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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 March 31, 2023

 

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

 

eth20230331_10qimg001.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 April 19, 2023, was 25,356,462.

 

 

 
 

 

 

ETHAN ALLEN INTERIORS INC.

FORM 10-Q THIRD 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

34

   

PART II - OTHER INFORMATION

 
   

Item 1. Legal Proceedings

35

   

Item 1A. Risk Factors

35

   

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

35

   

Item 3. Defaults Upon Senior Securities

35

   

Item 4. Mine Safety Disclosures

35

   

Item 5. Other Information

35

   

Item 6. Exhibits

36

   

SIGNATURES

37

 

1

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

 

   

March 31, 2023

   

June 30, 2022

 

ASSETS

 

(Unaudited)

         
Current assets                

Cash and cash equivalents

  $ 61,031     $ 109,919  

Investments

    95,171       11,199  

Accounts receivable, net

    15,817       17,019  

Inventories, net

    151,655       176,504  

Prepaid expenses and other current assets

    28,275       32,108  

Total current assets

    351,949       346,749  
                 

Property, plant and equipment, net

    223,284       223,530  

Goodwill

    25,388       25,388  

Intangible assets

    19,740       19,740  

Operating lease right-of-use assets

    117,871       100,782  

Deferred income taxes

    977       820  

Other assets

    2,114       2,886  

Total ASSETS

  $ 741,323     $ 719,895  
                 

LIABILITIES

               
Current liabilities                

Accounts payable and accrued expenses

  $ 28,043     $ 37,370  

Customer deposits

    92,772       121,080  

Accrued compensation and benefits

    20,952       22,700  

Current operating lease liabilities

    25,275       25,705  

Other current liabilities

    7,314       8,788  

Total current liabilities

    174,356       215,643  

Operating lease liabilities, long-term

    107,119       89,506  

Deferred income taxes

    2,465       4,418  

Other long-term liabilities

    4,190       3,005  

Total LIABILITIES

  $ 288,130     $ 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, 49,426 and 49,360 shares issued; 25,356 and 25,323 shares outstanding at March 31, 2023 and June 30, 2022, respectively

    494       494  

Additional paid-in capital

    386,003       384,782  

Treasury stock, at cost: 24,070 and 24,037 shares at March 31, 2023 and June 30, 2022, respectively

    (682,646 )     (681,834 )

Retained earnings

    753,588       710,369  

Accumulated other comprehensive loss

    (4,236 )     (6,462 )

Total Ethan Allen Interiors Inc. shareholders' equity

    453,203       407,349  

Noncontrolling interests

    (10 )     (26 )

Total SHAREHOLDERS' EQUITY

    453,193       407,323  

Total LIABILITIES AND SHAREHOLDERS' EQUITY

  $ 741,323     $ 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

   

Nine months ended

 
   

March 31,

   

March 31,

 
   

2023

   

2022

   

2023

   

2022

 

Net sales

  $ 186,316     $ 197,659     $ 604,007     $ 588,079  

Cost of sales

    74,765       78,199       238,820       237,158  

Gross profit

    111,551       119,460       365,187       350,921  
                                 

Selling, general and administrative expenses

    83,233       88,270       262,342       259,457  

Restructuring and other impairment charges, net of gains

    (470 )     (1,463 )     (2,662 )     (4,841 )

Operating income

    28,788       32,653       105,507       96,305  
                                 

Interest and other income (expense), net

    1,123       (10 )     2,420       (8 )

Interest expense and other financing costs

    52       51       157       147  

Income before income taxes

    29,859       32,592       107,770       96,150  

Income tax expense

    7,503       7,878       27,368       24,389  

Net income

  $ 22,356     $ 24,714     $ 80,402     $ 71,761  
                                 
Per share data                                
Basic earnings per common share                                

Net income per basic share

  $ 0.88     $ 0.97     $ 3.16     $ 2.83  

Basic weighted average common shares

    25,477       25,434       25,470       25,402  
Diluted earnings per common share                                

Net income per diluted share

  $ 0.87     $ 0.97     $ 3.14     $ 2.81  

Diluted weighted average common shares

    25,599       25,549       25,580       25,504  
                                 
Comprehensive income                                

Net income

  $ 22,356     $ 24,714     $ 80,402     $ 71,761  
Other comprehensive income (loss), net of tax                                

Foreign currency translation adjustments

    1,683       496       2,031       (146 )

Other income (loss)

    (159 )     (11 )     211       (18 )

Other comprehensive income (loss), net of tax

    1,524       485       2,242       (164 )

Comprehensive income

  $ 23,880     $ 25,199     $ 82,644     $ 71,597  

 

 

See accompanying notes to consolidated financial statements.

 

3

 

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

 

   

Nine months ended

 
   

March 31,

 

Cash Flows from Operating Activities

 

2023

     

2022

 

Net income

  $ 80,402       $ 71,761  
Adjustments to reconcile net income to net cash provided by operating activities                  

Depreciation and amortization

    11,673         12,040  

Share-based compensation expense

    1,145         783  

Non-cash operating lease cost

    22,557         22,505  

Deferred income taxes

    (2,110 )       1,709  

Restructuring and other impairment charges, net of gains

    (2,662 )       (4,841 )

Restructuring payments

    (1,020 )       (1,144 )

Loss on disposal of property, plant and equipment

    43         25  

Other

    513         23  
Change in operating assets and liabilities                  

Accounts receivable, net

    1,202         (2,523 )

Inventories, net

    24,849         (38,711 )

Prepaid expenses and other current assets

    3,757         (3,551 )

Customer deposits

    (28,308 )       5,790  

Accounts payable and accrued expenses

    (9,319 )       5,330  

Accrued compensation and benefits

    (1,634 )       (3,690 )

Operating lease liabilities

    (23,355 )       (25,027 )

Other assets and liabilities

    (3,375 )       (478 )

Net cash provided by operating activities

    74,358         40,001  
                   

Cash Flows from Investing Activities

                 

Proceeds from sales of property, plant and equipment

    8,105         10,613  

Capital expenditures

    (10,679 )       (9,031 )

Purchases of investments

    (189,951 )       (18,521 )

Proceeds from sales of investments

    106,933         9,000  

Net cash used in investing activities

    (85,592 )       (7,939 )
                   

Cash Flows from Financing Activities

                 

Payment of cash dividends

    (37,183 )       (40,114 )

Proceeds from employee stock plans

    75         1,096  

Taxes paid related to net share settlement of equity awards

    (812 )       (843 )

Payments on financing leases

    (395 )       (389 )

Other financing costs

    28         (505 )

Net cash used in financing activities

    (38,287 )       (40,755 )
                   

Effect of exchange rate changes on cash and cash equivalents

    27         43  
                   

Net decrease in cash, cash equivalents and restricted cash

    (49,494 )       (8,650 )

Cash, cash equivalents and restricted cash at beginning of period

    110,871         104,596  

Cash, cash equivalents and restricted cash at end of period

  $ 61,377       $ 95,946  

 

 

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  

Net income

    -       -       -       -       -       -       22,356       -       22,356  

Common stock issued on share-based awards

    1       -       66       -       -       -       -       -       66  

Share-based compensation expense

    -       -       382       -       -       -       -       -       382  

Cash dividends declared

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

Restricted stock vesting

    9       -       -       2       (47 )     -       -       -       (47 )

Other comprehensive income (loss)

    -       -       -       -       -       1,513       -       11       1,524  

Balance at March 31, 2023

    49,426     $ 494     $ 386,003       24,070     $ (682,646 )   $ (4,236 )   $ 753,588     $ (10 )   $ 453,193  

 

                                           

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  

Net income

    -       -       -       -       -       -       24,714       -       24,714  

Common stock issued on share-based awards

    13       1       283       -       -       -       -       -       284  

Share-based compensation expense

    -       -       157       -       -       -       -       -       157  

Cash dividends declared

    -       -       -       -       -       -       (7,374 )     -       (7,374 )

Restricted stock vesting

    10       -       -       2       (64 )     -       -       -       (64 )

Other comprehensive income (loss)

    -       -       -       -       -       490       -       (5 )     485  

Balance at March 31, 2022

    49,359     $ 494     $ 384,406       24,037     $ (681,834 )   $ (6,083 )   $ 686,993     $ (37 )   $ 383,939  

 

 

See accompanying notes to consolidated financial statements.

 
5

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

(1)

Organization and Nature of Business

 

Organization

 

Founded in 1932, 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 March 31, 2023, the Company operated 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 (expense), 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 nine months ended March 31, 2023 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”). We derived the June 30, 2022 consolidated balance sheet from our audited financial statements included in our 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 sheets. As of March 31, 2023 and June 30, 2022, we held $0.3 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 2021-08, 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 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 2022-01, 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 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 do not expect this law to have a material impact on our consolidated financial statements.

 

No other new accounting pronouncements or legislation issued or effective as of March 31, 2023 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 March 31, 2023 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 March 31, 2023 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 March 31, 2023, we had prepaid commissions of $15.0 million, which we expect to recognize to selling expense in the next two fiscal quarters 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 March 31, 2023, we had customer deposits of $92.8 million. At June 30, 2022 we had customer deposits of $121.1 million, of which we recognized $6.1 million and $115.1 million of revenue related to our contract liabilities during the three and nine months ended March 31, 2023, respectively We expect that substantially all of the customer deposits received as of March 31, 2023 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 are typically 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 March 31, 2023

   

Three months ended March 31, 2022

 
   

Wholesale

   

Retail

   

Eliminations(1)

   

Total

   

Wholesale

   

Retail

   

Eliminations(1)

   

Total

 

Upholstery(2)

  $ 56,923     $ 71,269     $ (38,603 )   $ 89,589     $ 64,993     $ 83,819     $ (46,854 )   $ 101,958  

Case goods(3)

    39,761       41,917       (24,439 )     57,239       35,919       42,625       (22,632 )     55,912  

Accents(4)

    19,456       29,382       (15,760 )     33,078       22,451       32,535       (20,616 )     34,370  

Other(5)

    (1,945 )     8,355       -       6,410       (2,329 )     7,748       -       5,419  

Total

  $ 114,195     $ 150,923     $ (78,802 )   $ 186,316     $ 121,034     $ 166,727     $ (90,102 )   $ 197,659  

 

 

   

Nine months ended March 31, 2023

   

Nine months ended March 31, 2022

 
   

Wholesale

   

Retail

   

Eliminations(1)

   

Total

   

Wholesale

   

Retail

   

Eliminations(1)

   

Total

 

Upholstery(2)

  $ 169,206     $ 245,144     $ (121,089 )   $ 293,261     $ 187,424     $ 251,308     $ (135,003 )   $ 303,729  

Case goods(3)

    113,734       137,061       (68,855 )     181,940       104,520       130,956       (70,097 )     165,379  

Accents(4)

    57,292       97,737       (47,486 )     107,543       59,944       97,769       (54,520 )     103,193  

Other(5)

    (5,139 )     26,402       -       21,263       (5,485 )     21,263       -       15,778  

Total

  $ 335,093     $ 506,344     $ (237,430 )   $ 604,007     $ 346,403     $ 501,296     $ (259,620 )   $ 588,079  

 

 

(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 March 31, 2023 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 March 31, 2023 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 March 31, 2023 and June 30, 2022. We did not have any transfers between levels of fair value measurements during the periods presented.

 

   

Fair Value Measurements at March 31, 2023

 

Assets

 

Level 1

   

Level 2

   

Level 3

   

Total

 

Corporate money market funds (1)

  $ 20,613     $ -     $ -     $ 20,613  

Investments (2)

    -       95,171       -       95,171  

Total

  $ 20,613     $ 95,171     $ -     $ 115,784  

 

 

   

Fair Value Measurements at June 30, 2022

 

Assets

 

Level 1

   

Level 2

   

Level 3

   

Total

 

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 March 31, 2023 consisted 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 March 31, 2023 or June 30, 2022.

 

9

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 

 

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 March 31, 2023 and June 30, 2022. We have historically categorized our outstanding bank borrowings as a Level 2 liability.

 

 

(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:

 

   

March 31,

 
   

2023

   

2022

 
Weighted average remaining lease term (in years)                    

Operating leases

    6.0         5.9    

Financing leases

    2.2         1.9    
Weighted average discount rate                    

Operating leases

    5.4 %       4.1 %  

Financing leases

    3.3 %       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

March 31,

   

Nine months ended

March 31,

 
 

Statements of Comprehensive Income Location

 

2023

   

2022

   

2023

   

2022

 

Operating lease cost(1)

Selling, general and administrative (“SG&A”) expenses   $ 7,573     $ 7,557     $ 22,557     $ 22,505  
Financing lease cost                                  

Depreciation of property

SG&A expenses     124       119       379       371  

Interest on lease liabilities

Interest and other financing costs     6       5       21       18  

Short-term lease cost(2)

SG&A expenses     307       361       887       978  

Variable lease cost(3)

SG&A expenses     2,427       2,417       6,940       7,101  

Less: Sublease income

SG&A expenses     (288 )     (292 )     (874 )     (1,091 )

Total lease expense

  $ 10,149     $ 10,167     $ 29,910     $ 29,882  

 

 

(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.

 

10

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 

 

 

(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, 2023 (in thousands):

 

Fiscal Year

 

Operating Leases

   

Financing Leases

 

2023 (remaining three months)

  $ 7,747     $ 136  

2024

    31,658       392  

2025

    28,839       80  

2026

    24,758       72  

2027

    18,372       66  

Thereafter

    44,917       -  

Total undiscounted future minimum lease payments

    156,291       746  

Less: imputed interest

    (23,897 )     (34 )

Total present value of lease obligations(1)

  $ 132,394     $ 712  

 

 

(1)

Excludes future commitments under short-term operating lease agreements of $0.2 million as of March 31, 2023.

 

As of March 31, 2023, we have one operating lease for a new 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 occurred in April 2023, our fiscal 2023 fourth quarter. The operating lease is for a period of five years and has aggregate undiscounted future lease payments of $0.5 million. As of March 31, 2023, we did not have any financing leases that had not commenced.

 

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

 

   

Nine months ended
March 31,

 
   

2023

   

2022

 
Cash paid for amounts included in the measurement of lease liabilities                

Operating cash flows from operating leases

  $ 23,355     $ 25,027  

Operating cash flows from financing leases

  $ 395     $ 389  

Operating lease assets obtained in exchange for operating lease liabilities

  $ 36,375     $ 13,508  

 

There were no non-cash financing lease obligations obtained in exchange for new financing lease assets during the nine months ended March 31, 2023 or 2022.

 

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 nine months ended March 31, 2023, we amortized an additional $1.7 million of this deferred liability as a gain within Restructuring and other impairment charges, net of gains. As of March 31, 2023, the deferred liability balance was $3.5million, with $2.6 million in Other current liabilities and $0.9 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):

 

   

March 31,

   

June 30,

 
   

2023

   

2022

 

Finished goods

  $ 110,870     $ 131,021  

Work in process

    13,563       15,098  

Raw materials

    29,287       32,490  

Inventory reserves

    (2,065 )     (2,105 )

Inventories, net

  $ 151,655     $ 176,504  

 

 

 

 

(8)

Property, Plant and Equipment

 

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

 

   

March 31,

   

June 30,

 
   

2023

   

2022

 

Land and improvements

  $ 77,876     $ 78,443  

Building and improvements

    351,271       356,622  

Machinery and equipment

    124,833       127,062  

Property, plant and equipment, gross

    553,980       562,127  

Less: accumulated depreciation and amortization

    (330,696 )     (338,597 )

Property, plant and equipment, net

  $ 223,284     $ 223,530  

 

We recorded depreciation expense of $4.0 million and $3.9 million for the three months ended March 31, 2023 and 2022, respectively. Depreciation expense was $11.7 million and $12.0 million for the nine months ended March 31, 2023 and 2022, 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 March 31, 2023 and June 30, 2022, we had $25.4 million of goodwill and $19.7million 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):

 

   

March 31,

   

June 30,

 
   

2023

   

2022

 
                 

Income taxes payable

  $ 381     $ 4,558  

Deferred liability, short-term (1)

    2,620       -  

Financing lease liabilities, short-term

    488       535  

Other current liabilities

    3,825       3,695  

Other current liabilities

  $ 7,314     $ 8,788  

 

(1)

As of March 31, 2023, the deferred liability balance associated with the sale-leaseback transaction completed on August 1, 2022 was $3.5 million, with $2.6 million in Other current liabilities and $0.9 million in Other long-term liabilities on our consolidated balance sheet. Refer to Note 6, Leases, for further disclosure on the transaction.

 

12

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 

 

 

(11)

Income Taxes

 

The Company's process for determining the provision for income taxes involves using an estimated annual effective tax rate which is based on expected annual income and statutory tax rates across the various jurisdictions in which we operate. We recorded a provision for income tax expense of $7.5 million and $27.4 million, respectively, for the three and nine months ended March 31, 2023 compared with $7.9 million and $24.4 million in the prior year comparable periods. Our consolidated effective tax rate was 25.1% and 25.4% for the three and nine months ended March 31, 2023 compared with 24.2% and 25.4% 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 March 31, 2023, we had $3.3 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 March 31, 2023 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 Interest expense and other financing costs 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 March 31, 2023 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 March 31, 2023, 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 March 31, 2023 and June 30, 2022, we were in compliance with all the covenants under the Facility.

 

Letters of Credit. At both March 31, 2023 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
March 31,

   

Nine months ended
March 31,

 
   

2023

   

2022

   

2023

   

2022

 

Gain on sale-leaseback transaction(1)

  $ (655 )   $ -     $ (3,566 )   $ -  

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

    -       (1,518 )     -       (5,431 )

Severance and other charges

    185       55       904       590  

Total Restructuring and other impairment charges, net of gains

  $ (470 )   $ (1,463 )   $ (2,662 )   $ (4,841 )

 

(1)

In August 2022, we sold and subsequently leased back a retail design center and recognized a net gain of $0.7 million and $3.6 million for the three and nine months ended March 31, 2023, respectively. The remaining deferred liability was $3.5 million as of March 31, 2023 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 March 2022, we sold a previously closed property to an independent third party for $2.6 million, which resulted in a pre-tax gain of $1.5 million. During the second quarter of fiscal 2022 we also completed the sale of our Atoka, Oklahoma distribution center for $2.8 million, less closing costs, and recognized a pre-tax gain of $2.0 million. In addition, in December 2021, we completed the sale of a property for $5.6 million, which resulted in a pre-tax gain of $1.9 million.

 

Restructuring payments made by the Company during the first nine months of fiscal 2023 were $1.0 million, which were primarily for severance and lease payments due under a retail design center that was previously exited. Excluding the deferred liability of $3.5 million related to the sale-leaseback transaction, the remaining restructuring balance as of March 31, 2023 was $0.3 million, which is anticipated to be paid during the fourth quarter of fiscal 2023.

 

 

(14)

Earnings Per Share