Ethan Allen Interiors Inc 10-Q for FY2020 Q2

Ethan Allen Interiors Inc (ETD)

10-Q 2020-02-04 For: 2019-12-31

Added on April 10, 2026

About this 10-Q

Ethan Allen Interiors Inc filed this 10-Q on February 4, 2020, covering the quarter ended December 31, 2019 (FY2020 Q2).

Headline figures

Quarter ended December 31, 2019, as reported in this filing, compared with the same period a year earlier where the filing states it.

Revenue: $174.57M; down 11.5% from $197.15M a year earlier
Net income: $7.09M; down 41.9% from net income of $12.19M a year earlier
Diluted EPS: $0.27; down 40.0% from $0.45 a year earlier

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

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

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

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

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements	2

Consolidated Balance Sheets (Unaudited)	2

Consolidated Statements of Comprehensive Income (Unaudited)	3

Consolidated Statements of Cash Flows (Unaudited)	4

Consolidated Statements of Shareholders’ Equity (Unaudited)	5

Notes to Consolidated Financial Statements (Unaudited)	6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3. Quantitative and Qualitative Disclosures About Market Risk	30

Item 4. Controls and Procedures	31

PART II - OTHER INFORMATION

Item 1. Legal Proceedings	32

Item 1A. Risk Factors	32

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	32

Item 3. Defaults Upon Senior Securities	33

Item 4. Mine Safety Disclosures	33

Item 5. Other Information	33

Item 6. Exhibits	33

SIGNATURES	34

	December 31, 2019			June 30, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	28,306		$	20,824
Accounts receivable, net		13,139			14,247
Inventories, net		138,997			162,389
Prepaid expenses and other current assets		18,998			18,830
Total current assets		199,440			216,290
Property, plant and equipment, net		245,271			245,246
Goodwill		25,388			25,388
Intangible assets		19,740			19,740
Operating lease right-of-use assets		128,525			-
Deferred income taxes		2,082			2,108
Other assets		1,481			1,579
Total assets	$	621,927		$	510,351

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	27,256		$	35,485
Customer deposits and deferred revenue		47,506			56,714
Accrued compensation and benefits		19,184			21,327
Short-term debt		-			550
Current operating lease liabilities		32,809			-
Other current liabilities		10,687			8,750
Total current liabilities		137,442			122,826
Long-term debt		-			516
Operating lease liabilities, long-term		117,857			-
Deferred income taxes		648			1,069
Other long-term liabilities		3,155			22,011
Total liabilities	$	259,102		$	146,422

Commitments and contingencies (see Note 14)
Shareholders' equity:
Preferred stock, $0.01 par value; 1,055 shares authorized; none issued	$	-		$	-
Common stock, $0.01 par value, 150,000 shares authorized, 49,054 and 49,049 shares issued; 26,046 and 26,587 shares outstanding at December 31, 2019 and June 30, 2019, respectively		491			491
Additional paid-in capital		378,089			377,913
Treasury stock, at cost: 23,008 and 22,462 shares at December 31, 2019 and June 30, 2019, respectively		(666,626	)		(656,597	)
Retained earnings		656,211			647,710
Accumulated other comprehensive loss		(5,377	)		(5,651	)
Total Ethan Allen Interiors Inc. shareholders' equity		362,788			363,866
Noncontrolling interests		37			63
Total shareholders' equity		362,825			363,929
Total liabilities and shareholders' equity	$	621,927		$	510,351

	Three months ended						Six months ended
	December 31,						December 31,
	2019			2018			2019			2018
Net sales	$	174,574		$	197,152		$	348,495		$	384,937
Cost of sales		77,053			88,292			157,180			174,627
Gross profit		97,521			108,860			191,315			210,310

Selling, general and administrative expenses		88,495			92,732			174,505			182,383
Restructuring and impairment charges (gains)		(178	)		-			(11,035	)		-
Operating income		9,204			16,128			27,845			27,927
Interest income, net of interest (expense)		63			152			82			125
Income before income taxes		9,267			16,280			27,927			28,052
Provision for income taxes		2,181			4,090			6,735			7,022
Net income	$	7,086		$	12,190		$	21,192		$	21,030

Per share data
Basic earnings per common share:
Net income per basic share	$	0.27		$	0.46		$	0.80		$	0.79
Basic weighted average common shares		26,580			26,574			26,646			26,556
Diluted earnings per common share:
Net income per diluted share	$	0.27		$	0.45		$	0.79		$	0.78
Diluted weighted average common shares		26,612			26,923			26,681			26,932

Comprehensive income
Net income	$	7,086		$	12,190		$	21,192		$	21,030
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments		773			(1,195	)		274			52
Other		(19	)		(19	)		(26	)		(45	)
Other comprehensive income (loss), net of tax		754			(1,214	)		248			7
Comprehensive income	$	7,840		$	10,976		$	21,440		$	21,037

													Accumulated
					Additional								Other						Non-
	Common Stock				Paid-in			Treasury Stock					Comprehensive			Retained			Controlling			Total
	Shares		Par Value		Capital			Shares		Amount			Loss			Earnings			Interests			Equity
Balance at June 30, 2019		49,049	$	491	$	377,913			22,462	$	(656,597	)	$	(5,651	)	$	647,710		$	63		$	363,929
Net income		-		-		-			-		-			-			14,106			-			14,106
Common stock issued on share-based awards		1		-		18			-		-			-			-			-			18
Share-based compensation expense		-		-		151			-		-			-			-			-			151
Impact of ASU 2016-02 adoption, net of tax		-		-		-			-		-			-			(1,585	)		-			(1,585	)
Cash dividends declared		-		-		-			-		-			-			(5,610	)		-			(5,610	)
Other comprehensive income (loss)		-		-		-			-		-			(499	)		-			(7	)		(506	)
Balance at September 30, 2019		49,050	$	491	$	378,082			22,462	$	(656,597	)	$	(6,150	)	$	654,621		$	56		$	370,503
Net income		-		-		-			-		-			-			7,086			-			7,086
Common stock issued on share-based awards		4		-		35			-		-			-			-			-			35
Share-based compensation expense		-		-		(28	)		-		-			-			-			-			(28	)
Cash dividends declared		-		-		-			-		-			-			(5,496	)		-			(5,496	)
Repurchase of common stock		-		-		-			546		(10,029	)		-			-			-			(10,029	)
Other comprehensive income (loss)		-		-		-			-		-			773			-			(19	)		754
Balance at December 31, 2019		49,054	$	491	$	378,089			23,008	$	(666,626	)	$	(5,377	)	$	656,211		$	37		$	362,825

	Wholesale			Retail		Total
Upholstery⁽¹⁾	$	44,329		$	63,696	$	108,025
Case goods⁽²⁾		31,797			39,883		71,680
Accents⁽³⁾		16,170			30,247		46,417
Other⁽⁴⁾		(407	)		5,275		4,868
Total before intercompany eliminations	$	91,889		$	139,101		230,990
Intercompany eliminations⁽⁵⁾							(56,416	)
Consolidated net sales						$	174,574

	December 31,			June 30,
	2019			2019
Finished goods	$	107,105		$	128,047
Work in process		8,975			9,185
Raw materials		24,395			26,661
Inventory reserves		(1,478	)		(1,504	)
Inventories, net	$	138,997		$	162,389

	December 31, 2019
Weighted-average remaining lease term (in years)
Operating leases		6.7
Financing leases		1.9
Weighted-average discount rate
Operating leases		3.7	%
Financing leases		4.4	%

	Statement of Comprehensive Income Location	Three months ended December 31, 2019			Six months ended December 31, 2019
Operating lease cost	Selling, general and administrative (“SG&A”)	$	8,169		$	16,191
Financing lease cost:
Depreciation of property	SG&A		146			293
Interest on lease liabilities	Interest income, net of interest (expense)		8			17
Short-term lease cost	SG&A		355			742
Variable lease cost⁽¹⁾	SG&A		2,373			4,836
Less: Sublease income	SG&A		(596	)		(1,102	)
Total lease expense		$	10,455		$	20,977

	Consolidated Balance Sheet Location	December 31, 2019
Assets
Operating leases	Operating lease right-of-use assets (non-current)	$	128,525
Financing leases	Property, plant and equipment, net		891
Total lease assets		$	129,416

Liabilities
Current:
Operating leases	Current operating lease liabilities	$	32,809
Financing leases	Other current liabilities		597
Noncurrent:
Operating leases	Operating lease liabilities, long-term		117,857
Financing leases	Other long-term liabilities		278
Total lease liabilities		$	151,541

Fiscal Year	Operating Leases			Financing Leases
2020 (remaining six months)	$	17,788		$	303
2021		33,224			459
2022		28,909			78
2023		22,487			39
2024		17,397			19
Thereafter		52,636			8
Total undiscounted future minimum lease payments		172,441			906
Less: imputed interest		(21,775	)		(31	)
Total present value of lease obligations	$	150,666		$	875

	Six months ended December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	16,037
Operating cash flows from financing leases	$	278
Operating lease assets obtained in exchange for new operating lease liabilities	$	13,641

Fiscal Year	Operating Leases		Financing Leases ⁽¹⁾
2020	$	33,761	$	550
2021		30,534		437
2022		26,443		60
2023		20,276		19
2024		15,345		-
Thereafter		43,500		-
Total	$	169,859	$	1,066

			Fiscal 2020 Activity
Optimization of Manufacturing and Logistics	Balance June 30, 2019		New Charges (Income)			Non-Cash			(Payments) Receipts			Balance Dec 31, 2019
Employee severance, other payroll and benefit costs	$	1,714	$	712		$	23		$	(2,380	)	$	23	⁽¹⁾
Manufacturing overhead costs		-		1,323			-			(1,323	)		-
Sale of Passaic property		-		(11,497	)		245			11,742			-
Sale of other property, plant and equipment		-		(675	)		-			675			-
Other exit costs		-		425			(522	)		(947	)		-
Sub-total	$	1,714	$	(9,712	)	$	(254	)	$	7,767		$	23

Inventory write-downs
Inventory write-downs	$	-	$	3,209		$	3,209		$	-		$	-

Other Restructuring and Impairment Charges
Lease exit costs (remaining lease rentals)	$	3,145	$	-		$	2,878		$	(267	)	$	-	⁽²⁾
Other charges (income)		224		-			-			(104	)		120	⁽³⁾
Sub-total		3,369		-			2,878			(371	)		120

Total Restructuring, Impairments and other exit costs	$	5,083	$	(6,503	)	$	5,833		$	7,396		$	143

				Weighted
				Average
	Options			Exercise Price
Outstanding at June 30, 2019		378,911		$	21.95
Granted		49,188		$	17.82
Exercised		(4,500	)	$	11.74
Canceled (forfeited/expired)		(23,162	)	$	23.25
Outstanding at December 31, 2019		400,437		$	21.49
Exercisable at December 31, 2019		314,373		$	21.56

	FY 2020
Volatility		30.8	%
Risk-free rate of return		1.84	%
Dividend yield		4.56	%
Expected average life (years)		6.7

	FY 2020			FY 2019
Volatility		30.8	%		31.3	%
Risk-free rate of return		1.55	%		2.80	%
Dividend yield		3.97	%		3.24	%
Expected average life (years)		5.3			5.0

			Weighted Average
	Units		Grant Date Fair Value
Outstanding at June 30, 2019		313,882	$	22.80
Granted		99,405	$	12.72
Vested		-	$	-
Canceled (forfeited/expired)		-	$	-
Outstanding at December 31, 2019		413,287	$	20.37

	2019			2018
Beginning balance at July 1	$	(5,651	)	$	(6,171	)
Foreign currency translation adjustments		274			52
Amounts reclassified from accumulated other comprehensive income		-			-
Current period other comprehensive income		274			52
Ending balance at December 31	$	(5,377	)	$	(6,119	)

	-	Forward-Looking Statements
	-	Executive Overview
	-	Key Operating Metrics
	-	Results of Operations
	-	Reconciliation of Non-GAAP Financial Measures
	-	Liquidity
	-	Capital Resources
	-	Share Repurchase Program
	-	Contractual Obligations
	-	Dividends
	-	Off-Balance Sheet Arrangements and Other Commitments and Contingencies
	-	Foreign Currency
	-	Significant Accounting Policies and Critical Accounting Estimates
	-	Recent Accounting Pronouncements
	-	Business Outlook

	●	providing fashionable high-quality products of the finest craftsmanship;
	●	offering complimentary design service through approximately 2,000 motivated interior design professionals network-wide;
	●	offering a wide array of custom products across our upholstery, case goods, and accent product categories;
	●	enhancing our technology in all aspects of the business; and
	●	leveraging our vertically integrated structure.

	Three months ended December 31,											Six months ended December 31,
	2019			% of Sales			2018		% of Sales			2019		% of Sales			2018		% of Sales
Net sales	$	174.6					$	197.2				$	348.5				$	384.9
Gross profit	$	97.5			55.9	%	$	108.9		55.2	%	$	191.3		54.9	%	$	210.3		54.6	%
Adjusted gross profit⁽¹⁾	$	97.9			56.1	%	$	108.9		55.2	%	$	195.8		56.2	%	$	210.3		54.6	%
Operating income	$	9.2			5.3	%	$	16.1		8.2	%	$	27.8		8.0	%	$	27.9		7.3	%
Adjusted operating income⁽¹⁾	$	9.5			5.4	%	$	16.4		8.3	%	$	21.7		6.2	%	$	28.2		7.3	%
Net income	$	7.1			4.1	%	$	12.2		6.2	%	$	21.2		6.1	%	$	21.0		5.5	%
Adjusted net income⁽¹⁾	$	7.3			4.2	%	$	12.4		6.3	%	$	16.6		4.7	%	$	21.3		5.5	%
Diluted EPS	$	0.26					$	0.45				$	0.79		0.2	%	$	0.78
Adjusted diluted EPS⁽¹⁾	$	0.27					$	0.46				$	0.62		0.2	%	$	0.79
Cash flow from operating activities	$	(0.0	)				$	7.0				$	23.4				$	31.5

	Fiscal 2020									Fiscal 2019
	Independent			Company-						Independent			Company-
	retailers			operated			Total			retailers			operated			Total
Retail Design Center activity:
Balance at July 1		158			144			302			148			148			296
New locations		9			5			14			13			1			14
Closures		(8	)		(6	)		(14	)		(1	)		(4	)		(5	)
Transfers		(1	)		1			-			(1	)		1			-
Balance at December 31		158			144			302			159			146			305
Relocations (in new and closures)		1			4			5			-			1			1

Retail Design Center geographic locations:
United States		36			138			174			42			140			182
Canada		-			6			6			-			6			6
China		104			-			104			98			-			98
Other Asia		11			-			11			11			-			11
Europe		1			-			1			1			-			1
Middle East		6			-			6			7			-			7
Total		158			144			302			159			146			305

(Unaudited)
(In thousands, except per share data)	Three months ended									Six months ended
	December 31,									December 31,
	2019			2018			% Chg			2019			2018			% Chg
Consolidated Adjusted Gross Profit / Gross Margin
GAAP Gross profit	$	97,521		$	108,860			(10.4	%)	$	191,315		$	210,310			(9.0	%)
Adjustments (pre-tax) *		389			-						4,529			-
Adjusted gross profit *	$	97,910		$	108,860			(10.1	%)	$	195,844		$	210,310			(6.9	%)
Adjusted gross margin *		56.1	%		55.2	%					56.2	%		54.6	%

Consolidated Adjusted Operating Income / Operating Margin
GAAP Operating income	$	9,204		$	16,128			(42.9	%)	$	27,845		$	27,927			(0.3	%)
Adjustments (pre-tax) *		284			297						(6,144	)		297
Adjusted operating income *	$	9,488		$	16,425			(42.2	%)	$	21,701		$	28,224			(23.1	%)

Consolidated Net sales	$	174,574		$	197,152			(11.5	%)	$	348,495		$	384,937			(9.5	%)
GAAP Operating margin		5.3	%		8.2	%					8.0	%		7.3	%
Adjusted operating margin *		5.4	%		8.3	%					6.2	%		7.3	%

Consolidated Adjusted Net Income / Adjusted Diluted EPS
GAAP Net income	$	7,086		$	12,190			(41.9	%)	$	21,192		$	21,030			0.8	%
Adjustments, net of tax *		214			224						(4,639	)		224
Adjusted net income	$	7,300		$	12,414			(41.2	%)	$	16,553		$	21,254			(22.1	%)
Diluted weighted average common shares		26,612			26,923						26,681			26,932
GAAP Diluted EPS	$	0.27		$	0.45			(40.0	%)	$	0.79		$	0.78			1.3	%
Adjusted diluted EPS *	$	0.27		$	0.46			(41.3	%)	$	0.62		$	0.79			(21.5	%)

Wholesale Adjusted Operating Income / Operating Margin
Wholesale GAAP operating income	$	5,730		$	8,821			(35.0	%)	$	22,658		$	23,136			(2.1	%)
Adjustments (pre-tax) *		284			74						(6,292	)		74
Adjusted wholesale operating income *	$	6,014		$	8,895			(32.4	%)	$	16,366		$	23,210			(29.5	%)

Wholesale net sales	$	91,889		$	107,658			(14.6	%)	$	193,218		$	225,730			(14.4	%)
Wholesale GAAP operating margin		6.2	%		8.2	%					11.7	%		10.2	%
Adjusted wholesale operating margin *		6.5	%		8.3	%					8.5	%		10.3	%

Retail Adjusted Operating Income / Operating Margin
Retail GAAP operating income	$	(135	)	$	3,311			(104.1	%)	$	1,429		$	1,752			(18.4	%)
Adjustments (pre-tax) *		-			223						148			223
Adjusted retail operating income *	$	(135	)	$	3,534			(103.8	%)	$	1,577		$	1,975			(20.2	%)

Retail net sales	$	139,101		$	158,508			(12.2	%)	$	276,367		$	303,722			(9.0	%)
Retail GAAP operating margin		(0.1	%)		2.1	%					0.5	%		0.6	%
Adjusted retail operating margin *		(0.1	%)		2.2	%					0.6	%		0.7	%

Period	Total number of shares purchased⁽¹⁾		Average price paid per share		Total number of shares purchased as part of publicly announced plan or programs⁽²⁾		Maximum number of shares (or approximate dollar value) that may yet be purchased under the plans or programs⁽²⁾
October 2019		—	$	—		—		2,518,046
November 2019		—	$	—		—		2,518,046
December 2019		545,727	$	18.38		545,747		1,972,319	⁽³⁾
Total		545,727				545,747

	ETHAN ALLEN INTERIORS INC.
	(Registrant)


Date: February 4, 2020	BY:	/s/ M. Farooq Kathwari
	M. Farooq Kathwari Chairman, President and Chief Executive Officer (Principal Executive Officer)



Date: February 4, 2020	BY:	/s/ Corey Whitely
	Corey Whitely
	Executive Vice President, Administration Chief Financial Officer and Treasurer
	(Principal Financial Officer)

/s/ M. Farooq Kathwari	Chairman, President and Chief Executive Officer
(M. Farooq Kathwari)	(Principal Executive Officer)