0001437749-21-001497.txt : 20210128 0001437749-21-001497.hdr.sgml : 20210128 20210128161548 ACCESSION NUMBER: 0001437749-21-001497 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 74 CONFORMED PERIOD OF REPORT: 20201231 FILED AS OF DATE: 20210128 DATE AS OF CHANGE: 20210128 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ETHAN ALLEN INTERIORS INC CENTRAL INDEX KEY: 0000896156 STANDARD INDUSTRIAL CLASSIFICATION: WOOD HOUSEHOLD FURNITURE, (NO UPHOLSTERED) [2511] IRS NUMBER: 061275288 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11692 FILM NUMBER: 21565138 BUSINESS ADDRESS: STREET 1: ETHAN ALLEN DR STREET 2: PO BOX 1966 CITY: DANBURY STATE: CT ZIP: 06811 BUSINESS PHONE: 2037438000 10-Q 1 eth20201231_10q.htm FORM 10-Q eth20201231_10q.htm
0000896156 ETHAN ALLEN INTERIORS INC false --06-30 Q2 2021 0.01 0.01 1,055 1,055 0 0 0.01 0.01 150,000 150,000 49,173 49,053 25,173 25,053 24,000 24,000 1 3 0 3 5 3 0 4 10 3 10 2 3 Certain operating leases have renewal options and rent escalation clauses as well as various purchase options. We assess these options to determine if we are reasonably certain of exercising these options based on all relevant economic and financial factors. Any options that meet these criteria are included in the lease term at lease commencement. Upholstery furniture includes fabric-covered items such as sleepers, recliners and other motion furniture, chairs, ottomans, custom pillows, sofas, loveseats, cut fabrics and leather. Manufacturing overhead costs and inventory reserves and write-downs are reported within Cost of Sales in the consolidated statements of comprehensive income. Based on actual demand and forecasted market conditions, we recorded a non-cash charge of $0.4 million during the second quarter of fiscal 2021 to increase in our finished goods inventory obsolescence reserve for certain slow moving and discontinued inventory items, which was due to for these inventory items being less favorable than originally estimated. The non-cash inventory write-down was recorded in the consolidated statement of comprehensive income within the line item Cost of Sales. Represents the change in wholesale profit contained in the retail segment inventory at the end of the period. Calculated using the incremental borrowing rate for each lease at lease commencement. We recorded a non-cash impairment charge of $0.6 million during the first quarter of fiscal 2021 related to the impairment of long-lived assets held at a retail design center location. The asset group used in the impairment analysis, which represented the lowest level for which identifiable cash flows were available and largely independent of the cash flows of other groups of assets, was the individual retail design center. We estimated future cash flows based on design center-level historical results, current trends, and operating and cash flow projections. The impairment charge of $0.6 million was recorded in the consolidated statement of comprehensive income within the line item Restructuring and other impairment charges, net of gains. Accents includes items such as 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. Intercompany eliminations represents the elimination of all intercompany wholesale segment sales to the retail segment during the period presented. Leases with initial terms of one year or less are not capitalized and instead expensed on a straight-line basis over the lease term. Lease expense for operating leases consists of both fixed and variable components. Expense related to fixed lease payments are recognized on a straight-line basis over the lease term. Excludes future commitments under short-term lease agreements of $0.3 million as of December 31, 2020 as leases with an initial term of twelve months or less are not recorded on the balance sheet. Case goods furniture includes items such as beds, dressers, armoires, tables, chairs, buffets, entertainment units, home office furniture and wooden accents. Represents the wholesale profit contained in the retail segment inventory that has not yet been realized. These profits are realized when the related inventory is sold. We completed the sale of a previously closed retail property to an independent third party in December 2020 and received $1.3 million in cash less certain adjustments, including $0.1 million in selling and other closing costs. As a result of the sale, the Company recognized a pre-tax loss of $0.3 million in the second quarter of fiscal 2021, which was recorded within the line item Restructuring and other impairment charges, net of gains in the consolidated statements of comprehensive income. Other includes membership revenue, product delivery sales, the Ethan Allen Hotel room rentals and banquets, sales of third-party furniture protection plans and other miscellaneous product sales less prompt payment discounts, sales allowances and other incentives. Variable lease payments are generally expensed as incurred, where applicable, and include certain index-based changes in rent, certain non-lease components, such as maintenance, real estate taxes, incurance and other services provided by the lessor, and other charges included in the lease. 00008961562020-07-012020-12-31 xbrli:shares 00008961562021-01-21 iso4217:USD 00008961562020-12-31 00008961562020-06-30 iso4217:USDxbrli:shares 00008961562020-10-012020-12-31 00008961562019-10-012019-12-31 00008961562019-07-012019-12-31 00008961562019-06-30 00008961562019-12-31 0000896156us-gaap:CommonStockMember2020-06-30 0000896156us-gaap:AdditionalPaidInCapitalMember2020-06-30 0000896156us-gaap:TreasuryStockMember2020-06-30 0000896156us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-06-30 0000896156us-gaap:RetainedEarningsMember2020-06-30 0000896156us-gaap:NoncontrollingInterestMember2020-06-30 0000896156us-gaap:CommonStockMember2020-07-012020-09-30 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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended December 31, 2020

 

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

 

eth20201231_10qimg001.jpg

 

Ethan Allen Interiors Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

06-1275288

(State or other jurisdiction of incorporation or organization)

 

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

 

 

25 Lake Avenue Ext., Danbury, Connecticut

 

            06811-5286

(Address of principal executive offices)

 

       (Zip Code)

 

(203) 743-8000

(Registrant's telephone number, including area code)

 

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

 

Common Stock, $0.01 par value per share

 

ETH

 

New York Stock Exchange

(Title of each class)

 

(Trading symbol)

 

(Name of each exchange on which registered)

 

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

 

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

 

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

 

Large accelerated filer ☐

 Accelerated filer                  ☒

 

Non-accelerated filer     ☐

Smaller reporting company

 

Emerging growth company

  

 

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

 

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

 

The number of shares outstanding of the registrant’s common stock, $0.01 par value, as of January 21, 2021 was 25,173,082.

 

 

 

 

 

ETHAN ALLEN INTERIORS INC.

FORM 10-Q SECOND QUARTER OF FISCAL 2021

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION  
   
Item 1. Financial Statements 2
   
Consolidated Balance Sheets (Unaudited) 2
   
Consolidated Statements of Comprehensive Income (Unaudited)   3
   
Consolidated Statements of Cash Flows (Unaudited)    4
   
Consolidated Statements of Shareholders’ Equity (Unaudited)    5
   
Notes to Consolidated Financial Statements (Unaudited)    6
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations      18
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk      30
   
Item 4. Controls and Procedures      31
   
PART II - OTHER INFORMATION  
   
Item 1. Legal Proceedings      32
   
Item 1A. Risk Factors      32
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds      32
   
Item 3. Defaults Upon Senior Securities      32
   
Item 4. Mine Safety Disclosures      32
   
Item 5. Other Information      32
   
Item 6. Exhibits      33
   
SIGNATURES     33

 

1

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Consolidated Balance Sheets (Unaudited)

(In thousands, except par value)

 

  

December 31, 2020

  

June 30, 2020

 

ASSETS

        

Current assets:

        

Cash and cash equivalents

 $80,035  $72,276 

Accounts receivable, net

  8,985   8,092 

Inventories, net

  126,748   126,101 

Prepaid expenses and other current assets

  30,160   23,483 

Total current assets

  245,928   229,952 

Property, plant and equipment, net

  234,425   236,678 

Goodwill

  25,388   25,388 

Intangible assets

  19,740   19,740 

Operating lease right-of-use assets

  108,470   109,342 

Deferred income taxes

  641   137 

Other assets

  1,627   1,552 

Total ASSETS

 $636,219  $622,789 
         

LIABILITIES AND SHAREHOLDERS' EQUITY

        

Current liabilities:

        

Accounts payable and accrued expenses

 $33,989  $25,595 

Customer deposits and deferred revenue

  90,063   64,031 

Accrued compensation and benefits

  21,149   18,278 

Current operating lease liabilities

  31,838   27,366 

Other current liabilities

  10,439   3,708 

Total current liabilities

  187,478   138,978 

Long-term debt

  -   50,000 

Operating lease liabilities, long-term

  95,703   102,111 

Deferred income taxes

  872   1,074 

Other long-term liabilities

  4,602   2,562 

Total LIABILITIES

 $288,655  $294,725 
         

Commitments and contingencies (see Note 16)

          

Shareholders' equity:

        

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

 $-  $- 

Common stock, $0.01 par value, 150,000 shares authorized, 49,173 and 49,053 shares issued; 25,173 and 25,053 shares outstanding at December 31, 2020 and June 30, 2020, respectively

  492   491 

Additional paid-in capital

  380,643   378,300 

Treasury stock, at cost: 24,000 shares at December 31, 2020 and June 30, 2020

  (680,916)  (680,916)

Retained earnings

  653,255   638,631 

Accumulated other comprehensive loss

  (5,895)  (8,441)

Total Ethan Allen Interiors Inc. shareholders' equity

  347,579   328,065 

Noncontrolling interests

  (15)  (1)

Total shareholders' equity

  347,564   328,064 

Total LIABILITIES AND SHAREHOLDERS' EQUITY

 $636,219  $622,789 

 

See accompanying notes to consolidated financial statements.

 

2

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands, except per share data)

 

  

Three months ended

  

Six months ended

 
  

December 31,

  

December 31,

 
  

2020

  

2019

  

2020

  

2019

 

Net sales

 $178,826  $174,574  $329,884  $348,495 

Cost of sales

  77,494   77,053   142,782   157,180 

Gross profit

  101,332   97,521   187,102   191,315 
                 

Selling, general and administrative expenses

  78,354   88,495   151,820   174,505 

Restructuring and other impairment charges, net of gains

  423   (178)  1,046   (11,035)

Operating income

  22,555   9,204   34,236   27,845 

Other expenses

                

Interest and other financing costs

  47   51   382   99 

Other income (expense), net

  (330)  114   (435)  181 

Income before income taxes

  22,178   9,267   33,419   27,927 

Income tax expense

  5,295   2,181   7,183   6,735 

Net income

 $16,883  $7,086  $26,236  $21,192 
                 

Per share data

                

Basic earnings per common share:

                

Net income per basic share

 $0.67  $0.27  $1.04  $0.80 

Basic weighted average common shares

  25,239   26,580   25,209   26,646 

Diluted earnings per common share:

                

Net income per diluted share

 $0.67  $0.27  $1.04  $0.79 

Diluted weighted average common shares

  25,309   26,612   25,257   26,681 
                 

Comprehensive income

                

Net income

 $16,883  $7,086  $26,236  $21,192 

Other comprehensive income (loss), net of tax

                

Foreign currency translation adjustments

  1,990   773   2,546   274 

Other

  (5)  (19)  (14)  (26)

Other comprehensive income, net of tax

  1,985   754   2,532   248 

Comprehensive income

 $18,868  $7,840  $28,768  $21,440 

 

See accompanying notes to consolidated financial statements.

 

3

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

  

Six months ended

 
  

December 31,

 

 

 

2020

  

2019

 
Cash Flows from Operating Activities        

Net income

 $26,236  $21,192 

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

        

Depreciation and amortization

  8,145   8,430 

Share-based compensation expense

  711   123 

Non-cash operating lease cost

  14,953   16,191 

Deferred income taxes

  (706)  153 

Restructuring and other impairment charges, net of gains

  1,435   (6,503)

Restructuring payments

  31   (5,021)

Loss on disposal of property, plant and equipment

  13   163 

Other

  12   136 

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

        

Accounts receivable, net

  (893)  973 

Inventories, net

  (1,036)  21,303 

Prepaid expenses and other current assets

  (5,952)  226 

Customer deposits and deferred revenue

  26,032   (9,746)

Accounts payable and accrued expenses

  8,394   (8,342)

Accrued compensation and benefits

  2,780   (475)

Operating lease liabilities

  (16,706)  (16,037)

Other assets and liabilities

  2,469   622 

Net cash provided by operating activities

  65,918   23,388 
         

Cash Flows from Investing Activities

        

Proceeds from disposal of property, plant and equipment

  1,225   12,423 

Capital expenditures

  (5,878)  (7,987)

Acquisitions, net of cash acquired

  -   (1,281)

Other investing activities

  -   20 

Net cash (used in) provided by investing activities

  (4,653)  3,175 
         

Cash Flows from Financing Activities

        

Payments on borrowings

  (50,000)  - 

Payment of cash dividends

  (5,288)  (10,685)

Proceeds from employee stock plans

  1,633   53 

Repurchases of common stock

  -   (8,163)

Other financing activities

  (290)  (278)

Net cash used in financing activities

  (53,945)  (19,073)
         

Effect of exchange rate changes on cash and cash equivalents

  439   (8)
         

Net increase in cash and cash equivalents

  7,759   7,482 

Cash and cash equivalents at beginning of period

  72,276   20,824 

Cash and cash equivalents at end of period

 $80,035  $28,306 

 

See accompanying notes to consolidated financial statements.

 

4

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Consolidated Statements of Shareholders’ Equity (Unaudited)

 (In thousands)

 

                      

Accumulated

             
          

Additional

          

Other

      

Non-

     
  

Common Stock

  

Paid-in

  

Treasury Stock

  

Comprehensive

  

Retained

  

Controlling

  

Total

 
  

Shares

  

Par Value

  

Capital

  

Shares

  

Amount

  

Loss

  

Earnings

  

Interests

  

Equity

 

Balance at June 30, 2020

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

Net income

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

Share-based compensation expense

  -   -   254   -   -   -   -   -   254 

Cash dividends declared

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

Other comprehensive income (loss)

  -   -   -   -   -   556   -   (9)  547 

Balance at September 30, 2020

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

Net income

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

Common stock issued on share-based awards

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

Share-based compensation expense

  -   -   457   -   -   -   -   -   457 

Cash dividends declared

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

Other comprehensive income (loss)

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

Balance at December 31, 2020

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

 

 

                      

Accumulated

             
          

Additional

          

Other

      

Non-

     
  

Common Stock

  

Paid-in

  

Treasury Stock

  

Comprehensive

  

Retained

  

Controlling

  

Total

 
  

Shares

  

Par Value

  

Capital

  

Shares

  

Amount

  

Loss

  

Earnings

  

Interests

  

Equity

 

Balance at June 30, 2019

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

Net income

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

Common stock issued on share-based awards

  1   -   18   -   -   -   -   -   18 

Share-based compensation expense

  -   -   151   -   -   -   -   -   151 

Impact of ASU 2016-02 adoption, net of tax

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

Cash dividends declared

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

Other comprehensive income (loss)

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

Balance at September 30, 2019

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

Net income

  -   -   -   -   -   -   7,086   -   7,086 

Common stock issued on share-based awards

  4   -   35   -   -   -   -   -   35 

Share-based compensation expense

  -   -   (28)  -   -   -   -   -   (28)

Cash dividends declared

  -   -   -   -   -   -   (5,496)  -   (5,496)

Repurchase of common stock

  -   -   -   546   (10,029)  -   -   -   (10,029)

Other comprehensive income (loss)

  -   -   -   -   -   773   -   (19)  754 

Balance at December 31, 2019

  49,054  $491  $378,089   23,008  $(666,626) $(5,377) $656,211  $37  $362,825 

 

See accompanying notes to consolidated financial statements.

 

5

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements (Unaudited)

 

 

(1)

Organization and Nature of Business

 

Founded in 1932 and incorporated in Delaware in 1989, Ethan Allen Interiors Inc., through its wholly-owned subsidiary, Ethan Allen Global, Inc., and Ethan Allen Global, Inc.’s subsidiaries (collectively, “we,” “us,” “our,” “Ethan Allen” or the “Company”), is a leading interior design company, manufacturer and retailer in the home furnishings marketplace. Today we are a global luxury international home fashion brand that is vertically integrated from design through delivery, which affords our customers 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. As of December 31, 2020, our Company operates 144 retail design centers, with 138 located in the United States and the remaining six in Canada. The majority of the independently operated design centers are in Asia, with the remaining independently operated design centers located throughout the United States, the Middle East and Europe. We also own and operate nine manufacturing facilities including six manufacturing plants in the United States, two manufacturing plants in Mexico and one manufacturing plant in Honduras.

 

COVID-19 Update

 

The COVID-19 crisis has challenged our operations, but our associates continue to persevere through these challenges. Our primary focus has been to operate in a safe manner, for our associates and clients. As our design centers began to reopen, we implemented various mitigating and safety protocols recommended by the United States Center for Disease Control (“CDC”) guidelines for operating businesses safely. We established logistics for the supply of hand sanitizer and related dispensers, disinfectant cleaning supplies, masks and nitrile gloves, and have increased the cleaning frequency of our design centers and other facilities. For the safety of our associates in our design centers we require all associates and clients to wear masks.

 

In our initial response to the COVID-19 health crisis, we took immediate action and made adjustments to our business operations, including temporary design center and manufacturing plant closings, a reduction in headcount, curtailing certain operating expenses, suspension of our dividend and share repurchases and delaying investments and capital expenditures. Our approach to the crisis continues to evolve as business trends substantially improved during the first half of fiscal 2021. Given the positive trends in cash flows, we repaid the remaining $50.0 million in outstanding debt, previously borrowed under our credit facility in March 2020. We also resumed production in our North American manufacturing plants to work through existing order backlog and have ramped up to near pre-COVID-19 production levels. The temporary salary reductions were lifted, effective June 30, 2020, as planned and we have brought back many of our associates previously furloughed in April 2020. Further, on August 4, 2020, our Board of Directors reinstated the regular quarterly cash dividend.

 

We have seen a significant improvement in business conditions, which has increased our profitability and generated strong positive cash flow during fiscal 2021. Substantially all of our design centers that were temporarily closed have reopened and written orders taken at both the retail and wholesale segments exceeded levels from a year ago. Tempering these improvements are the continuing logistical challenges faced by the entire home furnishings industry resulting from COVID-19-related labor shortages and supply chain disruptions creating significant delays in order fulfillment and increasing backlogs. Inventory and supply chain management remain our areas of focus as we balance the need to maintain supply chain flexibility to help ensure competitive lead times with the risk of inventory shortage and obsolescence. We continue to produce about 75% of our products in our North American manufacturing facilities. The other 25% is sourced primarily from Southeast Asia and China. The receipt of inventory and raw materials imported from these areas has been slowed or disrupted. In addition, ocean freight capacity issues continue to persist worldwide due to the ongoing global COVID-19 pandemic, which has resulted in recent price increases per shipping container. While we continue to manage and evaluate our logistics providers, there is no indication that ocean freight container rates will return to pre-COVID-19 levels in the near-term and these increases could have an adverse effect on our consolidated results of operations.

 

Whereas some state and local governments have eased restrictions on commercial retail activity, it is possible that a resurgence in COVID-19 cases could prompt a return to tighter restrictions in certain areas. Furthermore, while the home furnishings industry has fared better during the pandemic than certain other sectors of the economy, continued economic weakness may eventually have an adverse impact upon our business. While we continue to serve our customers and operate our business while managing the ongoing COVID-19 health crisis, there can be no assurance that future COVID-19 related developments will not have an impact on our business, results of operations or financial condition since the extent and duration of the health crisis remains highly uncertain. We will continue to make decisions regarding the sources and uses of capital in our business to reflect and adapt to changes in market conditions, including any lasting effects of COVID-19. Future adverse developments in connection with the ongoing COVID-19 crisis, including additional waves of COVID-19 outbreaks, evolving international, federal, state and local restrictions and safety regulations in response to COVID-19, changes in consumer behavior, health concerns, the pace of economic activity in the wake of the COVID-19 crisis, or other similar issues could adversely affect our business, results of operations or financial condition in the future, or including our financial results and business performance for fiscal 2021.

 

6

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

(2)

Interim Basis of Presentation

 

Use of Estimates

 

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

 

Principles of Consolidation

 

We conduct business globally and 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. The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany activity and balances have been eliminated from the consolidated financial statements. In our opinion, all adjustments, consisting only of normal recurring adjustments necessary for fair presentation, have been included in the consolidated financial statements. The results of operations for the three and six months ended December 31, 2020 are not necessarily indicative of results that may be expected for the entire fiscal year. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our fiscal 2020 Annual Report on Form 10-K (the “2020 Annual Report on Form 10-K”).

 

Reclassifications

 

The Company reclassified in the Consolidated Statement of Comprehensive Income certain prior year comparative figures from Interest income, net of interest (expense) to Interest and other financing costs and Other income (expense), net to conform to the current year’s presentation. In addition, the Company reclassified in the Consolidated Statement of Cash Flows certain prior year comparative figures from Other financing activities to Proceeds from employee stock plans within Net cash used in financing activities to conform to the current year's presentation. These changes were made for disclosure purposes only and did not have any impact on previously reported results.

 

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

 

 

(3)

Recent Accounting Pronouncements

 

New Accounting Standards or Updates Recently Adopted

 

Credit Losses of Financial Instruments – In June 2016, the Financial Accounting Standards Board (“FASB”) issued accounting standards update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent amendments to the initial guidance through ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10, ASU 2019-11, ASU 2020-02 and ASU 2020-03 (collectively, the “ASUs”). The ASUs requires measurement and recognition of expected credit losses for financial assets held based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The guidance applies to financial assets measured at amortized cost basis, such as receivables that result from revenue transactions. Accounts receivable is presented net of allowance for doubtful accounts as a result of the assessment of the collectability of customer accounts, which is recorded based on an overall aging analysis and a review of specifically identified accounts, which considers factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay. We adopted the ASUs as of July 1, 2020 using a modified retrospective transition method, which requires a cumulative-effect adjustment, if any, to the opening balance of retained earnings. We did not recognize a cumulative-effect adjustment upon adoption as the adoption of the ASUs did not have a material effect on our consolidated financial statements.

 

7

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Implementation Costs in a Cloud Computing Arrangement – In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, an update related to a client’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. This guidance aligns the requirements for capitalizing implementation costs in a cloud computing service contract with the guidance for capitalizing implementation costs to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. We adopted the new guidance as of July 1, 2020 using a prospective method. We capitalize implementation costs related to hosted arrangements, which typically include multi-year service terms with additional renewal periods generally ranging from one to three years. The related assets are recorded within Prepaid expenses and other current assets (for service terms less than one year) or Other assets (for service terms greater than one year) on our consolidated balance sheets, net of accumulated amortization for assets placed in service. The amortization of assets placed in service is recorded in selling, general and administrative expenses, consistent with the costs of the hosting arrangement, on the consolidated statements of comprehensive income on a straight-line basis over the term of the hosting arrangement, which includes reasonably certain renewal periods. The adoption of the accounting standard update did not have a material impact on our consolidated financial statements.

 

Reference Rate Reform on Financial Reporting – In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, an update that provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This accounting standards update is intended to ease the process of migrating away from LIBOR to new reference rates. ASU 2020-04 was adopted in the first quarter of fiscal 2021, but did not have a material impact on our accounting policies or our consolidated financial statements.

 

Recent Accounting Standards or Updates Not Yet Effective

 

Simplifying the Accounting for Income Taxes – In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, an update intended to simplify various aspects related to accounting for income taxes. This guidance removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This accounting standards update will be effective for us beginning in the first quarter of fiscal 2022. We are currently evaluating the impact of this accounting standards update, but do not expect the adoption to have a material impact on our consolidated financial statements.

 

No other new accounting pronouncements issued or effective as of December 31, 2020 have had or are expected to have a material impact on our consolidated financial statements.

 

 

(4)

Revenue Recognition

 

Our reported revenue (net sales) consist substantially of product sales. We report product sales net of discounts and recognize them at the point in time when control transfers to the customer. For sales to our customers in our wholesale segment, control typically transfers when the product is shipped. The majority of our shipping agreements are freight-on-board shipping point and risk of loss transfers to our wholesale customer once the product is out of our control. Accordingly, revenue is recognized for product shipments on third-party carriers at the point in time that our product is loaded onto the third-party container or truck. For sales in our retail segment, control generally transfers upon delivery to the customer. We recognize the promised amount of consideration without adjusting for the effects of a significant financing component if the contract has a duration of one year or less. As our contracts typically are less than one year in length and do not have significant financing components, we have not adjusted consideration.

 

Our practice has been to sell our products at the same delivered cost to all retailers and customers nationwide, regardless of shipping point. Costs incurred by the Company to deliver finished goods are expensed and recorded in selling, general and administrative expenses. We recognize shipping and handling expense as fulfillment activities (rather than as a promised good or service) when the activities are performed even if those activities are performed after the control of the good has been transferred. Accordingly, we record the expenses for shipping and handling activities at the same time we recognize net sales. We exclude from the measurement of the transaction price all taxes imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer, including sales, use, excise, value-added, and franchise taxes (collectively referred to as sales taxes). Sales taxes collected is not recognized as revenue but is included in Accounts payable and accrued expenses on the consolidated balance sheets as it is ultimately remitted to governmental authorities.

 

8

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Estimated refunds for returns and allowances are based on our historical return patterns. We record these estimated sales refunds on a gross basis rather than on a net basis and have recorded an asset for product we expect to receive back from customers in Prepaid expenses and other current assets and a corresponding refund liability in Other current liabilities on our consolidated balance sheets. At December 31, 2020 and June 30, 2020, these amounts were immaterial.

 

We capitalize commission fees paid to our associates as contract assets within Prepaid expenses and other current assets on our consolidated balance sheets. These prepaid commissions are subsequently recognized as a selling expense upon delivery (when we have transferred control of our product to our customer). At December 31, 2020, we had prepaid commissions of $14.6 million, which we expect to recognize to selling expense in the next six months.

 

In many cases we receive deposits from customers before we have transferred control of our product to our customers, resulting in contract liabilities. These customer deposits are reported as a current liability in Customer deposits and deferred revenue on our consolidated balance sheets. At June 30, 2020 we had customer deposits of $62.6 million, of which we recognized $12.0 million and $57.9 million, respectively, as net sales upon delivery to the customer during the three and six months ended December 31, 2020. Customer deposits totaled $90.0 million at December 31, 2020.     

 

The following table disaggregates our net sales by product category by segment for the three months ended December 31, 2020 (in thousands):

 

  

Wholesale

  

Retail

  

Total

 

Upholstery(1)

 $53,573  $74,087  $127,660 

Case goods(2)

  30,984   38,743   69,727 

Accents(3)

  18,803   29,441   48,244 

Other(4)

  (1,810)  2,547   737 

Total before intercompany eliminations

 $101,550  $144,818   246,368 

Intercompany eliminations(5)

          (67,542)

Consolidated net sales

         $178,826 

 

The following table disaggregates our net sales by product category by segment for the six months ended December 31, 2020 (in thousands):

 

  

Wholesale

  

Retail

  

Total

 

Upholstery(1)

 $106,308  $131,772  $238,080 

Case goods(2)

  59,723   71,661   131,384 

Accents(3)

  35,999   53,754   89,753 

Other(4)

  (3,146)  5,712   2,566 

Total before intercompany eliminations

 $198,884  $262,899   461,783 

Intercompany eliminations(5)

          (131,899)

Consolidated net sales

         $329,884 

 

The following table disaggregates our net sales by product category by segment for the three months ended December 31, 2019 (in thousands):

 

  

Wholesale

  

Retail

  

Total

 

Upholstery(1)

 $44,329  $63,696  $108,025 

Case goods(2)

  31,797   39,883   71,680 

Accents(3)

  16,170   30,247   46,417 

Other(4)

  (407)  5,275   4,868 

Total before intercompany eliminations

 $91,889  $139,101   230,990 

Intercompany eliminations(5)

          (56,416)

Consolidated net sales

         $174,574 

 

9

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

The following table disaggregates our net sales by product category by segment for the six months ended December 31, 2019 (in thousands):

 

  

Wholesale

  

Retail

  

Total

 

Upholstery(1)

 $94,349  $126,932  $221,281 

Case goods(2)

  65,826   78,643   144,469 

Accents(3)

  34,167   60,229   94,396 

Other(4)

  (1,124)  10,563   9,439 

Total before intercompany eliminations

 $193,218  $276,367   469,585 

Intercompany eliminations(5)

          (121,090)

Consolidated net sales

         $348,495 

 

 

(1)

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

 

 

(2)

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

 

 

(3)

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

 

 

(4)

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

 

 

(5)

Intercompany eliminations represent the elimination of all intercompany wholesale segment sales to the retail segment during the period presented.

 

 

(5)

Fair Value Measurements

 

We have categorized our cash equivalents as Level 1 assets within the fair value hierarchy as there are quoted prices in active markets for identical assets or liabilities. As of December 31, 2020, we did not have any outstanding debt. The fair value of our long-term debt at June 30, 2020 was $50.0 million, which approximated its carrying amount given the application of a floating interest rate equal to the monthly LIBOR rate plus a spread using a debt leverage pricing grid. As the interest rate on our long-term debt is a variable rate, adjusted based on market conditions, it approximates the current market-rate for similar instruments available to companies with comparable credit quality and maturity, and therefore, our long-term debt was categorized as a Level 2 liability in the fair value hierarchy as of June 30, 2020. There were no Level 3 assets or liabilities held by the Company as of December 31, 2020 and June 30, 2020.

 

With the exception of the $0.6 million retail asset impairment charge, we did not record any additional other-than-temporary impairments on those assets required to be measured at fair value on a non-recurring basis during fiscal 2021.

 

 

(6)

Inventories

 

Inventories are summarized as follows (in thousands):

 

  

December 31,

  

June 30,

 
  

2020

  

2020

 

Finished goods

 $97,391  $97,718 

Work in process

  9,389   9,589 

Raw materials

  22,892   21,343 

Inventory reserves

  (2,924)  (2,549)

Inventories, net

 $126,748  $126,101 

 

 

(7)

Goodwill and Intangible Assets

 

Our goodwill and intangible assets are comprised of goodwill, which represents the excess of cost over the fair value of net assets acquired, and our Ethan Allen trade name and related trademarks. As of December 31, 2020, the goodwill balance was $25.4 million, while other indefinite-lived intangible assets totaled $19.7 million, consistent with the balances as of June 30, 2020.

 

Both goodwill and indefinite-lived intangible assets are not amortized as they are estimated to have an indefinite life. We evaluate goodwill and other indefinite-lived intangible assets 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 may exceed fair value.

 

10

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

(8)

Leases

 

We have operating leases for many of our design centers that expire at various dates through fiscal 2040. In addition, we also lease certain tangible assets, including computer equipment and vehicles with initial lease terms ranging from three to five years. We determine if a contract contains a lease at inception based on our right to control the use of an identified asset and our right to obtain substantially all of the economic benefits from the use of that identified asset. Certain operating leases have renewal options and rent escalation clauses as well as various purchase options. We assess these options to determine if we are reasonably certain of exercising these options based on all relevant economic and financial factors. Any options that meet these criteria are included in the lease term at lease commencement.

 

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

  

December 31,

 
  

2020

  

2019

 

Weighted-average remaining lease term (in years)

        

Operating leases

  6.6   6.7 

Financing leases

  1.7   1.9 

Weighted-average discount rate

        

Operating leases

  4.3%  3.7%

Financing leases

  4.3%  4.4%

 

Lease expense for operating leases consists of both fixed and variable components. Expense related to fixed lease payments are recognized on a straight-line basis over the lease term. Variable lease payments are generally expensed as incurred, where applicable, and include certain index-based changes in rent, certain non-lease components, such as maintenance and other services provided by the lessor, and other charges included in the lease. Leases with an initial term of twelve months or less are not recorded on the balance sheet. In addition, certain of our equipment lease agreements include variable lease payments, which are based on the usage of the underlying asset. The variable portion of payments are not included in the initial measurement of the asset or lease liability due to uncertainty of the payment amount and are recorded as lease expense in the period incurred.

 

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

 

   

Three months ended

December 31,

 
 

Statement of Comprehensive Income Location

 

2020

  

2019

 

Operating lease cost(1)

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

 $7,461  $8,169 

Financing lease cost

         

Depreciation of property

SG&A

  144   146 

Interest on lease liabilities

Interest and other financing costs

  3   8 

Short-term lease cost(2)

SG&A

  240   355 

Variable lease cost(3)

SG&A

  2,351   2,373 

Less: Sublease income

SG&A

  (454)  (596)

Total lease expense

 $9,745  $10,455 

 

11

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

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

 

   

Six months ended

December 31,

 
 

Statement of Comprehensive Income Location

 

2020

  

2019

 

Operating lease cost(1)

SG&A

 $14,953  $16,191 

Financing lease cost

         

Depreciation of property

SG&A

  295   293 

Interest on lease liabilities

Interest and other financing costs

  8   17 

Short-term lease cost(2)

SG&A

  480   742 

Variable lease cost(3)

SG&A

  4,613   4,836 

Less: Sublease income

SG&A

  (892)  (1,102)

Total lease expense

 $19,457  $20,977 

 

 

(1)

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

 

 

(2)

Leases with initial terms of one year or less are not capitalized and instead expensed on a straight-line basis over the lease term.

 

 

(3)

Variable lease payments are generally expensed as incurred, where applicable, and include certain index-based changes in rent, certain non-lease components, such as maintenance, real estate taxes, insurance and other services provided by the lessor, and other charges included in the lease.

 

The table below reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under noncancelable leases with terms of more than one year to the total lease liabilities recognized on the consolidated balance sheets as of December 31, 2020 (in thousands):

 

Fiscal Year

 

Operating Leases

  

Financing Leases

 

2021 (remaining six months)

 $16,408  $160 

2022

  29,552   78 

2023

  23,147   39 

2024

  18,374   19 

2025

  14,961   8 

Thereafter

  45,640   - 

Total undiscounted future minimum lease payments(1)(2)

  148,082   304 

Less: imputed interest(3)

  (20,541)  (9)

Total present value of lease obligations

 $127,541  $295 

 

 

(1)

Certain operating leases have renewal options and rent escalation clauses as well as various purchase options. We assess these options to determine if we are reasonably certain of exercising these options based on all relevant economic and financial factors. Any options that meet these criteria are included in the lease term at lease commencement.

 

 

(2)

Excludes future commitments under short-term lease agreements of $0.3 million as of December 31, 2020 as leases with an initial term of twelve months or less are not recorded on the balance sheet.

 

 

(3)

Calculated using the incremental borrowing rate for each lease at lease commencement.

 

As of  December 31, 2020, we have entered into two additional financing leases for computer equipment, which have not yet commenced and are therefore not part of the tables above nor included in the consolidated balance sheet as property, plant and equipment (assets) and other current and non-current liabilities. The leases commence when we obtain possession of the underlying leased assets which were in January 2021. The leases are for a period of three years and have aggregate undiscounted future rent payments of $1.4 million.

 

As of December 31, 2020, we did not have any operating leases that had not commenced.

 

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

 

  

Six months ended

December 31,

 
  

2020

  

2019

 

Cash paid for amounts included in the measurement of lease liabilities

        

Operating cash flows from operating leases

 $16,706  $16,037 

Operating cash flows from financing leases

 $290  $278 

Operating lease assets obtained in exchange for operating lease liabilities

 $12,102  $14,326 

 

12

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

(9)

Income Taxes

 

We recorded income tax expense of $5.3 million and $7.2 million, respectively, for the three and six months ended December 31, 2020 compared with $2.2 million and $6.7 million in the prior year comparable periods. Our consolidated effective tax rate was 23.9% and 21.5% for the three and six months ended December 31, 2020 compared with 23.5% and 24.1% in the prior year comparable periods. Our effective tax rate varies from the 21% federal statutory rate due to state taxes and other nonrecurring events that may not be predictable. The decrease in the effective tax rate during the first half of fiscal 2021 compared with a year ago was due to a $0.9 million reduction in our valuation allowance on deferred tax assets.

 

As of December 31, 2020, we had $2.2 million of unrecognized tax benefits, of which $2.0 million would reduce our income tax expense and the effective tax rate, if recognized. As of December 31, 2020, we had $0.5 million of unrecognized tax benefits that are expected to decrease in the next 12 months.

 

 

(10)

Debt

 

Total debt obligations consist of the following (in thousands):

 

  

December 31,

  

June 30,

 
  

2020

  

2020

 
         

Borrowings under revolving credit facility

 $-  $50,000 

Less current maturities

  -   - 

Total long-term debt

 $-  $50,000 

 

Credit Agreement

 

On  December 21, 2018, the Company and most of its domestic subsidiaries (the “Loan Parties”) entered into a Second Amended and Restated Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. as administrative agent and syndication agent and Capital One, National Association, as documentation agent. The Credit Agreement provides for a $165 million revolving credit facility (the “Facility”), subject to borrowing base availability, with the maturity date of December 21, 2023. We incurred financing costs of $0.6 million, which are being amortized as interest expense over the remaining life of the Facility using the effective interest method.

 

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

 

The availability of credit at any given time under the Facility will be constrained by the terms and conditions of the Facility, including the amount of collateral available, a borrowing base formula based upon numerous factors, including the value of eligible inventory and eligible accounts receivable, and other restrictions contained in the Facility. All obligations under the Facility are secured by assets of the Loan Parties, including inventory, receivables and certain types of intellectual property.

 

Borrowings under the Facility

 

We borrowed $100.0 million under the Facility in March 2020 and repaid $50.0 million in June 2020 and the remaining $50.0 million in September 2020 using available cash on hand. The borrowings had a weighted average interest rate equal to the one-month LIBOR rate plus a spread using a debt leverage pricing grid. For the six months ended December 31, 2020 we recorded interest expense of $0.4 million on our outstanding debt. Interest expense was $0.1 million for the six months ended December 31, 2019.

 

Covenants and Other Ratios

 

The Facility contains various restrictive and affirmative covenants, including required financial reporting, limitations on the ability to grant liens, make loans or other investments, incur additional debt, issue additional equity, merge or consolidate with or into another person, sell assets, pay dividends or make other distributions or enter into transactions with affiliates, along with other restrictions and limitations similar to those frequently found in credit agreements of this type and size. Loans under the Facility may become immediately due and payable upon certain events of default (including failure to comply with covenants, change of control or cross-defaults) as set forth in the Facility.

 

The Facility does not contain any significant financial ratio covenants or coverage ratio covenants other than a fixed charge coverage ratio covenant based on the ratio of (a) EBITDA, plus cash Rentals, minus Unfinanced Capital Expenditures to (b) Fixed Charges, as such terms are defined in the Facility (the “FCCR Covenant”). The FCCR Covenant only applies in certain limited circumstances, including when the unused availability under the Facility falls below $18.5 million. The FCCR Covenant ratio is set at 1.0 and measured on a trailing twelve-month basis.

 

13

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

At December 31, 2020 and June 30, 2020, there was $5.0 million and $5.8 million, respectively, of standby letters of credit outstanding under the Facility. Total borrowing base availability under the Facility was $85.3 million at December 31, 2020 and $58.9 million at June 30, 2020. At both December 31, 2020 and June 30, 2020, we were in compliance with all the covenants under the Facility.

 

 

(11)

Restructuring and Other Impairment Activities

 

Restructuring and other impairment charges, net of gains, were as follows (in thousands):

 

  

Three months ended
December 31,

  

Six months ended
December 31,

 
  

2020

  

2019

  

2020

  

2019

 

Loss (gain) on sale of property, plant and equipment(1)

 $273  $-  $273  $(11,497)

Employee severance costs

  150   -   150   - 

Impairment of long-lived assets(2)

  -   -   623   - 

Optimization of manufacturing and logistics

  -   (178)  -   462 

Total Restructuring and other impairment charges, net of gains

 $423  $(178) $1,046  $(11,035)

Manufacturing overhead costs(3)

  -   270   -   1,323 

Inventory reserves and write-downs(3)(4)

  389   119   389   3,209 

Total

 $812  $211  $1,435  $(6,503)

 

(1)

We completed the sale of a previously closed retail property to an independent third party in December 2020 and received $1.3 million in cash less certain adjustments, including $0.1 million in selling and other closing costs. As a result of the sale, the Company recognized a pre-tax loss of $0.3 million in the second quarter of fiscal 2021, which was recorded within the line item Restructuring and other impairment charges, net of gains in the consolidated statements of comprehensive income.

 

(2)

We recorded a non-cash impairment charge of $0.6 million during the first quarter of fiscal 2021 related to the impairment of long-lived assets held in the retail segment. The asset group used in the impairment analysis, which represented the lowest level for which identifiable cash flows were available and largely independent of the cash flows of other groups of assets, was the individual retail design center. We estimated future cash flows based on design center-level historical results, current trends, and operating and cash flow projections. The impairment charge of $0.6 million was recorded in the consolidated statement of comprehensive income within the line item Restructuring and other impairment charges, net of gains.

 

(3)

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

 

(4)

Based on actual demand and the most current forecasted market conditions, we recorded a non-cash charge of $0.4 million during the second quarter of fiscal 2021 to increase our finished goods inventory obsolescence reserve for certain slow moving and discontinued inventory items. The non-cash inventory write-down was recorded in the consolidated statement of comprehensive income within the line item Cost of Sales.

 

 

(12)

Earnings Per Share

 

We compute basic earnings per share (“EPS”) by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS is calculated similarly, except that the weighted average outstanding shares are adjusted to include the effects of converting all potentially dilutive share-based awards issued under our employee stock plans. The number of potential common shares outstanding are determined in accordance with the treasury stock method to the extent they are dilutive.

 

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

 

  

Three months ended

  

Six months ended

 
  

December 31,

  

December 31,

 
  

2020

  

2019

  

2020

  

2019

 

Weighted average shares outstanding for basic calculation

  25,239   26,580   25,209   26,646 

Dilutive effect of stock options and other share-based awards

  70   32   48   35 

Weighted average shares outstanding adjusted for dilution calculation

  25,309   26,612   25,257   26,681 

 

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

 

14

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

As of December 31, 2020 and 2019, total share-based awards of 270,108 and 280,437, respectively, were excluded from the diluted EPS calculations because their inclusion would have been anti-dilutive.

 

As of December 31, 2020 and 2019, the number of performance units excluded from the calculation of diluted EPS was 316,445 and 287,287, respectively. Contingently issuable shares with performance conditions are evaluated for inclusion in diluted EPS if, at the end of current period, conditions would be satisfied as if it were the end of the contingency period.

 

 

(13)

Accumulated Other Comprehensive Income (Loss)

 

Accumulated other comprehensive income (loss) consists of foreign currency translation adjustments which are the result of changes in foreign currency exchange rates related to our operations in Canada, Honduras and Mexico. Assets and liabilities are translated into U.S. dollars using the current period-end exchange rate and income and expense amounts are translated using the average exchange rate for the period in which the transaction occurred.

 

The following table sets forth the activity in accumulated other comprehensive loss (in thousands).

 

  

2020

  

2019

 

Beginning balance at July 1

 $(8,441) $(5,651)

Other comprehensive income (loss), net of tax

  2,532   248 

Less AOCI attributable to noncontrolling interests

  14   26 

Ending balance at December 31

 $(5,895) $(5,377)

 

 

(14)

Share-Based Compensation

 

During the six months ended December 31, 2020 and 2019, we recognized total share-based compensation expense of $0.7 million and $0.1 million, respectively. These amounts have been included in the consolidated statements of comprehensive income within selling, general and administrative expenses. There was no share-based compensation capitalized for the six months ended December 31, 2020 and 2019, respectively.

 

At December 31, 2020, there were 1,303,638 shares of common stock available for future issuance pursuant to the Ethan Allen Interiors Inc. Stock Incentive Plan (the “Plan”), which provides for the grant of stock options, restricted stock and stock units. 

 

Stock Option Activity

 

There were no stock option awards granted to employees during the first half of fiscal 2021. In the prior year period, we granted 15,000 stock options with a weighted average exercise price of $18.44 to existing employees of the Company. These stock option awards vest 25% annually on the anniversary date of the grant and are fully vested after four years, expiring ten years from the date of grant.

 

The Plan also provides for the grant of share-based awards, including stock options, to non-employee directors of the Company. During fiscal 2021, we granted 37,008 stock options at an exercise price of $12.97 to our existing non-employee Directors. In the prior year period, we granted 34,188 stock options at an exercise price of $17.55. These stock options vest in three equal annual installments commencing on the first anniversary of the date of grant so long as the director continues to serve on our Board. All options granted to directors have an exercise price equal to the fair market value of our common stock on the date of grant and remain exercisable for a period of up to ten years, subject to continuous service on our Board.

 

As of December 31, 2020, $0.2 million of total unrecognized compensation expense related to non-vested stock options is expected to be recognized over a weighted average remaining period of 2.2 years.

 

Restricted Stock Unit Activity

 

During the first half of fiscal 2021, we granted 38,000 non-performance based restricted stock units ("RSUs"), with a weighted average grant date fair value of $9.58. The RSUs granted to employees entitle the holder to receive the underlying shares of common stock as the unit vests over the relevant vesting period. The RSUs do not entitle the holder to receive dividends declared on the underlying shares while the RSUs remain unvested and vest in two equal annual installments on the first and second anniversary date of the date of grant. There were no RSUs granted during the first half of fiscal 2020. As of December 31, 2020, $0.7 million of total unrecognized compensation expense related to non-vested restricted stock units is expected to be recognized over a weighted average remaining period of 2.5 years.

 

15

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Performance Stock Unit Activity

 

Under the Plan, the Compensation Committee of the Board of Directors was authorized to award common shares to certain employees based on the attainment of certain financial goals over a given performance period. Payout of these grants depends on our financial performance (80%) and a market-based condition based on the total return our shareholders receive on their investment in our stock relative to returns earned through investments in other peer companies (20%). The performance award opportunity ranges from 50% of the employee's target award if minimum performance requirements are met to a maximum of 125% of the target award based on the attainment of certain financial and shareholder-return goals over a specific performance period, which is generally three fiscal years. The number of awards that will vest, as well as unearned and canceled awards, depends on the achievement of certain financial and shareholder-return goals over the three-year performance periods, and will be settled in shares if service conditions are met, requiring employees to remain employed with us through the end of the three-year performance periods. We account for performance stock unit awards as equity-based awards because upon vesting, they will be settled in common shares. We expense as compensation cost the fair value of the shares as of the grant date and amortize expense ratably over the total performance and time vest period, considering the probability that we will satisfy the performance goals.

 

During the first half of fiscal 2021 we granted 117,338 PSUs. We estimate, as of the date of grant, the fair value of PSUs with a discounted cash flow model, using as model inputs the risk-free rate of return as the discount rate, dividend yield for dividends not paid during the restriction period, and a discount for lack of marketability for a one-year post-vest holding period. The lack of marketability discount used is the present value of a future put option using the Chaffe model. The weighted average assumptions used for the PSUs granted during fiscal 2021 and 2020, respectively, is presented below.

 

  

FY 2021

  

FY 2020

 

Volatility

  56.0%  30.5%

Risk-free rate of return

  0.14%  1.72%

Dividend yield

  3.26%  3.97%

 

Our unrecognized compensation expense as of December 31, 2020, related to PSUs, was $1.2 million based on the current estimates of the number of awards that will vest, and is expected to be recognized over a weighted average remaining period of 2.0 years.

 

 

(15)

Segment Information

 

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

 

As of December 31, 2020, 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, and sales to our independent retailers and other third parties. Our retail segment net sales accounted for 79.7% of our consolidated net sales for the six months ended December 31, 2020 compared to 79.3% a year ago. Our wholesale segment net sales accounted for the remaining 20.3% during fiscal 2021.

 

16

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Segment information is provided below (in thousands):

 

  

Three months ended

  

Six months ended

 
  

December 31,

  

December 31,

 
  

2020

  

2019

  

2020

  

2019

 

Net sales

                

Wholesale segment

 $101,550  $91,889  $198,884  $193,218 

Retail segment

  144,818   139,101   262,899   276,367 

Elimination of intercompany sales

  (67,542)  (56,416)  (131,899)  (121,090)

Consolidated total

 $178,826  $174,574  $329,884  $348,495 
                 

Income before income taxes

                

Wholesale segment

 $12,720  $5,730  $25,858  $22,658 

Retail segment

  9,909   (135)  11,892   1,429 

Elimination of intercompany profit (a)

  (74)  3,609   (3,514)