10-K 1 eth20190630_10k.htm FORM 10-K eth20190630_10k.htm
 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________________________________

 

FORM 10-K

(Mark One)

 

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

 

For the fiscal year ended June 30, 2019

 

OR

 

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

 

For the transition period from            to           

 

Commission file number 1-11692

 _________________________________________________

 

 

Ethan Allen Interiors Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

06-1275288

(State or other jurisdiction of incorporation or organization)

 

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

 

 

25 Lake Avenue Ext., Danbury, Connecticut

 

            06811-5286

(Address of principal executive offices)

 

       (Zip Code)

 

(203) 743-8000

(Registrant's telephone number, including area code)

 

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

 

Common stock $0.01 par value

 

ETH

 

New York Stock Exchange

(Title of each class)

 

(Trading symbol)

 

(Name of exchange on which registered)

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.      [  ] Yes      [X] No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     [  ] Yes      [X] No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes   [  ] No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).      [X] Yes      [  ] No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer           [   ]

Accelerated filer                      [X]

Non-accelerated filer             [   ]

Smaller reporting company    [   ]

Emerging growth company  [   ]

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). [  ] Yes [X] No

 

The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant on December 31, 2018, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $419,386,567. The number of shares outstanding of the registrant’s common stock, $0.01 par value, as of July 25, 2019 was 26,586,945.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A for its 2019 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended June 30, 2019.

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

 

 

PART I

   
     

Item 1.

Business

5

     

Item 1A.

Risk Factors

12

     

Item 1B.

Unresolved Staff Comments

17

     

Item 2.

Properties

18

     

Item 3.

Legal Proceedings

19

     

Item 4.

Mine Safety Disclosures

19

     

PART II

   
     

Item 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 20
     

Item 6.

Selected Financial Data

21

     

Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

22

     

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

34

     

Item 8.

Financial Statements and Supplementary Data

35

     

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

66

     

Item 9A.

Controls and Procedures

66

     

Item 9B.

Other Information

66

     

PART III

   
     

Item 10.

Directors, Executive Officers and Corporate Governance

67

     

Item 11.

Executive Compensation

67

     

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 67
     

Item 13.

Certain Relationships and Related Transactions, and Director Independence

68

     

Item 14.

Principal Accounting Fees and Services

68

     

PART IV

   
     

Item 15.

Exhibits, Financial Statement Schedules

68

     

Item 16.

Form 10-K Summary

71
     

SIGNATURES

72

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS (SAFE-HARBOR)

 

This Annual Report on Form 10-K contains certain statements which may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Generally, forward-looking statements give current expectations and projections relating to financial condition, results of operations, plans, objectives, future performance and business. A reader can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “continue,” “may,” “will,” “short-term,” “target,” “outlook,” “forecast,” “guidance,” “non-recurring,” “one-time,” “unusual,” “should,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events.

 

Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that are expected. Ethan Allen Interiors Inc. and its subsidiaries (the “Company”) derive many of its forward-looking statements from operating budgets and forecasts, which are based upon many detailed assumptions. While the Company believes that its assumptions are reasonable, it cautions that it is very difficult to predict the impact of known factors and it is impossible for the Company to anticipate all factors that could affect actual results and matters that are identified as “short term,” “non-recurring,” “unusual,” “one-time,” or other words and terms of similar meaning may in fact recur in one or more future financial reporting periods. Important factors that could cause actual results to differ materially from the Company’s expectations, or cautionary statements, are disclosed in Item 1A, Risk Factors, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere in this Annual Report Form 10-K. All forward-looking statements attributable to the Company, or persons acting on its behalf, are expressly qualified in their entirety by these cautionary statements, as well as other cautionary statements. A reader should evaluate all forward-looking statements made in this Annual Report on Form 10-K in the context of these risks and uncertainties. Given the risks and uncertainties surrounding forward-looking statements, you should not place undue reliance on these statements. Many of these factors are beyond our ability to control or predict.

 

The forward-looking statements included in this Annual Report on Form 10-K are made only as of the date hereof. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as otherwise required by law.

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

PART I

ITEM 1.     BUSINESS

 

Overview

 

Founded in 1932 and incorporated in Delaware in 1989, Ethan Allen Interiors Inc., through its wholly-owned subsidiary, Ethan Allen Global, Inc., and Ethan Allen Global, Inc.’s subsidiaries (collectively, “we,” “us,” “our,” “Ethan Allen” or the “Company”), is a leading interior design company, manufacturer and retailer in the home furnishings marketplace. Today we are a global luxury international home fashion brand that is vertically integrated from design through delivery, which affords our clientele a value proposition of style, quality and price. We provide complimentary interior design service to our customers and sell a full range of furniture products and decorative accents through a retail network of approximately 300 design centers in the United States and abroad as well as online at ethanallen.com. The design centers represent a mix of independent licensees and Company-owned and operated locations. We own and operate six manufacturing facilities, including three manufacturing plants and one sawmill in the United States and one upholstery manufacturing plant in Mexico and one case goods manufacturing plant in Honduras.

 

Business Strategy

 

Our strategy has been to position Ethan Allen as a preferred brand offering complimentary design service together with products of superior style, quality and value to provide consumers with a comprehensive, one-stop shopping solution for their home furnishing and interior design needs. In carrying out our strategy, we continue to expand our reach to a broader consumer base through a diverse selection of attractively priced products, designed to complement one another, reflecting current fashion trends in home decorating. We continuously monitor changes in home fashion trends through attendance at international industry events and fashion shows, internal market research, and regular communication with our retailers and design center design consultants who provide valuable input on consumer trends. We believe that the observations and input gathered enable us to incorporate appropriate style details into our products to react quickly to changing consumer tastes.

 

Product 

 

The majority of the products we sell are built by artisans in our North American plants. Most upholstery frames are hand-assembled and stitching is guided by hand. We select international partners who are as committed to quality and social responsibility as we are. All case goods frames are made with premium lumber and veneers. We use best-in-class construction techniques, including mortise and tenon joinery and four-corner glued dovetail joinery on drawers. We combine technology with personal service and maintain an up-to-date broad range of styles and custom options in keeping with today’s home decorating trends. These factors continue to define Ethan Allen, positioning us as a fashion leader in the home furnishing industry.

 

The interior of our design centers, which have been substantially refreshed during the past three fiscal years, are organized to facilitate display of our product offerings, both in room settings that project the category lifestyle and by product grouping to facilitate comparisons of the styles and tastes of our customers. To further enhance the experience, technology is used to expand the range of products viewed by including content from our website and 3-D digital images in applications used on large touch-screen flat panel displays.

 

Product Development

 

Using a combination of employees and designers, we design the majority of the products we sell. All of our products are Ethan Allen branded. This important facet of our vertically integrated business enables us to control the design specifications and establish consistent levels of quality across all our product programs. In addition to our four United States manufacturing facilities, we have an upholstery manufacturing facility in Mexico and a case goods manufacturing facility in Honduras. Approximately 75% of our products are manufactured or assembled in these North American facilities. We selectively outsource the remaining 25% of our products, primarily from Asia. We carefully select our sourcing partners and require strict compliance with our specifications and quality standards. We believe that strategic investments in our manufacturing facilities balanced with outsourcing from foreign and domestic suppliers would enable us to accommodate any significant future sales growth and allow us to maintain an appropriate degree of control over cost, quality and service to our customers.

 

Raw Materials and Other Suppliers

 

The most important raw materials we use in furniture manufacturing are lumber, veneers, plywood, hardware, glue, finishing materials, glass, laminates, steel, fabrics, foam, and filling material. The various types of wood used in our products include cherry, ash, oak, maple, prima vera, African mahogany, birch, rubber wood and poplar.

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Fabrics and other raw materials are purchased both domestically and outside the United States . We have no significant long-term supply contracts, and have sufficient alternate sources of supply to prevent disruption in supplying our operations. We maintain a number of sources for our raw materials, which we believe contribute to our ability to obtain competitive pricing. Lumber prices and availability fluctuate over time based on factors such as weather and demand. The cost of some of our raw materials such as foam and shipping costs are dependent on petroleum cost. Higher material prices, cost of petroleum, and costs of sourced products could have an adverse effect on margins.

 

Appropriate amounts of lumber and fabric inventory are typically stocked to maintain adequate production levels. We believe that our sources of supply for these materials are sufficient and that we are not dependent on any one supplier.

 

We enter into standard purchase agreements with foreign and domestic suppliers to source selected products. The terms of these arrangements are customary for the industry and do not contain any long-term contractual obligations on our behalf. We believe we maintain good relationships with our suppliers. 

 

Segments

 

We have strategically aligned our business into two reportable segments: Wholesale and Retail. These two segments represent strategic business areas of our vertically integrated enterprise that operate separately and provide their own distinctive services. This vertical structure enables us to offer our complete line of home furnishings and accents while controlling quality and cost. We evaluate performance of the respective segments based upon net sales and operating income. Inter-segment transactions result, primarily, from the wholesale sale of inventory to the retail segment, including the related profit margin. Financial information, including sales, operating income and long-lived assets related to our segments are disclosed in Note 19, Segment Information, of the notes to our consolidated financial statements included under Item 8 of this Annual Report on Form 10-K.

 

As of June 30, 2019, the Company operated 144 design centers (our retail segment) and our independent retailers operated 158 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.

 

The following charts depict net sales related to our reportable segments.

 

 

We believe that the demand for furniture generally reflects sensitivity to overall economic conditions, including consumer confidence, housing market conditions and unemployment rates. For both our segments, the second and fourth quarters are historically the seasonally highest-volume sales quarters. However, during fiscal 2019, we experienced our largest sales volume quarter for our wholesale business during the first quarter while our retail segment had its highest sales volume during the second quarter. We believe this fiscal 2019 experience was not an indicator that our seasonal trends are changing.

 

Retail Segment

 

The retail segment, which accounted for 79% of net sales during fiscal 2019, sells home furnishings and accents to consumers through a network of Company operated design centers. Retail revenue is generated upon the retail sale and delivery of our products to our retail customers through our network of service centers. Retail profitability reflects (i) the retail gross margin, which represents the difference between the retail net sales price and the cost of goods, purchased primarily from the wholesale segment, and (ii) other operating costs associated with retail segment activities.

 

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. Due to the nature of the business in which the retail segment operates, there are no customer concentration risks.

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

The retail segment’s product line revenue, expressed as a percentage of net sales, is comprised of approximately 48% in upholstered products, 30% case goods and the remaining 22% in home accents and other.

 

During fiscal 2019, we acquired two new design centers in the United States from independent retailers and closed six locations, which is net of three relocations. The geographic distribution of retail design center locations is disclosed under Item 2, Properties, contained in Part I of this Annual Report on Form 10-K.

 

Wholesale Segment

 

The wholesale segment, which accounted for 21% of net sales during fiscal 2019, is principally involved in the development of the Ethan Allen brand and encompasses all aspects of design, manufacture, sourcing, marketing, sale and distribution of our broad range of home furnishings and accents. Wholesale revenue is generated upon the sale and shipment of our products to our retail network of independently operated design centers, Company operated design centers and other contract customers. Sales to ten of our largest customers accounted for 21% of revenues within our wholesale segment during fiscal 2019.

 

Within the wholesale segment, we maintain revenue information according to each respective product line (i.e. case goods, upholstery, and home accents). Case goods include items such as beds, dressers, armoires, tables, chairs, buffets, entertainment units, home office furniture, and wooden accents. Upholstery items include sleepers, recliners and other motion furniture, chairs, ottomans, custom pillows, sofas, loveseats, cut fabrics and leather. Skilled artisans cut, sew and upholster custom-designed upholstery items which are available in a variety of frame, fabric and trim options. Home accent items include window treatments and drapery hardware, wall decor, florals, lighting, clocks, mattresses, bedspreads, throws, pillows, decorative accents, area rugs, wall coverings and home and garden furnishings.

 

Wholesale profitability includes (i) the wholesale gross margin, which represents the difference between the wholesale net sales price and the cost associated with manufacturing and/or sourcing the related product, and (ii) other operating costs associated with wholesale segment activities.

 

The wholesale segment’s product line revenue, expressed as a percentage of net sales, is comprised of approximately 50% in upholstered products, 33% case goods and the remaining 17% in home accents and other.

 

As of June 30, 2019, our wholesale backlog was $46.4 million (as compared to $56.5 million as of June 30, 2018) which is anticipated to be serviced in the first quarter of fiscal 2020. Our backlog was down 18.0% as our manufacturing operations returned to normal throughput as compared to the prior year’s longer production lead-times primarily related to the GSA contract startup. Our wholesale backlog fluctuates based on the timing of net orders booked, manufacturing schedules and efficiency, the timing of sourced product receipts, the timing and volume of wholesale shipments, and the timing of various promotional events. Because orders may be rescheduled and/or canceled and the sourcing timing may change, the measure of backlog at a point in time is not necessarily indicative of future sales performance.

 

Our independent retailers are required to enter into license agreements with us, which (i) authorize the use of certain Ethan Allen trademarks and (ii) require adherence to certain standards of operation, including a requirement to fulfill related warranty service agreements. We are not subject to any territorial or exclusive retailer agreements in North America.

 

The geographic distribution of manufacturing and distribution locations is disclosed under Item 2, Properties, contained in Part I of this Annual Report on Form 10-K.

 

Talent

 

Since our founding, we have built a collaborative culture that recognizes and rewards innovation and offers employees a variety of opportunities and experiences. Our employees are critical to our success and are one of the main reasons we continue to execute at a high level. We believe our continued focus on making employee engagement a top priority will help us provide high quality products and services to our customers.

 

At June 30, 2019 our employee count totaled 4,700, a decrease from 5,200 a year ago, which reflects the impact of restructuring actions taken to further optimize our manufacturing and logistics operations. The majority of our employees are employed on a full time basis and we believe we maintain good relationships with our employees. None of our employees are represented by unions or collective bargaining agreements.

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Customer Service Offerings

 

We offer numerous customer service programs, each of which has been developed and introduced to consumers in an effort to make their shopping experience easier and more enjoyable.

 

Gift Card. This program allows customers to purchase and redeem gift cards through our website or at any participating retail design center, which can be used for any of our products or services.

 

Ethan Allen Consumer Credit. The Ethan Allen Platinum consumer credit program offers customers a menu of custom financing options. Financing offered through this program is administered by a third-party financial institution and is granted to our customers on a non-recourse basis to the Company. Customers may apply for an Ethan Allen Platinum card at any participating design center or online at ethanallen.com.

 

Marketing

 

Rooted in the five pillars of our brand – diversity of style, quality and craftsmanship, sustainability, complimentary design service, and premier in-home delivery – Ethan Allen’s marketing programs are designed to drive traffic to our retail network of approximately 300 design centers as well as to our e-commerce and social sites.

 

Our marketing approach begins with a customer experience that exemplifies the Ethan Allen difference. Through interactions in the design center, monitoring and response to online reviews and social channels, and surveys, we work to incorporate the voices of our customers into every decision we make. By deploying customer relationship management tools, we are further segmenting our target markets, creating a more personalized shopping experience and developing more personalized content than ever before.

 

Our new Ethan Allen Platinum consumer credit program, designed to make the Ethan Allen brand accessible to everyone, had a successful national launch and should continue to attract both new prospects and returning customers.

 

Through both paid and owned channels, we continue to position Ethan Allen as an aspirational yet approachable brand. We deliver these messages in a variety of ways – locally, nationally, and globally – to connect and engage with our target audience and drive sales. Direct mail continues to be a critical marketing medium for us. Our magazine, distributed to almost 22 million households, enables customers and prospects to immerse themselves in inspirational photos of our products; it is also a frequent starting point for conversations with our designers. We strive to be present at natural connection points with customers, using targeted direct mail pieces like our new mover's brochure. Along with our magazine, each direct mail piece is distributed to a targeted marketing segment based on data collected internally and through independent market research.

 

In addition to newspapers and shelter magazines, local efforts complement and strengthen our national marketing strategy with many markets increasing their reach through targeted broadcast, streaming radio, local digital and robust social initiatives.

 

As online shopping takes on increasing importance, we have continued to improve both user experience and conversion optimization on ethanallen.com and ethanallen.ca. We invest in both paid and organic search engine marketing, and we work to improve the local search rankings of each design center location. We have also continued to improve our programs for collecting user-generated content, both from customers and designers, which showcases the way our customers are living with Ethan Allen. Our new EA InHomeTM mobile app, which utilizes augmented reality, gives customers the ability to preview products in their space before they make a purchase; our 3-D room planner, available in design centers, offers an even more immersive experience and helps move customers toward conversion.

 

Significant growth in our organic social following, including a 25% increase in Instagram followers during the 2018 calendar year, and paid social campaigns help bring awareness of the Ethan Allen brand to every demographic. We utilize these channels to build a sense of community, and by extension brand loyalty, among our current and prospective customers.

 

Competition

 

We believe the home furnishings industry competes primarily on the basis of product styling and quality, personal service, prompt delivery, product availability and price. We further believe that we effectively compete on the basis of each of these factors and that, more specifically under our vertical structure, our complimentary interior design service, direct manufacturing, white glove delivery service, product presentations, and website create a competitive advantage, further supporting our mission of providing consumers with a complete home decorating and design solution. We also believe that we differentiate ourselves further with the quality of our interior design service through our intensive training and the caliber of our design consultants. Our objective is to continue to develop and strengthen our retail network by (i) expanding the Company operated retail business through the repositioning and opening of new design centers, (ii) obtaining and retaining independent retailers, encouraging such retailers to expand their business through the opening or relocation of new design centers with the objective of increasing the volume of their sales, (iii) further expanding our sales network through our independent design associates and realtor referral programs, and (iv) further expanding our ecommerce.

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

At Ethan Allen, our internet strategy is to drive traffic into our design centers by combining technology with excellent personal service. Though our customers have the opportunity to buy our products online, we take the process further. With so much of our product customizable, we encourage our website customers to get personal help from our interior design professionals either in person or by chatting online with one of our qualified design consultants. This complimentary direct contact with one of our knowledgeable interior designers creates a competitive advantage through our excellent personal service. This enhances the online experience and regularly leads to internet customers becoming customers of our network of interior design centers.

 

Retail Design Centers

 

We continue to strengthen the Ethen Allen brand with many initiatives, including the opening of new design centers and relocating or consolidating certain existing design and service centers, regularly updating presentations and floor plans, and strengthening of the qualifications of our designers through training and certification.

 

Ethan Allen design centers are typically located in busy retail settings as freestanding destinations or as part of town centers, lifestyle centers, suburban strip malls or shopping malls, depending upon the real estate opportunities in a particular market. Our 144 Company operated retail design centers average approximately 15,300 square feet in size with 63% of them ranging between 10,000 and 20,000 square feet, while 21% being less than 10,000 square feet and the remaining 16% being greater than 20,000 square feet. During the past 10 years, 37% of our design centers are new or have been relocated.

 

Combining technology with personal service in our design centers has allowed us to reduce the size of our design centers. In the past five years, we have either opened or relocated a total of 24 new design centers that have an average size of approximately 9,000 square feet. These smaller footprint design centers reflect our direction as we move forward in repositioning our retail design centers. These new and relocated design centers also reflect our shift from destination and shopping mall locations to lifestyle centers that better project our brand and offer increased traffic opportunities.

 

We strive to maintain consistency of presentation throughout our retail design centers through a comprehensive set of standards and display planning assistance. These interior display design standards enable each design center to present a high quality image by using focused lifestyle settings and select product category groupings to display our products and information to facilitate design solutions and to educate consumers. We also create a consistent brand projection through our exterior facades and signage.

 

Distribution and Logistics

 

We distribute our products through four distribution centers, owned by the Company, strategically located in North Carolina, Oklahoma, and Virginia. These distribution centers provide efficient cross-dock operations to receive and ship product from our manufacturing facilities and third-party suppliers to our retail network of Company and independently operated retail service centers. Retail service centers prepare products for delivery into customers’ homes. At June 30, 2019, our Company operated retail design centers were supported by 13 Company operated retail service centers and 14 service centers operated by third parties.

 

While we manufacture to custom order the majority of our products, we also stock certain case goods, upholstery and home accents to provide for quick delivery of in-stock items and to allow for more efficient production runs. We utilize independent carriers to ship our products.

 

Our practice has been to sell our products at the same delivered cost to all Company and independently operated design centers throughout the United States, regardless of their shipping point. This policy creates pricing credibility with our wholesale customers while providing our retail segment the opportunity to achieve more consistent margins by removing fluctuations attributable to the cost of shipping. Further, this policy eliminates the need for our independent retailers to carry significant amounts of inventory in their own warehouses. As a result, we obtain more accurate consumer product demand information.

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Environmental Sustainability and Social Responsibility

 

We continue to be focused on environmental and social responsibility while incorporating uniform social, environmental, health and safety programs into our global manufacturing standards.

 

Our environmental (green) initiatives include but are not limited to the use of responsibly harvested Appalachian woods, and water-based finishes and measuring our carbon footprint, greenhouse gases and recycled materials from our operations. We have eliminated the use of heavy metals and hydrochlorofluorocarbons in all packaging. Our mattresses and custom upholstery use foam made without harmful chemicals and substances. We have implemented the Enhancing Furniture’s Environmental Culture (“EFEC”) environmental management system sponsored by the American Home Furnishing Alliance (“AHFA”) at all our domestic manufacturing, distribution and service center facilities, and have expanded these efforts to our retail design centers, which have now been registered in EFEC. Our Mexico and Honduras facilities are also registered under the AHFA's EFEC program. Our United States manufacturing, distribution and service centers have also achieved Sustainable by Design (“SBD”) registration status under the EFEC program. SBD provides a framework for home furnishings companies to create and maintain a corporate culture of conservation and environmental stewardship by integrating socio-economic policies and sustainable business practices into their manufacturing operations and sourcing strategies.

 

The Company requires its sourcing facilities that manufacture Ethan Allen branded products to implement a labor compliance program and meet or exceed the standards established for preventing child labor, involuntary labor, coercion and harassment, discrimination, and restrictions to freedom of association. These facilities are also required to provide a safe and healthy environment in all workspaces, compliance with all local wage and hour laws and regulations, compliance with all applicable environmental laws and regulations, and are required to authorize Ethan Allen or its designated agents (including third-party auditing companies) to engage in monitoring activities to confirm compliance.

 

We work to ensure our products are safe in our customers’ homes through responsible use of chemicals and manufacturing substances.

 

Intellectual Property

 

We currently hold, or have registration applications pending for, numerous trademarks, service marks and copyrights for the Ethan Allen name, logos and designs in a broad range of classes for both products and services in the United States and in many foreign countries. In addition, we have registered, or have applications pending for certain of our slogans utilized in connection with promoting brand awareness, retail sales and other services and certain collection names. We view such trademarks and service marks as valuable assets and have an ongoing program to diligently monitor and defend, through appropriate action, against their unauthorized use.

 

Government Regulation

 

The Company is subject to reporting requirements, disclosure obligations and other recordkeeping requirements of the Securities and Exchange Commission (“SEC”) and the various local authorities that regulate each location in which we operate. 

 

Corporate Contact Information

 

Ethan Allen’s principal executive office is in Danbury, Connecticut.

 

Mailing address of the Company’s headquarters: 25 Lake Avenue Ext., Danbury, Connecticut 06811

 

Telephone number: +1 (203) 743-8000

 

Website address: ethanallen.com

 

Available Information

 

Information contained in our Investor Relations section of our website at ethanallen.com/investors is not part of this Annual Report on Form 10-K. Information that we furnish or file with the SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K or exhibits included in these reports are available for download, free 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 available on the SEC’s website at sec.gov.

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Information about our Executive Officers

Listed below are the name, age, and current position for each of our executive officers as of the date of this Annual Report on Form 10-K. If they have not held the positions for at least five years, their former positions during that period are listed.

 

M. Farooq Kathwari*, age 74

●   Chairman of the Board, President and Chief Executive Officer since 1988

 

Daniel M. Grow, age 73

●   Senior Vice President, Business Development since February 2015

●   Vice President, Business Development from 2009 to 2015

 

Eric D. Koster, age 72

●   Vice President, General Counsel and Secretary since April 2013

●   Private practice prior to joining the Company in April 2013

 

Christopher Robertson, age 50

●   Vice President, Logistics and Service since January 2016

●   Director, Operations Support since May 2011

 

Clifford Thorn, age 67

●   Vice President, Upholstery Manufacturing since May 2001

 

Corey Whitely, age 59

●   Executive Vice President, Administration, Chief Financial Officer and Treasurer since July 2014

●   Executive Vice President, Operations from October 2007 through July 2014

 

Michael Worth, age 52

●   Vice President, Case Goods Manufacturing since December 2016

●   Regional Operations Manager, Case Goods since February 2004

 

* Mr. Kathwari is the only one of our executive officers who operates under a written employment agreement.

 

Additional Information

 

Additional information with respect to the Company’s business is included in the following pages and is incorporated herein by reference:

 

Page

Five-Year Summary of Selected Financial Data

21

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

Quantitative and Qualitative Disclosures about Market Risk

34

Note 1 to Consolidated Financial Statements entitled Organization and Nature of Business

43

Note 19 to Consolidated Financial Statements entitled Segment Information

61

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

ITEM 1A. RISK FACTORS

 

The following risks could materially and adversely affect our business, financial condition, cash flows, results of operations and the trading price of our common stock could decline. These risk factors do not identify all risks that we face; our operations could also be affected by factors that are not presently known to us or that we currently consider to be immaterial to our operations. Investors should also refer to the other information set forth in this Annual Report on Form 10-K, including Management’s Discussion and Analysis of Financial Condition and Results of Operations and our financial statements including the related notes. Investors should carefully consider all risks, including those disclosed, before making an investment decision.

 

A volatile retail environment and changing economic conditions may further adversely affect consumer demand and spending.

 

General economic factors that are beyond the Company’s control could impact our forecasts and actual performance. These factors include housing markets, recession, inflation, deflation, consumer credit availability, consumer debt levels, fuel and energy costs, interest rates, tax rates and policy, unemployment trends, the impact of natural disasters, civil disturbances and terrorist activities, foreign currency exchange rate fluctuations, conditions affecting the retail environment for products sold by the Company and other matters that influence consumer spending. Changes in the economic climate could adversely affect the Company’s performance.

 

Historically, the home furnishings industry has been subject to cyclical variations in the general economy and to uncertainty regarding future economic prospects. Should the current economic recovery falter or the current recovery in housing starts to stall, consumer confidence and demand for home furnishings could deteriorate, which could adversely affect our business through its impact on the performance of our Company-owned design centers, as well as on our independent licensees and the ability of a number of them to meet their obligations to us.

 

Our business and results of operations are affected by international, national and regional economic conditions. Regional economic conditions in the United States and in other regions of the world where we have a concentration of design centers such as Canada or China, may have a greater impact on the Company compared to economic conditions in other parts of the world where we have lesser concentration of design centers. An economic downturn of significance or extended duration could adversely affect consumer demand and discretionary spending habits and, as a result, our business performance, profitability, and cash flows. Our international net sales accounted for 6.8% of our consolidated net sales during fiscal 2019.

 

Global and local economic uncertainty may materially adversely affect our manufacturing operations or sources of merchandise and international operations.

 

The current economic challenges in China, including global economic ramifications of the softening of the Chinese economy and trade agreement negotiations, may continue to put pressure on global economic conditions. This economic uncertainty, as well as other variations in global economic conditions such as fuel costs, wage and benefit inflation, and currency fluctuations, may cause inconsistent and unpredictable consumer spending habits, while increasing our own input costs. These risks resulting from global and local economic uncertainty could also severely disrupt our manufacturing operations, which could have a material adverse affect on our financial performance. We import a portion of our merchandise from foreign countries and operate manufacturing plants in Mexico and Honduras and retail design centers in Canada. As a result, our ability to obtain adequate supplies or to control our costs may be adversely affected by events affecting international commerce and businesses located outside the United States, including natural disasters, changes in international trade including tariffs, central bank actions, changes in the relationship of the United States dollar versus other currencies, labor availability and cost, and other governmental policies of the United States and the countries from which we import our merchandise or in which we operate facilities.

 

Disruptions of our supply chain could have a material adverse affect on our operating and financial results.

 

Disruption of the Company’s supply chain capabilities due to trade restrictions, political instability, weather, natural disaster, terrorism, product recalls, labor supply or stoppages, the financial and/or operational instability of key suppliers and carriers, or other reasons could impair the Company’s ability to distribute its products. To the extent we are unable to mitigate the likelihood or potential impact of such events, there could be a material adverse affect on our operating and financial results.

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Changes in United States trade and tax policy could materially adversely affect our business and results of operations.

 

Changes in the political environment in the United States may require us to modify our current business practices. Because we manufacture components and finished goods in Mexico and Honduras and purchase components and finished goods manufactured in foreign countries, including China, we are subject to risks relating to increased tariffs on United States imports, changes in the North American Free Trade Agreement, and other changes affecting imports. Recently, the United States administration considered enacting certain tariffs on many items sourced from China, including certain furniture, accessories, furniture parts, and raw materials that are imported into the United States and used in our domestic operations. We may not be able to fully or substantially mitigate the impact of such tariffs, pass price increases on to our customers, or secure adequate alternative sources of products or materials. The tariffs, along with any additional tariffs or retaliatory trade restrictions implemented by other countries, could negatively impact customer sales, including potential delays in product received from our vendors, our cost of goods sold and results of operations.

 

Approximately 25% of our merchandise is sourced from outside of the United States. The United States government is considering proposals for substantial changes to its trade and tax policies, which could include import restrictions, increased import tariffs, changes to or withdrawal from existing trade agreements, and border-adjustment taxes among other possible measures. Material changes in these policies could increase our tax obligations or require us to increase prices to customers, which would likely adversely affect sales. Any significant change in United States policy related to imported merchandise could have a material adverse affect on our business and financial results.

 

Competition from overseas manufacturers and domestic retailers may adversely materially affect our business, operating results or financial condition.

 

Our wholesale business segment is involved in the development of our brand, which encompasses the design, manufacture, sourcing, sales and distribution of our home furnishings products, and competes with other United States and foreign manufacturers. Our retail network sells home furnishings to consumers through a network of independently operated and Company operated design centers, and competes against a diverse group of retailers ranging from specialty stores to traditional furniture and department stores, any of which may operate locally, regionally, nationally or globally, as well as over the internet. We also compete with these and other retailers for retail locations as well as for qualified design consultants and management personnel. Such competition could adversely affect our future financial performance.

 

Industry globalization has led to increased competitive pressures brought about by the increasing volume of imported finished goods and components, particularly for case good products, and the development of manufacturing capabilities in other countries, specifically within Asia. The increase in overseas production has created over‐capacity for many manufacturers, including us, which has led to industry‐wide plant consolidation. In addition, because many foreign manufacturers are able to maintain substantially lower production costs, including the cost of labor and overhead, imported product may be capable of being sold at a lower price to consumers, which, in turn, could lead to some measure of further industry‐wide price deflation.

 

We cannot provide assurance that we will be able to establish or maintain relationships with sufficient or appropriate manufacturers, whether foreign or domestic, to supply us with selected case goods, upholstery and home accent items to enable us to maintain our competitive advantage. In addition, the emergence of foreign manufacturers has served to broaden the competitive landscape. Some of these competitors produce furniture types not manufactured by us and may have greater financial resources available to them or lower costs of operating. This competition could materially adversely affect our future financial performance.

 

Failure to successfully anticipate or respond to changes in consumer tastes and trends in a timely manner could materially adversely impact our business, operating results and financial condition.

 

Sales of our products are dependent upon consumer acceptance of our product designs, styles, quality and price. We continuously monitor changes in home design trends through attendance at international industry events and fashion shows, internal marketing research, and regular communication with our retailers and design consultants who provide valuable input on consumer tendencies. However, as with all retailers, our business is susceptible to changes in consumer tastes and trends. Such tastes and trends can change rapidly and any delay or failure to anticipate or respond to changing consumer tastes and trends in a timely manner could materially adversely impact our business, operating results and financial condition.

 

Inability to maintain and enhance our brand may materially adversely impact our business.

 

Maintaining and enhancing our brand is critical to our ability to expand our base of customers and may require us to make substantial investments. Our advertising campaign utilizes television, direct mail, digital, newspapers, magazines and radio to maintain and enhance our existing brand equity. We cannot provide assurance that our marketing, advertising and other efforts to promote and maintain awareness of our brand will not require us to incur substantial costs. If these efforts are unsuccessful or we incur substantial costs in connection with these efforts, our business, operating results and financial condition could be materially adversely affected.

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Our number of manufacturing and logistics sites may increase our exposure to business disruptions and could result in higher transportation costs.

 

We have a limited number of manufacturing sites in our case goods and upholstery operations and consolidated our distribution network into fewer centers for both wholesale and retail segments. Our upholstery operations consist of two upholstery plants at our North Carolina campus and one plant in Mexico. The Company operates two manufacturing plants (Vermont and Honduras) and one sawmill in support of our case goods operations. As a result of the consolidation of our manufacturing operations into fewer facilities, if any of our manufacturing or logistics sites experience significant business interruption, our ability to manufacture or deliver our products in a timely manner would likely be impacted. While we have long‐standing relationships with multiple outside suppliers of our raw materials and commodities, there can be no assurance of their ability to fulfill our supply needs on a timely basis. The consolidation to fewer locations has resulted in longer distances for delivery and could result in higher costs to transport products if fuel costs increase significantly.

 

Fluctuations in the price, availability and quality of raw materials could result in increased costs or cause production delays which might result in a decline in sales, either of which could materially adversely impact our earnings.

 

We use various types of wood, foam, fibers, fabrics, leathers, and other raw materials in manufacturing our furniture. Certain of our raw materials, including fabrics, are purchased domestically as well as outside North America. Fluctuations in the price, availability and quality of raw materials could result in increased costs or a delay in manufacturing our products, which in turn could result in a delay in delivering products to our customers. For example, lumber prices fluctuate over time based on factors such as weather and demand, which, in turn, impact availability. Production delays or upward trends in raw material prices could result in lower sales or margins, thereby materially adversely impacting our earnings.

 

In addition, certain suppliers may require extensive advance notice of our requirements in order to produce products in the quantities we desire. This long lead time may require us to place orders far in advance of the time when certain products will be offered for sale, thereby exposing us to risks relating to shifts in consumer demand and trends, and any significant downturn in the United States economy.

 

Our current and former manufacturing and retail operations and products are subject to increasingly stringent environmental, health and safety requirements.

 

We use and generate hazardous substances in our manufacturing and retail operations. In addition, both the manufacturing properties on which we currently operate and those on which we have ceased operations are and have been used for industrial purposes. Our manufacturing operations and, to a lesser extent, our retail operations involve risk of personal injury or death. We are subject to increasingly stringent environmental, health and safety laws and regulations relating to our products, current and former properties and our current operations. These laws and regulations provide for substantial fines and criminal sanctions for violations and sometimes require product recalls and/or redesign, the installation of costly pollution control or safety equipment, or costly changes in operations to limit pollution or decrease the likelihood of injuries. In addition, we may become subject to potentially material liabilities for the investigation and cleanup of contaminated properties and to claims alleging personal injury or property damage resulting from exposure to or releases of hazardous substances or personal injury because of an unsafe workplace.

 

In addition, noncompliance with, or stricter enforcement of, existing laws and regulations, adoption of more stringent new laws and regulations, discovery of previously unknown contamination or imposition of new or increased requirements could require us to incur costs or become the basis of new or increased liabilities that could be material.

 

We operate in the highly competitive retail business where the use of emerging technologies as well as unanticipated changes in the pricing and other practices of competitors may adversely affect our performance.

 

The retail business is highly competitive. We compete for customers, employees, locations, merchandise, technology, services and other important aspects of the business with many other local, regional and national retailers. Those competitors range from specialty retailers to department stores and discounters as well as online and multichannel retailers. Specifically, rapidly evolving technologies are altering the manner in which the Company and its competitors communicate and transact with customers. Our strategy designed to adapt to these changes, in the context of competitors’ actions, customers adoption of new technology, and related changes in customer behavior, presents a specific risk in the event we are unable to successfully execute our plans or adjust them over time if needed. Further, unanticipated changes in pricing and other practices of competitors, including promotional activity, such as thresholds for free shipping and rapid price fluctuation enabled by technology, may adversely affect our performance.

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

We rely extensively on information technology systems to process transactions, summarize results, and manage our business and that of certain independent retailers. Disruptions in both our primary and back-up systems could adversely affect our business and operating results.

 

Our primary and back-up information technology systems are subject to damage or interruption from power outages, computer and telecommunications failures, viruses, phishing attempts, cyber-attacks, malware and ransomware attacks, security breaches, natural disasters, and errors by employees. Though losses arising from some of these issues would be covered by insurance, interruptions of our critical business information technology systems or failure of our back-up systems could result in longer production times or negatively impact customers resulting in damage to our reputation and a reduction in sales. If our critical information technology systems or back-up systems were damaged or ceased to function properly, we might have to make a significant investment to repair or replace them.

 

Product recalls or product safety concerns could materially adversely affect our sales and operating results.

 

If the Company's merchandise offerings do not meet applicable safety standards or consumers' expectations regarding safety, the Company could experience decreased sales, increased costs and/or be exposed to legal and reputational risk. Events that give rise to actual, potential or perceived product safety concerns could expose the Company to government enforcement action and/or private litigation. Reputational damage caused by real or perceived product safety concerns or product recalls could negatively affect the Company's business and results of operations.

 

Successful cyber-attacks and the failure to maintain adequate cyber-security systems and procedures could harm materially our operations.

 

In the current environment, there are numerous and evolving risks to cybersecurity and privacy, including criminal hackers, hacktivists, state-sponsored intrusions, industrial espionage, employee malfeasance and human or technological error. High-profile security breaches at other companies and in government agencies have increased in recent years, and security industry experts and government officials have warned about the risks of hackers and cyberattacks targeting businesses such as ours. Cyber-attacks are becoming more sophisticated and frequent, and in some cases have caused significant harm. Computer hackers and others routinely attempt to breach the security of technology products, services and systems, and to fraudulently induce employees, customers, or others to disclose information or unwittingly provide access to systems or data. We operate many aspects of our business including financial reporting, and customer relationship management through server and web‐based technologies, and store various types of data on such servers or with third‐parties who in turn store it on servers and in the “cloud.” Any disruption to the internet or to the Company's or its service providers' global technology infrastructure, including malware, insecure coding, “Acts of God,” attempts to penetrate networks, data theft or loss and human error, could have adverse affects on the Company's operations. A cyber-attack of our systems or networks that impairs our information technology systems could disrupt our business operations and result in loss of service to customers. The risk of cyberattacks to our Company also includes attempted breaches of contractors, business partners, vendors and other third parties. We have a comprehensive cybersecurity program designed to protect and preserve the integrity of our information technology systems. We have experienced and expect to continue to experience actual or attempted cyber-attacks of our IT systems or networks; however, none of these actual or attempted cyber-attacks had a material impact on our operations or financial condition.

 

While we devote significant resources to network security, data encryption and other security measures to protect our systems and data, including our own proprietary information and the confidential and personally identifiable information of our customers, employees, and business partners, these measures cannot provide absolute security. The costs to eliminate or alleviate network security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and our efforts to address these problems may not be successful, resulting potentially in the theft, loss, destruction or corruption of information we store electronically, as well as unexpected interruptions, delays or cessation of service, any of which could cause harm to our business operations. Moreover, if a computer security breach or cyber-attack affects our systems or results in the unauthorized release of proprietary or personally identifiable information, our reputation could be materially damaged, our customer confidence could be diminished, and our operations, including technical support for our devices, could be impaired. We would also be exposed to a risk of loss or litigation and potential liability, which could have a material adverse affect on our business, results of operations and financial condition.

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Loss, corruption and misappropriation of data and information relating to customers could materially adversely affect our operations.

 

We have access to sensitive customer information in the ordinary course of business. If a significant data breach occurred, our reputation may be adversely affected, customer confidence may be diminished, or we may be subject to legal claims, or legal proceedings, including regulatory investigations and actions, may have a negative impact on our reputation, may lead to regulatory enforcement actions against us, and may materially adversely affect our business, operating results and financial condition. The loss, disclosure or misappropriation of our business information may materially adversely affect our business, operating results and financial condition. Further, legislative or regulatory action in these areas is evolving, and we may be unable to adapt our IT systems or to manage the IT systems of third parties to accommodate these changes. Finally, if a significant data breach occurred, our reputation could be materially and adversely affected, and confidence among our customers may be diminished.

 

Our business is dependent on certain key personnel; if we lose key personnel or are unable to hire additional qualified personnel, our business may be harmed.

 

The success of our business depends upon our ability to retain continued service of certain key personnel, particularly our Chairman of the Board, President and Chief Executive Officer, M. Farooq Kathwari, and to attract and retain additional qualified key personnel in the future. We face risks related to loss of any key personnel and we also face risks related to any changes that may occur in key senior leadership executive positions. Any disruption in the services of our key personnel could make it more difficult to successfully operate our business and achieve our business goals and could adversely affect our results of operation and financial condition. These changes could also increase the volatility of our stock price.

 

The market for qualified employees and personnel in the retail and manufacturing industries is highly competitive. Our success depends upon our ability to attract, retain and motivate qualified artisans, professional and clerical employees and upon the continued contributions of these individuals. We cannot provide assurance that we will be successful in attracting and retaining qualified personnel. A shortage of qualified personnel may require us to enhance our wage and benefits package in order to compete effectively in the hiring and retention of qualified employees. Our labor and benefit costs may continue to increase and such increases may not be recovered. This could have a material adverse affect on our business, operating results and financial condition.

 

In addition, as previously announced in April 2019, we are currently executing plans to further improve our vertically integrated operations with a number of initiatives. As a result of the ongoing evolution of our business, we frequently implement changes to our organizational design in order to more closely align our management structure with the needs of the business. In connection with such changes to our retail and wholesale structure, we also implement changes in personnel and reductions in force as a result of which we may incur severance costs and other reorganization charges and expenses. Changes in our organizational structure may also have an adverse impact on our ability to retain qualified personnel.

 

Our total assets include substantial amounts of long-lived assets, principally property and equipment. Changes to estimates or projections used to assess the fair value of these assets, financial results that are lower than current estimates at certain design center locations or determinations to close underperforming locations may cause us to incur future impairment charges, negatively affecting its financial results.

 

We make certain accounting estimates and projections with regard to individual design center operations as well as overall Company performance in connection with our impairment analysis for long-lived assets in accordance with applicable accounting guidance. An impairment charge may be required if the impairment analysis indicates that the carrying value of an asset exceeds the sum of the expected undiscounted cash flows of the asset. The projection of future cash flows used in this analysis requires the use of judgment and a number of estimates and projections of future operating results. If actual results differ from Company estimates, additional charges for asset impairments may be required in the future. If impairment charges are significant, our financial results could be negatively affected.

 

Access to consumer credit could be interrupted as a result of conditions outside of our control, which could reduce sales and profitability.

 

Our ability to continue to access consumer credit for our customers could be negatively affected by conditions outside our control. If capital market conditions have a material negative change, there is a risk that our business partner that issues our private label credit card program may not be able to fulfill its obligations under that agreement. In addition, the tightening of credit markets may restrict the ability and willingness of customers to make purchases.

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

We may not be able to maintain our current design center locations at current costs. We may also fail to successfully select and secure design center locations.

 

Our design centers are typically located in busy urban settings as freestanding destinations or as part of suburban strip malls or shopping malls, depending upon the real estate opportunities in a particular market. Our business competes with other retailers and as a result, our success may be affected by our ability to renew current design center leases and to select and secure appropriate retail locations for existing and future design centers.

 

Our business may be materially adversely affected by changes to fiscal and tax policies.

 

In the ordinary course of business, we are subject to tax examinations by various governmental tax authorities. The global and diverse nature of our business means that there could be additional examinations by governmental tax authorities and the resolution of ongoing and other probable audits, which could impose a future risk to the results of our business.

 

On December 22, 2017, the United States Tax Cuts and Jobs Act, (the “Act”) was signed into law. The Act enacted broad changes to the existing United States Internal Revenue code, including reducing the federal corporate income tax rate from 35% to 21%, among many other complex provisions. Guidance issued by the SEC provided a measurement period of one year from the enactment date to finalize the accounting for effects of the Act. In fiscal 2018, we made a provisional estimate of the effects of the Act on our existing deferred tax balances. In fiscal 2019 the measurement period ended, and no material adjustments were made to our provisional estimate of the impacts of the Act. The U.S. Treasury Department, the Internal Revenue Service and other standard-setting bodies could interpret or issue guidance on how provisions of the Act will be applied or otherwise administered that is different from our interpretation. Finally, foreign governments may enact tax laws in response to the Act that could result in further changes to global taxation and materially affect our financial position and results of operations. The uncertainty surrounding the effect of the reforms on our financial results and business could also weaken confidence among investors in our financial condition.  This could, in turn, have a materially adverse affect on the price of our common stock.

 

Our operations present hazards and risks which may not be fully covered by insurance, if insured.

 

The scope and nature of our operations present a variety of operational hazards and risks that must be managed through continual oversight and control. As protection against hazards and risks, we maintain insurance against many, but not all, potential losses or liabilities arising from such risks. Uninsured losses and liabilities from operating risks could reduce the funds available to us for capital and investment spending and could have a material adverse impact on the results of operations.

 

Failure to protect our intellectual property could materially adversely affect us.

 

We believe that our copyrights, trademarks, service marks, trade secrets, and all of our other intellectual property are important to our success. We rely on patent, trademark, copyright and trade secret laws, and confidentiality and restricted use agreements, to protect our intellectual property and may seek licenses to intellectual property of others. Some of our intellectual property is not covered by any patent, trademark, or copyright or any applications for the same. We cannot provide assurance that agreements designed to protect our intellectual property will not be breached, that we will have adequate remedies for any such breach, or that the efforts we take to protect our proprietary rights will be sufficient or effective. Any significant impairment of our intellectual property rights or failure to obtain licenses of intellectual property from third parties could harm our business or our ability to compete. Moreover, we cannot provide assurance that the use of our technology or proprietary “know‐how” or information does not infringe the intellectual property rights of others. If we have to litigate to protect or defend any of our rights, such litigation could result in significant expense.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

ITEM 2.     PROPERTIES

 

Ethan Allen’s 144,000 square foot corporate headquarters building, located in Danbury, Connecticut, is owned by the Company.

 

We operate six manufacturing facilities located in the United States, Mexico and Honduras. These facilities are owned by the Company and include three case goods plants (including one sawmill) totaling 1,300,000 square feet and three upholstery furniture plants totaling 1,170,000 square feet. Two of our case goods manufacturing facilities are located in Vermont and one is in Honduras. We have two upholstery manufacturing facilities at our North Carolina campus and one in Mexico. Our wholesale division also owns and operates four national distribution and fulfillment centers, which are a combined 1,428,000 square feet. Our distribution facilities are located in North Carolina, Oklahoma, and Virginia.

 

We own three and lease 10 retail service centers, totaling approximately 770,000 square feet. Our retail service centers are located throughout the United States and Canada and serve to support our various retail design centers.

 

As of June 30, 2019 there were 144 Company operated retail design centers totaling 2,210,000 square feet, and averaging approximately 15,300 square feet in size per location. Of the 144 Company operated retail design centers, 50 of the properties are owned and 94 are leased. We own one and lease six additional retail properties, of which we sublease three to independent Ethan Allen retailers and four to unaffiliated third parties.

 

The location activity and geographic distribution of our retail network for fiscal years ended June 30 are as follows:

 

   

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

    21       3       24       11       2       13  

Closures

    (9 )     (9 )     (18 )     (16 )     (4 )     (20 )

Transfers

    (2 )     2       -       (2 )     2       -  

Balance at June 30

    158       144       302       148       148       296  

Relocations (in new and closures)

    -       3       3       -       1       1  
                                                 

Retail Design Center geographic locations:

                                               

United States

    40       138       178       44       142       186  

Canada

    -       6       6       -       6       6  

China

    100       -       100       87       -       87  

Other Asia

    11       -       11       9       -       9  

Europe

    1       -       1       1       -       1  

Middle East

    6       -       6       7       -       7  

Total

    158       144       302       148       148       296  

 

We believe that all our properties are well maintained and in good condition. We have additional capacity at each facility as we estimate that our manufacturing plants are currently operating at approximately 50% of capacity based on their current shifts and staffing. In an effort to further improve and optimize our manufacturing and logistics operations, we are currently executing the following plans, which we expect to be completed during fiscal 2020: (i) convert our Old Fort, North Carolina plant into a state-of-the-art distribution center to support our national distribution structure and growing United States government General Services Administration (“GSA”) contract business; (ii) consolidate United States case goods manufacturing to Vermont; (iii) expand our Maiden, North Carolina campus with the addition of 80,000 square feet; and (iv) move the distribution operations from our Passaic, New Jersey facility to our operations in North Carolina and outsource the art framing operations.

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

ITEM 3.     LEGAL PROCEEDINGS

 

From time to time, we are subject to legal proceedings, claims and litigation arising in the ordinary course of business. Based on currently available information, we do not believe that the ultimate outcome of these unresolved matters against Ethan Allen, individually or in the aggregate, will have a material adverse affect on our consolidated financial position, our annual results of operations or our annual cash flows. However, these matters are subject to inherent uncertainties and our view of these matters may change in the future. For additional information regarding legal matters, refer to Note 20, Commitments and Contingencies, of the notes to our consolidated financial statements included under Item 8 of this Annual Report on Form 10-K.

 

Regulations issued under the Clean Air Act Amendments of 1990 required the industry to reformulate certain furniture finishes or institute process changes to reduce emissions of volatile organic compounds. Compliance with many of these requirements has been facilitated through the introduction of high solids coating technology and alternative formulations. In addition, we have instituted a variety of technical and procedural controls, including reformulation of finishing materials to reduce toxicity, implementation of high velocity low pressure spray systems, development of storm water protection plans and controls, and further development of related inspection/audit teams, all of which have served to reduce emissions per unit of production. We remain committed to implementing new waste minimization programs and/or enhancing existing programs with the objective of (i) reducing the total volume of waste, (ii) limiting the liability associated with waste disposal, and (iii) continuously improving environmental and job safety programs on the factory floor which serve to minimize emissions and safety risks for employees. To reduce the use of hazardous materials in the manufacturing process, we will continue to evaluate the most appropriate, cost-effective control technologies for finishing operations and production methods. We believe that our facilities are in material compliance with all such applicable laws and regulations. Our currently anticipated capital expenditures for environmental control facility matters are not material.

 

ITEM 4.     MINE SAFETY DISCLOSURES

 

Not applicable.

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

PART II

 

ITEM 5.     MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

 

(a)

Market Information, Holders of Record, Dividends, Securities Authorized for Issuance and Stock Performance Graph

 

Market Information. Ethan Allen common stock is traded on the New York Stock Exchange (“NYSE”) under ticker symbol “ETH”.

 

Holders of Record. As of July 25, 2019, there were 221 shareholders of record of our common stock, including Cede & Co., the nominee of the Depository Trust Company. However, because many of our shares of common stock are held by brokers and other institutions on behalf of shareholders, we are unable to estimate the total number of shareholders represented by these record holders. The closing price of our common stock on July 25, 2019, was $20.63 per share as reported on the NYSE.

 

Dividends. The Company’s policy is to issue quarterly dividends, and we expect to continue to declare and pay comparable quarterly dividends for the foreseeable future, business conditions permitting.

 

Securities Authorized for Issuance under Equity Compensation Plans. Refer to Part III of this Annual Report on Form 10-K.

 

Stock Performance Graph. The annual changes for the five-year period shown in the graph below are based on the assumption that $100 had been invested in our common stock, the Standard & Poor’s 500 Index and the Standard & Poor’s Retail Select Industry Index (“SPSIRE”) on June 30, 2014. The total cumulative dollar returns shown on the graph represent the value that such investments would have had on June 30, 2019. Stockholder returns over the indicated period are based on historical data and should not be considered indicative of future stockholder returns.

 

 

 

*This performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Ethan Allen under the Securities Act of 1933, as amended, or the Exchange Act whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.

 

(b)

Recent Sales of Unregistered Securities

 

There were no sales of unregistered equity securities during fiscal 2019.

 

(c)

Purchases of Equity Securities by the Issuer

 

We may from time to time make repurchases in the open market and through privately negotiated transactions, subject to market conditions, including pursuant to our previously announced repurchase program. There were no share repurchases under the program during fiscal 2019. At June 30, 2019, we had a remaining Board authorization to repurchase 2,518,046 shares of our common stock pursuant to our program.

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

ITEM 6.     SELECTED FINANCIAL DATA

 

The following tables set forth, for the periods and at the dates indicated, our selected historical consolidated financial data. We have derived the selected consolidated financial data for the years ended June 30, 2019, 2018 and 2017, and as of June 30, 2019 and 2018, from our audited consolidated financial statements appearing elsewhere in this report. We have derived the selected consolidated financial data for the years ended June 30, 2016 and 2015, and as of June 30, 2017, 2016 and 2015 from our consolidated financial statements not appearing elsewhere in this report. Our historical results are not necessarily indicative of the results we may achieve in any future period.

 

This financial data should be read in conjunction with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

 

(in thousands, except per share data)

 

Fiscal Year Ended June 30,

 
   

2019

   

2018

   

2017

   

2016

   

2015

 

Consolidated Statements of Income Data

                                       

Net Sales

  $ 746,684     $ 766,784     $ 763,385     $ 794,202     $ 754,600  

Gross Margin

    54.8 %     54.2 %     55.0 %     55.7 %     54.5 %

Operating income(1)

  $ 33,947     $ 48,867     $ 57,950     $ 89,179     $ 65,934  

Operating margin(1)

    4.5 %     6.4 %     7.6 %     11.2 %     8.7 %

Provision for income taxes

  $ 8,162     $ 12,696     $ 20,801     $ 31,319     $ 19,541  

Effective tax rate

    24.1 %     25.9 %     36.5 %     35.6 %     34.5 %

Net income(2)

  $ 25,698     $ 36,371     $ 36,194     $ 56,637     $ 37,142  
                                         

Per Share Data

                                       

Net income per basic share(3)

  $ 0.96     $ 1.33     $ 1.31     $ 2.02     $ 1.29  

Basic weighted average shares

    26,695       27,321       27,679       28,072       28,874  

Net income per diluted share(3)

  $ 0.96     $ 1.32     $ 1.29     $ 2.00     $ 1.27  

Diluted weighted average shares

    26,751       27,625       27,958       28,324       29,182  

Cash dividends declared per share

  $ 1.76     $ 1.07     $ 0.74     $ 0.62     $ 0.50  
                                         

Other Information

                                       

Depreciation and amortization

  $ 19,637     $ 19,831     $ 20,115     $ 19,353     $ 19,142  

Capital expenditures and acquisitions

  $ 9,654     $ 18,773     $ 18,321     $ 23,132     $ 21,778  

Cash dividends paid

  $ 46,990     $ 29,509     $ 20,031     $ 16,646     $ 13,348  

Working capital

  $ 93,464     $ 93,165     $ 116,653     $ 124,857     $ 130,012  

Current ratio

    1.76 to 1       1.77 to 1       1.92 to 1       2.01 to 1       1.92 to 1  
                                         

Consolidated Balance Sheet Data (at end of period)

                                 

Cash and cash equivalents

  $ 20,824     $ 22,363     $ 57,701     $ 52,659     $ 76,182  

Total assets

  $ 510,351     $ 530,433     $ 568,222     $ 577,409     $ 605,977  

Long-term debt

  $ 516     $ 1,096     $ 11,608     $ 38,837     $ 73,203  

Total liabilities

  $ 146,422     $ 146,563     $ 167,326     $ 185,207     $ 235,442  

Shareholders' equity

  $ 363,929     $ 383,870     $ 400,896     $ 392,202     $ 370,535  

Long-term debt to equity ratio

    0.1 %     0.3 %     2.9 %     9.9 %     19.8 %
                                         

 

(1) Operating income in fiscal 2019 included pre-tax charges of $20.4 million from restructuring and impairment charges ($2.0 million is reported in cost of sales and $18.4 million in operating expenses) and $0.7 million related to other corporate actions, which combined to lower operating margin by 2.9%.

 

(2) Net income in fiscal 2019 included after-tax charges of $15.4 million related to restructuring and impairment charges and $0.6 million (after-tax) from other corporate actions.

 

(3) Diluted EPS in fiscal 2019 included a $0.58 decrease from restructuring and impairment charges and $0.02 decrease from other corporate actions.

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

ITEM 7.     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. 

 

The MD&A is based upon, and should be read in conjunction with, our Consolidated Financial Statements and related Notes included under Item 8 of this Annual Report on Form 10-K.

 

Executive Overview

 

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

 

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

 

Our competitive advantages arise from:

 

providing fashionable high-quality products of the finest craftsmanship;

 

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

 

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

 

enhancing our technology in all aspects of the business; and

 

leveraging our vertically integrated structure.

 

Transformation. 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 relevant new products featuring a modern perspective on classic designs. During fiscal 2019, we successfully introduced our Relaxed Modern product line, a casual, livable, inspired by nature, transitional design made of mixed materials as well as expanded our Home & Garden collection. Our contract sales, including sales to the GSA, hospitality and other commercial businesses, continue to grow and the 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.

 

Fiscal 2019 Year in Review.(1) Improved adjusted gross margin, cost containment within our expenses and a lower effective tax rate helped increase our adjusted diluted earnings per share in fiscal 2019 to $1.56, up 15.6%. Consolidated net sales decreased 2.6% due to a decline of 7.2% within our wholesale segment partially offset by growth in our retail segment of 0.4%. Consolidated international net sales for fiscal 2019 decreased $27.4 million primarily due to lower sales in China and made up 6.8% of our consolidated net sales compared with 10.2% in the prior year period. Our adjusted gross margin expanded 90 basis points to 55.1%, driven by a price increase and a change in the retail segment sales mix relative to total consolidated sales, which was 79.0% compared with 76.6% in the year ago period. Adjusted operating income, which excludes $21.1 million of pre-tax charges from restructuring initiatives, asset impairments and other corporate actions, rose 9.8% during the current year due to lower national television advertising costs and a reduction in share-based compensation. The full year fiscal 2019 effective income tax rate was 24.1% compared with 25.9% in the prior year due to tax law changes resulting from the Tax Act. As of June 30, 2019, our balance sheet remains strong with cash and cash equivalents of $20.8 million and inventory of $162.4 million. During the fiscal 2019 year we paid $47.0 million in dividends, including a special dividend payment of $26.7 million, reflecting an annual increase of 59.2%. In addition, 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 revolving credit facility and subsequently repaid this borrowing in full by June 30, 2019, using cash generated from operating activities.

 

(1)

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

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Optimization of Manufacturing and Logistics. During April 2019 we announced plans to further improve our vertically integrated operations with a number of initiatives including converting our case goods manufacturing plant in North Carolina to a state-of-the-art distribution center, consolidating case goods manufacturing to our Vermont and other plants, adding a 80,000 square foot addition to one of our upholstery plants and moving our distribution operations from New Jersey to North Carolina. For these actions, we recorded pre-tax restructuring, impairment, and other related charges totaling $8.3 million, consisting of $3.1 million in impairments of long-lived assets, $2.8 million in employee severance and other payroll and benefit costs, $2.0 million in inventory write-downs and manufacturing variances and $0.4 million of other associated costs, including freight and relocation expenses. Consistent with our overall strategy to maximize production efficiencies and maintain competitive advantage, we have also reduced our employee headcount by approximately 380 positions as part of our efforts to consolidate our manufacturing and logistics operations.

 

Retail Segment Impairment Charges. During fiscal 2019 we recorded $12.1 million of impairment and exit charges within the retail segment. Approximately $9.9 million was an impairment charge for long-lived assets held at the retail design center level. An additional $2.1 million primarily represented remaining contractual obligations under leased space for which we ceased using as of June 30, 2019.

 

Key Operating Metrics

 

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

 

   

Fiscal Year Ended June 30,  

 
   

2019

   

% of Sales

   

2018

   

% of Sales

   

2017

   

% of Sales

 

Net sales

  $ 746.7       100.0 %   $ 766.8       100.0 %   $ 763.4       100.0 %

Gross profit

  $ 409.5       54.8 %   $ 416.0       54.2 %   $ 419.7       55.0 %

Adjusted gross profit(1)

  $ 411.5       55.1 %   $ 416.0       54.2 %   $ 426.1       55.8 %

Operating income

  $ 33.9       4.5 %   $ 48.9       6.4 %   $ 58.0       7.6 %

Adjusted operating income(1)

  $ 55.1       7.4 %   $ 50.1       6.5 %   $ 65.0       8.5 %

Net income

  $ 25.7       3.4 %   $ 36.4       4.7 %   $ 36.2       4.7 %

Adjusted net income(1)

  $ 41.6       5.6 %   $ 37.3       4.9 %   $ 40.6       5.3 %

Diluted EPS

  $ 0.96             $ 1.32             $ 1.29          

Adjusted diluted EPS(1)

  $ 1.56             $ 1.35             $ 1.45          

Cash flow from operating activities

  $ 55.2             $ 42.5             $ 78.6          

 

(1)

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

 

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

 

   

Fiscal Year Ended June 30,

 
   

2019

   

2018

   

2017

 

Net sales

    (2.6% )     0.4 %     (3.9% )

Gross Profit

    (1.6% )     (0.9% )     (5.1% )

Adjusted gross profit(1)

    (1.1% )     (2.4% )     (3.6% )

Operating income

    (30.5% )     (15.7% )     (35.0% )

Adjusted operating income(1)

    9.8 %     (22.8% )     (25.3% )

Net income

    (29.3% )     0.5 %     (36.1% )

Adjusted net income(1)

    11.6 %     (8.2% )     (25.4% )

Diluted EPS

    (27.3% )     2.3 %     (35.5% )

Adjusted diluted EPS(1)

    15.6 %     (6.9% )     (24.5% )

Cash flows from operating activites

    30.0 %     (46.0% )     34.7 %

 

(1)

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

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

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

 

   

Fiscal Year Ended June 30,

 
   

2019

   

2018

   

2017

 

Net sales

                       

Wholesale segment

  $ 441.6     $ 475.7     $ 453.3  

Retail segment

    589.8       587.5       603.7  

Elimination of intersegment sales

    (284.7 )     (296.4 )     (293.6 )

Consolidated net sales

  $ 746.7     $ 766.8     $ 763.4  
                         

Operating income (loss):

                       

Wholesale segment

  $ 42.4     $ 48.5     $ 53.5  

Retail segment

    (10.5 )     (1.7 )     1.2  

Elimination of intercompany profit(1)

    2.0       2.1       3.3  

Consolidated operating income

  $ 33.9     $ 48.9     $ 58.0  

 

(1)

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:

 

   

Fiscal Year Ended June 30,

 
   

2019

   

2018

   

2017

 

Wholesale segment:

                       

Net sales

    (7.2% )     4.9 %     (7.8% )

Operating income

    (12.4% )     (9.4% )     (28.1% )

Backlog

    (18.0% )     19.3 %     17.6 %
                         

Retail segment:

                       

Net sales

    0.4 %     (2.7% )     (3.6% )

Comparable design center net sales

    (0.8% )     (3.2% )     (4.6% )

Total written orders

    (1.4% )     (3.1% )     (0.9% )

Comparable design center written orders

    (2.7% )     (3.8% )     (2.5% )

Operating income

    (505.8% )     (245.1% )     (92.7% )

Backlog

    (11.0% )     (2.3% )     (1.0% )

 

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

    21       3       24       11       2       13  

Closures

    (9 )     (9 )     (18 )     (16 )     (4 )     (20 )

Transfers

    (2 )     2       -       (2 )     2       -  

Balance at June 30

    158       144       302       148       148       296  

Relocations (in new and closures)

    -       3       3       -       1       1  
                                                 

Retail Design Center geographic locations:

                                               

United States

    40       138       178       44       142       186  

Canada

    -       6       6       -       6       6  

China

    100       -       100       87       -       87  

Other Asia

    11       -       11       9       -       9  

Europe

    1       -       1       1       -       1  

Middle East

    6       -       6       7       -       7  

Total

    158       144       302       148       148       296  

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Results of Operations

 

For an understanding of the significant factors that influenced our financial performance during the past two fiscal years, the following discussion should be read in conjunction with the consolidated financial statements and related notes presented under Item 8 in this Annual Report on Form 10-K ($ in millions, except per share amounts).

 

Fiscal 2019 Compared to Fiscal 2018

 

Consolidated net sales for fiscal 2019 were $746.7 million, a decrease of 2.6% compared to the same prior year period. Net sales decreased by 7.2% for our wholesale segment, which were partly offset by a 0.4% increase in our retail segment. There was a $27.4 million decrease in international sales from our combined retail and wholesale segments, which was primarily related to the economic uncertainty surrounding international trade disputes, lower sales in China and a slowing global economy.

 

Wholesale net sales decreased by $34.2 million or 7.2%, to $441.6 million. The lower net sales were primarily due to a $22.3 million decline in sales to China and an $18.3 million reduction in sales to our North American independent retail network. Partially offsetting these declines was growth in contract sales, which grew $19.5 million year over year. The year over year increase in contract sales was primarily attributable to higher sales from the GSA contract. There were 302 design centers globally as of June 30, 2019, an increase of six in the past 12 months. Our international net sales to independent retailers was 4.1% of our consolidated net sales compared to 7.0%. Our backlog at June 30, 2019 was down 18.0% compared to the prior year as our manufacturing operations returned to normal throughput as compared to the prior year’s longer production lead-times primarily related to the GSA contract startup.

 

Retail net sales from Ethan Allen operated design centers increased by $2.3 million, or 0.4%, to $589.8 million. There was a 1.2% increase in sales in the United States, while sales from the Canadian design centers decreased 17.3%. Comparative retail net sales decreased 0.8%. There were 144 Company operated design centers at the end of fiscal 2019, down from 148 at the beginning of the year. Total written business (new orders booked) decreased 1.4%, with the United States decreasing 0.9% while Canada declined 13.9%. Comparable design center written business was down 2.7% during fiscal 2019 in total. Regional economic conditions in Canada, where we have six design centers, were negatively impacted in fiscal 2019 due to the trade dispute and additional tariffs levied during most of the year. A higher increase in retail net sales relative to written orders is reflected in the 11.0% decrease in our ending retail order backlog at June 30, 2019.

 

Gross profit decreased 1.6% to $409.5 million compared to the prior year period due to a 9.1% decline in profit within our wholesale segment, while our retail segment grew 3.0%. Wholesale gross profit in fiscal 2019 was negatively impacted by lower sales volume and restructuring actions taken during the year, partially offset by a change in product mix. Our fiscal 2019 gross margin improved to 54.8%, up from 54.2% in the prior year. Retail sales as a percent of total consolidated sales were 79.0% for the year compared with 76.6% in the prior fiscal year, which sales mix increased our consolidated gross margin. A price increase during fiscal 2019 improved retail gross profit, while lower wholesale sales volume negatively impacted gross profit. The restructuring actions, which included the write off of inventory, higher unfavorable manufacturing variances and incremental freight and relocation costs, negatively impacted our fiscal 2019 gross margin by 30 basis points.

 

Operating expenses increased $8.4 million or 2.3% to $375.5 million or 50.3% of net sales in fiscal 2019 from $367.1 million or 47.9% of net sales in fiscal 2018. The increase in operating expenses was due to $18.4 million in restructuring and impairments charges and higher occupancy and retail management costs partially offset by lower national television advertising costs of $14.4 million.

 

Operating income for fiscal 2019 totaled $33.9 million, or 4.5% of net sales, compared to $48.9 million, or 6.4% of net sales, in the prior fiscal year. The primary causes for the decrease in operating income was lower net sales of $20.1 million and restructuring charges in the current fiscal year of $18.4 million partially offset by a higher gross margin and a reduction in national television advertising costs.

 

Wholesale operating income totaled $42.5 million, or 9.6% of net sales, as compared to $48.5 million, or 10.2% of net sales, in the prior year. The decrease was largely due to lower sales volumes, restructuring actions which included $2.0 million within cost of goods sold and $6.3 million within operating expenses during fiscal 2019 and lower margins in upholstery. These decreases were partially offset by lower advertising costs and improved gross margins in case goods and home accents.

 

Retail operating loss was $10.5 million, or 1.8% of sales for fiscal 2019, compared to a loss of $1.7 million, or 0.3% of sales, for fiscal 2018, a decrease of $8.8 million. Restructuring and impairments charges lowered retail operating income by $12.1 million during fiscal 2019. These charges were partially offset by a higher gross margin.

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Income tax expense was $8.2 million for fiscal 2019 and $12.7 million for fiscal 2018. Our effective tax rate for fiscal 2019 was 24.1% compared to 25.9% in fiscal 2018. The effective tax rate of 24.1% primarily includes a provision for income tax on the current 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 decrease from 25.9% in the prior fiscal year to 24.1% in the current fiscal year was primarily driven by being able to recognize a full year benefit of the Tax Act, which required us to compute income taxes expense for fiscal 2018 using a blended rate of 28% and 21% while fiscal 2019 was able to utilize the 21% rate for the full year.

 

Net income for fiscal 2019 was $25.7 million compared with $36.4 million for the prior year period, which resulted in $0.96 per diluted share compared to $1.32 in the prior year period. Fiscal 2019 restructuring and impairment charges of $20.4 million along with other corporate actions during the year totaled $0.7 million, which lowered diluted EPS by $0.60. Fiscal 2018 was negatively impacted by organizational changes and other exit costs of $0.03 per diluted share.

 

Fiscal 2018 Compared to Fiscal 2017

 

For a comparison of our results of operations for the fiscal years ended June 30, 2018 and 2017, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year ended June 30, 2018, filed with the SEC on August 2, 2018.

 

Regulation G Reconciliations of Non-GAAP Financial Measures

 

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

 

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

 

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

 

26

 

 

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

 

   

Fiscal Year Ended June 30,

         
   

2019

   

2018

   

% Change

 

Consolidated Adjusted Gross Profit / Gross Margin

                 

GAAP Gross profit

  $ 409,491     $ 415,964       (1.6% )

Adjustments (pre-tax) *

    1,994       -          

Adjusted gross profit *

  $ 411,485     $ 415,964       (1.1% )

Adjusted gross margin *

    55.1 %     54.2 %        
                         

Adjusted Operating Income / Operating Margin

                 

GAAP Operating income

  $ 33,947     $ 48,867       (30.5% )

Adjustments (pre-tax) *

    21,104       1,278          

Adjusted operating income *

  $ 55,051     $ 50,145       9.8 %
                         

Net sales

  $ 746,684     $ 766,784          

GAAP Operating margin

    4.5 %     6.4 %        

Adjusted operating margin *

    7.4 %     6.5 %        

Adjusted Net Income / Adjusted Diluted EPS

                       

GAAP Net income

  $ 25,698     $ 36,371       (29.3% )

Adjustments, net of tax *

    15,934       935          

Adjusted net income

  $ 41,632     $ 37,306       11.6 %

Diluted weighted average common shares

    26,751       27,625          

GAAP Diluted EPS

  $ 0.96     $ 1.32       (27.3% )

Adjusted diluted EPS *

  $ 1.56     $ 1.35       15.6 %
                         

Wholesale Adjusted Operating Income / Adjusted Operating Margin

                 

Wholesale GAAP operating income

  $ 42,481     $ 48,499       (12.4% )

Adjustments (pre-tax) *

    8,498       1,035          

Adjusted wholesale operating income *

  $ 50,979     $ 49,534       2.9 %
                         

Wholesale net sales

  $ 441,551     $ 475,731          

Wholesale GAAP operating margin

    9.6 %     10.2 %        

Adjusted wholesale operating margin *

    11.5 %     10.4 %        
                         

Retail Adjusted Operating Income / Adjusted Operating Margin

                 

Retail GAAP operating income

  $ (10,529 )   $ (1,738 )     (505.8% )

Adjustments (pre-tax) *

    12,606       243          

Adjusted retail operating income *

  $ 2,077     $ (1,495 )     238.9 %
                         

Retail net sales

  $ 589,829     $ 587,502          

Retail GAAP operating margin

    (1.8% )     (0.3% )        

Adjusted retail operating margin *

    0.4 %     (0.3% )        

 

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

 

 

   

Fiscal Year Ended June 30,

 
   

2019

   

2018

 

Inventory write-downs and manufacturing overhead costs

  $ 1,994     $ -  

Adjustments to gross profit

  $ 1,994     $ -  
                 

Restructuring charges, including inventory write-downs (wholesale)

  $ 8,324     $ -  

Impairment of long-lived assets, including lease exit costs (retail)

    12,050       -  

Contingent legal claim (wholesale)

    -       500  

Wholesale other exit costs (wholesale)

    174       535  

Retail acquisition and other exit costs (retail)

    556       243  

Adjustments to operating income

  $ 21,104     $ 1,278  

Early debt extinguishment

    -       67  

Adjustments to income before income taxes

  $ 21,104     $ 1,345  

Related income tax effects(1)

    (5,170 )     (410 )

Adjustments to net income

  $ 15,934     $ 935  

 

(1)

Calculated using an effective tax rate of 24.5% in fiscal 2019 and 30.5% in fiscal 2018.

 

Liquidity

 

At June 30, 2019, we held cash and equivalents of $20.8 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 our credit facility. Cash and cash equivalents aggregated to 4.1% of our total assets at June 30, 2019, compared with 4.2% of our total assets a year ago. Our cash and cash equivalents decreased $1.5 million during fiscal 2019 due to $47.0 million in dividend payments and $9.1 million of capital expenditures partially offset by net cash provided by operating activities of $55.2 million.

 

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A summary of net cash provided by (used in) operating, investing and financing activities for each of the last three fiscal years is provided below (in millions):

 

   

Fiscal Years Ended June 30,

 
   

2019

   

2018

     

2017

 

Cash provided by (used in) operating activities

                         

Net income plus other non-cash items

  $ 60.2     $ 57.0       $ 62.1  

Change in working capital

    (5.0 )     (14.5 )       16.5  

Total provided by operating activities

  $ 55.2     $ 42.5       $ 78.6  
                           

Cash provided by (used in) investing activities

                         

Capital expenditures

  $ (9.1 )   $ (12.5 )     $ (17.6 )

Acquisitions, net of cash acquired

    (0.5 )     (6.3 )       (0.7 )

Other investing activities

    0.1       0.6         1.4  

Total (used in) investing activities

  $ (9.5 )   $ (18.2 )     $ (16.9 )
                           

Cash provided by (used in) financing activities

                         

Payments on borrowings and capital lease obligations

  $ (16.6 )   $ (14.5 )     $ (28.4 )

Borrowings from revolving credit facility

    16.0       -         -  

Purchases and retirements of company stock

    -       (23.1 )       (10.2 )

Payment of cash dividends

    (47.0 )     (29.5 )       (20.0 )

Other financing activities

    0.3       0.2         1.3  

Total (used in) financing activities

  $ (47.3 )   $ (66.9 )     $ (57.3 )

 

 

Cash Provided By (Used in) Operating Activities. In fiscal 2019 cash generated from operations totaled $55.2 million, an increase of $12.7 million. This was largely due to $9.5 million in working capital improvements as fiscal 2018 experienced a significant inventory increase to support the order backlog and the expansion of our GSA business. In fiscal 2019, our inventory levels declined by $0.6 million while the year ago balance grew by $13.5 million. Partially offsetting the benefits of reduced inventory amounts was a reduction in customer deposits of $4.5 million, which negatively impacted cash flow. Lower customer deposits were due to written orders in the fourth quarter of fiscal 2019 being 4.0% lower than the year ago fourth quarter.

 

Cash Provided by (Used in) Investing Activities. In fiscal 2019, cash of $9.5 million was used in investing activities, a decrease of $8.7 million due to lower capital expenditures and design center acquisitions. Cash paid to acquire design centers from our independent retailers in an arm’s length transaction totaled $0.5 million during fiscal 2019 compared with $6.3 million a year ago. Effective July 1, 2018, and further described in Note 5 to the consolidated financial statements included under Part II, Item 8 of this Annual Report on Form 10-K, we consider restricted cash as a component of cash and cash equivalents as presented on our 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. In fiscal 2019, $47.3 million was used in financing activities, which is $19.6 million less cash used than the $66.9 million of cash used in the prior year comparable period. The decrease year over year was primarily due to $23.1 million in share repurchases during fiscal 2018 (which included $22.0 million under our existing share repurchase program) compared to none in fiscal 2019. During fiscal 2019 we paid cash dividends of $47.0 million compared with $29.5 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. We have continuously paid regular quarterly dividends for every quarter since 1996 and expect to continue to do so as economic conditions and liquidity permit. This year our total dividends paid to shareholders grew by 59.2%.

 

We believe that our cash flow from operations, together with our other available sources of liquidity including the credit facility, will be sufficient to fund changes in working capital, necessary capital expenditures, acquisition activity, repayment of debt, the payment of dividends and other cash requirements.

 

For a discussion of our liquidity and capital resources as of and our cash flow activities for the fiscal year ended June 30, 2018 and 2017, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year ended June 30, 2018, filed with the SEC on August 2, 2018.

 

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Capital Resources

 

Capital Expenditures. Capital expenditures in fiscal 2019 were $9.1 million compared with $12.5 million in the prior year period. The decrease of $3.4 million from the prior year related primarily to less spending on retail design center improvements. In fiscal 2019, approximately 65% of our total capital expenditures related to opening new and relocating design centers in desirable locations, updating presentations and floor plans and the consolidation of certain design centers and service centers. In fiscal 2018, approximately 75% of our capital expenditures were within the retail segment. We anticipate that cash from operations will be sufficient to fund future capital expenditures.

 

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 revolving credit facility. By June 30, 2019, we had repaid 100% of the total borrowed from cash generated from operating activities. For a detailed discussion of revolving credit facility, our debt obligations and timing of our related cash payments see Note 11 to the consolidated financial statements included under Part II, Item 8 of this Annual Report on Form 10-K.

 

Letters of Credit. At June 30, 2019 and 2018, there was $6.1 million and $6.2 million, respectively, of standby letters of credit outstanding under the revolving credit facility.

 

Total availability under the revolving credit facility was $158.9 million at June 30, 2019 and $108.8 million at June 30, 2018. At both June 30, 2019 and 2018, respectively, we were in compliance with all the covenants under the revolving credit facility.

 

For a discussion of our liquidity and capital resources as of and our cash flow activities for the fiscal year ended June 30, 2018 and 2017, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year ended June 30, 2018, filed with the SEC on August 2, 2018.

 

Share Repurchase Program

 

We may from time to time make repurchases in the open market and through privately negotiated transactions, subject to market conditions, including pursuant to our previously announced repurchase program. There were no share repurchases under the program during fiscal 2019. During fiscal 2018, we repurchased 950,484 shares for $22.0 million under the existing share repurchase program. At June 30, 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, levels of inventory on hand, 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 impact 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, 2019, we had total contractual obligations of $207.0 million, which was comparable to the prior year commitments of $218.0 million, reflecting no material changes during fiscal 2019.

 

The following table summarizes our significant contractual obligations as of June 30, 2019 and the corresponding impact that these obligations will have on our liquidity and cash flows in future periods (in millions):

 

           

Payments Due by Period

 
           

Less than

    1-3     4-5    

More than

 
   

Total

   

1 Year

   

Years

   

Years

   

5 Years

 

Long-term debt obligations(1)

  $ -     $ -     $ -     $ -     $ -  

Capital lease obligations(2)

    1.1       0.6       0.5       -       -  

Operating lease obligations(3)

    169.9       33.8       57.0       35.6       43.5  

Purchase obligations(4)

    35.8       32.0       3.8       -       -  

Other long-term liabilities

    0.2       -       -       -       0.2  

Total contractual obligations(5)

  $ 207.0     $ 66.4     $ 61.3     $ 35.6     $ 43.7  

 

(1)

Long-term debt obligations mean all payment obligations under long-term borrowings. As of June 30, 2019, we did not have any outstanding borrowings under our revolving credit facility. Further discussion of our contractual obligations associated with long-term debt can be found in Note 11, Debt, in the notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

 

(2)

Capital lease amounts include all future payment obligations under a lease classified as a capital lease pursuant to FASB ASC Topic 840.

 

(3)

Operating lease amounts include future minimum lease payments under all our non-cancelable operating leases with an initial term in excess of one year. For more information on our operating leases, see Note 20, Commitments and Contingencies, in the notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

 

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(4)

Purchase obligations are defined as agreements that are enforceable and legally binding that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. We do, in the normal course of business, regularly initiate purchase orders for the procurement of (i) selected finished goods sourced from third-party suppliers, (ii) lumber, fabric, leather and other raw materials used in production, and (iii) certain outsourced services. All purchase orders are based on current needs and are fulfilled by suppliers within short time periods. At June 30, 2019, our open purchase orders with respect to such goods and services totaled $23.9 million and are to be paid in less than one year. Other purchase commitments included within this table represent payment due for other services such as telecommunication, computer-related software, royalties, web development, insurance and other maintenance contracts.

 

(5)

Non-current income taxes payable of $1.6 million and non-current deferred tax liabilities of $1.1 million have been excluded from the table above due to uncertainty regarding the timing of future payments.

 

We believe that our cash flow from operations, together with our other available sources of liquidity, 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 June 30, 2019, we had working capital of $93.5 million compared to $93.2 million at June 30, 2018, an increase of $0.3 million and a current ratio of 1.76 at June 30, 2019 compared to 1.77 at June 30, 2018. In addition to using available cash to fund changes in working capital, capital expenditures, retail acquisitions, repayment of debt, and payment of cash dividends, the Company has been authorized by our Board of Directors to repurchase shares of our common stock from time to time, either directly or through agents, in the open market at prices and on terms satisfactory to us.

 

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 June 30, 2019 and 2018, respectively, was for our legacy consumer credit program described below.

 

Ethan Allen Consumer Credit Program. The terms and conditions of our legacy 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. 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 the Company collateral at a variable rate based on the volume of program sales if the Company does not meet certain covenants, including a minimum working capital requirement. At June 30, 2019 and 2018, we were in compliance with all such covenants. The Program Agreement and legacy consumer credit program will terminate on July 31, 2019.

 

During the fourth quarter of fiscal 2019, we launched a new consumer credit program utilizing a non-related third-party financial institution. Our new Ethan Allen Platinum consumer credit program, designed to make the Ethan Allen brand accessible to everyone, had a successful national launch and should continue to attract both new prospects and returning clients. Financing offered through this program is administered by a third-party financial institution and is granted to our clients on a non-recourse basis to the Company.

 

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Product Warranties. Our products, including our case goods, upholstery and home accents, generally carry explicit product warranties 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 occasion, 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 to be 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. As of June 30, 2019 and 2018, our product warranty liability totaled $1.6 million and $1.5 million, respectively.

 

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. For the full fiscal 2019 year, we paid a total of $1.76 per share in dividends for an aggregate total of $47.0 million. In the prior year, total dividends paid were $29.5 million.

 

With our dividends, we have returned $126.5 million to shareholders over the past five years. Future cash dividends will depend on our earnings, capital requirements, financial condition and other factors considered relevant by us, subject to final determination by our Board of Directors.

 

 

Foreign Currency

 

Foreign Currency Exposure. 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 U.S. dollars. The financial statements of these 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 foreign currencies did not have a material impact during any of the fiscal periods presented in this Annual Report on Form 10-K.

 

Impact of Inflation. We believe any inflationary impact on our product and operating costs during the past three fiscal years was offset by our ability to create operational efficiencies, seek lower cost alternatives and raise selling prices.

 

Critical Accounting Estimates

 

We prepare our consolidated financial statements in conformity with U.S. 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 results and disclosures. We consider an accounting estimate to be critical if: (i) the accounting estimate requires us to 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 reasonably could have used in the current period, would have a material impact on our financial 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.

 

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The following critical accounting estimates affect our consolidated financial statements.

 

Goodwill and Intangible Assets. Goodwill and other indefinite-lived intangible assets are evaluated for impairment on an annual basis during the fourth quarter of each fiscal year, and between annual tests whenever events or circumstances indicate that the carrying value of the goodwill or other indefinite-lived intangible asset may exceed its fair value. When testing goodwill for impairment, we may assess qualitative factors for some or all of our reporting units to determine whether it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount, including goodwill. Alternatively, we may bypass this qualitative assessment and determine whether the carrying value exceeds the fair value using a quantitative assessment.

 

We also annually evaluate whether our trade name continues to have an indefinite life. Our trade name is reviewed for impairment annually in the fourth quarter and may be reviewed more frequently if indicators of impairment are present. Conditions that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate that could affect the value of an asset, a product recall or an adverse action or assessment by a regulator. We qualitatively assess indefinite-lived intangible asset impairment to determine whether it is more likely than not that the fair value of the asset is less than its carrying amount. If our trade name is qualitatively assessed and determined it is not more likely than not that the asset’s fair value is greater than its carrying amount, an impairment review is performed by comparing the carrying value to the estimated fair value, determined using a discounted cash flow methodology. Factors used in the valuation of intangible assets with indefinite lives include, but are not limited to, management’s plans for future operations, recent results of operations and projected future cash flows.

 

Impairment of Long-lived Assets. The recoverability of long-lived assets is evaluated for impairment at least annually or whenever events or changes in circumstances indicate that we may not be able to recover the carrying amount of an asset or asset group. Our assessment of recoverability determines whether the carrying value will be recovered through the expected undiscounted future cash flows resulting from the use of the asset. In the event the sum of the expected undiscounted future cash flows is less than the carrying value of the asset, an impairment loss equal to the excess of the asset’s carrying value over its fair value is recorded. For retail design center level long-lived assets, expected cash flows are determined based on our estimate of future net sales, margin rates and expenses over the remaining expected terms of the leases. Impairment, if any, is recorded in the period in which the impairment occurred.

 

Inventories. Inventories (finished goods, work in process and raw materials) are stated at the lower of cost, determined on a first-in, first-out basis, and net realizable value. Cost is determined based solely on those charges incurred in the acquisition and production of the related inventory (i.e. material, labor and manufacturing overhead costs). We estimate an inventory reserve for excess quantities and obsolete items based on specific identification and historical write-downs, taking into account future demand and market conditions. If actual demand or market conditions in the future are less favorable than those estimated, additional inventory write-downs may be required.

 

Income Taxes. We are subject to income taxes in the United States and other foreign jurisdictions. Our tax provision is an estimate based on our understanding of laws in Federal, state and foreign tax jurisdictions. These laws can be complicated and are difficult to apply to any business, including ours. The tax laws also require us to allocate our taxable income to many jurisdictions based on subjective allocation methodologies and information collection processes.

 

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Additional factors that we consider when making judgments about the deferred tax valuation include tax law changes, a recent history of cumulative losses, and variances in future projected profitability.

 

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The Company evaluates, on a quarterly basis, uncertain tax positions taken or expected to be taken on tax returns for recognition, measurement, presentation, and disclosure in its financial statements. If an income tax position exceeds a 50% probability of success upon tax audit, based solely on the technical merits of the position, the Company recognizes an income tax benefit in its financial statements. The tax benefits recognized are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The liability associated with an unrecognized tax benefit is classified as a long-term liability except for the amount for which a cash payment is expected to be made or tax positions settled within one year.

 

Business Insurance Reserves. We have insurance programs in place to cover workers’ compensation and property/casualty claims. The insurance programs, which are funded through self-insured retention, are subject to various stop-loss limitations. We accrue estimated losses using actuarial models and assumptions based on historical loss experience. Although we believe that the insurance reserves are adequate, the reserve estimates are based on historical experience, which may not be indicative of current and future losses. In addition, the actuarial calculations used to estimate insurance reserves are based on numerous assumptions, some of which are subjective. We adjust insurance reserves, as needed, in the event that future loss experience differs from historical loss patterns.

 

Recent Accounting Pronouncements

 

See Note 3, Summary of Significant Accounting Policies, in the notes to our consolidated financial statements included under Part II, Item 8, for a full description of recent accounting pronouncements, including the expected dates of adoption, which we include here by reference.

 

Business Outlook

 

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 ethanallen.com, and (v) further expansion internationally. We believe this strategy provides an opportunity to grow our business.

 

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.

 

We have completed a major transformation of our product offerings, which reflect fresh and relevant styling targeted to a wide demographic base. Our design centers continue to be optimized, both in location and size, to build traffic and increase sales. In addition to expanding our retail channels, we continue to leverage our manufacturing capacities to expand our contract sales with GSA-related governmental agencies and the military as well as with other contract customers, including those in the hospitality industry.

 

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.

 

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 25% 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, lower inventory levels, and short lead times and is the most effective approach to ensuring that acceptable levels of quality and service are maintained.

 

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ITEM 7A.      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

 

Debt. Interest rate risk exists primarily through our borrowing activities. We utilize U.S. 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 June 30, 2019, we did not have any floating-rate debt obligations outstanding under our revolving credit facility. It is anticipated that the fair market value of any future debt under the credit facility will continue to be immaterially affected by fluctuations in interest rates and we do not believe that the value of such debt would be significantly impacted by current market events. Previous borrowings under the facility during fiscal 2019 had an interest 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 fiscal 2019, we recorded interest expense of $0.2 million on our borrowings. 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 affect on our consolidated results of operations and financial condition.

 

LIBOR Transition. LIBOR is the subject of recent national, international and other regulatory guidance and proposals for reform. These reforms and other pressure may cause LIBOR to disappear entirely or to perform differently than in the past. It is expected that certain banks will stop reporting information used to set LIBOR at the end of 2021 when their reporting obligations cease. This will effectively end the usefulness of LIBOR and may end its publication. The consequences of these developments cannot be entirely predicted but, as noted above, could impact the interest earned on our investments and our interest expense. If LIBOR is no longer widely available, or otherwise at our option, we will pursue alternative interest rate calculations in our credit agreement. As of June 30, 2019 and 2018, the Company had no outstanding borrowings under its existing credit facility and no material exposure to LIBOR, thus we do not believe the discontinuation of LIBOR will have a material impact on our financial position and results of operations.

 

Cash and Cash Equivalents. The fair market value of our cash and cash equivalents at June 30, 2019 was $20.8 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. It is anticipated that the fair market value of our cash equivalents will continue to be immaterially affected by fluctuations in interest rates. Preservation of principal is the primary goal of our cash and investment policy. Pursuant to our established investment guidelines, we try to achieve high levels of credit quality, liquidity and diversification. Because of our investment policy, our financial exposure to fluctuations in interest rates is expected to remain low. We do not believe that the value or liquidity of our cash and cash equivalents have been significantly impacted by current market events.

 

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 affect on our consolidated results of operations. A decrease in the value of foreign currencies relative to the U.S. dollar may affect the profitability of our vendors, but as we employ a balanced sourcing strategy, we believe any impact would be moderate relative to peers in our industry.

 

A hypothetical 10% weaker United States dollar against all foreign currencies at June 30, 2019 would have had an immaterial impact on our consolidated results of operations and financial condition. We currently do not engage in any foreign currency hedging activity and we have no intention of doing so in the foreseeable future.

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Index to Consolidated Financial Statements and Supplementary Data

 

Consolidated Financial Statements

Page

   

Management’s Report on Internal Control over Financial Reporting

36

   

Report of Independent Registered Public Accounting Firm

37

   

Consolidated Balance Sheets at June 30, 2019 and 2018

39

   

Consolidated Statements of Comprehensive Income for the years ended June 30, 2019, 2018 and 2017

40

   

Consolidated Statements of Cash Flows for the years ended June 30, 2019, 2018 and 2017

41

   

Consolidated Statements of Shareholders’ Equity for the years ended June 30, 2019, 2018 and 2017

42

   

Notes to the Consolidated Financial Statements

43

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Management’s Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP.

 

Our internal control over financial reporting includes those policies and procedures that:

 

 

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

 

 

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

 

 

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material affect on our financial statements.

 

Management has assessed the effectiveness of our internal control over financial reporting based on the framework in “Internal Control – Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

Based on the above evaluation, management has concluded that our internal control over financial reporting was effective as of June 30, 2019 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external reporting purposes in accordance with U.S. GAAP. The effectiveness of our internal control over financial reporting as of June 30, 2019 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report, which is included herein.

 

/s/ M. Farooq Kathwari

/s/ Corey Whitely

Chairman, President and

Executive Vice President, Administration

Chief Executive Officer

Chief Financial Officer and Treasurer

(Principal Executive Officer)

(Principal Financial Officer)

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Report of Independent Registered Public Accounting Firm

 

To the Shareholders and Board of Directors
Ethan Allen Interiors Inc.:

 

Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting

 

We have audited the accompanying consolidated balance sheets of Ethan Allen Interiors Inc. and subsidiaries (the “Company”) as of June 30, 2019 and 2018, the related consolidated statements of comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended June 30, 2019, and the related notes (collectively, the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of June 30, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended June 30, 2019, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

Basis for Opinions

 

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States ) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

 

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

Definition and Limitations of Internal Control Over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material affect on the financial statements.

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ KPMG LLP

 

We have served as the Company’s auditor since 1989.

 

Stamford, Connecticut
August 9, 2019

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

 
   

June 30,

 
   

2019

   

2018

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 20,824     $ 22,363  

Accounts receivable, net

    14,247       12,364  

Inventories, net

    162,389       163,012  

Prepaid expenses and other current assets

    18,830       16,686  

Total current assets

    216,290       214,425  
                 

Property, plant and equipment, net

    245,246       267,903  

Goodwill

    25,388       25,388  

Intangible assets

    19,740       19,740  

Deferred income taxes

    2,108       1,688  

Other assets

    1,579       1,289  

TOTAL ASSETS

  $ 510,351     $ 530,433  
                 

LIABILITIES

               

Current liabilities:

               

Accounts payable and accrued expenses

  $ 35,485     $ 33,288  

Customer deposits

    56,714       61,248  

Accrued compensation and benefits

    21,327       18,926  

Short-term debt

    550       584  

Other current liabilities

    8,750       7,214  

Total current liabilities

    122,826       121,260  

Long-term debt

    516       1,096  

Deferred income taxes

    1,069       4,160  

Other long-term liabilities

    22,011       20,047  

TOTAL LIABILITIES

  $ 146,422     $ 146,563  
                 

Commitments and contingencies (See Note 20)

               
                 

SHAREHOLDERS' EQUITY

               

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

  $ -     $ -  

Common stock, $0.01 par value; 150,000 shares authorized; 49,049 and 48,989 shares issued; 26,587 and 26,529 shares outstanding at June 30, 2019 and 2018, respectively

    491       490  

Additional paid-in-capital

    377,913       376,950  

Treasury stock, at cost: 22,462 and 22,460 shares at June 30, 2019 and 2018, respectively

    (656,597 )     (656,551 )

Retained earnings

    647,710       669,013  

Accumulated other comprehensive loss

    (5,651 )     (6,171 )

Total Ethan Allen Interiors Inc. shareholders' equity

    363,866       383,731  

Noncontrolling interests

    63       139  

TOTAL SHAREHOLDERS' EQUITY

    363,929       383,870  

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

  $ 510,351     $ 530,433  

 

See accompanying notes to consolidated financial statements.

 

39

 

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, except share data)

 

   

Years ended June 30,   

 
   

2019

   

2018

   

2017

 

Net sales

  $ 746,684     $ 766,784     $ 763,385  

Cost of sales

    337,193       350,820       343,662  

Gross profit

    409,491       415,964       419,723  
                         

Selling, general and administrative

    357,164       367,097       361,773  

Restructuring and impairment charges

    18,380       -       -  

Operating income

    33,947       48,867       57,950  
                         

Interest (expense), net of interest income

    (87 )     200       (955 )

Income before income taxes

    33,860       49,067       56,995  
                         

Provision for income taxes

    8,162       12,696       20,801  

Net Income

  $ 25,698     $ 36,371     $ 36,194  
                         

Per share data:

                       

Basic earnings per common share:

                       

Net income per basic share

  $ 0.96     $ 1.33     $ 1.31  

Basic weighted average common shares

    26,695       27,321       27,679  

Diluted earnings per common share:

                       

Net income per diluted share

  $ 0.96     $ 1.32     $ 1.29  

Diluted weighted average common shares

    26,751       27,625       27,958  
                         

Comprehensive income:

                       

Net income

  $ 25,698     $ 36,371     $ 36,194  

Other comprehensive income (loss), net of tax

                       

Foreign curency translation adjustments

    520       (2,040 )     715  

Other

    (76 )     (51 )     (14 )

Other comprehensive income (loss), net of tax

    444       (2,091 )     701  

Comprehensive income

  $ 26,142     $ 34,280     $ 36,895  

 

See accompanying notes to consolidated financial statements.

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

   

Years ended June 30,   

 
   

2019

   

2018

   

2017

 

Cash Flows from Operating Activities

                       

Net income

  $ 25,698     $ 36,371     $ 36,194  

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

                       

Depreciation and amortization

    19,637       19,831       20,115  

Share-based compensation expense

    121       954       1,259  

Deferred income taxes

    (3,511 )     (106 )     3,507  

Restructuring and impairment charges

    20,374       -       -  

Payments for restructuring

    (2,296 )     -       -  

Loss on disposal of property, plant and equipment

    157       201       1,033  

Other

    115       (250 )     (6 )

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

                       

Accounts receivable, net

    (565 )     (682 )     (2,826 )

Inventories

    957       (11,876 )     13,507  

Prepaid expenses and other current assets

    (2,155 )     3,274       1,010  

Customer deposits

    (4,924 )     (2,444 )     1,883  

Accounts payable and accrued expenses

    631       2,288       1,257  

Accrued compensation and benefits

    687       (1,426 )     (1,715 )

Other assets and liabilities

    321       (3,638 )     3,415  

Net cash provided by operating activities

    55,247       42,497       78,633  
                         

Cash Flows from Investing Activities

                       

Proceeds from the disposal of property, plant & equipment

    1       327       1,273  

Capital expenditures

    (9,120 )     (12,486 )     (17,645 )

Acquisitions, net of cash acquired

    (534 )     (6,287 )     (676 )

Other investing activities

    153       204       175  

Net cash used in investing activities

    (9,500 )     (18,242 )     (16,873 )
                         

Cash Flows from Financing Activities

                       

Borrowings on revolving credit facility

    16,000       -       -  

Payments on borrowings and capital lease obligations

    (16,578 )     (14,456 )     (28,401 )

Repurchases of common stock

    (46 )     (23,120 )     (10,246 )

Payment of cash dividends

    (46,990 )     (29,509 )     (20,031 )

Other financing activities

    276       194       1,335  

Net cash used in financing activities

    (47,338 )     (66,891 )     (57,343 )
                         

Effect of exchange rate changes on cash and cash equivalents

    52       (32 )     135  

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

    (1,539 )     (42,668 )     4,552  

Cash, cash equivalents and restricted cash at beginning of period

    22,363       65,031       60,479  

Cash, cash equivalents and restricted cash at end of period

  $ 20,824     $ 22,363     $ 65,031  
                         

Supplemental Disclosure on Cash Flow Information

                       

Cash paid during the year for income taxes, net of refunds

  $ 13,339     $ 14,305     $ 15,074  

Cash paid during the year for interest

  $ 306     $ 177     $ 936  
                         

Supplemental Disclosure on Non-Cash Information

                       

Non-cash capital lease obligations incurred

  $ -     $ 1,442     $ 613  

Dividends declared, not paid

  $ 5,075     $ 5,065     $ 5,239  

 

See accompanying notes to consolidated financial statements.

 

41

 

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(In thousands)

 

                                           

Accumulated

                         
                   

Additional

                   

Other

           

Non-

         
   

Common Stock

   

Paid-in

   

Treasury Stock   

   

Comprehensive

   

Retained

   

Controlling

   

Total

 
   

Shares

   

Par Value

   

Capital

   

Shares

   

Amount

   

Loss

   

Earnings

   

Interests