UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission File Number:
Ethan Allen Interiors Inc.
(Exact name of registrant as specified in its charter)
| | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| | |
(Address of principal executive offices) | (Zip Code) |
(
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | ||
(Title of each class) | (Trading symbol) | (Name of each exchange on which registered) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | | |
Non-accelerated filer ☐ | Smaller reporting company | |
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
The number of shares outstanding of the registrant’s common stock, $0.01 par value, as of April 21, 2022, was
ETHAN ALLEN INTERIORS INC.
FORM 10-Q THIRD 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 |
3 |
Consolidated Statements of Cash Flows |
4 |
Consolidated Statements of Shareholders’ Equity |
5 |
Notes to Consolidated Financial Statements |
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 |
34 |
Item 4. Controls and Procedures |
35 |
PART II - OTHER INFORMATION |
|
Item 1. Legal Proceedings |
36 |
Item 1A. Risk Factors |
36 |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
37 |
Item 3. Defaults Upon Senior Securities |
37 |
Item 4. Mine Safety Disclosures |
37 |
Item 5. Other Information |
37 |
Item 6. Exhibits |
37 |
SIGNATURES |
38 |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
March 31, 2022 | June 30, 2021 | |||||||
| (Unaudited) | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Investments | ||||||||
Accounts receivable, net | ||||||||
Inventories, net | ||||||||
Prepaid expenses and other current assets | ||||||||
Total current assets | ||||||||
Property, plant and equipment, net | ||||||||
Goodwill | ||||||||
Intangible assets | ||||||||
Operating lease right-of-use assets | ||||||||
Deferred income taxes | ||||||||
Other assets | ||||||||
Total ASSETS | $ | $ | ||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | $ | ||||||
Customer deposits and deferred revenue | ||||||||
Accrued compensation and benefits | ||||||||
Current operating lease liabilities | ||||||||
Other current liabilities | ||||||||
Total current liabilities | ||||||||
Operating lease liabilities, long-term | ||||||||
Deferred income taxes | ||||||||
Other long-term liabilities | ||||||||
Total LIABILITIES | $ | $ | ||||||
Commitments and contingencies (see Note 17) | ||||||||
SHAREHOLDERS' EQUITY | ||||||||
Preferred stock, $ par value; shares authorized; issued | $ | $ | ||||||
Common stock, $ par value, shares authorized, and shares issued; and shares outstanding at March 31, 2022 and June 30, 2021, respectively | ||||||||
Additional paid-in capital | ||||||||
Treasury stock, at cost: and shares at March 31, 2022 and June 30, 2021, respectively | ( | ) | ( | ) | ||||
Retained earnings | ||||||||
Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
Total Ethan Allen Interiors Inc. shareholders' equity | ||||||||
Noncontrolling interests | ( | ) | ( | ) | ||||
Total shareholders' equity | ||||||||
Total LIABILITIES AND SHAREHOLDERS' EQUITY | $ | $ |
See accompanying notes to consolidated financial statements.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In thousands, except per share data)
Three months ended |
Nine months ended |
|||||||||||||||
March 31, |
March 31, |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
Net sales |
$ | $ | $ | $ | ||||||||||||
Cost of sales |
||||||||||||||||
Gross profit |
||||||||||||||||
Selling, general and administrative expenses |
||||||||||||||||
Restructuring and other impairment charges, net of gains |
( |
) | ( |
) | ||||||||||||
Operating income |
||||||||||||||||
Other expenses |
||||||||||||||||
Interest and other financing costs |
||||||||||||||||
Other income (expense), net |
( |
) | ( |
) | ( |
) | ||||||||||
Income before income taxes |
||||||||||||||||
Income tax expense |
||||||||||||||||
Net income |
$ | $ | $ | $ | ||||||||||||
Per share data |
||||||||||||||||
Basic earnings per common share: |
||||||||||||||||
Net income per basic share |
$ | $ | $ | $ | ||||||||||||
Basic weighted average common shares |
||||||||||||||||
Diluted earnings per common share: |
||||||||||||||||
Net income per diluted share |
$ | $ | $ | $ | ||||||||||||
Diluted weighted average common shares |
||||||||||||||||
Comprehensive income |
||||||||||||||||
Net income |
$ | $ | $ | $ | ||||||||||||
Other comprehensive income (loss), net of tax |
||||||||||||||||
Foreign currency translation adjustments |
( |
) | ( |
) | ||||||||||||
Other |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Other comprehensive income (loss), net of tax |
( |
) | ( |
) | ||||||||||||
Comprehensive income |
$ | $ | $ | $ |
See accompanying notes to consolidated financial statements.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Nine months ended |
||||||||
March 31, |
||||||||
|
2022 |
2021 |
||||||
Cash Flows from Operating Activities | ||||||||
Net income |
$ | $ | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
||||||||
Share-based compensation expense |
||||||||
Non-cash operating lease cost |
||||||||
Deferred income taxes |
( |
) | ||||||
Restructuring and other impairment charges, net of gains |
( |
) | ||||||
Restructuring payments |
( |
) | ( |
) | ||||
Loss on disposal of property, plant and equipment |
||||||||
Other |
( |
) | ||||||
Change in operating assets and liabilities |
||||||||
Accounts receivable, net |
( |
) | ( |
) | ||||
Inventories, net |
( |
) | ( |
) | ||||
Prepaid expenses and other current assets |
( |
) | ( |
) | ||||
Customer deposits and deferred revenue |
||||||||
Accounts payable and accrued expenses |
||||||||
Accrued compensation and benefits |
( |
) | ||||||
Operating lease liabilities |
( |
) | ( |
) | ||||
Other assets and liabilities |
( |
) | ||||||
Net cash provided by operating activities |
||||||||
Cash Flows from Investing Activities |
||||||||
Proceeds from sales of property, plant and equipment |
||||||||
Capital expenditures |
( |
) | ( |
) | ||||
Purchases of investments |
( |
) | ||||||
Proceeds from sales of investments |
||||||||
Net cash used in investing activities |
( |
) | ( |
) | ||||
Cash Flows from Financing Activities |
||||||||
Payments on borrowings |
( |
) | ||||||
Dividend payments |
( |
) | ( |
) | ||||
Proceeds from employee stock plans |
||||||||
Taxes paid related to net share settlement of equity awards |
( |
) | ( |
) | ||||
Payments for debt issuance costs |
( |
) | ||||||
Payments on financing leases |
( |
) | ( |
) | ||||
Net cash used in financing activities |
( |
) | ( |
) | ||||
Effect of exchange rate changes on cash and cash equivalents |
||||||||
Net (decrease) increase in cash, cash equivalents and restricted cash |
( |
) | ||||||
Cash, cash equivalents and restricted cash at beginning of period |
||||||||
Cash, cash equivalents and restricted cash at end of period |
$ | $ |
See accompanying notes to consolidated financial statements.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)
(In thousands)
Accumulated |
||||||||||||||||||||||||||||||||||||
Additional |
Other |
Non- |
||||||||||||||||||||||||||||||||||
Common Stock |
Paid-in |
Treasury Stock |
Comprehensive |
Retained |
Controlling |
Total |
||||||||||||||||||||||||||||||
Shares |
Par Value |
Capital |
Shares |
Amount |
Loss |
Earnings |
Interests |
Equity |
||||||||||||||||||||||||||||
Balance at June 30, 2021 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | $ | |||||||||||||||||||||||
Net income |
- | - | ||||||||||||||||||||||||||||||||||
Share-based compensation expense |
- | - | ||||||||||||||||||||||||||||||||||
Restricted stock vesting |
( |
) | ( |
) | ||||||||||||||||||||||||||||||||
Cash dividends declared |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
Other comprehensive income (loss) |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
Balance at September 30, 2021 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | $ | |||||||||||||||||||||||
Net income |
- | - | ||||||||||||||||||||||||||||||||||
Common stock issued on share-based awards |
||||||||||||||||||||||||||||||||||||
Share-based compensation expense |
- | - | ||||||||||||||||||||||||||||||||||
Cash dividends declared |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
Other comprehensive income (loss) |
- | - | ( |
) | ||||||||||||||||||||||||||||||||
Balance at December 31, 2021 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | $ | |||||||||||||||||||||||
Net income |
- | - | ||||||||||||||||||||||||||||||||||
Common stock issued on share-based awards |
||||||||||||||||||||||||||||||||||||
Share-based compensation expense |
- | - | ||||||||||||||||||||||||||||||||||
Cash dividends declared |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
Restricted stock vesting |
( |
) | ( |
) | ||||||||||||||||||||||||||||||||
Other comprehensive income (loss) |
- | - | ( |
) | ||||||||||||||||||||||||||||||||
Balance at March 31, 2022 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | $ |
Accumulated |
||||||||||||||||||||||||||||||||||||
Additional |
Other |
Non- |
||||||||||||||||||||||||||||||||||
Common Stock |
Paid-in |
Treasury Stock |
Comprehensive |
Retained |
Controlling |
Total |
||||||||||||||||||||||||||||||
Shares |
Par Value |
Capital |
Shares |
Amount |
Loss |
Earnings |
Interests |
Equity |
||||||||||||||||||||||||||||
Balance at June 30, 2020 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | $ | |||||||||||||||||||||||
Net income |
- | - | ||||||||||||||||||||||||||||||||||
Share-based compensation expense |
- | - | ||||||||||||||||||||||||||||||||||
Cash dividends declared |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
Other comprehensive income (loss) |
- | - | ( |
) | ||||||||||||||||||||||||||||||||
Balance at September 30, 2020 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | $ | |||||||||||||||||||||||
Net income |
- | - | ||||||||||||||||||||||||||||||||||
Common stock issued on share-based awards |
120 | - | ||||||||||||||||||||||||||||||||||
Share-based compensation expense |
- | - | ||||||||||||||||||||||||||||||||||
Cash dividends declared |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
Other comprehensive income (loss) |
- | - | ( |
) | ||||||||||||||||||||||||||||||||
Balance at December 31, 2020 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | $ | |||||||||||||||||||||||
Net income |
- | - | ||||||||||||||||||||||||||||||||||
Common stock issued on share-based awards |
||||||||||||||||||||||||||||||||||||
Share-based compensation expense |
- | - | ||||||||||||||||||||||||||||||||||
Cash dividends declared |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
Restricted stock vesting |
( |
) | ( |
) | ||||||||||||||||||||||||||||||||
Other comprehensive income (loss) |
- | - | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||
Balance at March 31, 2021 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | $ |
See accompanying notes to consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1) |
Organization and Nature of Business |
Organization
Founded in 1932 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 March 31, 2022, the Company operates 141 retail design centers with 137 located in the United States and four in Canada. Our independently operated design centers are located in the United States, Asia, the Middle East and Europe. We also own and operate ten manufacturing facilities in the United States, Mexico and Honduras, including one sawmill, one rough mill and a lumberyard. Approximately
Impact of the COVID-19 Pandemic Upon our Financial Condition and Results of Operations
The global coronavirus (“COVID-19”) pandemic continues to disrupt several segments of the economy and has caused, and continues to cause, impact to our business. 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. Since our manufacturing facilities re-opened 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. We continue to experience strong written orders taken at both the retail and wholesale segments, and as a result, our current order backlog increased during the third quarter of fiscal 2022 and is approximately
While we continue to increase production, 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.
The COVID-19 pandemic also continues to expose us to greater market risk as a result of increases in the cost of raw materials that we use in our manufacturing processes, principally plywood, fabric and foam products. These raw materials have been, and continue to be, subject to rising inflationary pressures that are partially attributable to the COVID-19 pandemic and which have led to increased production costs. As commodity prices (notably, fuel costs) have continued to rise during the third quarter of fiscal 2022, we will continue to evaluate whether further price increases to our customers to offset these costs are warranted.
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
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 nine months ended March 31, 2022 are not necessarily indicative of results that may be expected for the entire fiscal year. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in Annual Report on Form 10-K for the fiscal year ended June 30, 2021 (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 require 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 March 31, 2022, we held $
We have evaluated subsequent events through the date of issuance of the financial statements included in this Quarterly Report on Form 10-Q.
(3) | Recent Accounting Pronouncements |
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.
Derivatives and Hedging. In March 2022, the FASB issued ASU 2022-01, Derivatives and Hedging (Topic 801): Fair Value Hedging – Portfolio Layer Method, which expands the current single-layer hedging model to allow multiple-layer hedges of a single closed portfolio of prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments under the method. 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.
No other new accounting pronouncements issued or effective as of March 31, 2022 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 March 31, 2022 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 March 31, 2022 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 March 31, 2022, we had prepaid commissions of $
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 $
The following table disaggregates our net sales by product category by segment for the three months ended March 31, 2022 (in thousands):
Wholesale |
Retail |
Eliminations(1) |
Total |
|||||||||||||
Upholstery(2) |
$ | $ | $ | ( |
) | $ | ||||||||||
Case goods(3) |
( |
) | ||||||||||||||
Accents(4) |
( |
) | ||||||||||||||
Other(5) |
( |
) | ||||||||||||||
Total |
$ | $ | $ | ( |
) | $ |
The following table disaggregates our net sales by product category by segment for the three months ended March 31, 2021 (in thousands):
Wholesale |
Retail |
Eliminations(1) |
Total |
|||||||||||||
Upholstery(2) |
$ | $ | $ | ( |
) | $ | ||||||||||
Case goods(3) |
( |
) | ||||||||||||||
Accents(4) |
( |
) | ||||||||||||||
Other(5) |
( |
) | ||||||||||||||
Total |
$ | $ | $ | ( |
) | $ |
The following table disaggregates our net sales by product category by segment for the nine months ended March 31, 2022 (in thousands):
Wholesale |
Retail |
Eliminations(1) |
Total |
|||||||||||||
Upholstery(2) |
$ | $ | $ | ( |
) | $ | ||||||||||
Case goods(3) |
( |
) | ||||||||||||||
Accents(4) |
( |
) | ||||||||||||||
Other(5) |
( |
) | ||||||||||||||
Total |
$ | $ | $ | ( |
) | $ |
The following table disaggregates our net sales by product category by segment for the nine months ended March 31, 2021 (in thousands):
Wholesale |
Retail |
Eliminations(1) |
Total |
|||||||||||||
Upholstery(2) |
$ | $ | $ | ( |
) | $ | ||||||||||
Case goods(3) |
( |
) | ||||||||||||||
Accents(4) |
( |
) | ||||||||||||||
Other(5) |
( |
) | ||||||||||||||
Total |
$ | $ | $ | ( |
) | $ |
(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. The accounting guidance for fair value measurements establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value based on the reliability of inputs. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect its placement within the fair value hierarchy levels. We have categorized our cash equivalents and investments within the fair value hierarchy as follows:
Level 1 – applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities. These Level 1 assets include our corporate money market funds that are classified as cash equivalents. We have categorized our cash equivalents as Level 1 assets as there are quoted prices in active markets for identical assets or liabilities.
Level 2 – applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data. At March 31, 2022, we have categorized our investments as Level 2 assets.
Level 3 – applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities. We held no Level 3 assets or liabilities as of March 31, 2022 or June 30, 2021.
Assets and Liabilities Measured at Fair Value on a Recurring Basis. The following tables show, by level within the fair value hierarchy, our assets and liabilities that are measured at fair value on a recurring basis at March 31, 2022 and June 30, 2021. We did not have any transfers between levels of fair value measurements during the periods presented.
Fair Value Measurements at March 31, 2022 | ||||||||||||||||
Assets | Level 1 | Level 2 | Level 3 | Balance | ||||||||||||
Corporate money market funds(1) | $ | $ | $ | $ | ||||||||||||
Investments(2) | ||||||||||||||||
Total | $ | $ | $ | $ |
Fair Value Measurements at June 30, 2021 | ||||||||||||||||
Assets | Level 1 | Level 2 | Level 3 | Balance | ||||||||||||
Corporate money market funds(1) | $ | $ | $ | $ | ||||||||||||
Investments(2) | ||||||||||||||||
Total | $ | $ | $ | $ |
(1) | We invest excess cash in money market accounts and short-term investments. Our corporate money market funds are readily convertible into cash and the net asset value of each fund on the last day of the quarter is used to determine its fair value. Our corporate money market funds are classified as Level 1 assets and are included in Cash and cash equivalents within the consolidated balance sheets. |
(2) | Our investments consist of municipal bonds, commercial paper and certificates of deposit with maturities of one year or less. The fair value of our underlying investments is based on observable inputs. Our investments are classified as Level 2 and are included in Investments (short-term) within the consolidated balance sheets. All unrealized gains and losses were included in Accumulated Other Comprehensive Income (Loss) within the consolidated balance sheets. There were material gross unrealized gains or losses on the investments at March 31, 2022. We did hold any investments as of June 30, 2021. |
As of March 31, 2022 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 investments that have been in a continuous loss position for more than one year, and there have been no other-than-temporary impairments recognized.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis. We did not record any other-than-temporary impairments on assets required to be measured at fair value on a non-recurring basis during fiscal 2022.
Assets and Liabilities Measured at Fair Value for Disclosure Purposes Only. We had
(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
to years. We determine if a contract contains a lease at inception based on our right to control the use of an identified asset and our right to obtain substantially all of the economic benefits from the use of that identified asset. Certain operating leases have renewal options and rent escalation clauses as well as various purchase options. We assess these options to determine if we are reasonably certain of exercising these options based on all relevant economic and financial factors. Any options that meet these criteria are included in the lease term at lease commencement. Most of our leases do not have an interest rate implicit in the lease. As a result, for purposes of measuring our ROU asset and lease liability, we determine our incremental borrowing rate by computing the rate of interest that we would have to pay to (i) borrow on a collateralized basis (ii) over a similar term (iii) at an amount equal to the total lease payments and (iv) in a similar economic environment. 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:
March 31, |
||||||||
2022 |
2021 |
|||||||
Weighted average remaining lease term (in years) |
||||||||
Operating leases |
||||||||
Financing leases |
||||||||
Weighted average discount rate |
||||||||
Operating leases |
% | % | ||||||
Financing leases |
% | % |
The following table discloses the location and amount of our operating and financing lease costs within our consolidated statements of comprehensive income (in thousands):
Three months ended March 31, |
Nine months ended March 31, |
||||||||||||||||
Statement of Comprehensive Income Location |
2022 |
2021 |
2022 |
2021 |
|||||||||||||
Operating lease cost(1) |
Selling, general and administrative (“SG&A”) expenses |
$ | $ | $ | $ | ||||||||||||
Financing lease cost |
|||||||||||||||||
Depreciation of property |
SG&A expenses |
||||||||||||||||
Interest on lease liabilities |
Interest and other financing costs |
||||||||||||||||
Short-term lease cost(2) |
SG&A expenses |
||||||||||||||||
Variable lease cost(3) |
SG&A expenses |
||||||||||||||||
Less: Sublease income |
SG&A expenses |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Total lease expense |
$ | $ | $ | $ |
(1) |
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. |
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 March 31, 2022 (in thousands):
Fiscal Year |
Operating Leases |
Financing Leases |
||||||
2022 (remaining three months) |
$ | $ | ||||||
2023 |
||||||||
2024 |
||||||||
2025 |
||||||||
2026 |
||||||||
Thereafter |
||||||||
Total undiscounted future minimum lease payments |
||||||||
Less: imputed interest |
( |
) | ( |
) | ||||
Total present value of lease obligations(1) |
$ | $ |
(1) |
Excludes future commitments under short-term operating lease agreements of $ |
As of March 31, 2022, we did not have any operating leases which have not yet commenced. However, we have one financing lease which has not yet commenced and is therefore neither included in the tables above nor in the lease right-of-use assets and liabilities. The financing lease is for a period of
Other supplemental information for our leases is as follows (in thousands):
Nine months ended March 31, |
||||||||
2022 |
2021 |
|||||||
Cash paid for amounts included in the measurement of lease liabilities |
||||||||
Operating cash flows from operating leases |
$ | $ | ||||||
Operating cash flows from financing leases |
$ | $ | ||||||
Operating lease assets obtained in exchange for operating lease liabilities |
$ | $ |
There were no non-cash financing lease obligations obtained in exchange for new financing lease assets during the nine months ended March 31, 2022. Financing lease obligations exchanged for new financing lease assets totaled $
(7) |
Inventories |
Inventories are summarized as follows (in thousands):
March 31, |
June 30, |
|||||||
2022 |
2021 |
|||||||
Finished goods |
$ | $ | ||||||
Work in process |
||||||||
Raw materials |
||||||||
Inventory reserves |
( |
) | ( |
) | ||||
Inventories, net |
$ | $ |
(8) |
Property, Plant and Equipment |
Property, plant and equipment are summarized as follows (in thousands):
March 31, |
June 30, |
|||||||
2022 |
2021 |
|||||||
Land and improvements |
$ | $ | ||||||
Building and improvements |
||||||||
Machinery and equipment |
||||||||
Property, plant and equipment, gross |
||||||||
Less: accumulated depreciation and amortization |
( |
) | ( |
) | ||||
Property, plant and equipment, net |
$ | $ |
(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 March 31, 2022 and June 30, 2021, we had $
Both goodwill and indefinite-lived intangible assets are not amortized as they are estimated to have an indefinite life. We test our wholesale goodwill and indefinite-lived intangibles for impairment on an annual basis in the fourth quarter of each fiscal year, and more frequently if events or changes in circumstances indicate that it might be impaired. We performed our annual goodwill impairment test during the fourth quarter of fiscal 2021, consistent with the timing of prior years. We concluded it was more likely than not that the fair value was greater than the respective carrying value and no impairment charge was required.
(10) |
Income Taxes |
We recorded income tax expense of $
We recognize interest and penalties related to income tax matters as a component of income tax expense. As of March 31, 2022, we had $
(11) | Credit Agreement |
On January 26, 2022, the Company and most of its domestic subsidiaries (the “Loan Parties”) entered into a Third Amended and Restated Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. as administrative agent and syndication agent and Capital One, National Association, as documentation agent. The Credit Agreement amends and restates the Second Amended and Restated Credit Agreement, dated as of December 21, 2018, as amended. The Credit Agreement provides for a $
Availability. The availability of credit at any given time under the Facility will be constrained by the terms and conditions of the Credit Agreement, including the amount of collateral available, a borrowing base formula based upon numerous factors including the value of eligible inventory and eligible accounts receivable, and other restrictions contained in the Facility. All obligations under the Facility are secured by assets of the Loan Parties including inventory, receivables and certain types of intellectual property. Total borrowing base availability under the Facility was $
Borrowings. At the Company’s option, borrowings under the Facility bear interest, based on the average quarterly availability, at an annual rate of either (a) Adjusted Term SOFR Rate (defined as the Term SOFR Rate plus
Covenants and Other Ratios. The Facility contains various restrictive and affirmative covenants, including required financial reporting, limitations on the ability to grant liens, make loans or other investments, incur additional debt, issue additional equity, merge or consolidate with or into another person, sell assets, pay dividends or make other distributions or enter into transactions with affiliates, along with other restrictions and limitations similar to those frequently found in credit agreements of this type and size. Loans under the Facility may become immediately due and payable upon certain events of default (including failure to comply with covenants, change of control or cross-defaults) as set forth in the Facility.
The Facility does not contain any significant financial ratio covenants or coverage ratio covenants other than a fixed charge coverage ratio covenant based on the ratio of (a) EBITDA, plus cash Rentals, minus Unfinanced Capital Expenditures to (b) Fixed Charges, as such terms are defined in the Facility. The fixed charge coverage ratio covenant, set at
Letters of Credit. At March 31, 2022 and June 30, 2021, there was $
(12) |
Restructuring and Other Impairment Activities |
Restructuring and other impairment charges, net of gains, were as follows (in thousands):
Three months ended March 31, |
Nine months ended March 31, |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
Gain on sales of property, plant and equipment(1) |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
Lease exit costs(2) |