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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 September 30, 2024

 

or

 

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

 

For the transition period from __________ to __________

 

Commission File Number: 1-11692

logo.jpg

 

Ethan Allen Interiors Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

06-1275288

(State or other jurisdiction of incorporation or organization)

 

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

 

 

25 Lake Avenue Ext., Danbury, Connecticut

 

            06811-5286

(Address of principal executive offices)

 

       (Zip Code)

 

(203) 743-8000

(Registrant's telephone number, including area code)

 

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

 

Title of each class

 

  Trading symbol

 

 Name of exchange on which registered

Common Stock, $0.01 par value

 

         ETD

 

New York Stock Exchange

 

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

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: The number of shares outstanding of the registrant’s common stock, $0.01 par value, as of October 23, 2024, was 25,429,960.

 

 

 

  

 
 

ETHAN ALLEN INTERIORS INC.

FORM 10-Q FIRST QUARTER OF FISCAL 2025

 

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 17
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
   
Item 4. Controls and Procedures 30
   
PART II - OTHER INFORMATION  
   
Item 1. Legal Proceedings 31
   
Item 1A. Risk Factors 31
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 31
   
Item 3. Defaults Upon Senior Securities 31
   
Item 4. Mine Safety Disclosures 31
   
Item 5. Other Information 31
   
Item 6. Exhibits 32
   
SIGNATURES 32

 

1

  

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

 

   

September 30, 2024

   

June 30, 2024

 

 

 

(Unaudited)

         
ASSETS              

Current assets:

               

Cash and cash equivalents

  $ 59,234     $ 69,710  

Investments, short-term

    76,730       91,319  

Accounts receivable, net

    6,855       6,766  

Inventories, net

    143,204       142,040  

Prepaid expenses and other current assets

    27,329       22,848  

Total current assets

    313,352       332,683  
                 

Property, plant and equipment, net

    213,875       215,258  

Goodwill

    25,388       25,388  

Intangible assets

    19,740       19,740  

Operating lease right-of-use assets

    111,977       114,242  

Deferred income taxes

    874       824  

Investments, long-term

    50,426       34,772  

Other assets

    2,072       2,010  

TOTAL ASSETS

  $ 737,704     $ 744,917  
                 

LIABILITIES

               

Current liabilities:

               

Accounts payable and accrued expenses

  $ 27,221     $ 27,400  

Customer deposits

    74,054       73,471  

Accrued compensation and benefits

    19,522       20,702  

Current operating lease liabilities

    27,854       27,387  

Other current liabilities

    8,664       4,736  

Total current liabilities

    157,315       153,696  

Operating lease liabilities, long-term

    98,468       100,897  

Deferred income taxes

    2,872       3,035  

Other long-term liabilities

    4,398       4,373  

TOTAL LIABILITIES

    263,053       262,001  
                 

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, 49,638 and 49,550 shares issued; 25,430 and 25,412 shares outstanding at September 30, 2024 and June 30, 2024, respectively

    496       495  

Additional paid-in capital

    388,478       388,104  

Treasury stock, at cost: 24,208 and 24,138 shares at September 30, 2024 and June 30, 2024, respectively

    (687,003 )     (684,796 )

Retained earnings

    777,901       783,366  

Accumulated other comprehensive loss

    (5,147 )     (4,189 )

Total Ethan Allen Interiors Inc. shareholders' equity

    474,725       482,980  

Noncontrolling interests

    (74 )     (64 )

TOTAL SHAREHOLDERS' EQUITY

    474,651       482,916  

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

  $ 737,704     $ 744,917  

 

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

 
   

September 30,

 
   

2024

   

2023

 

Net sales

  $ 154,337     $ 163,892  

Cost of sales

    60,468       63,751  

Gross profit

    93,869       100,141  
                 

Selling, general and administrative expenses

    76,072       80,298  

Restructuring and other charges, net of gains

    232       1,492  

Operating income

    17,565       18,351  
                 

Interest and other income, net

    2,198       1,785  

Interest and other financing costs

    60       61  

Income before income taxes

    19,703       20,075  

Income tax expense

    4,984       5,136  

Net income

  $ 14,719     $ 14,939  
                 

Per share data

               

Basic earnings per common share

               

Net income per basic share

  $ 0.58     $ 0.59  

Basic weighted average common shares

    25,547       25,504  

Diluted earnings per common share

               

Net income per diluted share

  $ 0.57     $ 0.58  

Diluted weighted average common shares

    25,618       25,618  
                 

Comprehensive income

               

Net income

  $ 14,719     $ 14,939  

Other comprehensive loss, net of tax

               

Foreign currency translation adjustments

    (1,583 )     (552 )

Other

    615       521  

Other comprehensive loss, net of tax

    (968 )     (31 )

Comprehensive income

  $ 13,751     $ 14,908  

 

See accompanying notes to consolidated financial statements.

 

3

 
 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

 

   

Three months ended

 
   

September 30,

 
   

2024

   

2023

 
Cash Flows from Operating Activities                

Net income

  $ 14,719     $ 14,939  

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

               

Depreciation and amortization

    3,872       3,947  

Share-based compensation expense

    375       357  

Non-cash operating lease cost

    8,118       7,925  

Deferred income taxes

    (213 )     (5 )

Restructuring and other charges, net of gains

    232       1,492  

Payments on restructuring and other charges, net of proceeds

    (134 )     (166 )

Loss on disposal of property, plant and equipment

    1       35  

Other

    (260 )     24  

Changes in operating assets and liabilities:

               

Accounts receivable, net

    (89 )     524  

Inventories, net

    (1,289 )     (1,389 )

Prepaid expenses and other current assets

    (4,845 )     (3,194 )

Customer deposits

    583       163  

Accounts payable and accrued expenses

    (370 )     (363 )

Accrued compensation and benefits

    (1,180 )     (3,012 )

Operating lease liabilities

    (8,466 )     (8,200 )

Other assets and liabilities

    4,026       3,623  

Net cash provided by operating activities

    15,080       16,700  
                 

Cash Flows from Investing Activities

               

Capital expenditures

    (3,589 )     (3,697 )

Purchases of investments

    (25,247 )     (24,998 )

Proceeds from sales of investments

    26,058       30,684  

Net cash (used in) provided by investing activities

    (2,778 )     1,989  
                 

Cash Flows from Financing Activities

               

Payment of cash dividends

    (20,184 )     (21,928 )

Proceeds from employee stock plans

    -       313  

Taxes paid related to net share settlement of equity awards

    (2,207 )     (2,101 )

Payments on financing leases

    (85 )     (131 )

Net cash used in financing activities

    (22,476 )     (23,847 )
                 

Effect of exchange rate changes on cash and cash equivalents

    (211 )     (90 )
                 

Net decrease in cash, cash equivalents and restricted cash

    (10,385 )     (5,248 )

Cash, cash equivalents and restricted cash at beginning of period

    70,216       62,622  

Cash, cash equivalents and restricted cash at end of period

  $ 59,831     $ 57,374  

 

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, 2024

    49,550     $ 495     $ 388,104       24,138     $ (684,796 )   $ (4,189 )   $ 783,366     $ (64 )   $ 482,916  

Net income

    -       -       -       -       -       -       14,719       -       14,719  

Share-based compensation expense

    -       -       375       -       -       -       -       -       375  

Restricted stock vesting

    88       1       (1 )     70       (2,207 )     -       -       -       (2,207 )

Cash dividends declared

    -       -       -       -       -       -       (20,184 )     -       (20,184 )

Other comprehensive income (loss)

    -       -       -       -       -       (958 )     -       (10 )     (968 )

Balance at September 30, 2024

    49,638     $ 496     $ 388,478       24,208     $ (687,003 )   $ (5,147 )   $ 777,901     $ (74 )   $ 474,651  

 

 

                                           

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, 2023

    49,426     $ 494     $ 386,146       24,070     $ (682,646 )   $ (2,785 )   $ 769,819     $ (22 )   $ 471,006  

Net income

    -       -       -       -       -       -       14,939       -       14,939  

Common stock issued on share-based awards

    12       -       313       -       -       -       -       -       313  

Share-based compensation expense

    -       -       357       -       -       -       -       -       357  

Restricted stock vesting

    97       1       -       66       (2,101 )     -       -       -       (2,100 )

Cash dividends declared

    -       -       -       -       -       -       (21,928 )     -       (21,928 )

Other comprehensive income (loss)

    -       -       -       -       -       (25 )     -       (6 )     (31 )

Balance at September 30, 2023

    49,535     $ 495     $ 386,816       24,136     $ (684,747 )   $ (2,810 )   $ 762,830     $ (28 )   $ 462,556  

 

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

 

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. 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, and for our commitment to social responsibility and sustainable operations. Our strong network of entrepreneurial leaders and interior designers provide complimentary interior design service to our clients and sell a full range of home furnishing products 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. At September 30, 2024, there were 142 Company-operated retail design centers with 138 located in the U.S. and 4 in Canada. We also have 46 independently owned and operated Ethan Allen design centers located in the U.S., Asia, the Middle East and Europe.

 

We manufacture approximately 75% of our furniture in our North American manufacturing plants and have been recognized for product quality and craftsmanship since we were founded in 1932. At September 30, 2024 we own and operate eleven manufacturing facilities, including four manufacturing plants, one sawmill, one rough mill and one kiln dry lumberyard in the U.S., three manufacturing plants in Mexico and one manufacturing plant in Honduras.

 

 

(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.

 

The interim consolidated financial statements were prepared on a basis consistent with those reflected in our Annual Report on Form 10-K for the fiscal year ended June 30, 2024 (the “2024 Annual Report on Form 10-K”) but do not include all disclosures required by U.S. generally accepted accounting principles (“GAAP”). We derived the June 30, 2024 consolidated balance sheet from our audited financial statements included in our 2024 Annual Report on Form 10-K. 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 months ended September 30, 2024 are not necessarily indicative of results that may be expected for the entire fiscal year.

 

Use of Estimates

 

We prepare our consolidated financial statements in accordance with 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, 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 statements of cash flows and within Other assets on our consolidated balance sheets. At September 30, 2024 and June 30, 2024, we held $0.6 million and $0.5 million, respectively, of restricted cash related to our 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

 

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.

 

New Accounting Standards or Updates Adopted in Fiscal 2025 

 

Segment Reporting. In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires all public entities to provide enhanced disclosures about significant segment expenses. This accounting standard will be effective for our fiscal 2025 Form 10-K on a retrospective basis and subsequent interim periods starting in fiscal 2026. We do not anticipate the adoption of this accounting standard to have a material impact on our consolidated financial statements or related disclosures.

 

Recent Accounting Standards or Updates Not Yet Effective

 

Income Taxes. In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which enhances transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid and to improve the effectiveness of income tax disclosures. This ASU will be effective for us for fiscal 2026 and interim periods beginning in the first quarter of fiscal 2027, with early adoption permitted. We are currently evaluating the impact of this accounting standard, but do not expect it to have a material impact on our income tax disclosures.

 

No other new accounting pronouncements issued or effective at September 30, 2024 have had or are expected to have a material impact on our consolidated financial statements or related disclosures.

 

 

(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. 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.

 

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 September 30, 2024 and June 30, 2024, these amounts were immaterial.

 

Allowance for Credit Losses. Accounts receivable arise from the sale of products on trade credit terms and presented net of our allowances for credit losses. We maintain an allowance for estimated credit losses resulting from the inability of our customers to make required payments. The allowance is based on a review of specifically identified accounts in addition to an overall aging analysis. At September 30, 2024 and June 30, 2024, the allowance for credit losses was immaterial.

 

7

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 

 

Commissions. We capitalize commission fees paid to our employees 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 September 30, 2024, we had prepaid commissions of $11.1 million, which we expect to recognize to selling expense during the remainder of fiscal 2025 as SG&A expenses within our consolidated statements of comprehensive income. Prepaid commissions totaled $11.5 million at June 30, 2024.

 

Customer Deposits. 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. At September 30, 2024, we had customer deposits of $74.1 million. At June 30, 2024, we had customer deposits of $73.5 million, of which we recognized $55.2 million of revenue related to our contract liabilities during the three months ended September 30, 2024. Revenue recognized during the three months ended September 30, 2023, which was previously included in Customer deposits as of June 30, 2023, was $54.2 million. We expect that substantially all of the customer deposits at September 30, 2024 will be recognized as revenue within the next 12 months as the performance obligations are satisfied.

 

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

 

   

Three months ended September 30, 2024

   

Three months ended September 30, 2023

 
   

Wholesale

   

Retail

   

Eliminations(1)

   

Total

   

Wholesale

   

Retail

   

Eliminations(1)

   

Total

 

Upholstery(2)

  $ 45,995     $ 63,871     $ (32,881 )   $ 76,985     $ 49,265     $ 65,193     $ (35,952 )   $ 78,506  

Case goods(3)

    25,931       34,156       (17,407 )     42,680       30,335       32,301       (17,976 )     44,660  

Accents(4)

    15,053       28,037       (14,184 )     28,906       20,788       28,825       (15,211 )     34,402  

Other(5)

    (923 )     6,689       -       5,766       (958 )     7,282       -       6,324  

Total

  $ 86,056     $ 132,753     $ (64,472 )   $ 154,337     $ 99,430     $ 133,601     $ (69,139 )   $ 163,892  

 

 

(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, mattresses, bedspreads, throws, pillows, decorative accents, area rugs, flooring, wall coverings and outdoor furnishings.

 

(5)

Other includes product delivery sales, 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.

 

 

(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.

 

8

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 

 

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 September 30, 2024 and June 30, 2024, 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 at September 30, 2024 or June 30, 2024.

 

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 September 30, 2024 and June 30, 2024. There were no transfers between levels of fair value measurements during the periods presented.

 

     

Fair Value Measurements at September 30, 2024

 

Financial Assets

Balance Sheet Location

 

Level 1

   

Level 2

   

Level 3

   

Total

 

Corporate money market funds (1)

Cash and cash equivalents

  $ 23,310     $ -     $ -     $ 23,310  

U.S. Treasury bills (2)

Investments, short-term

    -       76,730       -       76,730  

U.S. Treasury notes (2)

Investments, long-term

    -       50,426       -       50,426  

Total

  $ 23,310     $ 127,156     $ -     $ 150,466  

 

     

Fair Value Measurements at June 30, 2024

 

Financial Assets

Balance Sheet Location

 

Level 1

   

Level 2

   

Level 3

   

Total

 

Corporate money market funds (1)

Cash and cash equivalents

  $ 33,487     $ -     $ -     $ 33,487  

U.S. Treasury bills (2)

Investments, short-term

    -       91,319       -       91,319  

U.S. Treasury notes (2)

Investments, long-term

    -       34,772       -       34,772  

Total

  $ 33,487     $ 126,091     $ -     $ 159,578  

 

 

(1)

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.

 

 

(2)

We have current and non-current debt securities (U.S. Treasury bills and notes) intended to enhance returns on our cash as well as to fund future obligations.

 

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 2025 or 2024.

 

Assets and Liabilities Measured at Fair Value for Disclosure Purposes Only. We had no outstanding bank borrowings at September 30, 2024 and June 30, 2024. We have historically categorized our outstanding bank borrowings as a Level 2 liability.

 

 

(6)

Leases

 

We recognize leases on our consolidated balance sheets as a right-of-use (“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. 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. 

 

9

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 

 

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

 

   

September 30,

 
   

2024

   

2023

 

Weighted average remaining lease term (in years)

           

Operating leases

  5.6     5.8  

Financing leases

  2.6     2.2  

Weighted average discount rate

           

Operating leases

  5.9%     5.7%  

Financing leases

  5.6%     3.8%  

 

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

September 30,

 
 

Statements of Comprehensive Income Location

 

2024

   

2023

 

Operating lease cost(1)

SG&A expenses

  $ 8,118     $ 7,925  

Financing lease cost

                 

Depreciation of property

SG&A expenses

    85       124  

Interest on lease liabilities

Interest and other financing costs

    13       4  

Short-term lease cost(2)

SG&A expenses

    100       58  

Variable lease cost(3)

SG&A expenses

    2,437       2,427  

Less: Sublease income

SG&A expenses

    (405 )     (288 )

Total lease expense

  $ 10,348     $ 10,250  

 

 

(1)

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

 

 

(2)

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

 

 

(3)

Variable lease payments are generally expensed as incurred, where applicable, and include certain non-lease components, such as maintenance, utilities, 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 following table reconciles the undiscounted future minimum lease payments (by year and in the aggregate) under noncancelable leases with terms of more than one year to the total lease liabilities recognized on our consolidated balance sheets at September 30, 2024 (in thousands):

 

Fiscal Year

 

Operating Leases

   

Financing Leases

 

2025 (remaining nine months)

  $ 25,838     $ 283  

2026

    31,368       374  

2027

    24,670       317  

2028

    21,421       -  

2029

    16,877       -  

Thereafter

    28,864       -  

Total undiscounted future minimum lease payments

    149,038       974  

Less: imputed interest

    (22,716 )     (65 )

Total present value of lease obligations(1)

  $ 126,322     $ 909  

 

(1)

Excludes future commitments under short-term operating lease agreements of $0.1 million at September 30, 2024.

 

At September 30, 2024, we have two operating leases for retail design centers which have not yet commenced and are therefore not part of the tables above nor included in the lease ROU assets and liabilities. These leases will commence when we obtain possession of the underlying leased asset, which is expected within the next six months. These two operating leases are each for a period of 10 years, respectively, and have aggregate undiscounted future lease payments of $4.1 million. At September 30, 2024, we did not have any financing leases that had not commenced.

 

10

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 

 

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

 

   

Three months ended
September 30,

 
   

2024

   

2023

 

Cash paid for amounts included in the measurement of lease liabilities

               

Operating cash flows from operating leases

  $ 8,466     $ 8,200  

Operating cash flows from financing leases

  $ 85     $ 131  

Operating lease assets obtained in exchange for operating lease liabilities

  $ 4,685     $ 7,680  

Financing lease obligations obtained in exchange for new financing lease assets

  $ -     $ -  

  

 

(7)

Investments

 

We have investments in debt securities intended to enhance returns on our cash as well as to fund future obligations. Our short-term investments consist of U.S. Treasury bills, with maturities of less than one year, and total $76.7 million at September 30, 2024. Our long-term investments consist of U.S. Treasury notes, with maturities ranging between one and two years, and total $50.4 million at September 30, 2024. We had $26.1 million of U.S. Treasuries mature during the first quarter of fiscal 2025, which were subsequently reinvested for $25.2 million. All unrealized gains and losses are included in Accumulated other comprehensive loss within our consolidated balance sheets.

 

Our debt securities are presented below in accordance with their stated maturities:

 

   

September 30, 2024

 
   

Amortized cost

   

Gross unrealized gains

   

Gross unrealized losses

   

Fair Value

 

Due within one year

  $ 74,960     $ 1,770     $ -     $ 76,730  

Due within one and two years

    50,160       311       (45 )     50,426  

Total

  $ 125,120     $ 2,081     $ (45 )   $ 127,156  

 

 

   

June 30, 2024

 
   

Amortized cost

   

Gross unrealized gains

   

Gross unrealized losses

   

Fair Value

 

Due within one year

  $ 89,997     $ 1,322     $ -     $ 91,319  

Due within one and two years

    34,894       -       (122 )     34,772  

Total

  $ 124,891     $ 1,322     $ (122 )   $ 126,091  

  

 

(8)

Inventories

 

Inventories are stated at the lower of cost, determined on a first-in, first-out basis, and net realizable value and are summarized as follows (in thousands):

 

   

September 30,

   

June 30,

 
   

2024

   

2024

 

Finished goods

  $ 109,301     $ 107,835  

Work in process

    12,357       11,752  

Raw materials

    23,423       24,249  

Inventory reserves

    (1,877 )     (1,796 )

Inventories, net

  $ 143,204     $ 142,040  

 

11

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 

  

 

(9)

Property, Plant and Equipment

 

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

 

   

September 30,

   

June 30,

 
   

2024

   

2024

 

Land and improvements

  $ 77,784     $ 77,049  

Building and improvements

    365,703       365,380  

Machinery and equipment

    119,957       119,434  

Property, plant and equipment, gross

    563,444       561,863  

Less: accumulated depreciation and amortization

    (349,569 )     (346,605 )

Property, plant and equipment, net

  $ 213,875     $ 215,258  

 

We recorded depreciation and amortization expense of $3.9 million during the three months ended September 30, 2024 and 2023, respectively.

 

 

(10)

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. Both goodwill and indefinite-lived intangible assets are not amortized as they are estimated to have an indefinite life. At September 30, 2024 and June 30, 2024, we had $25.4 million of goodwill and $19.7 million of indefinite-lived intangible assets, all of which is assigned to our wholesale reporting unit. Our wholesale reporting unit is principally involved in the development of the Ethan Allen brand and encompasses all aspects of design, manufacturing, sourcing, marketing, sale and distribution of the Company’s broad range of home furnishings and accents.

 

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. Consistent with the timing of prior years, we performed our annual goodwill and indefinite-lived intangible asset impairment tests during the fourth quarter of fiscal 2024 utilizing a qualitative analysis and concluded it was more likely than not the fair value of our trade name was greater than its carrying value and no impairment charge was required.

 

 

(11)

Restructuring and Other Charges, Net of Gains

 

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

 

   

Three months ended
September 30,

 
   

2024

   

2023

 

Hurricane Helene impact (1)

  $ 335     $ -  

Orleans, Vermont flood (2)

    18       2,096  

Gain on sale-leaseback transaction (3)

    (218 )     (655 )

Severance and other charges

    97       51  

Total Restructuring and other charges, net of gains

  $ 232     $ 1,492  

 

(1)

In September 2024, an Ethan Allen distribution center located in Old Fort, North Carolina was impacted from significant flooding caused by Hurricane Helene. The distribution center, which primarily focuses on shipping custom-made home furnishings to select wholesale customers, suffered losses related to damaged inventory, impaired equipment, a temporary work stoppage and a disruption in shipments. Total losses incurred during the first quarter of fiscal 2025 was a pre-tax charge of $0.3 million. Restoration efforts, including electricity and internet connectivity and a full return of the workforce, are well underway, and have helped our warehouse operations to resume normal shipping and receiving capacity.

(2)

In July 2023, our wood furniture manufacturing operations located in Orleans, Vermont sustained damage from flooding of the nearby Barton River. In addition to losses related to wood furniture inventory parts and state-of-the-art manufacturing equipment, the flooding also resulted in a temporary work stoppage for many Vermont employees and a disruption and delay of shipments. Total losses incurred from the disposal of damaged inventory, inoperable machinery equipment from water damage, facility cleanup, and restoration, during fiscal 2024 was $2.2 million, net of insurance recoveries and grant proceeds.

(3)

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 which resulted in a deferred gain of $5.2 million to be amortized over the term of the operating lease agreement which expired on July 31, 2024.

 

Restructuring payments made by the Company during the three months ended September 30, 2024 were $0.1 million, which were primarily for severance. The restructuring balance at September 30, 2024 was $0.6 million and is anticipated to be paid during the remainder of fiscal 2025.

 

12

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 

  

 

(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 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 September 30, 2024 and June 30, 2024.

 

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 at September 30, 2024, June 30, 2024, or at any time during fiscal 2025 and 2024. Since we had no outstanding borrowings during fiscal 2025 and 2024, there was no related interest expense during these periods.

 

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 2025 or 2024, 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 September 30, 2024 and June 30, 2024, we were in compliance with all the covenants under the Facility.

 

Letters of Credit. At both September 30, 2024 and June 30, 2024, there was $4.0 million of standby letters of credit outstanding under the Facility.

 

 

(13)

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 forecasted annual income and statutory tax rates across the various jurisdictions in which we operate. We recorded a provision for income tax expense of $5.0 million for the three months ended September 30, 2024 compared with $5.1 million in the prior year comparable period. Our consolidated effective tax rate was 25.3% and 25.6%, respectively, for the three months ended September 30, 2024 and 2023. 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. At September 30, 2024, we had $4.1 million of unrecognized tax benefits compared with $3.9 million at June 30, 2024. It is reasonably possible that various issues relating to $0.9 million of the total gross unrecognized tax benefits at September 30, 2024 will be resolved within the next 12 months as exams are completed or statutes expire. If recognized, $0.7 million of unrecognized tax benefits would reduce our income tax expense in the period realized.

 

13

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 

  

 

(14)

Earnings Per Share

 

The following is a reconciliation of the numerators and denominators we used in our computations of basic and diluted earnings per share (“EPS”):

 

   

Three months ended

 
   

September 30,

 

(in thousands, except per share data)

 

2024

   

2023

 

Numerator (basic and diluted):

               

Net income available to common Shareholders

  $ 14,719     $ 14,939  
                 

Denominator:

               

Basic weighted average shares common shares outstanding

    25,547       25,504  

Dilutive effect of stock options and other share-based awards (1)

    71       114  

Diluted weighted average shares common shares outstanding

    25,618       25,618  
                 

Earnings per share:

               

Basic

  $ 0.58     $ 0.59  

Diluted

  $ 0.57     $ 0.58  

 

(1)

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

 

At September 30, 2024 and 2023, total share-based awards of 43,232 and 20,088, respectively, were excluded from the diluted EPS calculations because their inclusion would have been anti-dilutive.

 

At September 30, 2024 and 2023, the number of performance units excluded from the calculation of diluted EPS were 218,954 and 165,176, 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 our 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. All unrealized gains and losses on investments are included in Accumulated Other Comprehensive Loss within our consolidated balance sheets.

 

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

 

   

September 30,
2024

   

June 30,
2024

 

Accumulated foreign currency translation adjustments

  $ (6,668 )   $ (5,085 )

Accumulated unrealized gains on investments, net of tax

    1,521       896  
    $ (5,147 )   $ (4,189 )

 

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

 

   

2024

   

2023

 

Beginning balance at July 1

  $ (4,189 )   $ (2,785 )

Other comprehensive loss, net of tax

    (968 )     (31 )

Less AOCI attributable to noncontrolling interests

    10       6  

Ending balance at September 30

  $ (5,147 )   $ (2,810 )

 

14

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 

  

 

(16)

Share-Based Compensation

 

We recognized total share-based compensation expense of $0.4 million during the three months ended September 30, 2024 and 2023, respectively. These amounts have been included in the consolidated statements of comprehensive income within SG&A expenses. At September 30, 2024, $3.2 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 during the three months ended September 30, 2024 and 2023.

 

At September 30, 2024, there were 1,134,454 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. The Plan also provides for the issuance of stock appreciation rights (“SARs”) on issued options; however, no SARs have been issued to date. All share-based awards are approved by the Compensation Committee of the Board of Directors after consideration of recommendations proposed by the Chief Executive Officer. 

 

Stock Option Activity

 

Employee Stock Option Grants. There were no stock option awards granted to employees during the three months ended September 30, 2024 and 2023.

 

Non-Employee Stock Option Grants. The Plan also provides for the grant of share-based awards to non-employee directors of the Company. During the first quarter of fiscal 2025, we granted 16,650 stock options at an exercise price of $30.03 to our non-employee directors. In the prior year period, we granted 14,330 stock options at an exercise price of $34.89. 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. 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 of Directors. At September 30, 2024, $0.2 million of total unrecognized compensation expense related to unvested non-employee stock options is expected to be recognized over a weighted average remaining period of 2.2 years.

 

A total of 116,411 stock options were outstanding at September 30, 2024, with a weighted average exercise price of $25.73 and a weighted average grant date fair value of $6.64.

 

Restricted Stock Unit Activity

 

During the first three months of fiscal 2025, we granted 23,399 non-performance based restricted stock units (“RSUs”), with a weighted average grant date fair value of $24.04. 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 three equal annual installments on the anniversary of the date of grant. In the prior year period, we granted 17,232 RSUs with a weighted average grant date fair value of $28.58 and vest in three equal annual installments on the anniversary date of the grant.

 

During the first three months of fiscal 2025, 20,282 RSUs vested leaving 49,425 RSUs unvested and outstanding at September 30, 2024, with a weighted average grant date fair value of $24.01. At September 30, 2024, $1.1 million of total unrecognized compensation expense related to unvested RSUs is expected to be recognized over a weighted average remaining period of 2.1 years.

 

Performance Stock Unit Activity

 

Payout of performance stock units (“PSUs”) 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 three months of fiscal 2025, we granted 92,669 PSUs with a weighted average grant date fair value of $23.06 compared with 73,095 PSUs at a weighted average grant date fair value of $27.58 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.

 

15

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 

 

During the first three months of fiscal 2025, 68,250 PSUs, that were previously granted in August 2020, vested and none were forfeited. At September 30, 2024, a total of 390,260 PSUs were outstanding, with a weighted average grant date fair value of $23.34. Unrecognized compensation expense at September 30, 2024, related to PSUs, was $1.9 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 2.3 years.

 

 

(17)

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. We evaluate performance of our 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 our 142 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.

 

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 income, net, interest and other financing costs, and income taxes. Sales are attributed to countries on the basis of the customer's location.

 

Segment information is provided below (in thousands):

 

   

Three months ended

 
   

September 30,

 
   

2024

   

2023

 

Net sales

               

Wholesale segment

  $ 86,056     $ 99,430  

Less: intersegment sales

    (64,472 )     (69,139 )

Wholesale sales to external customers

    21,584       30,291  

Retail segment

    132,753       133,601  

Consolidated total

  $ 154,337     $ 163,892  
                 

Income before income taxes

               

Wholesale segment

  $ 11,855     $ 14,371  

Retail segment

    7,487       5,162  

Elimination of intercompany profit (a)

    (1,777 )     (1,182 )

Operating income

    17,565       18,351  

Interest and other income, net

    2,198       1,785  

Interest and other financing costs

    60       61  

Consolidated total

  $ 19,703     $ 20,075  
                 

Depreciation and amortization

               

Wholesale segment

  $ 1,510     $ 1,602  

Retail segment

    2,362       2,345  

Consolidated total

  $ 3,872     $ 3,947  
                 

Capital expenditures

               

Wholesale segment

  $ 2,795     $ 1,456  

Retail segment

    794       2,241  

Consolidated total

  $ 3,589     $ 3,697  

 

 

(a)

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

 

16

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 

 

(in thousands)

 

September 30,

   

June 30,

 

Total Assets

 

2024

   

2024

 

Wholesale segment

  $ 381,325     $ 379,693  

Retail segment

    385,378       392,243  

Inventory profit elimination (a)

    (28,999 )     (27,019 )

Consolidated total

  $ 737,704     $ 744,917  

 

 

(a)

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

 

 

(18)

 Commitments and Contingencies

 

Commitments represent obligations, such as those for future purchases of goods or services that are not yet recorded on the consolidated balance sheets as liabilities. We record liabilities for commitments when incurred (specifically when the goods or services are received). Fluctuations in our operating results, levels of inventory on hand, the degree of success of our accounts receivable collection efforts, the timing of tax and other payments, as well as capital expenditures will impact our liquidity and cash flows in future periods. 

 

Material Cash Requirements from Contractual Obligations. As disclosed in our 2024 Annual Report on Form 10-K, we had total contractual obligations of $197.9 million, including $151.3 million related to our operating lease commitments and $30.7 million of open purchase orders at June 30, 2024. Except for $8.5 million in operating lease payments made to our landlords and $4.7 million of operating lease assets obtained in exchange for $4.7 million of operating lease liabilities during the first quarter of fiscal 2025, there were no other material changes, outside of the ordinary course of business, in our contractual obligations as previously disclosed in our 2024 Annual Report on Form 10-K.

 

Legal Matters. We are routinely party to various legal proceedings in the ordinary course of business, including investigations or as a defendant in litigation. On a quarterly basis, we review our litigation activities and determine if an unfavorable outcome to us is considered “remote,” “reasonably possible” or “probable” as defined by ASC 450, Contingencies. Where we determine an unfavorable outcome is probable and is reasonably estimable, we accrue for potential litigation losses. Although the outcome of the various claims and proceedings against us cannot be predicted with certainty, management believes that, based on information available at September 30, 2024, the likelihood is remote that any existing claims or proceedings, individually or in the aggregate, will have a material adverse effect on our financial position, results of operations or cash flows.

 

 

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”) is designed to provide a reader of our consolidated financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results.

 

The MD&A is based upon, and should be read in conjunction with, our 2024 Annual Report on Form 10-K, Current Reports on Form 8-K and other filings with the SEC, and the consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q.

 

The MD&A is presented in the following sections:

 

 

-

Cautionary Note Regarding Forward-Looking Statements

 

-

Executive Overview

 

-

Key Operating Metrics

 

-

Results of Operations

 

-

Regulation G Reconciliations of Non-GAAP Financial Measures

 

-

Liquidity

 

-

Capital Resources, including Material Cash Requirements

 

-

Other Arrangements

 

-

Significant Accounting Policies

 

-

Critical Accounting Estimates

 

-

Recent Accounting Pronouncements

 

17

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 

 

Cautionary Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q, including the MD&A, contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Generally, forward-looking statements represent management’s beliefs and assumptions concerning current expectations, projections or trends relating to results of operations, financial results, financial condition, strategic objectives and plans, expenses, dividends, share repurchases, liquidity, use of cash and cash requirements, borrowing capacity, investments, future economic performance, and our business and industry. Such forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. These forward-looking statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “continue,” “may,” “will,” “short-term,” “target,” “outlook,” “forecast,” “future,” “strategy,” “opportunity,” “would,” “guidance,” “non-recurring,” “one-time,” “unusual,” “should,” “likely,” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. We derive many of our forward-looking statements from operating budgets and forecasts, which are based upon many detailed assumptions. While the Company believes that its assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors and it is impossible for the Company to anticipate all factors that could affect actual results and matters that are identified as “short term,” “non-recurring,” “unusual,” “one-time,” or other words and terms of similar meaning may in fact recur in one or more future financial reporting periods. 

 

Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that are expected. Actual results could differ materially from those anticipated in the forward-looking statements due to a number of risks and uncertainties including, but not limited to the following: declines in certain economic conditions, which impact consumer confidence and spending; financial or operational difficulties due to competition in the residential home furnishings industry; a significant shift in consumer preference toward purchasing products online; inability to maintain and enhance the Ethan Allen brand; failure to successfully anticipate or respond to changes in consumer tastes and trends in a timely manner; inability to maintain current design center locations at current costs; failure to select and secure appropriate retail locations; disruptions in the supply chain and supply chain management; fluctuations in the price, availability and quality of raw materials and imported finished goods resulting in increased costs and production delays; competition from overseas manufacturers and domestic retailers; the number of manufacturing and distribution sites may increase exposure to business disruptions and could result in higher transportation costs; current and former manufacturing and retail operations and products are subject to increasingly stringent environmental, health and safety requirements; product recalls or product safety concerns; significant increased costs or potential liabilities as a result of environmental laws and regulations aimed at combating climate change; risk to reputation and stock price related to future disclosures on Environmental, Social and Governance matters; extensive reliance on information technology systems to process transactions, summarize results, and manage the business and that of certain independent retailers; disruptions in both primary and back-up systems; cyber-attacks and the failure to maintain adequate cyber-security systems and procedures; loss, corruption and misappropriation of data and information relating to customers; global and local economic uncertainty may materially adversely affect manufacturing operations or sources of merchandise and international operations; changes in U.S. trade and tax policies; reliance on certain key personnel, loss of key personnel or inability to hire additional qualified personnel; a shortage of qualified labor within our operations and our supply chain; potential future asset impairment charges resulting from changes to estimates or projections used to assess assets’ fair value, financial results that are lower than current estimates or determinations to close underperforming locations; access to consumer credit could be interrupted as a result of external conditions; risks associated with self-insurance related to health benefits; failure to protect the Company’s intellectual property; hazards and risks which may not be fully covered by insurance; and other factors disclosed in Part I, Item 1A, Risk Factors, in our 2024 Annual Report on Form 10-K, and elsewhere here in this Quarterly Report on Form 10-Q.

 

All forward-looking statements attributable to the Company, or persons acting on its behalf, are expressly qualified in their entirety by these cautionary statements, as well as other cautionary statements. A reader should evaluate all forward-looking statements made in this Quarterly Report on Form 10-Q in the context of these risks and uncertainties. Given the risks and uncertainties surrounding forward-looking statements, you should not place undue reliance on these statements. Many of these factors are beyond our ability to control or predict. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as otherwise required by law.

 

18

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 

 

Executive Overview

 

Who We Are. Ethan Allen is a leading interior design company, manufacturer and retailer in the home furnishings marketplace. We are a global luxury home fashion brand that is vertically integrated from product design through home delivery, which offers clients 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 complimentary interior design service to our clients and sell a full range of home furnishings through a retail network of design centers located throughout the U.S. and internationally as well as online at ethanallen.com.

 

Ethan Allen design centers represent a mix of locations operated by independent licensees and Company-operated locations. At September 30, 2024, the Company operates 142 retail design centers, 138 located in the U.S. and 4 in Canada. Our independently operated design centers are located in the U.S., Asia, the Middle East and Europe. We manufacture approximately 75% of our furniture in our North American manufacturing plants and have been recognized for product quality and craftsmanship since we were founded in 1932. At September 30, 2024, we own and operate eleven manufacturing facilities, including four manufacturing plants, one sawmill, one rough mill and a kiln dry lumberyard in the United States, three upholstery plants in Mexico and one case goods plant in Honduras. We also partner with suppliers located in the U.S., Europe and Asia to produce and import various products that support our business.

 

Business Model. Our vertical integration is a competitive advantage for us. Our North American manufacturing and logistics operations are an integral part of an overall strategy to maximize production efficiencies and maintain this competitive advantage. We strive to deliver value to our shareholders through the execution of our strategic initiatives focused on the concept of constant reinvention.  Ethan Allen has a distinct vision of classic American style with a modern perspective, which we believe differentiates us from our competitors. Our business model is to maintain continued focus on (i) providing relevant product offerings, (ii) capitalizing on the professional and personal service offered to our clients by our interior design professionals, (iii) leveraging the benefits of our vertical integration including a strong manufacturing presence in North America, (iv) regularly investing in new technologies across all aspects of our vertically integrated business, (v) maintaining a strong logistics network, (vi) communicating our messages with strong marketing campaigns, and (vii) utilizing our website, ethanallen.com, as a key marketing tool to drive traffic to our retail design centers. We aim to position Ethan Allen as a premier interior design destination and a preferred brand offering products of superior style, quality, and value to clients with a comprehensive solution for their home furnishing and interior design needs. We operate our business with an entrepreneurial attitude and treat our employees, vendors, and clients with dignity and respect.

 

Talent. At September 30, 2024, our employee count totaled 3,347, with 2,347 employees in our wholesale segment and 1,000 in our retail segment. We continue to invest in technology, which has helped us further streamline and automate processes. By leveraging technology and identifying workflow efficiencies, we have reduced our headcount by 8.5% in the last 12 months.

 

Fiscal 2025 First Quarter in Review (1). Our financial results for the first quarter were highlighted by strong margins and operating cash flow. In addition, for the second year in a row, Ethan Allen was named to Newsweek’s list of America’s Best Retailers, including the #1 retailer of Premium Furniture. We ended the quarter with cash, cash equivalents and investments of $186.4 million and no outstanding debt. Continuing our history of returning capital to shareholders, we paid a special dividend of $0.40 per share in addition to the regular quarterly cash dividend of $0.39 per share. Our vertically integrated business delivered consolidated net sales of $154.3 million, which were down 5.8% compared with a year ago due to a decline in delivered unit volume from lower available backlog and reduced production from slowing demand, lower design center traffic and fewer contract sales. Industry-wide soft demand for home furnishings and challenging economic headwinds remained throughout the quarter, which led to retail written orders being down 6.8% and wholesale written orders down 4.8%. We maintained a strong consolidated gross margin of 60.8% due to lower manufacturing raw material input costs, reduced headcount, a change in the sales mix and selective price increases. Our double-digit operating margin of 11.4% was driven by disciplined cost control, reduced headcount leveraging technology to streamline workflows. Diluted EPS was $0.57 compared with $0.58 a year ago. We ended the quarter with 188 Ethan Allen retail design centers, including 142 Company-operated and 46 independently owned and operated locations.

 

(1)

Refer to the Regulation G Reconciliations of Non-GAAP Financial Measures section within the MD&A for the reconciliation of GAAP to adjusted key financial metrics.

 

19

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 

 

Key Operating Metrics

 

A summary of our key operating metrics is presented in the following table (in millions, except per share data):

 

   

Three months ended
September 30,

         
   

2024

   

% of Sales

   

2023

   

% of Sales

   

% Chg

 

Net sales

  $ 154.3       100.0 %   $ 163.9       100.0 %     (5.8% )

Gross profit

  $ 93.9       60.8 %   $ 100.1       61.1 %     (6.3% )

Operating income

  $ 17.6       11.4 %   $ 18.4       11.2 %     (4.3% )

Adjusted operating income(1)

  $ 17.8       11.5 %   $ 19.8       12.1 %     (10.3% )

Net income

  $ 14.7       9.5 %   $ 14.9       9.1 %     (1.5% )

Adjusted net income(1)

  $ 14.9       9.6 %   $ 16.1       9.8 %     (7.2% )

Diluted EPS

  $ 0.57             $ 0.58               (1.7% )

Adjusted diluted EPS(1)

  $ 0.58             $ 0.63               (7.9% )

Cash flow from operating activities

  $ 15.1             $ 16.7               (9.7% )

Wholesale written orders

                                    (4.8% )

Retail written orders

                                    (6.8% )

 

(1)

Refer to the Regulation G Reconciliations of Non-GAAP Financial Measures section within the MD&A for the reconciliation of GAAP to adjusted key financial metrics.

 

Design center activity and geographic distribution of our retail network are as follows:

 

   

Fiscal 2025

   

Fiscal 2024

 
   

Independent

   

Company-

           

Independent

   

Company-

         
   

retailers

   

operated

   

Total

   

retailers

   

operated

   

Total

 

Retail Design Center activity:

                                               

Balance at July 1

    45       142       187       48       139       187  

New locations

    2       1       3       -       3       3  

Closures

    (1 )     (1 )     (2 )     -       (1 )     (1 )

Balance at September 30

    46       142       188       48       141       189  

Relocations (in new and closures)

    -       1       1       -       1       1  
                                                 

Retail Design Center geographic locations:

                                               

United States

    31       138       169       33       137       170  

Canada

    -       4       4       -       4       4  

Europe

    1       -       1       1       -       1  

Middle East and Asia

    14       -       14