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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, 2022

 

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

 

img01.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 18, 2023, was 25,347,753.

 

 

 

 

 

ETHAN ALLEN INTERIORS INC.

FORM 10-Q SECOND QUARTER OF FISCAL 2023

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION  
     
Item 1.Financial Statements

2

     
CONSOLIDATED BALANCE SHEETS

2

     
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

3

     
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

4

     
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

5

     
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

6

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

18

     
Item 3.Quantitative and Qualitative Disclosures About Market Risk 32
     
Item 4.Controls and Procedures 33
     
PART II - OTHER INFORMATION  
     
Item 1.Legal Proceedings 34
     
Item 1A.Risk Factors 34
     
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds 34
     
Item 3.Defaults Upon Senior Securities 34
     
Item 4.Mine Safety Disclosures 34
     
Item 5.Other Information 34
     
Item 6.Exhibits 35
     

SIGNATURES

35

 

 

 

 

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, 2022

   

June 30, 2022

 

ASSETS

  (Unaudited)          
Current assets:                

Cash and cash equivalents

  $ 85,392     $ 109,919  

Investments

    55,030       11,199  

Accounts receivable, net

    10,696       17,019  

Inventories, net

    159,874       176,504  

Prepaid expenses and other current assets

    27,414       32,108  

Total current assets

    338,406       346,749  
                 

Property, plant and equipment, net

    223,702       223,530  

Goodwill

    25,388       25,388  

Intangible assets

    19,740       19,740  

Operating lease right-of-use assets

    103,238       100,782  

Deferred income taxes

    1,091       820  

Other assets

    2,416       2,886  

Total ASSETS

  $ 713,981     $ 719,895  
                 
LIABILITIES                
Current liabilities:                

Accounts payable and accrued expenses

  $ 30,463     $ 37,370  

Customer deposits

    83,651       121,080  

Accrued compensation and benefits

    21,131       22,700  

Current operating lease liabilities

    24,122       25,705  

Other current liabilities

    16,348       8,788  

Total current liabilities

    175,715       215,643  

Operating lease liabilities, long-term

    93,706       89,506  

Deferred income taxes

    2,801       4,418  

Other long-term liabilities

    4,695       3,005  

Total LIABILITIES

  $ 276,917     $ 312,572  
                 
Commitments and contingencies (see Note 18)            
SHAREHOLDERS' EQUITY                

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

  $ -     $ -  

Common stock, $0.01 par value, 150,000 shares authorized, 49,416 and 49,360 shares issued; 25,348 and 25,323 shares outstanding at December 31, 2022 and June 30, 2022, respectively

    494       494  

Additional paid-in capital

    385,555       384,782  

Treasury stock, at cost: 24,068 and 24,037 shares at December 31, 2022 and June 30, 2022, respectively

    (682,599 )     (681,834 )

Retained earnings

    739,384       710,369  

Accumulated other comprehensive loss

    (5,749 )     (6,462 )

Total Ethan Allen Interiors Inc. shareholders' equity

    437,085       407,349  

Noncontrolling interests

    (21 )     (26 )

Total SHAREHOLDERS' EQUITY

    437,064       407,323  

Total LIABILITIES AND SHAREHOLDERS' EQUITY

  $ 713,981     $ 719,895  

 

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,

 
   

2022

   

2021

   

2022

   

2021

 

Net sales

  $ 203,161     $ 208,093     $ 417,691     $ 390,420  

Cost of sales

    79,141       85,824       164,055       158,959  

Gross profit

    124,020       122,269       253,636       231,461  
                                 

Selling, general and administrative expenses

    87,147       89,610       179,109       171,187  

Restructuring and other impairment charges, net of gains

    (196 )     (3,633 )     (2,192 )     (3,378 )

Operating income

    37,069       36,292       76,719       63,652  
                                 

Interest and other income, net

    901       (26 )     1,297       2  

Interest expense and other financing costs

    50       48       105       96  

Income before income taxes

    37,920       36,218       77,911       63,558  

Income tax expense

    9,754       9,324       19,865       16,511  

Net income

  $ 28,166     $ 26,894     $ 58,046     $ 47,047  
                                 
Per share data                                
Basic earnings per common share:                                

Net income per basic share

  $ 1.11     $ 1.06     $ 2.28     $ 1.85  

Basic weighted average common shares

    25,474       25,396       25,466       25,386  
Diluted earnings per common share:                                

Net income per diluted share

  $ 1.10     $ 1.05     $ 2.27     $ 1.85  

Diluted weighted average common shares

    25,582       25,513       25,571       25,482  
                                 
Comprehensive income                                

Net income

  $ 28,166     $ 26,894     $ 58,046     $ 47,047  
Other comprehensive income (loss), net of tax                                

Foreign currency translation adjustments

    574       11       348       (642 )

Other income (loss)

    233       (8 )     370       (7 )

Other comprehensive income (loss), net of tax

    807       3       718       (649 )

Comprehensive income

  $ 28,973     $ 26,897     $ 58,764     $ 46,398  

 

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

 

2022

   

2021

 

Net income

  $ 58,046     $ 47,047  
Adjustments to reconcile net income to net cash provided by operating activities:                

Depreciation and amortization

    7,695       8,187  

Share-based compensation expense

    763       626  

Non-cash operating lease cost

    14,984       14,948  

Deferred income taxes

    (1,888 )     1,460  

Restructuring and other impairment charges, net of gains

    (2,192 )     (3,378 )

Restructuring payments

    (801 )     (615 )

Loss on disposal of property, plant and equipment

    42       4  

Other

    290       -  
Change in operating assets and liabilities                

Accounts receivable, net

    6,323       1,531  

Inventories, net

    16,630       (20,572 )

Prepaid expenses and other current assets

    5,419       (551 )

Customer deposits

    (37,429 )     (6,439 )

Accounts payable and accrued expenses

    (6,927 )     (51 )

Accrued compensation and benefits

    (1,455 )     (2,538 )

Operating lease liabilities

    (15,710 )     (16,734 )

Other assets and liabilities

    (2,851 )     (224 )

Net cash provided by operating activities

    40,939       22,701  
                 
Cash Flows from Investing Activities                

Proceeds from sales of property, plant and equipment

    8,105       8,206  

Capital expenditures

    (8,473 )     (3,730 )

Purchases of investments

    (94,953 )     -  

Proceeds from sales of investments

    51,504       -  

Net cash (used in) provided by investing activities

    (43,817 )     4,476  
                 
Cash Flows from Financing Activities                

Payment of cash dividends

    (20,879 )     (25,372 )

Proceeds from employee stock plans

    9       813  

Taxes paid related to net share settlement of equity awards

    (765 )     (778 )

Payments on financing leases

    (265 )     (264 )

Other financing costs

    28       (28 )

Net cash used in financing activities

    (21,872 )     (25,629 )
                 

Effect of exchange rate changes on cash and cash equivalents

    (128 )     (87 )
                 

Net (decrease) increase in cash, cash equivalents and restricted cash

    (24,878 )     1,461  

Cash, cash equivalents and restricted cash at beginning of period

    110,871       104,596  

Cash, cash equivalents and restricted cash at end of period

  $ 85,993     $ 106,057  

 

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, 2022

    49,360     $ 494     $ 384,782       24,037     $ (681,834 )   $ (6,462 )   $ 710,369     $ (26 )   $ 407,323  

Net income

    -       -       -       -       -       -       29,880       -       29,880  

Share-based compensation expense

    -       -       268       -       -       -       -       -       268  

Restricted stock vesting

    55       -       1       31       (765 )     -       -       -       (764 )

Cash dividends declared

    -       -       -       -       -       -       (20,879 )     -       (20,879 )

Other comprehensive income (loss)

    -       -       -       -       -       (82 )     -       (7 )     (89 )

Balance at September 30, 2022

    49,415     $ 494     $ 385,051       24,068     $ (682,599 )   $ (6,544 )   $ 719,370     $ (33 )   $ 415,739  

Net income

    -       -       -       -       -       -       28,166       -       28,166  

Common stock issued on share-based awards

    1       -       9       -       -       -       -       -       9  

Share-based compensation expense

    -       -       495       -       -       -       -       -       495  

Cash dividends declared

    -       -       -       -       -       -       (8,152 )     -       (8,152 )

Other comprehensive income (loss)

    -       -       -       -       -       795       -       12       807  

Balance at December 31, 2022

    49,416     $ 494     $ 385,555       24,068     $ (682,599 )   $ (5,749 )   $ 739,384     $ (21 )   $ 437,064  

 

                                           

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  

 

See accompanying notes to consolidated financial statements.

 

5

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

(1)

Organization and Nature of Business

 

Organization

 

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

 

Nature of Business

 

We are a global luxury home fashion brand that is vertically integrated from product design through home delivery, which offers our customers stylish product offerings, artisanal quality and personalized service. We are known for the quality and craftsmanship of our products as well as for the exceptional personal service from design to delivery. We provide interior design service to our clients and sell a full range of home furnishings through a retail network of design centers located throughout the United States and abroad as well as online at ethanallen.com.

 

Ethan Allen design centers represent a mix of locations operated by independent licensees and Company-operated locations. As of December 31, 2022, the Company operates 139 retail design centers with 135 located in the United States and four in Canada. Our independently operated design centers are located in the United States, Asia, the Middle East and Europe. We also own and operate ten manufacturing facilities, including four manufacturing plants, one sawmill, one rough mill and one kiln dry lumberyard in the United States, two manufacturing plants in Mexico and one manufacturing plant in Honduras. Approximately 75% of our products are manufactured or assembled in the North American plants. We also contract with various suppliers located in Europe, Asia and other countries that produce products that support our business.

 

 

(2)

Interim Basis of Presentation

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Our consolidated financial statements also include the accounts of an entity in which we are a majority shareholder with the power to direct the activities that most significantly impact the entity’s performance. Noncontrolling interest amounts in the entity are immaterial and included in the consolidated statements of comprehensive income within Interest and other income, net.

 

All intercompany activity and balances, including any related profit on intercompany sales, have been eliminated from the consolidated financial statements. In our opinion, all adjustments, consisting only of normal recurring adjustments necessary for fair presentation, have been included in the consolidated financial statements. The results of operations for the three and six months ended December 31, 2022 are not necessarily indicative of results that may be expected for the entire fiscal year. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022 (the “2022 Annual Report on Form 10-K”).

 

Use of Estimates

 

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

 

Restricted Cash

 

We present restricted cash as a component of total cash and cash equivalents on our consolidated statement of cash flows and within Other Assets on our consolidated balance sheet. As of December 31, 2022 and June 30, 2022, we held $0.6 million and $1.0 million, respectively, of restricted cash related to our Ethan Allen insurance captive.

 

We have evaluated subsequent events through the date of issuance of the financial statements included in this Quarterly Report on Form 10-Q.

 

6

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

(3)

Recent Accounting Pronouncements

 

New Accounting Standards or Updates Adopted in Fiscal 2023

 

The Company evaluates all Accounting Standards Updates (“ASUs”) issued by the Financial Accounting Standards Board (“FASB”) for consideration of their applicability to our consolidated financial statements. We did not adopt any new standards or updates during fiscal 2023 that had 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 2021-08Business 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 do not expect this accounting standards update to have a material impact on our consolidated financial statements.

 

Derivatives and Hedging. In March 2022, the FASB issued ASU 2022-01Derivatives 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 do not expect this accounting standards update to have a material impact on our consolidated financial statements.

 

Inflation Reduction Act of 2022. On August 16, 2022, the Inflation Reduction Act (“IRA”) was signed into law. The IRA contains several revisions to the Internal Revenue Code effective in taxable years beginning after December 31, 2022, including a 15% minimum income tax on certain large corporations and a 1% excise tax on corporate stock repurchases by publicly traded U.S. corporations. We are currently evaluating the impact of the IRA, but do not expect this law to have a material impact on our consolidated financial statements.

 

No other new accounting pronouncements issued or effective as of December 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.

 

Shipping and Handling. Our practice has been to sell our products at the same delivered cost to all retailers and customers nationwide, regardless of shipping point. Costs incurred by the Company to deliver finished goods are expensed and recorded in selling, general and administrative (“SG&A”) expenses. We recognize shipping and handling expense as fulfillment activities (rather than as a promised good or service) when the activities are performed even if those activities are performed after the control of the good has been transferred. Accordingly, we record the expenses for shipping and handling activities at the same time we recognize net sales.

 

Sales Taxes. We exclude from the measurement of the transaction price all taxes imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer, including sales, use, excise, value-added, and franchise taxes (collectively referred to as sales taxes). Sales tax collected is not recognized as revenue but is included in Accounts payable and accrued expenses on the consolidated balance sheets as it is ultimately remitted to governmental authorities.

 

Returns and Allowances. Estimated refunds for returns and allowances are based on our historical return patterns. We record these estimated sales refunds on a gross basis rather than on a net basis and have recorded an asset for product we expect to receive back from customers in Prepaid expenses and other current assets and a corresponding refund liability in Other current liabilities on our consolidated balance sheets. At December 31, 2022 and June 30, 2022, these amounts were immaterial.

 

7

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Allowance for Doubtful Accounts. Accounts receivable arise from the sale of products on trade credit terms and is presented net of allowance for doubtful accounts. We maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. The allowance for doubtful accounts is based on a review of specifically identified accounts in addition to an overall aging analysis. At December 31, 2022 and June 30, 2022, the allowance for doubtful accounts was immaterial.

 

Commissions. We capitalize commission fees paid to our associates as contract assets within Prepaid expenses and other current assets on our consolidated balance sheets. These prepaid commissions are subsequently recognized as a selling expense upon delivery (when we have transferred control of our product to our customer). At December 31, 2022, we had prepaid commissions of $13.4 million, which we expect to recognize to selling expense during the remainder of fiscal 2023 as Selling, general and administrative expenses within our consolidated statements of comprehensive income.

 

Customer Deposits. In most cases we collect deposits from customers on a portion of the total purchase price at the time a written order is placed, but before we have transferred control of our product to our customers, resulting in contract liabilities. These customer deposits are reported as a current liability in Customer deposits on our consolidated balance sheets. As of December 31, 2022, we had customer deposits of $83.7 million. At June 30, 2022 we had customer deposits of $121.1 million, of which we recognized $30.9 million and $109.1 million of revenue related to our contract liabilities during the three and six months ended December 31, 2022. We expect that substantially all of the customer deposits received as of December 31, 2022 will be recognized as revenue within the next twelve months as the performance obligations are satisfied.

 

We recognize the promised amount of consideration without adjusting for the effects of a significant financing component if the contract has a duration of one year or less. As our contracts typically are less than one year in length and do not have significant financing components, we have not adjusted consideration.

 

The following table disaggregates our net sales by product category by segment (in thousands):

 

   

Three months ended December 31, 2022

   

Three months ended December 31, 2021

 
   

Wholesale

   

Retail

   

Eliminations(1)

   

Total

   

Wholesale

   

Retail

   

Eliminations(1)

   

Total

 

Upholstery(2)

  $ 53,661     $ 82,893     $ (38,921 )   $ 97,633     $ 62,428     $ 91,195     $ (46,274 )   $ 107,349  

Case goods(3)

    35,803       45,890       (20,958 )     60,735       35,082       46,876       (24,475 )     57,483  

Accents(4)

    18,215       34,150       (14,970 )     37,395       20,048       34,017       (16,662 )     37,403  

Other(5)

    (1,432 )     8,830       -       7,398       (1,637 )     7,495       -       5,858  

Total

  $ 106,247     $ 171,763     $ (74,849 )   $ 203,161     $ 115,921     $ 179,583     $ (87,411 )   $ 208,093  

 

   

Six months ended December 31, 2022

   

Six months ended December 31, 2021

 
   

Wholesale

   

Retail

   

Eliminations(1)

   

Total

   

Wholesale

   

Retail

   

Eliminations(1)

   

Total

 

Upholstery(2)

  $ 112,283     $ 173,875     $ (82,486 )   $ 203,672     $ 122,431     $ 167,489     $ (88,149 )   $ 201,771  

Case goods(3)

    73,973       95,144       (44,416 )     124,701       68,601       88,331       (47,465 )     109,467  

Accents(4)

    37,836       68,355       (31,726 )     74,465       37,493       65,234       (33,904 )     68,823  

Other(5)

    (3,194 )     18,047       -       14,853       (3,156 )     13,515       -       10,359  

Total

  $ 220,898     $ 355,421     $ (158,628 )   $ 417,691     $ 225,369     $ 334,569     $ (169,518 )   $ 390,420  

 

 

(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, flooring, 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 and other miscellaneous product sales less prompt payment discounts, sales allowances and other incentives.

 

8

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

(5)

Fair Value Measurements

 

Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, the use of various valuation methodologies, including market, income and cost approaches is permissible. We consider the principal or most advantageous market in which it would transact and assumptions that market participants would use when pricing the asset or liability.

 

Fair Value Hierarchy. The accounting guidance for fair value measurements establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value based on the reliability of inputs. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect their placement within the fair value hierarchy levels.

 

We have categorized our cash equivalents and investments within the fair value hierarchy as follows: 

 

Level 1 – applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities. These Level 1 assets include our corporate money market funds that are classified as cash equivalents. We have categorized our cash equivalents as Level 1 assets as there are quoted prices in active markets for identical assets or liabilities.

 

Level 2 – applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data. At December 31, 2022 and June 30, 2022, we have categorized our investments as Level 2 assets. 

 

Level 3 – applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities. We held no Level 3 assets or liabilities as of December 31, 2022 or June 30, 2022.

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis. The following tables show, by level within the fair value hierarchy, our assets and liabilities that are measured at fair value on a recurring basis at December 31, 2022 and June 30, 2022. We did not have any transfers between levels of fair value measurements during the periods presented.

 

   

Fair Value Measurements at December 31, 2022

 

Assets

 

Level 1

   

Level 2

   

Level 3

   

Balance

 

Corporate money market funds (1)

  $ 8,830     $ -     $ -     $ 8,830  

Investments (2)

    -       55,030       -       55,030  

Total

  $ 8,830     $ 55,030     $ -     $ 63,860  

 

 

   

Fair Value Measurements at June 30, 2022

 

Assets

 

Level 1

   

Level 2

   

Level 3

   

Balance

 

Corporate money market funds (1)

  $ 51,035     $ -     $ -     $ 51,035  

Investments (2)

    -       11,199       -       11,199  

Total

  $ 51,035     $ 11,199     $ -     $ 62,234  

 

 

(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 as of December 31, 2022 consist solely of U.S. Treasury Bills with maturities of less than one year. Previously held investments included fixed income securities including municipal bonds, commercial paper and certificates of deposits with maturities of less than one year. We classify our investments as available-for-sale debt investments. 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 Loss within the consolidated balance sheets. There were no material gross unrealized gains or losses on the investments at December 31, 2022 or June 30, 2022.

 

9

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

As of December 31, 2022 and June 30, 2022, we did not have any outstanding bank borrowings, which we historically have categorized as a Level 2 liability. There were no investments that have been in a continuous loss position for more than one year, and there have been no other-than-temporary impairments recognized.

 

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis. We did not record any other-than-temporary impairments on assets required to be measured at fair value on a non-recurring basis during fiscal 2023 or 2022.

 

Assets and Liabilities Measured at Fair Value for Disclosure Purposes Only. We had no outstanding bank borrowings as of December 31, 2022 and June 30, 2022.

 

 

(6)

Leases

 

We recognize substantially all leases on our balance sheet as a ROU asset and a lease liability. We have operating leases for many of our design centers that expire at various dates through fiscal 2040. We also lease certain tangible assets, including computer equipment and vehicles, with initial lease terms ranging from 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. As we do not have any outstanding public debt, we estimated the incremental borrowing rate based on our estimated credit rating and available market information. The incremental borrowing rate is subsequently reassessed upon a modification to the lease agreement. Some of our leases contain variable lease payments based on a consumer price index or percentage of sales, which are excluded from the measurement of the lease liability.

 

The Company's lease terms and discount rates are as follows:

 

   

December 31,

 
   

2022

   

2021

 
Weighted average remaining lease term (in years)                

Operating leases

    6.1       6.0  

Financing leases

    2.3       2.2  
Weighted average discount rate                

Operating leases

    5.0%       4.1%  

Financing leases

    3.2%       2.2%  

 

The following table discloses the location and amount of our operating and financing lease costs within our consolidated statements of comprehensive income (in thousands):

 

 

     

Three months ended

December 31,

   

Six months ended

December 31,

 
 

Statements of Comprehensive Income Location

 

2022

   

2021

   

2022

   

2021

 

Operating lease cost(1)

Selling, general and administrative (“SG&A”) expenses   $ 7,182     $ 7,475     $ 14,984     $ 14,948  
Financing lease cost                                  

Depreciation of property

SG&A expenses     127       126       256       252  

Interest on lease liabilities

Interest and other financing costs     7       6       15       13  

Short-term lease cost(2)

SG&A expenses     325       309       580       617  

Variable lease cost(3)

SG&A expenses     2,303       2,371       4,513       4,684  

Less: Sublease income

SG&A expenses     (293 )     (386 )     (587 )     (799 )

Total lease expense

  $ 9,651     $ 9,901     $ 19,761     $ 19,715  

 

 

(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.

 

10

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

(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 December 31, 2022 (in thousands):

 

Fiscal Year

 

Operating Leases

   

Financing Leases

 

2023 (remaining six months)

  $ 14,968     $ 271  

2024

    27,162       392  

2025

    23,400       80  

2026

    19,758       72  

2027

    14,742       66  

Thereafter

    38,462       -  

Total undiscounted future minimum lease payments

    138,492       881  

Less: imputed interest

    (20,664 )     (39 )

Total present value of lease obligations(1)

  $ 117,828     $ 842  

 

 

(1)

Excludes future commitments under short-term operating lease agreements of $0.5 million as of December 31, 2022.

 

As of December 31, 2022, we have one operating lease for a retail design center, which has not yet commenced. This operating lease is not part of the tables above nor in the lease right-of-use assets and liabilities. This lease will commence when we obtain possession of the underlying leased asset, which is expected to occur during the third quarter of fiscal 2023. The operating lease is for a period of five years and has aggregate undiscounted future lease payments of $0.5 million. As of December 31, 2022, 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,

 
   

2022

   

2021

 
Cash paid for amounts included in the measurement of lease liabilities                

Operating cash flows from operating leases

  $ 15,710     $ 16,734  

Operating cash flows from financing leases

  $ 265     $ 264  

Operating lease assets obtained in exchange for operating lease liabilities

  $ 15,765     $ 7,534  

 

There were no non-cash financing lease obligations obtained in exchange for new financing lease assets during the six months ended December 31, 2022 or 2021.

 

Sale-leaseback transaction. On August 1, 2022, we completed a sale-leaseback transaction with an independent third party for the land, building and related fixed assets of a retail design center. The design center was leased back to Ethan Allen via a multi-year operating lease agreement. As part of the transaction, we received net proceeds of $8.1 million, which resulted in a pre-tax gain of $1.8 million recorded within Restructuring and other impairment charges, net of gains and $5.2 million deferred as a liability to be amortized to Restructuring and other impairment charges, net of gains over the term of the related lease. For the six months ended December 31, 2022, we amortized an additional $1.1 million of this deferred liability as a gain within Restructuring and other impairment charges, net of gains. As of December 31, 2022, the deferred liability balance was $4.1 million, with $2.6 million in Other current liabilities and $1.5 million in Other long-term liabilities on our consolidated balance sheet.

 

11

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

(7)

Inventories

 

Inventories are summarized as follows (in thousands):

 

   

December 31,

   

June 30,

 
   

2022

   

2022

 

Finished goods

  $ 115,258     $ 131,021  

Work in process

    14,337       15,098  

Raw materials

    32,442       32,490  

Inventory reserves

    (2,163 )     (2,105 )

Inventories, net

  $ 159,874     $ 176,504  

 

 

(8)

Property, Plant and Equipment

 

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

 

   

December 31,

   

June 30,

 
   

2022

   

2022

 

Land and improvements

  $ 77,783     $ 78,443  

Building and improvements

    348,501       356,622  

Machinery and equipment

    123,785       127,062  

Property, plant and equipment, gross

    550,069       562,127  

Less: accumulated depreciation and amortization

    (326,367 )     (338,597 )

Property, plant and equipment, net

  $ 223,702     $ 223,530  

 

We recorded depreciation expense of $3.8 million and $3.9 million for the three months ended December 31, 2022 and 2021, respectively. Depreciation expense was $7.7 million and $8.2 million for the six months ended December 31, 2022 and 2021, respectively.

 

 

(9)

Goodwill and Intangible Assets

 

Our goodwill and intangible assets are comprised of goodwill, which represents the excess of cost over the fair value of net assets acquired, and our Ethan Allen trade name and related trademarks. At December 31, 2022 and June 30, 2022, we had $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. We performed our annual goodwill impairment test during the fourth quarter of fiscal 2022, consistent with the timing of prior years. We concluded it was more likely than not that the fair value was greater than the respective carrying value and no impairment charge was required.

 

 

(10)

Other Current Liabilities

 

The following table summarizes the nature of the amounts within Other current liabilities (in thousands):

 

   

December 31,

   

June 30,

 
   

2022

   

2022

 
                 

Income taxes payable

  $ 1,378     $ 4,558  

Deferred liability, short-term (1)

    2,620       -  

Dividends payable(2)

    8,152       -  

Financing lease liabilities, short-term

    523       535  

Other current liabilities

    3,675       3,695  

Other current liabilities

  $ 16,348     $ 8,788  

 

(1)

As of December 31, 2022, the deferred liability balance associated with the sale-leaseback transaction completed on August 1, 2022 was $4.1 million, with $2.6 million in Other current liabilities and $1.5 million in Other long-term liabilities on our consolidated balance sheet. Refer to Note 6, Leases, for further disclosure on the transaction.

 

(2)

On November 9, 2022, the Board of Directors declared a regular quarterly cash dividend of $0.32 per share, payable on January 4, 2023, to shareholders of record at the close of business on December 7, 2022.

 

12

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

(11)

Income Taxes

 

We recorded income tax expense of $9.8 million and $19.9 million, respectively, for the three and six months ended December 31, 2022 compared with $9.3 million and $16.5 million in the prior year comparable periods. Our consolidated effective tax rate was 25.7% and 25.5% for the three and six months ended December 31, 2022 compared with 25.7% and 26.0% in the prior year periods. Our effective tax rate varies from the 21% federal statutory rate primarily due to state taxes.

 

We recognize interest and penalties related to income tax matters as a component of income tax expense. As of December 31, 2022, we had $3.0 million of unrecognized tax benefits compared with $2.5 million as of June 30, 2022. It is reasonably possible that various issues relating to approximately $0.5 million of the total gross unrecognized tax benefits as of December 31, 2022 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.

 

 

(12)

Credit Agreement

 

On January 26, 2022, the Company and most of its domestic subsidiaries (the “Loan Parties”) entered into a Third Amended and Restated Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. as administrative agent and syndication agent and Capital One, National Association, as documentation agent. The Credit Agreement amends and restates the Second Amended and Restated Credit Agreement, dated as of December 21, 2018, as amended. The Credit Agreement provides for a $125 million revolving credit facility (the “Facility”), subject to borrowing base availability, with a maturity date of January 26, 2027. The Credit Agreement also provides the Company with an option to increase the size of the facility up to an additional amount of $60 million. We incurred financing costs of $0.5 million during fiscal 2022, which are being amortized as interest expense within in the consolidated statements of comprehensive income over the remaining life of the Credit Agreement using the effective interest method.

 

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 $121.0 million at both December 31, 2022 and June 30, 2022.

 

Borrowings. At the Company’s option, borrowings under the Facility bear interest, based on the average quarterly availability, at an annual rate of either (a) Adjusted Term SOFR Rate (defined as the Term SOFR Rate for such interest period plus 0.10%) plus 1.25% to 2.0%, or (b) Alternate Base Rate (defined as the greatest of (i) the prime rate, (ii) the Federal Reserve Bank of New York (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%. We had no outstanding borrowings under the Facility as of December 31, 2022, June 30, 2022, or at any time during fiscal 2023 and 2022. Since we had no outstanding borrowings during fiscal 2023 and 2022, there was no interest expense during fiscal 2023 and 2022.

 

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 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 Facility drops below $14.0 million. At no point during fiscal years 2023 or 2022, did the unused availability under the Facility fall below $14.0 million, thus the Fixed-Charge Coverage Ratio (FCCR) Covenant did not apply. At both December 31, 2022 and June 30, 2022, we were in compliance with all the covenants under the Facility.

 

Letters of Credit. At both December 31, 2022 and June 30, 2022, there was $4.0 million of standby letters of credit outstanding under the Facility.

 

13

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

(13)

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,

 
   

2022

   

2021

   

2022

   

2021

 

Gain on sale-leaseback transaction(1)

  $ (654 )   $ -     $ (2,911 )   $ -  

Gain on sale of property, plant and equipment(2)

    -       (3,913 )     -       (3,913 )

Severance and other charges

    458       280       719       535  

Total Restructuring and other impairment charges, net of gains

  $ (196 )   $ (3,633 )   $ (2,192 )   $ (3,378 )

 

(1)

In August 2022, we sold and subsequently leased back a retail design center and recognized a net gain of $0.7 million and $2.9 million for the three and six months ended December 31, 2022, respectively. The remaining deferred liability was $4.1 million as of December 31, 2022 and will be recognized over the remaining life of the lease. Refer to Note 6, Leases, for further discussion on the sale-leaseback transaction.

 

(2)

In October 2021, we sold our Atoka, Oklahoma distribution center to an independent third party 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 sold a property for $5.6 million in cash, which resulted in a pre-tax gain of $1.9 million.

 

Restructuring payments made by the Company during the first six months of fiscal 2023 were $0.8 million, which were primarily for severance and lease payments due under a retail design center that was previously exited. Excluding the deferred liability of $4.1 million related to the sale-leaseback transaction, the remaining restructuring balance as of December 31, 2022 was less than $0.4 million, which is anticipated to be paid during the remainder of fiscal 2023.

 

 

(14)

Earnings Per Share

 

Basic and diluted earnings per share (“EPS”) are calculated using the following weighted average share data (in thousands):

 

   

Three months ended

   

Six months ended

 
   

December 31,

   

December 31,

 
   

2022

   

2021

   

2022

   

2021

 

Weighted average shares outstanding for basic calculation

    25,473       25,396       25,466       25,386  

Dilutive effect of stock options and other share-based awards

    109       117       105       96  

Weighted average shares outstanding adjusted for dilution calculation

    25,582       25,513       25,571       25,482  

 

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

 

As of December 31, 2022 and 2021, total share-based awards of 68,517 and 115,710, respectively, were excluded from the diluted EPS calculations because their inclusion would have been anti-dilutive.

 

As of December 31, 2022 and 2021, the number of performance units excluded from the calculation of diluted EPS were 181,096 and 220,082, respectively. Contingently issuable shares with performance conditions are evaluated for inclusion in diluted EPS if, at the end of the current period, conditions would be satisfied as if it were the end of the contingency period.

 

 

(15)

Accumulated Other Comprehensive Loss

 

Accumulated other comprehensive loss consists of foreign currency translation adjustments and unrealized gains or losses on investments. Foreign currency translation adjustments are the result of changes in foreign currency exchange rates related to our operations in Canada, Honduras and Mexico. Assets and liabilities are translated into U.S. dollars using the current period-end exchange rate and income and expense amounts are translated using the average exchange rate for the period in which the transaction occurred. Our investments consist of U.S. Treasury Bills, municipal bonds, commercial paper and certificates of deposit with maturities of one year or less. All unrealized gains and losses are included in Accumulated Other Comprehensive Loss within the consolidated balance sheets.

 

14

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

The components of accumulated other comprehensive loss are as follows (in thousands):

 

   

December 31,
2022

   

June 30,
2022

 

Accumulated foreign currency translation adjustments

  $ (6,049 )   $ (6,397 )

Accumulated unrealized gains (losses) on investments

    300       (65 )
    $ (5,749 )   $ (6,462 )

 

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

 

   

2022

   

2021

 

Beginning balance at July 1

  $ (6,462 )   $ (5,931 )

Other comprehensive income (loss), net of tax

    718       (649 )

Less AOCI attributable to noncontrolling interests

    (5 )     7  

Ending balance at December 31

  $ (5,749 )   $ (6,573 )

 

 

(16)

Share-Based Compensation

 

We recognized total share-based compensation expense of $0.8 million and $0.6 million during the six months ended December 31, 2022 and 2021, respectively. These amounts have been included in the consolidated statements of comprehensive income within SG&A expenses. As of December 31, 2022, $3.3 million of total unrecognized compensation expense related to non-vested equity awards is expected to be recognized over a weighted average period of 2.2 years. There was no share-based compensation capitalized for the six months ended December 31, 2022 and 2021, respectively.

 

At December 31, 2022, there were 1,327,482 shares of common stock available for future issuance pursuant to the Ethan Allen Interiors Inc. Stock Incentive Plan (the “Plan”), which provides for the grant of stock options, restricted stock, and stock units.

 

Stock Option Activity

 

Employee Stock Option Grants. There were no stock option awards granted to employees during the six months ended December 31, 2022 and 2021.

 

Non-Employee Stock Option Grants. The Plan also provides for the grant of share-based awards, including stock options, to non-employee directors of the Company. During the first quarter of fiscal 2023, we granted 23,970 stock options at an exercise price of $25.03 to our existing non-employee directors. In the prior year first quarter, we granted 25,410 stock options at an exercise price of $23.61. 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 2023 or 2022.

 

As of December 31, 2022, $0.2 million of total unrecognized compensation expense related to non-vested stock options is expected to be recognized over a weighted average remaining period of 2.4 years. A total of 121,165 stock options were outstanding as of December 31, 2022, at a weighted average exercise price of $24.05 and a weighted average grant date fair value of $7.55.

 

Restricted Stock Unit Activity

 

During the first six months of fiscal 2023, we granted 21,257 non-performance based restricted stock units (“RSUs”), with a weighted average grant date fair value of $19.48. 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 year ago first quarter, we granted 51,100 RSUs with a weighted average grant date fair value of $20.71 and vest in four equal annual installments on the anniversary date of the grant.

 

During the first six months of fiscal 2023, 24,025 RSUs vested and 750 RSUs were forfeited leaving 72,582 RSUs outstanding as of December 31, 2022, with a weighted average grant date fair value of $17.69.

 

As of December 31, 2022, $1.1 million of total unrecognized compensation expense related to non-vested restricted stock units is expected to be recognized over a weighted average remaining period of 2.5 years.

 

15

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

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 six months of fiscal 2023 we granted 103,096 PSUs with a weighted average grant date fair value of $18.75 compared with 90,367 RSUs at a weighted average grant date fair value of $17.15 in the prior year first quarter. 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 six months of fiscal 2023, 31,635 PSUs, that were previously granted in August 2019, vested. As of December 31, 2022, a total of 391,596 PSUs were outstanding at a weighted average grant date fair value of $18.25.

 

Unrecognized compensation expense as of December 31, 2022, related to PSUs, was $2.0 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 2.1 years.

 

 

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Segment Information

 

Ethan Allen conducts business globally and has strategically aligned its business into two reportable segments: Wholesale and Retail. These two segments represent strategic business areas of our vertically integrated enterprise that operate separately and provide their own distinctive services. Our operating segments are aligned with how the Company, including our chief operating decision maker, manages the business. This vertical structure enables us to offer our complete line of home furnishings and accents more effectively while controlling quality and cost. We evaluate performance of the respective segments based upon sales and operating income.

 

Wholesale Segment. The wholesale segment is principally involved in the development of the Ethan Allen brand and encompasses all aspects of design, manufacturing, sourcing, merchandising, marketing and distribution of our broad range of home furnishings and accents. Our wholesale segment net sales include sales to our retail segment, which are eliminated in consolidation, and sales to our independent retailers and other third parties. Wholesale revenue is generated upon the sale and shipment of our products to our retail network of independently operated design centers, Company-operated design centers and other contract customers.

 

Retail Segment. The retail segment sells home furnishings and accents to clients through a network of Company-operated design centers. Retail revenue is generated upon the retail sale and delivery of our products to our retail customers through our network of retail home delivery centers. Retail profitability reflects (i) the retail gross margin, which represents the difference between the retail net sales price and the cost of goods, purchased from the wholesale segment, and (ii) other operating costs associated with retail segment activities. As of December 31, 2022, the Company operated 139 design centers within our retail segment.

 

Intersegment. We account for intersegment sales transactions between our segments consistent with independent third-party transactions, that is, at current market prices. As a result, the manufacturing profit related to sales to our retail segment is included within our wholesale segment. Operating income realized on intersegment revenue transactions is therefore generally consistent with the operating income realized on our revenue from independent third-party transactions. Segment operating income is based on profit or loss from operations before interest and other financing costs, other income (expense), net and income taxes. Sales are attributed to countries on the basis of the customer's location.

 

16

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Segment information is provided below (in thousands):

 

   

Three months ended

   

Six months ended

 
   

December 31,

   

December 31,

 
   

2022

   

2021

   

2022

   

2021

 
Net sales                                

Wholesale segment

  $ 106,247     $ 115,921     $ 220,898     $ 225,369  

Less: intersegment sales

    (74,849 )     (87,411 )     (158,628 )     (169,518 )

Wholesale sales to external customers

    31,398       28,510       62,270       55,851  

Retail segment

    171,763       179,583       355,421       334,569  

Consolidated total

  $ 203,161     $ 208,093     $ 417,691     $ 390,420  
                                 
Income before income taxes                                

Wholesale segment

  $ 14,569     $ 9,744     $ 29,982     $ 22,563  

Retail segment

    18,080       22,635       40,069       36,980  

Elimination of intercompany profit (a)

    4,420       3,913       6,668       4,109  

Operating income

    37,069       36,292       76,719       63,652  

Interest and other income, net

    901       (26 )     1,297       2  

Interest expense and other financing costs

    50       48       105       96  

Consolidated total

  $ 37,920     $ 36,218     $ 77,911     $ 63,558  
                                 
Depreciation and amortization                                

Wholesale segment

  $ 1,575     $ 1,588     $ 3,166     $ 3,228  

Retail segment

    2,263       2,274       4,529       4,959  

Consolidated total

  $ 3,838     $ 3,862     $ 7,695     $ 8,187  
                                 
Capital expenditures                                

Wholesale segment

  $ 2,701     $ 1,324