Company Quick10K Filing
Ethan Allen Interiors
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 27 $550
10-Q 2019-11-04 Quarter: 2019-09-30
10-K 2019-08-09 Annual: 2019-06-30
10-Q 2019-04-29 Quarter: 2019-03-31
10-Q 2019-01-28 Quarter: 2018-12-31
10-Q 2018-10-24 Quarter: 2018-09-30
10-K 2018-08-02 Annual: 2018-06-30
10-Q 2018-04-27 Quarter: 2018-03-31
10-Q 2018-01-25 Quarter: 2017-12-31
10-Q 2017-10-26 Quarter: 2017-09-30
10-K 2017-08-02 Annual: 2017-06-30
10-Q 2017-04-27 Quarter: 2017-03-31
10-Q 2017-01-26 Quarter: 2016-12-31
10-Q 2016-10-26 Quarter: 2016-09-30
10-K 2016-08-08 Annual: 2016-06-30
10-Q 2016-04-26 Quarter: 2016-03-31
10-Q 2016-01-27 Quarter: 2015-12-31
10-Q 2015-10-28 Quarter: 2015-09-30
10-K 2015-08-12 Annual: 2015-06-30
10-Q 2015-04-27 Quarter: 2015-03-31
10-Q 2015-01-28 Quarter: 2014-12-31
10-Q 2014-10-30 Quarter: 2014-09-30
10-K 2014-08-15 Annual: 2014-06-30
10-Q 2014-05-01 Quarter: 2014-03-31
10-Q 2014-01-31 Quarter: 2013-12-31
10-Q 2013-10-31 Quarter: 2013-09-30
10-K 2013-08-16 Annual: 2013-06-30
10-Q 2013-05-01 Quarter: 2013-03-31
10-Q 2013-02-01 Quarter: 2012-12-31
10-Q 2012-11-02 Quarter: 2012-09-30
10-K 2012-08-16 Annual: 2012-06-30
10-Q 2012-05-03 Quarter: 2012-03-31
10-Q 2012-02-02 Quarter: 2011-12-31
10-Q 2011-11-02 Quarter: 2011-09-30
10-K 2011-08-18 Annual: 2011-06-30
10-Q 2011-05-05 Quarter: 2011-03-31
10-Q 2011-02-02 Quarter: 2010-12-31
10-Q 2010-11-03 Quarter: 2010-09-30
10-K 2010-08-19 Annual: 2010-06-30
10-Q 2010-05-10 Quarter: 2010-03-31
10-Q 2010-02-05 Quarter: 2009-12-31
8-K 2020-01-13 Regulation FD, Exhibits
8-K 2019-11-13 Shareholder Vote
8-K 2019-11-04 Earnings, Exhibits
8-K 2019-10-17
8-K 2019-07-31 Earnings, Exhibits
8-K 2019-04-29 Earnings, Exhibits
8-K 2019-04-17 Regulation FD, Exhibits
8-K 2019-04-16 Officers
8-K 2019-02-25 Regulation FD
8-K 2019-02-11 Regulation FD
8-K 2019-02-05 Officers
8-K 2019-01-28 Earnings, Exhibits
8-K 2018-12-21 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-11-14 Shareholder Vote
8-K 2018-10-24 Earnings, Exhibits
8-K 2018-10-11 Regulation FD, Exhibits
8-K 2018-10-04 Officers
8-K 2018-07-25 Earnings, Exhibits
8-K 2018-06-13 Regulation FD
8-K 2018-04-26 Earnings, Exhibits
8-K 2018-04-24 Regulation FD, Exhibits
8-K 2018-04-17 Regulation FD, Exhibits
8-K 2018-04-05 Regulation FD, Exhibits
8-K 2018-02-07 Regulation FD, Exhibits
8-K 2018-01-24 Earnings, Exhibits
8-K 2018-01-16 Regulation FD, Exhibits
ETH 2019-09-30
Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 ex_162401.htm
EX-31.2 ex_162402.htm
EX-32.1 ex_162403.htm
EX-32.2 ex_162404.htm

Ethan Allen Interiors Earnings 2019-09-30

ETH 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
CODI 949 2,370 1,369 1,733 584 109 227 1,869 34% 8.2 5%
TILE 932 1,454 1,102 1,311 476 51 153 1,520 36% 10.0 4%
CSWI 862 367 90 363 167 49 79 874 46% 11.1 13%
KBAL 616 365 148 768 255 39 66 542 33% 8.2 11%
HOME 601 2,891 2,048 1,270 392 65 133 931 31% 7.0 2%
ETH 550 510 146 747 409 32 60 530 55% 8.9 6%
TCS 349 1,122 860 909 529 24 88 610 58% 6.9 2%
HOFT 248 401 133 660 134 30 47 267 20% 5.6 8%
HBB 240 306 247 732 181 5 20 239 25% 12.2 2%
TTS 201 417 279 349 245 3 39 259 70% 6.6 1%

10-Q 1 eth20190930_10q.htm FORM 10-Q eth20190930_10q.htm
 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2019

 

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

_________________________________________________

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

 

New York Stock Exchange

 

ETH

(Title of each class)

 

(Name of each exchange on which registered)

 

(Trading symbol)

 

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.     [X] 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).   [X] 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                    [X]

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     [X] No

 

The number of shares outstanding of the registrant’s common stock, $0.01 par value, as of October 28, 2019 was 26,589,445.

 

 

 

 

 

Table of Contents

 

PART I - FINANCIAL INFORMATION  
   
Item 1. Financial Statements 2
   
Consolidated Balance Sheets (Unaudited)  2
   
Consolidated Statements of Comprehensive Income (Unaudited) 3
   
Consolidated Statements of Cash Flows (Unaudited)  4
   

Consolidated Statements of Shareholders’ Equity (Unaudited) 

5
   

Notes to Consolidated Financial Statements (Unaudited)

6
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations  18
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
   
Item 4. Controls and Procedures 28
   
Item 1. Legal Proceedings 29
   
Item 1A. Risk Factors 29
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
   
Item 3. Defaults Upon Senior Securities 29
   
Item 4. Mine Safety Disclosures 29
   
Item 5. Other Information 29
   
Item 6. Exhibits 30
   
SIGNATURES 31

 

1

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

Consolidated Balance Sheets (Unaudited)

(In thousands, except par value)

 

   

September 30, 2019

   

June 30, 2019

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 45,876     $ 20,824  

Accounts receivable, net

    12,345       14,247  

Inventories, net

    151,421       162,389  

Prepaid expenses and other current assets

    23,189       18,830  

Total current assets

    232,831       216,290  
                 

Property, plant and equipment, net

    244,574       245,246  

Goodwill

    25,388       25,388  

Intangible assets

    19,740       19,740  

Operating lease right-of-use assets

    127,837       -  

Deferred income taxes

    2,060       2,108  

Other assets

    1,469       1,579  

Total assets

  $ 653,899     $ 510,351  
                 

LIABILITIES AND SHAREHOLDERS' EQUITY

               

Current liabilities:

               

Accounts payable and accrued expenses

  $ 29,020     $ 35,485  

Customer deposits

    65,195       56,714  

Accrued compensation and benefits

    22,508       21,327  

Short-term debt

    -       550  

Current operating lease liabilities

    30,662       -  

Other current liabilities

    12,514       8,750  

Total current liabilities

    159,899       122,826  

Long-term debt

    -       516  

Operating lease liabilities, long-term

    119,235       -  

Deferred income taxes

    1,037       1,069  

Other long-term liabilities

    3,225       22,011  

Total liabilities

  $ 283,396     $ 146,422  
                 

Commitments and contingencies (see Note 14)

               

Shareholders' equity:

               

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

  $ -     $ -  

Common stock, $0.01 par value, 150,000 shares authorized, 49,050 and 49,049 shares issued; 26,588 and 26,587 shares outstanding at September 30, 2019 and June 30, 2019, respectively

    491       491  

Additional paid-in capital

    378,082       377,913  

Treasury stock, at cost: 22,462 and 22,462 shares at September 30, 2019 and June 30, 2019, respectively

    (656,597 )     (656,597 )

Retained earnings

    654,621       647,710  

Accumulated other comprehensive loss

    (6,150 )     (5,651 )

Total Ethan Allen Interiors Inc. shareholders' equity

    370,447       363,866  

Noncontrolling interests

    56       63  

Total shareholders' equity

    370,503       363,929  

Total liabilities and shareholders' equity

  $ 653,899     $ 510,351  

 

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,

 
   

2019

   

2018

 

Net sales

  $ 173,921     $ 187,785  

Cost of sales

    80,127       86,335  

Gross profit

    93,794       101,450  
                 

Selling, general and administrative expenses

    86,010       89,651  

Restructuring and impairment charges (gains)

    (10,857 )     -  

Operating income

    18,641       11,799  

Interest income, net of interest (expense)

    19       (27 )

Income before income taxes

    18,660       11,772  

Provision for income taxes

    4,554       2,932  

Net income

  $ 14,106     $ 8,840  
                 

Per share data

               

Basic earnings per common share:

               

Net income per basic share

  $ 0.53     $ 0.33  

Basic weighted average common shares

    26,713       26,539  

Diluted earnings per common share:

               

Net income per diluted share

  $ 0.53     $ 0.33  

Diluted weighted average common shares

    26,750       26,940  
                 

Comprehensive income

               

Net income

  $ 14,106     $ 8,840  

Other comprehensive income (loss), net of tax

               

Foreign currency translation adjustments

    (499 )     1,247  

Other

    (7 )     (26 )

Other comprehensive income (loss), net of tax

    (506 )     1,221  

Comprehensive income

  $ 13,600     $ 10,061  

 

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,

 

 

 

2019

   

2018

 
Cash Flows from Operating Activities                

Net income

  $ 14,106     $ 8,840  

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

               

Depreciation and amortization

    3,976       5,000  

Shared-based compensation expense

    151       491  

Non-cash operating lease cost

    8,022       -  

Deferred income taxes

    564       99  

Restructuring and impairment charges (gains)

    (6,717 )     -  

Restructuring payments

    (4,071 )     -  

Loss on disposal of property, plant and equipment

    9       12  

Other

    79       104  

Change in operating assets and liabilities, net of effects of acquisitions:

               

Accounts receivable, net

    1,767       (408 )

Inventories

    8,999       (2,707 )

Prepaid expenses and other current assets

    (3,980 )     (1,538 )

Customer deposits

    7,943       6,328  

Accounts payable and accrued expenses

    (4,763 )     1,336  

Accrued compensation and benefits

    2,734       4,592  

Operating lease liabilities

    (8,066 )     -  

Other assets and liabilities

    2,643       2,291  

Net cash provided by operating activities

    23,396       24,440  
                 

Cash Flows from Investing Activities

               

Proceeds from disposal of property, plant and equipment

    11,615       -  

Capital expenditures

    (3,414 )     (2,777 )

Acquisitions, net of cash acquired

    (1,281 )     -  

Other investing activities

    20       32  

Net cash provided by (used in) investing activities

    6,940       (2,745 )
                 

Cash Flows from Financing Activities

               

Payments on debt and finance lease liabilities

    (137 )     (165 )

Payment of cash dividends

    (5,075 )     (5,065 )

Other financing activities

    18       637  

Net cash used in financing activities

    (5,194 )     (4,593 )
                 

Effect of exchange rate changes on cash and cash equivalents

    (90 )     125  
                 

Net increase in cash and cash equivalents

    25,052       17,227  

Cash and cash equivalents at beginning of period

    20,824       22,363  

Cash and cash equivalents at end of period

  $ 45,876     $ 39,590  

 

See accompanying notes to consolidated financial statements.

 

4

 

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Consolidated Statements of Shareholders’ Equity (Unaudited)

 (In thousands)

 

Three months ended September 30, 2019

 
                                           

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, 2019

    49,049     $ 491     $ 377,913       22,462     $ (656,597 )   $ (5,651 )   $ 647,710     $ 63     $ 363,929  

Net income

    -       -       -       -       -       -       14,106       -       14,106  

Common stock issued on share-based awards

    1       -       18       -       -       -       -       -       18  

Share-based compensation expense

    -       -       151       -       -       -       -       -       151  

Impact of ASU 2016-02 adoption, net of tax

    -       -       -       -       -       -       (1,585 )     -       (1,585 )

Cash dividends declared

    -       -       -       -       -       -       (5,610 )     -       (5,610 )

Other comprehensive income (loss)

    -       -       -       -       -       (499 )     -       (7 )     (506 )

Balance at September 30, 2019

    49,050     $ 491     $ 378,082       22,462     $ (656,597 )   $ (6,150 )   $ 654,621     $ 56     $ 370,503  

 

 

Three months ended September 30, 2018

 
                                           

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, 2018

    48,989     $ 490     $ 376,950       22,460     $ (656,551 )   $ (6,171 )   $ 669,013     $ 139     $ 383,870  

Net income

    -       -       -       -       -       -       8,840       -       8,840  

Common stock issued on share-based awards

    40       -       637       -       -       -       -       -       637  

Share-based compensation expense

    -       -       491       -       -       -       -       -       491  

Cash dividends declared

    -       -       -       -       -       -       (5,072 )     -       (5,072 )

Other comprehensive income (loss)

    -       -       -       -       -       1,247       -       (26 )     1,221  

Balance at September 30, 2018

    49,029     $ 490     $ 378,078       22,460     $ (656,551 )   $ (4,924 )   $ 672,781     $ 113     $ 389,987  

 

See accompanying notes to consolidated financial statements.

 

5

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

 

(1)

Organization and Nature of Business

 

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. Today we are a global luxury international home fashion brand that is vertically integrated from design through delivery, which affords our clientele a value proposition of style, quality and price. We provide complimentary interior design service to our customers and sell a full range of furniture products and decorative accents through a retail network of approximately 300 design centers in the United States and abroad as well as online at ethanallen.com. The design centers represent a mix of independent licensees and Company-owned and operated locations. Our Company operates retail design centers located in the United States and Canada. The independently operated design centers are located in the United States, Asia, the Middle East and Europe. We also own and operate nine manufacturing facilities, including six manufacturing plants in the United States plus two plants in Mexico and one in Honduras.

 

 

(2)

Interim Basis of Presentation

 

Use of Estimates. We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the United States (“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, revenue recognition, inventory obsolescence, useful lives for property, plant and equipment, goodwill and indefinite-lived intangible asset impairment analyses, business insurance retention reserves, tax valuation allowances, the evaluation of uncertain tax positions and other loss reserves.

 

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. 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 months ended September 30, 2019 are not necessarily indicative of results that may be expected for the entire fiscal year. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our fiscal 2019 Annual Report on Form 10-K (the “2019 Annual Report on Form 10-K”).

 

Reclassifications. Certain reclassifications have been made to the amounts in prior periods in order to conform to the current period’s presentation. These changes were made for disclosure purposes only and did not have any impact on previously reported results.

 

The Company has evaluated subsequent events through the date that the financial statements were issued.

 

 

(3)

Recent Accounting Pronouncements

 

New Accounting Standards or Updates Recently Adopted

 

Leases – In February 2016, the FASB issued accounting standards update (“ASU”) 2016-02, Leases (Topic 842), an update related to accounting for leases. This guidance requires an entity to recognize lease liabilities and a right-of-use asset for all leases on the balance sheet and to disclose key information about the entity's leasing arrangements. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with earlier adoption permitted. In July 2018, the FASB approved an amendment to the new guidance that allows companies the option of using the effective date of the new standard as the initial application (at the beginning of the period in which it is adopted, rather than at the beginning of the earliest comparative period) and to recognize the effects of applying the new ASU as a cumulative effect adjustment to the opening balance sheet or retained earnings.

 

We adopted ASU 2016-02 as of July 1, 2019 using the modified retrospective method and have not restated comparative periods. The Company elected the package of practical expedients upon adoption, which permits us to (i) not reassess whether any expired or existing contracts are or contain leases, (ii) to not reassess lease classification for any expired or existing leases, and (iii) to not reassess treatment of initial direct costs, if any, for any expired or existing leases. In addition, we elected not to separate lease and non-lease components when determining the ROU asset and lease liability for our design center real estate leases and did not elect the hindsight practical expedient, which would have allowed us to use hindsight when determining the remaining lease term as of the adoption date on July 1, 2019. Lastly, we elected the short-term lease exception policy for all leases, permitting us to exclude the recognition requirements of this standard from leases with initial terms of 12 months or less.

 

6

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

Upon adoption we recognized operating lease assets of $129.7 million and operating lease liabilities of $149.7 million on our consolidated balance sheet. In addition, $20.0 million of deferred rent and various lease incentives, which were recorded as other long-term liabilities as of June 30, 2019 were reclassified as a component of the right-of-use assets upon adoption. The Company also recognized a cumulative adjustment as of July 1, 2019, which decreased opening retained earnings by $1.6 million due to the impairment of certain right-of-use assets. The adoption of the new standard did not have a material impact on the consolidated statements of operations or cash flows. See Note 6 for further details on new disclosures required under ASU 2016-02.

 

Recent Accounting Standards or Updates Not Yet Effective

 

Goodwill Impairment Test - In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which removes the requirement for companies to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This accounting standards update will be effective for us beginning in the first quarter of fiscal 2021 and we do not expect the adoption to have a material impact on our consolidated financial statements.

 

Implementation Costs in a Cloud Computing Arrangement - In August 2018, the FASB issued ASU 2018-15, Cloud Computing Arrangements for Service Contracts, an update related to a client’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. This guidance aligns the requirements for capitalizing implementation costs in a cloud computing service contract with the guidance for capitalizing implementation costs to develop or obtain internal-use software. Capitalized implementation costs will be expensed over the term of the arrangement. This accounting standards update will be effective for us beginning in the first quarter of fiscal 2021, with early adoption permitted. We are currently evaluating the impact of this accounting standards update, but do not expect the adoption to have a material impact on our consolidated financial statements.

 

No other new accounting pronouncements issued or effective as of September 30, 2019 have had or are expected to have an impact on our consolidated financial statements.

 

 

(4)

Revenue Recognition

 

Our reported revenue (net sales) consist 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. For sales in our retail segment, control generally transfers upon delivery to the customer. 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. 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). We do not adjust net sales for the effects of financing components as we believe that we will receive payment from the customer within one year of when we transfer control of the related goods.

 

Estimated refunds for sales returns and allowances are based on our historical return patterns. We record these estimated 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, 2019 and June 30, 2019, these amounts were immaterial.

 

In many cases we receive deposits from customers before we have transferred control of our product to our customers, resulting in contract liabilities. These contract liabilities are reported as a current liability in Customer Deposits on our consolidated balance sheets. At June 30, 2019 we had customer deposits of $56.7 million, of which we recognized $46.5 million as net sales upon delivery to the customer during the three months ended September 30, 2019. Customer deposits totaled $65.2 million at September 30, 2019.

 

7

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

The following table disaggregates net sales by product category by segment for the three months ended September 30, 2019 (in thousands):

 

   

Wholesale

   

Retail

   

Total

 

Upholstery furniture(1)

  $ 50,020     $ 63,236     $ 113,256  

Case goods furniture(2)

    34,029       38,760       72,789  

Accents(3)

    17,997       29,982       47,979  

Other(4)

    (717 )     5,288       4,571  

Total before intercompany eliminations

  $ 101,329     $ 137,266       238,595  

Intercompany eliminations(5)

                    (64,674 )

Consolidated net sales

                  $ 173,921  

 

 

(1)

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

 

 

(2)

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

 

 

(3)

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.

 

 

(4)

Other includes product delivery sales, the Ethan Allen Hotel room rentals and banquets, sales of third-party furniture protection plans and other miscellaneous product sales less prompt payment discounts, sales allowances and other incentives.

 

 

(5)

Represents the elimination of all intercompany wholesale segment sales to the retail segment during the period presented.

 

 

(5)

Inventories

 

Inventories are stated at the lower of cost (on first-in, first-out basis) or net realizable value. Cost is determined based solely on those charges incurred in the acquisition and production of the related inventory.

 

Inventories at September 30, 2019 and June 30, 2019 are summarized as follows (in thousands):

 

   

September 30,

   

June 30,

 
   

2019

   

2019

 

Finished goods

  $ 119,272     $ 128,047  

Work in process

    9,545       9,185  

Raw materials

    24,114       26,661  

Inventory reserve

    (1,510 )     (1,504 )

Inventories, net

  $ 151,421     $ 162,389  

 

 

(6)

Leases

 

During the first quarter of fiscal 2020, we adopted ASU 2016-02 and all related amendments. The guidance requires lessees to recognize substantially all leases on their balance sheet as a right-of-use (“ROU”) asset and a lease liability.

 

Lease Accounting Policy

 

The Company has operating leases for many of its design centers that expire at various dates through fiscal 2040. In addition, we also lease certain tangible assets, including computer equipment and vehicles with 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.

 

8

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

Lease right-of-use assets represent the right to use an underlying asset pursuant to the lease for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. Lease right-of-use assets and lease liabilities are recognized at the commencement of an arrangement where it is determined at inception that a lease exists. These assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using our incremental borrowing rate generally applicable to the location of the lease right-of-use asset, unless an implicit rate is readily determinable. We combine lease and certain non-lease components for our design center real estate leases in determining the lease payments subject to the initial present value calculation. Lease right-of-use assets include upfront lease payments and exclude lease incentives, where applicable. Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised.

 

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. 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 and other services provided by the lessor, and other charges included in the lease. Leases with an initial term of twelve months or less are not recorded on the balance sheet. 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 lease expense in the period incurred.

 

We have elected the short-term lease exemption, whereby leases with initial terms of one year or less are not capitalized and instead expensed on a straight-line basis over the lease term.

 

Key Estimates and Judgments

 

Key estimates and judgments in applying ASU 2016-02 include how the Company determines the discount rate to discount the unpaid lease payments to present value and the lease term.

 

ASC 842 requires companies to use the rate implicit in the lease whenever that rate is readily determinable and if the interest rate is not readily determinable, then a lessee may use its incremental borrowing rate. 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 determined 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. We used the incremental borrowing rates we determined as of July 1, 2019 for operating leases that commenced prior to that date. In the case an interest rate is implicit in a lease we will use that rate as the discount rate for that lease. The lease term for all of our lease arrangements include the noncancelable period of the lease plus, if applicable, any additional periods covered by an option to extend the lease that is reasonably certain to be exercised by the Company. Our leases generally do not include termination options for either party to the lease or restrictive financial or other covenants. 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:

 

   

September 30, 2019

 

Weighted-average remaining lease term (in years)

       

Operating leases

    6.7  

Finance leases

    1.8  

Weighted-average discount rate

       

Operating leases

    3.7

%

Finance leases

    4.6

%

 

9

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

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

 

 

Statement of Comprehensive Income Location

 

Three months ended

September 30, 2019

 

Operating lease cost

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

  $ 8,022  

Finance lease cost:

         

Depreciation of property

SG&A

    146  

Interest on lease liabilities

Interest income, net of interest (expense)

    9  

Short-term lease cost

SG&A

    387  

Variable lease cost(1)

SG&A

    2,463  

Less: Sublease income

SG&A

    (506 )

Total lease expense

  $ 10,521  

 

 

(1)

Variable lease payments include index-based changes in rent, maintenance, real estate taxes, insurance and other charges included in the lease.

 

Operating lease rent expense during the three months ended September 30, 2018, as reported within SG&A was $8.0 million, net of sublease rental income of $0.5 million.

 

The following table discloses the operating and finance lease assets and liabilities recognized within our consolidated balance sheet as of September 30, 2019 (in thousands):

 

 

Consolidated Balance Sheet Location

 

September 30, 2019

 

Assets

         

Operating leases

Operating lease right-of-use assets (non-current)

  $ 127,837  

Finance leases

Property, plant and equipment, net

    953  

Total lease assets

  $ 128,790  
           

Liabilities

         

Current:

         

Operating leases

Current operating lease liabilities

  $ 30,662  

Finance leases

Other current liabilities

    582  

Noncurrent:

         

Operating leases

Operating lease liabilities, long-term

    119,235  

Finance leases

Other long-term liabilities

    347  

Total lease liabilities

  $ 150,826  

 

The ROU assets by segment are as follows as of September 30, 2019 (in thousands):

 

Retail

  $ 127,904  

Wholesale

    886  

Total ROU assets

  $ 128,790  

 

10

 

 

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 condensed consolidated balance sheets as of September 30, 2019 (in thousands):

 

Fiscal Year

 

Operating Leases

   

Finance Leases

 

Remainder of fiscal 2020 (nine months)

  $ 25,971     $ 441  

2021

    31,627       440  

2022

    27,563       59  

2023

    21,189       20  

2024

    16,100       -  

Thereafter

    49,489       -  

Total undiscounted future minimum lease payments

    171,939       960  

Less: imputed interest

    (22,042 )     (31 )

Total present value of lease obligations

  $ 149,897     $ 929  

 

At September 30, 2019, we did not have any significant operating or finance leases that had not commenced.

 

Other information for the Company's leases is as follows (in thousands):

 

   

Three months ended

September 30, 2019

 

Cash paid for amounts included in the measurement of lease liabilities:

       

Operating cash flows from operating leases

  $ 8,851  

Operating cash flows from finance leases

  $ 147  

Operating lease assets obtained in exchange for new operating lease liabilities

  $ 6,916  

 

At the beginning of fiscal 2020, the Company adopted ASU 2016-02, and as required, the following disclosure is provided for periods prior to adoption. As of June 30, 2019, future minimum payments under non-cancelable leases were as follows (in thousands):

 

Fiscal Year

 

Operating Leases

   

Finance Leases (1)

 

2020

  $ 33,761     $ 550  

2021

    30,534       437  

2022

    26,443       60  

2023

    20,276       19  

2024

    15,345       -  

Thereafter

    43,500       -  

Total

  $ 169,859     $ 1,066  

 

(1)

As of June 30, 2019, our capital lease obligations were $1.1 million of which the current and long-term portions were included within short-term debt and long-term debt, respectively, in the consolidated balance sheet. Monthly minimum lease payments were accounted for as principal and interest payments.

 

 

(7)

Income Taxes

 

The Company reviews its expected annual effective income tax rates and makes changes on a quarterly basis as necessary based on certain factors such as changes in forecasted annual operating income; changes to actual or forecasted permanent book to tax differences; impacts from future tax audits with state, federal or foreign tax authorities; impacts from tax law changes; or change in judgment as to the realizability of deferred tax assets. The Company identifies items which are non-recurring in nature and treats these as discrete events. The tax effect of such items is recorded in the quarter in which the related events occur. Due to the volatility of these factors, the Company's consolidated effective income tax rate can change significantly quarter over quarter.

 

The Company conducts business globally and, as a result, the Company and its subsidiaries files income tax returns in the U.S. and in various state and foreign jurisdictions. In the normal course of business, the Company is subject to periodic examination in such domestic and foreign jurisdictions by tax authorities. The Company and certain subsidiaries are currently under audit in the U.S. for fiscal 2016. While the amount of uncertain tax impacts with respect to the entities and years under audit may change within the next twelve months, it is not anticipated that any of the changes will be significant. It is reasonably possible that some of these audits may be completed during the next twelve months and that various issues relating to uncertain tax impacts will be resolved within the next twelve months as exams are completed or as statutes expire and will impact the effective tax rate.

 

11

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

We are subject to a U.S. federal statutory tax rate of 21% for the fiscal year ending June 30, 2020. The Company’s consolidated effective tax rate was 24.4% for the three months ended September 30, 2019 compared with 24.9% in the year ago first quarter. The current fiscal year’s effective tax rate primarily includes a provision for income tax on the taxable year’s income, tax expense on the maintenance of a valuation allowance on Canadian deferred tax assets and tax and interest expense on uncertain tax positions. The prior quarter’s effective tax rate primarily includes tax expense on the taxable year’s net income, tax expense on the cancelation of stock options and tax and interest expense on uncertain tax positions.

 

 

(8)

Debt

 

Total debt obligations at September 30, 2019 and June 30, 2019 consist of the following (in thousands):

 

   

September 30,

   

June 30,

 
   

2019

   

2019

 
                 

Borrowings under revolving credit facility

  $ -     $ -  

Capital leases (1)

    -       1,066  

Total debt

    -       1,066  

Less current maturities

    -       550  

Total long-term debt

  $ -     $ 516  

 

 

(1)

Capital leases were previously reported as debt as of June 30, 2019. Upon the adoption of the new leasing standard, the Company reclassified its capital lease obligations from short and long-term debt to other current liabilities and other long-term liabilities, respectively. Refer to Note 6 for further details regarding capital lease obligations.

 

Revolving Credit Facility

 

On December 21, 2018, the Company and most of its domestic subsidiaries (the “Loan Parties”) entered into a Second Amended and Restated Credit Agreement (the “Facility”). The Facility amends and restates the existing Amended and Restated Credit Agreement, dated as of October 21, 2014, as amended. The Facility provides a revolving credit line of up to $165 million, subject to borrowing base availability, and extends the maturity of the Facility to December 21, 2023. We incurred financing costs of $0.6 million under the Facility, which are being amortized over the remaining life of the Facility using the effective interest method.

 

At the Company’s option, revolving loans under the Facility bear interest, based on the average availability, at an annual rate of either (a) the London Interbank Offered rate (“LIBOR”) plus 1.5% to 2.0%, or (b) the higher of (i) the prime rate, (ii) the federal funds effective rate plus 0.5%, or (iii) LIBOR plus 1.0% plus in each case 0.5% to 1.0%.

 

The availability of credit at any given time under the Facility will be constrained by the terms and conditions of the Facility, 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.

 

Borrowings under the Facility

 

As of September 30, 2019, we had no borrowings outstanding under the Facility.

 

Debt Obligations

 

As of September 30, 2019, we have no current outstanding long-term debt obligations. Interest expense incurred during the three months ended September 30, 2019 and 2018 were immaterial.

 

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.

 

12

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

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 “FCCR Covenant”). The FCCR Covenant only applies in certain limited circumstances, including when the unused availability under the Facility drops below $18.5 million. The FCCR Covenant ratio is set at 1.0 and measured on a trailing twelve-month basis.

 

At September 30, 2019 and June 30, 2019, there was $5.9 million and $6.1 million, respectively, of standby letters of credit outstanding under the Facility. Total availability under the Facility was $148.4 million at September 30, 2019 and $158.9 at June 30, 2019. At both September 30, 2019 and June 30, 2019, we were in compliance with all the covenants under the Facility.

 

 

(9)

Restructuring and Impairment Activities

 

Optimization of Manufacturing and Logistics

 

During the fourth quarter of fiscal 2019, we initiated restructuring plans to consolidate our manufacturing and logistics operations as part of an overall strategy to maximize production efficiencies and maintain our competitive advantage. As of June 30, 2019, we permanently ceased operations at our Passaic, New Jersey property and, for the most part, transferred our Old Fort, North Carolina case goods manufacturing operations to our other existing operations. As a result, approximately 325 of our associates in Old Fort and 55 associates in Passaic were terminated.

 

During the first quarter of fiscal 2020, we continued with this optimization project as we converted the Old Fort facility into a distribution center and expanded our existing Maiden, North Carolina manufacturing campus while finalizing severance and other exit costs associated with our case goods operations. In connection with the foregoing first quarter fiscal 2020 initiatives, we recorded pre-tax restructuring and other exit charges totaling $1.7 million, consisting of $1.1 million in manufacturing variances associated with the closing of the Passaic property and the repurposing of the Old Fort case goods manufacturing operations, $0.4 million in employee severance and other payroll and benefit costs, and $0.2 million of other exit costs. The manufacturing overhead variances of $1.1 million were recorded within Cost of Sales with the remaining $0.6 million recorded within the line item Restructuring and Impairment Charges (Gains) in the consolidated statements of comprehensive income.

 

As part of our optimization plans, we completed the sale of our Passaic property in September 2019 to an independent third party and received $12.4 million in cash less certain adjustments set forth in the purchase and sale agreement, including $0.9 million in selling and other closing costs. As a result of the sale, the Company recognized a pre-tax gain of $11.5 million in the first quarter of fiscal 2020, which was recorded within the line item Restructuring and Impairment Charges (Gains) in the consolidated statements of comprehensive income.

 

Inventory Write-downs

 

During the first quarter of fiscal 2020 we recorded a non-cash charge of $3.1 million related to the write-down and disposal of certain slow moving and discontinued inventory items, which was due to actual demand and forecasted market conditions for these inventory items being less favorable than originally estimated. Of the total inventory write-down, $2.7 million related to slow moving finished goods with the remaining $0.4 million consisting of raw materials that were disposed. The non-cash inventory write-down was recorded in the consolidated statement of comprehensive income within the line item Cost of Sales.

 

13

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

Summary of Restructuring, Impairments and Other related charges (gains)

 

Restructuring, impairment and other related costs incurred during the first quarter of fiscal 2020 were as follows (in thousands):

 

   

Three months ended

 
   

September 30, 2019

 

Optimization of manufacturing and logistics

  $ 640  

Gain on sale of Passaic property

    (11,497 )

Total Restructuring and other exit costs (income)

  $ (10,857 )

Manufacturing overhead costs

    1,052  (1)

Inventory write-downs

    3,088  (1)

Total

  $ (6,717 )

 

(1)

Manufacturing overhead costs and inventory write-downs are reported within Cost of Sales in the consolidated statements of comprehensive income.

 

Restructuring and Other Related Charges Rollforward

 

The Company’s restructuring activity is summarized in the table below (in thousands):

 

   

 

   

Fiscal 2020 Activity

   

 

 

Optimization of Manufacturing and Logistics

 

Balance June 30, 2019

   

New Charges (Income)

   

Non-Cash

   

(Payments) Receipts

   

Balance Sept 30, 2019

 

Employee severance, other payroll and benefit costs

  $ 1,714     $ 449     $ -     $ (2,002 )   $ 161  (1)

Manufacturing overhead costs

    -       1,052       -       (1,052 )     -  

Gain on sale of Passaic property

    -       (11,497 )     245       11,612       (130 ) (2)

Other exit and relocation costs

    -       191       (465 )     (697 )     (41 ) (3)

Sub-total

  $ 1,714     $ (9,805 )   $ (220 )   $ 7,861     $ (10 )
                                         

Inventory write-downs

                                       

Inventory write-downs

  $ -     $ 3,088     $ 3,088     $ -     $ -  
                                         

Other Restructuring and Impairment Charges

                                       

Lease exit costs (remaining lease rentals)

  $ 3,145     $ -     $ 2,878     $ (267 )   $ -  (4)

Other charges (income)

    224       -       -       (53 )     171  (5)

Sub-total

    3,369       -       2,878       (320 )     171  

Total Restructuring, Impairments and other exit costs

  $ 5,083     $ (6,717 )   $ 5,746     $ 7,541     $ 161  

 

(1)

Remaining severance expected to be paid during the second quarter of fiscal 2020. The balance of $0.2 million is reported within Accrued compensation and benefits in our consolidated balance sheet as of September 30, 2019.

 

(2)

The remaining balance of $0.1 million as of September 30, 2019 represents prepaid income taxes from the sale of the Passaic property, which are recorded as a reduction to our income taxes payable balance reported in Other current liabilities.

 

(3)

Balance represents proceeds to be received from inventory sold at auction in the closing of the Passaic property. We expect to receive the proceeds from these sales during the second quarter of fiscal 2020. The balance is reported within Prepaid expenses and other current assets as of September 30, 2019.

 

(4)

The previously recorded vacant space liability was reclassified from Accounts payable and accrued expenses and Other long-term liabilities to Operating lease right-of-use assets upon the adoption of ASU 2016-02, which requires all right-of-use assets to be measured net of any Topic 420 lease liabilities.

 

(5)

The remaining balance from the other charges (income) as of September 30, 2019 is recorded within Accounts payable and accrued expenses.

 

 

(10)

Share-Based Compensation

 

During the three months ended September 30, 2019 and 2018, we recognized total share-based compensation expense of $0.2 million and $0.5 million, respectively. These amounts have been included in the consolidated statements of comprehensive income within selling, general and administrative expenses. As of September 30, 2019, $1.8 million of total unrecognized compensation expense related to non-vested equity awards is expected to be recognized over a weighted average period of 2.3 years. There was no share-based compensation capitalized for the three months ended September 30, 2019 or 2018.

 

14

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

At September 30, 2019, there were 1,470,810 shares of common stock available for future issuance pursuant to the Ethan Allen Interiors Inc. Stock Incentive Plan. Stock options are granted with an exercise price equal to the market price of our common stock at the date of grant, vest ratably over a specified service period, and have a contractual term of 10 years. Equity awards can also include performance vesting conditions. Company policy further requires an additional one year holding period beyond the service vest date for certain executives. Grants to independent directors have a three-year service vesting condition.

 

A summary of stock option activity during the three months ended September 30, 2019 is presented below.

 

           

Weighted

 
           

Average

 
   

Options

   

Exercise Price

 

Outstanding at June 30, 2019

    378,911     $ 21.95  

Granted

    34,188     $ 17.55  

Exercised

    (1,500 )   $ 11.74  

Canceled (forfeited/expired)

    (17,497 )   $ 25.61  

Outstanding at September 30, 2019

    394,102     $ 21.45  

Exercisable at September 30, 2019

    322,483     $ 21.36  

 

There were no stock option awards granted to employees during each of the periods presented. Non-employee (independent) directors were granted stock options during the first quarter of each fiscal year presented and valued using the Black-Scholes option pricing model with the following assumptions.

 

   

Q1 2020

   

Q1 2019

 

Volatility

    30.8 %     31.3 %

Risk-free rate of return

    1.55 %     2.80 %

Dividend yield

    3.97 %     3.24 %

Expected average life (years)

    5.3       5.0  

 

A summary of stock unit awards activity during the three months ended September 30, 2019 is presented below.

 

   

Units

   

Grant Date Fair Value

 

Outstanding at June 30, 2019

    313,882     $ 22.82  

Granted

    99,405     $ 12.72  

Vested

    -     $ -  

Canceled (forfeited/expired)

    -     $ -  

Outstanding at September 30, 2019

    413,287     $ 20.37  

 

We estimate, as of the date of grant, the fair value of performance stock units 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 a Monte-Carlo simulation. The weighted average assumptions used for the stock units granted during the first quarter of fiscal 2020 and 2019, respectively, is presented below.

 

   

Q1 2020

   

Q1 2019

 

Volatility

    30.5 %     32.1 %

Risk-free rate of return

    1.72 %     2.72 %

Dividend yield

    3.97 %     3.24 %

Expected average life (years)

    3.0       3.0  

 

There was no restricted stock award activity during fiscal 2020. As of September 30, 2019, there were no restricted stock awards outstanding.

 

15

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

 

(11)

Earnings Per Share

 

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

 

   

Three months ended

 
   

September 30,

 
   

2019

   

2018

 

Weighted average shares outstanding for basic calculation

    26,713       26,539  

Dilutive effect of stock options and other share-based awards

    37       401  

Weighted average shares outstanding adjusted for dilution calculation

    26,750       26,940  

 

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

 

As of September 30, 2019 and 2018, stock options to purchase 232,914 and 157,294 common shares, respectively, were excluded from the diluted EPS calculations because their inclusion would have been anti-dilutive.

 

As of September 30, 2019 and 2018, the number of performance-based equity award grants excluded from the calculation of diluted EPS was 287,287 and 288,815, respectively. Performance-based awards are excluded from the calculation of diluted EPS unless the performance criteria are probable of being achieved as of the balance sheet date.

 

 

(12)

Accumulated Other Comprehensive Income (Loss)

 

Accumulated other comprehensive income (loss) consists of foreign currency translation adjustments which are the result of changes in foreign currency exchange rates related to our operations outside the U.S. 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. The following table sets forth the activity in accumulated other comprehensive loss for the fiscal year-to-date period ended September 30, 2019 (in thousands).

 

   

Three months ended

 
   

September 30,

 
   

2019

   

2018

 

Beginning balance at July 1

  $ (5,651 )   $ (6,171 )

Foreign currency translation adjustments

    (499 )     1,247  

Amounts reclassified from accumulated other comprehensive income

    -       -  

Current period other comprehensive income (loss)

    (499 )     1,247  

Ending balance at September 30

  $ (6,150 )   $ (4,924 )

 

 

(13)

Segment Information

 

Our operating segments are aligned with how the Company, including its chief operating decision maker, manages the business. As such, our reportable operating segments are the Wholesale segment and the Retail segment. Our wholesale and retail operating segments represent strategic business areas of our vertically integrated enterprise that operate separately and provide their own distinctive services. This vertical structure enables us to offer our complete line of home furnishings and accents more effectively while controlling quality and cost. We evaluate performance of the respective segments based upon revenues and operating income. Inter-segment transactions result, primarily, from the wholesale sale of inventory to the retail segment, including the related profit margin.

 

As of September 30, 2019, the Company operated 145 design centers (our retail segment) and our independent retailers operated 156 design centers. Our wholesale segment net sales include sales to our retail segment, which are eliminated in consolidation, and sales to our independent retailers. Our retail segment net sales accounted for 79% of our consolidated net sales in the three months ended September 30, 2019. Our wholesale segment net sales accounted for the remaining 21%.

 

16

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

Segment information for the three months ended September 30, 2019 and 2018 is provided below (in thousands):

 

   

Three months ended

 
   

September 30,

 
   

2019

   

2018

 

Net sales

               

Wholesale segment

  $ 101,329     $ 118,072  

Retail segment

    137,266       145,214  

Elimination of intercompany sales

    (64,674 )     (75,501 )

Consolidated Total

  $ 173,921     $ 187,785  
                 

Income before income taxes

               

Wholesale segment

  $ 16,928     $ 14,315  

Retail segment

    1,564       (1,559 )

Elimination of intercompany profit (a)

    149       (957 )

Operating income

    18,641       11,799  

Interest income, net of interest (expense)

    19       (27 )

Consolidated Total

  $ 18,660     $ 11,772  
                 

Depreciation and amortization

               

Wholesale segment

  $ 1,890     $ 1,961  

Retail segment

    2,086       3,039  

Consolidated Total

  $ 3,976     $ 5,000  
                 

Capital expenditures

               

Wholesale segment

  $ 1,163     $ 850  

Retail segment

    2,251       1,927  

Consolidated Total

  $ 3,414     $ 2,777  

 

 

(a)

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

 

   

September 30,

   

June 30,

 
   

2019

   

2019

 

Total Assets:

               

Wholesale segment

  $ 249,539     $ 237,354  

Retail segment

    430,563       299,125  

Inventory profit elimination (b)

    (26,203 )     (26,128 )

Consolidated Total

  $ 653,899     $ 510,351  

 

 

(b)

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.

 

 

(14)

Commitments and Contingencies

 

We accrue non-income tax liabilities for contingencies when management believes that a loss is probable, and the amounts can be reasonably estimated, while contingent gains are recognized only when realized. We are routinely party to various legal proceedings, claims and litigation that have arisen in the ordinary course of business, including employment matters, commercial and intellectual property disputes and environmental items. For more information on how we determine whether to accrue for potential losses resulting from litigation, see Note 20 to our consolidated financial statements included in our 2019 Annual Report on Form 10-K. Environmental items typically involve investigations and proceedings concerning air emissions, hazardous waste discharges, and/or management of solid and hazardous wastes. Under applicable environmental laws and regulations, we and/or our subsidiaries are, or may be, required to remove or mitigate the effects on the environment due to the disposal or release of certain hazardous materials. We believe that our facilities are in material compliance with all such applicable laws and regulations.

 

The outcome of all the matters against us is subject to future resolution, including the uncertainties of litigation. Based on information available at September 30, 2019, management believes that the ultimate outcome of these unresolved matters against the Company, individually or in the aggregate, will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

 

17

 

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

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

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of our 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. Our MD&A is presented in the following sections:

  

 

-

Forward-Looking Statements

 

-

Executive Overview

 

-

Key Operating Metrics

 

-

Results of Operations

 

-

Reconciliation of Non-GAAP Financial Measures

 

-

Liquidity

 

-

Capital Resources

 

-

Share Repurchase Program

 

-

Contractual Obligations

 

-

Dividends

 

-

Off-Balance Sheet Arrangements and Other Commitments and Contingencies

 

-

Foreign Currency

 

-

Significant Accounting Policies and Critical Accounting Estimates

 

-

Recent Accounting Pronouncements

 

-

Business Outlook

 

The following MD&A should be read in conjunction with our 2019 Annual Report on Form 10-K, Current Reports on Form 8-K and other filings with the Securities and Exchange Commission (the “SEC”), and the consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q.

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q, including this MD&A, contains forward-looking statements regarding future events and our future results that are subject to the safe harbors found in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts are statements that could be deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts, and projections about the industry in which we operate and the beliefs and assumptions of our management. Words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” “will,” “may,” “continue,” “project,” ”target,” “outlook,” “forecast,” “guidance,” variations of such words, and similar expressions and the negatives of such forward-looking words are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business, and other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements are subject to management decisions and various assumptions about future events and are not guarantees of future performance. Actual results could differ materially from those anticipated in the forward-looking statements due to a number of risk factors and uncertainties including, but not limited to the following: a volatile retail environment and changing economic conditions may further adversely affect consumer demand and spending; global and local economic uncertainty may materially adversely affect our manufacturing operations or sources of merchandise and international operations; disruptions of our supply chain; changes in United States trade and tax policy; competition from overseas manufacturers and domestic retailers; failure to successfully anticipate or respond to changes in consumer tastes and trends in a timely manner; our ability to maintain and enhance our brand; our number of manufacturing and logistics sites may increase our exposure to business disruptions and could result in higher transportation costs; fluctuations in the price, availability and quality of raw materials could result in increased costs or cause production delays; our current and former manufacturing and retail operations and products are subject to increasingly stringent environment, health and safety requirements; the use of emerging technologies as well as unanticipated changes in the pricing and other practices of competitors; reliance on information technology systems to process transactions, summarize results, and manage our business and that of certain independent retailers; disruptions in both our primary and back-up systems; product recalls or product safety concerns; successful cyber-attacks and the ability to maintain adequate cyber-security systems and procedures; loss, corruption and misappropriation of data and information relating to customers; loss of key personnel; additional asset impairment charges that could reduce our profitability; access to consumer credit could be interrupted as a result of conditions outside of our control; our ability to locate new design center sites and/or negotiate favorable lease terms for additional design centers or for the expansion of existing design centers; changes to fiscal and tax policies; our operations present hazards and risks which may not be fully covered by insurance; possible failure to protect our intellectual property; and other factors described under Part I, Item 1A. Risk Factors in our 2019 Annual Report on Form 10-K, and elsewhere herein.

 

18

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

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. Our forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Other than as required by law, we undertake no obligation to update or revise forward-looking statements, whether as a result of new information, future events, or otherwise.

 

Executive Overview

 

We are a leading interior design company and manufacturer and retailer of quality home furnishings. Founded over 87 years ago, today we are a leading international home fashion brand doing business in North America, Europe, Asia and the Middle East. We are vertically integrated from design through delivery, affording our clientele a value proposition of style, quality and price. We offer complementary interior design service to our clients and sell a full range of furniture products and decorative accents through ethanallen.com and a network of approximately 300 design centers in the United States and abroad. The design centers represent a mix of independent licensees and our own Company operated retail segment. We own and operate nine manufacturing facilities, including six manufacturing plants in the United States plus two plants in Mexico and one in Honduras.

 

Our business model is to maintain continued focus on (i) capitalizing on the strength of our interior design professionals and management in our retail design centers, (ii) communicating our messages with effective advertising and marketing campaigns, (iii) utilizing ethanallen.com as a key marketing tool to drive traffic to our design centers, (iv) investing in new technologies across key aspects of our vertically integrated business, and (v) leveraging the benefits of our vertical integration by maintaining manufacturing capacity in North America where we manufacture approximately 75% of our products.

 

Our competitive advantages arise from:

 

providing fashionable high-quality products of the finest craftsmanship;

 

offering complimentary design service through approximately 2,000 motivated interior design professionals network-wide;

 

offering a wide array of custom products across our upholstery, case goods, and accent product categories;

 

enhancing our technology in all aspects of the business; and

 

leveraging our vertically integrated structure.

 

We measure the performance of our wholesale and retail segments based on total net sales on a comparable period basis. We also measure wholesale orders booked on a comparable period basis. Wholesale orders booked reflect new orders placed with our wholesale segment from all sales channels, including our retail segment, independent retailers and contract customers. The frequency and timing of our promotional events can affect the comparability of orders booked during a given period.

 

Fiscal 2020 First Quarter in Review We continued strengthening our product and marketing programs during the first three months of fiscal 2020 and believe we are well positioned for future growth. In September 2019, we completed the sale of our Passaic, New Jersey facility, to an independent third party, and received $12.4 million in cash less certain adjustments, including $0.9 million in selling and other closing costs. The resulting net gain of $11.5 million from this sale is reported within our wholesale segment operating results. This transaction, together with our cash provided by operating activities, increased our cash on hand at the end of the quarter by 120% to $45.9 million. While our wholesale orders from China declined 37.6% mainly due to the imposition of tariffs by China, our contract business, driven by the GSA contract, had a strong quarter with orders growing by 62.4%. Total wholesale orders excluding our China business increased 0.7%, and including the impact of decreased China orders, our total wholesale orders decreased 1.5% in the first quarter of fiscal 2020 compared with the same quarter last fiscal year.

 

Adjusted gross and operating margin expansion helped increase our adjusted diluted earnings per share in fiscal 2020 to $0.35, up 6.1% from $0.33 in the year ago first quarter. Consolidated net sales decreased 7.4% primarily due to lower sales to China and a 5.5% decrease in retail net sales. For the three months ended September 30, 2019, adjusted gross margin was 56.3%, up from 54.0% a year ago, due to improved retail and wholesale gross margin coupled with a change in the retail sales mix relative to total sales, which was 78.9% compared with 77.3% in the comparable prior year period. Adjusted operating expenses, as expressed as percentage of sales, increased to 49.3% compared with 47.7% a year ago primarily due to net sales decreasing 7.4% while adjusted operating expenses declined 4.4%. The effective income tax rate was 24.4% in the current quarter compared with 24.9%.

 

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 amounts).

 

   

Three months ended
September 30,

 
   

2019

   

% of Sales

   

2018

   

% of Sales

 

Net sales

  $ 173.9             $ 187.8          

Gross profit

  $ 93.8       53.9 %   $ 101.5       54.0 %

Adjusted gross profit(1)

  $ 97.9       56.3 %   $ 101.5       54.0 %

Operating income

  $ 18.6       10.7 %   $ 11.8       6.3 %

Adjusted operating income(1)

  $ 12.2       7.0 %   $ 11.8       6.3 %

Net income

  $ 14.1       8.1 %   $ 8.8       4.7 %

Adjusted net income(1)

  $ 9.3       5.3 %   $ 8.8       4.7 %

Diluted EPS

  $ 0.53             $ 0.33          

Adjusted diluted EPS(1)

  $ 0.35             $ 0.33          

Cash flow from operating activities

  $ 23.4             $ 24.4          

 

(1)

Refer to the Reconciliation of Non-GAAP Financial Measures section within this MD&A for the reconciliation of U.S. GAAP to adjusted key financial metrics.

 

A summary of changes from the applicable periods in the preceding fiscal year is presented in the following table.

 

   

Three months ended

 
   

September 30,

 
   

2019

   

2018

 

Net sales

    (7.4 %)     3.6 %

Gross profit

    (7.5 %)     1.1 %

Adjusted gross profit(1)

    (3.5 %)     1.1 %

Operating income

    58.0 %     2.2 %

Adjusted operating income(1)

    3.5 %     (4.8 %)

Net income

    59.6 %     19.2 %

Adjusted net income(1)

    4.7 %     12.9 %

Diluted EPS

    60.6 %     22.2 %

Adjusted diluted EPS(1)

    6.1 %     17.9 %

Cash flow from operating activities

    (4.3 %)     38.6 %

 

(1)

Refer to the Reconciliation of Non-GAAP Financial Measures section within this MD&A for the reconciliation of U.S. GAAP to adjusted key financial metrics.

 

The components of consolidated net sales and operating income by business segment is presented in the following table ($ in millions).

 

   

Three months ended
September 30,

         
   

2019

   

2018

   

% Chg

 

Net Sales

                       

Wholesale segment

  $ 101.3     $ 118.1       (14.2 %)

Retail segment

    137.3       145.2       (5.5 %)

Elimination of intersegment sales

    (64.7 )     (75.5 )        

Consolidated net sales

  $ 173.9     $ 187.8       (7.4 %)
                         

Operating income

                       

Wholesale segment

  $ 16.9     $ 14.3       18.3 %

Retail segment

    1.6       (1.6 )     200.3 %

Elimination of intercompany profit (a)

    0.1       (0.9 )        

Consolidated operating income

  $ 18.6     $ 11.8       58.0 %

 

 

(a)

Represents the change in wholesale profit contained in Ethan Allen-operated design center inventory existing at the end of the period.

 

20

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

The following table shows selected design center location information.

 

   

Fiscal 2020

   

Fiscal 2019

 
   

Independent

   

Company-

           

Independent

   

Company-

         
   

retailers

   

operated

   

Total

   

retailers

   

operated

   

Total

 
Retail Design Center location activity:                                                

Balance at July 1

    158       144       302       148       148       296  

New locations

    3       4       7       6       -       6  

Closures

    (4 )     (4 )     (8 )     (1 )     (1 )     (2 )

Transfers

    (1 )     1       -       -       -       -  

Balance at September 30

    156       145       301       153       147       300  

Relocations (in new and closures)

    -       3       3       -       -       -  
                                                 

Retail Design Center geographic locations:

                                         

United States

    38       139       177       43       141       184  

Canada

    -       6       6       -       6       6  

China

    100       -       100       92       -       92  

Other Asia

    11       -       11       10       -       10  

Europe

    1       -       1       1       -       1  

Middle East

    6       -       6       7       -       7  

Total

    156       145       301       153       147       300  

 

Results of Operations

For an understanding of the significant factors that influenced our performance for the three months ended September 30, 2019 and 2018, respectively, the following discussion should be read in conjunction with the consolidated financial statements and related notes presented in this Quarterly Report on Form 10-Q ($ in millions, except per share amounts). Unless otherwise noted, all comparisons in the following discussion are from the three-month period ended September 30, 2019 to the comparable prior fiscal year three-month period.

 

First Quarter ended September 30, 2019 compared with First Quarter ended September 30, 2018

 

Consolidated net sales were $173.9 million, a decrease of 7.4% or $13.9 million compared to the same prior year period. Net sales decreased by 14.2% for our wholesale segment and by 5.5% in our retail segment. There was a $4.7 million decrease in international sales from our combined retail and wholesale segments, which was primarily related to lower sales in China and Canada due to the economic uncertainty surrounding international trade disputes and a challenging global economy. Net sales to China were 49.4% lower in the first quarter of fiscal 2020 compared with the same quarter last fiscal year.

 

Wholesale net sales decreased 14.2% to $101.3 million. The lower net sales were primarily due to a decline in sales to China and to our North American retail network. Partially offsetting these declines was growth in contract sales, which grew $4.5 million year over year. The year over year increase in contract sales was primarily attributable to higher sales from the GSA contract. Our international net sales to independent retailers was 3.4% of our consolidated net sales compared to 5.3%.

 

Wholesale orders booked, which represents orders booked through all of our channels, during the first quarter of fiscal 2020 was down 1.5% compared with the same quarter last fiscal year. Wholesale orders from China declined 37.6% from a year ago mainly due to the imposition of tariffs by China and the economic uncertainty surrounding the international trade disputes. Excluding orders from China, our total wholesale orders increased 0.7%, which was driven by continued growth in our contract business, including the GSA contract. We believe our new format of reporting on wholesale orders booked through all channels provides a more holistic view of our business than our previous reporting approach focusing on the change in only the company retail division written orders.

 

21

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

Retail net sales from Ethan Allen operated design centers decreased by $7.9 million, or 5.5%, to $137.3 million. There was a 5.3% decrease in net sales in the United States, while net sales from the Canadian design centers decreased 10.8%. These decreases were primarily due to softer order trends as consumers have been cautious with discretionary spending. There were 145 Company operated design centers at the end of the first quarter of fiscal 2020, two less than the 147 in the prior year period.

 

Gross profit decreased 7.5% to $93.8 million compared with the prior year period due to a decline in profit within our wholesale segment, while our retail segment grew slightly. Wholesale gross profit in fiscal 2020 was negatively impacted by lower sales volume during the past three months, partially offset by a change in product mix. Retail sales, as a percentage of total consolidated sales, were 78.9% in fiscal 2020 compared with 77.3% in the prior fiscal year, which favorably impacted our consolidated gross margin. Our fiscal 2020 adjusted gross margin improved to 56.3%, up from 54.0% in the prior year. Restructuring charges totaling $4.1 million, which included the write off of inventory, higher unfavorable manufacturing variances and incremental freight and relocation costs, negatively impacted our fiscal 2020 consolidated gross margin by 240 basis points.

 

Operating expenses decreased to $75.2 million, or 43.2% of net sales, compared with $89.7 million, or 47.7% of net sales, for the prior year period. The 16.2% decrease was primarily due to a gain of $11.5 million from the sale of the Passaic property during the first quarter of fiscal 2020. The gain on the sale is reported within restructuring charges. In addition to the gain on the sale, operating expenses were lower in fiscal 2020 due to lower retail depreciation expense and lower wholesale distribution costs from a lower volume of shipments.

 

Operating income totaled $18.6 million, or 10.7% of net sales, compared with $11.8 million, or 6.3% of net sales, for the prior year first quarter. The increase in operating income was driven by the $11.5 million gain on the sale of the Passaic property and higher retail sales as a percent of total consolidated sales partially offset by lower net sales. Adjusted operating margin in the first quarter of fiscal 2020 was 7.0%, an increase of 70 bps compared to 6.3% last year. The 70-basis point increase in adjusted operating margin was from lower depreciation expense and a decrease in wholesale distribution costs partially offset by lower net sales.

 

Wholesale operating income increased 18.3% to $16.9 million compared with $14.3 million for the prior year period. The increase was due to the $11.5 million gain on the sale of the Passaic property partially offset by $4.7 million in restructuring actions, including $4.1 million within cost of goods sold and $0.6 million within operating expenses during fiscal 2020. Adjusted wholesale operating income decreased 27.7% largely due to lower sales volume.

 

Retail operating income was $1.6 million, or 1.1% of net sales in the first quarter of fiscal 2020 compared with a loss of $1.6 million for the prior year period. Growth in operating income was driven by an improvement in our gross margin rate and lower depreciation partially offset by lower sales. The main factor contributing to the overall gross margin increase stems from improved retail price and promotion optimization.

 

Income tax expense was $4.6 million compared with $2.9 million a year ago. Our effective tax rate was 24.4% in the current year first quarter compared with 24.9%. The effective tax rate of 24.4% primarily includes a provision for income tax on the current quarter’s taxable income, including federal, state and local taxes, tax expense on the maintenance of a valuation allowance on Canadian deferred tax assets and tax and interest expense on uncertain tax positions. The year ago first quarter effective tax rate of 24.9% primarily includes tax expense on that quarter’s taxable income, tax expense on the cancelation of stock options and tax and interest expense on uncertain tax positions.

 

Net income was $14.1 million compared with $8.8 million for the prior year period, which resulted in $0.53 per diluted share compared with $0.33 in the prior year period. The gain on the sale of the Passaic property partially offset with other fiscal 2020 restructuring activities and corporate actions increased diluted EPS by $0.18. Adjusted diluted EPS of $0.35 in the current year first quarter represents 6.1% of growth over the prior year first quarter. This increase was driven by improved gross margin and cost containment.

 

Reconciliation of Non-GAAP Financial Measures

 

To supplement the financial measures prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, we use non-GAAP financial measures including adjusted gross profit and margin, adjusted operating income, adjusted retail operating income and margin, adjusted wholesale operating income and margin, adjusted net income and adjusted diluted earnings per share. The reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with U.S. GAAP are shown in tables below.

 

22

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

These non-GAAP measures are derived from the consolidated financial statements but are not presented in accordance with U.S. GAAP. We believe these non-GAAP measures provide a meaningful comparison of our results to others in our industry and our prior year results. Investors should consider these non-GAAP financial measures in addition to, and not as a substitute for, our financial performance measures prepared in accordance with U.S. GAAP. Moreover, these non-GAAP financial measures have limitations in that they do not reflect all the items associated with the operations of the business as determined in accordance with U.S. GAAP. Other companies may calculate similarly titled non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.

 

Despite the limitations of these non-GAAP financial measures, we believe these adjusted financial measures and the information they provide are useful in viewing our performance using the same tools that management uses to assess progress in achieving our goals. Adjusted measures may also facilitate comparisons to our historical performance.

 

The following tables below show a reconciliation of non-GAAP financial measures used in this filing to the most directly comparable GAAP financial measures (in thousands, except per share data).

 

   

Three months ended

September 30,

         
   

2019

   

2018

   

% Change

 

Consolidated Adjusted Gross Profit / Gross Margin

                       

GAAP Gross profit

  $ 93,794     $ 101,450       (7.5 %)

Adjustments (pre-tax) *

    4,140       -          

Adjusted gross profit *

  $ 97,934     $ 101,450       (3.5 %)

Adjusted gross margin *

    56.3 %     54.0 %        
                         

Consolidated Adjusted Operating Income / Operating Margin

                       

GAAP Operating income

  $ 18,641     $ 11,799       58.0 %

Adjustments (pre-tax) *

    (6,428 )     -          

Adjusted operating income *

  $ 12,213     $ 11,799       3.5 %
                         

Net sales

  $ 173,921     $ 187,785       (7.4 %)

GAAP Operating margin

    10.7 %     6.3 %        

Adjusted operating margin *

    7.0 %     6.3 %        
                         

Consolidated Adjusted Net Income / Adjusted Diluted EPS

                       

GAAP Net income

  $ 14,106     $ 8,840       59.6 %

Adjustments, net of tax *

    (4,853 )     -          

Adjusted net income

  $ 9,253     $ 8,840       4.7 %

Diluted weighted average common shares

    26,750       26,940          

GAAP Diluted EPS

  $ 0.53     $ 0.33       60.6 %

Adjusted diluted EPS *

  $ 0.35     $ 0.33       6.1 %
                         

Wholesale Adjusted Operating Income / Adjusted Operating Margin

                       

Wholesale GAAP operating income

  $ 16,928     $ 14,315       18.3 %

Adjustments (pre-tax) *

    (6,576 )     -          

Adjusted wholesale operating income *

  $ 10,352     $ 14,315       (27.7 %)
                         

Wholesale net sales

  $ 101,329     $ 118,072       (14.2 %)

Wholesale GAAP operating margin

    16.7 %     12.1 %        

Adjusted wholesale operating margin *

    10.2 %     12.1 %        
                         

Retail Adjusted Operating Income / Adjusted Operating Margin

                       

Retail GAAP operating income

  $ 1,564     $ (1,559 )     200.3 %

Adjustments (pre-tax) *

    148       -          

Adjusted retail operating income *

  $ 1,712     $ (1,559 )     209.8 %
                         

Retail net sales

  $ 137,266     $ 145,214       (5.5 %)

Retail GAAP operating margin

    1.1 %     (1.1 %)        

Adjusted retail operating margin *

    1.2 %     (1.1 %)        

 

23

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

* Adjustments to reported U.S. GAAP financial measures including gross profit and margin, operating income and margin, net income, and diluted EPS have been adjusted by the following (in thousands):

 

 

   

Three months ended

September 30,

 
   

2019

   

2018

 

Inventory write-downs and manufacturing overhead costs

  $ 4,140     $ -  

Adjustments to gross profit

  $ 4,140     $ -  
                 

Restructuring charges, including inventory write-downs (wholesale)

  $ 4,771     $ -  

Gain on sale of Passaic, New Jersey property (wholesale)

    (11,497 )     -  

Other professional fees incurred (wholesale)

    150       -  

Retail acquisition costs and other restructuring charges (retail)

    148       -  

Adjustments to operating income

  $ (6,428 )   $ -  

Adjustments to income before income taxes

  $ (6,428 )   $ -  

Related income tax effects (1)

    1,575       -  

Adjustments to net income

  $ (4,853 )   $ -  

 

(1)

Calculated using a rate of 24.4% in fiscal 2020 and 24.5% in fiscal 2019.

 

Liquidity

 

At September 30, 2019, we held cash and cash equivalents of $45.9 million compared with $20.8 million at June 30, 2019. Our principal sources of liquidity include cash and cash equivalents, cash flow from operations, and amounts available under our credit facility. Cash and cash equivalents aggregated to 7.0% of our total assets at September 30, 2019, compared with 7.2% of our total assets a year ago and 4.1% at June 30, 2019. Our cash and cash equivalents increased $25.1 million during the first quarter of fiscal 2020 due to net cash provided by operating activities of $23.4 million and proceeds from the sale of our Passaic property $11.6 million, partially offset by $5.1 million in dividend payments, $3.4 million of capital expenditures and $1.3 million from design center acquisitions.

 

A summary of net cash provided by (used in) operating, investing, and financing activities for the three months ended September 30, 2019 and 2018 is provided below (in millions):

 

   

Three months ended

 
   

September 30,

 
   

2019

   

2018

 

Cash provided by (used in) operating activities

               

Net income plus other non-cash items

  $ 20.2