0000896156 ETHAN ALLEN INTERIORS INC false --06-30 Q2 2022 0.01 0.01 1,055 1,055 0 0 0.01 0.01 150,000 150,000 49,336 49,240 25,301 25,237 24,035 24,003 2 0 0 0 0 0 3 5 7 0 25.4 19.7 0 5.0 0 0 0 3 10 4 2 3 We completed the sale of our previously closed Atoka, Oklahoma distribution center to an independent third party in October 2021 and received $2.8 million in cash less $0.2 million in closing costs. As a result of the sale, the Company recognized a pre-tax gain of $2.0 million in the second quarter of fiscal 2022. In addition, in December 2021, we completed the sale of a property for $5.6 million in cash, which resulted in a pre-tax gain of $1.9 million. In the year ago second quarter, we sold a previously closed retail property and received $1.3 million in cash less $0.1 million in closing costs, resulting in a pre-tax loss of $0.3 million. All three of these transactions were recorded within the line item Restructuring and other impairment charges, net of gains in the consolidated statements of comprehensive income. Leases with an initial term of 12 months or less are not recorded on the balance sheet and instead expensed on a straight-line basis over the lease term. Accents includes items such as window treatments and drapery hardware, wall décor, florals, lighting, clocks, mattresses, bedspreads, throws, pillows, decorative accents, area rugs, wall coverings and home and garden furnishings. In the prior year first quarter, we recorded a non-cash charge of $0.6 million related to the impairment of long-lived assets held at a retail design center location. The asset group used for the impairment analysis was the individual retail design center, which represented the lowest level for which identifiable cash flows were available and largely independent of the cash flows of other groups of assets. We estimated future cash flows based on the design center-level historical results, current trends and operating and cash flow projections. The $0.6 million non-cash charge was recorded in the consolidated statement of comprehensive income within the line item Restructuring and other impairment charges, net of gains. Manufacturing overhead costs and inventory reserves and write-downs are reported within Cost of Sales in the consolidated statements of comprehensive income. Excludes future commitments under short-term operating lease agreements of $0.6 million as of December 31, 2021. We recorded a non-cash charge of $0.4 million during the year ago second quarter to increase our finished goods inventory obsolescence reserve for certain slow moving and discontinued inventory items based on actual demand and the most current forecasted market conditions at that time. The non-cash inventory write-down was recorded in the consolidated statement of comprehensive income within the line item Cost of Sales. Represents the change in wholesale profit contained in the retail segment inventory at the end of the period. Variable lease payments are generally expensed as incurred, where applicable, and include certain index-based changes in rent, certain non-lease components, such as maintenance, real estate taxes, insurance and other services provided by the lessor, and other charges included in the lease. In addition, certain of our equipment lease agreements include variable lease payments, which are based on the usage of the underlying asset. The variable portion of payments are not included in the initial measurement of the asset or lease liability due to uncertainty of the payment amount and are recorded as expense in the period incurred. The Eliminations column in the tables above represents the elimination of all intercompany wholesale segment sales to the retail segment in each period presented. Lease expense for operating leases consists of both fixed and variable components. Expense related to fixed lease payments are recognized on a straight-line basis over the lease term. Case goods includes items such as beds, dressers, armoires, tables, chairs, buffets, entertainment units, home office furniture and wooden accents. Upholstery includes fabric-covered items such as sleepers, recliners and other motion furniture, chairs, ottomans, custom pillows, sofas, loveseats, cut fabrics and leather. We recorded $0.3 million and $0.5 million of charges during the three and six months ended December 31, 2021, respectively. These charges primarily related to severance for terminated employees, including those at our recently sold Atoka distribution center. In recent years, we have executed on many key initiatives to further optimize our manufacturing and logistics, including closing our Atoka, Oklahoma distribution center and consolidating its workflow into our Old Fort, North Carolina facility. These charges were recorded in the consolidated statement of comprehensive income within the line item Restructuring and other impairment charges, net of gains. Other includes product delivery sales, the Ethan Allen Hotel revenues, sales of third-party furniture protection plans, membership revenue (in the prior fiscal year only) and other miscellaneous product sales less prompt payment discounts, sales allowances and other incentives. Represents the wholesale profit contained in the retail segment inventory that has not yet been realized. 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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended December 31, 2021

 

or

 

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

 

For the transition period from __________ to __________

 

Commission File Number: 1-11692

 

logo.jpg

 

Ethan Allen Interiors Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

06-1275288

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

25 Lake Avenue Ext., Danbury, Connecticut

 

06811-5286

(Address of principal executive offices)

 

(Zip Code)

 

(203) 743-8000

(Registrant's telephone number, including area code)

 

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

 

Common Stock, $0.01 par value

 

ETD

 

New York Stock Exchange

(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.         ☒ Yes         ☐ No

 

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

 

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

 

Large accelerated filer        ☐

         Accelerated filer                             ☒

 

Non-accelerated filer          ☐

Smaller reporting company         

 

Emerging growth company    

  

 

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

 

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

 

The number of shares outstanding of the registrant’s common stock, $0.01 par value, as of January 20, 2022, was 25,301,091.

 

 

 

 

 

ETHAN ALLEN INTERIORS INC.

FORM 10-Q SECOND QUARTER OF FISCAL 2022

 

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 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 33
   
Item 4. Controls and Procedures 34
   
PART II - OTHER INFORMATION  
   
Item 1. Legal Proceedings 35
   
Item 1A. Risk Factors 35
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 36
   
Item 3. Defaults Upon Senior Securities 36
   
Item 4. Mine Safety Disclosures 36
   
Item 5. Other Information 36
   
Item 6. Exhibits  36
   
SIGNATURES 37

 

1
 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

 

  

December 31, 2021

  

June 30, 2021

 
  (Unaudited)      

ASSETS

 

 

     

Current assets:

        

Cash and cash equivalents

 $105,207  $104,596 

Accounts receivable, net

  7,495   9,026 

Inventories, net

  164,550   143,978 

Prepaid expenses and other current assets

  38,992   37,679 

Total current assets

  316,244   295,279 
         

Property, plant and equipment, net

  222,195   231,446 

Goodwill

  25,388   25,388 

Intangible assets

  19,740   19,740 

Operating lease right-of-use assets

  102,912   108,730 

Deferred income taxes

  489   1,078 

Other assets

  2,360   1,584 

Total ASSETS

 $689,328  $683,245 
         

LIABILITIES AND SHAREHOLDERS' EQUITY

        

Current liabilities:

        

Accounts payable and accrued expenses

 $37,451  $37,786 

Customer deposits and deferred revenue

  124,196   130,635 

Accrued compensation and benefits

  21,487   23,866 

Current operating lease liabilities

  26,766   27,395 

Other current liabilities

  12,917   4,220 

Total current liabilities

  222,817   223,902 

Operating lease liabilities, long-term

  91,769   97,911 

Deferred income taxes

  5,899   5,028 

Other long-term liabilities

  3,106   4,986 

Total LIABILITIES

 $323,591  $331,827 
         

Commitments and contingencies (see Note 17)

          

SHAREHOLDERS' EQUITY

        

Preferred stock, $0.01 par value; 1,055 shares authorized; none issued

 $-  $- 

Common stock, $0.01 par value, 150,000 shares authorized, 49,336 and 49,240 shares issued; 25,301 and 25,237 shares outstanding at December 31, 2021 and June 30, 2021, respectively

  493   492 

Additional paid-in capital

  383,966   382,527 

Treasury stock, at cost: 24,035 and 24,003 shares at December 31, 2021 and June 30, 2021, respectively

  (681,770)  (680,991)

Retained earnings

  669,653   655,346 

Accumulated other comprehensive loss

  (6,573)  (5,931)

Total Ethan Allen Interiors Inc. shareholders' equity

  365,769   351,443 

Noncontrolling interests

  (32)  (25)

Total shareholders' equity

  365,737   351,418 

Total LIABILITIES AND SHAREHOLDERS' EQUITY

 $689,328  $683,245 

 

See accompanying notes to consolidated financial statements.

 

2

 

 

 

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,

 
  

2021

  

2020

  

2021

  

2020

 

Net sales

 $208,093  $178,826  $390,420  $329,884 

Cost of sales

  85,824   77,494   158,959   142,782 

Gross profit

  122,269   101,332   231,461   187,102 
                 

Selling, general and administrative expenses

  89,610   78,354   171,187   151,820 

Restructuring and other impairment charges, net of gains

  (3,633)  423   (3,378)  1,046 

Operating income

  36,292   22,555   63,652   34,236 

Other expenses

                

Interest and other financing costs

  48   47   96   382 

Other income (expense), net

  (26)  (330)  2   (435)

Income before income taxes

  36,218   22,178   63,558   33,419 

Income tax expense

  9,324   5,295   16,511   7,183 

Net income

 $26,894  $16,883  $47,047  $26,236 
                 

Per share data

                

Basic earnings per common share:

                

Net income per basic share

 $1.06  $0.67  $1.85  $1.04 

Basic weighted average common shares

  25,396   25,239   25,386   25,209 

Diluted earnings per common share:

                

Net income per diluted share

 $1.05  $0.67  $1.85  $1.04 

Diluted weighted average common shares

  25,513   25,309   25,482   25,257 
                 

Comprehensive income

                

Net income

 $26,894  $16,883  $47,047  $26,236 

Other comprehensive income (loss), net of tax

                

Foreign currency translation adjustments

  11   1,990   (642)  2,546 

Other

  (8)  (5)  (7)  (14)

Other comprehensive income (loss), net of tax

  3   1,985   (649)  2,532 

Comprehensive income

 $26,897  $18,868  $46,398  $28,768 

 

See accompanying notes to consolidated financial statements.

 

3

 

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

 

  Six months ended 
  December 31, 

Cash Flows from Operating Activities

 

2021

  

2020

 

Net income

 $47,047  $26,236 

Adjustments to reconcile net income to net cash provided by operating activities:

        

Depreciation and amortization

  8,187   8,145 

Share-based compensation expense

  626   711 

Non-cash operating lease cost

  14,948   14,953 

Deferred income taxes

  1,460   (706)

Restructuring and other impairment charges, net of gains

  (3,378)  1,435 

Restructuring payments

  (615)  31 

Loss on disposal of property, plant and equipment

  4   13 

Other

  -   12 

Change in operating assets and liabilities

        

Accounts receivable, net

  1,531   (893)

Inventories, net

  (20,572)  (1,036)

Prepaid expenses and other current assets

  (551)  (5,952)

Customer deposits and deferred revenue

  (6,439)  26,032 

Accounts payable and accrued expenses

  (51)  8,394 

Accrued compensation and benefits

  (2,538)  2,780 

Operating lease liabilities

  (16,734)  (16,706)

Other assets and liabilities

  (224)  2,469 

Net cash provided by operating activities

  22,701   65,918 
         

Cash Flows from Investing Activities

        

Proceeds from disposal of property, plant and equipment

  8,206   1,225 

Capital expenditures

  (3,730)  (5,878)

Net cash provided by (used in) investing activities

  4,476   (4,653)
         

Cash Flows from Financing Activities

        

Payments on borrowings

  -   (50,000)

Dividend payments

  (25,372)  (5,288)

Proceeds from employee stock plans

  813   1,633 

Taxes paid related to net share settlement of equity awards

  (778)  - 

Payments for debt issuance costs

  (28)  - 

Payments on financing leases

  (264)  (290)

Net cash used in financing activities

  (25,629)  (53,945)
         

Effect of exchange rate changes on cash and cash equivalents

  (87)  439 
         

Net increase in cash, cash equivalents and restricted cash

  1,461   7,759 

Cash, cash equivalents and restricted cash at beginning of period

  104,596   72,276 

Cash, cash equivalents and restricted cash at end of period

 $106,057  $80,035 

 

See accompanying notes to consolidated financial statements.

 

4

 

 

 

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, 2021

  49,240  $492  $382,527   24,003  $(680,991) $(5,931) $655,346  $(25) $351,418 

Net income

  -   -   -   -   -   -   20,153   -   20,153 

Share-based compensation expense

  -   -   277   -   -   -   -   -   277 

Restricted stock vesting

  55   1   -   32   (779)  -   -   -   (778)

Cash dividends declared

  -   -   -   -   -   -   (25,372)  -   (25,372)

Other comprehensive income (loss)

  -   -   -   -   -   (653)  -   1   (652)

Balance at September 30, 2021

  49,295  $493  $382,804   24,035  $(681,770) $(6,584) $650,127  $(24) $345,046 

Net income

  -   -   -   -   -   -   26,894   -   26,894 

Common stock issued on share-based awards

  41   -   813   -   -   -   -   -   813 

Share-based compensation expense

  -   -   349   -   -   -   -   -   349 

Cash dividends declared

  -   -   -   -   -   -   (7,368)  -   (7,368)

Other comprehensive income (loss)

  -   -   -   -   -   11   -   (8)  3 

Balance at December 31, 2021

  49,336  $493  $383,966   24,035  $(681,770) $(6,573) $669,653  $(32) $365,737 

 

 

                      

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, 2020

  49,053  $491  $378,300   24,000  $(680,916) $(8,441) $638,631  $(1) $328,064 

Net income

  -   -   -   -   -   -   9,353   -   9,353 

Common stock issued on share-based awards

  -   -   -   -   -   -   -   -   - 

Share-based compensation expense

  -   -   254   -   -   -   -   -   254 

Cash dividends declared

  -   -   -   -   -   -   (5,287)  -   (5,287)

Other comprehensive income (loss)

  -   -   -   -   -   556   -   (9)  547 

Balance at September 30, 2020

  49,053  $491  $378,554   24,000  $(680,916) $(7,885) $642,697  $(10) $332,931 

Net income

  -   -   -   -   -   -   16,883   -   16,883 

Common stock issued on share-based awards

  120   1   1,632   -   -   -   -   -   1,633 

Share-based compensation expense

  -   -   457   -   -   -   -   -   457 

Cash dividends declared

  -   -   -   -   -   -   (6,325)  -   (6,325)

Other comprehensive income (loss)

  -   -   -   -   -   1,990   -   (5)  1,985 

Balance at December 31, 2020

  49,173  $492  $380,643   24,000  $(680,916) $(5,895) $653,255  $(15) $347,564 

 

See accompanying notes to consolidated financial statements.

 

 

5

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

(1)

Organization and Nature of Business

 

Organization

 

Founded in 1932 and incorporated in Delaware in 1989, Ethan Allen Interiors Inc., through its wholly-owned subsidiary, Ethan Allen Global, Inc., and Ethan Allen Global, Inc.’s subsidiaries (collectively, “we,” “us,” “our,” “Ethan Allen” or the “Company”), is a leading interior design company, manufacturer and retailer in the home furnishings marketplace.

 

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 provide complimentary 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, 2021, the Company operates 141 retail design centers with 136 located in the United States and five in Canada. Our independently operated design centers are located in the United States, Asia, the Middle East and Europe. We also own and operate nine manufacturing facilities in the United States, Mexico and Honduras, including one sawmill, one rough mill and a lumberyard. Approximately 75% of our products are manufactured or assembled in these North American facilities. We also contract with various suppliers located in Europe, Asia, and various other countries that produce products that support our business.

 

Impact of the COVID-19 Pandemic Upon our Financial Condition and Results of Operations

 

We have been and continue to be impacted by the ongoing global coronavirus (“COVID-19”) pandemic. Our design centers are open and demand for our products continues to be strong as customers allocate greater amounts of discretionary spending to home furnishings than at the start of the COVID-19 pandemic. After having re-opened our manufacturing facilities in May 2020, we have ramped up and increased production capacity by adding headcount as well as second shifts and weekend production shifts to our North American plants. Our ability to expand production combined with higher import receipts has led to a reduction in order backlog during the second quarter of fiscal 2022. However, because we continue to experience strong written orders taken at both the retail and wholesale segments, our order backlog is approximately 50% higher than our backlog during the prior year period.

 

While we have increased production to meet the strong demand for our products, we continue to experience ongoing logistical challenges that we, as well as the entire home furnishings industry, have faced resulting from COVID-19 related supply chain disruptions creating delays in order fulfillment. Our focus on inventory and supply chain management is critical as we balance the need to maintain supply chain flexibility to help ensure competitive lead times with the risk of inventory shortage and obsolescence. In addition, ocean freight capacity issues continue to persist worldwide due to the ongoing COVID-19 pandemic, which has resulted in price increases per shipping container. While we continue to manage and evaluate our logistics providers, we do not believe ocean freight container rates will return to pre-COVID-19 levels in the near-term. While we improved our headcount during the second quarter of fiscal 2022, we continue to experience a shortage of qualified labor in certain geographies, particularly with United States manufacturing plant production workers and at our distribution facilities. Outside suppliers that we rely on have also experienced shortages of qualified labor. While we continue to actively identify, recruit, develop and retain qualified talent, an ongoing shortage in certain geographies could result in increased costs from higher overtime and the need to hire temporary help to meet demand and higher wage rates from actions to attract and retain employees, as well as higher costs to purchase raw materials or services from such third parties, all of which would have a negative impact on our results of operations.

 

The COVID-19 pandemic has also exposed us to greater market risk as a result of increases in the cost of raw materials that we use in our manufacturing processes, principally wood, fabric and foam products. These raw materials have been, and continue to be, subject to rising inflationary pressures, partially attributable to the COVID-19 pandemic, which has led to increased costs of production. As commodity prices rise, we continue to evaluate whether a price increase to our customers to offset these costs is warranted.

 

In addition, in recent months, the United States federal government has issued orders and regulations directing employers to require their employees to be vaccinated against COVID-19. Due to our United States government General Services Administration contract, we are classified as a government contractor. In addition, we are a company with more than 100 employees, thus subject to these recently issued orders and regulations, if finalized. However, given the uncertainty surrounding if the mandates are legal and when they become effective, it is not possible to predict with certainty the impacts the mandates would have on us.

 

6

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 

Although we actively manage the impact of the ongoing COVID-19 pandemic, we are unable to predict the impact COVID-19 will have on our financial operations in the near- and long-term. The timing of any future actions in response to COVID-19 is dependent on the mitigation of the spread of the virus along with the adoption and continued effectiveness of vaccines, status of government orders, directives and guidelines, recovery of the business environment, global supply chain conditions, economic conditions, raw material prices, and consumer demand for our products.

 

 

(2)

Interim Basis of Presentation

 

Principles of Consolidation

 

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. 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 Other income (expense), net. All intercompany activity and balances have been eliminated from the consolidated financial statements. In our opinion, all adjustments, consisting only of normal recurring adjustments necessary for fair presentation, have been included in the consolidated financial statements. The results of operations for the three and six months ended December 31, 2021 are not necessarily indicative of results that  may be expected for the entire fiscal year. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our fiscal 2021 Annual Report on Form 10-K (the “2021 Annual Report on Form 10-K”).

 

Use of Estimates

 

We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”), which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of net sales and expenses during the reporting period. Due to the inherent uncertainty involved in making those estimates, actual results could differ from those estimates. Areas in which significant estimates have been made include, but are not limited to, goodwill and indefinite-lived intangible asset impairment analyses, useful lives for property, plant and equipment, inventory obsolescence, business insurance reserves, tax valuation allowances and the evaluation of uncertain tax positions.

 

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. As of December 31, 2021, we held $0.9 million of restricted cash related to an Ethan Allen insurance captive. We did not hold any restricted cash as of June 30, 2021.

 

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

 

New Accounting Standards or Updates Adopted in Fiscal 2022

 

Simplifying the Accounting for Income Taxes. In December 2019, the Financial Accounting Standards Board (the “FASB”) issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, an update intended to simplify various aspects related to accounting for income taxes. This guidance removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The adoption of this accounting standards update in the first quarter of fiscal 2022 did not have a material impact on our consolidated financial statements.

 

Recent Accounting Standards or Updates Not Yet Effective

 

Business Combinations. In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires an acquirer to recognize and measure contract assets and liabilities acquired in a business combination in accordance with Revenue from Contracts with Customers (Topic 606) rather than adjust them to fair value at the acquisition date. This accounting standards update will be effective for us beginning in the first quarter of fiscal 2024. We are currently evaluating the impact of this accounting standard, but do not expect it to have a material impact on our consolidated financial statements.

 

7

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 

No other new accounting pronouncements issued or effective as of December 31, 2021 have had or are expected to have a material impact on our consolidated financial statements.

 

 

(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. As our contracts with customers are typically less than one year in length and do not have significant financing components, we do not adjust promised consideration.

 

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 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 taxes collected are not recognized as revenue but are 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, 2021 and June 30, 2021, 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. Judgments are made with respect to the collectability of accounts receivable based on historical experience and current economic trends. On a monthly basis, we review all significant accounts as to their past due balances, as well as collectability of the outstanding trade accounts receivable for possible write-off. It is our policy to write-off the accounts receivable against the allowance account when we deem the receivable to be uncollectible. Additionally, we review orders from retailers that are significantly past due, and we ship product only when our ability to collect payment from our customer for the new order is probable. At December 31, 2021 and June 30, 2021, 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, 2021, we had prepaid commissions of $22.1 million, which we expect to recognize during the remainder of fiscal 2022 as Selling, general and administrative expenses within our consolidated statements of comprehensive income.

 

Customer Deposits. In most cases we receive deposits from customers before we have transferred control of our product to our customers, resulting in contract liabilities. These customer deposits are reported as a current liability in Customer deposits and deferred revenue on our consolidated balance sheets. At June 30, 2021, we had customer deposits of $130.6 million, of which we recognized $44.3 million and $113.0 million as net sales upon delivery to the customer during the three and six months ended December 31, 2021. Customer deposits totaled $124.2 million at December 31, 2021. 

 

8

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 

The following table disaggregates our net sales by product category by segment for the three months ended December 31, 2021 (in thousands):

 

  

Wholesale

  

Retail

  

Eliminations(1)

  

Total

 

Upholstery(2)

 $62,428  $91,195  $(46,274) $107,349 

Case goods(3)

  35,082   46,876   (24,475)  57,483 

Accents(4)

  20,048   34,017   (16,662)  37,403 

Other(5)

  (1,637)  7,495   -   5,858 

Total

 $115,921  $179,583  $(87,411) $208,093 

 

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

 

  

Wholesale

  

Retail

  

Eliminations(1)

  

Total

 

Upholstery(2)

 $53,573  $74,087  $(35,090) $92,570 

Case goods(3)

  30,984   38,743   (18,268)  51,459 

Accents(4)

  18,803   29,442   (14,184)  34,061 

Other(5)

  (1,810)  2,546   -   736 

Total

 $101,550  $144,818  $(67,542) $178,826 

 

The following table disaggregates our net sales by product category by segment for the six months ended December 31, 2021 (in thousands):

 

  

Wholesale

  

Retail

  

Eliminations(1)

  

Total

 

Upholstery(2)

 $122,431  $167,489  $(88,149) $201,771 

Case goods(3)

  68,601   88,331   (47,465)  109,467 

Accents(4)

  37,493   65,234   (33,904)  68,823 

Other(5)

  (3,156)  13,515   -   10,359 

Total

 $225,369  $334,569  $(169,518) $390,420 

 

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

 

  

Wholesale

  

Retail

  

Eliminations(1)

  

Total

 

Upholstery(2)

 $106,308  $131,772  $(67,268) $170,812 

Case goods(3)

  59,723   71,661   (36,932)  94,452 

Accents(4)

  35,999   53,755   (27,699)  62,055 

Other(5)

  (3,146)  5,711   -   2,565 

Total

 $198,884  $262,899  $(131,899) $329,884

 

 

 

(1)

The “Eliminations” column in the tables above represents the elimination of all intercompany wholesale segment sales to the retail segment in each period presented.

 

 

(2)

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

 

 

(3)

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

 

 

(4)

Accents includes items such as window treatments and drapery hardware, wall décor, florals, lighting, clocks, mattresses, bedspreads, throws, pillows, decorative accents, area rugs, wall coverings and home and garden furnishings.

 

 

(5)

Other includes product delivery sales, the Ethan Allen Hotel revenues, sales of third-party furniture protection plans, membership revenue (in the prior fiscal year only) and other miscellaneous product sales less prompt payment discounts, sales allowances and other incentives.

 

 

(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. We have categorized our cash equivalents as Level 1 assets within the fair value hierarchy as there are quoted prices in active markets for identical assets or liabilities. As of December 31, 2021 and June 30, 2021, we did not have any outstanding bank borrowings, which we historically have categorized as a Level 2 liability. There were no Level 3 assets or liabilities held by the Company as of December 31, 2021 and June 30, 2021.

 

9

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 

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 2022. In addition, we did not hold any available-for-sale securities during fiscal 2022 and 2021, and thus no fair value measurements were required.

 

Assets and Liabilities Measured at Fair Value for Disclosure Purposes Only. We had no outstanding bank borrowings as of December 31, 2021 and June 30, 2021.

 

 

(6)

Leases

 

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

 
  

2021

  

2020

 

Weighted average remaining lease term (in years)

        

Operating leases

  6.0   6.6 

Financing leases

  2.2   1.7 

Weighted average discount rate

        

Operating leases

  4.1%  4.3%

Financing leases

  2.2%  4.3%

 

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,

 
 

Statement of Comprehensive Income Location

 

2021

  

2020

  

2021

  

2020

 

Operating lease cost(1)

Selling, general and administrative (“SG&A”) expenses

 $7,475  $7,461  $14,948  $14,953 

Financing lease cost

                 

Depreciation of property

SG&A expenses

  126   144   252   295 

Interest on lease liabilities

Interest and other financing costs

  6   3   13   8 

Short-term lease cost(2)

SG&A expenses

  309   240   617   480 

Variable lease cost(3)

SG&A expenses

  2,371   2,351   4,684   4,613 

Less: Sublease income

SG&A expenses

  (386)  (454)  (799)  (892)

Total lease expense

  $9,901  $9,745  $19,715  $19,457 

 

 

(1)

Lease expense for operating leases consists of both fixed and variable components. Expense related to fixed lease payments are recognized on a straight-line basis over the lease term.

 

 

 

(2)

Leases with an initial term of 12 months or less are not recorded on the balance sheet and instead expensed on a straight-line basis over the lease term.

 

 

(3)

Variable lease payments are generally expensed as incurred, where applicable, and include certain index-based changes in rent, certain non-lease components, such as maintenance, real estate taxes, insurance and other services provided by the lessor, and other charges included in the lease. In addition, certain of our equipment lease agreements include variable lease payments, which are based on the usage of the underlying asset. The variable portion of payments are not included in the initial measurement of the asset or lease liability due to uncertainty of the payment amount and are recorded as expense in the period incurred.

 

10

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 

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, 2021 (in thousands):

 

Fiscal Year

 

Operating Leases

  

Financing Leases

 

2022 (remaining six months)

 $16,629  $253 

2023

  27,367   490 

2024

  22,394   320 

2025

  18,753   8 

2026

  15,192   - 

Thereafter

  34,886   - 

Total undiscounted future minimum lease payments

  135,221   1,071 

Less: imputed interest

  (16,686)  (24)

Total present value of lease obligations(1)

 $118,535  $1,047 

 

 

(1)

Excludes future commitments under short-term operating lease agreements of $0.6 million as of December 31, 2021.

 

As of  December 31, 2021, we have entered into one additional operating lease for a retail design center, which has not yet commenced and is therefore not part of the tables above nor included 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 be within the next three months. The operating lease is for a period of seven years and has an aggregate undiscounted future lease payments of $2.7 million. As of December 31, 2021, we did not have any financing leases that had not commenced.

 

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

 

  

Six months ended

December 31,

 
  

2021

  

2020

 

Cash paid for amounts included in the measurement of lease liabilities

        

Operating cash flows from operating leases

 $16,734  $16,706 

Operating cash flows from financing leases

 $264  $290 

Operating lease assets obtained in exchange for operating lease liabilities

 $7,534  $12,102 

 

There were no non-cash financing lease obligations obtained in exchange for new financing lease assets during the six months ended December 31, 2021 and 2020, respectively.

 

 

(7)

Inventories

 

Inventories are summarized as follows (in thousands):

 

  

December 31,

  

June 30,

 
  

2021

  

2021

 

Finished goods

 $124,420  $106,924 

Work in process

  13,262   11,612 

Raw materials

  29,194   28,235 

Inventory reserves

  (2,326)  (2,793)

Inventories, net

 $164,550  $143,978 

 

11

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 
 

(8)

Property, Plant and Equipment

 

Property, plant and equipment are summarized as follows (in thousands):

 

  

December 31,

  

June 30,

 
  

2021

  

2021

 

Land and improvements

 $78,374  $79,478 

Building and improvements

  354,038   358,469 

Machinery and equipment

  122,912   127,673 

Property, plant and equipment, gross

  555,324   565,620 

Less: accumulated depreciation and amortization

  (333,129)  (334,174)

Property, plant and equipment, net

 $222,195  $231,446 

 

 

(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, 2021 and June 30, 2021, we had $25.4 million of goodwill and $19.7 million of indefinite-lived intangible assets, all of which are recorded in our wholesale segment.

 

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.

 

 

(10)

Income Taxes

 

We recorded income tax expense of $9.3 million and $16.5 million, respectively, for the three and six months ended December 31, 2021 compared with $5.3 million and $7.2 million in the prior year comparable periods. Our consolidated effective tax rate was 25.7% and 26.0% for the three and six months ended December 31, 2021 compared with 23.9% and 21.5% in the prior year periods. Our effective tax rate varies from the 21% federal statutory rate primarily due to state taxes. The increase in the effective tax rate compared with the prior year was primarily due to a reduction in our valuation allowance on retail state and local deferred tax assets in the prior year.

 

We recognize interest and penalties related to income tax matters as a component of income tax expense. As of December 31, 2021, we had $2.5 million of unrecognized tax benefits compared with $2.0 million as of June 30, 2021. It is reasonably possible that various issues relating to approximately $0.5 million of the total gross unrecognized tax benefits as of December 31, 2021 will be resolved within the next 12 months as exams are completed or statutes expire. If recognized, approximately $0.4 million of unrecognized tax benefits would reduce our income tax expense in the period realized.

 

 

(11)

Credit Agreement

 

On  December 21, 2018, the Company and most of its domestic subsidiaries (the “Loan Parties”) entered into a Second Amended and Restated Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. as administrative agent and syndication agent and Capital One, National Association, as documentation agent. The Credit Agreement provides for a $165 million revolving credit facility (the “Facility”), subject to borrowing base availability, with the maturity date of December 21, 2023. We incurred financing costs of $0.6 million in fiscal 2019, which are being amortized as interest expense over the remaining life of the Facility using the effective interest method.

 

At the Company’s option, revolving loans under the Facility bear interest, based on the average availability, at an annual rate of either (a) the London Interbank Offered rate (“LIBOR”) plus 1.5% to 2.0%, or (b) the higher of (i) the prime rate, (ii) the federal funds effective rate plus 0.5%, or (iii) LIBOR plus 1.0% plus in each case 0.5% to 1.0%.

 

Availability. The availability of credit at any given time under the Facility will be constrained by the terms and conditions of the Facility, including the amount of collateral available, a borrowing base formula based upon numerous factors, including the value of eligible inventory and 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 $102.2 million at December 31, 2021 and $75.7 million at June 30, 2021.

 

Borrowings. We borrowed $100.0 million under the Facility in March 2020 at a weighted average interest rate equal to the one-month LIBOR rate plus a spread using a debt leverage pricing grid. We repaid $50.0 million of our outstanding borrowings in June 2020 and the remaining $50.0 million was repaid in September 2020 using available cash on hand. As such, we had no outstanding borrowings under the Facility as of December 31, 2021, June 30, 2021 or at any time during fiscal 2022. Interest expense on our outstanding borrowings during the six months ended December 31, 2020, was $0.4 million.

 

12

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 

Letters of Credit. At December 31, 2021 and June 30, 2021, there was $4.0 million and $5.0 million, respectively, of standby letters of credit outstanding under the Facility.

 

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 have any significant financial ratio covenants or coverage ratio covenants other than a fixed charge coverage ratio covenant based on the ratio of (a) EBITDA, plus cash Rentals, minus Unfinanced Capital Expenditures to (b) Fixed Charges, as such terms are defined in the Facility (the “FCCR Covenant”). The FCCR Covenant only applies in certain limited circumstances, including when the unused availability under the Facility falls below $18.5 million. The FCCR Covenant ratio is set at 1.0 and measured on a trailing twelve-month basis. At both December 31, 2021 and June 30, 2021, we were in compliance with all the covenants under the Facility.

 

Amendment to the Credit Agreement. On January 26, 2022, we entered into a Third Amended and Restated Credit Agreement (the “Amended Facility”) with JPMorgan Chase Bank, N.A. as Administrative Agent and Syndication Agent and Capital One, National Association as Documentation Agent. The Amended Facility amends and restates the existing Facility and provides a revolving credit line of up to $125 million, subject to borrowing base availability, and extends the maturity of the Facility to January 2027. Refer to Note 18, Subsequent Event, for additional details on the Amended Facility.

 

 

(12)

Restructuring and Other Impairment Activities

 

Restructuring and other impairment charges, net of gains, were as follows (in thousands):

 

  

Three months ended
December 31,

  

Six months ended
December 31,

 
  

2021

  

2020

  

2021

  

2020

 

(Gain) loss on sale of property, plant and equipment(1)

 $(3,913)  273  $(3,913) $273 

Severance and other charges(2)

  280   150   535   150 

Impairment of long-lived assets (3)

  -   -   -   623 

Total Restructuring and other impairment charges, net of gains

  (3,633)  423   (3,378)  1,046 

Inventory reserves and write-downs(4)(5)

     389   -   389 

Total

 $(3,633) $812  $(3,378) $1,435 

 

(1)

We completed the sale of our previously closed Atoka, Oklahoma distribution center to an independent third party in October 2021 and received $2.8 million in cash less $0.2 million in closing costs. As a result of the sale, the Company recognized a pre-tax gain of $2.0 million in the second quarter of fiscal 2022. In addition, in December 2021, we completed the sale of a property for $5.6 million in cash, which resulted in a pre-tax gain of $1.9 million. In the year ago second quarter, we sold a previously closed retail property and received $1.3 million in cash less $0.1 million in closing costs, resulting in a pre-tax loss of $0.3 million. All three of these transactions were recorded within the line item Restructuring and other impairment charges, net of gains in the consolidated statements of comprehensive income.

  

(2)

We recorded $0.3 million and $0.5 million of charges during the three and six months ended December 31, 2021, respectively. These charges primarily related to severance for terminated employees, including those at our recently sold Atoka, Oklahoma distribution center. In recent years, we have executed on many key initiatives to further optimize our manufacturing and logistics, including closing our Atoka, Oklahoma distribution center and consolidating its workflow into our Old Fort, North Carolina facility. These charges were recorded in the consolidated statement of comprehensive income within the line item Restructuring and other impairment charges, net of gains.

  

(3)

In the first quarter of fiscal 2021, we recorded a non-cash charge of $0.6 million related to the impairment of long-lived assets held at a retail design center location. The asset group used for the impairment analysis was the individual retail design center, which represented the lowest level for which identifiable cash flows were available and largely independent of the cash flows of other groups of assets. We estimated future cash flows based on the design center-level historical results, current trends and operating and cash flow projections. The $0.6 million non-cash charge was recorded in the consolidated statement of comprehensive income within the line item Restructuring and other impairment charges, net of gains.

  

(4)

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

 

13

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 

(5)

We recorded a non-cash charge of $0.4 million during the second quarter of fiscal 2021 to increase our finished goods inventory obsolescence reserve for certain slow moving and discontinued inventory items based on actual demand and the most current forecasted market conditions at that time. The non-cash inventory write-down was recorded in the consolidated statement of comprehensive income within the line item Cost of Sales. 

 

Restructuring payments made by the Company during the first six months of fiscal 2022 were $0.6 million, which were primarily for severance, lease exit costs (ongoing monthly rent in exited space) and closing costs related to our Atoka, Oklahoma distribution center. As of December 31, 2021, remaining restructuring liabilities totaled $1.0 million and are primarily reported as a current liability in Accrued Compensation and Benefits on our consolidated balance sheets.

 

 

(13)

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,

 
  

2021

  

2020

  

2021

  

2020

 

Weighted average shares outstanding for basic calculation

  25,396   25,239   25,386   25,209 

Dilutive effect of stock options and other share-based awards

  117   70   96   48 

Weighted average shares outstanding adjusted for dilution calculation

  25,513   25,309   25,482   25,257 

 

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

 

As of December 31, 2021 and 2020, total share-based awards of 115,710 and 270,108, respectively, were excluded from the diluted EPS calculations because their inclusion would have been anti-dilutive.

 

As of December 31, 2021 and 2020, the number of performance units excluded from the calculation of diluted EPS were 220,082 and 316,445, respectively. Contingently issuable shares with performance conditions are evaluated for inclusion in diluted EPS if, at the end of current period, conditions would be satisfied as if it were the end of the contingency period.

 

 

(14)

Accumulated Other Comprehensive Income (Loss)

 

Accumulated other comprehensive income (loss) consists of foreign currency translation adjustments which are the result of changes in foreign currency exchange rates related to our operations in Canada, Honduras and Mexico. Assets and liabilities are translated into U.S. dollars using the current period-end exchange rate and income and expense amounts are translated using the average exchange rate for the period in which the transaction occurred.

 

The following table sets forth the activity in accumulated other comprehensive loss (in thousands).

 

  

2021

  

2020

 

Beginning balance at July 1

 $(5,931) $(8,441)

Other comprehensive income (loss), net of tax

  (649)  2,532 

Less AOCI attributable to noncontrolling interests

  7   14 

Ending balance at December 31

 $(6,573) $(5,895)

 

 

(15)

Share-Based Compensation

 

We recognized total share-based compensation expense of $0.6 million and $0.7 million during the six months ended December 31, 2021 and 2020, respectively. These amounts have been included in the consolidated statements of comprehensive income within SG&A. As of December 31, 2021, $3.1 million of total unrecognized compensation expense related to non-vested equity awards is expected to be recognized over a weighted average period of 2.6 years. There was no share-based compensation capitalized for the three months ended December 31, 2021 and 2020, respectively.

 

At December 31, 2021, there were 1,302,526 shares of common stock available for future issuance pursuant to the Ethan Allen Interiors Inc. Stock Incentive Plan (the “Plan”), which provides for the grant of stock options, restricted stock, and stock units. 

 

14

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 

Stock Option Activity

 

Employee Stock Option Grants. There were no stock option awards granted to employees during the six months ended December 31, 2021 and 2020.

 

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 2022, we granted 25,410 stock options at an exercise price of $23.61 to our existing non-employee directors. In the prior year first quarter, we granted 37,008 stock options at an exercise price of $12.97. These stock options vest in three equal annual installments beginning on the first anniversary of the date of grant so long as the director continues to serve on the Company’s Board of Directors (the “Board”). All options granted to directors have an exercise price equal to the fair market value of our common stock on the date of grant and remain exercisable for a period of up to ten years, subject to continuous service on our Board. There were no other non-employee stock option grants during fiscal 2021 and have been no such grants during fiscal 2022 to date.

 

As of December 31, 2021, $0.1 million of total unrecognized compensation expense related to non-vested stock options is expected to be recognized over a weighted average remaining period of 2.0 years.

 

Restricted Stock Unit Activity

 

During the first half of fiscal 2022, we granted 51,100 non-performance based restricted stock units (“RSUs”), with a weighted average grant date fair value of $20.71. The RSUs granted to employees entitle the holder to receive the underlying shares of common stock as the unit vests over the relevant vesting period. The RSUs do not entitle the holder to receive dividends declared on the underlying shares while the RSUs remain unvested and vest in four equal annual installments on the anniversary of the date of grant. In the first half of the prior fiscal year, we granted 38,000 RSUs with a weighted average grant date fair value of $9.58. The fiscal 2021 RSUs vest in two equal annual installments on the first and second anniversary date of the grant.

 

During the first half of fiscal 2022, 50% or 19,000 RSUs vested. These awards were previously granted in fiscal 2021. As of December 31, 2021, a total of 98,100 RSUs were outstanding at a weighted average grant date fair value of $15.24.

 

As of December 31, 2021, $1.2 million of total unrecognized compensation expense related to non-vested restricted stock units is expected to be recognized over a weighted average remaining period of 3.2 years.

 

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 three 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 half of fiscal 2022 we granted 90,367 PSUs with a weighted average grant date fair value of $17.15 compared with 117,338 RSUs at a weighted average grant date fair value of $8.76 in the prior year. We estimate, as of the date of grant, the fair value of PSUs with a discounted cash flow model, using as model inputs the risk-free rate of return as the discount rate, dividend yield for dividends not paid during the restriction period, and a discount for lack of marketability for a one-year post-vest holding period. The lack of marketability discount used is the present value of a future put option using the Chaffe model.

 

During the first half of fiscal 2022, 35,124 PSUs, that were previously granted in July 2018, vested. As of December 31, 2021, a total of 409,032 PSUs were outstanding at a weighted average grant date fair value of $16.42.

 

Unrecognized compensation expense as of December 31, 2021, related to PSUs, was $1.8 million based on the current estimates of the number of awards that will vest, and is expected to be recognized over a weighted average remaining period of 2.2 years.

 

 

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Segment Information

 

Our operating segments are aligned with how the Company, including our chief operating decision maker, manages the business. As such, our reportable operating segments are the wholesale segment and the retail segment. Our wholesale and retail operating segments represent strategic business areas of our vertically integrated enterprise that operate separately and provide their own distinctive services. This vertical structure enables us to offer our complete line of home furnishings and accents more effectively while controlling quality and cost. We evaluate performance of the respective segments based upon revenues and operating income. Inter-segment transactions result, primarily, from the wholesale sale of inventory to the retail segment, including the related profit margin. 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.

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 

As of December 31, 2021, the Company operated 141 design centers (our retail segment) and our independent retailers operated 161 design centers. Our wholesale segment net sales include sales to our retail segment, which are eliminated in consolidation, and sales to our independent retailers and other third parties. Our retail segment net sales accounted for 85.7% of our consolidated net sales during the first half of fiscal 2022 compared with 79.7% a year prior. Our wholesale segment net sales accounted for the remaining 14.3%.

 

Segment information is provided below (in thousands):

 

  

Three months ended

  

Six months ended

 
  

December 31,

  

December 31,

 
  

2021

  

2020

  

2021

  

2020

 

Net sales

                

Wholesale segment

 $115,921  $101,550  $225,369  $198,884 

Less: intersegment sales

  (87,411)  (67,542)  (169,518)  (131,899)

Wholesale sales to external customers

  28,510   34,008   55,851   66,985 

Retail segment

  179,583   144,818   334,569   262,899 

Consolidated total

 $208,093  $178,826  $390,420  $329,884 
                 

Income before income taxes

                

Wholesale segment

 $9,744  $12,720  $22,563  $25,858 

Retail segment

  22,635   9,909   36,980   11,892 

Elimination of intercompany profit (a)

  3,913   (74)  4,109   (3,514)

Operating income

  36,292   22,555   63,652   34,236 

Interest and other financing costs

  48   47   96   382 

Other income (expense), net

  (26)  (330)  2   (435)

Consolidated total

 $36,218  $22,178  $63,558  $33,419 
                 

Depreciation and amortization

                

Wholesale segment

 $1,588  $1,643  $3,228  $3,347 

Retail segment

  2,274   2,362   4,959   4,798 

Consolidated total

 $3,862  $4,005  $8,187  $8,145 
                 

Capital expenditures

                

Wholesale segment

 $1,324  $2,082  $2,412  $3,124 

Retail segment

  877   1,357   1,318   2,754 

Consolidated total

 $2,201  $3,439  $3,730  $5,878 

 

 

(a)

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

 

(in thousands)

December 31,

 

June 30,

 
 2021 2021 

Total Assets

 

 

 

 

Wholesale segment

$307,546 $298,332 

Retail segment

 404,529  412,066 

Inventory profit elimination (a)

 (22,747) (27,153)

Consolidated total

$689,328 $683,245 

 

 

(a)

Represents the wholesale profit contained in the retail segment inventory that has not yet been realized. These profits are realized when the related inventory is sold.

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 
 

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 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 2021 Annual Report on Form 10-K, as of June 30, 2021, we had total contractual obligations of $203.9 million, including $143.6 million related to our operating lease commitments and $50.2 million open purchase orders. Except for operating lease payments made to our landlords totaling $16.7 million for the first half of fiscal 2022, there were no other material changes, outside of the ordinary course of business, in our contractual obligations as previously disclosed in 2021 Annual Report on Form 10-K.

 

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, 2021, 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.

 

 

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 Subsequent Event

 

On January 26, 2022, we entered into the Amended Facility, dated as of January 26, 2022, with JPMorgan Chase Bank, N.A. as Administrative Agent and Syndication Agent and Capital One, National Association as Documentation Agent. The Amended Facility amends and restates the existing Second Amended and Restated Credit Agreement, dated as of December 21, 2018, as amended. The Amended Facility provides a revolving credit line of $125 million, subject to borrowing base availability, and extends the maturity of the Facility to January 26, 2027. The Amended Facility also provides the Company the option to increase the size of the facility up to an additional amount of $60 million.

 

At the Company’s option, borrowings under the Amended 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 plus 0.10%) plus 1.25% to 2.0%, or (b) Alternate Base Rate (defined as the greatest of (i) the prime rate, (ii) the NYRFB rate plus 0.5%, or (iii) the Adjusted Term SOFR Rate for a one-month interest period plus 1.0%) plus 0.25% to 1.0%.

 

The availability of credit at any given time under the Amended Facility will be constrained by the terms and conditions of the Amended Facility, including the amount of collateral available, a borrowing base formula based upon numerous factors including the value of eligible inventory and eligible accounts receivable, and other restrictions contained in the Amended Facility. All obligations under the Amended Facility are secured by assets of the loan parties including inventory, receivables and certain types of intellectual property.

 

The Amended 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 Amended 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 Amended 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 Amended Facility. The fixed charge coverage ratio covenant, set at 1.0 to 1.0 and measured on a trailing period of four consecutive fiscal quarters, only applies in certain limited circumstances, including when the unused availability under the Amended Facility drops below $14.0 million.

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 
 

Item 2. Managements 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 2021 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

 

-

COVID-19 Update

 

-

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 this 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 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 “anticipat