months, increased premier home delivery revenue, additional clearance sales and manufacturing production levels that have remained above pre-pandemic levels. Canadian retail net sales were impacted by one less design center in Canada combined with temporary disruptions within the local service center that impacted delivery timing during the first quarter. While retail written orders decreased 12.3% year over year, they were 0.1% above the first six months of fiscal 2019, which we believe reflects continued demand for our relevant products in a softening demand environment partially due to strong execution at the design center level including incremental average ticket sales and a higher percentage of sales per traffic count. We remain focused on providing exceptional personal service from design to delivery, investing in digital design capabilities and interactive communication technologies, refining and repositioning our product offerings to reach a larger client base, and leveraging our vertically integrated structure. We are currently working on plans to open or relocate a select number of design centers within the United States by the end of fiscal 2023. As of December 31, 2022, there were 139 Company-operated design centers compared with 141 in the prior year period.
Consolidated Gross Profit and Margin
Consolidated gross profit for the three months ended December 31, 2022 increased $1.8 million or 1.4% compared to the prior year quarter due to consolidated and wholesale gross margin expansion partially offset by a reduction in retail gross margin and lower consolidated net sales. Consolidated gross margin, as a percentage of net sales, for the three months ended December 31, 2022 was 61.0% compared with 58.8% in the prior year quarter. This consolidated gross margin expansion of 220 basis points offset the 2.4% decline in consolidated net sales, which led to gross profit increasing by 1.4% over the prior year. The 220-basis point increase in consolidated gross margin was driven by product pricing actions taken over the past 12 months, a favorable product mix, disciplined promotional activity and lower inbound freight costs. These gross margin drivers were partially offset by a change in our sales mix and a decrease in unit volume that led to higher unfavorable manufacturing overhead costs. Retail sales, as a percentage of total consolidated sales, were 84.5% in the current year second quarter, down from 86.3% in the prior year quarter. Our retail segment has a higher gross margin than our wholesale segment, thus the decrease in sales mix negatively impacted our consolidated gross margin. Despite an 8.3% decrease in net sales, our wholesale segment gross profit increased 22.9% in the current year second quarter, which was primarily attributable to product pricing actions taken in the past 12 months, change in product mix, lower inbound freight costs, efficiencies gained with higher manufacturing production levels within case goods and improved imported receipts of home accents. Product pricing actions taken in the past 12 months have helped to offset input costs that continue to face inflationary pressure. Each product category within our wholesale segment expanded its gross margin, which led to higher gross profit. Retail gross profit decreased by 6.2% due to a 4.4% decrease in net shipments combined with a 100-basis point decrease in gross margin. The reduction in our retail gross margin was driven by a change in product mix, increased wholesale dealer costs to purchase inventory and higher fees associated with offering 36-month interest financing to our customers partially offset by incremental home delivery revenue and an increase in average ticket sale.
Consolidated gross profit for the six months ended December 31, 2022 increased $22.2 million or 9.6% compared to the prior year period due to sales growth of 6.2% within our retail segment combined with consolidated and wholesale gross margin expansion. Consolidated gross margin was 60.7% during the first six months of fiscal 2023 compared with 59.3% in the prior period. The 140-basis point increase was driven by product pricing actions taken, disciplined promotional activity, benefits from expanded case goods manufacturing operations, a favorable product mix and lower inbound freight costs partially offset by a change in sales mix. Retail sales, as a percentage of total consolidated sales, were 85.1% in the first six months of fiscal 2023, down from 85.7% in the prior year period. Retail gross profit increased 5.3% due to the 6.2% increase in net shipments partially offset by a decline in gross margin. Our Retail gross margin was negatively impacted by higher prices to acquire inventory from wholesale combined with increased fees to offer our customers interest free financing partially offset by higher premier home delivery revenue and an increase in average ticket sale. Wholesale gross profit increased 17.2% for the first six months of fiscal 2023 primarily due to gross margin expansion from efficiencies gained with higher manufacturing production levels and product pricing actions taken in the past 12 months partially offset by a 2.0% reduction in net sales. Higher year over year manufacturing production within case goods and improved imported receipts of home accents helped drive sales growth within each of these categories. Product pricing actions taken in the past 12 months have helped to offset elevated input costs, although inbound freight costs have been on the decline for several months.
SG&A Expenses
|
(in thousands) |
Three months ended |
Six months ended |
||||||||||||||||||||||
|
December 31, |
December 31, |
|||||||||||||||||||||||
|
2022 |
2021 |
% Change |
2022 |
2021 |
% Change |
|||||||||||||||||||
|
SG&A expenses |
$ | 87,147 | $ | 89,610 | (2.7% | ) | $ | 179,109 | $ | 171,187 | 4.6 | % | ||||||||||||
|
Restructuring and other impairment charges, net of gains |
$ | (196 | ) | $ | (3,633 | ) | (94.6% | ) | $ | (2,192 | ) | $ | (3,378 | ) | (35.1% | ) | ||||||||
|
Consolidated operating income |
$ | 37,069 | $ | 36,292 | 2.1 | % | $ | 76,719 | $ | 63,652 | 20.5 | % | ||||||||||||
|
Consolidated operating margin |
18.2 | % | 17.4 | % | 18.4 | % | 16.3 | % | ||||||||||||||||
|
Wholesale operating income |
$ | 14,569 | $ | 9,744 | 49.5 | % | $ | 29,982 | $ | 22,563 | 32.9 | % | ||||||||||||
|
Retail operating income |
$ | 18,080 | $ | 22,635 | (20.1% | ) | $ | 40,069 | $ | 36,980 | 8.4 | % | ||||||||||||
SG&A expenses for the three months ended December 31, 2022 decreased $2.5 million or 2.7% due to lower selling expenses and a reduction in general and administrative costs. Consolidated selling expenses were down 2.4% while general and administrative costs decreased 3.3%, indicative of strong cost control measures. When expressed as a percentage of net sales, SG&A expenses were 42.9% of net sales, compared with 43.1% of net sales in the prior year quarter as we were able to manage expenses in a declining sales environment. Wholesale selling expenses, which includes logistics, were down 9.2% as distribution costs decreased from lower sales volumes and declining freight rates partially offset by higher diesel fuel costs compared to a year ago. Retail selling expenses were down 0.1% due to lower designer variable compensation and labor costs offset by higher warehouse and delivery costs from increased contract rates and fuel surcharges. Total advertising expense during the second quarter of fiscal 2023 was equal to 2.0% of net sales, the same as in the prior year second quarter. We continue to utilize various advertising mediums including national television, direct mail and digital. Through our recent digital campaigns, we have substantially increased our digital marketing outreach, which helped us reach more households through the publication of our periodic digital magazine. Consolidated general and administrative expenses decreased 3.3% primarily due to lower retail occupancy costs, a reduction in professional and legal fees, and less employee compensation due to a lower headcount partially offset by increased employee benefit costs, including higher group insurance.
SG&A expenses for the six months ended December 31, 2022 increased $7.9 million or 4.6% due to higher selling expenses. Consolidated selling expenses were up 7.1% while general and administrative costs rose only 0.8%. When expressed as a percentage of net sales, SG&A expenses were 42.9% of net sales, a 90-basis point decrease compared to the prior year period due to higher sales volume relative to fixed costs. SG&A expenses were up 4.6% while consolidated net sales increased 7.0%, which led to improved operating leverage. Retail selling expenses increased 10.0% due to the 6.2% increase in Retail net sales, which drove higher delivery costs and variable compensation, increased contract rates and fuel surcharges and increased marketing spend. Wholesale selling costs declined 1.3% primarily from a 2.0% reduction in sales volume, which led to lower distribution and freight costs. For the six months of fiscal 2023, our consolidated advertising spend was equal to 2.3% of net sales, up from 2.0% in the prior year period. Consolidated general and administrative expenses increased by 0.8% for the first six months of fiscal 2023 primarily related to our disciplined approach to cost savings and expense controls, including our cost containment and expense management efforts.
Restructuring and Other Impairment Charges, Net of Gains
Restructuring and other impairment charges, net of gains for the three months ended December 31, 2022 was a gain of $0.2 million compared to a gain of $3.6 million in the prior year second quarter. The current year second quarter includes a $0.7 million gain related to the amortization of the deferred liability generated from the sale-leaseback transaction completed on August 1, 2022, partially offset by $0.5 million related primarily to severance costs. In the year ago second quarter, we completed the sale of two properties for a combined pre-tax gain of $3.9 million, which was partially offset by $0.3 million related to severance.
Restructuring and other impairment charges, net of gains for the six months ended December 31, 2022 was a $2.2 million gain compared to a gain of $3.4 million in the prior year period. The recognized gain of $2.9 million from the sale-leaseback transaction was partially offset by $0.7 million in severance and other lease costs. In the first six months of last year, we completed the sale of two properties for a combined pre-tax gain of $3.9 million, which was partially offset by $0.5 million of severance and lease costs.
Consolidated Operating Income
Consolidated operating income for the three months ended December 31, 2022 increased $0.8 million or 2.1% and as a percentage of net sales was 18.2%, compared to 17.4% the prior year quarter. Adjusted operating income, which excludes restructuring and other charges, net of gains, was $36.9 million, or 18.1% of net sales compared with $32.8 million, or 15.7% of net sales in the prior year quarter. The increase in operating income was driven by gross margin expansion combined with cost containment measures partially offset by a reduction in consolidated net sales. Even though consolidated net sales decreased 2.4%, our 220-basis point consolidated gross margin expansion combined with the 2.7% reduction in SG&A expenses helped grow our consolidated operating income by $0.8 million and improve to 18.2% of net sales, up from 17.4% last year.
Consolidated operating income for the six months ended December 31, 2022 increased $13.1 million or 20.5% and as a percentage of net sales was 18.4%, compared to 16.3% in the prior year period. Adjusted operating income, which excludes restructuring and other charges, net of gains, was $74.6 million, or 17.9% of net sales compared with $60.5 million, or 15.5% of net sales in the prior year period. The increase in operating income was driven by the $27.3 million or 7.0% increase in consolidated net sales, wholesale gross margin expansion and cost containment measures that improved our operating leverage partially offset by higher selling expenses. We believe our efforts to maintain disciplined cost and expense controls, including cost containment measures and expense management helped drive our operating income growth for the first six months ended December 31, 2022. Our ability to operate the business with fewer associates has contributed to consolidated operating income and margin expansion. The majority of the headcount reductions since the end of the second quarter of fiscal 2019 were within our retail segment, which is down 41.8%.
Wholesale Operating Income
Wholesale operating income for the three months ended December 31, 2022 was $14.6 million or 13.7% of net sales, an increase compared with $9.7 million or 8.4% in the prior year quarter. Adjusted operating income, which excludes restructuring and other charges, net of gains, was $14.6 million or 13.7% of net sales compared with $6.0 million or 5.2% of net sales in the prior year quarter. The increase in wholesale operating income is due to a significant improvement in wholesale gross margin, cost containment measures within SG&A, lower distribution and inbound freight costs due to lower rates and volume, lower compensation from decreased headcount and lower professional and legal fees partially offset by higher employee benefit costs and a decline in net sales.
Wholesale operating income for the six months ended December 31, 2022 was $30.0 million or 13.6% of net sales, an increase compared with $22.6 million or 10.0% of net sales in the prior year period. Adjusted operating income, which excludes restructuring and other charges, net of gains, was $30.0 million or 13.6% of net sales compared with $19.0 million or 8.4% of net sales in the prior year period. The increase is due to a significant improvement in wholesale gross margin, cost containment measures within SG&A and lower distribution and inbound freight costs due to lower rates and volume. These benefits were partially offset by lower net sales and higher employee benefit costs.
Retail Operating Income
Retail operating income for the three months ended December 31, 2022 was $18.1 million, or 10.5% of sales, compared with $22.6 million, or 12.6% of sales in the prior year quarter. Adjusted retail operating income, which excludes restructuring and other charges, net of gains, was $17.9 million or 10.4% of net sales compared with $22.8 million or 12.7% of net sales in the prior year quarter. The decrease in retail operating income is attributed to the 4.4% decrease in net sales and a 100-basis point decline in retail gross margin partially offset by lower retail SG&A expenses.
Retail operating income for the six months ended December 31, 2022 was $40.1 million, or 11.3% of sales, compared with $37.0 million, or 11.1% of sales in the prior year period. Adjusted retail operating income, which excludes restructuring and other charges, net of gains, was $37.9 million or 10.7% of net sales compared with $37.4 million or 11.2% of net sales in the prior year period. The increase was driven by the 6.2% increase in net sales, decreased occupancy expenses and leveraged fixed costs partially offset by a 40-basis point decline in retail gross margin, increased selling, delivery and variable compensation due to sales volume and increased advertising expenses.
Income Tax Expense
|
(in thousands) |
Three months ended |
Six months ended |
||||||||||||||||||||||
|
December 31, |
December 31, |
|||||||||||||||||||||||
|
2022 |
2021 |
% Change |
2022 |
2021 |
% Change |
|||||||||||||||||||
|
Income tax expense |
$ | 9,754 | $ | 9,324 | 4.6 | % | $ | 19,865 | $ | 16,511 | 20.3 | % | ||||||||||||
|
Effective tax rate |
25.7 | % | 25.7 | % | 25.5 | % | 26.0 | % | ||||||||||||||||
|
Net income |
$ | 28,166 | $ | 26,894 | 4.7 | % | $ | 58,046 | $ | 47,047 | 23.4 | % | ||||||||||||
|
Diluted EPS |
$ | 1.10 | $ | 1.05 | 4.8 | % | $ | 2.27 | $ | 1.85 | 22.7 | % | ||||||||||||
Income tax expense for the three months ended December 31, 2022 was $9.8 million compared with $9.3 million in the prior year second quarter primarily due to the $1.7 million increase in income before income taxes. Our consolidated effective tax rate was 25.7% in both the current and prior year. Our effective tax rate of 25.7% varies from the 21% federal statutory rate primarily due to state taxes.
Income tax expense for the six months ended December 31, 2022 was $19.9 million compared with $16.5 million in the prior year period primarily due to the $14.4 million increase in income before income taxes. Our consolidated effective tax rate was 25.5% compared with 26.0% in the prior year comparable period. Our effective tax rate of 25.5% varies from the 21% federal statutory rate primarily due to state taxes.
Net Income
Net income for the three months ended December 31, 2022 was $28.2 million compared with $26.9 million in the prior year period. Adjusted net income, which removes the after-tax impact of restructuring and other charges, net of gains, was $28.0 million, up 15.5% from the prior year period. The increase in net income and adjusted net income was due to improved gross margins and our ability to minimize SG&A expenses.
Net income for the six months ended December 31, 2022 was $58.0 million compared with $47.0 million in the prior year period. Adjusted net income, which removes the after-tax impact of restructuring and other charges, net of gains, was $56.4 million, up 26.3% from the prior year period. The increase in net income and adjusted net income was due to higher net sales, improved gross margins and cost containment measures.
Diluted EPS
Diluted EPS for the three months ended December 31, 2022 was $1.10 compared with $1.05 per diluted share in the prior year period. Adjusted diluted EPS was $1.10, up 15.8% compared with the prior year period. The increase in diluted EPS and adjusted diluted EPS was driven by higher gross margins and cost containment measures partially offset by a decrease in net sales.
Diluted EPS for the six months ended December 31, 2022 was $2.27 compared with $1.85 per diluted share in the prior year period. Adjusted diluted EPS was $2.21, up 26.3% compared with the prior year period. The increase in diluted EPS and adjusted diluted EPS was driven by higher net sales, improved gross margins and cost containment measures.
Reconciliation of Non-GAAP Financial Measures
To supplement the financial measures prepared in accordance with GAAP, we use non-GAAP financial measures, including adjusted operating income and margin, adjusted wholesale operating income and margin, adjusted retail operating income and margin, adjusted net income and adjusted diluted earnings per share. The reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are shown in tables below.
These non-GAAP measures are derived from the consolidated financial statements but are not presented in accordance with GAAP. We believe these non-GAAP measures provide a meaningful comparison of our results to others in our industry and our prior year results. Investors should consider these non-GAAP financial measures in addition to, and not as a substitute for, our financial performance measures prepared in accordance with GAAP. Moreover, these non-GAAP financial measures have limitations in that they do not reflect all the items associated with the operations of the business as determined in accordance with GAAP. Other companies may calculate similarly titled non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.
Despite the limitations of these non-GAAP financial measures, we believe these adjusted financial measures and the information they provide are useful in viewing our performance using the same tools that management uses to assess progress in achieving our goals. Adjusted measures may also facilitate comparisons to our historical performance.
The following tables below show a reconciliation of non-GAAP financial measures used in this filing to the most directly comparable GAAP financial measures.
| (in thousands, except per share amounts) |
Three months ended |
Six months ended |
||||||||||||||||||||||
|
December 31, |
December 31, |
|||||||||||||||||||||||
|
2022 |
2021 |
% Change |
2022 |
2021 |
% Change |
|||||||||||||||||||
|
Consolidated Adjusted Operating Income / Operating Margin |
||||||||||||||||||||||||
|
GAAP Operating income |
$ | 37,069 | $ | 36,292 | 2.1 | % | $ | 76,719 | $ | 63,652 | 20.5 | % | ||||||||||||
|
Adjustments (pre-tax) * |
(196 | ) | (3,520 | ) | (2,154 | ) | (3,152 | ) | ||||||||||||||||
|
Adjusted operating income * |
$ | 36,873 | $ | 32,772 | 12.5 | % | $ | 74,565 | $ | 60,500 | 23.2 | % | ||||||||||||
|
Consolidated Net sales |
$ | 203,161 | $ | 208,093 | (2.4% | ) | $ | 417,691 | $ | 390,420 | 7.0 | % | ||||||||||||
|
GAAP Operating margin |
18.2 | % | 17.4 | % | 18.4 | % | 16.3 | % | ||||||||||||||||
|
Adjusted operating margin * |
18.1 | % | 15.7 | % | 17.9 | % | 15.5 | % | ||||||||||||||||
|
Consolidated Adjusted Net Income / Adjusted Diluted EPS |
||||||||||||||||||||||||
|
GAAP Net income |
$ | 28,166 | $ | 26,894 | 4.7 | % | $ | 58,046 | $ | 47,047 | 23.4 | % | ||||||||||||
|
Adjustments, net of tax * |
(146 | ) | (2,637 | ) | (1,609 | ) | (2,361 | ) | ||||||||||||||||
|
Adjusted net income |
$ | 28,020 | $ | 24,257 | 15.5 | % | $ | 56,437 | $ | 44,686 | 26.3 | % | ||||||||||||
|
Diluted weighted average common shares |
25,582 | 25,513 | 25,571 | 25,482 | ||||||||||||||||||||
|
GAAP Diluted EPS |
$ | 1.10 | $ | 1.05 | 4.8 | % | $ | 2.27 | $ | 1.85 | 22.7 | % | ||||||||||||
|
Adjusted diluted EPS * |
$ | 1.10 | $ | 0.95 | 15.8 | % | $ | 2.21 | $ | 1.75 | 26.3 | % | ||||||||||||
|
Wholesale Adjusted Operating Income / Adjusted Operating Margin |
||||||||||||||||||||||||
|
Wholesale GAAP operating income |
$ | 14,569 | $ | 9,744 | 49.5 | % | $ | 29,982 | $ | 22,563 | 32.9 | % | ||||||||||||
|
Adjustments (pre-tax) * |
- | (3,734 | ) | (4 | ) | (3,556 | ) | |||||||||||||||||
|
Adjusted wholesale operating income * |
$ | 14,569 | $ | 6,010 | 142.4 | % | $ | 29,978 | $ | 19,007 | 57.7 | % | ||||||||||||
|
Wholesale net sales |
$ | 106,247 | $ | 115,921 | (8.3% | ) | $ | 220,898 | $ | 225,369 | (2.0% | ) | ||||||||||||
|
Wholesale GAAP operating margin |
13.7 | % | 8.4 | % | 13.6 | % | 10.0 | % | ||||||||||||||||
|
Adjusted wholesale operating margin * |
13.7 | % | 5.2 | % | 13.6 | % | 8.4 | % | ||||||||||||||||
|
Retail Adjusted Operating Income / Adjusted Operating Margin |
||||||||||||||||||||||||
|
Retail GAAP operating income |
$ | 18,080 | $ | 22,635 | (20.1% | ) | $ | 40,069 | $ | 36,980 | 8.4 | % | ||||||||||||
|
Adjustments (pre-tax) * |
(196 | ) | 214 | (2,150 | ) | 404 | ||||||||||||||||||
|
Adjusted retail operating income * |
$ | 17,884 | $ | 22,849 | (21.7% | ) | $ | 37,919 | $ | 37,384 | 1.4 | % | ||||||||||||
|
Retail net sales |
$ | 171,763 | $ | 179,583 | (4.4% | ) | $ | 355,421 | $ | 334,569 | 6.2 | % | ||||||||||||
|
Retail GAAP operating margin |
10.5 | % | 12.6 | % | 11.3 | % | 11.1 | % | ||||||||||||||||
|
Adjusted retail operating margin * |
10.4 | % | 12.7 | % | 10.7 | % | 11.2 | % | ||||||||||||||||
* Adjustments to reported GAAP financial measures including operating income and margin, net income and diluted EPS have been adjusted by the following:
| (in thousands) |
Three months ended |
Six months ended |
||||||||||||||
|
December 31, |
December 31, |
|||||||||||||||
|
2022 |
2021 |
2022 |
2021 |
|||||||||||||
|
Gain on sale-leaseback transaction (retail) |
$ | (654 | ) | $ | - | $ | (2,911 | ) | $ | - | ||||||
|
Gain on sale of property, plant and equipment (wholesale) |
- | (3,913 | ) | - | (3,913 | ) | ||||||||||
|
Severance and other charges (wholesale) |
- | 179 | (4 | ) | 357 | |||||||||||
|
Severance and other charges (retail) |
458 | 214 | 761 | 404 | ||||||||||||
|
Adjustments to operating income |
$ | (196 | ) | $ | (3,520 | ) | $ | (2,154 | ) | $ | (3,152 | ) | ||||
|
Adjustments to income before income taxes |
$ | (196 | ) | $ | (3,520 | ) | $ | (2,154 | ) | $ | (3,152 | ) | ||||
|
Related income tax effects on non-recurring items(1) |
50 | 883 | 545 | 791 | ||||||||||||
|
Adjustments to net income |
$ | (146 | ) | $ | (2,637 | ) | $ | (1,609 | ) | $ | (2,361 | ) | ||||
|
(1) |
Calculated using a tax rate of 25.3% in the current year and 25.1% in the prior year. |
Liquidity
We are committed to maintaining a strong balance sheet and continue to monitor our liquidity closely during this continued period of economic uncertainty and volatility. Our sources of liquidity include cash and cash equivalents, short-term investments and amounts available under our credit facility. We believe these sources remain adequate to meet our short-term and long-term liquidity requirements, finance our long-term growth plans, invest in capital expenditures, and fulfill cash requirements for day-to-day operations and contractual obligations. As of December 31, 2022, the Company had a strong balance sheet, including available liquidity of $261.4 million as summarized below.
|
December 31, |
June 30, |
|||||||
|
(in thousands) |
2022 |
2022 |
||||||
|
Cash and cash equivalents |
$ | 85,392 | $ | 109,919 | ||||
|
Short-term investments |
55,030 | 11,199 | ||||||
|
Availability under existing credit facility |
120,952 | 120,952 | ||||||
|
Total Liquidity |
$ | 261,374 | $ | 242,070 | ||||
As of December 31, 2022, we had working capital of $162.7 million compared to $131.1 million at June 30, 2022 and a current ratio of 1.93 at December 31, 2022, comparable to 1.61 at June 30, 2022 and 1.42 at December 31, 2021. Included in our cash and cash equivalents at December 31, 2022, is $7.6 million held by foreign subsidiaries, of which $7.4 million we have determined to be indefinitely reinvested.
Summary of Cash Flows
At December 31, 2022, we held cash and cash equivalents of $85.4 million compared with $109.9 million at June 30, 2022. Cash and cash equivalents aggregated to 12.0% of our total assets at December 31, 2022, compared with 15.3% of our total assets a year prior and 15.3% at June 30, 2022. In addition, we had short-term investments of $55.0 million at December 31, 2022 compared with $11.2 million at June 30, 2022. Our short-term investments at December 31, 2022 are within U.S. Treasury Bills with maturities of less than one year, and to which we expect will further enhance our returns on cash.
Our cash and cash equivalents decreased $24.5 million or 22.3% during the first six months of fiscal 2023 due to $43.4 million in net purchases of investments, $20.9 million in cash dividends paid and capital expenditures of $8.5 million, partially offset by net cash provided by operating activities of $40.9 million and $8.1 million in proceeds received from the sale-leaseback transaction completed in August 2022.
The following table illustrates the main components of our cash flows for the six months ended December 31, 2022 and 2021 (in millions):
|
Six months ended |
||||||||
|
December 31, |
||||||||
|
2022 |
2021 |
|||||||
|
Operating activities |
||||||||
|
Net income |
$ | 58.0 | $ | 47.0 | ||||
|
Non-cash operating lease cost |
15.0 | 14.9 | ||||||
|
Restructuring and other impairment charges, net of gains |
(2.2 | ) | (3.4 | ) | ||||
|
Restructuring payments |
(0.8 | ) | (0.6 | ) | ||||
|
Depreciation and amortization and other non-cash items |
6.9 | 10.3 | ||||||
|
Change in operating assets and liabilities |
(36.0 | ) | (45.5 | ) | ||||
|
Total provided by operating activities |
$ | 40.9 | $ | 22.7 | ||||
|
Investing activities |
||||||||
|
Capital expenditures |
$ | (8.5 | ) | $ | (3.7 | ) | ||
|
Proceeds from sales of property, plant and equipment |
8.1 | 8.2 | ||||||
|
Purchases of investments, net of sales |
(43.4 | ) | - | |||||
|
Total (used in) provided by investing activities |
$ | (43.8 | ) | $ | 4.5 | |||
|
Financing activities |
||||||||
|
Dividend payments |
$ | (20.9 | ) | $ | (25.4 | ) | ||
|
Taxes paid related to net share settlement of equity awards |
(0.8 | ) | (0.8 | ) | ||||
|
Proceeds from employee stock plans |
- | 0.8 | ||||||
|
Payments on financing leases and other |
(0.2 | ) | (0.2 | ) | ||||
|
Total used in financing activities |
$ | (21.9 | ) | $ | (25.6 | ) | ||
Cash Provided by (Used in) Operating Activities
We generated $40.9 million in cash from operating activities during the first six months of fiscal 2023, an increase from $22.7 million in the prior year period primarily due to an improvement in working capital and higher net income. The increase in working capital was primarily from a reduction in customer deposits as net shipments outpaced written orders, improved collections on our outstanding accounts receivable, which converted shipments to cash at a faster pace, and a reduction in inventory carrying levels. Restructuring payments made during the first six months of fiscal 2023 were $0.8 million compared to $0.6 million in the prior year and related primarily to severance and rent paid for an exited leased space.
Cash Provided by (Used in) Investing Activities
Cash used in investing activities was $43.8 million, an increase from $4.5 million in the prior year period due to $43.4 million of net purchases of investments (net of proceeds from sales of investments) and an increase in capital expenditures, partially offset by $8.1 million in proceeds received from the sale-leaseback transaction completed in August 2022. During fiscal 2023, we invested $49.5 million in short-term U.S. Treasury Bills, of which $25.0 million matured in November 2022 and was subsequently reinvested in additional U.S. Treasury Bills totaling $30.0 million. We also liquidated our previously held investments in municipal bonds, commercial paper and certificates of deposit during fiscal 2023, which had totaled $11.2 million as of June 30, 2022. Our short-term investments are reported within Investments in our consolidated balance sheet as of December 31, 2022 and June 30, 2022. Capital expenditures of $8.5 million during the first six months of fiscal 2023 primarily related to efficiency and safety upgrades to our manufacturing plants, spending on design center relocations and improvements and investments in technology upgrades and infrastructure.
Cash Provided by (Used in) Financing Activities
Cash used in financing activities was $21.9 million during the first six months of fiscal 2023 compared with $25.6 million in the prior year period. The decrease in cash used of $3.7 million was primarily from a lower special dividend paid, which was $0.50 in the current year compared with $0.75 a year ago. This decrease was partially offset by a 28.0% increase in the regular quarterly cash dividend payments over the prior year. The regular quarterly dividend declared by our Board on November 9, 2022 was paid on January 4, 2023, thus it was excluded from the consolidated statement of cash flows for the six months ended December 31, 2022. Similarly, the regular quarterly dividend declared by our Board on November 30, 2021 was paid on January 5, 2022, thus excluded from the consolidated statement of cash flows for the six months ended December 31, 2021.
Restricted Cash
We present restricted cash as a component of total cash and cash equivalents as presented on our consolidated statement of cash flows and within Other Assets on our consolidated balance sheet. At December 31, 2022 and June 30, 2022, we held $0.6 million and $1.0 million, respectively, of restricted cash related to an Ethan Allen insurance captive.
Exchange Rate Changes
Due to changes in exchange rates, our cash and cash equivalents were impacted by $0.1 million during the first six months of fiscal 2023. These changes had an immaterial impact on our cash balances held in Canada, Mexico, and Honduras.
Capital Resources, including Material Cash Requirements
Sources of Liquidity
Capital Needs. On January 26, 2022, we entered into a Third 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 amended and restated the Second Amended and Restated Credit Agreement, dated as of December 21, 2018, as amended. The Credit Agreement provides for a $125 million revolving credit facility (the “Facility”), subject to borrowing base availability, with a maturity date of January 26, 2027. The Credit Agreement also provides us with an option to increase the size of the Facility up to an additional amount of $60 million. Availability under the Facility fluctuates according to a borrowing base calculated on eligible accounts receivable and inventory, net of customer deposits and reserves. The Facility includes covenants that apply under certain circumstances, including a fixed-charge coverage ratio requirement that applies when excess availability under the credit line is less than certain thresholds. As of December 31, 2022, we were not subject to the fixed-charge coverage ratio requirement, had no borrowings outstanding under the Facility, were in compliance with all other covenants and had borrowing availability of $121.0 million of the $125.0 million credit commitment. We incurred financing costs of $0.5 million during fiscal 2022, which are being amortized as interest expense over the remaining life of the Facility using the effective interest method.
Letters of Credit. At both December 31, 2022 and June 30, 2022, there was $4.0 million of standby letters of credit outstanding under the Facility.
Uses of Liquidity
Capital Expenditures. Capital expenditures during the first six months of fiscal 2023 totaled $8.5 million compared with $3.7 million in the prior year period. The increase is primarily related to $4.5 million of spending on our Upholstery and Case Goods manufacturing facilities to further improve their capacity, safety and efficiency. The remaining spend of $4.0 million was primarily for retail design center openings, relocations and projection changes, as well as additional investments in technology used throughout each design center. In the first six months of fiscal 2023, 53% of our total capital expenditures were for manufacturing capital projects while 47% related to retail design center development, expansion, and renovation as well as additional technology improvements.
We have no material contractual commitments outstanding for future capital expenditures and anticipate that cash from operations will be sufficient to fund future capital expenditures. We expect our full year fiscal 2023 capital expenditures to be above fiscal 2022 levels as we further invest in technology, increase manufacturing efficiency and open new or relocate design centers while also continuing to improve all of our design center projections.
Dividends. Our Board has sole authority to determine if and when we will declare future dividends and on what terms. We have a strong history of returning capital to shareholders and continued this practice during the first six months of fiscal 2023. On August 16, 2022, our Board declared a $0.50 per share special cash dividend in addition to our regular quarterly cash dividend of $0.32 per share, which was paid to shareholders on August 30, 2022. During the second quarter of fiscal 2023, our Board declared a regular quarterly cash dividend of $0.32 per share, payable on January 4, 2023 to shareholders of record at the close of business on December 7, 2022.
Although we expect to continue to declare and pay comparable quarterly cash dividends for the foreseeable future, the payment of future cash dividends is within the discretion of our Board of Directors and will depend on our earnings, operations, financial condition, capital requirements and general business outlook, among other factors. Our credit agreement also includes covenants that includes limitations on our ability to pay dividends.
Share Repurchase Program. There were no share repurchases under our existing multi-year share repurchase program (the “Share Repurchase Program”) during the first six months of fiscal 2023 or 2022. At December 31, 2022, we had a remaining Board authorization to repurchase 2,007,364 shares of our common stock pursuant to our Share Repurchase Program. 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 while also maintaining financial flexibility.
Material Cash Requirements from Contractual Obligations. Fluctuations in our operating results, levels of inventory on hand, operating lease commitments, the degree of success of our accounts receivable collection efforts, the timing of tax and other payments, the rate of written orders and net sales, levels of customer deposits on hand, as well as necessary capital expenditures to support growth of our operations will impact our liquidity and cash flows in future periods. The effect of our contractual obligations on our liquidity and capital resources in future periods should be considered in conjunction with the factors mentioned here. As disclosed in our 2022 Annual Report on Form 10-K, as of June 30, 2022, we had total contractual obligations of $193.2 million, including $131.6 million related to our operating lease commitments and $40.8 million of open purchase orders. Except for $15.7 million in operating lease payments made to our landlords and $15.8 million of operating lease assets obtained in exchange for $15.8 million of operating lease liabilities during the first six months of fiscal 2023, there were no other material changes, outside of the ordinary course of business, in our contractual obligations as previously disclosed in our 2022 Annual Report on Form 10-K.
Other Arrangements
We do not utilize or employ any other arrangements in operating our business. As such, we do not maintain any (i) retained or contingent interests, (ii) derivative instruments or (iii) variable interests which could serve as a source of potential risk to our future liquidity, capital resources and results of operations. We may, from time to time in the ordinary course of business, provide guarantees on behalf of selected affiliated entities or become contractually obligated to perform in accordance with the terms and conditions of certain business agreements. The nature and extent of these guarantees and obligations may vary based on our underlying relationship with the benefiting party and the business purpose for which the guarantee or obligation is being provided.
Significant Accounting Policies
We describe our significant accounting policies in Note 3, Summary of Significant Accounting Policies, in the notes to our consolidated financial statements included in our 2022 Annual Report on Form 10-K. There have been no changes in our significant accounting policies during the first six months of fiscal 2023 from those disclosed in our 2022 Annual Report on Form 10-K.
Critical Accounting Estimates
We prepare our consolidated financial statements in conformity with GAAP. In some cases, these principles require management to make difficult and subjective judgments regarding uncertainties and, as a result, such estimates and assumptions may significantly impact our financial results and disclosures. We consider an accounting estimate to be critical if: (i) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (ii) changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations. We base our estimates on currently known facts and circumstances, prior experience and other assumptions we believe to be reasonable. We use our best judgment in valuing these estimates and may, as warranted, use external advice. Actual results could differ from these estimates, assumptions, and judgments and these differences could be significant. We make frequent comparisons throughout the year of actual experience to our assumptions to reduce the likelihood of significant adjustments and will record adjustments when differences are known.
We discuss our critical accounting estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2022 Annual Report on Form 10-K. There have been no significant changes in our critical accounting estimates during the first six months of fiscal 2023 from those disclosed in our 2022 Annual Report on Form 10-K.
Recent Accounting Pronouncements
See Note 3, Recent Accounting Pronouncements, to the consolidated financial statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q for a full description of recent accounting pronouncements, including the expected dates of adoption.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, we are exposed to market risks relating to fluctuations in interest rates and foreign currency exchange rates that impact our financial position and results of operations.
Interest Rate Risk
Debt. Interest rate risk exists primarily through our borrowing activities. Short-term debt, if required, is used to meet working capital requirements and long-term debt, if required, is generally used to finance long-term investments. There is inherent rollover risk for borrowings as they mature and are renewed at current market rates. The extent of this risk is not quantifiable or predictable because of the variability of future interest rates and our future financing requirements. For floating-rate obligations, interest rate changes do not affect the fair value of the underlying financial instrument but would impact future earnings and cash flows, assuming other factors are held constant. Conversely, for fixed-rate obligations, interest rate changes affect the fair value of the underlying financial instrument but would not impact earnings or cash flows. While we had no fixed or variable rate borrowings outstanding at December 31, 2022, we could be exposed to market risk from changes in risk-free interest rates if we incur variable rate debt in the future as interest expense will fluctuate with changes in the Secured Overnight Financing Rate (“SOFR”). Based on our current and expected levels of exposed liabilities, we estimate that a hypothetical 100 basis point change (up or down) in interest rates based on one-month SOFR would not have a material impact on our results of operations and financial condition.
Cash and Cash Equivalents and Investments. The fair market value of our cash and cash equivalents at December 31, 2022 was $85.4 million while our short-term investments balance was $55.0 million. Our cash and cash equivalents consist of demand deposits and money market funds with original maturities of three months or less and are reported at fair value. Our investments consist of U.S. Treasury Bills with maturities of one year or less and at fair value based on observable inputs. Our primary objective for holding available-for-sale securities is to achieve an appropriate investment return consistent with preserving principal and managing risk. Pursuant to our established investment guidelines, we try to achieve high levels of credit quality, liquidity and diversification. At any time, a sharp rise in market interest rates could have an impact on the fair value of our available-for-sale securities portfolio. Conversely, declines in interest rates, including the impact from lower credit spreads, could have an adverse impact on interest income for our investment portfolio. However, because of our investment policy and the short-term nature of our investments, our financial exposure to fluctuations in interest rates is expected to remain low. We do not believe that the value or liquidity of our cash equivalents and investments have been materially impacted by current market events. Our available-for-sale securities are held for purposes other than trading and are not leveraged as of December 31, 2022. We monitor our interest rate and credit risks and believe the overall credit quality of our portfolio is strong. It is anticipated that the fair market value of our cash equivalents and short-term investments will continue to be immaterially affected by fluctuations in interest rates.
Foreign Currency Exchange Risk
Foreign currency exchange risk is primarily limited to our operation of Ethan Allen operated retail design centers located in Canada and our manufacturing plants in Mexico and Honduras, as substantially all purchases of imported parts and finished goods are denominated in United States dollars. As such, foreign exchange gains or losses resulting from market changes in the value of foreign currencies have not had, nor are they expected to have, a material effect on our consolidated results of operations. A decrease in the value of foreign currencies relative to the U.S. dollar may affect the profitability of our vendors, but as we employ a balanced sourcing strategy, we believe any impact would be moderate relative to peers in our industry.
The financial statements of our foreign locations are translated into U.S. dollars using period-end rates of exchange for assets and liabilities and average rates for the period for revenues and expenses. Translation gains and losses that arise from translating assets, liabilities, revenues and expenses of foreign operations are recorded in accumulated other comprehensive (loss) income as a component of shareholders’ equity. Foreign exchange gains or losses resulting from market changes in the value of foreign currencies did not have a material impact during any of the fiscal periods presented in this Annual Report on Form 10-K.
A hypothetical 10% weaker United States dollar against all foreign currencies at December 31, 2022 would have had an immaterial impact on our consolidated results of operations and financial condition. We currently do not engage in any foreign currency hedging activity and we have no intention of doing so in the foreseeable future.
Duties and Tariffs Market Risk
We are exposed to market risk with respect to duties and tariffs assessed on raw materials, component parts, and finished goods we import into countries where we operate. Additionally, we are exposed to duties and tariffs on our finished goods that we export from our assembly plants to other countries. As these tariffs and duties increase, we determine whether a price increase to our customers to offset these costs is warranted. To the extent that an increase in these costs would have a material impact on our results of operations, we believe that our competitors would experience a similar impact.
Raw Materials and Other Commodity Price Risk
We are exposed to market risk from changes in the cost of raw materials used in our manufacturing processes, principally logs, lumber, plywood, fabric and foam products. The cost of foam products, which are petroleum-based, is sensitive to changes in the price of oil. We are also exposed to risk with respect to transportation costs for delivering our products, including the cost of fuel. As commodity prices and transportation costs remain volatile and, in some cases, rise, we determine whether a price increase to our customers to offset these costs is warranted. To the extent that an increase in these costs would have a material impact on our results of operations, we believe that our competitors would experience a similar impact.
Inflation Risk
Our results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the impact of recent inflationary pressure, we believe any inflationary impact on our product and operating costs would be offset by our ability to increase selling prices, create operational efficiencies and seek lower cost alternatives.
Commercial Real Estate Market Risk
We have potential exposure to market risk related to conditions in the commercial real estate market. As of December 31, 2022, there were 139 Company-operated retail design centers, of which 49 are owned and 90 are leased. Our retail segment real estate holdings could suffer significant impairment in value if we are forced to close design centers and sell or lease the related properties during periods of weakness in certain markets. We are also exposed to risk related to conditions in the commercial real estate rental market with respect to the right-of-use assets we carry on our balance sheet for leased design center locations and warehouse and distribution facilities. At December 31, 2022, the unamortized balance of such right-of-use assets totaled $103.2 million. Should we have to close or otherwise abandon one of these leased locations, we could incur additional impairment charges if rental market conditions do not support a fair value for the right of use asset in excess of its carrying value.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chairman of the Board, President and Chief Executive Officer (“CEO”) and Senior Vice President, Chief Financial Officer and Treasurer (“CFO”), has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our CEO and CFO have concluded that, as of December 31, 2022, our disclosure controls and procedures are effective to provide reasonable assurance that information relating to us (including our consolidated subsidiaries), which is required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the second quarter of fiscal 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material changes during the first six months of fiscal 2023 to the matters discussed in Part I, Item 3 – Legal Proceedings in our 2022 Annual Report on Form 10-K.
Item 1A. Risk Factors
We operate in a changing environment that involves a number of risks that could materially and adversely affect our business, financial condition, operating results or cash flows. We described in our 2022 Annual Report on Form 10-K the primary risks related to our business and periodically update those risks for material developments. For a detailed discussion of those risks that affect our business, refer to the risk factors identified in Part I, Item 1A – Risk Factors in our 2022 Annual Report on Form 10-K. There have been no material changes to our risk factors during the first six months of fiscal 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Items 2(a) and (b) are not applicable as there have been no unregistered sales of equity securities.
(c) Issuer Purchases of Equity Securities
Our Board has authorized management, at its discretion, to make repurchases of its common stock in the open market and through privately negotiated transactions, subject to market conditions, pursuant to our previously announced repurchase program. There is no expiration date on the repurchase authorization and the amount and timing of future share repurchases, if any, will be determined by our officers at their discretion, and as allowed by securities laws, covenants under existing bank agreements and other legal and contractual requirements, and will be based on a number of factors, including an evaluation of general market and economic conditions and the trading price of the common stock. The share repurchase program may be suspended or discontinued at any time without prior notice.
We did not repurchase any shares of our outstanding common stock during the second quarter of fiscal 2023 under the existing share repurchase program. At December 31, 2022, we had a remaining Board authorization to repurchase 2,007,364 shares of our common stock pursuant our program.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
|
(a) |
Exhibits |
The following documents are filed as exhibits to this report:
|
Exhibit Number |
Exhibit Description |
Incorporated by Reference |
Filed Herewith |
Furnished Herewith |
||||||||
|
Form |
File No. |
Exhibit |
Filing Date |
|||||||||
|
3.1 |
8-K |
001-11692 |
3(a) |
11/18/2016 |
- |
- |
||||||
|
3.2 |
8-K |
001-11692 |
3(d) |
11/18/2016 |
- |
- |
||||||
|
31.1 |
X |
|||||||||||
|
31.2 |
X |
|||||||||||
|
32.1 |
X |
|||||||||||
|
32.2 |
X |
|||||||||||
|
101.INS |
Inline XBRL Instance Document |
X |
||||||||||
|
101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
X |
||||||||||
|
101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
X |
||||||||||
|
101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
X |
||||||||||
|
101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document |
X |
||||||||||
|
101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
X |
||||||||||
|
104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
X |
||||||||||
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
ETHAN ALLEN INTERIORS INC. |
|
|
(Registrant) |
|
Date: January 25, 2023 |
BY: /s/ M. Farooq Kathwari |
|
M. Farooq Kathwari |
|
|
Chairman, President and Chief Executive Officer |
|
|
(Principal Executive Officer and Authorized Signatory) |
|
Date: January 25, 2023 |
BY: /s/ Matthew J. McNulty |
|
Matthew J. McNulty |
|
|
Senior Vice President, Chief Financial Officer and Treasurer |
|
|
(Principal Financial Officer) |
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
EXCHANGE ACT RULE 13a-14(a)/15d-14(a) AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, M. Farooq Kathwari, certify that:
|
1. |
I have reviewed this Quarterly Report on Form 10-Q of Ethan Allen Interiors Inc. (the “registrant”); |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|
5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: January 25, 2023
|
/s/ M. Farooq Kathwari |
Chairman, President and Chief Executive Officer (Principal Executive Officer) |
|
M. Farooq Kathwari |
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO
EXCHANGE ACT RULE 13a-14(a)/15d-14(a) AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Matthew J. McNulty, certify that:
|
1. |
I have reviewed this Quarterly Report on Form 10-Q of Ethan Allen Interiors Inc. (the “registrant”); |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|
5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: January 25, 2023
|
/s/ Matthew J. McNulty |
Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) |
|
Matthew J. McNulty |
Exhibit 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, M. Farooq Kathwari, do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge, the Quarterly Report on Form 10-Q (the “Quarterly Report”) for the period ended December 31, 2022, as filed by Ethan Allen Interiors Inc. (the “Company”), which contains the Company's financial statements, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and that the information contained in such Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: January 25, 2023
|
/s/ M. Farooq Kathwari |
Chairman, President and Chief Executive Officer (Principal Executive Officer) |
|
M. Farooq Kathwari |
This certification accompanies this Quarterly Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Exchange Act. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.
This written statement is being furnished to the Securities and Exchange Commission as an exhibit to the Quarterly Report. A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Matthew J. McNulty, do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge, the Quarterly Report on Form 10-Q (the “Quarterly Report”) for the period ended December 31, 2022, as filed by Ethan Allen Interiors Inc. (the “Company”), which contains the Company's financial statements, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and that the information contained in such Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: January 25, 2023
|
/s/ Matthew J. McNulty |
Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) |
|
Matthew J. McNulty |
This certification accompanies this Quarterly Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Exchange Act. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.
This written statement is being furnished to the Securities and Exchange Commission as an exhibit to the Quarterly Report. A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.