10-Q 1 eth20220331_10q.htm FORM 10-Q eth20220331_10q.htm
0000896156 ETHAN ALLEN INTERIORS INC false --06-30 Q3 2022 0.01 0.01 1,055 1,055 0 0 0.01 0.01 150,000 150,000 49,359 49,240 25,322 25,237 24,035 24,003 2 0 0 0 0 3 5 5 0 5.0 0 0 0 3 10 4 2 3 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. The “Eliminations” column in the tables above represents the elimination of all intercompany wholesale segment sales to the retail segment in each period presented. We recorded a non-cash charge of $0.4 million during fiscal 2021 to increase our inventory obsolescence reserve for certain slow moving and discontinued finished goods inventory items based on actual demand and the most current forecasted market conditions at that time. The non-cash inventory charge was recorded in the consolidated statement of comprehensive income within the line item Cost of Sales. 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. During the prior year period, we completed the sale of two previously closed properties to independent third parties. As a result of these sales, the Company recognized a pre-tax gain of $1.2 million. All of these transactions were recorded within the line item Restructuring and other impairment charges, net of gains in the consolidated statements of comprehensive income. 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. Accents includes items such as window treatments and drapery hardware, wall décor, florals, lighting, clocks, mattresses, bedspreads, throws, pillows, decorative accents, area rugs, wall coverings and home and garden furnishings. Represents the change in wholesale profit contained in the retail segment inventory at the end of the period. Variable lease payments are generally expensed as incurred, where applicable, and include certain index-based changes in rent, certain non-lease components, such as maintenance, real estate taxes, insurance and other services provided by the lessor, and other charges included in the lease. In addition, certain of our equipment lease agreements include variable lease payments, which are based on the usage of the underlying asset. The variable portion of payments are not included in the initial measurement of the asset or lease liability due to uncertainty of the payment amount and are recorded as expense in the period incurred. Excludes future commitments under short-term operating lease agreements of $0.4 million as of March 31, 2022. We recorded a non-cash charge of $0.6 million during fiscal 2021 related to the impairment of long-lived assets held at a retail design center location. The asset group used for the impairment analysis was the individual retail design center, which represented the lowest level for which identifiable cash flows were available and largely independent of the cash flows of other groups of assets. We estimated future cash flows based on the design center-level historical results, current trends and operating and cash flow projections. The $0.6 million non-cash charge was recorded in the consolidated statement of comprehensive income within the line item Restructuring and other impairment charges, net of gains. Our investments consist of municipal bonds, commercial paper and certificates of deposit with maturities of one year or less. The fair value of our underlying investments is based on observable inputs. Our investments are classified as Level 2 and are included in Investments (short-term) within the Consolidated Balance Sheets. All unrealized gains and losses were included in Accumulated Other Comprehensive Income (Loss) within the Consolidated Balance Sheets. There were no material gross unrealized gains or losses on the investments at March 31, 2022. We did not hold any investments as of June 30, 2021. 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. We recorded charges of $0.1 million and $0.6 million during the three and nine months ended March 31, 2022, respectively. These charges primarily related to severance for terminated employees, including those at our previously sold Atoka, Oklahoma distribution center. In recent years, we have executed on many key initiatives to further optimize our manufacturing and logistics, including the closing and sale of our Atoka, Oklahoma distribution center and the consolidation of its workflow into our Old Fort, North Carolina distribution facility. These charges were recorded in the consolidated statement of comprehensive income within the line item Restructuring and other impairment charges, net of gains. Case goods includes items such as beds, dressers, armoires, tables, chairs, buffets, entertainment units, home office furniture and wooden accents. Upholstery includes fabric-covered items such as sleepers, recliners and other motion furniture, chairs, ottomans, custom pillows, sofas, loveseats, cut fabrics and leather. Other includes product delivery sales, the Ethan Allen Hotel revenues, sales of third-party furniture protection plans, membership revenue (in the prior fiscal year only) and other miscellaneous product sales less prompt payment discounts, sales allowances and other incentives. We recorded restructuring charges of $1.4 million during fiscal 2021 which related to lease exit costs within the retail segment as a result of an early termination of a lease and the closing and subsequent exit of a retail design center. Represents the wholesale profit contained in the retail segment inventory that has not yet been realized. 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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended March 31, 2022

 

or

 

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

 

For the transition period from __________ to __________

 

Commission File Number: 1-11692

ealogo.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 21, 2022, was 25,321,792.

 

 

 

 

 

ETHAN ALLEN INTERIORS INC.

FORM 10-Q THIRD QUARTER OF FISCAL 2022

 

TABLE OF CONTENTS

 

 

PART I - FINANCIAL INFORMATION

 
   

Item 1. Financial Statements

2

   

Consolidated Balance Sheets

2

   

Consolidated Statements of Comprehensive Income

3

   

Consolidated Statements of Cash Flows

4

   

Consolidated Statements of Shareholders’ Equity

5

   

Notes to Consolidated Financial Statements

6

   

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

18

   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

34

   

Item 4. Controls and Procedures

35

   

PART II - OTHER INFORMATION

 
   

Item 1. Legal Proceedings

36

   

Item 1A. Risk Factors

36

   

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

37

   

Item 3. Defaults Upon Senior Securities

37

   

Item 4. Mine Safety Disclosures

37

   

Item 5. Other Information

37

   

Item 6. Exhibits

37

   

SIGNATURES

38

 

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, 2022

  

June 30, 2021

 

 

 

(Unaudited)

     
ASSETS        

Current assets:

        

Cash and cash equivalents

 $95,045  $104,596 

Investments

  9,525   - 

Accounts receivable, net

  11,549   9,026 

Inventories, net

  182,689   143,978 

Prepaid expenses and other current assets

  42,041   37,679 

Total current assets

  340,849   295,279 
         

Property, plant and equipment, net

  223,067   231,446 

Goodwill

  25,388   25,388 

Intangible assets

  19,740   19,740 

Operating lease right-of-use assets

  102,477   108,730 

Deferred income taxes

  566   1,078 

Other assets

  2,816   1,584 

Total ASSETS

 $714,903  $683,245 
         

LIABILITIES AND SHAREHOLDERS' EQUITY

        

Current liabilities:

        

Accounts payable and accrued expenses

 $42,696  $37,786 

Customer deposits and deferred revenue

  136,425   130,635 

Accrued compensation and benefits

  19,974   23,866 

Current operating lease liabilities

  26,269   27,395 

Other current liabilities

  5,073   4,220 

Total current liabilities

  230,437   223,902 

Operating lease liabilities, long-term

  91,157   97,911 

Deferred income taxes

  6,223   5,028 

Other long-term liabilities

  3,147   4,986 

Total LIABILITIES

 $330,964  $331,827 
         

Commitments and contingencies (see Note 17)

          

SHAREHOLDERS' EQUITY

        

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

 $-  $- 

Common stock, $0.01 par value, 150,000 shares authorized, 49,359 and 49,240 shares issued; 25,322 and 25,237 shares outstanding at March 31, 2022 and June 30, 2021, respectively

  494   492 

Additional paid-in capital

  384,406   382,527 

Treasury stock, at cost: 24,037 and 24,003 shares at March 31, 2022 and June 30, 2021, respectively

  (681,834)  (680,991)

Retained earnings

  686,993   655,346 

Accumulated other comprehensive loss

  (6,083)  (5,931)

Total Ethan Allen Interiors Inc. shareholders' equity

  383,976   351,443 

Noncontrolling interests

  (37)  (25)

Total shareholders' equity

  383,939   351,418 

Total LIABILITIES AND SHAREHOLDERS' EQUITY

 $714,903  $683,245 

 

See accompanying notes to consolidated financial statements.

 

2

 
 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(In thousands, except per share data)

 

   

Three months ended

   

Nine months ended

 
   

March 31,

   

March 31,

 
   

2022

   

2021

   

2022

   

2021

 

Net sales

  $ 197,659     $ 176,962     $ 588,079     $ 506,846  

Cost of sales

    78,199       75,553       237,158       218,335  

Gross profit

    119,460       101,409       350,921       288,511  
                                 

Selling, general and administrative expenses

    88,270       81,829       259,457       233,649  

Restructuring and other impairment charges, net of gains

    (1,463 )     593       (4,841 )     1,639  

Operating income

    32,653       18,987       96,305       53,223  

Other expenses

                               

Interest and other financing costs

    51       51       147       433  

Other income (expense), net

    (10 )     57       (8 )     (378 )

Income before income taxes

    32,592       18,993       96,150       52,412  

Income tax expense

    7,878       3,385       24,389       10,568  

Net income

  $ 24,714     $ 15,608     $ 71,761     $ 41,844  
                                 

Per share data

                               

Basic earnings per common share:

                               

Net income per basic share

  $ 0.97     $ 0.62     $ 2.83     $ 1.66  

Basic weighted average common shares

    25,434       25,303       25,402       25,240  

Diluted earnings per common share:

                               

Net income per diluted share

  $ 0.97     $ 0.61     $ 2.81     $ 1.65  

Diluted weighted average common shares

    25,549       25,400       25,504       25,305  
                                 

Comprehensive income

                               

Net income

  $ 24,714     $ 15,608     $ 71,761     $ 41,844  

Other comprehensive income (loss), net of tax

                               

Foreign currency translation adjustments

    496       (576 )     (146 )     1,970  

Other

    (11 )     (9 )     (18 )     (23 )

Other comprehensive income (loss), net of tax

    485       (585 )     (164 )     1,947  

Comprehensive income

  $ 25,199     $ 15,023     $ 71,597     $ 43,791  

 

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,

 

 

 

2022

   

2021

 
Cash Flows from Operating Activities                

Net income

  $ 71,761     $ 41,844  

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

               

Depreciation and amortization

    12,040       12,359  

Share-based compensation expense

    783       999  

Non-cash operating lease cost

    22,505       22,571  

Deferred income taxes

    1,709       (624 )

Restructuring and other impairment charges, net of gains

    (4,841 )     2,028  

Restructuring payments

    (1,144 )     (1,180 )

Loss on disposal of property, plant and equipment

    25       15  

Other

    23       (88 )

Change in operating assets and liabilities

               

Accounts receivable, net

    (2,523 )     (3,481 )

Inventories, net

    (38,711 )     (9,974 )

Prepaid expenses and other current assets

    (3,551 )     (10,872 )

Customer deposits and deferred revenue

    5,790       51,219  

Accounts payable and accrued expenses

    5,330       12,387  

Accrued compensation and benefits

    (3,690 )     7,535  

Operating lease liabilities

    (25,027 )     (25,923 )

Other assets and liabilities

    (478 )     3,305  

Net cash provided by operating activities

    40,001       102,120  
                 

Cash Flows from Investing Activities

               

Proceeds from sales of property, plant and equipment

    10,613       4,913  

Capital expenditures

    (9,031 )     (10,342 )

Purchases of investments

    (18,521 )     -  

Proceeds from sales of investments

    9,000       -  

Net cash used in investing activities

    (7,939 )     (5,429 )
                 

Cash Flows from Financing Activities

               

Payments on borrowings

    -       (50,000 )

Dividend payments

    (40,114 )     (11,612 )

Proceeds from employee stock plans

    1,096       1,740  

Taxes paid related to net share settlement of equity awards

    (843 )     (76 )

Payments for debt issuance costs

    (505 )     -  

Payments on financing leases

    (389 )     (455 )

Net cash used in financing activities

    (40,755 )     (60,403 )
                 

Effect of exchange rate changes on cash and cash equivalents

    43       392  
                 

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

    (8,650 )     36,680  

Cash, cash equivalents and restricted cash at beginning of period

    104,596       72,276  

Cash, cash equivalents and restricted cash at end of period

  $ 95,946     $ 108,956  

 

See accompanying notes to consolidated financial statements.

 

4

 
 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (Unaudited)

(In thousands)

 

                                           

Accumulated

                         
                   

Additional

                   

Other

           

Non-

         
   

Common Stock

   

Paid-in

   

Treasury Stock

   

Comprehensive

   

Retained

   

Controlling

   

Total

 
   

Shares

   

Par Value

   

Capital

   

Shares

   

Amount

   

Loss

   

Earnings

   

Interests

   

Equity

 

Balance at June 30, 2021

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

Net income

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

Share-based compensation expense

    -       -       277       -       -       -       -       -       277  

Restricted stock vesting

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

Cash dividends declared

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

Other comprehensive income (loss)

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

Balance at September 30, 2021

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

Net income

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

Common stock issued on share-based awards

    41       -       813       -       -       -       -       -       813  

Share-based compensation expense

    -       -       349       -       -       -       -       -       349  

Cash dividends declared

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

Other comprehensive income (loss)

    -       -       -       -       -       11       -       (8 )     3  
                                                                         

Balance at December 31, 2021

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

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  

 

 

                                           

Accumulated

                         
                   

Additional

                   

Other

           

Non-

         
   

Common Stock

   

Paid-in

   

Treasury Stock

   

Comprehensive

   

Retained

   

Controlling

   

Total

 
   

Shares

   

Par Value

   

Capital

   

Shares

   

Amount

   

Loss

   

Earnings

   

Interests

   

Equity

 

Balance at June 30, 2020

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

Net income

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

Share-based compensation expense

    -       -       254       -       -       -       -       -       254  

Cash dividends declared

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

Other comprehensive income (loss)

    -       -       -       -       -       556       -       (9 )     547  
                                                                         

Balance at September 30, 2020

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

Net income

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

Common stock issued on share-based awards

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

Share-based compensation expense

    -       -       457       -       -       -       -       -       457  

Cash dividends declared

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

Other comprehensive income (loss)

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

Balance at December 31, 2020

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

Net income

    -       -       -       -       -       -       15,608       -       15,608  

Common stock issued on share-based awards

    -       -       107       -       -       -       -       -       107  

Share-based compensation expense

    -       -       288       -       -       -       -       -       288  

Cash dividends declared

    -       -       -       -       -       -       (6,328 )     -       (6,328 )

Restricted stock vesting

    -       -       -       3       (76 )     -       -       -       (76 )

Other comprehensive income (loss)

    -       -       -       -       -       (576 )     -       (9 )     (585 )

Balance at March 31, 2021

    49,173     $ 492     $ 381,038       24,003     $ (680,992 )   $ (6,471 )   $ 662,535     $ (24 )   $ 356,578  

 

See accompanying notes to consolidated financial statements.

 

 

5

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

(1)

Organization and Nature of Business

 

Organization

 

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

 

Nature of Business

 

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

 

Ethan Allen design centers represent a mix of locations operated by independent licensees and Company-operated locations. As of  March 31, 2022, the Company operates 141 retail design centers with 137 located in the United States and four in Canada. Our independently operated design centers are located in the United States, Asia, the Middle East and Europe. We also own and operate ten manufacturing facilities in the United States, Mexico and Honduras, including one sawmill, one rough mill and a lumberyard. Approximately 75% of our products are manufactured or assembled in these North American facilities. We also contract with various suppliers located in Europe, Asia, and various other countries that produce products that support our business.

 

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

 

The global coronavirus (“COVID-19”) pandemic continues to disrupt several segments of the economy and has caused, and continues to cause, impact to our business. Our design centers are open and demand for our products continues to be strong as customers allocate greater amounts of discretionary spending to home furnishings than at the start of the COVID-19 pandemic. Since our manufacturing facilities re-opened in May 2020, we have ramped up and increased production capacity by adding headcount as well as second shifts and weekend production shifts to our North American plants. We continue to experience strong written orders taken at both the retail and wholesale segments, and as a result, our current order backlog increased during the third quarter of fiscal 2022 and is approximately 25% higher compared with a year ago.

 

While we continue to increase production, we continue to experience ongoing logistical challenges that we, as well as the entire home furnishings industry, have faced resulting from COVID-19 related supply chain disruptions creating delays in order fulfillment. Our focus on inventory and supply chain management is critical as we balance the need to maintain supply chain flexibility to help ensure competitive lead times with the risk of inventory shortage and obsolescence. In addition, ocean freight capacity issues continue to persist worldwide due to the ongoing COVID-19 pandemic, which has resulted in price increases per shipping container.

 

The COVID-19 pandemic also continues to expose us to greater market risk as a result of increases in the cost of raw materials that we use in our manufacturing processes, principally plywood, fabric and foam products. These raw materials have been, and continue to be, subject to rising inflationary pressures that are partially attributable to the COVID-19 pandemic and which have led to increased production costs. As commodity prices (notably, fuel costs) have continued to rise during the third quarter of fiscal 2022, we will continue to evaluate whether further price increases to our customers to offset these costs are warranted.

 

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

 

6

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

 

(2)

Interim Basis of Presentation

 

Principles of Consolidation

 

Ethan Allen conducts business globally and has strategically aligned its business into two reportable segments: wholesale and retail. These two segments represent strategic business areas of our vertically integrated enterprise that operate separately and provide their own distinctive services. The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Our consolidated financial statements also include the accounts of an entity in which we are a majority shareholder with the power to direct the activities that most significantly impact the entity’s performance. Noncontrolling interest amounts in the entity are immaterial and included in the Consolidated Statements of Comprehensive Income within Other income (expense), net. All intercompany activity and balances have been eliminated from the consolidated financial statements. In our opinion, all adjustments, consisting only of normal recurring adjustments necessary for fair presentation, have been included in the consolidated financial statements. The results of operations for the three and nine months ended March 31, 2022 are not necessarily indicative of results that  may be expected for the entire fiscal year. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in Annual Report on Form 10-K for the fiscal year ended June 30, 2021 (the “2021 Annual Report on Form 10-K”).

 

Use of Estimates

 

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

 

Restricted Cash

 

We present restricted cash as a component of total cash and cash equivalents as presented on our consolidated statement of cash flows and within Other Assets on our consolidated balance sheet. As of March 31, 2022, we held $0.9 million of restricted cash related to our Ethan Allen insurance captive. We did not hold any restricted cash as of June 30, 2021.

 

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

 

 

(3)

Recent Accounting Pronouncements

 

New Accounting Standards or Updates Adopted in Fiscal 2022

 

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

 

Recent Accounting Standards or Updates Not Yet Effective

 

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

 

Derivatives and Hedging. In March 2022, the FASB issued ASU 2022-01, Derivatives and Hedging (Topic 801): Fair Value Hedging Portfolio Layer Method, which expands the current single-layer hedging model to allow multiple-layer hedges of a single closed portfolio of prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments under the method. This accounting standards update will be effective for us beginning in the first quarter of fiscal 2024. We are currently evaluating the impact of this accounting standard, but do not expect it to have a material impact on our consolidated financial statements.

 

No other new accounting pronouncements issued or effective as of March 31, 2022 have had or are expected to have a material impact on our consolidated financial statements.

 

7

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

 

(4)

Revenue Recognition

 

Our reported revenue (net sales) consists substantially of product sales. We report product sales net of discounts and recognize them at the point in time when control transfers to the customer. For sales to our customers in our wholesale segment, control typically transfers when the product is shipped. The majority of our shipping agreements are freight-on-board shipping point and risk of loss transfers to our wholesale customer once the product is out of our control. Accordingly, revenue is recognized for product shipments on third-party carriers at the point in time that our product is loaded onto the third-party container or truck. For sales in our retail segment, control generally transfers upon delivery to the customer. As our contracts with customers are typically less than one year in length and do not have significant financing components, we do not adjust promised consideration.

 

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

 

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

 

Returns and Allowances. Estimated refunds for returns and allowances are based on our historical return patterns. We record these estimated sales refunds on a gross basis rather than on a net basis and have recorded an asset for product we expect to receive back from customers in Prepaid expenses and other current assets and a corresponding refund liability in Other current liabilities on our consolidated balance sheets. At March 31, 2022 and June 30, 2021, these amounts were immaterial.

 

Allowance for Doubtful Accounts. Accounts receivable arise from the sale of products on trade credit terms and is presented net of allowance for doubtful accounts. We maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. The allowance for doubtful accounts is based on a review of specifically identified accounts in addition to an overall aging analysis. Judgments are made with respect to the collectability of accounts receivable based on historical experience and current economic trends. On a monthly basis, we review all significant accounts as to their past due balances, as well as collectability of the outstanding trade accounts receivable for possible write-off. It is our policy to write-off the accounts receivable against the allowance account when we deem the receivable to be uncollectible. Additionally, we review orders from retailers that are significantly past due, and we ship product only when our ability to collect payment from our customer for the new order is probable. At March 31, 2022 and June 30, 2021, the allowance for doubtful accounts was immaterial.

 

Commissions. We capitalize commission fees paid to our associates as contract assets within Prepaid expenses and other current assets on our consolidated balance sheets. These prepaid commissions are subsequently recognized as a selling expense upon delivery (when we have transferred control of our product to our customer). At March 31, 2022, we had prepaid commissions of $24.2 million, which we expect to recognize 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 receive deposits from customers before we have transferred control of our product to our customers, resulting in contract liabilities. These customer deposits are reported as a current liability in Customer deposits and deferred revenue on our consolidated balance sheets. At June 30, 2021, we had customer deposits of $130.6 million, of which we recognized $9.8 million and $122.8 million as net sales upon delivery to the customer during the three and nine months ended March 31, 2022. Customer deposits totaled $136.4 million at March 31, 2022. 

 

8

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 

 

The following table disaggregates our net sales by product category by segment for the three months ended March 31, 2022 (in thousands):

 

   

Wholesale

   

Retail

   

Eliminations(1)

   

Total

 

Upholstery(2)

  $ 64,993     $ 83,819     $ (46,854 )   $ 101,958  

Case goods(3)

    35,919       42,625       (22,632 )     55,912  

Accents(4)

    22,451       32,535       (20,616 )     34,370  

Other(5)

    (2,329 )     7,748       -       5,419  

Total

  $ 121,034     $ 166,727     $ (90,102 )   $ 197,659  

 

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

 

   

Wholesale

   

Retail

   

Eliminations(1)

   

Total

 

Upholstery(2)

  $ 57,448     $ 71,297     $ (36,850 )   $ 91,895  

Case goods(3)

    33,054       38,225       (20,231 )     51,048  

Accents(4)

    19,022       28,883       (15,173 )     32,732  

Other(5)

    (1,704 )     2,991       -       1,287  

Total

  $ 107,820     $ 141,396     $ (72,254 )   $ 176,962  

 

The following table disaggregates our net sales by product category by segment for the nine months ended March 31, 2022 (in thousands):

 

   

Wholesale

   

Retail

   

Eliminations(1)

   

Total

 

Upholstery(2)

  $ 187,424     $ 251,308     $ (135,003 )   $ 303,729  

Case goods(3)

    104,520       130,956       (70,097 )     165,379  

Accents(4)

    59,944       97,769       (54,520 )     103,193  

Other(5)

    (5,485 )     21,263       -       15,778  

Total

  $ 346,403     $ 501,296     $ (259,620 )   $ 588,079  

 

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

 

   

Wholesale

   

Retail

   

Eliminations(1)

   

Total

 

Upholstery(2)

  $ 163,756     $ 203,069     $ (104,118 )   $ 262,707  

Case goods(3)

    92,777       109,886       (57,163 )     145,500  

Accents(4)

    55,021       82,638       (42,872 )     94,787  

Other(5)

    (4,850 )     8,702       -       3,852  

Total

  $ 306,704     $ 404,295     $ (204,153 )   $ 506,846  

 

 

 

(1)

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

 

 

(2)

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

 

 

(3)

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

 

 

(4)

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

 

 

(5)

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

 

 

(5)

Fair Value Measurements

 

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

 

9

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 

 

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

 

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

 

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

 

Level 3 – applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities. We held no Level 3 assets or liabilities as of March 31, 2022 or June 30, 2021.

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis. The following tables show, by level within the fair value hierarchy, our assets and liabilities that are measured at fair value on a recurring basis at March 31, 2022 and June 30, 2021. We did not have any transfers between levels of fair value measurements during the periods presented.

 

  

Fair Value Measurements at March 31, 2022

 

Assets

 

Level 1

  

Level 2

  

Level 3

  

Balance

 

Corporate money market funds(1)

 $32,152  $-  $-  $32,152 

Investments(2)

  -   9,525   -   9,525 

Total

 $32,152  $9,525  $-  $41,677 

 

  

Fair Value Measurements at June 30, 2021

 

Assets

 

Level 1

  

Level 2

  

Level 3

  

Balance

 

Corporate money market funds(1)

 $70,247  $-  $-  $70,247 

Investments(2)

  -   -   -   - 

Total

 $70,247  $-  $-  $70,247 

 

 

(1)

We invest excess cash in money market accounts and short-term investments. Our corporate money market funds are readily convertible into cash and the net asset value of each fund on the last day of the quarter is used to determine its fair value. Our corporate money market funds are classified as Level 1 assets and are included in Cash and cash equivalents within the consolidated balance sheets.

 

 

(2)

Our investments consist of municipal bonds, commercial paper and certificates of deposit with maturities of one year or less. The fair value of our underlying investments is based on observable inputs. Our investments are classified as Level 2 and are included in Investments (short-term) within the consolidated balance sheets. All unrealized gains and losses were included in Accumulated Other Comprehensive Income (Loss) within the consolidated balance sheets. There were no material gross unrealized gains or losses on the investments at March 31, 2022. We did not hold any investments as of June 30, 2021.

 

As of March 31, 2022 and June 30, 2021, we did not have any outstanding bank borrowings, which we historically have categorized as a Level 2 liability. There were no investments that have been in a continuous loss position for more than one year, and there have been no other-than-temporary impairments recognized.

 

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

 

Assets and Liabilities Measured at Fair Value for Disclosure Purposes Only. We had no outstanding bank borrowings as of March 31, 2022 and June 30, 2021.

 

10

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

 

(6)

Leases

 

We have operating leases for many of our design centers that expire at various dates through fiscal 2040. In addition, we also lease certain tangible assets, including computer equipment and vehicles with initial lease terms ranging from three to five years. We determine if a contract contains a lease at inception based on our right to control the use of an identified asset and our right to obtain substantially all of the economic benefits from the use of that identified asset. Certain operating leases have renewal options and rent escalation clauses as well as various purchase options. We assess these options to determine if we are reasonably certain of exercising these options based on all relevant economic and financial factors. Any options that meet these criteria are included in the lease term at lease commencement. Most of our leases do not have an interest rate implicit in the lease. As a result, for purposes of measuring our ROU asset and lease liability, we determine our incremental borrowing rate by computing the rate of interest that we would have to pay to (i) borrow on a collateralized basis (ii) over a similar term (iii) at an amount equal to the total lease payments and (iv) in a similar economic environment. The incremental borrowing rate is subsequently reassessed upon a modification to the lease agreement. Some of our leases contain variable lease payments based on a consumer price index or percentage of sales, which are excluded from the measurement of the lease liability.

 

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

 

   

March 31,

 
   

2022

   

2021

 

Weighted average remaining lease term (in years)

               

Operating leases

    5.9       6.3  

Financing leases

    1.9       2.9  

Weighted average discount rate

               

Operating leases

    4.1 %     4.2 %

Financing leases

    2.2 %     2.3 %

 

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

 

     

Three months ended

March 31,

   

Nine months ended

March 31,

 
 

Statement of Comprehensive Income Location

 

2022

   

2021

   

2022

   

2021

 

Operating lease cost(1)

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

  $ 7,557     $ 7,618     $ 22,505     $ 22,571  

Financing lease cost

                                 

Depreciation of property

SG&A expenses

    119       247       371       542  

Interest on lease liabilities

Interest and other financing costs

    5       9       18       16  

Short-term lease cost(2)

SG&A expenses

    361       180       978       667  

Variable lease cost(3)

SG&A expenses

    2,417       2,362       7,101       6,975  

Less: Sublease income

SG&A expenses

    (292 )     (411 )     (1,091 )     (1,303 )

Total lease expense

  $ 10,167     $ 10,005     $ 29,882     $ 29,468  

 

 

(1)

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

 

 

(2)

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

 

 

(3)

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

 

11

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 

 

The table below reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under noncancelable leases with terms of more than one year to the total lease liabilities recognized on the consolidated balance sheets as of March 31, 2022 (in thousands):

 

Fiscal Year

 

Operating Leases

   

Financing Leases

 

2022 (remaining three months)

  $ 8,460     $ 123  

2023

    28,780       490  

2024

    23,678       320  

2025

    19,912       8  

2026

    16,189       -  

Thereafter

    36,572       -  

Total undiscounted future minimum lease payments

    133,591       941  

Less: imputed interest

    (16,165 )     (19 )

Total present value of lease obligations(1)

  $ 117,426     $ 922  

 

 

(1)

Excludes future commitments under short-term operating lease agreements of $0.4 million as of March 31, 2022.

 

As of  March 31, 2022, we did not have any operating leases which have not yet commenced. However, we have one financing lease which has not yet commenced and is therefore neither included in the tables above nor in the lease right-of-use assets and liabilities. The financing lease is for a period of five years and has aggregate undiscounted future lease payments of $0.4 million. This lease will commence when we obtain possession of the underlying leased asset, which is expected to occur in the fourth quarter of fiscal 2022.

 

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

 

   

Nine months ended

March 31,

 
   

2022

   

2021

 

Cash paid for amounts included in the measurement of lease liabilities

               

Operating cash flows from operating leases

  $ 25,027     $ 25,923  

Operating cash flows from financing leases

  $ 389     $ 455  

Operating lease assets obtained in exchange for operating lease liabilities

  $ 13,508     $ 23,672  

 

There were no non-cash financing lease obligations obtained in exchange for new financing lease assets during the nine months ended March 31, 2022. Financing lease obligations exchanged for new financing lease assets totaled $1.3 million during the same prior year period.

 

 

(7)

Inventories

 

Inventories are summarized as follows (in thousands):

 

   

March 31,

   

June 30,

 
   

2022

   

2021

 

Finished goods

  $ 137,338     $ 106,924  

Work in process

    15,835       11,612  

Raw materials

    31,362       28,235  

Inventory reserves

    (1,846 )     (2,793 )

Inventories, net

  $ 182,689     $ 143,978  

 

12

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

 

(8)

Property, Plant and Equipment

 

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

 

   

March 31,

   

June 30,

 
   

2022

   

2021

 

Land and improvements

  $ 78,466     $ 79,478  

Building and improvements

    355,406       358,469  

Machinery and equipment

    124,493       127,673  

Property, plant and equipment, gross

    558,365       565,620  

Less: accumulated depreciation and amortization

    (335,298 )     (334,174 )

Property, plant and equipment, net

  $ 223,067     $ 231,446  

 

 

(9)

Goodwill and Intangible Assets

 

Our goodwill and intangible assets are comprised of goodwill, which represents the excess of cost over the fair value of net assets acquired, and our Ethan Allen trade name and related trademarks. At March 31, 2022 and June 30, 2021, we had $25.4 million of goodwill and $19.7 million of indefinite-lived intangible assets, all of which are recorded in our wholesale segment.

 

Both goodwill and indefinite-lived intangible assets are not amortized as they are estimated to have an indefinite life. We test our wholesale goodwill and indefinite-lived intangibles for impairment on an annual basis in the fourth quarter of each fiscal year, and more frequently if events or changes in circumstances indicate that it might be impaired. We performed our annual goodwill impairment test during the fourth quarter of fiscal 2021, consistent with the timing of prior years. We concluded it was more likely than not that the fair value was greater than the respective carrying value and no impairment charge was required.

 

 

(10)

Income Taxes

 

We recorded income tax expense of $7.9 million and $24.4 million, respectively, for the three and nine months ended March 31, 2022 compared with $3.4 million and $10.6 million in the prior year comparable periods. Our consolidated effective tax rate was 24.2% and 25.4% for the three and nine months ended March 31, 2022 compared with 17.8% and 20.2% in the prior year periods. Our effective tax rate varies from the 21% federal statutory rate primarily due to state taxes. The increase in the effective tax rate compared with the prior year was primarily due to a reduction in our valuation allowance on retail state and local deferred tax assets in the prior year.

 

We recognize interest and penalties related to income tax matters as a component of income tax expense. As of March 31, 2022, we had $2.6 million of unrecognized tax benefits compared with $2.0 million as of June 30, 2021. It is reasonably possible that various issues relating to approximately $0.4 million of the total gross unrecognized tax benefits as of March 31, 2022 will be resolved within the next 12 months as exams are completed or statutes expire. If recognized, approximately $0.4 million of unrecognized tax benefits would reduce our income tax expense in the period realized.

 

 

(11)

Credit Agreement

 

On  January 26, 2022, the Company and most of its domestic subsidiaries (the “Loan Parties”) entered into a Third Amended and Restated Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. as administrative agent and syndication agent and Capital One, National Association, as documentation agent. The Credit Agreement amends and restates the Second Amended and Restated Credit Agreement, dated as of December 21, 2018, as amended. The Credit Agreement provides for a $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