0001437749-21-010279.txt : 20210430 0001437749-21-010279.hdr.sgml : 20210430 20210429200052 ACCESSION NUMBER: 0001437749-21-010279 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 74 CONFORMED PERIOD OF REPORT: 20210331 FILED AS OF DATE: 20210430 DATE AS OF CHANGE: 20210429 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: 21873104 BUSINESS ADDRESS: STREET 1: ETHAN ALLEN DR STREET 2: PO BOX 1966 CITY: DANBURY STATE: CT ZIP: 06811 BUSINESS PHONE: 2037438000 10-Q 1 eth20210331_10q.htm FORM 10-Q eth20210331_10q.htm
0000896156 ETHAN ALLEN INTERIORS INC false --06-30 Q3 2021 0.01 0.01 1,055 1,055 0 0 0.01 0.01 150,000 150,000 49,190 49,053 25,187 25,053 24,003 24,000 2 1 3 0 3 5 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. Intercompany eliminations represent the elimination of all intercompany wholesale segment sales to the retail segment during the period presented. 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 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. 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. 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. 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. 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. We completed the sale of two previously closed retail properties to independent third parties in December 2020 and March 2021. As a result of these sales, the Company recognized a pre-tax gain of $1.2 million in the first nine months 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. Case goods furniture includes items such as beds, dressers, armoires, tables, chairs, buffets, entertainment units, home office furniture and wooden accents. Excludes future commitments under short-term lease agreements of $0.3 million as of March 31, 2021 as leases with an initial term of twelve months or less are not recorded on the balance sheet. 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. 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. We recorded non-cash charges related to lease exit costs in the retail segment as a result of the early termination of a lease. 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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 March 31, 2021

 

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

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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 April 19, 2021, was 25,196,789.

 

 

 
 

 

 

ETHAN ALLEN INTERIORS INC.

FORM 10-Q THIRD 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 19
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
   
Item 4. Controls and Procedures 32
   
PART II - OTHER INFORMATION  
   
Item 1. Legal Proceedings 33
   
Item 1A. Risk Factors 33
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 33
   
Item 3. Defaults Upon Senior Securities 33
   
Item 4. Mine Safety Disclosures 33
   
Item 5. Other Information 33
   
Item 6. Exhibits 34
   
SIGNATURES 35

 

1

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Consolidated Balance Sheets

 

(In thousands, except par value)

 

  

March 31, 2021

  

June 30, 2020

 
  (Unaudited)     

ASSETS

       

Current assets:

        

Cash and cash equivalents

 $108,956  $72,276 

Accounts receivable, net

  11,573   8,092 

Inventories, net

  135,686   126,101 

Prepaid expenses and other current assets

  34,905   23,483 

Total current assets

  291,120   229,952 
         

Property, plant and equipment, net

  233,331   236,678 

Goodwill

  25,388   25,388 

Intangible assets

  19,740   19,740 

Operating lease right-of-use assets

  114,583   109,342 

Deferred income taxes

  1,745   137 

Other assets

  1,639   1,552 

Total ASSETS

 $687,546  $622,789 
         

LIABILITIES AND SHAREHOLDERS' EQUITY

        

Current liabilities:

        

Accounts payable and accrued expenses

 $38,716  $25,595 

Customer deposits and deferred revenue

  115,250   64,031 

Accrued compensation and benefits

  25,821   18,278 

Current operating lease liabilities

  34,537   27,366 

Other current liabilities

  11,622   3,708 

Total current liabilities

  225,946   138,978 

Long-term debt

  -   50,000 

Operating lease liabilities, long-term

  97,467   102,111 

Deferred income taxes

  2,058   1,074 

Other long-term liabilities

  5,497   2,562 

Total LIABILITIES

 $330,968  $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, 49,190 and 49,053 shares issued; 25,187 and 25,053 shares outstanding at March 31, 2021 and June 30, 2020, respectively

  492   491 

Additional paid-in capital

  381,038   378,300 

Treasury stock, at cost: 24,003 and 24,000 shares at March 31, 2021 and June 30, 2020, respectively

  (680,992)  (680,916)

Retained earnings

  662,535   638,631 

Accumulated other comprehensive loss

  (6,471)  (8,441)

Total Ethan Allen Interiors Inc. shareholders' equity

  356,602   328,065 

Noncontrolling interests

  (24)  (1)

Total shareholders' equity

  356,578   328,064 

Total LIABILITIES AND SHAREHOLDERS' EQUITY

 $687,546  $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

  

Nine months ended

 
  

March 31,

  

March 31,

 
  

2021

  

2020

  

2021

  

2020

 

Net sales

 $176,962  $149,774  $506,846  $498,269 

Cost of sales

  75,553   65,825   218,335   223,005 

Gross profit

  101,409   83,949   288,511   275,264 
                 

Selling, general and administrative expenses

  81,829   83,841   233,649   258,346 

Restructuring and other impairment charges, net of gains

  593   862   1,639   (10,173)

Operating income

  18,987   (754)  53,223   27,091 

Other expenses

                

Interest and other financing costs

  51   85   433   184 

Other income (expense), net

  57   298   (378)  479 

Income before income taxes

  18,993   (541)  52,412   27,386 

Income tax expense

  3,385   (318)  10,568   6,417 

Net income

 $15,608  $(223) $41,844  $20,969 
                 

Per share data

                

Basic earnings per common share:

                

Net income per basic share

 $0.62  $(0.01) $1.66  $0.80 

Basic weighted average common shares

  25,303   25,703   25,240   26,332 

Diluted earnings per common share:

                

Net income per diluted share

 $0.61  $(0.01) $1.65  $0.80 

Diluted weighted average common shares

  25,400   25,703   25,305   26,362 
                 

Comprehensive income

                

Net income

 $15,608  $(223) $41,844  $20,969 

Other comprehensive income (loss), net of tax

                

Foreign currency translation adjustments

  (576)  (3,841)  1,970   (3,567)

Other

  (9)  (15)  (23)  (41)

Other comprehensive income, net of tax

  (585)  (3,856)  1,947   (3,608)

Comprehensive income

 $15,023  $(4,079) $43,791  $17,361 

 

See accompanying notes to consolidated financial statements.

 

3

 
 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows (Unaudited)

 

(In thousands)

 

  

Nine months ended

 
  

March 31,

 

 

 

2021

  

2020

 
Cash Flows from Operating Activities        

Net income

 $41,844  $20,969 

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

        

Depreciation and amortization

  12,359   12,845 

Share-based compensation expense

  999   200 

Non-cash operating lease cost

  22,571   24,369 

Deferred income taxes

  (624)  1,077 

Restructuring and other impairment charges, net of gains

  2,028   (5,647)

Restructuring payments

  (1,180)  (5,574)

Loss on disposal of property, plant and equipment

  15   191 

Other

  (88)  (13)

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

        

Accounts receivable, net

  (3,481)  3,630 

Inventories, net

  (9,974)  21,567 

Prepaid expenses and other current assets

  (10,872)  (1,980)

Customer deposits and deferred revenue

  51,219   (4,914)

Accounts payable and accrued expenses

  12,387   (3,428)

Accrued compensation and benefits

  7,535   429 

Operating lease liabilities

  (25,923)  (24,411)

Other assets and liabilities

  3,305   (626)

Net cash provided by operating activities

  102,120   38,684 
         

Cash Flows from Investing Activities

        

Proceeds from disposal of property, plant and equipment

  4,913   12,423 

Capital expenditures

  (10,342)  (12,457)

Acquisitions, net of cash acquired

  -   (1,350)

Other investing activities

  -   20 

Net cash (used in) provided by investing activities

  (5,429)  (1,364)
         

Cash Flows from Financing Activities

        

Borrowings on revolving credit facility

  -   100,000 

Payments on borrowings

  (50,000)  - 

Payment of cash dividends

  (11,612)  (16,181)

Proceeds from employee stock plans

  1,740   53 

Repurchases of common stock

  (76)  (24,319)

Other financing activities

  (455)  (422)

Net cash used in financing activities

  (60,403)  59,131 
         

Effect of exchange rate changes on cash and cash equivalents

  392   (407)
         

Net increase in cash and cash equivalents

  36,680   96,044 

Cash and cash equivalents at beginning of period

  72,276   20,824 

Cash and cash equivalents at end of period

 $108,956  $116,868 

 

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 

Net income

  -   -   -   -   -   -   15,608   -   15,608 

Common stock issued on share-based awards

  -   -   107   -   -   -   -   -   107 

Share-based compensation expense

  -   -   288   -   -   -   -   -   288 

Cash dividends declared

  -   -   -   -   -   -   (6,328)  -   (6,328)

Restricted stock vesting

  -   -   -   3   (76)  -   -   -   (76)

Repurchase of common stock

  -   -   -          -   -   -   - 

Other comprehensive income (loss)

  -   -   -   -   -   (576)  -   (9)  (585)

Balance at March 31, 2021

  49,173  $492  $381,038   24,003  $(680,992) $(6,471) $662,535  $(24) $356,578 

 

 

                      

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 

Net loss

  -   -   -   -   -   -   (223)  -   (223)

Share-based compensation expense

  -   -   77   -   -   -   -   -   77 

Cash dividends declared

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

Repurchase of common stock

  -   -   -   993   (14,290)  -   -   -   (14,290)

Other comprehensive income (loss)

  -   -   -   -   -   (3,841)  -   (15)  (3,856)

Balance at March 31, 2020

  49,054  $491  $378,166   24,001  $(680,916) $(9,218) $650,701  $22  $339,246 

 

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 March 31, 2021, our Company operates 144 retail design centers, with 139 located in the United States and the remaining five 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. We have implemented various mitigating and safety protocols recommended by the United States Center for Disease Control (“CDC”) guidelines for operating businesses safely.

 

In our action plan in response to COVID-19 that we announced on April 1, 2020, we took immediate action and made a number of adjustments to our business operations, including temporary design center and manufacturing plant closings, a reduction in headcount and curtailing certain operating expenses. Our approach to the crisis continues to evolve as business trends substantially improved during the nine months of fiscal 2021 as consumers have continued to allocate more discretionary spending to home furnishings. 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 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 nine months ended March 31, 2021 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): Customers 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 March 31, 2021 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.

 

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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 March 31, 2021 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 March 31, 2021, we had prepaid commissions of $19.7 million, which we expect to recognize to selling expense in the next three 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 $1.2 million and $59.0 million, respectively, as net sales upon delivery to the customer during the three and nine months ended March 31, 2021. Customer deposits totaled $115.3 million at March 31, 2021.

 

The following table disaggregates our net sales by product category by segment for the three months ended March 31, 2021 (in thousands):

 

  

Wholesale

  

Retail

  

Total

 

Upholstery(1)

 $57,448  $71,297  $128,745 

Case goods(2)

  33,054   38,225   71,279 

Accents(3)

  19,022   28,884   47,906 

Other(4)

  (1,704)  2,990   1,286 

Total before intercompany eliminations

 $107,820  $141,396   249,216 

Intercompany eliminations(5)

          (72,254)

Consolidated net sales

         $176,962 

 

The following table disaggregates our net sales by product category by segment for the nine months ended March 31, 2021 (in thousands):

 

  

Wholesale

  

Retail

  

Total

 

Upholstery(1)

 $163,756  $203,069  $366,825 

Case goods(2)

  92,777   109,886   202,663 

Accents(3)

  55,021   82,638   137,659 

Other(4)

  (4,850)  8,702   3,852 

Total before intercompany eliminations

 $306,704  $404,295   710,999 

Intercompany eliminations(5)

          (204,153)

Consolidated net sales

         $506,846 

 

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

 

  

Wholesale

  

Retail

  

Total

 

Upholstery(1)

 $47,214  $54,791  $102,005 

Case goods(2)

  30,096   31,822   61,918 

Accents(3)

  16,942   25,849   42,791 

Other(4)

  (1,113)  3,236   2,123 

Total before intercompany eliminations

 $93,139  $115,698   208,837 

Intercompany eliminations(5)

          (59,063)

Consolidated net sales

         $149,774 

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

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

 

  

Wholesale

  

Retail

  

Total

 

Upholstery(1)

 $141,563  $181,723  $323,286 

Case goods(2)

  95,922   110,465   206,387 

Accents(3)

  51,109   86,078   137,187 

Other(4)

  (2,237)  13,799   11,562 

Total before intercompany eliminations

 $286,357  $392,065   678,422 

Intercompany eliminations(5)

          (180,153)

Consolidated net sales

         $498,269 

 

 

(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 March 31, 2021, 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 March 31, 2021 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):

 

  

March 31,

  

June 30,

 
  

2021

  

2020

 

Finished goods

 $102,177  $97,718 

Work in process

  10,684   9,589 

Raw materials

  25,631   21,343 

Inventory reserves

  (2,806)  (2,549)

Inventories, net

 $135,686  $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 March 31, 2021, 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:

 

  

March 31,

 
  

2021

  

2020

 

Weighted-average remaining lease term (in years)

        

Operating leases

  6.3   6.7 

Financing leases

  2.9   1.7 

Weighted-average discount rate

        

Operating leases

  4.2%  3.8%

Financing leases

  2.3%  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

March 31,

 
 

Statement of Comprehensive Income Location

 

2021

  

2020

 

Operating lease cost(1)

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

 $7,618  $8,178 

Financing lease cost

         

Depreciation of property

SG&A

  247   152 

Interest on lease liabilities

Interest and other financing costs

  9   8 

Short-term lease cost(2)

SG&A

  180   280 

Variable lease cost(3)

SG&A

  2,362   2,333 

Less: Sublease income

SG&A

  (411)  (486)

Total lease expense

 $10,005  $10,465 

 

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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):

 

   

Nine months ended

March 31,

 
 

Statement of Comprehensive Income Location

 

2021

  

2020

 

Operating lease cost(1)

SG&A

 $22,571  $24,369 

Financing lease cost

         

Depreciation of property

SG&A

  542   445 

Interest on lease liabilities

Interest and other financing costs

  16   25 

Short-term lease cost(2)

SG&A

  667   1,022 

Variable lease cost(3)

SG&A

  6,975   7,169 

Less: Sublease income

SG&A

  (1,303)  (1,588)

Total lease expense

 $29,468  $31,442 

 

 

(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 March 31, 2021 (in thousands):

 

Fiscal Year

 

Operating Leases

  

Financing Leases

 

2021 (remaining three months)

 $8,244  $138 

2022

  31,942   529 

2023

  25,873   490 

2024

  21,351   320 

2025

  17,807   8 

Thereafter

  46,459   - 

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

  151,676   1,485 

Less: imputed interest(3)

  (19,672)  (44)

Total present value of lease obligations

 $132,004  $1,441 

 

 

(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 $1.1 million as of March 31, 2021 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  March 31, 2021, we did not have any financing or operating leases that had not commenced.

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

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

 

  

Nine months ended

March 31,

 
  

2021

  

2020

 

Cash paid for amounts included in the measurement of lease liabilities

        

Operating cash flows from operating leases

 $25,923  $24,411 

Operating cash flows from financing leases

 $455  $422 

Operating lease assets obtained in exchange for operating lease liabilities

 $23,672  $16,333 

 

 

(9)

Income Taxes

 

We recorded income tax expense of $3.4 million and $10.6 million, respectively, for the three and nine months ended March 31, 2021 compared with a benefit of $0.3 million and expense of $6.4 million in the prior year comparable periods. Our consolidated effective tax rate was 17.8% and 20.2% for the three and nine months ended March 31, 2021 compared with 58.8% and 23.4% 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 nine months of fiscal 2021 compared with a year ago was due to a reduction in our valuation allowance on certain deferred tax assets.

 

As of March 31, 2021, we had $2.2 million of unrecognized tax benefits of which $0.3 million are expected to decrease in the next 12 months. If recognized, $2.0 million of unrecognized tax benefits would reduce our income tax expense and the effective tax rate.

 

 

(10)

Debt

 

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

 

  

March 31,

  

June 30,

 
  

2021

  

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 nine months ended March 31, 2021, we recorded interest expense of $0.4 million on our outstanding debt. Interest expense was $0.2 million for the nine months ended March 31, 2020.

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

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 have 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.

 

At March 31, 2021, 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 $78.3 million at March 31, 2021, and $58.9 million at June 30, 2020. At both March 31, 2021, 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
March 31,

  

Nine months ended
March 31,

 
  

2021

  

2020

  

2021

  

2020

 

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

 $(1,443) $-  $(1,170) $(11,497)

Employee severance costs

  455   -   605   - 
Lease exit costs(2)  1,406       1,406     

Impairment of long-lived assets

      389   623   389 

Optimization of manufacturing and logistics

      368       829 

Other charges

  175   105   175   106 

Total Restructuring and other impairment charges, net of gains

 $593  $862  $1,639  $(10,173)

Manufacturing overhead costs(3)

  -   (5)  -   1,318 

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

  -   -   389   3,208 

Total

 $593  $857  $2,028  $(5,647)

 

(1)

We completed the sale of two previously closed retail properties to independent third parties in December 2020 and March 2021. As a result of these sales, the Company recognized a pre-tax gain of $1.2 million in the first nine months 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 non-cash charges related to lease exit costs in the retail segment as a result of the early termination of a lease. These charges were 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.

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

(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

  

Nine months ended

 
  

March 31,

  

March 31,

 
  

2021

  

2020

  

2021

  

2020

 

Weighted average shares outstanding for basic calculation

  25,303   25,703   25,240   26,332 

Dilutive effect of stock options and other share-based awards

  97   -   65   30 

Weighted average shares outstanding adjusted for dilution calculation

  25,400   25,703   25,305   26,362 

 

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

 

As of March 31, 2021, and 2020, total share-based awards of 161,902 and 290,104, respectively, were excluded from the diluted EPS calculations because their inclusion would have been anti-dilutive.

 

As of March 31, 2021, and 2020, 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).

 

  

2021

  

2020

 

Beginning balance at July 1

 $(8,441) $(5,651)

Other comprehensive income (loss), net of tax

  1,947   (3,608)

Less AOCI attributable to noncontrolling interests

  23   41 

Ending balance at March 31

 $(6,471) $(9,218)

 

 

(14)

Share-Based Compensation

 

During the nine months ended March 31, 2021, and 2020, we recognized total share-based compensation expense of $1.0 million and $0.2 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 nine months ended March 31, 2021, and 2020, respectively.

 

At March 31, 2021, there were 1,317,846 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 nine months 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 beginning 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 March 31, 2021, $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 2.0 years.

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Restricted Stock Unit Activity

 

During the first nine months 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. We granted 57,000 RSUs granted during the first nine months of fiscal 2020, with a weighted average grant date fair value of $9.15. As of March 31, 2021, $0.6 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 2.3 years.

 

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 achievement 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 achievement 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 nine months 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