(8)
| Share-Based Compensation
|
All options are issued at the closing stock price on each grant date, and have a contractual term of 10 years. A summary of stock option activity occurring during the six months ended December 31, 2017 is presented below:
| | Shares
| |
Outstanding as of June 30, 2017
| | | 836,020 | |
Granted
| | | 19,482 | |
Exercised
| | | (5,166 | ) |
Canceled (forfeited/expired)
| | | (271,342 | ) |
Outstanding as of December 31, 2017
| | | 578,994 | |
| | | | |
Exerciseable as of December 31, 2017
| | | 410,060 | |
A summary of stock unit activity occurring during the six months ended December 31, 2017 is presented below.
| | | | | | | Weighted | |
| | | | | | | Average | |
| | | | | | | Grant Date | |
| | | Units | | | Fair Value | |
Non-vested units at June 30, 2017 | | | 308,330 | | | $ | 25.92 | |
Granted | | | 81,250 | | | | 25.42 | |
Vested | | | (59,211 | ) | | | 23.96 | |
Canceled (forfeited/expired) | | | - | | | | - | |
Non-vested units at December 31, 2017 | | | 330,369 | | | $ | 26.15 | |
A summary of restricted stock activity occurring during the six months ended December 31, 2017 is presented below.
| | | | | | | Weighted | |
| | | | | | | Average | |
| | | | | | | Grant Date | |
| | | Units | | | Fair Value | |
Non-vested shares at June 30, 2017 | | | - | | | $ | - | |
Granted | | | 16,234 | | | | 25.62 | |
Vested | | | - | | | | - | |
Canceled (forfeited/expired) | | | - | | | | - | |
Non-vested units at December 31, 2017 | | | 16,234 | | | $ | 25.62 | |
At December 31, 2017, there were 1,417,906 shares of common stock available for future issuance pursuant to the Stock Incentive Plan.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Basic and diluted earnings per share are calculated using the following weighted average share data (in thousands):
| | | Three months ended | | | Six months ended | |
| | | December 31, | | | December 31, | |
| | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Weighted average shares of common stock outstanding for basic calculation | | | 27,472 | | | | 27,666 | | | | 27,466 | | | | 27,696 | |
Effect of dilutive stock options and other share-based awards | | | 256 | | | | 279 | | | | 276 | | | | 283 | |
Weighted average shares of common stock outstanding adjusted for dilution calculation | | | 27,728 | | | | 27,945 | | | | 27,742 | | | | 27,979 | |
As of December 31, 2017 and 2016, stock options to purchase 256,319 and 464,495 common shares, respectively, were excluded from the respective diluted earnings per share calculations because their impact was anti-dilutive.
(10) Accumulated Other Comprehensive Income
Accumulated other comprehensive income consists of foreign currency translation adjustments which are the result of changes in foreign currency exchange rates related to our operations in Canada, Belgium, Honduras, and Mexico, and exclude income taxes given that the earnings of non-U.S. subsidiaries are deemed to be reinvested for an indefinite time. The table following sets forth the activity in accumulated other comprehensive income (loss) for the fiscal year-to-date period ended December 31, 2017 (in thousands).
Balance June 30, 2017 | | $ | (4,131 | ) |
Changes before reclassifications | | $ | (1,522 | ) |
Amounts reclassified from accumulated other comprehensive income | | $ | - | |
Current period other comprehensive income (loss) | | $ | (1,522 | ) |
Balance December 31, 2017 | | $ | (5,653 | ) |
(11) Financial Instruments
We determine fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the Company. In addition, the fair value of liabilities includes consideration of non-performance risk including our own credit risk. Each fair value measurement is reported in one of the three levels, determined by the lowest level input that is significant to the fair value measurement in its entirety. Level 1 inputs are based upon unadjusted quoted prices for identical instruments traded in active markets. Level 2 inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
The following section describes the valuation methodologies we use to measure different financial assets and liabilities at fair value.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents our assets and liabilities measured at fair value on a recurring basis at December 31, 2017 and June 30, 2017
(in thousands):
| | | December 31, 2017 | | | June 30, 2017 | |
| | | Level 1 | | | Level 2 | | | Balance | | | Level 1 | | | Level 2 | | | Balance | |
Cash equivalents | | $ | 49,050 | | | $ | - | | | $ | 49,050 | | | $ | 65,031 | | | $ | - | | | $ | 65,031 | |
Available-for-sale securities | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total | | $ | 49,050 | | | $ | - | | | $ | 49,050 | | | $ | 65,031 | | | $ | - | | | $ | 65,031 | |
Cash equivalents consist of money market accounts, and mutual funds in U.S. government and agency fixed income securities. We use quoted prices in active markets for identical assets or liabilities to determine fair value. There were no transfers between level 1 and level 2 during fiscal years 2018 or 2017. At December 31, 2017 and June 30, 2017, $7.1 million and $7.3 million, respectively, of cash equivalents were restricted and classified as a long-term asset. We did not hold any available-for-sale securities at December 31, 2017 or June 30, 2017.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
We measure certain assets, including our cost and equity method investments, at fair value on a nonrecurring basis. These assets are recognized at fair value when they are deemed to be other-than-temporarily impaired. During the six month period ended December 31, 2017, we did not record any other-than-temporary impairments on those assets required to be measured at fair value on a non-recurring basis.
(12) Segment Information
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 December 31, 2017, the Company operated 148 design centers (our retail segment) and our independent retailers operated 157 design centers. Our wholesale segment net sales include sales to our retail segment, which are eliminated in consolidation, sales to our independent retailers and unaffiliated third parties. Our retail segment net sales accounted for 78% of our consolidated net sales in the six months ended December 31, 2017. Our wholesale segment net sales accounted for 22%. Information for the three and six months ended December 31, 2017 and 2016 sales by product line for our wholesale segment is provided below:
| | | Three months ended | | | Six months ended | |
| | | December 31, | | | December 31, | |
| | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Case Goods | | | 31 | % | | | 32 | % | | | 32 | % | | | 32 | % |
Upholstered Products | | | 52 | % | | | 50 | % | | | 51 | % | | | 51 | % |
Home Accents and Other | | | 17 | % | | | 18 | % | | | 17 | % | | | 17 | % |
| | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % |
The proportion of retail segment sales by these product lines for the three and six months ended December 31, 2017 and 2016 is provided as follows:
| | | Three months ended | | | Six months ended | |
| | | December 31, | | | December 31, | |
| | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Case Goods | | | 29 | % | | | 31 | % | | | 30 | % | | | 30 | % |
Upholstered Products | | | 49 | % | | | 48 | % | | | 48 | % | | | 49 | % |
Home Accents and Other | | | 22 | % | | | 21 | % | | | 22 | % | | | 21 | % |
| | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % |
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Segment information for the three and six months ended December 31, 2017 and 2016 is provided below (in thousands):
| | | Three months ended | | | Six months ended | |
| | | December 31, | | | December 31, | |
| | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Net sales: | | | | | | | | | | | | | | | | |
Wholesale segment | | $ | 117,965 | | | $ | 113,693 | | | $ | 229,552 | | | $ | 228,257 | |
Retail segment | | | 152,991 | | | | 156,292 | | | | 294,566 | | | $ | 308,547 | |
Elimination of inter-company sales | | | (72,475 | ) | | | (75,313 | ) | | | (144,335 | ) | | | (148,845 | ) |
Consolidated Total | | $ | 198,481 | | | $ | 194,672 | | | $ | 379,783 | | | $ | 387,959 | |
| | | | | | | | | | | | | | | | | |
Operating income: | | | | | | | | | | | | | | | | |
Wholesale segment | | $ | 15,568 | | | $ | 14,179 | | | $ | 29,030 | | | $ | 30,670 | |
Retail segment | | | (635 | ) | | | 2,147 | | | | (3,408 | ) | | | 3,170 | |
Adjustment of inter-company profit (1) | | | 2,605 | | | | 768 | | | | 3,465 | | | | 1,591 | |
Consolidated Total | | $ | 17,538 | | | $ | 17,094 | | | $ | 29,087 | | | $ | 35,431 | |
| | | | | | | | | | | | | | | | | |
Depreciation & Amortization: | | | | | | | | | | | | | | | | |
Wholesale segment | | $ | 1,838 | | | $ | 1,869 | | | $ | 3,825 | | | $ | 3,779 | |
Retail segment | | | 3,116 | | | | 3,131 | | | | 6,215 | | | | 6,220 | |
Consolidated Total | | $ | 4,954 | | | $ | 5,000 | | | $ | 10,040 | | | $ | 9,999 | |
| | | | | | | | | | | | | | | | | |
Capital expenditures: | | | | | | | | | | | | | | | | |
Wholesale segment | | $ | 764 | | | $ | 1,944 | | | $ | 1,515 | | | $ | 5,583 | |
Retail segment | | | 1,564 | | | | 1,870 | | | | 3,466 | | | | 5,671 | |
Acquisitions | | | - | | | | - | | | | - | | | | - | |
Consolidated Total | | $ | 2,328 | | | $ | 3,814 | | | $ | 4,981 | | | $ | 11,254 | |
| | | December 31, | | | June 30, | |
| | | 2017 | | | 2017 | |
Total Assets: | | | | | | | | |
Wholesale segment | | $ | 275,596 | | | $ | 279,364 | |
Retail segment | | | 305,989 | | | | 319,341 | |
Inventory profit elimination (2) | | | (26,573 | ) | | | (30,483 | ) |
Consolidated Total | | $ | 555,012 | | | $ | 568,222 | |
(1)
| Represents the change in wholesale profit contained in the retail segment inventory at the end of the period.
|
(2)
| 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.
|
(13) Recently Adopted Accounting Pronouncements
In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” which states that inventory should be measured at the lower of cost and net realizable value. Net realizable value is defined as estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. We adopted the provisions of ASU 2015-11 effective July 1, 2017, applied prospectively. We do not believe that the adoption will have a material impact on our consolidated financial statements.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which requires the Company to present all deferred tax assets and liabilities as noncurrent. We adopted the provisions of ASU 2015-17 effective July 1, 2017. At June 30, 2017, we had net current deferred tax assets of $3.9 million which would have been classified as noncurrent under the new standard.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Stock Compensation. The objective of this amendment is part of the FASB’s Simplification Initiative as it applies to several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. We adopted the provisions of ASU 2016-09 effective July 1, 2017. For the fiscal year ended June 30, 2017, the Company recorded a credit to additional paid in capital of $0.1 million that under the new standard would have been recognized in income. Excess tax benefits were not material in fiscal year 2017.
(14) Subsequent Events
None
Item 2. Management’s’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussionThis Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”) is designed to provide a reader of our consolidated financial statements with a narrative from the perspective of our management on our financial condition, and results of operations, liquidity and certain other factors that may affect our future results. The MD&A should be read in conjunction with (i) our Consolidated Financial Statements,2023 Annual Report on Form 10-K, Current Reports on Form 8-K and other filings with the SEC, and the consolidated financial statements and related notes thereto, included in Item 1 of Part I of this Quarterly Report on Form 10-Q and (ii) our Annual Report on Form 10-K for the year ended June 30, 2017.10-Q.
The MD&A is presented in the following sections:
| - | Cautionary Note Regarding Forward-Looking Statements |
| - | Executive Overview |
| - | Key Operating Metrics |
| - | Results of Operations |
| - | Reconciliation of Non-GAAP Financial Measures |
| - | Liquidity |
| - | Capital Resources, including Material Cash Requirements |
| - | Other Arrangements |
| - | Significant Accounting Policies |
| - | Critical Accounting Estimates |
| - | Recent Accounting Pronouncements |
Cautionary Note Regarding Forward-Looking Statements
Management's discussion and analysis of financial condition and results of operations and other sections of thisThis Quarterly Report on Form 10-Q, contain forward-looking statementsincluding the MD&A, contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which. Generally, forward-looking statements represent our management’smanagement’s beliefs and assumptions concerning future events based on information currently available to uscurrent expectations, projections or trends relating to results of operations, financial results, financial condition, strategic objectives and plans, expenses, dividends, share repurchases, liquidity, use of cash and cash requirements, borrowing capacity, investments, future economic performance, and our future results.business and industry. Such forward-looking statements arecan be identified in this Quarterly Report on Form 10-Q and in documents incorporated herein by reference by use ofthe fact that they do not relate strictly to historical or current facts. These forward-looking statements may include words such as "anticipate", "believe", "plan", "estimate", "expect", "intend", “will”, “may”, “continue”, “project”, ”target”, “outlook”, “forecast”, “guidance”,“anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “continue,” “may,” “will,” “short-term,” “target,” “outlook,” “forecast,” “future,” “strategy,” “opportunity,” “would,” “guidance,” “non-recurring,” “one-time,” “unusual,” “should,” “likely,” and other words and terms of similar expressionsmeaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. We derive many of our forward-looking statements from operating budgets and forecasts, which are based upon many detailed assumptions. While the negativesCompany believes that its assumptions are reasonable, we caution that it is very difficult to predict the impact of such forward-looking words. These forward-lookingknown factors and it is impossible for the Company to anticipate all factors that could affect actual results and matters that are identified as “short term,” “non-recurring,” “unusual,” “one-time,” or other words and terms of similar meaning may in fact recur in one or more future financial reporting periods.
Forward-looking statements are subject to management decisionsrisks and various assumptions about future events, anduncertainties that may cause actual results to differ materially from those that are not guarantees of future performance.expected. Actual results could differ materially from those anticipated in the forward-looking statements due to a number of risks and uncertainties including, but not limited to:to the following: declines in certain economic conditions, which impact consumer confidence and spending; financial or operational difficulties due to competition from overseas manufacturersin the residential home furnishings industry; a significant shift in consumer preference toward purchasing products online; inability to maintain and domestic retailers; our anticipatingenhance the Ethan Allen brand; failure to successfully anticipate or respondingrespond to changes in consumer tastes and trends in a timely manner; our abilityinability to maintain current design center locations at current costs; failure to select and enhance our brand, marketingsecure appropriate retail locations; disruptions in the supply chain and advertising effortssupply chain management; fluctuations in the price, availability and pricing strategies; changesquality of raw materials and imported finished goods resulting in increased costs and production delays; competition from overseas manufacturers and domestic retailers; the number of manufacturing and distribution sites may increase exposure to business disruptions and could result in higher transportation costs; current and former manufacturing and retail operations and products are subject to increasingly stringent environmental, health and safety requirements; product recalls or product safety concerns; significant increased costs or potential liabilities as a result of environmental laws and regulations aimed at combating climate change; risk to reputation and stock price related to future disclosures on Environmental, Social and Governance (“ESG”) matters; extensive reliance on information technology systems to process transactions, summarize results, and manage the business and that of certain independent retailers; disruptions in both primary and back-up systems; cyber-attacks and the failure to maintain adequate cyber-security systems and procedures; loss, corruption and misappropriation of data and information relating to customers; global and local economic conditions thatuncertainty may materially adversely affect consumer demand and spending, our manufacturing operations or sources of merchandise and international operations; changes in U.S. policy related to imported merchandise; an economic downturn; our limited number of manufacturingtrade and logistics sites; fluctuations in the price, availability and quality of raw materials; environmental, health and safety requirements; product safety concerns; disruption to our technology infrastructure (including cyber attacks); increasing labor costs, competitive labor markets and our continued ability to retain high-qualitytax policies; reliance on certain key personnel, and risks of work stoppages; loss of key personnel or inability to hire additional qualified personnel; our ability to obtain sufficient external funding to financea shortage of qualified labor within our operations and growth;our supply chain; potential future asset impairment charges resulting from changes to estimates or projections used to assess assets’ fair value, financial results that are lower than current estimates or determinations to close underperforming locations; access to consumer credit;credit could be interrupted as a result of external conditions; risks associated with self-insurance related to health benefits; adverse developments with respect to specific financial institutions or the effectbroader financial services industry may lead to market-wide liquidity shortages, impair the ability of operating losses oncompanies to access working capital needs, and create additional market and economic uncertainty; failure to protect the Company’s intellectual property; hazards and risks which may not be fully covered by insurance; and other factors disclosed in Part I, Item 1A. Risk Factors, in our ability to pay cash dividends; 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; the effects of terrorist attacks or conflicts or wars involving the United States or its allies or trading partners; and those matters discussed in “Item 1A – Risk Factors” of our2023 Annual Report on Form 10-K, forand elsewhere here in this Quarterly Report on Form 10-Q.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
All forward-looking statements attributable to the year ended June 30, 2017, and elsewhereCompany, or persons acting on its behalf, are expressly qualified in their entirety by these cautionary statements, as well as other cautionary statements. A reader should evaluate all forward-looking statements made in this Quarterly Report on Form 10-Q in the context of these risks and our SEC filings. Accordingly, actual circumstances and results could differ materially from those contemplated by the forward-looking statements.
uncertainties. Given the risks and uncertainties surrounding forward-looking statements, you should not place undue reliance on these statements. Many of these factors are beyond our ability to control or predict. OurThe forward-looking statements speakincluded in this Quarterly Report on Form 10-Q are made only as of the date of this Quarterly Report on Form 10-Q. Other than as required by law, wehereof. We undertake no obligation to publicly update or revise any forward-looking statements,statement, whether as a result of new information, future events or otherwise.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIESotherwise, except as otherwise required by law.
Critical Accounting PoliciesExecutive Overview
The Company’s consolidated financial statements are based on the accounting policies used. Certain accounting polices require that estimates and assumptions be made by management for useWho We Are. Founded in the preparation of the financial statements. Critical accounting policies are those that are central to the presentation of the Company’s financial condition and results and that require subjective or complex estimates by management. There have been no other changes with respect to the Company’s critical accounting policies from those disclosed in its 2017 Annual Report on Form 10-K filed with the SEC on August 2, 2017. Also see Note 13, Recently Adopted Accounting Pronouncements.
Overview
We are1932, Ethan Allen is a leading interior design company, and manufacturer and retailer of qualityin the home furnishings. Founded over 80 years ago, today wefurnishings marketplace. We are a leading internationalglobal luxury home fashion brand doing business in North America, Europe, Asia and the Middle East. We arethat is vertically integrated from product design through home delivery, affordingwhich offers our clientele a value proposition of style,customers stylish product offerings, artisanal quality and price.personalized service. We offer complementaryare known for the quality and craftsmanship of our products as well as for the exceptional personal service from design to delivery. We provide complimentary interior design service to our clients and sell a full range of furniture products and decorative accentshome furnishings through ethanallen.com and a retail network of approximately 300 design centers inlocated throughout the United StatesU.S. and abroad. Theabroad as well as online at ethanallen.com.
Ethan Allen design centers represent a mix of locations operated by the Company and independent licensees and our ownlicensees. As of March 31, 2024, the Company operated 141 retail segment.design centers; 137 located in the U.S. and four in Canada. Our independently operated design centers are located in the U.S., Asia, the Middle East and Europe. We own and operate nineten manufacturing facilities, including sixfour manufacturing plants, and one sawmill, one rough mill and a kiln dry lumberyard in the United States and oneU.S., two upholstery manufacturing plant eachplants in Mexico and one case goods manufacturing plant in Honduras. Approximately 75% of our products are manufactured or assembled in the North American plants. We also contract with various suppliers located in Europe, Asia and other various countries to produce products that support our business.
Ethan Allen was named to Newsweek’s list of America’s Best Retailers, including the #1 retailer of Premium Furniture, during fiscal 2024. This award is presented by Newsweek and Statista Inc., a leading statistics portal and industry ranking provider. The final assessment and rankings were the result of an independent survey of more than 9,000 customers who have shopped at retail stores in person in the past three years and based on the likelihood of recommendation and the evaluation of products, customer service, atmosphere, accessibility and store layout.
For the fifth year in a row, the Mexican Center for Corporate Philanthropy and the Alliance for Corporate Social Responsibility recognized Ethan Allen’s upholstery manufacturing operations in Silao, as “Environmentally and Socially Responsible” for our ongoing commitment to socially responsible management.
Business Model. We are an Interior Design Destination. Our business model is to maintain continued focus on (i) communicating our messages with strong advertising and marketing campaigns,providing relevant product offerings, (ii) capitalizing on the strength ofprofessional and personal service offered to our customers by our interior design professionals, and management(iii) leveraging the benefits of our vertical integration including a strong manufacturing presence in our retail design centers, (iii) utilizing ethanallen.com as a key marketing tool to drive traffic to a network of 200 North American design centers located near our demographic base,America, (iv) regularly investing in new technologies across key aspects of our vertically integrated business, (v) maintaining a strong logistics network, (vi) communicating our messages with strong advertising and (v) leveragingmarketing campaigns, and (vii) being socially responsible. We seek to constantly reinvent our projection and product offerings through a broad selection of products, designed to complement one another, reflecting current fashion trends in home furnishing under the benefitsumbrella of ourClassics with a Modern Perspective. Our vertical integration by maintaining our manufacturing capacity inis a competitive advantage for us. Our 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 an estimated 2,000 motivated interior design professionals network-wide, which we believe makes us the world’s leading interior design network;
|
| ●
| 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 believe our network of professionally trained interior design professionals differentiates us significantly from our competitors. We continue to strengthen the level of service, professionalism, and interior design competence, as well as to improve the efficiency of our retail operations. We believe that over time, we will continue to benefit from (i) continuous repositioning of our retail network, (ii) frequent new product introductions, (iii) new and innovative marketing promotions and effective use of targeted advertising media, and (iv) continued use of the latest technology combined with personal service from our interior design professionals.
Beginning in the fall of 2014 and through the fall of 2016; we completed a major transformation of our product offerings, which refreshed over 70% of our entire line of products. During the spring of 2017 we expanded the reach of our Ethan Allen | Disney home line by selling a selection on shopdisney.com and launching it in the China market, we were awarded a blanket purchase agreement for the Department of State “Worldwide Residential Furniture Program” and we entered into an agreement with Amazon to sell products through the Amazon marketplace. During the fall of 2017 we introduced Passport, a focused collection of unique artisan crafted items inspired by designs from around the world. We also announced the planned launch in the spring of 2018 of our new Uptown collection, which features a modern perspective on classic designs.
During the first quarter of fiscal 2018, we were negatively impacted by adverse weather affecting sales,American manufacturing and deliverylogistics operations are an integral part of our products. Additionally, our net delivered salesan overall strategy to maximize production efficiencies and profitability were negatively affected by first run production of floor samples for Passport, which launched in November, and first run production of product for the Department of State “Worldwide Residential Furniture Program”. Additionally, high order volume from the Department of State together with the new product runs further impacted production capacity which resulted in production and shipping delays, which continued into the second quarter of fiscal 2018. Additionally, with the timing of the holidays in November and December resulting in some downtime in our manufacturing plants, disruptions to our Honduras product flow due to social unrest related to the Honduran elections held in November, as well as severe weather events in December, many of the expected shipping dates for the Department of State orders got delayed to the third quarter. As a result, our retail division and wholesale backlogs remained at higher levels at the end of the second quarter compared to the prior year quarter.maintain this competitive advantage.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
While we implement major product introductions, such as the introductions described above,Talent. As of March 31, 2024, our employee count totaled 3,448, with 2,408 employees in our wholesale segment experiences some disruptionsand 1,040 in manufacturing as we change tooling and manufacturing methods, build prototypes and then ramp up production. Inour retail segment. Compared to a year ago, our wholesale segment headcount is down 12.2% while our retail segment some disruption also occursis 3.1% lower. Our employee count decreased 8.0% during fiscal 2024, reflective of manufacturing efficiencies gained through the use of technology combined with reduced production from lower available backlog and a decline in our design centersincoming written orders. Our retail segment headcount decreased 3.2% during fiscal 2024 as we update floor displays,continue to streamline administrative workflows while seeking to ensure the ability to offer interior design services.
Fiscal 2024 Third Quarter in Review (1). We maintained a robust balance sheet, a strong gross margin and sella double-digit operating margin despite challenging economic conditions, including ongoing elevated inflation and interest rates, which continue to impact the remainderhome furnishings industry. We remain cautiously optimistic as we believe that the strength and stability of our olderbalance sheet has us well positioned to maximize our vertically integrated structure in anticipation of a better macroeconomic environment in the future. We believe the strong value proposition of our current assortment of products along with the addition of several new products recently introduced will complement the wide array of custom home furnishings Ethan Allen has to offer.
We ended the quarter with cash, cash equivalents and investments of $181.1 million and no outstanding debt. Continuing our history of returning capital to shareholders, our Board declared a regular quarterly cash dividend of $0.36 per share, which was paid on clearanceFebruary 22, 2024. Consolidated net sales of $146.4 million were down 21.4% compared with a year ago primarily due to make space for the new product. These disruptions may affecta decline in delivered unit volume from lower available backlog and reduced production from slowing demand combined with lower design center traffic and contract sales. Retail written orders were down 8.6% compared with a year ago while wholesale written orders declined 14.6%. A strong consolidated gross margin of 61.3% was due to a change in sales mix, lower raw material input costs, reduced headcount, lower fuel costs and leveraging investments in technology partially offset by lower unit volume sales and expenses.higher sales of designer floor samples. Our adjusted operating margin of 10.0% was driven by disciplined cost control initiatives. Adjusted diluted earnings per share was $0.48 compared with $0.86 a year ago. Cash generated from operations totaled $23.7 million, compared to $33.4 million in the prior year quarter driven primarily due to the decrease in net sales.
(1) | Refer to the Reconciliation ofNon-GAAP Financial Measures section within the MD&A for the reconciliation of GAAP to adjusted key financial metrics. |
Results of OperationsKey Operating Metrics
A summary of our consolidated operationskey operating metrics is presented in the following tables. In this Item 2 of this quarterly report, unless otherwise noted, all comparisons in the discussion are from the three or six month period ended December 31, 2017 to the comparable prior year fiscal three or six month period ($ intable (in millions, except per share amounts)data).
| | | Three months ended December 31, | | | Six months ended December 31, | |
| | | 2017 | | | % | | | 2016 | | | % | | | 2017 | | | % | | | 2016 | | | % | |
Net sales | | $ | 198.5 | | | | 100.0 | % | | $ | 194.7 | | | | 100.0 | % | | $ | 379.8 | | | | 100.0 | % | | $ | 388.0 | | | | 100.0 | % |
Gross profit | | | 107.8 | | | | 54.3 | % | | | 108.1 | | | | 55.5 | % | | | 208.1 | | | | 54.8 | % | | | 216.6 | | | | 55.8 | % |
Selling, general and administrative expenses | | | 90.3 | | | | 45.5 | % | | | 91.0 | | | | 46.8 | % | | | 179.0 | | | | 47.1 | % | | | 181.2 | | | | 46.7 | % |
Operating income | | | 17.5 | | | | 8.8 | % | | | 17.1 | | | | 8.8 | % | | | 29.1 | | | | 7.7 | % | | | 35.4 | | | | 9.1 | % |
Net income | | | 14.9 | | | | 7.5 | % | | | 10.7 | | | | 5.5 | % | | | 22.3 | | | | 5.9 | % | | | 22.2 | | | | 5.7 | % |
Earnings per diluted share | | $ | 0.54 | | | | | | | $ | 0.38 | | | | | | | $ | 0.80 | | | | | | | $ | 0.79 | | | | | |
Net cash provided by operating activities | | $ | (3.5 | ) | | | | | | $ | (0.0 | ) | | | | | | $ | 14.2 | | | | | | | $ | 27.5 | | | | | |
The components of consolidated revenues and operating income (loss) by business segment are as follows (in millions):
| | | Three months ended December 31, | | | Six months ended December 31, | |
| | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Revenue: | | | | | | | | | | | | | | | | |
Wholesale segment | | $ | 118.0 | | | $ | 113.7 | | | $ | 229.5 | | | $ | 228.3 | |
Retail segment | | | 153.0 | | | | 156.3 | | | | 294.6 | | | | 308.5 | |
Elimination of inter-segment sales | | | (72.5 | ) | | | (75.3 | ) | | | (144.3 | ) | | | (148.8 | ) |
Consolidated revenue | | $ | 198.5 | | | $ | 194.7 | | | $ | 379.8 | | | $ | 388.0 | |
| | | | | | | | | | | | | | | | | |
Operating income (loss): | | | | | | | | | | | | | | | | |
Wholesale segment | | $ | 15.5 | | | $ | 14.2 | | | $ | 29.0 | | | $ | 30.6 | |
Retail segment | | | (0.6 | ) | | | 2.1 | | | | (3.4 | ) | | | 3.2 | |
Adjustment for inter-company profit (1) | | | 2.6 | | | | 0.8 | | | | 3.5 | | | | 1.6 | |
Consolidated operating income | | $ | 17.5 | | | $ | 17.1 | | | $ | 29.1 | | | $ | 35.4 | |
| | | Three months ended
March 31, | | | Nine months ended
March 31, | | | | | |
| | | 2024 | | | % of Sales | | | % Chg | | | 2023 | | | % of Sales | | | % Chg | | | 2024 | | | % of Sales | | | % of Chg | | | 2023 | | | % of Sales | | | % of Chg | |
Net sales | | $ | 146.4 | | | | 100.0 | % | | | (21.4% | ) | | $ | 186.3 | | | | 100.0 | % | | | (5.7% | ) | | $ | 477.6 | | | | 100.0 | % | | | (20.9% | ) | | $ | 604.0 | | | | 100.0 | % | | | 2.7 | % |
Gross profit | | $ | 89.8 | | | | 61.3 | % | | | (19.5% | ) | | $ | 111.6 | | | | 59.9 | % | | | (6.6% | ) | | $ | 290.6 | | | | 60.8 | % | | | (20.4% | ) | | $ | 365.2 | | | | 60.5 | % | | | 4.1 | % |
Operating income | | $ | 15.3 | | | | 10.5 | % | | | (46.8% | ) | | $ | 28.8 | | | | 15.5 | % | | | (11.8% | ) | | $ | 55.4 | | | | 11.6 | % | | | (47.5% | ) | | $ | 105.5 | | | | 17.5 | % | | | 9.6 | % |
Adjusted operating income(1) | | $ | 14.6 | | | | 10.0 | % | | | (48.5% | ) | | $ | 28.3 | | | | 15.2 | % | | | (9.5% | ) | | $ | 55.9 | | | | 11.7 | % | | | (45.7% | ) | | $ | 102.9 | | | | 17.0 | % | | | 12.1 | % |
Net income | | $ | 13.0 | | | | 8.8 | % | | | (42.1% | ) | | $ | 22.4 | | | | 12.0 | % | | | (9.5% | ) | | $ | 45.3 | | | | 9.5 | % | | | (43.7% | ) | | $ | 80.4 | | | | 13.3 | % | | | 12.0 | % |
Adjusted net income(1) | | $ | 12.4 | | | | 8.5 | % | | | (43.7% | ) | | $ | 22.0 | | | | 11.8 | % | | | (7.2% | ) | | $ | 45.7 | | | | 9.6 | % | | | (41.8% | ) | | $ | 78.4 | | | | 13.0 | % | | | 14.7 | % |
Diluted EPS | | $ | 0.50 | | | | | | | | (42.5% | ) | | $ | 0.87 | | | | | | | | (10.3% | ) | | $ | 1.77 | | | | | | | | (43.6% | ) | | $ | 3.14 | | | | | | | | 11.7 | % |
Adjusted diluted EPS(1) | | $ | 0.48 | | | | | | | | (44.2% | ) | | $ | 0.86 | | | | | | | | (7.5% | ) | | $ | 1.78 | | | | | | | | (42.0% | ) | | $ | 3.07 | | | | | | | | 14.6 | % |
Cash flow from operating activities | | $ | 23.7 | | | | | | | | (29.2% | ) | | $ | 33.4 | | | | | | | | 93.2 | % | | $ | 54.0 | | | | | | | | (27.4% | ) | | $ | 74.4 | | | | | | | | 85.9 | % |
Adjusted annualized return on equity | | | | | | | | | | | | | | | | | | | | | | | | | | | 12.2 | % | | | | | | | | | | | 25.1 | % | | | | | | | | |
Wholesale written orders | | | | | | | | | | | (14.6% | ) | | | | | | | | | | | (9.3% | ) | | | | | | | | | | | (14.0% | ) | | | | | | | | | | | (10.8% | ) |
Retail written orders | | | | | | | | | | | (8.6% | ) | | | | | | | | | | | (12.3% | ) | | | | | | | | | | | (10.4% | ) | | | | | | | | | | | (12.3% | ) |
| (1) | RepresentsRefer to the change in wholesale profit contained in Ethan Allen operated design center inventory existing atReconciliation of Non-GAAP Financial Measures section within the endMD&A for the reconciliation of the period.GAAP to adjusted key financial metrics.
|
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
The following table shows our design center information.
| | | Fiscal 2024 | | | Fiscal 2023 | |
| | | Independent | | | Company- | | | | | | | Independent | | | Company- | | | | | |
| | | retailers | | | operated | | | Total | | | retailers | | | operated | | | Total | |
Retail Design Center activity: | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at July 1 | | | 48 | | | | 139 | | | | 187 | | | | 50 | | | | 141 | | | | 191 | |
New locations | | | - | | | | 3 | | | | 3 | | | | 2 | | | | 2 | | | | 4 | |
Closures | | | (1 | ) | | | (1 | ) | | | (2 | ) | | | (2 | ) | | | (4 | ) | | | (6 | ) |
Transfers | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Balance at March 31 | | | 47 | | | | 141 | | | | 188 | | | | 50 | | | | 139 | | | | 189 | |
Relocations (in new and closures) | | | - | | | | 1 | | | | 1 | | | | 1 | | | | 2 | | | | 3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Retail Design Center geographic locations: | | | | | | | | | | | | | | | | | | | | | | | | |
United States | | | 32 | | | | 137 | | | | 169 | | | | 33 | | | | 135 | | | | 168 | |
Canada | | | - | | | | 4 | | | | 4 | | | | - | | | | 4 | | | | 4 | |
Europe | | | 1 | | | | - | | | | 1 | | | | 1 | | | | - | | | | 1 | |
Middle East and Asia | | | 14 | | | | - | | | | 14 | | | | 16 | | | | - | | | | 16 | |
Total | | | 47 | | | | 141 | | | | 188 | | | | 50 | | | | 139 | | | | 189 | |
Results of Operations
We measureFor an understanding of the significant factors that influenced our financial performance ofduring the three and nine months ended March 31, 2024 and 2023, 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 thousands) | | Three months ended | | | Nine months ended | |
| | | March 31, | | | March 31, | |
| | | 2024 | | | 2023 | | | % Change | | | 2024 | | | 2023 | | | % Change | |
Consolidated net sales | | $ | 146,421 | | | $ | 186,316 | | | | (21.4% | ) | | $ | 477,589 | | | $ | 604,007 | | | | (20.9% | ) |
Wholesale net sales | | $ | 89,825 | | | $ | 114,195 | | | | (21.3% | ) | | $ | 279,882 | | | $ | 335,093 | | | | (16.5% | ) |
Retail net sales | | $ | 122,616 | | | $ | 150,923 | | | | (18.8% | ) | | $ | 395,414 | | | $ | 506,344 | | | | (21.9% | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated gross profit | | $ | 89,824 | | | $ | 111,551 | | | | (19.5% | ) | | $ | 290,601 | | | $ | 365,187 | | | | (20.4% | ) |
Consolidated gross margin | | | 61.3 | % | | | 59.9 | % | | | | | | | 60.8 | % | | | 60.5 | % | | | | |
Consolidated Net Sales
Consolidated net sales for the three months ended March 31, 2024 decreased $39.9 million or 21.4% compared to the prior year quarter due to an 18.8% reduction in retail sales through our Company-operated design centers based onand a decline of 21.3% in wholesale net sales and written orders booked on a comparable period basis. Comparable design centers are those which have been operating for at least 15 months, including relocated design centers provided the original and relocated design center location had been operating for at least 15 months on a combined basis. During the first three months of operations of newly opened design centers, written orders are booked but minimal net sales are achieved through the delivery of products. Design centers we acquire from independent retailers are included in comparable design center sales in their 13th full month of Ethan Allen-owned operations. The frequency of our promotional events as well as the timing of the end of those events can also affect the comparability of orders booked during a given period. shipments. Our international net sales are comprised of our wholesale segment sales to independent retailers and our retail segment sales to consumers through the Company operated international design centers. International net sales as a percent of our consolidated net sales were 10.0%impacted by a decline in delivered unit volume, a challenging consumer environment that led to lower incoming written orders, a difficult prior year comparative period, lower design center traffic partially due to adverse winter weather events in January 2024 and reduced available backlog.
Consolidated net sales for the nine months ended March 31, 2024 decreased $126.4 million or 20.9% compared to the prior year period primarily due to a 21.9% reduction in retail sales through our Company-operated design centers and a decline of 16.5% in wholesale net shipments. Consolidated net sales in the currentprior year were historically high as we benefited from delivery of significant backlog driven by heightened demand in prior periods.
Wholesale Net Sales
Wholesale net sales for the three months ended March 31, 2024 decreased $24.4 million or 21.3% compared to the prior year quarter due to decreases in intersegment sales to our Company-operated design centers, sales to our independent dealers and 8.5%contract sales. The decrease in sales primarily reflects a decline in delivered unit volume as the significant backlog built up in prior periods returns to pre-pandemic levels. Additionally, volume in the third quarter of fiscal 2024 was negatively impacted by winter weather events in January and the continued challenging consumer environment. Excluding intersegment sales to our retail segment, wholesale net sales decreased 32.7% compared to the prior year quarter. Our international sales, which represent 2.2% of total wholesale net sales, decreased from lower net sales to our international retailers in Southeast Asia and the Middle East partially offset by an increase in sales to China. Our contract sales, including shipments to the U.S. government General Services Administration (“GSA”) decreased due to lower available backlog, timing of purchases and slowdown in government spending.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Wholesale net sales for the nine months ended March 31, 2024 decreased $55.2 million or 16.5% compared to the prior year period primarily from a decline in delivered volume as a result of lower incoming written orders. Excluding intersegment sales to our retail segment, wholesale net sales decreased 15.9% compared to the prior year. Our international sales, which represent 2.0% of total wholesale net sales during fiscal 2024, were down 4.2% compared to the prior year due to a reduction in net sales to our international retailers in Southeast Asia and the Middle East partially offset by an increase in sales to China. Our contract sales, including shipments to the GSA decreased by 19.9% primarily from lower incoming orders.
Wholesale written orders, which represent orders booked through all of our channels, were down 14.6% for the three months ended March 31, 2024 compared to the prior year quarter. The decline in wholesale written orders is a result of the softening in the home furnishings market, ongoing inflationary pressures, high interest rates, a slow housing market, elevated designer floor sample sales at Retail, adverse winter weather and a slower contract business. Orders from our independent U.S. retail network decreased 11.1% while orders from our intersegment Company-operated design centers were down 8.6% and our contract orders were down 57.3%. These decreases were partially offset by an 8.7% increase in orders from our international retailers, mostly from China.
Wholesale written orders for the nine months ended March 31, 2024 were down 14.0% compared to the prior year period. Our independent U.S. retail network orders were down 10.0%, orders from our intersegment Company-operated design centers were down 12.5% and our contract orders were down 32.5% partially offset by an increase of 9.5% for our international retailers. The year-to-date decline in written orders is primarily a result of a pullback on discretionary home-related spending and a difficult prior year comparison.
Wholesale backlog was $57.7 million as of March 31, 2024, down 21.3% from a year ago; however it is more reflective of historical norms and pre-pandemic levels. The number of weeks of wholesale backlog as of March 31, 2024 was down compared to last year as we improved our delivery times during fiscal 2024 with notable improvements seen across each product category.
Retail Net Sales
Net sales from Company-operated design centers for the three months ended March 31, 2024 decreased $28.3 million or 18.8% compared to the prior year quarter. There was an 18.5% decrease in net sales within the U.S., while net sales from our Canadian design centers decreased 26.9%. The decline in retail net sales was primarily from a decline in delivered unit volume combined with less incoming written orders, lower available backlog, lower average ticket price, winter weather events in January which caused reduced design center traffic and decreased premier home delivery revenue partially offset by higher designer floor sample sales and a reduction in sales returns.
Net sales from Company-operated design centers for the nine months ended March 31, 2024 decreased $110.9 million or 21.9% compared to the prior year period. There was a 22.2% decrease in net sales within the U.S., while net sales from our Canadian design centers decreased 8.1%. The decline in retail net sales within the U.S. was primarily from a decline in delivered unit volume as a result of lower manufacturing levels, combined with lower written orders and decreased premier home delivery revenue partially offset by higher designer floor sample sales.
Retail written orders for the three months ended March 31, 2024 decreased 8.6% compared with the prior year period due to the continued softening of home-related spending, reduced design center traffic, high interest rates, ongoing inflationary pressure and a slow housing market partially offset by higher designer floor sample sales and strong promotional activity, including extended financing terms that led to increased demand. For the nine months ended March 31, 2024, retail written orders were down 10.4% year over year as weaker traffic, inflationary pressure, and elevated interest rates contributed to the softening of consumer interest in home furnishings.
To help drive traffic and related business to our retail design centers, we hosted grand reopening celebrations during fiscal 2024, unveiling the repositioning of our retail network as an Interior Design Destination offering guests a chance to view new products, meet each location’s interior designers and experience the newly refreshed and reimagined design centers. We also utilized extended financing terms over select promotional periods, which helped drive traffic and business around holidays. As of March 31, 2024, there were 141 Company-operated design centers compared to 139 in the prior year, with new locations in The Villages, Florida and Avon, Ohio and a relocation of our Manhattan (New York, New York) design center.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Consolidated Gross Profit and Margin
Consolidated gross profit for the three months ended March 31, 2024 decreased $21.7 million or 19.5% compared to the prior year quarter due to sales declines within both our wholesale and retail segments, including lower delivered unit volume, and a decrease in average retail ticket price partially offset by an improved consolidated gross margin. Wholesale gross profit decreased 29.3% primarily due to a 21.3% decline in sales and a lower gross margin driven by reduced production levels. Retail gross profit decreased 19.4% due to the 18.8% decrease in net shipments, combined with a decrease in average ticket price and a lower retail gross margin driven by higher sales of designer floor samples.
Consolidated gross profit for the nine months ended March 31, 2024 decreased $74.6 million or 20.4% compared to the prior year period due to sales declines within both our wholesale and retail segments, lower delivered unit volume and a decrease in average ticket price. These decreases were partially offset by an increase in our consolidated gross margin and a favorable product mix. Wholesale gross profit decreased 17.3% primarily due to a 16.5% reduction in net sales. Retail gross profit decreased 22.4% primarily due to the 21.9% decrease in net shipments, a lower average ticket price and elevated sales of designer floor samples which led to a lower retail gross margin.
Consolidated gross margin for the three months ended March 31, 2024 was 61.3% compared to 59.9% in the prior year quarter. The following tables show selected design center location information.
| | | Fiscal 2018 | | | Fiscal 2017 | |
| | | Independent | | | Company- | | | | | | | Independent | | | Company- | | | | | |
| | | retailers | | | operated | | | Total | | | retailers | | | operated | | | Total | |
Retail Design Center location activity: | | | | | | | | | | | | | | | | | | | | | |
Balance at beginning of period | | | 155 | | | | 148 | | | | 303 | | | | 153 | | | | 143 | | | | 296 | |
New locations | | | 6 | | | | 2 | | | | 8 | | | | 5 | | | | 3 | | | | 8 | |
Closures | | | (4 | ) | | | (2 | ) | | | (6 | ) | | | (3 | ) | | | - | | | | (3 | ) |
Transfers | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Balance at end of period | | | 157 | | | | 148 | | | | 305 | | | | 155 | | | | 146 | | | | 301 | |
Relocations (in new and closures) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Retail Design Center geographic locations: | | | | | | | | | | | | | | | | | | | | | |
United States | | | 47 | | | | 142 | | | | 189 | | | | 49 | | | | 140 | | | | 189 | |
Canada | | | - | | | | 6 | | | | 6 | | | | - | | | | 6 | | | | 6 | |
China | | | 85 | | | | - | | | | 85 | | | | 82 | | | | - | | | | 82 | |
Other Asia | | | 12 | | | | - | | | | 12 | | | | 11 | | | | - | | | | 11 | |
Europe | | | 6 | | | | - | | | | 6 | | | | 6 | | | | - | | | | 6 | |
Middle East | | | 7 | | | | - | | | | 7 | | | | 7 | | | | - | | | | 7 | |
Total | | | 157 | | | | 148 | | | | 305 | | | | 155 | | | | 146 | | | | 301 | |
Second Quarter Ended December 31, 2017 Compared to Second Quarter Ended December 31, 2016
Consolidated net140-basis point increase in consolidated gross margin was primarily from a change in sales for mix, lower manufacturing input costs, reduced headcount, improved premier home delivery margin and leveraging investments in technology partially offset by deleveraging from lower unit volume, lower manufacturing production and higher sales of designer floor samples. Our sales mix, which represents the quarterpercentage of $198.5 millionretail sales compared to $194.7 million fortotal consolidated sales, increased to 83.7% in the same periodcurrent year third quarter, up from 81.0% in the prior year, which positively impacted our consolidated gross margin. The decrease in our wholesale gross margin was driven by reduced manufacturing production, which led to higher plant manufacturing variances, combined with inflationary pressure on labor partially offset by lower raw material and fuel costs and reduced headcount. As a result of the decline in incoming written orders and lower available backlog, we reduced our manufacturing headcount and production levels. Retail gross margin was slightly lower than a year ago due to elevated sales of designer floor samples, a lower average ticket price, a change in the product mix and higher financing costs partially offset by an improved premier home delivery margin.
Consolidated gross margin for the nine months ended March 31, 2024 was 60.8% comparable with 60.5% in the prior year period. Both our wholesale segment gross margin and retail segment gross margin remained comparable to the prior year period. Retail sales, as a percentage of total consolidated sales, were 82.8% in the current year period, down from 83.8% in the prior year, which negatively affected our consolidated gross margin. This negative impact was offset by lower manufacturing input costs and reduced headcount.
SG&A Expenses
(in thousands) | | Three months ended | | | Nine months ended | |
| | | March 31, | | | March 31, | |
| | | 2024 | | | 2023 | | | % Change | | | 2024 | | | 2023 | | | % Change | |
SG&A expenses | | $ | 75,253 | | | $ | 83,233 | | | | (9.6% | ) | | $ | 234,734 | | | $ | 262,342 | | | | (10.5% | ) |
Restructuring and other charges, net of gains | | $ | (754 | ) | | $ | (470 | ) | | | 60.4 | % | | $ | 503 | | | $ | (2,662 | ) | | | (118.9% | ) |
Consolidated operating income | | $ | 15,325 | | | $ | 28,788 | | | | (46.8% | ) | | $ | 55,364 | | | $ | 105,507 | | | | (47.5% | ) |
Consolidated GAAP operating margin | | | 10.5 | % | | | 15.5 | % | | | | | | | 11.6 | % | | | 17.5 | % | | | | |
Consolidated adjusted operating margin | | | 10.0 | % | | | 15.2 | % | | | | | | | 11.7 | % | | | 17.0 | % | | | | |
Wholesale operating income | | $ | 11,243 | | | $ | 18,805 | | | | (40.2% | ) | | $ | 36,437 | | | $ | 48,787 | | | | (25.3% | ) |
Retail operating income | | $ | 2,275 | | | $ | 12,598 | | | | (81.9% | ) | | $ | 14,399 | | | $ | 52,667 | | | | (72.7% | ) |
SG&A expenses for the three months ended March 31, 2024 decreased $8.0 million or 9.6% primarily due to lower selling expenses from less delivered net sales and a reduction in general and administrative costs. Consolidated selling expenses were down 15.3% while general and administrative costs decreased 1.0%. When expressed as a percentage of sales, SG&A expenses were 51.4% compared to 44.7% in the prior year quarter, an increase of 2.0%. While670 basis points driven by lower sales volume relative to fixed costs. SG&A expenses were down 9.6% while consolidated net sales decreased 21.4%, which led to a decrease in operating leverage.
Retail selling expenses were down 11.8% due to lower designer variable compensation and delivery costs from the 18.8% decrease in retail net sales partially offset by increased advertising. Wholesale selling expenses, which includes our logistics operation, were down 24.8% primarily from a 19.8% decrease in wholesale units shipped, lower freight costs (including fuel), and less outgoing distribution costs combined with reduced headcount and less merchandising sample costs partially offset by increased software and web-development spend. Our consolidated advertising expenses during the third quarter of fiscal 2024 represented 3.4% of net sales, up from 2.2% a year ago due to additional direct mail campaigns. Consolidated general and administrative expenses decreased 1.0% primarily due to lower employee compensation from reduced headcount and less professional fees partially offset by higher retail occupancy costs, including rent from our new design centers, and increased employee benefit costs.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
SG&A expenses for the wholesale segment increased, they were hampered by disruptions in the manufacturing processesnine months ended March 31, 2024 decreased $27.6 million or 10.5% primarily due to first production runslower selling expenses from less sales. Consolidated selling expenses were down 16.9% while general and administrative costs decreased 0.2%. When expressed as a percentage of new product lines and production to satisfy Department of State orders absorbing a significant portion of our manufacturing capacity. This resulted in reduced shipments from wholesale to fill retail orders, which together with lower traffic and winter weather at our retail design centers translated into lower sales, for the retail segment.
Retail net sales for the quarter of $153.0 millionSG&A expenses were 49.1% compared to $156.3 million for43.4% in the prior year period, a decrease of 2.1%. Comparative retail570 basis points driven by lower sales relative to fixed costs. SG&A expenses were down 10.5% while consolidated net sales decreased 2.2%20.9%, partlywhich led to the decrease in our operating leverage.
Retail selling expenses were down 16.4% due to lower designer variable compensation and reduced delivery costs from the 21.9% decrease in retail net sales. Wholesale selling expenses were down 18.3% from lower freight costs (including fuel), a decrease in wholesale units shipped and reduced headcount and less advertising costs partially offset by an increase in technology spend. Consolidated advertising costs decreased 14.0% during the first nine months of fiscal 2024, but increased 20 basis points to 2.5% of net sales. Consolidated general and administrative expenses decreased 0.2% due to additional costs incurred for the design center projection refreshes and higher retail occupancy expenses from the addition of two new design centers in the last twelve months partially offset by lower employee compensation, including annual incentive compensation, and less professional fees. As part of our fiscal 2024 design center refresh initiative as the Interior Design Destination, we incurred incremental expenditures for new product swatches, samples, floor displays, painting, lighting and flooring.
Compared to a year ago, our consolidated headcount is down 9.6% or 368 associates (335 wholesale and 33 retail) as we continue to identify operational efficiencies and leverage the use of technology to streamline workflows to help reduce our human capital costs throughout our vertically-integrated enterprise.
Restructuring and other charges, net of gains
We recorded a gain of $0.8 million within Restructuring and other charges, net of gains during the three months ended March 31, 2024 compared to a gain of $0.5 million for the prior year period. The current year third quarter included a gain of $0.7 million from the amortization of the deferred liability generated from the sale-leaseback transaction completed on August 1, 2022 as well as $0.1 million in additional insurance proceeds received for the Vermont flood. In the year ago third quarter we recorded a $0.7 million gain related to the amortization of the deferred liability generated from the sale-leaseback transaction partially offset by $0.2 million of severance costs.
Restructuring and other charges, net of gains for the nine months ended March 31, 2024, was a $0.5 million charge compared to a gain of $2.7 million in the prior year period. Fiscal 2024 restructuring charge of $0.5 million related primarily to the $2.2 million net loss incurred from the damage sustained in the July 2023 Vermont flooding and severance costs of $0.2 million partially offset by a $1.9 million gain related to the amortization of the above-mentioned deferred liability generated from the sale-leaseback transaction. Vermont flood losses incurred from the disposal of damaged inventory, inoperable machinery equipment from water damage, facility cleanup, and restoration, were $2.2 million, net of insurance recoveries and grant proceeds. In the prior year period, we recognized a gain of $3.6 million on the sale-leaseback transaction partially offset by severance costs of $0.9 million.
Consolidated Operating Income
Consolidated operating income for the three months ended March 31, 2024 decreased $13.5 million or 46.8% and as a percentage of net sales throughwas 10.5%, compared to 15.5% in the internet. There were 148 Company-operated design centers during the quarter, up from 146prior year quarter. Adjusted operating income, which excludes restructuring and other charges, net of gains was $14.6 million, or 10.0% of net sales compared with $28.3 million, or 15.2% of net sales in the prior year quarter. The reduction in sales is primarily a reflection of delayed shipments to the retail segment from the wholesale segment as a large share of manufacturing capacity was absorbed by Department of State production. Total written business (new orders booked) decreased 5.8%, and comparable design center written business in the quarter decreased 6.2%. Written business was impacted by lower traffic and for some retail design centers, by winter weather.
Wholesale net sales for the quarter of $118.0 million compared to $113.7 million for the prior year period, an increase of 3.8%. The increase in sales is due to increases to our international and domestic independent retailers and the Department of State. Disruptions were caused by first production runs as discussed previously.
Gross profit for the quarter of $107.8 million compared to $108.1 million for the prior year period, a decrease of 0.3%, with a decrease in our retail segment and an increase in our wholesale segments. Gross profit for wholesale improved due to a 3.8% increase in sales, while decreased gross profit for our retail segment was due to a 2.1% decrease in sales along with increased promotional activity. Consolidated gross margin for the quarter was 54.3% compared to 55.5%. Retail sales as a percent of total consolidated sales was 77.1% for the quarter compared to 80.3% in the prior year quarter, decreasing our consolidated gross margin due to mix.
Operating expenses for the quarter of $90.3 million, or 45.5% of net sales, decreased $0.8 million compared to $91.0 million, or 46.8% of net sales, for the prior year period. The 0.9% decrease to prior year was primarily due to a number of minor non-recurring items in the current year.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Operating income and profit margin for the quarter of $17.5 million, or 8.8% of net sales, compared to $17.1 million, or 8.8% of net sales, for the prior year period. The primary causes for the 2.6% increase in operating income were the positive effects of the increase in wholesale sales, partly offset by lower sales in retail during the current year quarter.
Retail operating income for the quarter of a loss of $0.6 million, or -0.4% of sales, compared to income of $2.1 million, or 1.4% of sales, for the prior year period. The lower operating income and margin in the current quarter was driven primarily by lower consolidated net sales partially offset by gross margin expansion and lower operating expenses. We remain focused on a disciplined approach to cost savings and expense control in a declining net sales environment, which helped mitigate the impact of the reduction in consolidated net sales.
WholesaleConsolidated operating income for the quarter of $15.5nine months ended March 31, 2024 decreased $50.1 million or 13.2%47.5% and as a percentage of net sales was 11.6%, compared to $14.2 million, or 12.5% of sales, for17.5% in the prior year period. The increaseAdjusted operating income, which excludes restructuring and other charges, net of gains was largely due to the increase in current period sales.
Income tax expense for the quarter totaled $2.8 million compared to $6.3 million. Our effective tax rate was 16.0% in the quarter compared to 36.9%. The effective tax rate for the quarter was dramatically lower due to the Tax Act. The effective tax rate for the second quarter of fiscal 2018 primarily includes tax expense on that quarter’s net income, the tax benefit lost on the cancelation of stock options and tax and interest expense on uncertain tax positions, partially offset by tax benefit from the re-measurement of deferred tax assets and liabilities and the vesting of restricted stock units. The effective tax rate for the second quarter of fiscal 2017 primarily includes tax expense on that quarter’s net income, and tax and interest expense on uncertain tax positions, partially offset by the reversal and recognition of some uncertain tax positions. See footnote 3, Income Taxes, for further information.
Net income for the quarter of $14.9 million compared to $10.7 million for the prior year period increased 38.9%. This resulted in net income per diluted share for the quarter of $0.54 compared to $0.38, an increase of 42.1%. The largest single contributor to the increase was the reduced income tax rate for fiscal 2018.
Six Months Ended December 31, 2017 Compared to Six Months Ended December 31, 2016
Consolidated net sales year-to-date of $379.8 million compared to $388.0 million for the same period in the prior year, a decrease of 2.1%. Sales for the retail and wholesale segments were negatively affected mostly in the first quarter of fiscal 2018 by the hurricanes and disruptions in the manufacturing processes due to first production runs of new product lines, as discussed previously. While wholesale net sales increased compared to the prior year period, overall, an increase in wholesale net sales was more than offset by a decrease in retail sales.
Retail net sales year-to-date of $294.6 million compared to $308.5 million for the prior year period, a decrease of 4.5%. Comparative retail net sales decreased 5.5%, partly offset by an increase in net sales through the internet. There were 148 Company-operated design centers during the period, up from 146 in the prior year. The reduction in sales is primarily a reflection of the disruptions caused by the first production runs of new product lines and production to satisfy Department of State orders that delayed shipments to the retail segment from the wholesale segment and caused the retail undelivered order backlog to increase from the prior quarter. Total written business (new orders booked) decreased 1.9% and comparable design center written business year-to-date decreased 2.7%. Written business was also negatively affected by lower traffic at our retail design centers.
Wholesale net sales year-to-date of $229.6 million compared to $228.3 million for the prior year period, an increase of 0.6%. The increase in sales is primarily due to increases to our international and domestic independent dealers.
Gross profit year-to-date of $208.1 million compared to $216.6 million for the prior year period, a decrease of 3.9%, with a decrease in both our retail segment and wholesale segments. This was primarily due to the lower sales. Consolidated gross margin year-to-date was 54.8% compared to 55.8%. Retail sales as a percent of total consolidated sales was 77.6% year-to-date compared to 79.5% in the prior year period, decreasing our consolidated gross margin due to mix.
Operating expenses year-to-date of $179.0$55.9 million, or 47.1%11.7% of net sales compared to $181.2with $102.9 million, or 46.7%17.0% of net sales for the prior year period. The $2.1 million decrease was primarily due to lower sales in the current year, and also decreased advertising costs in the current year.
Operating income and profit margin year-to-date of $29.1 million, or 7.7% of net sales, compared to $35.4 million, or 9.1% of net sales, for the prior year period. The primary causes for the 17.9% decrease in operating income were lower sales in the first quarter of fiscal 2018 caused in part by the negative effects of the hurricanes and first production runs. During the second quarter of fiscal 2018 operating income was 2.6% greater than the previous fiscal period, and operating margin was 8.8% during both periods.
Retail operating income year-to-date of a loss of $3.4 million, or -1.2% of sales, compared to income of $3.2 million, or 1.0% of sales, for the prior year period. The lower operating income and margin in the current period was driven primarily by lower sales, partly offset by reduced operating expenses.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Wholesale operating income year-to-date of $29.0 million, or 12.6% of sales, compared to $30.7 million, or 13.4% of sales, for the prior year period. The decrease in operating income was largelydriven primarily by lower consolidated net sales partially offset by lower operating expenses.
Wholesale Operating Income
Wholesale operating income for the three months ended March 31, 2024 was $11.2 million or 12.5% of net sales compared with $18.8 million or 16.5% in the prior year quarter. Adjusted operating income, which excludes restructuring and other charges, net of gains, was $11.1 million or 12.4% of net sales compared with $19.0 million or 16.6% of net sales in the prior year quarter. The decrease in adjusted wholesale operating income was driven primarily by the 21.3% decline in wholesale net sales and the decline in wholesale gross margin partially offset by an 18.7% reduction in wholesale SG&A expenses.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Wholesale operating income for the nine months ended March 31, 2024 was $36.4 million or 13.0% of net sales compared with $48.8 million or 14.6% in the prior year period. Adjusted operating income, which excludes restructuring and other charges, net of gains, was $38.8 million or 13.9% of net sales compared with $49.0 million or 14.6% of net sales in the prior year period. The decrease in adjusted wholesale operating income was driven primarily by the 16.5% decline in wholesale net sales partially offset by the 14.6% reduction in wholesale SG&A expenses.
Retail Operating Income
Retail operating income for the three months ended March 31, 2024 was $2.3 million, or 1.9% of sales, compared with $12.6 million, or 8.3% of sales in the prior year quarter. Adjusted retail operating income, which excludes restructuring and other charges, net of gains was $1.6 million or 1.3% of net sales compared with $11.9 million or 7.9% of net sales in the prior year quarter. The decrease in adjusted retail operating income is driven primarily by the 18.8% decrease in retail net sales partially offset by the 6.4% reduction in retail SG&A expenses.
Retail operating income for the nine months ended March 31, 2024 was $14.4 million, or 3.6% of sales, compared with $52.7 million, or 10.4% of sales in the prior year period. Adjusted retail operating income, which excludes restructuring and other charges, net of gains was $12.5 million or 3.2% of net sales compared with $49.9 million or 9.8% of net sales in the prior year period. The decrease in adjusted retail operating income is driven primarily by the 21.9% decrease in retail net sales partially offset by the 9.1% reduction in retail SG&A expenses.
Income Tax Expense
(in thousands) | | Three months ended | | | Nine months ended | |
| | | March 31, | | | March 31, | |
| | | 2024 | | | 2023 | | | % Change | | | 2024 | | | 2023 | | | % Change | |
Income tax expense | | $ | 4,345 | | | $ | 7,503 | | | | (42.1% | ) | | $ | 15,425 | | | $ | 27,368 | | | | (43.6% | ) |
Effective tax rate | | | 25.1 | % | | | 25.1 | % | | | | | | | 25.4 | % | | | 25.4 | % | | | | |
Net income | | $ | 12,953 | | | $ | 22,356 | | | | (42.1% | ) | | $ | 45,303 | | | $ | 80,402 | | | | (43.7% | ) |
Adjusted Net income | | $ | 12,390 | | | $ | 22,005 | | | | (43.7% | ) | | $ | 45,679 | | | $ | 78,442 | | | | (41.8% | ) |
Diluted EPS | | $ | 0.50 | | | $ | 0.87 | | | | (42.5% | ) | | $ | 1.77 | | | $ | 3.14 | | | | (43.6% | ) |
Adjusted Diluted EPS | | $ | 0.48 | | | $ | 0.86 | | | | (44.2% | ) | | $ | 1.78 | | | $ | 3.07 | | | | (42.0% | ) |
Income tax expense for the three months ended March 31, 2024 was $4.3 million compared with $7.5 million in the prior year third quarter due to lower period sales during the first quarter of fiscal 2018.
Income tax expense year-to-date totaled $6.8$12.6 million compared to $12.9 million. Ourdecrease in income before income taxes as our consolidated effective tax rate was 23.5%25.1% in both periods.
Income tax expense for the nine months ended March 31, 2024 was $15.4 million compared with $27.4 million in the period comparedprior year due to 36.7%. Thethe $47.0 million decrease in income before income taxes as our consolidated effective tax rate was 25.4% in both periods. Our effective tax rates vary from the 21% federal statutory rate primarily due to state taxes.
Net Income
Net income for the current year-to-date periodthree months ended March 31, 2024 was dramatically lower due to$13.0 million compared with $22.4 million in the Tax Act. The effective tax rate for the current fiscalprior year primarily includes tax expense on that fiscal year’speriod. Adjusted net income, which removes the tax benefit lost onafter-tax impact of restructuring and other charges, net of gains was $12.4 million, down 43.7% from the cancelation of stock optionsprior year period. The decrease in net income and tax and interest expense on uncertain tax positions,adjusted net income was driven by the $39.9 million decrease in consolidated net sales partially offset by tax benefitgross margin expansion of 140-basis points combined with lower operating expenses.
Net income for the nine months ended March 31, 2024 was $45.3 million compared with $80.4 million in the prior year period. Adjusted net income, which removes the after-tax impact of restructuring and other charges, net of gains was $45.7 million, down 41.8% from the re-measurement of deferred tax assets and liabilities and the vesting of restricted stock units.prior year period. The effective tax rate for the prior fiscal year primarily includes tax expense on that fiscal year’sdecrease in net income and tax and interest expense on uncertain tax positions,adjusted net income was driven by the $126.4 million reduction in consolidated net sales partially offset by the reversal and recognition of some uncertain tax positions. See Note 3, Income Taxes, for further information.lower operating expenses.
Net income year-to-date of $22.3 millionDiluted EPS
Diluted EPS for the three months ended March 31, 2024 was $0.50 compared with $0.87 per diluted share in the prior year period. Adjusted diluted EPS was $0.48, down 44.2% compared with the prior year period. The decrease in diluted EPS and adjusted diluted EPS was primarily due to $22.2 millionlower consolidated net sales partially offset by gross margin expansion and lower operating expenses.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Diluted EPS for the nine months ended March 31, 2024 was $1.77 compared with $3.14 per diluted share in the prior year period. Adjusted diluted EPS was $1.78, down 42.0% compared with the prior year period an increaseprimarily due to lower sales partially offset by lower operating expenses.
Reconciliation of 0.2%. This resultedNon-GAAP Financial Measures
To supplement the financial measures prepared in accordance with GAAP, we use non-GAAP financial measures, including adjusted operating income and margin, adjusted wholesale operating income and margin, adjusted retail 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 GAAP are shown in tables below.
These non-GAAP measures are derived from the consolidated financial statements but are not presented in accordance with 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 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 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.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
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 amounts) | | Three months ended | | | | | | | Nine months ended | | | | | |
| | | March 31, | | | | | | | March 31, | | | | | |
| | | 2024 | | | 2023 | | | % Change | | | 2024 | | | 2023 | | | % Change | |
Consolidated Adjusted Operating Income / Operating Margin | | | | | | | | | | | | | | | | | | | | | | | | |
GAAP Operating income | | $ | 15,325 | | | $ | 28,788 | | | | (46.8% | ) | | $ | 55,364 | | | $ | 105,507 | | | | (47.5% | ) |
Adjustments (pre-tax) * | | | (754 | ) | | | (470 | ) | | | | | | | 503 | | | | (2,624 | ) | | | | |
Adjusted operating income * | | $ | 14,571 | | | $ | 28,318 | | | | (48.5% | ) | | $ | 55,867 | | | $ | 102,883 | | | | (45.7% | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated Net sales | | $ | 146,421 | | | $ | 186,316 | | | | (21.4% | ) | | $ | 477,589 | | | $ | 604,007 | | | | (20.9% | ) |
GAAP Operating margin | | | 10.5 | % | | | 15.5 | % | | | | | | | 11.6 | % | | | 17.5 | % | | | | |
Adjusted operating margin * | | | 10.0 | % | | | 15.2 | % | | | | | | | 11.7 | % | | | 17.0 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated Adjusted Net Income / Adjusted Diluted EPS | | | | | | | | | | | | | | | | | | | | | | | | |
GAAP Net income | | $ | 12,953 | | | $ | 22,356 | | | | (42.1% | ) | | $ | 45,303 | | | $ | 80,402 | | | | (43.7% | ) |
Adjustments, net of tax * | | | (563 | ) | | | (351 | ) | | | | | | | 376 | | | | (1,960 | ) | | | | |
Adjusted net income | | $ | 12,390 | | | $ | 22,005 | | | | (43.7% | ) | | $ | 45,679 | | | $ | 78,442 | | | | (41.8% | ) |
Diluted weighted average common shares | | | 25,650 | | | | 25,599 | | | | | | | | 25,632 | | | | 25,580 | | | | | |
GAAP Diluted EPS | | $ | 0.50 | | | $ | 0.87 | | | | (42.5% | ) | | $ | 1.77 | | | $ | 3.14 | | | | (43.6% | ) |
Adjusted diluted EPS * | | $ | 0.48 | | | $ | 0.86 | | | | (44.2% | ) | | $ | 1.78 | | | $ | 3.07 | | | | (42.0% | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Wholesale Adjusted Operating Income / Adjusted Operating Margin | | | | | | | | | | | | | | | | | | | | | | | | |
Wholesale GAAP operating income | | $ | 11,243 | | | $ | 18,805 | | | | (40.2% | ) | | $ | 36,437 | | | $ | 48,787 | | | | (25.3% | ) |
Adjustments (pre-tax) * | | | (94 | ) | | | 194 | | | | | | | | 2,371 | | | | 190 | | | | | |
Adjusted wholesale operating income * | | $ | 11,149 | | | $ | 18,999 | | | | (41.3% | ) | | $ | 38,808 | | | $ | 48,977 | | | | (20.8% | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Wholesale net sales | | $ | 89,825 | | | $ | 114,195 | | | | (21.3% | ) | | $ | 279,882 | | | $ | 335,093 | | | | (16.5% | ) |
Wholesale GAAP operating margin | | | 12.5 | % | | | 16.5 | % | | | | | | | 13.0 | % | | | 14.6 | % | | | | |
Adjusted wholesale operating margin * | | | 12.4 | % | | | 16.6 | % | | | | | | | 13.9 | % | | | 14.6 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Retail Adjusted Operating Income / Adjusted Operating Margin | | | | | | | | | | | | | | | | | | | | | | | | |
Retail GAAP operating income | | $ | 2,275 | | | $ | 12,598 | | | | (81.9% | ) | | $ | 14,399 | | | $ | 52,667 | | | | (72.7% | ) |
Adjustments (pre-tax) * | | | (660 | ) | | | (664 | ) | | | | | | | (1,868 | ) | | | (2,814 | ) | | | | |
Adjusted retail operating income * | | $ | 1,615 | | | $ | 11,934 | | | | (86.5% | ) | | $ | 12,531 | | | $ | 49,853 | | | | (74.9% | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Retail net sales | | $ | 122,616 | | | $ | 150,923 | | | | (18.8% | ) | | $ | 395,414 | | | $ | 506,344 | | | | (21.9% | ) |
Retail GAAP operating margin | | | 1.9 | % | | | 8.3 | % | | | | | | | 3.6 | % | | | 10.4 | % | | | | |
Adjusted retail operating margin * | | | 1.3 | % | | | 7.9 | % | | | | | | | 3.2 | % | | | 9.8 | % | | | | |
* Adjustments to reported GAAP financial measures including operating income and margin, net income and diluted share year-to-dateEPS have been adjusted by the following (in thousands):
| | | Three months ended | | | Nine months ended | |
| | | March 31, | | | March 31, | |
| | | 2024 | | | 2023 | | | 2024 | | | 2023 | |
Orleans, Vermont flood (wholesale) | | $ | (103 | ) | | $ | - | | | $ | 2,243 | | | $ | - | |
Gain on sale-leaseback transaction (retail) | | | (656 | ) | | | (655 | ) | | | (1,966 | ) | | | (3,566 | ) |
Severance and other charges (wholesale) | | | 8 | | | | 165 | | | | 129 | | | | 175 | |
Severance and other charges (retail) | | | (3 | ) | | | 20 | | | | 97 | | | | 767 | |
Adjustments to operating income | | $ | (754 | ) | | $ | (470 | ) | | $ | 503 | | | $ | (2,624 | ) |
Related income tax effects on non-recurring items(1) | | | 191 | | | | 119 | | | | (127 | ) | | | 664 | |
Adjustments to net income | | $ | (563 | ) | | $ | (351 | ) | | $ | 376 | | | $ | (1,960 | ) |
(1) Calculated using a rate of $0.8025.3% in both current and prior year.
28
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Liquidity
Our sources of liquidity include cash, cash equivalents, investments, cash generated from operations and amounts available under our credit facility. We believe these sources remain adequate to meet our short-term and long-term liquidity requirements, finance our long-term growth plans, invest in capital expenditures and fulfill other cash requirements for day-to-day operations and contractual obligations. We are committed to maintaining a strong balance sheet in order to weather difficult industry conditions, as we continue to monitor our liquidity closely during this period of lower demand combined with high interest rates, market uncertainty and elevated inflationary pressures.
Our available liquidity as of March 31, 2024 and June 30, 2023 are summarized below (in thousands).
| | | March 31, | | | June 30, | |
| | | 2024 | | | 2023 | |
| | | | | | | | | |
Cash and cash equivalents | | $ | 63,862 | | | $ | 62,130 | |
Current investments | | | 82,356 | | | | 110,577 | |
Non-current investments (1) | | | 34,867 | | | | - | |
Availability under existing credit facility | | | 120,952 | | | | 120,952 | |
Total Available Liquidity | | $ | 302,037 | | | $ | 293,659 | |
(1) | Our long-term investments in U.S. Treasury notes are classified as non-current as they have stated maturities between one and two years. |
As of March 31, 2024, we had working capital of $170.2 million compared to $0.79$196.4 million at June 30, 2023 and a current ratio of 2.1 at March 31, 2024, comparable to 2.2 at June 30, 2023 and 2.0 a year ago. Our non-U.S. subsidiaries held $3.5 million in cash and cash equivalents at March 31, 2024, which we have determined to be indefinitely reinvested.
Summary of Cash Flows
At March 31, 2024, we held cash and cash equivalents of $63.9 million compared with $62.1 million at June 30, 2023. Cash and cash equivalents aggregated to 8.6% of our total assets at March 31, 2024 compared with 8.3% at June 30, 2023. In addition to cash and cash equivalents of $63.9 million, we had investments of $117.2 million at March 31, 2024 compared with $110.6 million at June 30, 2023. Our investments at March 31, 2024 are within U.S. Treasury bills and notes, which we expect will further enhance our returns on excess cash. Our U.S. Treasury bills total $82.4 million and have maturities of less than one year while our U.S. Treasury notes total $34.9 million and have maturities within one and two years.
Our cash and cash equivalents increased $1.7 million or 2.8% during the first nine months of fiscal 2024 due to net cash provided by operating activities of $54.0 million partially offset by $40.3 million in cash dividends paid, capital expenditures of $7.5 million, $2.6 million net purchases of investments and $2.2 million in taxes paid related to net share settlement of vested RSUs and PSUs.
The following table illustrates the main components of our cash flows (in millions).
| | | Nine months ended | |
| | | March 31, | |
| | | 2024 | | | 2023 | |
Operating activities | | | | | | | | |
Net income | | $ | 45.3 | | | $ | 80.4 | |
Non-cash operating lease cost | | | 23.8 | | | | 22.6 | |
Restructuring and other charges, net of gains | | | 0.5 | | | | (2.7 | ) |
Payments on restructuring and other charges, net of proceeds | | | (0.9 | ) | | | (1.0 | ) |
Depreciation and amortization and other non-cash items | | | 13.3 | | | | 13.4 | |
Deferred income taxes | | | (0.3 | ) | | | (2.1 | ) |
Change in operating assets and liabilities | | | (27.7 | ) | | | (36.2 | ) |
Total provided by operating activities | | $ | 54.0 | | | $ | 74.4 | |
| | | | | | | | | |
Investing activities | | | | | | | | |
Capital expenditures | | $ | (7.5 | ) | | $ | (10.7 | ) |
Proceeds from sales of property, plant and equipment | | | - | | | | 8.1 | |
Purchases of investments, net of proceeds from sales | | | (2.6 | ) | | | (83.0 | ) |
Total used in investing activities | | $ | (10.1 | ) | | $ | (85.6 | ) |
| | | | | | | | | |
Financing activities | | | | | | | | |
Dividend payments | | $ | (40.3 | ) | | $ | (37.2 | ) |
Taxes paid related to net share settlement of equity awards | | | (2.1 | ) | | | (0.8 | ) |
Proceeds from employee stock plans | | | 0.5 | | | | 0.1 | |
Payments on financing leases and other | | | (0.4 | ) | | | (0.4 | ) |
Total used in financing activities | | $ | (42.3 | ) | | $ | (38.3 | ) |
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Cash Provided by Operating Activities
We generated $54.0 million in cash from operating activities during the first nine months of fiscal 2024, a decrease from $74.4 million in the prior year period an increase of 1.3%.primarily due to lower net income partially offset by improvements in net working capital. Restructuring payments made during fiscal 2024 were $0.9 million compared to $1.0 million in the prior year and related primarily to the Orleans flood restoration services and severance. Net working capital improved due to lower inventory carrying levels combined with a decrease in accounts receivable from strong cash collections and lower contract sales. Our inventory decreased $4.7 million since June 30, 2023 as we restore our operating inventory levels to more historical levels as backlog declines. These working capital improvements were partially offset by a smaller reduction in customer deposits, reflecting reduced backlog and lower incoming orders.
Liquidity and Capital ResourcesCash Used in Investing Activities
At December 31, 2017,Cash used in investing activities was $10.1 million during the first nine months of fiscal 2024 compared with cash used of $85.6 million in the comparable prior year. During fiscal 2024, we held unrestrictedhad $2.6 million of net purchases of investments, which related to $77.3 million of short-term U.S. treasuries that matured during the fiscal year and the subsequent reinvestment totaling $79.9 million. The prior year period included $83.0 million of purchases of investments, net of proceeds from sales of investments as we significantly increased our investment balance to further enhance our return on excess cash. In addition, the prior year included $8.1 million in proceeds received from the sale-leaseback transaction completed in August 2022. Capital expenditures during fiscal 2024 were $7.5 million compared with $10.7 million in the prior year period. Current year capital expenditures related primarily to design center openings and improvements, manufacturing equipment replacement within our Orleans, Vermont plant due to the flood damage caused and investments in technology. Capital expenditures a year ago were higher as we incurred additional costs related to efficiency and safety upgrades to our manufacturing plants.
Cash Used in Financing Activities
Cash used in financing activities was $42.3 million in the current year, an increase from $38.3 million in the prior year period primarily due to the 12.5% increase in dividend payments from $0.32 to $0.36 per share, effective May 2023. A special cash dividend of $0.50 per share was paid in both the current and equivalentsprior year periods. In addition, there was an increase in taxes paid during the current fiscal year for the net share settlement of $42.0equity awards. During fiscal 2024, a total of 67,824 shares valued at $2.1 million were repurchased from employees to satisfy their withholding tax obligations upon vesting of RSUs and PSUs. This compared to $0.8 million repurchased for tax obligations upon vesting of RSUs and PSUs in the prior year period.
Restricted Cash
We present restricted cash and investmentsas a component of $7.1 million. At June 30, 2017, we held unrestrictedtotal cash and cash equivalents on our consolidated statements of $57.7cash flows and within Other assets on our consolidated balance sheets. At March 31, 2024 and June 30, 2023, we held $0.4 million and $0.5 million, respectively, of restricted cash and investments of $7.3 million. Our principal sources of liquidity includerelated to our insurance captive.
Exchange Rate Changes
Due to changes in exchange rates, our cash and cash equivalents were increased by $0.1 million during the first nine months of fiscal 2024 compared with a less than $0.1 million in the prior year period. These changes had an immaterial impact on our cash flow from operations, amounts availablebalances held in Canada, Mexico and Honduras.
Capital Resources, including Material Cash Requirements
Sources of Liquidity
Capital Needs. On January 26, 2022, we entered into a Third Amended and Restated Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. as administrative agent and syndication agent and Capital One, National Association, as documentation agent. The Credit Agreement amended and restated the Second Amended and Restated Credit Agreement, dated as of December 21, 2018, as amended. The Credit Agreement provides for a $125 million revolving credit facility (the “Facility”), subject to borrowing base availability, with a maturity date of January 26, 2027. The Credit Agreement also provides us with an option to increase the size of the Facility up to an additional amount of $60 million. Availability under the Facility fluctuates according to a borrowing base calculated on eligible accounts receivable and other borrowings.
Forinventory, net of customer deposits and reserves. The Facility includes covenants that apply under certain circumstances, including a detailed discussionfixed-charge coverage ratio requirement that applies when excess availability under the credit line is less than certain thresholds. As of our debt obligations and timing of our related cash payments see Note 6March 31, 2024, we were not subject to the Consolidated Financial Statements includedfixed-charge coverage ratio requirement, had no borrowings outstanding under Item 1the Facility, were in compliance with all other covenants and had borrowing availability of this Quarterly Report.
A summary$121.0 million of net cash provided by (used in) operating, investing, andthe $125.0 million credit commitment. We incurred financing activities forcosts of $0.5 million during fiscal 2022, which are being amortized as interest expense over the six months ended December 31, 2017 and 2016 is provided below (in millions):
| | | Six months ended | |
| | | December 31, | |
| | | 2017 | | | 2016 | |
Cash provided by (used in) operating activities | | | | | | | | |
Net income plus depreciation and amortization | | $ | 32.3 | | | $ | 32.2 | |
Working capital items | | | (18.8 | ) | | | (8.6 | ) |
Other operating activities | | | 0.7 | | | | 3.9 | |
Total provided by operating activities | | $ | 14.2 | | | $ | 27.5 | |
| | | | | | | | | |
Cash provided by (used in) investing activities | | | | | | | | |
Capital expenditures and acquisitions | | $ | (5.0 | ) | | $ | (11.3 | ) |
Net sales of marketable securities | | | - | | | | - | |
Other investing activities | | | 0.7 | | | | 1.9 | |
Total provided by (used in) investing activities | | $ | (4.3 | ) | | $ | (9.4 | ) |
| | | | | | | | | |
Cash provided by (used in) financing activities | | | | | | | | |
Payments on long-term debt and capital lease obligations | | $ | (14.2 | ) | | $ | (1.7 | ) |
Payment of cash dividends | | | (10.5 | ) | | | (9.5 | ) |
Purchase/retirement of company stock | | | (1.1 | ) | | | (3.4 | ) |
Other financing activities | | | 0.2 | | | | 1.1 | |
Total provided by (used in) financing activities | | $ | (25.6 | ) | | $ | (13.5 | ) |
Cash Provided by (Used in) Operating Activities
Year-to-date, cashremaining life of $14.2 million was provided by operating activities, a decrease of $13.3 million. This was largely due to changes in the ordinary course of business for working capital items, primarily inventory. Working capital items consist of current assets (accounts receivable, inventories, prepaid and other current assets) less current liabilities (customer deposits, payables, and accrued expenses and other current liabilities).Facility using the effective interest method.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Letters of Credit. At both March 31, 2024 and June 30, 2023, there was $4.0 million of standby letters of credit outstanding under the Facility.
Cash Provided by (Used in) Investing ActivitiesUses of Liquidity
Year-to-date, $4.3Capital Expenditures.Capital expenditures during the first nine months of fiscal 2024 totaled $7.5 million of cash was usedcompared with $10.7 million in investing activities, a decrease of $5.1 million.the prior year period. The decrease was primarily due to a decrease in capital expenditures offset by a decrease in proceeds from disposal of property, plant and equipment. Currentcurrent year capital expenditures were primarily related to $4.3 million for retail design center improvements. openings, renovations and floor projection updates and $2.8 million to further improve our manufacturing facilities, including a focus on efficiency and safety, as well as to replace equipment damaged in the Orleans, Vermont flood.
We have no material contractual commitments outstanding for future capital expenditures and anticipate that cash from operations will be sufficient to fund future capital expenditures.
Cash ProvidedDividends.Our Board has sole authority to determine if and when we will declare future dividends and on what terms. We have a history of returning capital to shareholders and continued this practice during fiscal 2024 by (Used in) Financing Activities
Year-to-date, $25.6 million was used in financing activities, which is $12.1 million more cash used than the $13.5 million of cash used during the first six months of fiscal 2017. During the current fiscal year, a $13.2 million pre-payment on the term loan was made. During the current fiscal year to date period we paid dividends of $10.5 million compared to $9.5 million in the prior year to date period, an increase of $1.0 million, paying $0.38 per share compared to $0.34, an increase of 11.8%. In November 2017, we declared a $0.50 per share cash dividend payable to our shareholders in January 2018 which includes a special dividend of $0.31$0.50 per share andin addition to regular quarterly dividends of $0.36 per share. During the first nine months of fiscal 2024, we paid total cash dividends of $40.3 million, up from $37.2 million a year ago as the regular quarterly dividend was increased by 12.5% in May 2023.
We have paid a special cash dividend each of $0.19 per share. The Company has continuouslythe past three years and paid dividends foran annual cash dividend every quarteryear since 1996 and1996. Although we expect to continue to do so as economic conditionsdeclare and liquidity permit.
We believe that ourpay comparable quarterly cash flow from operations, together with our other available sources of liquidity includingdividends for the Facility and refinancing alternatives, will be adequate to make all required payments of principal and interest on our debt, to permit anticipated capital expenditures, and to fund working capital and other cash requirements. As of December 31, 2017, we had working capital of $109.7 million compared to $116.7 million at June 30, 2017, a decrease of $7.0 million, or 6.0%. The Company had a current ratio of 1.87 to 1 at December 31, 2017 and 1.92 to 1 at June 30, 2017.
In addition to using available cash to fund changes in working capital, capital expenditures, acquisition activity, the repayment of debt,foreseeable future, the payment of future cash dividends and debt repurchases, we have been authorized by our board of directors to repurchase sharesis within the discretion of our common stock from timeBoard of Directors and will depend on our earnings, operations, financial condition, capital requirements and general business outlook, among other factors. Our credit agreement also includes covenants that includes limitations on our ability to time, either directly or through agents, in the open market at prices and on terms satisfactory to us. All our common stock repurchases and retirements are recorded as treasury stock and result in a reduction of shareholders’ equity. During the six months ending December 31, 2017 therepay dividends.
Share Repurchase Program. There were no share repurchases.
repurchases under our existing multi-year share repurchase program (the “Share Repurchase Program”) during the first nine months of fiscal 2024 or 2023. At DecemberMarch 31, 2017,2024, we had a remaining Board authorization to repurchase 1,400,4972,007,364 shares of our common stock pursuant to our previously announcedShare Repurchase Program. The timing and amount of any future share repurchase program.repurchases in the open market and through privately negotiated transactions will be determined by the Company’s officers at their discretion and based on a number of factors, including an evaluation of market and economic conditions while also maintaining financial flexibility.
Material Cash Requirements from Contractual ObligationsObligations.
There has been no material change toFluctuations in our operating results, levels of inventory on hand, operating lease commitments, the amount ordegree of success of our accounts receivable collection efforts, the timing of tax and other payments, the rate of written orders and net sales, levels of customer deposits on hand, as well as necessary capital expenditures to support growth of our operations will impact our liquidity and cash payments related toflows in future periods. The effect of our outstanding contractual obligations as set forthon our liquidity and capital resources in Part II, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations offuture periods should be considered in conjunction with the factors mentioned here. As disclosed in our 2023 Annual Report on Form 10-K, for the year endedas of June 30, 20172023, we had total contractual obligations of $199.1 million, including $152.4 million related to operating lease commitments and $29.2 million of open purchase orders. Except for $24.5 million in operating lease payments made to our landlords and $16.9 million of operating lease assets obtained in exchange for $16.9 million of operating lease liabilities during the first nine months of fiscal 2024, there were no other material changes in our contractual obligations as filed with the SECpreviously disclosed in our 2023 Annual Report on August 2, 2017.Form 10-K.
Off-Balance SheetOther Arrangements and Other Commitments, Contingencies and Contractual Obligations
We do not utilize or employ any off-balance sheetother arrangements including special-purpose entities, in operating our business. As such, we do not maintain any (i) retained or contingent interests, (ii) derivative instruments (other than as specified below), or (iii) variable interests which could serve as a source of potential risk to our future liquidity, capital resources and results of operations.
Significant Accounting Policies
We may, from time to timedescribe our significant accounting policies in Note 3, Summary of Significant Accounting Policies, in the ordinary coursenotes to our consolidated financial statements included in our 2023 Annual Report on Form 10-K. There have been no changes in our significant accounting policies during the first nine months of business, provide guaranteesfiscal 2024 from those disclosed in our 2023 Annual Report on behalf of selected affiliated entities or become contractually obligated to perform in accordance with the terms and conditions of certain business agreements. The nature and extent of these guarantees and obligations may vary based on our underlying relationship with the benefiting party and the business purpose for which the guarantee or obligation is being provided. The only such material program was for our consumer credit program described below, which was in place both at December 31, 2017 and June 30, 2017.Form 10-K.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Ethan Allen Consumer Credit Program
The terms and conditions of our consumer credit program, which is financed and administered by a third-party financial institution on a non-recourse basis to Ethan Allen, are set forth in an agreement between the Company and that financial service provider (the “Program Agreement”) which was last amended effective January 2014. Any independent retailer choosing to participate in the consumer credit program is required to enter into a separate agreement with that same third-party financial institution which sets forth the terms and conditions under which the retailer is to perform in connection with its offering of consumer credit to its customers (the “Retailer Agreement”). We have obligated ourselves on behalf of any independent retailer choosing to participate in our consumer credit program by agreeing, in the event of default, breach, or failure of the independent retailer to perform under such Retailer Agreement, to take on certain responsibilities of the independent retailer, including, but not limited to, delivery of goods and reimbursement of customer deposits. Customer receivables originated by independent retailers remain non-recourse to Ethan Allen. The Program Agreement will terminate on July 31, 2019, but includes a provision for automatic one-year renewals unless either party gives notice of termination. While the maximum potential amount of future payments (undiscounted) that we could be required to make under this obligation is indeterminable, recourse provisions exist that would enable us to recover, from the independent retailer, any amount paid or incurred by us related to our performance. Based on the underlying creditworthiness of our independent retailers, including their historical ability to satisfactorily perform in connection with the terms of our consumer credit program, we believe this obligation will expire without requiring funding by us. To ensure funding for delivery of products sold, the terms of the Program Agreement also contain a right for the financial services provider to demand from the Company collateral at a variable rate based on the volume of program sales if the Company does not meet certain covenants. At December 31, 2017 and June 30, 2017, no collateral was required under the Program Agreement.
Product Warranties
Our products, including our case goods, upholstery and home accents, generally carry explicit product warranties that extend from one to ten years and are provided based on terms that are generally accepted in the industry. All our domestic independent retailers are required to enter into and perform in accordance with the terms and conditions of a warranty service agreement. We record provisions for estimated warranty and other related costs at time of sale based on historical warranty loss experience and make periodic adjustments to those provisions to reflect actual experience. On rare occasions, certain warranty and other related claims involve matters of dispute that ultimately are resolved by negotiation, arbitration or litigation. In certain cases, a material warranty issue may arise which is beyond the scope of our historical experience. We provide for such warranty issues as they become known and are deemed both probable and estimable. It is reasonably possible that, from time to time, additional warranty and other related claims could arise from disputes or other matters beyond the scope of our historical experience. At December 31, 2017 and June 30, 2017 our product warranty liability totaled $1.4 million and $1.3 million, respectively.
Business OutlookCritical Accounting Estimates
We continue to strengthen our vertically integrated structure from concept of idea, to engineering, to manufacturing, to retail and logistics. We intend to maintain strong manufacturing capabilities in North America, which we believe is a long-term competitive advantage that will allow us to advance our objectives of maintaining fast order delivery, exceptional quality and improving capacity to ship stocked and custom made-to-order items more quickly, which in turn will allow us to grow our business. In December 2017, the Tax Act substantially reduced our effective tax rate. We expect our effective tax rate to be approximately 30% for the remainder of fiscal 2018 and 24% to 25% for fiscal 2019.
We expect the home furnishings industry to remain extremely competitive with respect to both the sourcing of products and the wholesale and retail sale of those products for the foreseeable future. Domestic manufacturers continue to face pricing pressures because of the lower manufacturing costs on imports, particularly from Asia. While we also utilize overseas sourcing for approximately one quarter of our products, we choose to differentiate ourselves by maintaining a substantial North American manufacturing base, the majority of which is located in the United States. This structure enables us to leverage our vertically integrated structure to our advantage. We continue to believe that a balanced approach to product sourcing, which includes our own North American manufacturing of about 75% of our product offerings coupled with the import of other selected products, provides the greatest degree of flexibility and shorter lead times and is the most effective approach to ensuring that acceptable levels of quality, service and value are attained.
We therefore remain cautiously optimistic about our performance due to the many strong programs already in place and others we currently plan to introduce in the coming months. Our retail strategy involves (i) a continued focus on providing relevant product offerings, a wide array of product solutions, and superior interior design solutions through our large staff of interior design professionals, (ii) continuing strong advertising and marketing campaigns to get our message across and to continue broadening our customer base, (iii) the opening of new or relocated design centers in more prominent locations, and encouraging independent retailers to do the same, (iv) leveraging the use of technology and personal service within our retail network and online through www.ethanallen.com, and (v) further expansion internationally. We believe this strategy provides an opportunity to grow our business.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU 2014-09, Revenue from Contracts with Customers. This ASU provides a framework for revenue recognition that replaces most existing GAAP revenue recognition guidance when it becomes effective. We have an option to use either a retrospective approach or a cumulative effect adjustment approach to implement the guidance. The new standard is effective for us on July 1, 2018, with early adoption permitted. We are currently conducting a comprehensive review of our revenue streams and contracts as they relate to this guidance to identify potential differences that would result from applying the new requirements. While we are still assessing the overall impact this guidance will have onprepare our consolidated financial statements in conformity with GAAP. In some cases, these principles require management to make difficult and subjective judgments regarding uncertainties and, as a result, such estimates and assumptions may significantly impact our financial statement disclosures, based onresults and disclosures. We consider an accounting estimate to be critical if: (i) the work performedaccounting estimate requires us to date,make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (ii) changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we do not believe thatreasonably could have used in the adoption willcurrent period, would have a material impact on the amount or timing of revenue recognized. We are still assessing the impact of the standard on our financial statement disclosures.condition or results of operations. We base our estimates on currently known facts and circumstances, prior experience and other assumptions we believe to be reasonable. We use our best judgment in valuing these estimates and may, as warranted, use external advice. Actual results could differ from these estimates, assumptions, and judgments and these differences could be significant. We make frequent comparisons throughout the year of actual experience to our assumptions to reduce the likelihood of significant adjustments and will record adjustments when differences are known.
In February 2016,We discuss our critical accounting estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2023 Annual Report on Form 10-K. There have been no significant changes in our critical accounting estimates during the FASB issued ASU 2016-02, first nine months of fiscal 2024 from those disclosed in our 2023 Annual Report on Form 10-K.
Recent Accounting Pronouncements
See Note 3, LeasesRecent Accounting Pronouncements, which is intended to improve financial reporting about leasing transactions. The ASU will require lessees that lease assets with lease terms of more than twelve months to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Lessors will remain largely unchanged from current GAAP. In addition, the ASU will require disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. This pronouncement is effective for the Company on July 1, 2019, and early adoption is permitted. The Company is currently evaluating the impact on our consolidated financial statements. We plan on adopting effective Julystatements included under Part I, Item 1 2019.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. It is intended to reduce diversity in the presentation of restricted cash and restricted cash equivalents in the statement. The statement requires that restricted cash and restricted cash equivalents be included as components of total cash and cash equivalents as presented on the statement of cash flows. The Company currently does not include restricted cash as a component of cash and equivalents as presented on the statement of cash flows. The new guidance is effective for the Company on July 1, 2018, with early adoption permitted. The Company is currently evaluating the impact on our consolidated financial statements. We plan on adopting effective July 1, 2018.
Where You Can Find Other Information
Our website is www.ethanallen.com. Information contained on our website is not part of this Quarterly Report on Form 10-Q. Information that we furnish or file with10-Q for a full description of recent accounting pronouncements, including the SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to, or exhibits included in, these reports are available for download, freeexpected dates of charge, on our website soon after such reports are filed with or furnished to the SEC. Our SEC filings, including exhibits filed therewith, are also available on the SEC’s website at www.sec.gov. You may obtain and copy any document we furnish or file with the SEC at the SEC’s public reference room at 100 F Street, NE, Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the SEC’s public reference facilities by calling the SEC at 1-800-SEC-0330. You may request copies of these documents, upon payment of a duplicating fee, by writing to the SEC at its principal office at 100 F Street, NE, Room 1580, Washington, D.C. 20549.adoption.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
WeIn the normal course of business, we are exposed to the following market risks, relating to fluctuations in interest rates.which could impact our financial position and results of operations.
Interest Rate Risk
Debt
Interest rate risk exists primarily through our borrowing activities. We utilize United States dollar denominated borrowings to fund substantially all our working capital and investment needs. Short-term debt, if required, is used to meet working capital requirements and long-term debt, if required, is generally used to finance long-term investments. There is inherent rollover risk for borrowings as they mature and are renewed at current market rates. The extent of this risk is not quantifiable or predictable because of the variability of future interest rates and our future financing requirementsrequirements. While we had no fixed or variable rate borrowings outstanding at March 31, 2024, we could be exposed to market risk from changes in risk-free interest rates if we incur variable rate debt in the future as interest expense will fluctuate with changes in the Secured Overnight Financing Rate (“SOFR”). Based on our current and expected levels of exposed liabilities, we estimate that a hypothetical 100 basis point change (up or down) in interest rates based on one-month SOFR would not have a material impact on our results of operations and financial condition.
For floating-rate obligations,Cash, Cash Equivalents and Investments
The fair market value of our cash and cash equivalents at March 31, 2024 was $63.9 million while our investments totaled $117.2 million. Our cash and cash equivalents consist of demand deposits and money market funds with original maturities of three months or less and are reported at fair value. Our investments consist of U.S. treasuries with maturities ranging up to two years and are reported at fair value based on observable inputs. Our primary objective for holding available-for-sale securities is to achieve appropriate investment returns consistent with preserving principal and managing risk. Pursuant to our established investment policy guidelines, we try to achieve high levels of credit quality, liquidity and diversification. At any time, a sharp rise in market interest rate changes do not affectrates could have an impact on the fair value of our available-for-sale securities portfolio. Conversely, declines in interest rates, including the underlyingimpact from lower credit spreads, could have an adverse impact on interest income for our investment portfolio. However, because of our investment policy and the nature of our investments, our financial instrument but would impact future earningsexposure to fluctuations in interest rates is expected to remain low. We do not believe that the value or liquidity of our cash equivalents and cash flows, assuming other factorsinvestments have been materially impacted by current market events. Our available-for-sale securities are held constant. Conversely, for fixed-rate obligations,purposes other than trading and are not leveraged as of March 31, 2024. We monitor our interest rate and credit risks and believe the overall credit quality of our portfolio is strong. It is anticipated that the fair market value of our cash equivalents and investments will continue to be immaterially affected by fluctuations in interest rates.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Foreign Currency Exchange Risk
Foreign currency exchange risk is primarily limited to the operation of our Company-operated retail design centers located in Canada and our manufacturing plants in Mexico and Honduras, as substantially all purchases of imported parts and finished goods are denominated in U.S. dollars. As such, foreign exchange gains or losses resulting from market changes in the value of foreign currencies have not had, nor are they expected to have, a material effect on our consolidated results of operations. A decrease in the value of foreign currencies relative to the U.S. dollar may affect the fairprofitability of our vendors, but as we employ a balanced sourcing strategy, we believe any impact would be moderate relative to peers in our industry.
The financial statements of our foreign locations are translated into U.S. dollars using period-end rates of exchange for assets and liabilities and average rates for the period for revenues and expenses. Translation gains and losses that arise from translating assets, liabilities, revenues and expenses of foreign operations are recorded in accumulated other comprehensive (loss) income as a component of shareholders’ equity. Foreign exchange gains or losses resulting from market changes in the value of the underlying financial instrument but would not impact earnings or cash flows. At December 31, 2017, weforeign currencies did not have a material impact during any floating-rate debt obligations outstanding underof the fiscal periods presented in this Annual Report on Form 10-K.
A hypothetical 10% weaker U.S. dollar against all foreign currencies at March 31, 2024 would have had an immaterial impact on our Facility.consolidated results of operations and financial condition. We currently do not engage in any interest rateforeign currency hedging activity and we have no intention of doing so in the foreseeable future. Based
Duties and Tariffs Market Risk
We are exposed to market risk with respect to duties and tariffs assessed on the average interest rate of the loans under the Facility during the quarter ended December 31, 2017,raw materials, component parts, and finished goods we import into countries where we operate. Additionally, we are exposed to duties and tariffs on our finished goods that we export from our assembly plants to other countries. As these tariffs and duties increase, we determine whether a price increase to our customers to offset these costs is warranted. To the extent that borrowings were outstanding, a 10% changean increase in the interest ratethese costs would not have a material effectimpact on our consolidatedresults of operations, we believe that our competitors would experience a similar impact.
Raw Materials and Other Commodity Price Risk
We are exposed to market risk from changes in the cost of raw materials used in our manufacturing processes, principally logs, lumber, plywood, fabric and foam products. The cost of foam products, which are petroleum-based, is sensitive to changes in the price of oil. We are also exposed to risk with respect to transportation costs for delivering our products, including the cost of fuel. As commodity prices and transportation costs remain volatile and, in some cases, rise, we determine whether a price increase to our customers to offset these costs is warranted. To the extent that an increase in these costs would have a material impact on our results of operations, we believe that our competitors would experience a similar impact.
Inflation Risk
Our results of operations and financial condition. For information regardingcondition are presented based on historical cost. We believe any material inflationary impact on our product and operating costs would be partially offset by our ability to increase selling prices, create operational efficiencies and seek lower cost alternatives. During fiscal 2024, a period marked by ongoing high inflation, we have been able to reduce certain manufacturing input costs by identifying lower cost alternatives in raw materials as well as implemented operational efficiencies, including reduced headcount, which have helped to minimize the Company’s otherimpact of high inflation.
Commercial Real Estate Market Risk
We have potential exposure to market risk factors, see Item 7A – Quantitativerelated to conditions in the commercial real estate market. As of March 31, 2024, there were 141 Company-operated retail design centers, of which 49 are owned and Qualitative Disclosures About Market Risk92 are leased. Our retail segment real estate holdings could suffer significant impairment in value if we are forced to close design centers and sell or lease the related properties during periods of weakness in certain markets. We are also exposed to risk related to conditions in the commercial real estate rental market with respect to the right-of-use assets we carry on our Annual Report on Form 10-Kbalance sheet for leased design center locations and warehouse and distribution facilities. At March 31, 2024, the unamortized balance of such right-of-use assets totaled $114.0 million. Should we have to close or otherwise abandon one of these leased locations, we could incur additional impairment charges if rental market conditions do not support a fair value for the year ended June 30, 2017 as filed with the SEC on August 2, 2017.right-of-use asset in excess of its carrying value.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Not applicable.
