PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Consolidated Balance Sheets (Unaudited)

(In thousands, except par value)

 

 

See accompanying notes to consolidated financial statements.

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands, except per share data)

 

 

See accompanying notes to consolidated financial statements.

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

 

See accompanying notes to consolidated financial statements.

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Consolidated Statements of Shareholders’ Equity (Unaudited)

 (In thousands)

 

Nine months ended March 31, 2019

 

Nine months ended March 31, 2018

 

See accompanying notes to consolidated financial statements.

 

 

 ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

 

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

 

 

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

 

 ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

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

 

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

  

	-	Forward-Looking Statements
	-	Executive Overview
	-	Key Operating Metrics
	-	Results of Operations
	-	Liquidity
	-	Capital Resources
	-	Share Repurchase Program
	-	Contractual Obligations
	-	Dividends
	-	Off-Balance Sheet Arrangements and Other Commitments and Contingencies
	-	Significant Accounting Policies and Critical Accounting Estimates
	-	Recent Accounting Pronouncements
	-	Business Outlook

 

The following MD&A should be read in conjunction with our 2018 Annual Report on Form 10-K, Current Reports on Form 8-K and other filings with the Securities and Exchange Commission (the “SEC”), and the consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q.

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q, including this MD&A, contains forward-looking statements regarding future events and our future results that are subject to the safe harbors found in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts are statements that could be deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts, and projections about the industry in which we operate and the beliefs and assumptions of our management. Words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” “will,” “may,” “continue,” “project,” ”target,” “outlook,” “forecast,” “guidance,” variations of such words, and similar expressions and the negatives of such forward-looking words are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business, and other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements are subject to management decisions and various assumptions about future events, and are not guarantees of future performance. Actual results could differ materially from those anticipated in the forward-looking statements due to a number of risk factors and uncertainties including, but not limited to: competition from overseas manufacturers and domestic retailers; our anticipating or responding to changes in consumer tastes and trends in a timely manner; our ability to maintain and enhance our brand, marketing and advertising efforts and pricing strategies; changes in global and local economic conditions that may 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; potentially negative or unexpected tax consequences of changes to fiscal and tax policies; our limited number of manufacturing and logistics sites; fluctuations in the price, availability and quality of raw materials; environmental, health and safety requirements; product safety concerns; disruptions to our technology infrastructure (including cyber-attacks); increasing labor costs, competitive labor markets and our continued ability to retain high-quality personnel and risks of work stoppages; loss of key personnel; our ability to obtain sufficient external funding to finance our operations and growth; access to consumer credit; the effect of operating losses on our ability to pay cash dividends; additional impairment charges that could reduce our profitability; 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 results of operations for any quarter are not necessarily indicative of our results of operations for a full year; possible failure to protect our intellectual property; and other factors described under Part I, Item 1A. Risk Factors in our 2018 Annual Report on Form 10-K, and elsewhere herein.

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

Given the risks and uncertainties surrounding forward-looking statements, you should not place undue reliance on these statements. Many of these factors are beyond our ability to control or predict. Our forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Other than as required by law, we undertake no obligation to update or revise forward-looking statements, whether as a result of new information, future events, or otherwise.

 

Executive Overview

 

We are a leading interior design company and manufacturer and retailer of quality home furnishings. Founded over 85 years ago, today we are a leading international home fashion brand doing business in North America, Europe, Asia and the Middle East. We are vertically integrated from design through delivery, affording our clientele a value proposition of style, quality and price. We offer complementary interior design service to our clients and sell a full range of furniture products and decorative accents through ethanallen.com and a network of approximately 300 design centers in the United States and abroad. The design centers represent a mix of independent licensees and our own Company operated retail segment. We own and operate nine manufacturing facilities, including six manufacturing plants and one sawmill in the United States and one manufacturing plant in each of Mexico and Honduras.

 

Our business model is to maintain continued focus on (i) communicating our messages with strong advertising and marketing campaigns, (ii) capitalizing on the strength of our interior design professionals and management in our retail design centers, (iii) utilizing ethanallen.com as a key marketing tool to drive traffic to a network of approximately 200 North American design centers located near our demographic base, (iv) investing in new technologies across key aspects of our vertically integrated business, and (v) leveraging the benefits of our vertical integration by maintaining our manufacturing capacity in North America where we manufacture approximately 75% of our products.

 

Our competitive advantages arise from:

 

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providing fashionable high-quality products of the finest craftsmanship;

 

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

 

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

 

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enhancing our technology in all aspects of the business; and

 

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leveraging our vertically integrated structure.

 

We have completed a major transformation of our product offerings, having refreshed over 70% of our entire product line over the past three years. In the past 12 months, we further strengthened our offerings with new products featuring a modern perspective on classic designs. Our contract sales, including sales to GSA, hospitality and commercial businesses, continue to grow and GSA has become one of our ten largest customers. Our internet sales, while still a low percentage of our consolidated sales, are growing at a rate that continues to out-pace our brick and mortar design centers.

 

We measure the performance of our design centers based on 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. Our international net sales are composed of our wholesale segment sales to independent retailers and our retail segment sales to consumers through the Company operated international design centers.

 

Fiscal 2019 Third Quarter in Review - Improved gross margin, cost containment within our expenses and a lower effective tax rate helped increase our diluted earnings per share in the three months ended March 31, 2019 to $0.30, up from $0.09 in the year ago third quarter. An increase of 1.5% for retail net sales was partly offset by a decrease of 8.9% for wholesale net sales. Consolidated international net sales for the three months ended March 31, 2019 decreased 30.2% primarily due to lower sales in China and made up 6.6% of our consolidated net sales compared with 9.3% in the prior year period. Gross profit grew by $1.7 million or 1.7% in the current year third quarter compared with the same period a year ago, driven by a 200-basis point expansion in our gross margin. For the three months ended March 31, 2019, gross margin was 55.3%, up from 53.3% a year ago, due to improved retail and wholesale gross margin coupled with a change in the retail sales mix relative to total sales, which was 78.1% compared with 75.5% in the comparable prior year period. Operating expenses in the three months ended March 31, 2019 decreased by $5.1 million, or 5.5%, representing 49.3% as a percentage of sales compared with 51.2% a year ago. The primary driver of lower operating expenses was a reduction in national television advertising costs partially offset by higher retail occupancy and selling expenses. The effective income tax rate was 24.8% in the current quarter compared with 31.2% in the prior year due to tax law changes resulting from the Tax Act.

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

Key Operating Metrics

 

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

 

		Three months ended March 31,																Nine months ended March 31,
		2019				% of Sales				2018				% of Sales				2019				% of Sales				2018				% of Sales
Net sales		$	177.8							$	181.4							$	562.8							$	561.2
Gross profit		$	98.4				55.3	%		$	96.7				53.3	%		$	308.7				54.9	%		$	304.8				54.3	%
Operating income		$	10.7				6.0	%		$	3.9				2.1	%		$	38.6				6.9	%		$	33.0				5.9	%
Net income		$	8.0				4.5	%		$	2.6				1.4	%		$	29.0				5.2	%		$	24.9				4.4	%
Diluted EPS		$	0.30							$	0.09							$	1.08							$	0.90
Net cash provided by operating activities		$	12.8							$	20.9							$	44.3							$	35.1
Capital expenditures		$	2.0							$	4.1							$	7.0							$	9.1

 

 

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

 

		Three months ended								Nine months ended
		March 31,								March 31,
		2019				2018				2019				2018
Net sales			(2.0	%)			0.5	%			0.3	%			(1.3	%)
Gross profit			1.7	%			2.4	%			1.3	%			(1.3	%)
Operating income			175.5	%			(1.2	%)			17.1	%			(16.2	%)
Net income			205.0	%			14.6	%			16.5	%			1.6	%
Diluted EPS			233.3	%			12.5	%			20.0	%			2.3	%
Net cash provided by operating activities			(38.7	%)			(20.4	%)			26.3	%			(34.7	%)
Capital expenditures			(50.8	%)			7.3	%			(23.4	%)			(39.6	%)

 

 

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

 

		Three months ended March 31,								Nine months ended March 31,
		2019				2018				2019				2018
Net Sales:
Wholesale segment		$	108.4			$	118.9			$	334.1			$	348.5
Retail segment			138.9				136.9				442.7				431.5
Elimination of intersegment sales			(69.5	)			(74.4	)			(214.0	)			(218.8	)
Consolidated net sales		$	177.8			$	181.4			$	562.8			$	561.2
Operating income (loss):
Wholesale segment		$	13.1			$	7.9			$	36.2			$	37.0
Retail segment			(1.7	)			(2.9	)			0.1				(6.3	)
Elimination of intercompany profit (a)			(0.7	)			(1.1	)			2.3				2.3
Consolidated operating income		$	10.7			$	3.9			$	38.6			$	33.0

 

(a)

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

 

 

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

 

		Three months ended March 31,								Nine months ended March 31,
		2019				2018				2019				2018
Wholesale segment:
Net Sales			(8.9	%)			7.3	%			(4.1	%)			2.8	%
Operating Income			64.6	%			(18.5	%)			(2.1	%)			(8.5	%)
Backlog			(22.1	%)			69.7	%			(22.1	%)			69.7	%
Retail segment:
Net Sales			1.5	%			(3.6	%)			2.6	%			(4.2	%)
Comparable design center revenue			0.5	%			(4.2	%)			1.4	%			(5.1	%)
Total written orders			1.4	%			2.6	%			(0.6	%)			(0.4	%)
Comparable design center written orders			0.4	%			1.6	%			(1.9	%)			(1.3	%)
Operating Income			42.4	%			60.4	%			101.3	%			(51.9	%)
Backlog			(11.9	%)			13.6	%			(11.9	%)			13.6	%

 

The following table shows selected design center location information.

 

		Fiscal 2019												Fiscal 2018
		Independent				Company-								Independent				Company-
		retailers				operated				Total				retailers				operated				Total
Retail Design Center location activity:
Balance at July 1			148				148				296				155				148				303
New locations			17				1				18				11				2				13
Closures			(3	)			(8	)			(11	)			(6	)			(3	)			(9	)
Transfers			(1	)			1				-				-				-				-
Balance at March 31			161				142				303				160				147				307
Relocations (in new and closures)			-				1				1				-				-				-
Retail Design Center geographic locations:
United States			41				136				177				47				141				188
Canada			-				6				6				-				6				6
China			102				-				102				88				-				88
Other Asia			11				-				11				12				-				12
Europe			1				-				1				6				-				6
Middle East			6				-				6				7				-				7
Total			161				142				303				160				147				307

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES 

 

 

Results of Operations

 

For an understanding of the significant factors that influenced our performance for the three and nine months ended March 31, 2019 and 2018, respectively, the following discussion should be read in conjunction with the consolidated financial statements and related notes presented in this Quarterly Report on Form 10-Q ($ in millions, except per share amounts). Unless otherwise noted, all comparisons in the following discussion are from the three- or nine-month period ended March 31, 2019 to the comparable prior fiscal year three- or nine-month period.

 

Third Quarter ended March 31, 2019 compared with Third Quarter ended March 31, 2018

 

Consolidated net sales for the quarter of $177.8 million compared with $181.4 million for the same prior year period, a decrease of 2.0%. Sales decreased by 8.9% for our wholesale segment, which were partly offset by a 1.5% increase in our retail segment. There was a 30.2% decrease in international sales in our combined retail and wholesale segments, which we believe is related to the economic uncertainty surrounding current international trade disputes.

 

Retail net sales for the quarter of $138.9 million compared with $136.9 million for the prior year period, an increase of 1.5%. Comparative retail net sales increased 0.5%. There were 142 Company-operated design centers during the quarter, down from 147 in the prior year period. There was a 1.9% increase in sales in the U.S., while sales from the Canadian design centers decreased 9.6%. Total written business (new orders booked) increased 1.4%, with an increase in the U.S. and a decrease in Canada. Comparable design center written business in the quarter increased 0.4% in total.

 

Wholesale net sales for the quarter of $108.4 million compared with $118.9 million for the prior year period, a decrease of 8.9%. The lower net sales were primarily due to a reduction in sales to our North American retail network. The prior year quarter net sales benefitted from delayed shipments during the first half that had begun shipping during the quarter. Contract sales increased for the current year quarter while international sales, especially to China, decreased.

 

Gross profit for the quarter of $98.4 million compared with $96.7 million for the prior year period, an increase of 1.7%, with an increase in our retail segment and a decrease in our wholesale segment. A price increase earlier in fiscal 2019 improved gross profit, while lower wholesale sales volume negatively impacted gross profit. Gross margin for the quarter was 55.3% compared with 53.3% in the prior year period. Retail sales as a percent of total consolidated sales were 78.1% for the quarter compared with 75.5% in the prior year quarter, increasing our consolidated gross margin.

 

Operating expenses for the quarter of $87.7 million, or 49.3% of net sales, decreased $5.1 million compared with $92.8 million, or 51.2% of net sales, for the prior year period. The 5.5% decrease was primarily due to lower national television advertising costs of $6.4 million. The prior year quarter also reflected a reduction in expenses due to the reversal of $1.5 million in accrued incentive compensation.

 

Operating income for the quarter of $10.7 million, or 6.0% of net sales, compared with $3.9 million, or 2.1% of net sales, for the prior year period. The primary causes for the increase in operating income was the benefit of higher gross profit and a reduction in national television advertising costs.

 

Retail operating income for the quarter was a loss of $1.7 million compared with a loss of $2.9 million for the prior year period. The higher operating income and improved margin in the current quarter was driven primarily by the improved sales and gross margin in the current year period.

 

Wholesale operating income for the quarter of $13.0 million compared with $7.9 million for the prior year period. The increase was largely due to higher gross margin and lower advertising costs as discussed above.

 

Income tax expense for the quarter totaled $2.6 million compared with $1.2 million. Our effective tax rate was 24.8% in the quarter compared with 31.2%. The effective tax rate of 24.8% primarily includes a provision for income tax on the current quarter’s taxable income, including federal, state and local taxes, tax expense on the establishment and maintenance of a valuation allowance on Canadian deferred tax assets, and tax and interest expense on uncertain tax positions, partially offset by the reversal of various uncertain tax positions. The prior fiscal year effective tax rate primarily includes tax expense on that quarter’s taxable income, re-measurement of deferred tax assets and liabilities as a result of the Tax Act, and tax and interest expense on uncertain tax positions, partially offset by the reversal of various uncertain tax positions.

 

Net income for the quarter of $8.0 million compared with $2.6 million for the prior year period, which resulted in $0.30 per diluted share compared with $0.09 in the prior year period.

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

Nine Months Ended March 31, 2019 Compared with Nine Months Ended March 31, 2018

 

Consolidated net sales year-to-date of $562.8 million compared with $561.2 million for the same prior year period, an increase of 0.3%. Sales increased by 2.6% in our retail segment, which were partially offset by a 4.1% decrease in our wholesale segment. There was a 28.1% decrease in international sales in our combined retail and wholesale segments, which we believe is related to the economic uncertainty surrounding current international trade disputes.

 

Retail net sales year-to-date of $442.7 million compared with $431.5 million for the prior year period, an increase of 2.6%. Comparative retail net sales increased 1.4%. There were 142 Company-operated design centers during the period, down from 147 in the prior year period. There was a 3.6% increase in sales in the U.S., while sales from the Canadian design centers decreased 20.0%. Total written business (new orders booked) decreased 0.6%, with a decrease in both Canada and the U.S. Comparable design center written business year-to-date decreased 1.9% in total.

 

Wholesale net sales year-to-date of $334.1 million compared with $348.5 million for the prior year period, a decrease of 4.1%. During the previous year, wholesale segment sales were at elevated levels as the shipping delays and the high backlogs from the first quarter were mostly caught up in the second quarter. This year the wholesale segment backlog levels returned to more normal levels. Lower international sales, especially to China, partially offset by increased contract sales, also contributed to the sales decrease.

 

Gross profit year-to-date of $308.7 million compared with $304.8 million for the prior year period, up 1.3%, with an increase in our retail segment and a decrease in our wholesale segment. Consolidated gross margin year-to-date was 54.9% compared with 54.3%. A price increase earlier in fiscal 2019 improved gross profit, while lower wholesale sales volume negatively impacted gross profit. Retail sales as a percent of total consolidated sales was 78.7% year-to-date compared with 76.9% in the prior year period, increasing our consolidated gross margin.

 

Operating expenses year-to-date of $270.1 million, or 48.0% of net sales, decreased $1.8 million compared with $271.9 million, or 48.4% of net sales, for the prior year period. The $1.8 million decrease from the prior year was primarily due to a $6.5 million reduction in national television advertising expenses partially offset by increased logistics (freight, distribution and warehouse) costs of $2.4 million.

 

Operating income year-to-date of $38.6 million, or 6.9% of net sales, compared with $33.0 million, or 5.9% of net sales, for the prior year period. The primary causes for the 17.1% increase in operating income were increased domestic retail sales and lower national television advertising costs partially offset by reduced sales in wholesale and increased variable logistics costs.

 

Retail operating income year-to-date of $0.1 million compared with a loss of $6.3 million for the prior year period. The improved operating income was driven primarily by the improved domestic sales in the current year period partially offset by lower international operating income.

 

Wholesale operating income year-to-date of $36.2 million compared with $37.0 million for the prior year period. The decrease was largely due to lower third quarter net sales and increased distribution costs partially offset by a reduction in national television advertising expenses.

 

Income tax expense year-to-date totaled $9.7 million compared with $8.0 million for the prior year period. Our effective tax rate was 25.0% in the period compared with 24.4%. The effective tax rate for the current fiscal year primarily includes tax expense on the fiscal year’s taxable income, including federal, state and local taxes, tax expense on the establishment and maintenance of a valuation allowance on Canadian deferred tax assets, and tax and interest expense on uncertain tax positions, partially offset by the reversal of various uncertain tax positions. The effective tax rate for the prior fiscal year primarily includes tax expense on that fiscal year’s taxable income, the tax benefit lost on the cancelation of stock options, and tax and interest expense on uncertain tax positions, partially offset by tax benefits from the re-measurement of deferred tax assets and liabilities as of result of the Tax Act, the vesting of restricted stock units, and the reversal of various uncertain tax positions.

 

Net income year-to-date of $29.0 million compared with $24.9 million for the prior year period, an increase of 16.5%. This resulted in net income per diluted share year-to-date of $1.08 compared with $0.90, an increase of 20.0%.

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

Liquidity

 

At March 31, 2019, we held cash and cash equivalents of $25.7 million compared with $22.4 million at June 30, 2018. Our principal sources of liquidity include cash and cash equivalents, cash flow from operations, and amounts available under the Facility.

 

A summary of net cash provided by (used in) operating, investing, and financing activities for the nine months ended March 31, 2019 and 2018 is provided below (in millions):

 

		Nine months ended
		March 31,
		2019				2018
Cash provided by (used in) operating activities
Net income plus other non-cash items		$	44.6			$	40.7
Change in working capital			(0.3	)			(5.6	)
Total provided by operating activities		$	44.3			$	35.1
Cash provided by (used in) investing activities
Capital expenditures		$	(7.0	)		$	(9.1	)
Other investing activities			0.1				0.5
Total (used in) investing activities		$	(6.9	)		$	(8.6	)
Cash provided by (used in) financing activities
Borrowings on revolving credit facility		$	16.0			$	-
Payments on borrowings and capital lease obligations			(8.4	)			(14.3	)
Payment of cash dividends			(41.9	)			(24.3	)
Repurchase of company stock			-				(1.1	)
Other financing activities			0.2				0.2
Total (used in) financing activities		$	(34.1	)		$	(39.5	)

 

 

Cash Provided by (Used in) Operating Activities - Year-to-date, cash of $44.3 million was provided by operating activities, an increase of $9.2 million. This was largely due higher net income and an improvement in our working capital compared with last year as fiscal 2018 experienced a significant inventory increase to support the order backlog. 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).

 

Cash Provided by (Used in) Investing Activities - Year-to-date, $6.9 million of cash was used in investing activities, a decrease of $1.7 million. Capital expenditures decreased $2.1 million from the prior year and related primarily to retail design center improvements. We anticipate that cash from operations will be sufficient to fund future capital expenditures. Effective July 1, 2018, and further described in Note 3 to the consolidated financial statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q, the Company considers restricted cash as a component of cash and cash equivalents as presented on its consolidated statement of cash flows. Previously the net change in restricted cash was considered an investing activity. Prior periods have been reclassified to conform to current year presentation.

 

Cash Provided by (Used in) Financing Activities - Year-to-date, $34.1 million was used in financing activities, which is $5.4 million less cash used than the $39.5 million of cash used during the first nine months of fiscal 2018. The decrease year over year was primarily due to a $13.2 million payment on the previously outstanding term loan in fiscal 2018, partially offset by a net borrowing on the Facility of $8.0 million in the current year. During the current fiscal year to date period we paid dividends of $41.9 million compared with $24.3 million in the prior year to date period. In November 2018, we declared a $1.00 per share special cash dividend, which was paid in January 2019, in addition to the regular quarterly dividend of $0.19 per share, also paid in January 2019. We have continuously paid regular quarterly dividends for every quarter since 1996 and we expect to continue to do so as economic conditions and liquidity permit.

 

We believe that our cash flow from operations, together with our other available sources of liquidity including the Facility, will be adequate to make all required debt payments, to permit anticipated capital expenditures, and to fund working capital and other cash requirements. As of March 31, 2019, we had working capital of $97.7 million compared with $93.2 million at June 30, 2018, an increase of $4.5 million, or 4.8%. The Company had a current ratio of 1.77 to 1 at March 31, 2019 and 1.77 to 1 at June 30, 2018.

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

In addition to using available cash to fund changes in working capital, necessary capital expenditures, acquisition activity, the repayment of debt and the payment of dividends, the Company has been authorized by our board of directors to repurchase our common stock from time to time, either directly or through agents, in the open market at prices and on terms satisfactory to us. During the nine months ending March 31, 2019 and 2018 there were no share repurchases, respectively.

 

Capital Resources

 

Capital Expenditures - Capital expenditures in the third quarter of fiscal 2019 were $2.0 million, compared with $4.1 million in the prior year period. Capital expenditures of $1.3 million, or 64%, were primarily related to retail design center improvements.

 

Capital Needs - During December 2018 we entered into a five-year, $165 million senior secured revolving credit facility, which amended and restated the previously existing facility. To partially fund the special cash dividend paid to shareholders in January 2019, we borrowed $16.0 million from the Facility. By March 31, 2019, we had repaid $8.0 million of the total borrowed from cash generated from operating activities. For a detailed discussion of our debt obligations and timing of our related cash payments see Note 8 to the consolidated financial statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q.

 

Letters of Credit - At both March 31, 2019 and June 30, 2018, there was $6.2 million of standby letters of credit outstanding under the Facility.

 

Total availability under the Facility was $150.8 million at March 31, 2019 and $108.8 at June 30, 2018. At both March 31, 2019 and June 30, 2018, we were in compliance with all the covenants under the Facility.

 

Share Repurchase Program

 

We may from time to time make repurchases in the open market and privately negotiated transactions, subject to market conditions, including pursuant to our previously announced repurchase program. There were no share repurchases under the program during the first nine months of fiscal 2019. At March 31, 2019, we had a remaining Board authorization to repurchase 2,518,046 shares of our common stock pursuant to our program.

 

Contractual Obligations

 

Fluctuations in our operating results, the degree of success of our accounts receivable collection efforts, the timing of tax and other payments, as well as necessary capital expenditures to support growth of our operations will impact our liquidity and cash flows in future periods. The effect of our contractual obligations on our liquidity and capital resources in future periods should be considered in conjunction with the factors mentioned here. As of June 30, 2018, we had total contractual obligations of $184.2 million, of which $176.0 million related to our operating lease commitments. With the exception of the additional borrowings of $16.0 million under our renewed Facility, of which we had repaid $8.0 million by March 31, 2019, as described in the Capital Resources – Capital Needs section of this MD&A, there were no new material changes in our contractual obligations during the first nine months of fiscal 2019.

 

Dividends

 

In January 2019, we paid a $1.00 per share special cash dividend, in addition to the regular quarterly dividend of $0.19 per share. On January 28, 2019, our Board of Directors approved a regular quarterly dividend of $0.19 per share. The cash dividend of $5.1 million was paid on April 25, 2019, to common stockholders of record at the close of business on April 11, 2019. Future cash dividends will depend on our earnings, capital requirements, financial condition and other factors considered relevant by us and is subject to final determination by our Board of Directors.

 

Off-Balance Sheet Arrangements and Other Commitments and Contingencies

 

Except as indicated below, we do not utilize or employ any off-balance sheet 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.

 

We may, from time to time in the ordinary course of business, provide guarantees 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 program in place at both March 31, 2019 and June 30, 2018 was for our consumer credit program as further described below.

 

 

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, and the Company will utilize a substitute program upon 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 perform satisfactorily 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 us collateral at a variable rate based on the volume of program sales if we do not meet a covenant regarding minimum working capital or tangible net worth. At both March 31, 2019 and June 30, 2018, we were in compliance with such covenant.

 

Product Warranties - Our products, including our case goods, upholstery and home accents, generally carry explicit product warranties that extend up to twelve 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. The Company’s product warranty liability totaled $1.4 million at March 31, 2019 compared with $1.5 million at June 30, 2018.

 

Significant Accounting Policies and Critical Accounting Estimates

 

We describe our significant accounting policies in Note 1, Summary of Significant Accounting Policies, of the notes to our consolidated financial statements included in our 2018 Annual Report on Form 10-K. We discuss our critical accounting estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2018 Annual Report on Form 10-K.

 

We implemented ASC 606 in the first quarter of fiscal 2019. There have been no other changes in our significant accounting policies or critical accounting estimates during the first nine months of fiscal 2019 from those disclosed in our 2018 Annual Report on Form 10-K. Refer to Note 4, Revenue Recognition, for further details on the adoption of ASC 606.

 

Recent Accounting Pronouncements

 

See Note 3, Recent Accounting Pronouncements, to the consolidated financial statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q for a full description of recent accounting pronouncements, including the expected dates of adoption.

 

Business Outlook

 

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. Having refreshed over 70% of our products in the last three years, our current product offerings are fresh and relevant.

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

Our marketing programs continue to be strengthened with messaging focused on our stylish products, quality and service offerings. We expect to continue to maintain a targeted advertising program utilizing various advertising mediums during the remainder of fiscal 2019 as we broaden the reach of our messaging to drive more traffic to our design centers and to ethanallen.com.

 

Our network of professionally trained interior design professionals differentiate 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.

 

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 approximately 75% of our product offerings coupled with the import of other selected products, provides the greatest degree of flexibility and short lead times and is the most effective approach to ensuring that acceptable levels of quality and service are maintained.

 

With our vertical enterprise well positioned, we maintain a cautiously optimistic outlook. Our retail strategy will continue with its focus on (i) 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

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

In the normal course of business, we are exposed to market risks relating to fluctuations in interest rates and foreign currency exchange rates that could impact our financial position and results of operations.

 

Interest Rate Risk

 

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 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 requirements.

 

For floating-rate obligations, interest rate changes do not affect the fair value of the underlying financial instrument but would impact future earnings and cash flows, assuming other factors are held constant. Conversely, for fixed-rate obligations, interest rate changes affect the fair value of the underlying financial instrument but would not impact earnings or cash flows.

 

At March 31, 2019, the fair value of our long-term debt was $8.0 million, which approximated its carrying amount and was determined based on quoted market prices for debt with a similar maturity. It is anticipated that the fair market value of our debt will continue to be immaterially affected by fluctuations in interest rates and we do not believe that the value of our debt has been significantly impacted by current market events. The debt bears interest on the outstanding principal amount at a rate equal to the one-month LIBOR rate of 2.5% plus a spread using a debt leverage pricing grid currently at 1.5%. During the nine months ended March 31, 2019, we recorded interest expense of $0.1 million on our outstanding debt amounts. We currently do not engage in any interest rate hedging activity and we have no intention of doing so in the foreseeable future. Assuming all terms of our outstanding long-term debt remained the same, a hypothetical 100 basis point change (up or down) in the one-month LIBOR rate would not have a material effect on our consolidated results of operations and financial condition.

 

For further information regarding our other risk factors, see Item 7A – Quantitative and Qualitative Disclosures About Market Risk in our 2018 Annual Report on Form 10-K.

 

Foreign Currency Exchange Risk

 

Foreign currency exchange risk is primarily limited to our operation of Ethan Allen 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 United States 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 hypothetical 10% weaker United States dollar against all foreign currencies at March 31, 2019 would have had an immaterial impact on our consolidated results of operations and financial condition.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including the Chairman of the Board and Chief Executive Officer (principal executive officer) and the Executive Vice President Administration and Chief Financial Officer (principal financial officer), we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, the principal executive officer and principal financial officer have concluded that, as of March 31, 2019, our disclosure controls and procedures were effective in ensuring that material information relating to us (including our consolidated subsidiaries), which is required to be disclosed by us in our periodic reports filed with or submitted to the SEC is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the third fiscal quarter ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

There have been no material changes during the first nine months of fiscal 2019 to the matters discussed in Part I, Item 3 - Legal Proceedings in our 2018 Annual Report on Form 10-K.

 

Item 1A. Risk Factors

 

There have been no material changes during the first nine months of fiscal 2019 to the risk factors identified in section Item IA – Risk Factors in our 2018 Annual Report on Form 10-K.

 

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

 

Items 2(a) and (b) are not applicable as there have been no unregistered sales of equity securities.

 

(c) Issuer Purchases of Equity Securities

 

The following table provides a month-to-month summary of the share repurchase activity during the three months ended March 31, 2019:

 

Period		Total number of shares purchased				Average price paid per share				Total number of shares purchased as part of publicly announced plans or programs				Maximum number of shares (or approximate dollar value) that may yet be purchased under the plans or programs
January 2019			-			$	-				-				2,518,046
February 2019			-			$	-				-				2,518,046
March 2019			-			$	-				-				2,518,046
Total			-								-

 

On April 24, 2018, our Board of Directors approved an increase to the share repurchase program authorizing us to repurchase up to approximately 3,000,000 shares. There is no expiration date on the repurchase authorization and the amount and timing of future share repurchases, if any, will be determined by our officers at their discretion, and as permitted by securities laws, covenants under existing bank agreements and other legal requirements, and will be based on a number of factors, including an evaluation of general market and economic conditions and the trading price of the common stock. The share repurchase program may be suspended or discontinued at any time without prior notice.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

Item 6. Exhibits

 

(a)

Exhibits

 

The following documents are filed as exhibits to this report:

 

Exhibit Number

Exhibit Description

Incorporated by Reference

Filed Herewith

Furnished Herewith

Form

File No.

Exhibit

Filing Date

31.1

Certification of Principal Executive Officer pursuant to Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

X

31.2

Certification of Principal Financial Officer pursuant to Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

X

32.1

Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

X

32.2

Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

X

101.INS

XBRL Instance Document

X

101.SCH

XBRL Taxonomy Extension Schema Document

X

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

X

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

X

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

X

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

X

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

	ETHAN ALLEN INTERIORS INC.
	(Registrant)

 

 

 

Date: April 29, 2019	BY:        /s/ M. Farooq Kathwari
	M. Farooq Kathwari
	Chairman, President and Chief Executive Officer
	(Principal Executive Officer)

 

 

 

 

Date: April 29, 2019	BY:       /s/ Corey Whitely
	Corey Whitely
	Executive Vice President, Administration Chief Financial Officer and Treasurer
	(Principal Financial Officer)

 

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